Internal Revenue Bulletin 2006-2 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
6-2
January 9, 2006
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2006–1, page 261.
Regulated investment company (RIC).A RIC’s income from
a derivative contract with respect to a commodity index is not
qualifying income for purposes of section 851(b)(2) of the Code
if the income from the contract is not derived with respect to
the RIC’s business of investing in stocks, securities, or curren-
cies. Such a contract is not a security for purposes of section
851(b)(2).
Rev. Rul.
2006–2, page 261.
Section 3
51.The conclusion in Rev. Rul. 74–503 that a trans-
feror’s b
asis in transferee stock received in exchange for trans-
feror sto
ck is determined under section 362(a) of the Code is
incorrec
t. The other conclusions in the ruling are under study.
Rev. Rul.
74–503 revoked.
Rev. Rul. 2006–3, page 276.
Japanese Yugen Kaisha (YK) and Tokurei Yugen Kaisha
(TYK).A Yugen Kaisha, a Japanese business entity, which will
become a Tokurei Yugen Kaisha under recently enacted Japan-
ese legislation, will continue to be eligible to elect its U.S. entity
classification under the check the box regulations.
Rev. Rul. 2006–4, page 264.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for January 2006.
T.D. 92
31, page 272.
Final r
egulations under section 1298 of the Code provide guid-
ance fo
r making certain elections for taxpayers that continue
to be su
bject to the passive foreign investment company (PFIC)
excess distribution regime of section 1291 even though the for-
eign corporation in which they own stock is no longer treated
as a PFIC.
T.D. 9232, page 266.
REG–133446–03, page 299.
Temporary and proposed regulations under section 1297 of
the Code provide guidance for making certain elections for
taxpayersthatcontinuetobesubjecttothepassiveforeign
investment company (PFIC) excess distribution regime of sec-
tion 1291 even though the foreign corporation in which they
own stock is no longer treated as a PFIC. A public hearing on
the proposed regulations is scheduled for March 22, 2006.
Notice 2006–2, page 278.
Extension of transition relief for certain partnerships and
other pass-thru entities under section 470.This notice ex-
tends the transition relief under section 470 of the Code pro-
vided under Notice 2005–29, 2005–13 I.R.B. 796, to partner-
ships and certain other pass-thru entities that are treated as
holding tax-exempt use property because of the application of
section 168(h)(6), to taxable years that begin before January
1, 2006. Notice 2005–29 modified and superseded.
Rev. Proc. 2006–9, page 278.
This procedure explains the manner in which taxpayers may
request an advance pricing agreement (APA) from the APA Pro-
gram within the Office of the Associate Chief Counsel (Interna-
tional), the manner in which such a request will be processed
by the APA Program, and the effect and administration of APAs.
Rev. Proc. 2004–40 superseded.
(Continued on the next page)
Fi
nding Lists begin on page ii.

Rev. Proc. 2006–10, page 293.
This procedure supersedes Rev. Proc. 96–52, 1996–2 C.B.
372. It describes the qualifications necessary to become an
acceptance agent and the procedures that an acceptance
agent applicant must follow for purposes of entering into an
acceptance agent agreement with the IRS. Rev. Proc. 96–52
superseded.
Announcement 2006–2, page 300.
The December 2005 revision of Form 8609,Low-Income Hous-
ing Credit Allocation and Certification, contains changes from
the previous revision. Form 8609–A,Annual Statement for
Low-Income Housing Credit, is replacing Schedule A (Form
8609).
ADMINISTRATIVE
Rev. Rul. 2006–3, page 276.
Japanese Yugen Kaisha (YK) and Tokurei Yugen Kaisha
(TYK).A Yugen Kaisha, a Japanese business entity, which will
become a Tokurei Yugen Kaisha under recently enacted Japan-
ese legislation, will continue to be eligible to elect its U.S. entity
classification under the check the box regulations.
January 9, 20062006–2 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2006–2 I.R.B.January 9, 2006

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 168.—Accelerated
Cost Recovery System
Transition relief provided to partnerships and other
pass-thru entities that are treated as holding tax-ex-
empt use property because of the application of sec-
tion 168(h)(6), is extended. See Notice 2006-2, page
278.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of January 2006. See Rev.
Rul. 2006-4, page 264.
Section 351.—Transfer
to Corporation Controlled
by Transferor
26 CFR 1.351–1: Transfer to Corporation Controlled
by Transferor.
Section 351.The conclusion in Rev.
Rul. 74–503 that a transferor’s basis in
transferee stock received in exchange for
transferor stock is determined under sec-
tion 362(a) of the Code is incorrect. The
other conclusions in the ruling are under
study. Rev. Rul. 74–503 revoked.
Rev. Rul. 2006–2
In Rev. Rul. 74–503, 1974–2 C.B. 117,
corporation X transferred shares of its trea-
sury stock to corporation Y in exchange for
newly issued shares of Y stock. In the ex-
change, X obtained 80 percent of the only
outstanding class of Y stock. Rev. Rul.
74–503 concludes that the basis of the X
treasury stock received by Y is zero and
the basis of the newly issued Y stock re-
ceived by X is zero.
Rev. Rul. 74–503 states that X’s ba-
sis in the Y stock received in the exchange
is determined under § 362(a) of the Inter-
nal Revenue Code. This conclusion is in-
correct. Accordingly, Rev. Rul. 74–503,
1974–2 C.B.117, is revoked, effective De-
cember 20, 2005. The other conclusions in
the ruling, including the conclusions that
X’s basis in the Y stock received in the
exchange and Y’s basis in the X stock re-
ceived in the exchange are zero, are under
study.
Under the authority of § 7805(b), the
Service will not challenge a position taken
prior to December 20, 2005, with respect
to a transaction occurring prior to such
date, by a taxpayer that reasonably relied
on the conclusions in Rev. Rul. 74–503.
See§ 601.601(d)(2)(v) of the Statement of
Procedural Rules.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 74–503, 1974–2 C.B. 117, is
revoked.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Mary Goode of the Office of
Associate Chief Counsel (Corporate). For
further information regarding this rev-
enue ruling, contact Ms. Goode at (202)
622–7930 (not a toll-free call).
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of January 2006. See Rev.
Rul. 2006-4, page 264.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of January 2006. See Rev.
Rul. 2006-4, page 264.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of January 2006. See Rev.
Rul. 2006-4, page 264.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section
846.—Discounted
Unpaid L
osses Defined
The adju
sted applicable federal short-term, mid-
term, an
d long-term rates are set forth for the month
of Janua
ry 2006. See Rev. Rul. 2006-4, page 264.
Section 851.—Definition of
Regulated Investment
Company
26 CFR 1.851–2: Limitations.
(Also Sections 7704, 7805; 301.7805–1.)
Regulated investment company
(RIC).A RIC’s income from a deriva-
tive contract with respect to a commodity
2006–2 I.R.B.261January 9, 2006

index is not qualifying income for pur-
poses of section 851(b)(2) of the Code if
the income from the contract is not de-
rived with respect to the RIC’s business of
investing in stocks, securities, or curren-
cies. Such a contract is not a security for
purposes of section 851(b)(2).
Rev. Rul. 2006–1
ISSUE
If a corporation enters into a deriva-
tive contract that provides for a total-return
exposure on a commodity index, does in-
come from the derivative contract satisfy
the test described in section 851(b)(2) of
the Internal Revenue Code?
FACTS
Ris a management company registered
under the Investment Company Act of
1940 (the “’40 Act”), 15 U.S.C. section
80a–1et seq., as amended, and has elected
under section 851(b)(1) of the Code to be
a regulated investment company (RIC)
taxable under subchapter M, part I, of the
Code.Rinvests substantially all of the
funds it receives from shareholders in debt
instruments.Ralso enters into contracts
(“Derivatives”) with various counterpar-
ties pursuant to Master Agreements under
whichitwillpayanamountequaltothe
3-month U.S. Treasury bill rate plus a
spread and pursuant to which it will re-
ceive (or pay) an amount based on the
total return gain (or loss) on a commodity
index. The aggregate amount of the index
on which the return on the Derivatives is
based is approximately equal to the ag-
gregate amountRhas invested in its debt
instruments. The payment obligation on
each Derivative is settled monthly by the
receipt (in the event of a gain) or payment
(in the event of a loss) of cash, in the net
amount due under the contract, and each
monthly measuring period constitutes a
separate derivative contract under the
Master Agreements.
LAW
Section 851(b)(2) of the Code provides
that a corporation shall not be considered
a RIC for any taxable year unless it meets
an income test (the “qualifying income re-
quirement”). Under this test, at least 90
percent of its gross income must be derived
from certain enumerated sources.
In addition, section 851(b)(3) of the
Code provides that a corporation shall not
be considered a RIC for any taxable year
unless it meets an asset test (the “asset
test”). Under this test, at least 50 percent
of its total assets must be represented by
cash, cash items, Government securities,
securities of other RICs, and “other secu-
rities.” The “other securities” are generally
limited with respect to any one issuer to an
amount not greater than 5 percent of the
value of the RIC’s total assets and to not
more than 10 percent of the outstanding
voting securities of the issuer.
Prior to the enactment of the Tax Re-
form Act of 1986 (the “1986 Act”), section
851(b)(2) identified qualifying income as
“dividends, interest, payments with re-
spect to securities loans (as defined in
section 512(a)(5)), and gains from the sale
or other disposition of stock or securities.”
Section 851 did not contain its own defi-
nition of the term “securities,” but section
851(c)(5) provided that, for purposes of
the asset test, “all other terms shall have
the same meaning as when used” in the
’40 Act.
The 1986 Act expanded the definition
of RIC qualifying income in a number of
ways: by adding a cross-reference to the
definition of “securities” in the ’40 Act;
by adding gains from the sale or other
disposition of foreign currencies; and by
adding an “other income” provision. As so
amended, section 851(b)(2) defines quali-
fying income, in relevant part, as—
dividends, interest, payments with re-
spect to securities loans (as defined in
section 512(a)(5)), and gains from the
sale or other disposition of stock or se-
curities (as defined in [the ’40 Act]) or
foreign currencies, or other income (in-
cluding but not limited to gains from
options, futures or forward contracts)
derived with respect to [the RIC’s] busi-
nessofinvestinginsuchstock,securi-
ties, or currencies . . . .
Section 851(b) further provides that, for
this purpose, “the Secretary may by regu-
lation exclude from qualifying income for-
eign currency gains which are not directly
related to the company’s principal busi-
ness of investing in stock or securities (or
options and futures with respect to stock or
securities).”
The ’40 Act defines “security” as—
any note, stock, treasury stock, secu-
rity future, bond, debenture, evidence
of indebtedness, certificate of interest
or participation in any profit-sharing
agreement, collateral-trust certificate,
preorganization certificate or subscrip-
tion, transferable share, investment
contract, voting-trust certificate, cer-
tificate of deposit for a security, frac-
tional undivided interest in oil, gas,
or other mineral rights, any put, call,
straddle, option, or privilege on any
security (including a certificate of de-
posit) or on any group or index of se-
curities (including any interest therein
or based on the value thereof), or any
put, call, straddle, option, or privilege
entered into on a national securities ex-
change relating to foreign currency, or,
in general, any interest or instrument
commonly known as a “security”, or
any certificate of interest or participa-
tion in, temporary or interim certificate
for, receipt for, guarantee of, or warrant
or right to subscribe to or purchase, any
of the foregoing.
15 U.S.C. § 80a–2(a)(36) (2000).
ANALYSIS
1.Definition of “securities.”
The Derivatives thatRenters into are
not stock, debt instruments, or currency (or
options, futures, or forward contracts with
respect to stock, debt instruments, or cur-
rency). Nevertheless,R’s income from the
Derivatives may be “other income” if the
Derivatives are “securities” for purposes
of section 851(b)(2). This determination
depends on the effect of the 1986 Act
amendments to section 851(b)(2), which
added the cross-reference to the definition
of securities in the ’40 Act.
There is no conclusive authority, how-
ever, as to whether derivative contracts on
commodities are included in the ’40 Act’s
definition of “securities.” Accordingly,
consideration of Congressional intent in
enacting that cross-reference is helpful in
determining whether commodity deriva-
tive contracts are securities for purposes of
section 851(b)(2). Evidence of that intent
may be found in the background to amend-
ments to section 851(b)(2) in the 1986 Act.
The amendments were added as a Senate
floor amendment to the bill that eventu-
ally became the 1986 Act. The House
January 9, 20062622006–2 I.R.B.

and Senate committee reports, therefore,
do not discuss these provisions, and the
relevant discussion of the cross-reference
in the report of the Conference Committee
is extremely brief.SeeH.R. Rep. No.
99–426 (1985) (not discussed); S. Rep.
No. 99–313 (1986) (not discussed); 2
H.R. Conf. Rep. No. 99–841, at II–243
(1986) (“The Senate amendment clarifies
the definition of ‘securities’ by reference
to the definition of securities in the Invest-
ment Company Act of 1940.”) Thus the
best evidence of Congressional intent is
found in the floor statement when the pro-
vision was added to the Senate bill and in
other floor statements and Administration
comments concerning related legislation.
The legislative antecedents to the 1986
Act amendments included H.R. 3397,
which was introduced on September
20, 1985, by Representatives Flippo,
Kennelly, and McGrath, and S. 2155,
which was introduced on March 7, 1986,
by Senator Armstrong. These bills pro-
posed the “other income” provision and
the cross-reference to the definition of se-
curity in the ’40 Act. The former change
was to codify a series of letter rulings, and
the latter was to reflect then-current Trea-
sury Regulations.See131 Cong. Rec.
24,570 (1985) (section-by section analysis
of H.R. 3397).
With respect to the definition of quali-
fying income, Senator Armstrong’s floor
amendment to the bill that became the
1986 Act was identical to S. 2155. In
introducing S. 2155, Senator Armstrong
explained that his bill incorporated “mi-
nor changes” to H.R. 3397 “to comply
with recommendations of the Treasury
Department, which has given its support
for the Bill.” 132 Cong. Rec. 4045 (1986)
(remarks of Senator Armstrong). Sena-
tor Armstrong concluded his remarks by
inserting into the Congressional Record
the letter from the Treasury Department
that had recommended changes to H.R
3397.See id. at 4046, 4047–48 (inserting
a letter from Acting Assistant Secretary of
the Treasury (Tax Policy) J. Roger Mentz,
dated February 5, 1986).
Mr. Mentz’s letter explained the funda-
mental policy served by the qualifying in-
come requirement:
[I]t is essential that two limits on
the activities of RICs be retained.
First, income qualifying under sec-
tion 851(b)(2) should be limited to
income from property held for invest-
ment, as opposed to property held for
sale to customers in the ordinary course
of business. Second, income qualify-
ing under section 851(b)(2) should be
limitedtoincomefromstocksandse-
curities, as opposed to other property.
...Forexample,underthatsecond
limit, we would generally not treat as
qualifying income gains from trading
in commodities, even if the purpose of
that trading is to hedge a related stock
investment.
Id. at 4048.
The letter pointed out that the Service
had “often gone beyond the literal terms
of the statute in order to give a reason-
able interpretation to [then-current] sec-
tion 851(b)(2),” for example by granting
letter rulings that certain investment prod-
ucts were securities, gains on the sale or
disposition of which resulted in qualify-
ing income. (The products explicitly men-
tioned were options on securities, futures
contracts on securities, stock index futures,
options on stock indices, and options on
stock index futures.) The letter noted that,
despite this flexibility, each RIC could be
certain of the treatment of various income
items only by obtaining its own letter rul-
ing.See id. at 4047–48. Thus, one justi-
fication for the amendments in H.R. 3397
appeared to be providing the needed cer-
tainty.
With respect to foreign currency gains,
the Treasury letter stated:
We believe that investments in for-
eign-currency denominated securities
are the type of passive investments that
should be permissible for RICs. More-
over, foreign currency investments that
are made to hedge investments in for-
eign-currency denominated securities
also appear to be an appropriate[] part
of the passive investment activity of
RICs. Accordingly, we believe that
foreign currency gains from invest-
ments in foreign-currency denominated
securities and from hedging activities
with respect to such securities should
be treated as qualifying income under
section 851(b)(2).
Id. at 4048.
The Treasury Department, however,
was not prepared at that time to propose
statutory rules that would distinguish
between currency gains relating to in-
vestments in stocks or securities denom-
inated in a foreign currency and other
currency gains that Treasury believed
should not be qualifying income under
section 851(b)(2). The letter, therefore,
suggested that foreign currency gains be
added to the list of qualifying income but
thatTreasurybeprovidedwith“regula-
tory authority to exclude from qualifying
income any foreign currency gains that are
not derived with respect to investment in a
foreign-currency denominated security or
from hedging activity with respect to such
a security.”Id.
When Senator Armstrong offered the
relevant provision as an amendment on the
Senate floor, he asserted that it “enjoys the
support of the Treasury Department” and
that its purpose was “to permit the mutual
fund industry to make better use of income
from stock options, futures contracts and
options on stock ind[ic]es, options and fu-
tures o[n] foreign currencies, and foreign
currency transactions.” 132 Cong. Rec.
14,991–92 (1986).
This discussion demonstrates that the
amendments to section 851(b)(2) made by
the 1986 Act had a very specific purpose,
which was to provide certainty by expand-
ing the statutory description of qualifying
income to include income that the Service,
in specific cases, had already treated ad-
ministratively as qualifying income. This
included income from derivative contracts
on stocks and securities (as the term “secu-
rity” is generally understood in the U.S. tax
law), such as futures and options on stock
indices, which create an economic expo-
sure to stock or securities even though the
property underlying the derivative may be
a collection of stocks and securities, rather
than a specific stock or security.
The new rule regarding gains from for-
eign currencies (and options, futures or
forward contracts on foreign currencies)
was distinct from both the “other income”
provision and the cross-reference to the
definition of “security” in the ’40 Act.
Thus a separate provision both established
the general rule that foreign currency gain
is qualifying incomeand created specific
regulatory authority to exclude any for-
eign currency gains that are not “directly
related” to a RIC’s “principal business of
investinginstockorsecurities (or options
and futures with respect to stock or secu-
rities).” The reason was that these gains
were income from property other than
stock or securities.
2006–2 I.R.B.263January 9, 2006

The foregoing indicates that Congress
did not intend for the cross-reference to
the ’40 Act to incorporate into section
851(b)(2) an expansive construction of the
term “securities.” Particularly important
was the specific inclusion in the 1986
amendment of foreign-currency-related
gains. If the ’40 Act were read expan-
sively, there would be no need for special
mention of these gains, because they
would be included in the provision for
“other income . . . derived with respect
to [the RIC’s] business of investing in
securities.” Moreover, the authority given
to Treasury to exclude from qualifying
income “foreign currency gains which
are not directly related to the company’s
principal business of investing in stock
or securities” indicates that the reason for
the special treatment for foreign currency
was to facilitate a RIC’s principal activity,
namely investing in qualifying stock or
securities, when the stock or securities are
denominated in a foreign currency.
A construction of the term “securities”
that excludes derivative contracts provid-
ing for a total return exposure to a com-
modity index is consistent with Congress’
intent in amending section 851(b)(2) in
1986. Accordingly, because the underly-
ing property is a commodity (or commod-
ity index), the Derivatives thatRenters
into are not securities for purposes of sec-
tion 851(b)(2).
2.Application of the “other income”
provision.
Rinvests substantially all of the funds
it receives from shareholders in debt in-
struments, which are securities for pur-
poses of section 851(b)(2). Even though
R’s Derivatives are not themselves securi-
ties for purposes of section 851(b)(2), in-
come from the Derivatives counts toward
the 90-percent test if it is “other income
(including but not limited to gains from
options, futures, or forward contracts) de-
rived with respect to [R’s]businessofin-
vesting in” stock, securities, or currencies.
R, however, does not enter into the
Derivatives in connection with a business
of investing in stock, securities, or curren-
cies. Nor doesRenter into the Derivatives
in order to reduce or hedge the level of risk
in a business of investing in stock, securi-
ties, or currencies.R’s business is to create
investment exposure to changes incom-
modityprices, and the Derivatives are the
primary vehicle for doing so.Rowns the
debt instruments to facilitate its business
of providing this commodity-derivative
exposure. BecauseR’s Derivatives are
not themselves securities and becauseR
does not enter into those contracts with
respect to a business of investing in stock,
securities, or currencies, income from the
Derivatives is not qualifying income for
purposes of section 851(b)(2).
HOLDING
A derivative contract with respect to a
commodity index is not a security for pur-
poses of section 851(b)(2). Under the facts
above,R’s income from such a contract
is not qualifying income for purposes of
section 851(b)(2) because the income from
the contract is not derived with respect to
R’s business of investing in stocks, securi-
ties or currencies.
PROSPECTIVE APPLICATION
Under the authority of section
7805(b)(8), the holding of this revenue
ruling will not be applied adversely with
respect to amounts of income that a tax-
payer recognizes on or before June 30,
2006.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Dale S. Collinson of the Office
of the Associate Chief Counsel (Finan-
cial Institutions & Products). For further
information regarding this revenue rul-
ing, contact him at (202) 622–3900 or
Susan Thompson Baker at (202) 622–3930
(not toll-free calls).
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for January 2006.
Rev. Rul. 2006–4
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2006 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Table 5
contains the federalrate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remain-
der or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the deemed rate of return for transfers
made during calendar year 2006 to pooled
income funds described in § 642(c)(5)
that have been in existence for less than
3 taxable years immediately preceding
the taxable year in which the transfer was
made.
January 9, 20062642006–2 I.R.B.

REV. RUL. 2006–
4TABLE1
Applicable Federal Rates (AFR) for January 2006
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.38%4.33%4.31%4.29%
110% AFR4.82%4.76%4.73%4.71%
120% AFR5.27%5.20%5.17%5.14%
130% AFR5.71%5.63%5.59%5.57%
Mid-term
AFR4.48%4.43%4.41%4.39%
110% AFR4.93%4.87%4.84%4.82%
120% AFR5.39%5.32%5.29%5.26%
130% AFR5.84%5.76%5.72%5.69%
150% AFR6.76%6.65%6.60%6.56%
175% AFR7.90%7.75%7.68%7.63%
Long-te
rm
AFR4.73%4.68%4.65%4.64%
110% AFR5.22%5.15%5.12%5.10%
120% AFR5.70%5.62%5.58%5.56%
130% AFR6.17%6.08%6.03%6.00%
REV. RUL. 2006–4 TABLE 2
Adjusted AFR for January 2006
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
3.17%3.15%3.14%3.13%
Mid
-term adjusted AFR
3.5
6%
3.5
3%
3.5
1%
3.5
0%
Long-term adjusted
AFR
4.36%4.31%4.29%4.27%
REV. RUL. 2006–4 TABLE 3
Rates Under Section 382 for January 2006
Adjusted federal long-term rate for the current month4.36%
L
ong-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
f
ederal long-term rates for the current month and the prior two months.)
4
.40%
REV. RUL. 2006–4 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 2006
Appropriate percentage for the 70% present value low-income housing credit8.07%
Appropriate percentage for the 30% present value low-income housing credit3.46%
2006–2 I.R.B.265January 9, 2006

REV. RUL. 2006–
4TABLE5
Rate Under Section 7520 for January 2006
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest5.4%
REV. RUL. 2006–4 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2006
Deemed rate of return for transfers during 2006 to pooled income funds that have been in existence for
less than 3 taxable years3.8%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 1297.—Passive
Foreign Investment
Company
26 CFR 1.1297–3T: Deemed sale or deemed dividend
election by a U.S. person that is a shareholder of a
section 1297(e) PFIC (temporary).
T.D. 9232
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Guidance on Passive Foreign
Investment Company (PFIC)
Purging Elections
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulation.
SUMMARY: This document contains
temporary regulations that provide certain
elections for taxpayers that continue to
be subject to the PFIC excess distribution
regime of section 1291 even though the
foreign corporation in which they own
stock is no longer treated as a PFIC under
section 1297(a) or (e). The regulations
are necessary to provide guidance about
purging the PFIC taint for such foreign
corporations. The regulations will affect
U.S. persons that hold stock in a PFIC.
The text of these temporary regulations
also serves as the text of the proposed
regulations set forth in the notice of pro-
posed rulemaking (REG–133446–03) on
this subject in this issue of the Bulletin.
DATES:Effective Date: These regulations
are effective December 8, 2005.
Applicability Date:Fordatesof
applicability,see §§1.1291–9T(k),
1.1297–3T(f), and 1.1298–3T(f).
FOR FURTHER INFORMATION
CONTACT: Ethan Atticks at (202)
622–3840 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public pro-
cedure pursuant to the Administrative Pro-
cedure Act (5 U.S.C. 553). For this reason,
the collection of information contained in
these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of Man-
agement and Budget under control number
1545–1965. Responses to this collection
of information are required to obtain a tax
benefit.
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
OMB control number.
For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the pream-
ble of the cross-referencing notice of pro-
posed rulemaking published in this issue of
the Bulletin.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains amendments
to regulations under sections 1291(d)(2),
1297(e) and 1298(b)(1). The temporary
regulations provide rules for a shareholder
of a foreign corporation to make a deemed
sale or a deemed dividend election under
section 1298(b)(1) when section 1297(e)
applies to a portion of the holding period.
The temporary regulations also provide
rules for such shareholders, or sharehold-
ers of foreign corporations that no longer
meet the income or asset tests of section
1297(a), to make late deemed sale or
deemed dividend elections.
Section 1297(e), added by the Taxpayer
Relief Act of 1997 (Public Law 105–34,
111 Stat. 708), provides that a foreign cor-
poration generally is not treated as a PFIC
with respect to a shareholder during the
qualified portion of the shareholder’s hold-
ingperiodinthestockoftheforeigncor-
poration. The “qualified portion” is the
portion of the shareholder’s holding pe-
riod which is after December 31, 1997,
and during which the shareholder is a U.S.
shareholder (as defined in section 951(b))
and the foreign corporation is a controlled
foreign corporation. If the qualified por-
tion of the U.S. shareholder’s holding pe-
riod in the stock of the foreign corporation
is less than the shareholder’s entire hold-
January 9, 20062662006–2 I.R.B.

ing period, then, notwithstanding section
1297(e), section 1298(b)(1) will apply to
treat the foreign corporation as a PFIC with
respect to the shareholder if at any time
during the shareholder’s holding period of
the stock, the corporation was a PFIC that
was not a QEF, and the shareholder has not
made an election under section 1298(b)(1)
to purge the PFIC taint under rules similar
to the rules of section 1291(d)(2).
Section 1298(b)(1) provides that if
a shareholder owns stock in a foreign
corporation that, at any time during the
shareholder’s holding period with respect
to such stock, was a PFIC that was not a
QEF, the stock will retain its character as
PFIC stock, even if the corporation later
ceases to qualify as a PFIC under section
1297(a), unless the shareholder elects to
purge the PFIC taint under rules similar to
the rules of section 1291(d)(2).
On March 2, 1988, the IRS and Trea-
sury Department published temporary
regulations (T.D. 8178, 1988–1 C.B. 313
[53 FR 6770]), and proposed regulations
that cross-referenced the temporary regu-
lations (INTL 941–86, 1988–1 C.B. 916
[53 FR 6781]), concerning the election
under section 1298(b)(1) (then section
1297(b)(1)) (1988 temporary regulations).
The 1988 temporary regulations permit-
ted a shareholder of a former PFIC, as
defined in §1.1291–9(j)(2)(iv), to purge
the PFIC taint by making a deemed sale
election. On January 2, 1998, the IRS and
Treasury Department published tempo-
rary regulations (T.D. 8750, 1998–1 C.B.
562 [63 FR 6]) and proposed regulations
that cross-referenced the temporary reg-
ulations (REG–115795–97, 1998–1 C.B.
591 [63 FR 39–01]) that amended the
1988 temporary regulations. The 1998
temporary regulations provided that a
shareholder of a former PFIC that was a
controlled foreign corporation (as defined
in section 957(a)) (CFC) during its last tax-
able year as a PFIC under section 1297(a),
may apply the rules of the deemed divi-
dend election under section 1291(d)(2)(B)
and §1.1291–9 to its section 1298(b)(1)
election. The 1998 temporary regulations
expired on January 2, 2001, pursuant to
section 7805(e)(2).
Explanation of Provisions
The regulations contained in this doc-
ument provide guidance on making a
deemed sale or a deemed dividend elec-
tion for a shareholder of a section 1297(e)
PFIC. Section 1.1291–9T(j)(2)(v) defines
a section 1297(e) PFIC as a foreign cor-
poration that qualifies as a PFIC under
section 1297(a) on the first day of the
qualified portion of the shareholder’s
holding period under section 1297(e), and
is also treated as a PFIC with respect to the
shareholder under section 1298(b)(1) be-
cause at any time during the shareholder’s
holding period of the stock, other than the
qualified portion, the foreign corporation
was a PFIC that was not a QEF.
The deemed sale and deemed divi-
dend election rules contained herein gen-
erally conform to the deemed sale and
deemed dividend election provisions un-
der §§1.1291–9 and –10, which apply to
shareholders making a purging election
in conjunction with aQEF election. The
deemed sale and deemed dividend election
rules contained in these regulations, which
apply to shareholders of section 1297(e)
PFICs, however, differ from those con-
tained in §§1.1291–9 and –10 in several
minor respects.
First, under the deemed dividend or
deemed sale election rules contained in
§§1.1291–9 and –10, the deemed dividend
or the gain recognized on the deemed
sale, is taxed as an excess distribution
received by the shareholder on the qual-
ification date, defined as the first day of
thePFIC’sfirsttaxableyearasaQEF.
See §1.1291–9T(e). Under these regula-
tions, for purposes of a deemed dividend
or deemed sale election made by a share-
holder of a section 1297(e) PFIC, the
deemed dividend, or the gain recognized
on the deemed sale, is taxed as an excess
distribution received on the CFC qualifi-
cation date. The “CFC qualification date”
is defined in §1.1297–3T(d) as the first
day on which the qualified portion of the
shareholder’s holding period in the Sec-
tion 1297(e) PFIC begins, as determined
under section 1297(e)(3).
Second, under §1.1291–9(a)(2), the
term “post-1986 earnings and profits” is
defined as certain undistributed earnings
and profits as of the day before the qual-
ification date. These regulations contain
a similar rule. Section 1.1297–3T(c) pro-
vides, in general, that “post-1986 earnings
and profits” means certain undistributed
earnings as of the day before the CFC
qualification date. Unlike the qualifica-
tion date under §1.1291–9, which is the
first day of the taxable year, the CFC
qualification date may be a day after
the first day of the taxable year. Thus,
§1.1297–3T(c)(3)(i)(B) also contains a
special rule for determining post-1986
earnings and profits when the CFC qual-
ification date is a day after the first day
of the taxable year. In such instances, the
undistributed earnings and profits will be
determined at the close of the taxable year
that includes the CFC qualification date.
Finally, taxpayers have commented
that, if a foreign corporation is a PFIC
under the “once a PFIC, always a PFIC”
rule of section 1298(b)(1) but the corpo-
ration has ceased to qualify as a PFIC
under section 1297(a) or is a corporation
to which section 1297(e) applies, and if
the shareholder fails to make a timely
purging election, the shareholder has no
waytoremovethePFICtaint.Toaddress
this situation, the IRS and Treasury De-
partment also have included late election
relief provisions in the regulations. These
provisions, contained in §§1.1297–3T(e)
and 1.1298–3T(e), allow shareholders of a
section 1297(e) PFIC or a former PFIC to
make a late deemed dividend or deemed
sale election with the consent of the Com-
missioner, provided certain requirements
are met. Under this provision, the share-
holder applies the rules of §§1.1297–3T
and 1.1298–3T as if itspurging election
were timely made. If the taxable year for
whichthepurgingelectionismade(i.e.,
the taxable year that includes the CFC
qualification date or the termination date)
is a closed taxable year, the taxpayer must
enter into a closing agreement to agree to
eliminate any prejudice to the interests of
the U.S. government as a consequence of
the taxpayer’s inability to file an amended
return.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. For applicability of the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6), please refer to the Special Analyses
section of the preamble of the cross-refer-
ence notice of proposed rulemaking pub-
lished in this issue of the Bulletin. Pur-
suant to section 7805(f) of the Code, this
2006–2 I.R.B.267January 9, 2006

regulation will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regula-
tions is Ethan Atticks, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. New §1.1291–9T is added to
read as follows:
§1.1291–9T Deemed dividend election
(temporary).
(a) through (i)(2)(iv) [Reserved].
For further guidance, see §1.1291–9(a)
through (j)(2)(iv).
(j)(2)(v)Section 1297(e) PFIC.Afor-
eign corporation is a section 1297(e) PFIC
with respect to a shareholder (as defined in
§1.1291–9(j)(3)) if—
(A) The foreign corporation qualifies as
a PFIC under section 1297(a) on the first
day on which the qualified portion of the
shareholder’s holding period in the foreign
corporation begins,as determined under
section 1297(e)(2); and
(B) The stock of the foreign corporation
held by the shareholder is treated as stock
of a PFIC, pursuant to section 1298(b)(1),
because, at any time during the share-
holder’s holding period of the stock, other
than the qualified portion, the corporation
was a PFIC that was not a QEF.
(3) [Reserved]. For further guidance,
see §1.1291–9(j)(3).
(k)Effective date. (1) The rules of this
section are applicable as of December 8,
2005.
(2) The applicability of this section will
expire on or before December 5, 2008.
Par. 3. Section 1.1297–0T is added to
read as follows:
§1.1297–0T Table of contents (temporary).
This section contains a listing of the
headings for §1.1297–3T.
§1.1297–3T Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a section 1297(e) PFIC
(temporary).
(a) In general.
(b) Application of deemed sale election
rules.
(1) Eligibility to make the deemed sale
election.
(2) Effect of the deemed sale election.
(3) Time for making the deemed sale
election.
(4) Manner of making the deemed sale
election.
(5) Adjustments to basis.
(6) Treatment of holding period.
(c) Application of deemed dividend
election rules.
(1) Eligibility to make the deemed div-
idend election.
(2) Effect of the deemed dividend elec-
tion.
(3) Post–1986 earnings and profits de-
fined.
(4) Time for making the deemed divi-
dend election.
(5) Manner of making the deemed div-
idend election.
(6) Adjustments to basis.
(7) Treatment of holding period.
(8) Coordination with section 959(e).
(d) CFC qualification date.
(e) Late elections requiring special con-
sent.
(1) In general.
(2) Prejudice to the interests of the U.S.
government.
(3) Procedural requirements.
(4) Time and manner of making late
election.
(f) Effective date.
Par. 4. Section 1.1297–3T is revised to
read as follows:
§1.1297–3T Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a section 1297(e) PFIC
(temporary).
(a)In general. A shareholder (as de-
fined in §1.1291–9(j)(3)) of a foreign cor-
poration that is a section 1297(e) PFIC (as
defined in §1.1291–9T(j)(2)(v)) with re-
spect to such shareholder, shall be treated
for tax purposes as holding stock in a
PFIC and therefore continues to be sub-
ject to taxation under section 1291 unless
the shareholder makes a purging elec-
tion under section 1298(b)(1). A purging
election under section 1298(b)(1) is made
under rules similar to the rules of section
1291(d)(2). Section 1291(d)(2) allows a
shareholder to purge the continuing PFIC
taint by either making a deemed sale elec-
tion or a deemed dividend election.
(b)Application of deemed sale election
rules—(1)Eligibility to make the deemed
sale election. A shareholder of a foreign
corporation that is a section 1297(e) PFIC
with respect to such shareholder may
make a deemed sale election under section
1298(b)(1) by applying the rules of this
paragraph (b).
(2)Effect of the deemed sale election.A
shareholder making the deemed sale elec-
tion with respect to a section 1297(e) PFIC
shall be treated as having sold all of its
stock in the section 1297(e) PFIC for its
fair market value on the CFC qualification
date, as defined in paragraph (d) of this
section. A deemed sale under this section
is treated as a disposition subject to tax-
ation under section 1291. Thus, the gain
from the deemed sale is taxed as an excess
distribution received on the CFC qualifica-
tion date. In the case of an election made
by an indirect shareholder, the amount of
gain to be recognized and taxed as an ex-
cess distribution is the amount of gain that
the direct owner of the stock of the PFIC
would have realized on an actual sale or
disposition of the stock of the PFIC indi-
rectly owned by the shareholder. Any loss
realized on the deemed sale is not recog-
nized. After the deemed sale election, the
shareholder’s stock with respect to which
the election was made under this paragraph
(b) shall not be treated as stock in a PFIC
and the shareholder shall not be subject to
taxation under section 1291 with respect to
such stock unless the qualified portion of
the shareholder’s holding period ends, as
determined under section 1297(e)(2), and
January 9, 20062682006–2 I.R.B.

the foreign corporation thereafter qualifies
as a PFIC under section 1297(a).
(3)Time for making the deemed sale
election. Except as provided in paragraph
(e) of this section, a shareholder shall
make the deemed sale election under this
paragraph (b) and section 1298(b)(1) in
the shareholder’s original or amended re-
turn for the taxable year that includes the
CFC qualification date (election year). If
the deemed sale election is made in an
amended return, the return must be filed
by a date that is within three years of the
due date, as extended under section 6081,
of the original return for the election year.
(4)Manner of making the deemed sale
election. A shareholder makes the deemed
sale election under this paragraph (b) by
filing Form 8621 (“Return by a Share-
holder of a Passive Foreign Investment
Company or Qualified Electing Fund”)
with the return of the shareholder for the
election year, reporting the gain as an
excess distribution pursuant to section
1291(a) as if such sale occurred under
section 1291(d)(2), and paying the tax and
interest due on the excess distribution. A
shareholder that makes the deemed sale
election after the due date of the return
(determined without regard to extensions)
for the election year must pay additional
interest, pursuant to section 6601, on the
amount of underpayment of tax for that
year. An electing shareholder that realizes
a loss shall report the loss on Form 8621,
but shall not recognize the loss.
(5)Adjustments to basis. A shareholder
that makes the deemed sale election in-
creases its adjusted basis of the PFIC
stock owned directly by the amount of
gain recognized on the deemed sale. If the
shareholder makes the deemed sale elec-
tion with respect to a PFIC of which it is
an indirect shareholder, the shareholder’s
adjusted basis of the stock or other prop-
erty owned directly by the shareholder,
through which ownership of the PFIC is
attributed to the shareholder, is increased
by the amount of gain recognized by
the shareholder. In addition, solely for
purposes of determining the subsequent
treatment under the Code and regulations
of a shareholder of the stock of the PFIC,
the adjusted basis of the direct owner of
the stock of the PFIC is increased by the
amount of gain recognized on the deemed
sale. A shareholder shall not adjust the ba-
sisofanystockwithrespecttowhichthe
shareholder realized a loss on the deemed
sale, which loss is not recognized under
paragraph (b)(2) of this section.
(6)Treatment of holding period.Ifa
shareholder of a foreign corporation has
made a deemed sale election, then, for pur-
poses of applying sections 1291 through
1298 to such shareholder after the deemed
sale, the shareholder’s holding period in
the stock of the foreign corporation be-
gins on the CFC qualification date, with-
out regard to whether the shareholder rec-
ognized gain on the deemed sale. For other
purposes of the Code and regulations, this
holding period rule does not apply.
(c)Application of deemed dividend
election rules—(1)Eligibility to make the
deemed dividend election. A shareholder
of a foreign corporation that is a section
1297(e) PFIC with respect to such share-
holder may make the deemed dividend
election under the rules of this paragraph
(c). A deemed dividend election may be
made by a shareholder whosepro rata
share of the post-1986 earnings and profits
of the PFIC attributable to the PFIC stock
held on the CFC qualification date is zero.
(2)Effect of the deemed dividend elec-
tion. A shareholder making the deemed
dividend election with respect to a section
1297(e) PFIC shall include in income as a
dividend itspro ratashare of the post-1986
earnings and profits of the PFIC attribut-
able to all of the stock it held, directly or
indirectly on the CFC qualification date,
as defined in paragraph (d) of this sec-
tion. The deemed dividend is taxed un-
der section 1291 as an excess distribution
received on the CFC qualification date.
The excess distribution determined under
this paragraph (c) is allocated under sec-
tion 1291(a)(1)(A) only to each day of the
shareholder’s holding period of the stock
during which the foreign corporation qual-
ified as a PFIC. For purposes of the pre-
ceding sentence, the shareholder’s holding
period of the PFIC stock ends on the day
before the CFC qualification date. After
the deemed dividend election, the share-
holder’s stock with respect to which the
election was made under this paragraph (c)
shall not be treated as stock in a PFIC and
the shareholder shall not be subject to tax-
ation under section 1291 with respect to
such stock unless the qualified portion of
the shareholder’s holding period ends, as
determined under section 1297(e)(2), and
the foreign corporation thereafter qualifies
as a PFIC under section 1297(a).
(3)Post–1986 earnings and profits
defined—(i)In general—(A)General
rule. For purposes of this section, the
term post-1986 earnings and profits means
the post-1986 undistributed earnings,
within the meaning of section 902(c)(1)
(determined without regard to section
902(c)(3)), as of the day before the CFC
qualification date, that were accumulated
and not distributed in taxable years of the
PFIC beginning after 1986 and during
which it was a PFIC, without regard to
whether the earnings related to a period
during which the PFIC was a CFC.
(B)Special rule.IftheCFCqualifi-
cation date is a day that is after the first
day of the taxable year, the term post-1986
earnings and profits means the post-1986
undistributed earnings, within the mean-
ing of section 902(c)(1) (determined with-
out regard to section902(c)(3)), as of the
close of the taxable year that includes the
CFC qualification date. For purposes of
this computation, only earnings and profits
accumulated in taxable years during which
the foreign corporation was a PFIC shall
be taken into account, but without regard
to whether the earnings related to a period
during which the PFIC was a CFC.
(ii)Pro rata share of post-1986 earn-
ings and profits attributable to share-
holder’s stock—(A)In general. A share-
holder’spro ratashare of the post-1986
earnings and profits of the PFIC attribut-
able to the stock held by the shareholder on
the CFC qualification date is the amount
of post-1986 earnings and profits of the
PFIC accumulated during any portion of
the shareholder’s holding period ending
at the close of the day before the CFC
qualification date andattributable, under
the principles of section 1248 and the reg-
ulations under that section, to the PFIC
stock held on the CFC qualification date.
(B)Reduction for previously taxed
amounts. A shareholder’spro ratashare
of the post-1986 earnings and profits of
the PFIC does not include any amount
that the shareholder demonstrates to the
satisfaction of the Commissioner (in the
manner provided in paragraph (c)(5)(ii)
of this section) was, pursuant to another
provision of the law, previously included
in the income of the shareholder, or of
another U.S. person if the shareholder’s
holding period of the PFIC stock includes
2006–2 I.R.B.269January 9, 2006

the period during which the stock was held
by that other U.S. person.
(4)Time for making the deemed divi-
dend election. Except as provided in para-
graph (e) of this section, the shareholder
shall make the deemed dividend elec-
tion under this paragraph (c) and section
1298(b)(1) in the shareholder’s original
or amended return for the taxable year
that includes the CFCqualification date
(election year). If the deemed dividend
election is made in an amended return, the
return must be filed by a date that is within
three years of the due date, as extended
under section 6081, of the original return
for the election year.
(5)Manner of making the deemed div-
idend election—(i)In general. A share-
holder makes the deemed dividend elec-
tion by filing Form 8621 and the attach-
ment to Form 8621 described in paragraph
(c)(5)(ii) of this section with the return of
the shareholder for the election year, re-
porting the deemed dividend as an excess
distribution pursuant to section 1291(a)(1),
and paying the tax and interest due on the
excess distribution. A shareholder that
makes the deemed dividend election af-
ter the due date of the return (determined
without regard to extensions) for the elec-
tion year must pay additional interest, pur-
suant to section 6601, on the amount of un-
derpayment of tax for that year.
(ii)Attachment to Form 8621.The
shareholder must attach a schedule to
Form 8621 that demonstrates the calcu-
lation of the shareholder’spro ratashare
of the post-1986 earnings and profits of
the PFIC that is treated as distributed to
the shareholder on the CFC qualification
date, pursuant to this paragraph (c). If the
shareholder is claiming an exclusion from
itspro ratashare of the post-1986 earn-
ings and profits for an amount previously
included in its income or the income of
another U.S. person, the shareholder must
include the following information:
(A) The name, address and taxpayer
identification number of each U.S. per-
son that previously included an amount in
income, the amount previously included
in income by each such U.S. person, the
provision of law, pursuant to which the
amount was previously included in in-
come, and the taxable year or years of
inclusion of each amount.
(B) A description of the transaction pur-
suant to which the shareholder acquired,
directly or indirectly, the stock of the PFIC
from another U.S. person, and the provi-
sion of law pursuant to which the share-
holder’s holding period includes the period
the other U.S. person held the CFC stock.
(6)Adjustments to basis. A shareholder
that makes the deemed dividend election
increases its adjusted basis of the stock
of the PFIC owned directly by the share-
holder by the amount of the deemed divi-
dend. If the shareholder makes the deemed
dividend election with respect to a PFIC
of which it is an indirect shareholder, the
shareholder’s adjusted basis of the stock or
other property owned directly by the share-
holder, through which ownership of the
PFIC is attributed to the shareholder, is in-
creased by the amount of the deemed div-
idend. In addition, solely for purposes of
determining the subsequent treatment un-
der the Code and regulations of a share-
holder of the stock of the PFIC, the ad-
justed basis of the direct owner of the stock
of the PFIC is increased by the amount of
the deemed dividend.
(7)Treatment of holding period.Ifthe
shareholder of a foreign corporation has
made a deemed dividend election, then,
for purposes of applying sections 1291
through 1298 to such shareholder after
the deemed dividend, the shareholder’s
holding period of the stock of the foreign
corporation begins on the CFC qualifica-
tion date. For other purposes of the Code
and regulations, this holding period rule
does not apply.
(8)Coordination with section 959(e).
For purposes of section 959(e), the en-
tire deemed dividend is treated as having
been included in gross income under sec-
tion 1248(a).
(d)CFC qualification date. For pur-
poses of this section, the CFC qualification
date is the first day on which the qualified
portion of the shareholder’s holding period
in the section 1297(e) PFIC begins, as de-
termined under section 1297(e).
(e)Late elections requiring special con-
sent—(1)In general. This section pre-
scribes the exclusive rules under which a
shareholder of a section 1297(e) PFIC may
make a section 1298(b)(1) election after
the time prescribed in paragraph (b)(2) or
(c)(4) of this section for making a deemed
sale or a deemed dividend election has
elapsed (late purging election). Therefore,
a shareholder may not seek such relief un-
der any other provisions of the law, in-
cluding §301.9100–3 of this chapter. A
shareholder may request the consent of the
Commissioner to make a late deemed sale
or deemed dividend election for the tax-
able year of the shareholder that includes
the CFC qualification date provided the
shareholder satisfies the requirements set
forth in this paragraph (e). The Commis-
sioner may, in his discretion, grant relief
under this paragraph (e) only if—
(i) In a case where the shareholder is re-
questing consent under this paragraph (e)
after June 30, 2006, the shareholder re-
quests such consent before a representa-
tive of the Internal Revenue Service raises
upon audit the PFIC status of the foreign
corporation for any taxable year of the
shareholder;
(ii) The shareholder has agreed in a
closing agreement with the Commissioner,
described in paragraph (e)(3) of this sec-
tion, to eliminate any prejudice to the inter-
ests of the U.S. government, as determined
under paragraph (e)(2) of this section, as a
consequence of the shareholder’s inability
to file amended returns for its taxable year
in which the CFC qualification date falls,
or an earlier closed taxable year in which
the shareholder has taken a position that is
inconsistent with the treatment of the for-
eign corporation as a PFIC; and
(iii) The shareholder satisfies the proce-
dural requirements set forth in paragraph
(e)(3) of this section.
(2)Prejudice to the interests of the U.S.
government. The interests of the U.S. gov-
ernment are prejudiced if granting relief
would result in the shareholder having a
lower tax liability (other than by ade min-
imisamount), taking into account applica-
ble interest charges, for the taxable year
that includes the CFC qualification date
(or a prior taxable year in which the tax-
payer took a position on a return that was
inconsistent with the treatment of the for-
eign corporation as aPFIC) than the share-
holder would have had if the shareholder
had properly made the section 1298(b)(1)
election in the time prescribed in para-
graph(b)(2)or(c)(3)ofthissection(orhad
not taken a position in a return for an ear-
lier year that was inconsistent with the sta-
tus of the foreign corporation as a PFIC).
The time value of money is taken into ac-
count for purposes of this computation.
(3)Procedural requirements—(i)In
general. The amount due with respect to
a late purging election is determined in
January 9, 20062702006–2 I.R.B.

the same manner as if the purging elec-
tion had been timely filed. However, the
shareholder is also liable for interest on
the amount due, determined for the period
beginning on the due date (without exten-
sions) for the taxpayer’s income tax return
for the year in which the CFC qualification
date falls and ending on the date the late
purging election is filed with the IRS.
(ii)Filing instructions. A late purging
election is made by filing a completed
Form 8621-A, “Return by a Shareholder
Making Certain Late Elections to End
Treatment as a Passive Foreign Investment
Company.”
(4)Time and manner of making late
election—(i)Time for making a late purg-
ing election. A shareholder may make a
late purging election in the manner pro-
vided in paragraph (e)(4)(ii) of this section
at any time. The date the election is filed
with the IRS will determine the amount of
interest due under paragraph (e)(3) of this
section.
(ii)Manner of making a late purging
election. A shareholder makes a late purg-
ing election by completing Form 8621-A
in the manner required by that form and
this section and filing that form with the
Internal Revenue Service, DP 8621-A,
Ogden, UT 84201.
(f)Effective date. (1) The rules of this
section are applicable as of December 8,
2005.
(2) The applicability of this section will
expire on or before December 5, 2008.
Par. 5. Section 1.1298–0T is added to
read as follows:
§1.1298–0T Table of contents (temporary).
This section contains a listing of the
paragraph headings for §1.1298–3T.
§1.1298–3T Deemed sale or deemed
dividend election by a U.S. person that
is a shareholder of a former PFIC
(temporary).
(a)through(d)[Reserved].Forfurther
guidance, see §1.1298–0, the entries for
§1.1298–3T(a) through (d).
(e) Late purging elections requiring
special consent.
(1) In general.
(2) Prejudice to the interests of the U.S.
government.
(3) Procedural requirement.
(4) Time and manner of making late
election.
Par. 6. Section 1.1298–3T is added to
read as follows:
§1.1298–3T Deemed sale or deemed
dividend election by a U.S. person that
is a shareholder of a former PFIC
(temporary).
(a) through (d) [Reserved]. For further
guidance, see §1.1298–3(a) through (d).
(e)Late purging elections requiring
special consent—(1)In general. This sec-
tion prescribes the exclusive rules under
which a shareholder of a former PFIC may
make a section 1298(b)(1) election after
the time prescribed in paragraph (b)(2) or
(c)(4) of this section for making a deemed
sale or a deemed dividend election has
elapsed (late purging election). Therefore,
a shareholder may not seek such relief
under any other provisions of the law,
including §301.9100–3 of this chapter. A
shareholder may request the consent of
the Commissioner to make a late purging
election for the taxable year of the share-
holder that includes the termination date
provided the shareholder satisfies the re-
quirements set forth in this paragraph (e).
The Commissioner may, in his discretion,
grant relief under this paragraph (e) only
if—
(i) In a case where the shareholder is re-
questing consent under this paragraph (e)
after June 30, 2006, the shareholder re-
quests such consent before a representa-
tive of the Internal Revenue Service raises
upon audit the PFIC status of the foreign
corporation for any taxable year of the
shareholder;
(ii) The shareholder has agreed in a
closing agreement with the Commissioner,
described in paragraph (e)(3) of this sec-
tion, to eliminate any prejudice to the inter-
ests of the U.S. government, as determined
under paragraph (e)(2) of this section, as
a consequence of the shareholder’s inabil-
ity to file amended returns for its taxable
year in which the termination date falls, or
an earlier closed taxable year in which the
shareholder has taken a position that is in-
consistent with the treatment of the foreign
corporation as a PFIC; and
(iii) The shareholder satisfies the proce-
dural requirements set forth in paragraph
(e)(3) of this section.
(2)Prejudice to the interests of the U.S.
government. The interests of the U.S. gov-
ernment are prejudiced if granting relief
would result in the shareholder having a
lower tax liability (other than by ade min-
imisamount), taking into account applica-
ble interest charges, for the taxable year
that includes the termination date (or a
prior taxable year in which the taxpayer
took a position on a return that was in-
consistent with the treatment of the for-
eign corporation as aPFIC) than the share-
holder would have had if the shareholder
had properly made the section 1298(b)(1)
election in the time prescribed in para-
graph(b)(2)or(c)(3)ofthissection(orhad
not taken a position in a return for an ear-
lier year that was inconsistent with the sta-
tus of the foreign corporation as a PFIC).
The time value of money is taken into ac-
count for purposes of this computation.
(3)Procedural requirement—(i)In
general. The amount due with respect to
a late purging election is determined in
the same manner as if the purging elec-
tion had been timely filed. However, the
shareholder is also liable for interest on
the amount due, determined for the period
beginning on the due date (without exten-
sions) for the taxpayer’s income tax return
for the year in which the CFC qualification
date falls and ending on the date the late
purging election is filed with the IRS.
(ii)Filing instructions. A late purging
election is made by filing a completed
Form 8621-A, “Return by a Shareholder
Making Certain Late Elections to End
Treatment as a Passive Foreign Investment
Company.”
(4)Time and manner of making late
election—(i)Time for making a late purg-
ing election. A shareholder may make a
latepurgingelectioninthemannerpro-
vided in paragraph (e)(4)(ii) of this section
at any time. The date the election is filed
with the IRS will determine the amount of
interest due under paragraph (e)(3) of this
section.
(ii)Manner of making a late purging
election. A shareholder makes a late purg-
ing election by completing Form 8621-A
in the manner required by that form and
this section and filing that form with the
Internal Revenue Service, DP 8621-A,
Ogden, UT 84201.
(f)Effective date. (1) The rules of this
section are applicable as of December 8,
2005.
2006–2 I.R.B.271January 9, 2006

(2) The applicability of this section will
expire on or before December 5, 2008.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 7. The authority citation of part
602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 8. In §602.101, paragraph (b) is
amended by revising an entry in the table
for “1.1297–3T” as follows:
§602.101 OMB Control numbers
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1297–3T........................................................... 1545–1965
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved November 21, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on December 7,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 8, 2005, 70 F.R. 72908)
Section 1298.—Special
Rules
26 CFR 1.1298–3: Deemed sale or deemed dividend
election by a U.S. person that is a shareholder of a
former PFIC.
T.D. 9231
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Guidance on Passive Foreign
Investment Company (PFIC)
Purging Elections
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that provide specific elections
that give relief to certain United States
persons that continue to be subject to the
PFIC excess distribution regime of section
1291 even though the foreign corporation
in which they hold stock no longer satis-
fies the definition of a PFIC under section
1297(a). The final regulations affect U.S.
persons owning stock in a PFIC.
DATES:Effective Date: These regulations
are effective December 8, 2005.
Applicability Date: For dates of appli-
cability, see §1.1298–3(f).
FOR FURTHER INFORMATION
CONTACT: Ethan Atticks at (202)
622–3840 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been previ-
ously reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1028, which was later incorporated
into control number 1545–1507.
The collection of information in these
final regulations is in §1.1298–3(c)(5).
This information is required to enable the
IRS to verify that a taxpayer is reporting
the correct amount of income, gain or loss
from that taxpayer’s interest in the foreign
corporation.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains final regula-
tions under section 1298(b)(1). Section
1298(b)(1) was originally enacted as sec-
tion 1297 by the Tax Reform Act of 1986
(Public Law 99–514, 100 Stat. 2085) and
was redesignated as section 1298 by the
Taxpayer Relief Act of 1997 (Public Law
105–34, 111 Stat. 788).
Section 1298(b)(1) provides that if
a shareholder owns stock in a foreign
corporation that, at any time during the
shareholder’s holding period with respect
to such stock, was a PFIC that was not a
qualified electing fund (QEF), the stock
will retain its character as PFIC stock,
even if the corporation later ceases to
qualify as a PFIC under section 1297(a),
unless the shareholder elects to purge the
PFIC taint under rules similar to the rules
of section 1291(d)(2).
On March 2, 1988, the IRS and Trea-
sury Department published temporary
regulations (T.D. 8178, 1988–1 C.B. 313
[53 FR 6770]), and proposed regulations
that cross-referenced the temporary regu-
lations (INTL 941–86, 1988–1 C.B. 916
[53 FR 6781]), concerning the election
under section 1298(b)(1) (then section
1297(b)(1)) (1988 temporary regulations).
The 1988 temporary regulations permit-
ted a shareholder of a former PFIC, as
defined in §1.1291–9(j)(2)(iv), to purge
the PFIC taint by making a deemed sale
election. On January 2, 1998, the IRS and
January 9, 20062722006–2 I.R.B.

Treasury Department published tempo-
rary regulations (T.D. 8750, 1998–1 C.B.
562 [63 FR 6]) and proposed regulations
that cross-referenced the temporary reg-
ulations (REG–115795–97, 1998–1 C.B.
591 [63 FR 39–01]) that amended the
1988 temporary regulations. The 1998
temporary regulations provided that a
shareholder of a former PFIC that was a
controlled foreign corporation (as defined
in section 957(a)) during its last taxable
year as a PFIC under section 1297(a),
may apply the rules of the deemed divi-
dend election under section 1291(d)(2)(B)
and §1.1291–9 to its section 1298(b)(1)
election. The 1998 temporary regulations
expired on January 2, 2001, pursuant to
section 7805(e)(2).
One written comment was received
regarding the deemed sale election in
response to the notice of proposed rule-
making published by cross-reference to
the 1988 regulations. No public hearing
was requested or held on the notice of
proposed rulemaking. After considera-
tion of the comment, the 1988 temporary
regulations, as modified by the 1998 tem-
porary regulations that permit a deemed
dividend election in certain circumstances,
are adopted as final regulations with the
changes discussed below.
Summary of Comments and
Explanation of Revisions
A. Time and Manner of Making the
Deemed Sale Election
One comment was received on the
1988 temporary regulations regarding the
deemed sale election under §1.1297–3T.
The comment recommended that the reg-
ulations permit a shareholder to make a
deemed sale election without having to
file an amended return in instances where
an election could be filed by the due date
of the shareholder’s original return for
the last taxable year during which the for-
eign corporation continued to qualify as
a PFIC under section 1297(a). This sug-
gestion was adopted with respect to both
the deemed sale and deemed dividend
elections, and the regulations have been
revised accordingly.
B. Additional Revisions
Additional revisions were made to the
final regulations to reflect the redesigna-
tion of certain Code sections pursuant to
the Taxpayer Relief Act of 1997 (Public
Law 105–34, 111 Stat. 788). Similar revi-
sions were made to the definition of former
PFIC contained in §1.1291–9(j)(2)(iv). In
addition, the deemed dividend election
provisions were added and the deemed
sale election provisions were revised to
conform generally the elections under sec-
tion 1298(b)(1) to the deemed dividend
and deemed sale election provisions con-
tained in §§1.1291–9 and –10 (purging
elections in connection with election to
treat PFIC as a QEF).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and, be-
cause the regulations do not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Code, the notice of proposed
rulemaking preceding this regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of this regula-
tion is Ethan Atticks, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
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 citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1291–9 is amended as
follows:
1. Paragraph (i)(1) is removed.
2. The paragraph heading of paragraph
(i)(2) is removed.
3. The text of paragraph (i)(2) is redes-
ignated as paragraph (i).
4. Paragraph (j)(2)(iv) is revised.
5. Paragraph (j)(2)(v) is added.
The revision and addition reads as fol-
lows:
§ 1.1291–9 Deemed dividend election.
*****
(j) * * *
(2) * * *
(iv)Former PFIC. A foreign corpora-
tion is a former PFIC with respect to a
shareholder if the corporation satisfies nei-
ther the income test of section 1297(a)(1)
nor the asset test of section 1297(a)(2),
but its stock, held by that shareholder, is
treated as stock of a PFIC, pursuant to sec-
tion 1298(b)(1), because the corporation
was a PFIC that was not a QEF at some
time during the shareholder’s holding pe-
riod of the stock.
(v)Section 1297(e) PFIC.[Re-
served]. For further guidance, see
§1.1291–9T(j)(2)(v).
*****
Par. 3. Section 1.1297–0 is revised to
read as follows:
§1.1297–0 Table of contents.
This section contains a listing of the
paragraph headings for §1.1297–3.
§1.1297–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a section 1297(e) PFIC.
[Reserved]. For further guidance, see
the entries in §1.1297–3T.
Par. 4. Section 1.1297–3 is added to
read as follows:
§1.1297–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a section 1297(e) PFIC.
[Reserved]. For further guidance, see
§1.1297–3T.
Par. 5. Sections 1.1298–0 and
1.1298–3 are added to read as follows:
§ 1.1298–0 Table of contents.
This section contains a listing of the
paragraph headings for §1.1298–3.
2006–2 I.R.B.273January 9, 2006

§ 1.1298–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a former PFIC.
(a) In general.
(b) Application of deemed sale election
rules.
(1) Eligibility to make the deemed sale
election.
(2) Effect of deemed sale election.
(3) Time for making the deemed sale
election.
(4) Manner of making the deemed sale
election.
(5) Adjustments to basis.
(6) Treatment of holding period.
(c) Application of deemed dividend
election rules.
(1) Eligibility to make the deemed div-
idend election.
(2) Effect of the deemed dividend elec-
tion.
(3) Post–1986 earnings and profits de-
fined.
(4) Time for making the deemed divi-
dend election.
(5) Manner of making the deemed div-
idend election.
(6) Adjustments to basis.
(7) Treatment of holding period.
(8) Coordination with section 959(e).
(d) Termination date.
(e) Late purging elections requiring
special consent. [Reserved]. For further
guidance, see §1.1298–0T.
(f) Effective date.
§ 1.1298–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a former PFIC.
(a)In general. A shareholder (as de-
fined in §1.1291–9(j)(3)) of a foreign cor-
poration that is a former PFIC, (as de-
fined in §1.1291–9(j)(2)(iv)) with respect
to such shareholder, shall be treated for tax
purposes as holding stock in a PFIC and
therefore continues to be subject to taxa-
tion under section 1291 unless the share-
holder makes a purging election under sec-
tion 1298(b)(1). A purging election un-
der section 1298(b)(1) is made under rules
similar to the rules of section 1291(d)(2).
Section 1291(d)(2) allows a shareholder to
purge the continuing PFIC taint by making
either a deemed sale election or a deemed
dividend election.
(b)Application of deemed sale elec-
tion rules—(1)Eligibility to make the
deemed sale election. A shareholder of a
foreign corporation that is a former PFIC
with respect to such shareholder may
make a deemed sale election under section
1298(b)(1) by applying the rules of this
paragraph (b).
(2)Effect of deemed sale election.A
shareholder making the deemed sale elec-
tion with respect to a former PFIC shall be
treated as having sold all its stock in the
former PFIC for its fair market value on the
termination date, as defined in paragraph
(d) of this section. A deemed sale is treated
as a disposition subject to taxation under
section 1291. Thus, gain from the deemed
sale is taxed under section 1291 as an ex-
cess distribution received on the termina-
tion date. In the case of an election made
by an indirect shareholder, the amount of
gain to be recognized and taxed as an ex-
cess distribution is the amount of gain that
the direct owner of the stock of the PFIC
would have realized on an actual sale or
disposition of the stock of the PFIC indi-
rectly owned by the shareholder. Any loss
realized on the deemed sale is not recog-
nized. After the deemed sale election, the
shareholder’s stock with respect to which
the election was made under this paragraph
(b) shall not be treated as stock in a PFIC
and the shareholder shall not be subject to
taxation under section 1291 with respect to
such stock unless the foreign corporation
thereafter qualifies as a PFIC under section
1297(a).
(3)Time for making the deemed sale
election. Except as provided in paragraph
(e) of this section, the shareholder shall
make the deemed sale election under this
paragraph (b) and section 1298(b)(1) in the
shareholder’s original or amended return
for the taxable year that includes the termi-
nation date (election year). If the deemed
sale election is made in an amended return,
the return must be filed by a date that is
within three years of the due date, as ex-
tended under section 6081, of the original
return for the election year.
(4)Manner of making the deemed sale
election. A shareholder makes the deemed
sale election under this paragraph (b) by
filing Form 8621 (“Return by a Share-
holder of a Passive Foreign Investment
Company or Qualified Electing Fund”)
with the return of the shareholder for the
election year, reporting the gain as an
excess distribution pursuant to section
1291(a) as if such deemed sale occurred
under section 1291(d)(2), and paying the
tax and interest due on the excess distribu-
tion. A shareholder that makes the deemed
sale election after the due date of the return
(determined without regard to extensions)
for the election year must pay additional
interest, pursuant to section 6601, on the
amount of underpayment of tax for that
year. An electing shareholder that realizes
a loss shall report the loss on Form 8621,
but shall not recognize the loss.
(5)Adjustments to basis. A shareholder
that makes the deemed sale election in-
creases its adjusted basis of the PFIC
stock owned directly by the amount of
gain recognized on the deemed sale. If the
shareholder makes the deemed sale elec-
tion with respect to a PFIC of which it is
an indirect shareholder, the shareholder’s
adjusted basis of the stock or other prop-
erty owned directly by the shareholder,
through which ownership of the PFIC is
attributed to the shareholder, is increased
by the amount of gain recognized by
the shareholder. In addition, solely for
purposes of determining the subsequent
treatment under the Code and regulations
of a shareholder of the stock of the PFIC,
the adjusted basis of the direct owner of
the stock of the PFIC is increased by the
amount of gain recognized on the deemed
sale. A shareholder shall not adjust the ba-
sis of any stock with respect to which the
shareholder realized a loss on the deemed
sale, but which loss is not recognized un-
der paragraph (b)(2) of this section.
(6)Treatment of holding period.Ifa
shareholder of a foreign corporation has
made a deemed sale election, then, for pur-
poses of applying sections 1291 through
1298 to such shareholder after the deemed
sale, the shareholder’s holding period in
the stock of the foreigncorporation begins
on the day following the termination, with-
out regard to whether the shareholder rec-
ognized gain on the deemed sale. For other
purposes of the Code and regulations, this
holding period rule does not apply.
(c)Application of deemed dividend
election rules—(1)Eligibility to make the
deemed dividend election. A shareholder
of a foreign corporation that is a former
PFIC with respect to such shareholder may
make the deemed dividend election under
the rules of this paragraph (c) provided
the foreign corporation was a controlled
January 9, 20062742006–2 I.R.B.

foreign corporation (as defined in section
957(a) (CFC)) during its last taxable year
as a PFIC. A shareholder may make the
deemed dividend election without regard
to whether the shareholder is a United
States shareholder within the meaning of
section 951(b). A deemed dividend elec-
tion may be made by a shareholder whose
pro ratashare of the post-1986 earnings
and profits of the PFIC attributable to the
PFIC stock held on the termination date is
zero.
(2)Effect of the deemed dividend elec-
tion. A shareholder making the deemed
dividend election with respect to a former
PFIC shall include in income as a dividend
itspro ratashare of the post-1986 earn-
ings and profits of the PFIC attributable
to all of the stock it held, directly or indi-
rectly on the termination date, as defined in
paragraph (d) of this section. The deemed
dividend is taxed under section 1291 as an
excess distribution received on the termi-
nation date. The excess distribution de-
termined under this paragraph (c) is al-
located under section 1291(a)(1)(A) only
to each day of the shareholder’s holding
period of the stock during which the for-
eign corporation qualified as a PFIC. For
purposes of the preceding sentence, the
shareholder’s holding period of the PFIC
stockendsontheterminationdate. After
the deemed dividend election, the share-
holder’s stock with respect to which the
election was made under this paragraph (c)
shall not be treated as stock in a PFIC and
the shareholder shall not be subject to tax-
ation under section 1291 with respect to
such stock unless the foreign corporation
thereafter qualifies as a PFIC under section
1297(a).
(3)Post-1986 earnings and profits de-
fined—(i)In general. For purposes of this
section, the termpost-1986 earnings and
profitsmeans the post-1986 undistributed
earnings, within the meaning of section
902(c)(1) (determined without regard to
section 902(c)(3)), as of the close of the
taxable year that includes the termination
date. For purposes of this computation,
only earnings and profits accumulated in
taxable years during which the foreign cor-
poration was a PFIC shall be taken into ac-
count, without regard to whether the earn-
ings relate to a period during which the
PFIC was a CFC.
(ii)Pro rata share of post-1986 earn-
ings and profits attributable to share-
holder’s stock—(A)In general. A share-
holder’spro ratashare of the post-1986
earnings and profits of the PFIC attribut-
able to the stock held by the shareholder
on the termination date is the amount of
post-1986 earnings and profits of the PFIC
accumulated during any portion of the
shareholder’s holding period ending at the
close of the termination date and attribut-
able, under the principles of section 1248
and the regulations under that section, to
the PFIC stock held on the termination
date.
(B)Reduction for previously taxed
amounts. A shareholder’spro ratashare
of the post-1986 earnings and profits of
the PFIC does not include any amount
that the shareholder demonstrates to the
satisfaction of the Commissioner (in the
manner provided in paragraph (c)(5)(ii)
of this section) was, pursuant to another
provision of the law, previously included
in the income of the shareholder, or of
another U.S. person if the shareholder’s
holding period of the PFIC stock includes
the period during which the stock was held
by that other U.S. person.
(4)Time for making the deemed div-
idend election. Except as provided in
paragraph (e) of this section, the share-
holder shall make the deemed dividend
election under this paragraph (c) and
section 1298(b)(1) in the shareholder’s
original or amended return for the taxable
year that includes the termination date
(election year). If the deemed dividend
election is made in an amended return, the
return must be filed by a date that is within
three years of the due date, as extended
under section 6081, of the original return
for the election year.
(5)Manner of making the deemed div-
idend election—(i)In general. A share-
holder makes the deemed dividend elec-
tion by filing Form 8621 and the attach-
ment to Form 8621 described in paragraph
(c)(5)(ii) of this section with the return of
the shareholder for the election year, re-
porting the deemed dividend as an excess
distribution pursuant to section 1291(a)(1),
and paying the tax and interest due on the
excess distribution. A shareholder that
makes the deemed dividend election af-
ter the due date of the return (determined
without regard to extensions) for the elec-
tion year must pay additional interest, pur-
suant to section 6601, on the amount of un-
derpayment of tax for that year.
(ii)Attachment to Form 8621.The
shareholder must attach a schedule to
Form 8621 that demonstrates the calcu-
lation of the shareholder’spro ratashare
of the post-1986 earnings and profits of
the PFIC that is treated as distributed to
the shareholder on the termination date
pursuant to this paragraph (c). If the
shareholder is claiming an exclusion from
itspro ratashare of the post-1986 earn-
ings and profits for an amount previously
included in its income or the income of
another U.S. person, the shareholder must
include the following information:
(A) The name, address, and taxpayer
identification number of each U.S. person
that previously included an amount in in-
come, the amount previously included in
income by each such U.S. person, the pro-
vision of law pursuant to which the amount
was previously included in income, and the
taxable year or years of inclusion of each
amount.
(B) A description of the transaction pur-
suant to which the shareholder acquired,
directly or indirectly, the stock of the PFIC
from another U.S. person, and the provi-
sion of law pursuant to which the share-
holder’s holding period includes the period
the other U.S. person held the CFC stock.
(6)Adjustments to basis. A shareholder
that makes the deemed dividend election
increases its adjusted basis of the stock
of the PFIC owned directly by the share-
holder by the amount of the deemed divi-
dend. If the shareholder makes the deemed
dividend election with respect to a PFIC
of which it is an indirect shareholder, the
shareholder’s adjusted basis of the stock or
other property owned directly by the share-
holder, through which ownership of the
PFIC is attributed to the shareholder, is in-
creased by the amount of the deemed div-
idend. In addition, solely for purposes of
determining the subsequent treatment un-
der the Code and regulations of a share-
holder of the stock of the PFIC, the ad-
justed basis of the direct owner of the stock
of the PFIC is increased by the amount of
the deemed dividend.
(7)Treatment of holding period.Ifthe
shareholder of a foreign corporation has
made a deemed dividend election, then,
for purposes of applying sections 1291
through 1298 to such shareholder after
the deemed dividend, the shareholder’s
holding period of the stock of the foreign
corporation begins on the day following
2006–2 I.R.B.275January 9, 2006

the termination date. For other purposes
of the Code and regulations, this holding
period rule does not apply.
(8)Coordination with section 959(e).
For purposes of section 959(e), the en-
tire deemed dividend is treated as having
been included in gross income under sec-
tion 1248(a).
(d)Termination date. For purposes of
this section, the termination date is the last
day of the last taxable year of the foreign
corporation during which it qualified as a
PFIC under section 1297(a).
(e)Late purging elections requiring
special consent. [Reserved]. For further
guidance, see §1.1298–3T(e).
(f)Effective date. This section applies
for taxable years of shareholders begin-
ning on or after December 8, 2005. How-
ever, taxpayers may apply the rules of this
section to a taxable year beginning prior to
December 8, 2005, provided the statute of
limitations on the assessment of tax has not
expired.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 7. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table:
§602.101 OMB Control numbers
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1298–3........................................................... 1545–1507
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved November 21, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Fi
led by the Office of the Federal Register on December 7,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 8, 2005, 70 F.R. 72914)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
Section 7701.—Definitions
26 CFR 301.7701–2: Business entities; definitions.
Japanese Yugen Kaisha (YK) and
Tokurei Yugen Kaisha (TYK).AYugen
Kaisha, a Japanese business entity, which
will become a Tokurei Yugen Kaisha un-
der recently enacted Japanese legislation,
will continue to be eligible to elect its U.S.
entity classification under the check the
box regulations.
Rev. Rul. 2006–3
ISSUE
Will a Japanese Yugen Kaisha business
entity (“YK”) that becomes a Japanese
Tokurei Yugen Kaisha business entity
(“TYK”) pursuant to the Kaisha Ho, Law
No. 86of2005(CompanyLaw)and
the Seibi Ho, Law No. 87 of 2005 (the
Law Concerning the Coordination, Etc.,
of Associated Laws in Connection with
the Enforcement of the Companies Law)
(Coordination Law), as promulgated on
July 26, 2005, remain an eligible entity
for purposes of § 301.7701–1 through 3 of
the Procedure and Administration Regula-
tions?
FACTS
On July 26, 2005, the Japanese Diet re-
organized Japanese corporate law through
the promulgation of the Company Law and
the Coordination Law, which were passed
on June 29, 2005. Pursuant to the Coordi-
nation Law, the YK will be abolished as a
Japanese corporate entity. All YKs in ex-
istence as of the effective date of the Co-
ordination Law will continue as TYKs, a
special type of Kabushiki Kaisha business
entity (“KK”) under the Company Law.
Theeffectivedateoftheselawswillbede-
termined by a Cabinet enforcement order;
however, the provisions will be effective
no later than January 26, 2007. After the
effective date of the new laws, no new YKs
or TYKs may be formed.
LAW AND ANALYSIS
Section 301.7701–2(a) defines the term
“business entity” as any entity recognized
for federal tax purposes (including an
entity with a single owner that may be
disregarded as an entity separate from
its owner under § 301.7701–3) that is
not properly classified as a trust under
§ 301.7701–4 or otherwise subject to spe-
cial treatment under the Code. A business
entity with two or more members is clas-
sified for federal tax purposes as either a
corporation or a partnership. A business
entity with only one owner is classified
as a corporation or is disregarded. How-
ever, § 301.7701–2(b)(8) provides that
certain foreign business entities are al-
ways classified as corporations for federal
tax purposes (per secorporations). Un-
der § 301.7701–2(b)(8), a KK is aper se
corporation. Further, a YK is an eligible
entity, for which an entity classification
election can be made under § 301.7701–3.
BasedontheCompanyLawandCo-
ordination Law promulgated on July 26,
2005, TYKs are notper secorporations de-
scribed in § 301.7701–2(b)(8) and will be
classified in the same manner as YKs were
prior to the effective date of the new Japan-
ese corporate law. Therefore, a YK that be-
January 9, 20062762006–2 I.R.B.

comes a TYK will remain an eligible entity
for purposes of § 301.7701–1 through 3.
HOLDING
A Japanese YK that becomes a Japan-
ese TYK, pursuant to the Company Law
and the Coordination Law, as promulgated
on July 26, 2005, will remain an eligi-
ble entity for purposes of § 301.7701–1
through 3.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Ronald M. Gootzeit of the Office of
Associate Chief Counsel (International).
For further information regarding this rev-
enue ruling, contact Ronald M. Gootzeit at
(202) 622–3860 (not a toll-free call).
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2006. See Rev. Rul. 2006-4, page 264.
2006–2 I.R.B.277January 9, 2006

Part III. Administrative, Procedural, and Miscellaneous
Extension of Transition Relief
for Certain Partnerships
and Other Pass-Thru Entities
Under Section 470
Notice 2006–2
PURPOSE
This notice extends by one year
the transition relief provided in Notice
2005–29, 2005–13 I.R.B. 796, under
§ 470 of the Internal Revenue Code to
partnerships and other pass-thru entities
that are treated as holding tax-exempt use
property as a result of the application of
§ 168(h)(6).
BACKGROUND
Section 848 of the American Jobs Cre-
ation Act of 2004, Pub. L. No. 108–357,
118 Stat. 1418, 1602, enacted on Oc-
tober 22, 2004, added § 470, which im-
posed new limitations on the deductibility
of losses relating to tax-exempt use prop-
erty. Under § 470(c)(2), “tax-exempt use
property” has the meaning provided un-
der § 168(h) (with certain modifications).
Under § 168(h)(6), if any property that is
not otherwise “tax-exempt use property”
under § 168(h) is owned by a partnership
that has both a tax-exempt entity and a per-
son who is not a tax-exempt entity as part-
ners, and any allocation to the tax-exempt
entity of partnership items is not a qual-
ified allocation, an amount equal to the
tax-exempt entity’s proportionate share of
the property generally is treated as tax-ex-
empt use property. Section 168(h)(6)(E)
provides that rules similar to those applica-
ble to partnerships in determining whether
property is tax-exempt use property apply
to other pass-thru entities. Section 470
generally applies to leases entered into af-
ter March 12, 2004.
Notice 2005–29 provides transition re-
lief to partnerships and other pass-thru en-
tities that are treated by § 470 as hold-
ing tax-exempt use property as a result of
the application of § 168(h)(6). Specifi-
cally, Notice 2005–29 provides that in the
case of partnerships and pass-thru entities
described in § 168(h)(6)(E), for taxable
years that begin before January 1, 2005,
the Internal Revenue Service will not ap-
ply § 470 to disallow losses associated
with property that istreated as tax-exempt
use property solely as a result of the appli-
cation of § 168(h)(6).
The Treasury Department and the Ser-
vice understand that Congress is consider-
ing possible legislation that would affect
the application of § 470 to certain trans-
actions involving partnerships and other
pass-thru entities.
EXTENSION OF TRANSITION RELIEF
In the case of partnerships and pass-thru
entities described in § 168(h)(6)(E), for
taxable years that begin before January 1,
2006, the Service will not apply § 470
to disallow losses associated with prop-
erty that is treated as tax-exempt use prop-
erty solely as a result of the application of
§ 168(h)(6). Abusive transactions involv-
ing partnerships and other pass-thru enti-
ties remain subject to challenge by the Ser-
vice under other provisions of the tax law.
EFFECT ON OTHER DOCUMENTS
Notice 2005–29 is modified and super-
seded.
DRAFTING INFORMATION
For further information regarding this
notice, contact John Aramburu of the
Office of the Associate Chief Counsel
(Income Tax & Accounting) at (202)
622–4960 (not a toll-free call).
Section 482.—Allocation of Income and Deductions Among Taxpayers
Rev. Proc. 2006–9
TABLE OF CONTENTS
Section 1: Purpose
................................................................................................. 279
Section 2: Principles of the APA Program.............................................................................. 279
Section 3: Prefiling Conferences...................................................................................... 280
Section 4: Content of APA Requests................................................................................... 280
Section 5: Taxpayer Disclosure Obligations............................................................................. 285
Section 6: Processing of APA Requests................................................................................. 285
Section 7: Competent Authority Consideration.......................................................................... 286
Section 8: Rollback of TPM.......................................................................................... 287
Section 9: Small Business Taxpayer APAs.............................................................................. 288
Section 10: Legal Effect of the APA................................................................................... 289
January 9, 20062782006–2 I.R.B.

Section 11: Administering the APA................................................................................... 289
Section 12: Renewing the APA....................................................................................... 291
Section 13: Disclosure............................................................................................... 292
Section 14: Effect on Other Documents................................................................................ 292
Section 15: Effective Date........................................................................................... 292
Section 16: Paperwork Reduction Act................................................................................. 292
Drafting Information............................................................................................... 292
SECTIO
N 1: PURPOSE
.01This revenue procedure explains the
manner in which taxpayers may request an
advance pricing agreement (“APA”) from
the APA Program within the Office of the
Associate Chief Counsel (International),
the manner in which such a request will
be processed by the APA Program, and the
effect and administration of APAs. This
revenue procedure updates and supersedes
Revenue Procedure 2004–40, 2004–2 C.B.
50.
SECTION 2: PRINCIPLES OF THE
APA PROGRAM
.01The APA Program provides a volun-
tary process whereby the Internal Revenue
Service (“Service”) and taxpayers may re-
solve transfer pricing issues under § 482
of the Internal Revenue Code (“Code”),
the Income Tax Regulations (“the regu-
lations”) thereunder, and relevant income
tax treaties to which the United States is
a party in a principled and cooperative
manner on a prospective basis. The APA
process increases the efficiency of tax ad-
ministration by encouraging taxpayers to
come forward and present to the Service
all the facts relevant to a proper trans-
fer pricing analysis and to work towards
a mutual agreement in a spirit of open-
ness and cooperation. The prospective na-
ture of APAs lessens the burden of compli-
ance by giving taxpayers greater certainty
regarding their transfer pricing methods,
and promotes the principled resolution of
these issues by allowing for their discus-
sion and resolution in advance before the
consequences of such resolution are fully
known to taxpayers and the Service.
.02The APA Program’s central goal is
the prompt, proper, and fair resolution of
APA requests and renewals consistent with
the principles of sound tax administration.
.03The
APA Program reserves the right
not to
accept an APA request or to termi-
nate c
onsideration of an APA request if
the re
quest or the continued development
of the
case is contrary to the principles of
sound
tax administration.
.04An
APA is an agreement between
ataxp
ayer and the Service in which the
part
ies set forth, in advance of controlled
tran
sactions, the best transfer pricing
meth
od (“TPM”) within the meaning of
§482
of the Code and the regulations.
The
agreement specifies the controlled
tra
nsactions or transfers (“covered trans-
act
ions”), TPM, APA term, operational
and
compliance provisions, appropriate
adj
ustments, critical assumptions regard-
ing
future events, required APA records,
an
d annual reporting responsibilities.
(1) APA
s are intended to supplement
tr
aditional administrative, judicial, and
tr
eaty mechanisms for resolving transfer
pr
icing issues.
(2
)
Ta
xpayers formally initiate the
pr
ocess for APAs. Thereafter, APAs re-
qu
ire discussions among the taxpayer, one
or
more associated enterprises, and one
o
r more tax administrations, including the
S
ervice.
(
3)
O
rdinarily, an APA is reached only
o
n the proposed covered transactions. In
s
ome cases, however, the APA Program
m
ay require that the scope of the proposed
c
overed transactions be expanded or con-
t
racted, or may determine that the TPM
proposed by the taxpayer is not appropri-
ate for some subset of the proposed cov-
ered transactions.
.05The taxpayer’s participation in the
APA process is entirely voluntary. In some
cases, the Service may approach a taxpayer
to discuss the advantages of an APA.
.06The APA Program is under the
immediate supervision of a Director (the
“APA Director”) within the Office of the
Associ
ate Chief Counsel (International).
The AP
A Director reports to the Asso-
ciate
Chief Counsel (International) who
exerc
ises general oversight over the APA
Progr
am. The APA Director, directly or
by del
egation, may take any action - not
cont
rary to statute, regulation, or treaty -
nece
ssary to carry out the provisions of
this
revenue procedure. The APA Director
may m
odify the provisions contained in
thi
s revenue procedure (for example, time
lim
its or content of an APA request) if
tha
t modification would be consistent with
sou
nd tax administration.
.07
Under the APA request procedure,
the
taxpayer proposes a TPM and provides
dat
a intended to show that the TPM consti-
tut
es the appropriate application of the best
me
thod rule under the § 482 regulations.
Th
e Service, through an APA Team, eval-
ua
tes the APA request by analyzing all rel-
ev
ant data and information submitted with
th
e initial request and at any time there-
a
fter.
.0
8Taxpayers may request a bilateral,
m
ultilateral, or, if appropriate, a unilateral
A
PA. A bilateral or multilateral APA in-
v
olves a request for an APA between the
t
axpayer and the Service, accompanied by
a
request for a mutual agreement between
r
elevant competent authorities. A unilat-
eral APA involves only an agreement be-
tween the taxpayer and the Service. Where
possible, in the interest of sound tax ad-
ministration and to ensure that no potential
for double taxation results from an APA,
an APA should be concluded on a bilateral
or multilateral basis between the compe-
tent authorities through the mutual agree-
ment procedure of the relevant income tax
treaty or treaties.
.09The APA Policy Board establishes
policy on matters of substantial genuine
importance pertaining to the APA Pro-
gram. It consists of the Associate Chief
2006–2 I.R.B.279January 9, 2006

Counsel (International), the APA Direc-
tor, the Director, International (Large and
Mid-Size Business (LMSB) Operating
Division), Treasury’s International Tax
Counsel, and other senior officials.
.10In a bilateral or multilateral case, the
APA Program prepares a recommended
negotiating position for the U.S. Compe-
tent Authority. The negotiating position
serves as a basis for discussions with the
relevant foreign competent authority or au-
thorities under the mutual agreement ar-
ticle of the applicable income tax treaty
or treaties. Prior to finalizing its recom-
mendation, the APA Program, through the
Team Leader (see section 6.03), conveys
the substance of the APA Team’s position
to the taxpayer to provide an opportunity
for the taxpayer to comment. The Team
Leader, in coordination with other mem-
bers of the APA Team, considers the mer-
its of the taxpayer’s timely received com-
ments in finalizing the recommended posi-
tion.
.11If the U.S. Competent Authority and
the relevant foreign competent authority or
authorities reach a mutual agreement, the
taxpayer and the Service may execute one
or more APAs consistent with that mutual
agreement.
.12In appropriate cases, the TPM may
be applied to tax years prior to those cov-
ered by the APA (“rollback” of the TPM,
see section 8). The Service’s policy is to
use rollbacks whenever feasible based on
the consistency of the facts, law, and avail-
able records for the prior years. This pol-
icy does not apply to unilateral APA re-
quests in which a rollback would decrease
taxable income on a return filed for a tax-
able year not covered by the APA (see
§ 1.482–1(a)(3)).
.13Filing an APA request does not sus-
pend any examination or other enforce-
ment proceedings. The APA Program will
coordinate its activities with those of other
Service proceedings to avoid duplicative
information requests to the taxpayer, en-
hance the efficiency of Service operations,
and reduce overall taxpayer compliance
burdens.
SECTION 3: PREFILING
CONFERENCES
.01 General Principles
A taxpayer may request a prefiling con-
ference (“PFC”) with the APA Program
to discuss informally the suitability of an
APA.
.02 Discussion Topics
The taxpayer may use a PFC to clar-
ify what information, documentation, and
analyses are likely to be necessary for
the Service to consider an APA request.
Among the areas of discussion are the
covered transactions, the potentially appli-
cable TPMs, the probability of agreement
among the competent authorities, and the
APA Program’s schedule and method for
coordinating and evaluating the request.
To provide for the efficient use of tax-
payer resources, PFCs are recommended
in order to ensure that the APA request is
appropriate and focuses on relevant issues.
.03 Scheduling
A taxpayer or its representative may
contact the APA Program Office in Wash-
ington, D.C. or California to schedule a
PFC. The taxpayer or its representative
should propose three alternative dates, and
should generally allow two weeks before
the first proposed date. The telephone and
facsimile numbers are:
W
ashington,DC
Voice: (202) 435–5220
Facsimile: (202) 435–5238
C
alifornia
Voice: (949) 360–3486
Facsimile: (949) 360–3446
.04 PFC May be Named or Anonymous
The taxpayer may request a PFC either
on an identified or anonymous basis.
.05 Participation
If a taxpayer identifies itself, represen-
tatives of the Service Operating Division
with responsibility for the taxpayer’s re-
turn normally will participate in the PFC.
Representatives from Appeals and the Di-
vision Counsel field offices may also at-
tend. In the case of a PFC regarding a bilat-
eral APA request, a Competent Authority
analyst may attend. If a taxpayer initially
requests a PFC on an anonymous basis but
prior to the meeting chooses to identify it-
self, the meeting may be rescheduled to
permit necessary Service personnel to at-
tend. When requesting a PFC on an iden-
tified basis, the taxpayer must inform the
APA Program whether transactions simi-
lar or related to those to be covered by the
proposed APA are currently under consid-
eration by a Service Operating Division, an
Appeals Office, a Division Counsel, or an
Associate Chief Counsel.
.06 Prefiling Submission
A taxpayer must send a brief prefil-
ing submission to the relevant APA Pro-
gram Office in Washington, D.C. or Cal-
ifornia that lists the persons attending the
PFC for the taxpayer (first names only or
job titles are sufficient if the PFC will be
on an anonymous basis) and that outlines
and describes the issues to be discussed.
This brief submission should be provided
at least one week in advance of the PFC.
If the document is twenty pages or less, it
may be sent by facsimile; but if it exceeds
twenty pages, eight copies (or if anony-
mous, only three copies) and one original
should be delivered.
SECTION 4: CONTENT OF APA
REQUESTS
.01 Introduction
A complete APA request is essential to
a timely and efficient APA process. In
the APA Program’s experience, a com-
plete APA request may save many months
of case processing time and hundreds of
hours of labor, as it allows the APA Team
to narrow its focus immediately to the core
issue or issues and avoids delays caused by
the need to supplement the original APA
request. The goal of completing a uni-
lateral APA or a recommended negotiat-
ing position within 12 months (see section
6.01) is predicated in large part on the as-
sumption that the taxpayer has submitted a
complete APA request.
A complete APA request should pro-
vide the information specified below and
all other information reasonably necessary
to permit the APA Program to evaluate
fully the taxpayer’s proposed TPM. The
level of detail required will depend on the
particular facts and circumstances of each
case and should be governed by relevancy
and materiality considerations (keeping
in mind that the request should provide
enough information to allow the reader
to concur that a matter is not relevant or
January 9, 20062802006–2 I.R.B.

material). The detailed information sup-
porting the APA request should be tailored
to the specific facts relating to the tax-
payer, the proposed covered transactions,
and relevant legalauthority. It should
also take into account discussions with the
APA Program in any PFC.
An APA request will normally be con-
sidered not “substantially complete” for
purposes of sections 4.07, 4.12, 6.01, and
6.03 unless the request contains the infor-
mation required below (as may be modi-
fied by agreement of the parties).
.02 General Principles
(1) For purposes of requesting an
APA, each taxpayer that is a member of a
consolidated group (as defined in Treasury
Regulations § 1.1502–1) must comply
with the provisions of § 1.1502–77.
(2) All materials submitted with the
APA request become part of the APA Pro-
gram’s case file and will not be returned.
Therefore, taxpayers should not submit
original documents.
(3) The taxpayer must submit copies
of any documents relating to the proposed
TPM. All materials submitted must be
properly labeled, indexed, and referenced
in the request. Any previously submitted
documents that the taxpayer wishes to
associate with the request must be refer-
enced.
(4) If the records or documents to be
submitted are too voluminous for transmit-
tal with the request, the taxpayer must de-
scribe the contents of such items in the
request and confirm that the items will
promptly be made available upon request.
(5) All documents submitted in a for-
eign language must be accompanied by an
accurate English translation.
(6) All documents in the APA request
that are available in electronic format
should be submitted, on either a CD-ROM
or diskette, along with the paper submis-
sion. Suitable formats include Microsoft
Word, Excel, PowerPoint, and Adobe
Portable Document Format. Other for-
mats may be arranged on a case-by-case
basis.
.03 Factual, Legal, and Analytical Items
for All Proposed APAs
Unless otherwise agreed, each APA re-
quest must include an appropriate discus-
sion of the items set forth below.
(1) A comprehensive table of contents.
(2) The names, addresses, telephone
and facsimile numbers, taxpayer iden-
tification numbers (if applicable), and
both the Standard Industrial Classification
(SIC) and the North American Industry
Classification System (NAICS) codes re-
ported on the most recently filed federal
tax returns (if applicable) of (a) the orga-
nizations, trades, and businesses engaging
in the proposed covered transactions, and
(b) the controlling taxpayer of the parties,
if the controlling taxpayer is not itself
engaging in the proposed covered transac-
tions.
(3) The controlling taxpayer’s indus-
try (for example, Heavy Manufacturing
and Transportation) within LMSB; or if the
taxpayer files its tax returns with the Small
Business/Self-Employed (SB/SE) Operat-
ing Division, a statement to that effect.
(4) A properly completed Form 2848
(Power of Attorney and Declaration of
Representative) for any person authorized
to represent the taxpayer in connection
with the request, disregarding if appro-
priate the line 3 instruction limiting the
authorization to three future tax periods. If
the taxpayer or the taxpayer’s authorized
representative retains any other person
(for example, a law firm, accounting firm,
or economic consulting firm) to assist the
taxpayer in pursuing the APA request,
the taxpayer must also provide a separate
written authorization for disclosures to
the person and such person’s employees
during the APA Program’s consideration
of the request, according to the instruc-
tions in § 301.6103(c)–1T (see also T.D.
9011, 2002–2 C.B. 356, 31 C.F.R. Part
10 (July 26, 2002)). Such written au-
thorization may be made by completing
Form 8821 (Tax Information Authoriza-
tion), disregarding, if appropriate, the line
3 instruction limiting the authorization to
three future tax periods.
(5) A description of the general his-
tory of business operations, worldwide
organizational structure, ownership, capi-
talization, financial arrangements, princi-
pal businesses, the place or places where
such businesses are conducted, and ma-
jor transaction flows of the parties to the
proposed covered transactions. The de-
scription must also identify any branches
or entities disregarded for tax purposes
(see § 301.7701–3) that are involved in
the proposed covered transactions.
(6) A description and analysis of the
transactions covered by the APA request,
as well as the estimated dollar value of
each proposed covered transaction for
each year of the proposed term of the
APA. The discussion must also describe
how the proposed covered transactions
relate to other controlled transactions that
the taxpayer does not propose to cover.
(7) A statement addressing the extent
to which the tested party has transactions
involving commission sales and ordinary
distribution sales (i.e., buying and re-
selling). If the APA request involves both
kinds of transactions, the taxpayer must
propose a TPM and analyze the extent
to which it is appropriate under the facts
and circumstances to (a) test both kinds
of transactions on an aggregated basis; (b)
test the two kinds of transactions sepa-
rately; or (c) exclude one of the two kinds
of transactions from the APA.
(8) For each party to the proposed cov-
ered transactions, a detailed analysis of:
(a) the functions and economic
activities performed;
(b) the assets employed;
(c) the economic costs incurred;
(d) the risks assumed;
(e) relevant contractual terms;
(f) relevant economic conditions;
and
(g) relevantnon-recognition
transactions.
(9) Copies of the principal written
agreement(s), if any, setting forth the con-
tractual terms for the covered transactions
(within the meaning of § 1.482–1(d)(3)(ii),
including without limitation the form of
consideration charged or paid); and an
explanation of any significant discrepancy
between the applicable written agree-
ment(s) and the economic substance of the
covered transactions (including payment
form) to date and as proposed for the APA.
(10) Representative financial and tax
data of the parties to the proposed covered
transactions for the last three taxable years
(or more years if relevant to the proposed
TPM), together with other pertinent data
and documents in support of the TPM.
This item may include (but need not be
limited to) data from the following:
(a) Form 5471 (Information Re-
turn of U.S. Persons With Respect To Cer-
tain Foreign Corporations);
(b) Form 5472 (Information Re-
turn of a 25% Foreign-Owned U.S. Corpo-
2006–2 I.R.B.281January 9, 2006

ration or a Foreign Corporation Engaged
in a U.S. Trade or Business);
(c) income tax returns;
(d) financial statements;
(e) annual reports to stockholders;
(f) other pertinent U.S. and for-
eign government filings (for example, cus-
toms reports or SEC filings);
(g) existing pricing, distribution,
or licensing agreements;
(h) marketing and financial stud-
ies;
(i) documentation prepared in
consideration of § 6662(e); and
(j) company-wide accounting
procedures, budgets, projections, business
plans, and worldwide product line or busi-
ness segment profitability reports.
(11) The functional currency of the par-
ties to the proposed covered transactions
and their respective foreign currency ex-
change risks.
(12) The taxable year of each party to
the proposed covered transactions.
(13) A description of significant finan-
cial accounting methods employed by the
parties that have a bearing on any proposed
TPM.
(14) An explanation of any relevant fi-
nancial and tax accounting differences be-
tween the U.S. and the foreign countries.
(15) A discussion of any relevant statu-
tory provisions, tax treaties, court deci-
sions, regulations, revenue rulings, or rev-
enue procedures that relate to the appro-
priateness of the proposed TPM for the re-
quested APA. For cases in which the tax-
payer requests a rollback, the discussion
should state whether the period of limita-
tions for the rollback years has expired in
the U.S. or in foreign countries, and if not,
when the periods of limitations do expire.
(16) (a) A statement describing all
previous and current issues at the exam-
ination, Appeals, judicial, or competent
authority levels that relate to the proposed
TPM, including an explanation of the tax-
payer’s and the government’s positions
and any resolution of the issues.
(b) If the taxpayer is requesting a
rollback that involves any issues relevant
to the proposed covered transactions that
are unresolved and still under consider-
ation by Appeals, the taxpayer must in-
clude with its APA request a waiver of its
right to be present during communications
between the Appeals Office and the APA
Team members (as described in section
6.04). See Rev. Proc. 2000–43, 2000–2
C.B. 404. The following language satis-
fies this requirement:
Waiver ofEx ParteCommunication:
[Name of taxpayer(s)] agrees to the
participation of the Appeals Office in
the consideration of this APA request,
and hereby waives its right to be present
during, or participate in, communica-
tions related to the APA request or the
proposed covered transactions between
the Appeals Office and the APA Team
members.
(17) A statement describing any APAs
with, or rulings by, foreign tax authori-
ties relating to the proposed covered trans-
actions (or any pending requests for such
APAs or rulings) and, if requested, copies
of such APAs or rulings.
(18) An economic analysis or study of
the general industry pricing practices and
economic functions performed within the
markets and geographical areas covered by
the APA request.
(19) A list of the taxpayer’s competitors
and a discussion of any uncontrolled trans-
actions, lines of business or types of busi-
nesses comparable or similar to those ad-
dressed in the request.
(20) An explanation of the proposed
TPMs, including any method used to con-
vert results from one payment form to an-
other (e.g., to convert from a lump sum to a
contingent payment such as a sales-based
royalty), and an analysis of why each pro-
posed TPM is the best method within the
meaning of § 1.482–1(c).
(21) A detailed presentation of the re-
search efforts and criteria used to identify
and select possible independent compara-
bles. This presentation should include a
list of potential comparables and an ex-
planation of why each was either accepted
or rejected. The taxpayer may request an
APA even though no comparable uncon-
trolled prices, transactions, or companies
can be identified. In such cases, a tax-
payer must demonstrate that the proposed
TPM otherwise satisfies the requirements
of § 482 and this revenue procedure.
(22) Detailed financial data (and li-
censes or other agreements, if applicable)
on the selected independent compara-
bles in print and electronic formats. For
example, if the proposed TPM uses the
comparable uncontrolled price (CUP)
method, the comparable pricing informa-
tion should be included; if the TPM uses
the comparable uncontrolled transaction
(CUT) method, the comparable license
agreements should be included; and if the
TPM uses the comparable profits method
(CPM), the annual and multiple year pe-
riod results using the selected profit level
indicator should be included. If pertinent,
the taxpayer should demonstrate consid-
eration of alternative measurements of
profitability and return on investment (for
example, gross profit margin or markup,
ratio of gross income to total operating
expenses, net operating profit margin, or
return on assets).
(23) A detailed explanation of any ad-
justments to the selected comparables,
such as: accounting for product line seg-
regations; differences in accounting prac-
tices; differences relating to functions,
assets employed, risks assumed, and costs
incurred; volume or scale differences; and
differing economic and market conditions.
(24) An illustration of the application of
each proposed TPM by applying the TPM,
in a consistent format, to the prior three
taxable years’ financial and tax data of the
parties to the covered transactions. If his-
torical data cannot be used to illustrate a
TPM (for example, when the TPM applies
to a new product or business), the request
should include an illustration based on pro-
jected or hypothetical data, as well as a de-
scription of the source of the data. If cover-
age of three taxable years is inappropriate
for any reason, the taxpayer should provide
data for an appropriate period and explain
why the period was chosen.
January 9, 20062822006–2 I.R.B.

.04 Specific Items for a Cost Sharing
Arrangement
In addition to the items in section 4.03,
an APA request related to a cost sharing
arrangement (“CSA”) must include:
(1) A copy of (a) the documents form-
ing or revising the CSA, (b) the docu-
ments relevant to the making available of
any pre-existing intangible property to the
CSA), including the documents relevant
to the acquisition or licensing of any pre-
existing intangible property that is made
available to the CSA, for purposes of re-
search in the intangible development area,
and (c) a statement that the CSA conforms
to the requirements of § 1.482–7(b).
(2) A specific description of intangi-
ble development costs for all participants
under the CSA. Such description should
include a description of the costs included
and excluded (for example, costs of tech-
nology acquired from third parties; the
treatment of stock-based compensation
under the CSA; non-product specific de-
velopment costs; costs associated with
abandoned projects; costs associated with
specific stages of product development;
relevant labor, material, and overhead
costs; and support and administrative
costs); a description of any services per-
formed for participants that will be in-
cluded in intangible development costs
(for example, contract research) and how
those services would be taken into ac-
count; and, for a representative period, a
breakdown of total costs incurred, and the
costs borne by each participant, according
to the CSA.
(3) The basis (as described in
§ 1.482–7(f)(3)(ii)) used to measure an-
ticipated benefits, the projections used to
estimate benefits, and why such basis and
projections yield the most reliable estimate
of reasonably anticipated benefits.
(4) The method used to calculate each
participant’s share of intangible develop-
ment costs; the reason why that method
can reasonably be expected to reflect that
participant’s share of anticipated benefits;
and a statement of the circumstances under
which the participants’ shares of intangible
development costs will be adjusted to ac-
count for changes in economic conditions,
business operations and practices, and the
ongoing development of intangibles under
the CSA.
(5) The accounting method used to de-
termine the costs and benefits of the intan-
gible development (including the method
used to translate foreign currencies).
(6) Each participant’s sales, cost of
sales, operating expenses, research and
development costs, and operating profit
(historical for the five most recently com-
pleted taxable years and projected for two
taxable years) for the product area covered
by the CSA.
(7) A description of any amounts to be
received from non-participants for the use
of covered intangibles (for example, as a
royalty pursuant to a license agreement)
and how the participants would take into
account such amounts.
(8) Representative internal manu-
als, directives, guidelines, and similar
documents prepared for purposes of im-
plementing or operating the CSA (for
example, research and development com-
mittee meeting minutes, market studies,
economic impact analyses, capital ex-
penditure budgets, engineering studies, re-
ports and studies of trends and profitability
in the industry, and financial analyses for
financing and cash flow purposes).
(9) A description of any prior research
undertaken in the intangible development
area; the identification of any pre-existing
intangible property made available to the
CSA; the amount of any buy-in or buy-out
payment (as defined in § 1.482–7(g)(2));
a complete economic analysis to support
the payment; the form of the payment,
the method used to determine the amount
of the payment (that is, the method used
to value the pre-existing intangible prop-
erty and to calculate any royalty, lump
sum, or installment payments, including,
if applicable, any conversion between
different payment forms); and an expla-
nation of any discrepancy between the
proposed payment form and the payment
form established in the documents listed in
paragraph (1) above (see section 4.03(9));
and an analysis demonstrating that the
method used constitutes the best method
under § 1.482–1(c).
(10) The treatment of cost sharing
and buy-in or buy-out payments for U.S.
income tax purposes (for example, the
source and character of those payments).
(11) Evidence of the participants’ com-
pliance with the reporting requirements
under § 1.482–7(j) of the cost sharing reg-
ulations.
(12) For taxpayers requesting an APA
that covers a CSA but does not cover the
related buy-in transaction, or an APA that
covers a buy-in transaction but does not
cover the related CSA, the reasons why an
APA limited in this manner is consistent
with the principles of the APA process, as
set forth in this revenue procedure. The
APA Program will evaluate the requests to
ensure their consistency with the princi-
ples of this revenue procedure and sound
tax administration. If an APA request is
limited to covering only buy-in payments,
the APA must include a representation by
the taxpayer, as a term and condition of
the APA, that the CSA to which the buy-in
payments relate meets the § 482 regulatory
requirements for CSAs.
.05 Critical Assumptions
The taxpayer should propose and de-
scribe any relevant critical assumptions. A
critical assumption is any fact the contin-
ued existence of which is material to the
taxpayer’s proposed TPM, whether related
to the taxpayer, a third party, an indus-
try, or business and economic conditions.
Critical assumptions might include, for ex-
ample, a particular mode of conducting
business operations, a particular corporate
or business structure, a range of expected
business volume, or the relative value of
foreign currencies.
.06 Contents of Annual Report
Section 11.01 provides that the taxpayer
must file an annual report for each taxable
year covered by the APA. The taxpayer
should propose in the request a list of items
to be included in each report. Considera-
tion should be given to all items listed in
Appendix C to the APA Program’s current
Model APA.
.07 Term and First Year of APA
(1) The taxpayer must propose a term
for the APA appropriate to the industry,
products, and transactions involved. Al-
though the appropriate APA term is deter-
mined on a case-by-case basis, a request
for an APA should propose an APA term of
at least five years unless the taxpayer states
a compelling reason for a shorter term.
Additionally, the APA Program strives to
have at least three prospective years re-
maining in the term upon the execution of
an APA (in the case of a unilateral APA)
or completion of the APA Program’s rec-
ommended negotiating position for Com-
petent Authority (in the case of a bilat-
2006–2 I.R.B.283January 9, 2006

eral or multilateral APA), except in un-
usual circumstances. Accordingly, taxpay-
ers should anticipate that the APA Program
may require their agreement to extend the
proposed term of an APA if necessary to
ensure such prospectivity.
(2) The taxpayer must file its APA re-
quest within the time prescribed by statute
(including extensions) for filing its Federal
income tax return for the first proposed
APA year. If the taxpayer receives an ex-
tension to file its Federal income tax re-
turn, it must file its APA request no later
than the actual filing date of the return. An
APA request will be considered filed on the
date the required user fee is paid (within
the meaning of § 7502(a)), provided that a
substantially complete APA request is filed
with the APA Program within 120 days of
the return due date (including extensions)
for the first proposed APA year. Because
of the need to begin the processing of the
APA request in a manner that ensures ap-
propriate prospectivity, the APA Director
will consider extending the 120-day period
pursuanttosection2.06onlyinunusual
circumstances. If the APA Program’s eval-
uation of an APA request is delayed due to
a lack of responsiveness or timeliness by
the taxpayer subsequent to the filing of its
request, the APA Director may deem the
taxpayer’s APA request to have been filed
for purposes of this paragraph on a date
subsequent to its actual filing.
.08 Request for Competent Authority
Consideration
(1) The taxpayer must state whether
any of the parties to the proposed cov-
ered transactions are residents of or con-
duct activities in a treaty partner country
or U.S. possession, and whether the tax-
payer proposes an agreement among com-
petent authorities (see section 7 for guide-
lines). For purposes of this revenue pro-
cedure, “competent authority” includes the
Director, International (LMSB) and desig-
nated foreign competent authorities under
income tax treaties to which the U.S. is a
party, and also includes the Director, Inter-
national (LMSB) acting as the U.S. Com-
petent Authority with respect to a posses-
sion tax agency described in Rev. Proc.
89–8, 1989–1 C.B. 778, as well as a des-
ignated possession tax official within the
meaning of that revenue procedure.
(2) If the APA request is unilateral and
involves transactions with an entity in a
treaty jurisdiction, the taxpayer must pro-
vide an explanation of why the request is
not bilateral. See sections 2.08 and 7.06.
(3) If the taxpayer requests a bilateral
or multilateral APA, the taxpayer’s request
must include the information described in
section 4.05(a) and (b) and, in a separate
document, section 4.05(n), of Rev. Proc.
2002–52, 2002–2 C.B. 242 (or its suc-
cessor), or similar information pursuant
to a request for relief under Rev. Proc.
89–8. The following wording satisfies sec-
tion 4.05(n) of Rev. Proc. 2002–52:
[Name of taxpayer(s)] consents to
the disclosure to the competent author-
ity of [name of foreign country] and
the competent authority’s staff of any
or all of the items of information set
forth or enclosed in the [bilateral/multilat-
eral] APA request for the taxable year(s)
[and accompany-
ing rollback request for relief from eco-
nomic double taxation of income for the
taxable years
],
and any further submissions, within the
limits contained in the [name of treaty].
.09 Perjury Statement
(1) The taxpayer must include in any
APA request and supplemental submission
a declaration in the following form:
Under penalties of perjury, I declare that
I have examined this [APA request] [sup-
plemental submission relating to this APA
request] including accompanying docu-
ments, and, to the best of my knowledge
and belief, the [APA request] [supplemen-
tal submission] contains all the relevant
facts relating to the [APA request] [sup-
plemental submission], and such facts are
true, correct, and complete.
(2) The declaration must be signed by
the person or persons on whose behalf the
request is being made and not by the tax-
payer’s representative. The person signing
for a corporate taxpayer must be an autho-
rized officer of the taxpayer who has per-
sonal knowledge of the facts, whose duties
are not limited to obtaining letter rulings or
determination letters from the Service, or
negotiating APAs, and who is authorized
to sign the taxpayer’s income tax return
pursuant to § 6062. The person signing
for any non-corporate taxpayer must be an
individual who has personal knowledge of
the facts, and who is authorized to sign in
accordance with §§ 6061 or 6063, as appli-
cable.
.10 Signatures
The taxpayer or the taxpayer’s autho-
rized representative must sign the APA re-
quest. If an authorized representative is to
sign, the taxpayer and representative must
satisfy the relevant instructions on signa-
tures in Rev. Proc. 2005–1, 2005–1 I.R.B.
1 (or its successor).
.11 Mailing, Deliveries, Copies, and
Office Location
(1) User fees (accompanied by an
identifying cover letter that includes a jus-
tification of the fee amount) must be sent
to:
Internal Revenue Service
Attn: CC:PA:LPD:DRU
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
The fee payment may also be hand deliv-
ered to the drop box at the 12th Street en-
trance of 1111 Constitution Avenue, N.W.,
Washington, DC.
(2) All other communications must be
mailed or delivered as follows to (unless
arranged otherwise, for example, mailing
to the California office):
Office of Associate Chief Counsel
(International)
Advance Pricing Agreement Program
Attn: CC:INTL:APA; MA2–266
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
(3) The taxpayer must provide the
original and eight copies of its APA re-
quest and any supplemental materials
submitted while the request is pending.
(4) The APA Program is located at:
799 9th Street, N.W.
Washington, D.C. 20001
.12 User Fees.
(1) A separate user fee is required for
each APA request. For this purpose, an
APA request means a substantially com-
plete and timely-filed APA submission,
as required by section 4, and includes all
such APA submissions filed by the tax-
payer within any single sixty-day period.
The taxpayer, for purposes of the preced-
ing sentence, includes all members of a
January 9, 20062842006–2 I.R.B.

controlled group as defined in Treasury
Regulations § 1.482–1(i)(6).
(2) User fees shall be made payable to
the United States Treasury.
(3) Except as provided in paragraphs
(4), (5), and (7), the user fee for an APA
request is $50,000.
(4) Except as provided in paragraph
(5), the user fee for an APA renewal re-
quest is $35,000. For this purpose, an APA
request will be considered an APA renewal
request if its subject matter is substantially
the same as in a previous APA request by
the taxpayer.
(5) The user fee for a small business
APA request is $22,500. For this purpose,
an APA request will be considered a small
business APA request if the taxpayer has
gross income of less than $200 million or
the aggregate value of the covered trans-
actions does not exceed (i) $50 million an-
nually, and (ii) $10 million annually with
respect to covered transactions involving
intangible property.
(6) For purposes of paragraph 5, the
gross income of a taxpayer includes the
gross income of all organizations, trades,
or businesses owned or controlled directly
or indirectly by the same interests control-
ling the taxpayer. Gross income must be
computed for the last full (12-month) tax-
able year ending before the date the tax-
payer filed the APA request. If the infor-
mation on the taxpayer’s gross income for
the last full taxable year is not available,
the taxpayer must use its projected gross
income for the first twelve months of the
APA term.
(7) The user fee to amend an APA re-
quest or to amend a completed APA is
$10,000. For this purpose, a request to
amend will be deemed to occur if a tax-
payer requests changes to an APA request
or to a completed APA that requires sub-
stantial additionalwork by the APA Team.
Generally, no user fee will be imposed if
substantial changes are requested by the
Service or by a foreign competent author-
ity.
(8) The APA Director may require a
corrected user fee after submission of an
APA request if the request does not meet
the criteria for the user fee amount initially
paid by the taxpayer. The taxpayer may
either pay the corrected fee and continue
the APA process or withdraw the request.
SECTION 5: TAXPAYER DISCLOSURE
OBLIGATIONS
.01 Any information submitted by a tax-
payer in connection with its APA request
must be true, correct, and accurate (see
section 4.09). If the APA Program deter-
mines that it needs additional information
to analyze the APA request, the APA Pro-
gram may require the taxpayer to provide
such information.
.02 A taxpayer has an obligation to up-
date on a timely basis all material facts and
information that it submits in connection
with its APA request. In addition, while an
APA request is pending and after an APA is
executed, a taxpayer is under a continuing
duty to timely supplement its disclosures
if the taxpayer discovers that information
that it provided in connection with an APA
request was false, incorrect, or incomplete
in some material respect. If a taxpayer dis-
covers such an error or omission after the
APA is executed, the taxpayer must dis-
close the error or omission in its next-filed
annual report (see section 11.01(1)).
.03 While the APA request is pending,
the taxpayer should be prepared to update
the financial data for the selected compara-
bles as new or revised data become avail-
able.
.04 If a taxable year is completed while
the APA request is pending, the taxpayer
should be prepared to update its APA sub-
mission following the close of the taxable
year by demonstrating the application of
the proposed TPM to the taxpayer’s actual
financial results for that year.
.05 Failure by a taxpayer to provide all
materials required by this revenue proce-
dure in its APA request (see section 4), or
requested by the APA Program while the
request is pending, can cause significant
delays in case processing and may result
in rejection of the APA under section 6.10.
SECTION 6: PROCESSING OF APA
REQUESTS
.01 General
The processing of an APA request
follows one of two paths, depending on
whether the request is for a bilateral or
multilateral APA, or for a unilateral APA.
The scheduling of due diligence, analysis,
discussion, agreement, and drafting is de-
signed to complete the recommended U.S.
negotiating position (bilateral or multilat-
eral APA request), or a unilateral APA,
within 12 months from the date the full
request was filed. The filing of a full APA
request includes not only the payment
of a user fee, but also the receipt by the
APA Program of the materials specified
in sections 4.02 through 4.10. Significant
analysis of the APA request will not begin
until a substantially complete request has
been filed.
.02 Initial Contact
After receiving an APA request, a rep-
resentative of the APA Program will con-
tact the taxpayer or its representative to
discuss any preliminary questions the APA
Program may have, or to ask for any addi-
tional information or documents necessary
in order to initiate processing of the re-
quest. The taxpayer must supply the addi-
tional information and documents, accom-
panied by the perjury statement described
in section 4.09, by the date specified by the
APA Program, as extended for good cause.
.03 Designation of Team Leader
Upon the receipt of a substantially com-
plete APA request, the APA Director will
designate a Team Leader to oversee the
APA Team’s activities in processing the re-
quest. If a prefiling conference was held
with the taxpayer, the Team Leader gen-
erally will be designated from among the
APA Program staff attending the prefiling
conference.
.04 Formation of APA Team
The Team Leader will organize the APA
Team, which normally consists of the fol-
lowing personnel: the Team Leader, an
APA Program economist and/or a Service
Operating Division economist, an LMSB
international examiner, a Division Coun-
sel attorney, and, in bilateral or multilateral
cases, a competent authority analyst. In
appropriate cases, an LMSB international
technical advisor, the international exam-
iner’s manager, and other Service Oper-
ating Division personnel familiar with the
taxpayer may serve on the APA Team. If
the APA or a rollback of the APA affects
taxable years in Appeals, the appropriate
Appeals Officer will be invited to partic-
ipate. The APA Team Leader will assure
that copies of the APA request are dis-
tributed to all Team members for review.
2006–2 I.R.B.285January 9, 2006

.05 Function of APA Team
The function of the APA Team is the
following: (1) for a bilateral or multilat-
eral APA, to develop, in consultation with
the taxpayer and consistent with sound tax
administration, a competent authority ne-
gotiating position that it can recommend
for approval, and (2) for a unilateral APA,
to make best efforts, consistent with sound
tax administration, to develop an APA that
the APA Program can recommend for ap-
proval by the Associate Chief Counsel (In-
ternational). The Service Operating Di-
vision field office responsible for the tax-
payer’s income tax return will be provided
an opportunity to review and comment on
the recommended U.S. competent author-
ity negotiating position in the case of a bi-
lateral or multilateral APA, and the pro-
posed APA in the case of a unilateral APA.
.06 Due Diligence and Analysis
The APA Team will evaluate the tax-
payer’s APA request by discussing it with
the taxpayer, verifying the data supplied,
and requesting additional supporting data
if necessary. The evaluation of the re-
quest will not constitute an examination
or inspection of the taxpayer’s books and
records under § 7605(b) or other provi-
sions of the Code.
.07 Schedule for Discussion and Draft-
ing
(1) The APA Team will strive to ar-
range an initial meeting with the taxpayer
to take place within 45 days from the as-
signment of an APA Team Leader (and fol-
lowing receipt of the substantially com-
plete APA request). The function of the
initial meeting is to review the taxpayer’s
facts, to discuss and clarify issues, and to
reach agreement on the scope and nature
of the APA Team’s due diligence.
(2) In connection with the initial meet-
ing, the APA Team and the taxpayer will
agree on a Case Plan to which both Service
and taxpayer personnel will be expected
to adhere. The Case Plan will be signed
by both an APA manager and an autho-
rized official of the taxpayer (see section
4.09(2)). The Case Plan may identify
issues raised by the APA Team’s initial
review of the APA request. Firm dates
should be agreed upon for resolving all
outstanding issues, and case milestones
should be cited. Case milestones include:
(a) submission of any necessary addi-
tional information by the taxpayer; (b) any
planned site visits or interviews; (c) evalu-
ation of the information by the Service; (d)
meeting dates; and (e) presentation of the
competent authority negotiating position
or recommended agreement to the APA
Director. To minimize delays caused by
the need to coordinate different parties’
schedules on short notice, the time and
place of future meetings required for any
steps in the case should be agreed upon at
the initial meeting and established in the
Case Plan.
(3) The time scheduled for completion
of the case milestones will depend to some
extent on the scope and complexity of the
particular case. In the case of bilateral or
multilateral requests, the Service will seek
to work with the competent authority of
the treaty partner or partners, or the U.S.
possession involved to minimize the time
needed for competent authority resolution.
(4) Failures by either the taxpayer or
the APA Team to meet case milestones will
be addressed promptly. The APA Direc-
tor will assist in remedying any difficul-
ties to ensure a course of action to meet
case milestones. Substantial or persistent
failure by the taxpayer to comply with the
Case Plan may be treated by the APA Pro-
gram as a withdrawal of the APA request.
In this event, if the taxpayer wishes to con-
tinue to pursue the APA, the taxpayer must
re-file the request and pay a new user fee.
(5) In some circumstances, develop-
ment of the case will suggest to both the
APA Team and the taxpayer that they ad-
just some milestone dates. To preserve
flexibility, the APA Team and the taxpayer
may amend the Case Plan by written mu-
tual agreement, consistent with the need to
complete the case expeditiously.
(6) If a case is not completed by the
date specified in the operative Case Plan,
the APA Team Leader and the taxpayer
must submit to the APA Director a joint
status report (or separate status reports in
the event of disagreement) explaining the
substantive or procedural matters causing
the delay and specifying how the parties
propose to resolve the outstanding issues
and complete the case within a reasonable
time. If the case is not completed by the
new target date, APA Program manage-
ment will hold a status conference. The
purpose of the status conference is to reach
agreement on how the case will be re-
solved. The Associate Chief Counsel (In-
ternational) may participate in this or sub-
sequent conferences if the case is not re-
solved satisfactorily in a timely manner.
.08 Execution
Signature of an APA by the APA Direc-
tor and the taxpayer will constitute agree-
ment to the APA. For purposes of execut-
ing the APA, each taxpayer that is a mem-
ber of a consolidated group (as defined in
§ 1.1502–1) must comply with the provi-
sions of § 1.1502–77. The person sign-
ing the APA request on behalf of the tax-
payer must satisfy the requirements of sec-
tion 4.09(2).
.09 Withdrawing the Request
The taxpayer may withdraw the request
at any time before the execution of the
APA. The user fee generally will not be re-
funded if the taxpayer withdraws its APA
request after the due diligence process has
been initiated.
.10 Rejecting the Request
The APA Program may decline either to
accept any APA request or to execute any
APA after a request has been accepted. If
the APA Program declines to execute an
APA after the due diligence process has
been initiated, the Service normally will
retain the user fee, although the fee may
be returned if the APA Program determines
that such action would be appropriate un-
der the circumstances. If the APA Program
proposes to reject an APA request, the tax-
payer will be granted one conference of
right with the APA Director. Other con-
ferences may be granted at the APA Direc-
tor’s discretion.
SECTION 7: COMPETENT
AUTHORITY CONSIDERATION
.01When any of the parties to a re-
quest are entitled toobtain assistance un-
der the mutual agreement provision of a
tax treaty between a foreign country and
the United States, or under Rev. Proc.
89–8, the competent authorities may en-
ter into agreements concerning the APA.
Requests similar to APA requests that are
initiated through treaty partners or posses-
sion tax agencies and submitted to the U.S.
competent authority will be processed un-
der this revenue procedure and Rev. Proc.
2002–52, as appropriate. In order to pro-
vide timely clarification of factual issues,
minimize the potential for miscommunica-
January 9, 20062862006–2 I.R.B.

tion, and assist in development of a multi-
ple party agreement on a timely basis, the
Service will generally initiate coordination
among the taxpayer, the Service, and the
competent authoritiesof treaty partners at
the earliest possible stage of consideration
of an APA request, including, where pos-
sible, the prefiling stage. In this manner,
the U.S. and foreign competent authori-
ties can develop a joint understanding of
the case, which should facilitate negotia-
tion and resolution of competent author-
ity issues. The taxpayer should remain
available throughout consideration of the
request to assist the Service in reaching
agreement with the foreign competent au-
thority. Final agreement to the negotiated
APA will be sought among the taxpayer,
the Service, and the foreign competent au-
thority. As a general matter, the taxpayer
should submit APA requests and related
correspondence simultaneously to the Ser-
vice and to foreign competent authorities
involved in the requests.
.02The purpose of a competent author-
ity agreement is to avoid double taxation
or taxation not in accordance with the rel-
evant income tax treaty or treaties. If such
an agreement is not acceptable to the tax-
payer, the taxpayer may withdraw the APA
request (see section 6.09). If the competent
authorities are unable to reach an agree-
ment, the taxpayer may withdraw its re-
quest or, at its discretion, the Service may
negotiate and enter into a unilateral APA
with the taxpayer (see section 7.06).
.03The taxpayer must cooperate with
the Service and the U.S. competent author-
ity, pursuant to the standards set forth in
Rev. Proc. 2002–52 and any other appli-
cable revenue procedures.
.04Taxpayers have an affirmative obli-
gation to identify relevant concerns that
may impact competent authority negotia-
tion of an APA request. For example, it
may be necessary for the Service to re-
quest sensitive confidential data (includ-
ing material that may constitute a trade se-
cret), which if disclosed, could harm the
taxpayer’s competitive position. If the
taxpayer identifies such sensitive informa-
tion, the Service will work with the tax-
payer in developing a mechanism to per-
mit consideration or verification by the
treaty partner or partners of the informa-
tion while still preserving its confidential-
ity.
.05When the competent authorities en-
ter into an agreement covering an APA,
the Service will, to the extent appropri-
ate, agree to a mutual exchange of in-
formationwiththeforeigncompetentau-
thority concerning any subsequent modifi-
cations, cancellation, revocation, requests
to renew, evaluation of annual reports, or
examination of the taxpayer’s compliance
with the terms and conditions of the APA.
Bilateral APAs may provide for simulta-
neous filing of the annual report with the
Service and with the foreign tax adminis-
tration.
.06To minimize taxpayer and gov-
ernmental uncertainty and administrative
cost, bilateral or multilateral APAs are
generally preferable to unilateral APAs
when competent authority procedures are
available with respect to the foreign coun-
try or countries involved. In appropriate
circumstances, however, the Service may
execute an APA with a taxpayer without
reaching a competent authority agree-
ment. The taxpayer must show sufficient
justification for a unilateral APA. In some
circumstances, procedures agreed upon
with particular foreign competent authori-
ties, or the requirements of proper relations
with treaty partners, may preclude unilat-
eral APAs.
.07Section 7.05 of Rev. Proc. 2002–52
provides in part that, if a taxpayer reaches
a settlement on an issue pursuant to a
written agreement, the U.S. competent
authority will endeavor only to obtain a
correlative adjustment from a treaty coun-
try and will not undertake any actions that
would otherwise change such agreement.
The restrictions imposed under section
7.05 of Rev. Proc. 2002–52 with respect
to the discretion of the U.S. competent au-
thority to negotiate correlative relief will
not apply to a unilateral APA. However, a
unilateral APA may hinder the ability of
the U.S. competent authority to reach a
mutual agreement that will provide relief
from double taxation, particularly when a
contemporaneous bilateral or multilateral
APA request would have been both ef-
fective and practical (within the meaning
of § 1.901–2(e)(5)(i)) to obtain consistent
treatment of the APA matters in a treaty
country. If there is a settlement with re-
spect to taxable years prior to the first
year subject to a unilateral APA based on
rollback of the APA’s TPM (as discussed
in sections 2.12 and 8 of this revenue
procedure), section 7.05 of Rev. Proc.
2002–52 will apply to the rollback years
in the regular manner.
SECTION 8: ROLLBACK OF TPM
.01Application of the TPM to tax years
priortothosecoveredbytheAPA(“roll-
back” of the TPM) may be an effective
means of enhancing voluntary compliance
and of using available resources to address
unresolved transfer pricing issues. The
taxpayer may request that the Service con-
sider a rollback (a “rollback request”) in
connection with a particular APA request.
Under regularly applicable procedures, the
Service may determine that the same or a
similar TPM as that agreed to in an APA
should be applied to prior years even in the
absence of a rollback request. When ap-
plying the TPM to prior years, adjustments
may be made to reflect differences in facts,
economic conditions, and applicable legal
rules. Those adjustments may be made re-
gardless of whether the taxpayer or the Ser-
vice initiated the rollback request.
.02The taxpayer may make a rollback
request in its APA request or at any time
prior to the execution of the APA. The
principles set forth in section 2.12 gen-
erally will govern the Service’s consid-
eration of the request. The balance of
prospectivity and retroactivity of the total
number of years covered by the proposed
overall agreement, and the status of any
on-going examination, will also be given
consideration in the Service’s decision to
entertain a rollback request. Rollbacks re-
quested after submission of the APA re-
quest must be in writing and addressed to
the APA Director.
.03If a rollback request is submitted
in connection with a bilateral or multi-
lateral APA, the rollback request will be
deemed to constitute an application for ac-
celerated competent authority considera-
tion as described in section 7.06 of Rev.
Proc. 2002–52 (or its successor). The
Office of Associate Chief Counsel (Inter-
national), the ServiceOperating Division
field office involved, and the U.S. Compe-
tent Authority will coordinate considera-
tion of the request. The taxpayer’s request
must include all information required for
accelerated competent authority consider-
ation under Rev. Proc. 2002–52 (or its
successor), subject to the rules set forth
therein. The taxpayer’s request can pertain
2006–2 I.R.B.287January 9, 2006

to any years prior to the first year to be cov-
ered under the requested APA. As neces-
sary to reach a competent authority agree-
ment, the Service may require that the roll-
back be applied to one or more specified
years if accelerated competent authority is
to be granted. In exercising its discretion
over the conduct of accelerated competent
authority consideration, the U.S. Compe-
tent Authority will seek to implement the
policy concerning APA rollbacks stated in
section 2.12.
.04Rollback requests submitted in con-
nection with a bilateral or multilateral APA
and involving a taxable year under the ju-
risdiction of Appeals will be deemed to
constitute an application for simultaneous
Appeals and competent authority consid-
eration. That application is described in
section 8 of Rev. Proc. 2002–52 and is
subject to the rules of that section. The
Office of Associate Chief Counsel (Inter-
national), Appeals, and the U.S. Compe-
tent Authority will coordinate considera-
tion of the request. In exercising its discre-
tion in a simultaneous Competent Author-
ity-Appeals proceeding, the U.S. Compe-
tent Authority will seek to implement the
policy concerning APA rollbacks stated in
section 2.12. Taxpayers are encouraged
to request accelerated competent author-
ity consideration under section 8.03 above,
in conjunction with an application for the
simultaneous Appeals and competent au-
thority process.
.05Subject to the policy stated in sec-
tion 2.12, the Service official with juris-
diction over the taxable year subject to the
rollback has discretion as to whether the
rollback is applied. That official may be ei-
ther the Service Operating Division execu-
tive responsible for the taxpayer’s income
tax return, the National Chief of Appeals,
the U.S. Competent Authority (for mat-
ters subject to competent authority negoti-
ations), or the Division Counsel (for mat-
ters pending litigation). Except to the ex-
tent inconsistent with this revenue proce-
dure, APA rollbacks will be implemented
using regularly applicable procedures for
resolving tax issues. Such procedures in-
clude but are not limited to closing agree-
ments and other settlement documents and
Forms 870 and 870AD.
SECTION 9: SMALL BUSINESS
TAXPAYER APAs
.01 Special Provisions Available to
Small Business Taxpayers
At the request of a small business tax-
payer (“SBT”), the APA Program may
apply any or all of the provisions in this
section. A SBT is any U.S. taxpayer with
total gross income of $200 million or less,
as determined under section 4.12(6). In
addition, SBT procedures will be available
for APAs that cover small transactions
described in section 4.12(5). Although
transactions involving valuable intangible
property or CSAs would not ordinarily
be appropriate for these SBT procedures
(because of the complexity of valuing
such intangibles), the APA Program will
consider employing special procedures for
such transactions on a case-by-case basis.
.02 PFC Procedures
(1) As set forth in the general rules
above, a taxpayer contemplating an APA
may request a PFC with the APA Program
(see section 3). If a PFC is requested, the
APA Program provides informal advice to
the taxpayer regarding the taxpayer’s pro-
posal, but ordinarily does not begin sig-
nificant due diligence until the taxpayer
formally files an APA request and pays
theappropriateuserfee(seesection6.01).
In the case of an SBT, however, the APA
Program will commence its due diligence
analysis earlier in the process to accelerate
the conclusion of the APA negotiations.
(2) The APA Program and a SBT may
hold a PFC to determine as early as possi-
ble the best method for the SBT’s proposed
covered transactions. The APA Program
will need a detailed description of the un-
derlying facts and the proposed TPM for
the SBT’s proposed covered transactions
at least 60 days prior to the scheduled con-
ference. The SBT may provide the infor-
mation it maintains under § 6662(e) to sat-
isfy this requirement. Prior to its prefil-
ing submission, the SBT must consult with
the APA Program to determine the infor-
mation required to evaluate the SBT’s cov-
ered transactions.
(3) An APA Team will evaluate the
APA prefiling information to determine
items of concern and the additional docu-
mentation needed to evaluate the request.
The SBT will be advised of the APA
Team’s initial conclusions before the PFC
so that it can address these items before or
at the conference.
(4) At the PFC, the SBT and APA
Program will agree on a schedule with the
objective of finalizing the recommended
negotiating position for a bilateral APA,
or concluding a unilateral APA, within
six months of the date the SBT files its
APA request. The APA Program expects
that performing this analysis earlier in the
process should result in a reduced number
of post-filing meetings and supplemental
information requests.
.03 Items Required for an SBT APA Re-
quest
Before an SBT submits an APA request,
the APA Program and the SBT may agree
to reduce or eliminate specific items that
would otherwise be required by section 4.
.04 Locale and Number of Meetings for
SBT APA Requests
The APA Program will endeavor to
hold meetings with the SBT at a location
convenient to the SBT. To minimize the
number of meetings, teleconferences will
be employed whenever feasible.
.05 Assistance in Economic Analysis
At the SBT’s request, the APA Pro-
gram will assist the SBT in the selection
and evaluation of comparables, as well as
the computation of any appropriate adjust-
ments to comparables.
.06 APA
For unilateral APA requests, a SBT
should submit a proposed draft APA in
a form substantially similar to the APA
Program’s current Model APA (see An-
nouncement 2005–27, 2005–16 I.R.B.
918, 950). The electronic component of
the APA request should include a “redline”
version showing the differences between
the Model APA and the SBT’s proposed
draft APA (see section 4.02(6)).
.07 APA Program’s Consideration of
Other Alternative Procedures
The APA Program may consider other
procedures suggested by the SBT to re-
duce the SBT’s administrative and finan-
cial burden, consistent with the objectives
of the APA Program and the requirements
of § 482.
January 9, 20062882006–2 I.R.B.

SECTION10:LEGALEFFECTOFTHE
APA
.01An APA is a binding agreement be-
tween the taxpayer and the Service. See
sections 2.01 - 2.04.
.02If the taxpayer complies with the
terms and conditions of the APA, the Ser-
vice will not contest the application of the
TPM to the subject matter of the APA ex-
cept as provided in this revenue procedure.
The taxpayer remains otherwise subject to
U.S. income tax laws and applicable in-
come tax conventions.
.03An APA will have no legal effect
except with respect to the taxpayer, taxable
years, and transactions to which the APA
specifically relates.
.04Unless provided otherwise by writ-
ten agreement or regulations, the Service
and the taxpayer may not introduce the
APA or non-factual oral and written rep-
resentations made in conjunction with the
APA request as evidence in any judicial or
administrative proceeding regarding any
tax year, transaction, or person not cov-
ered by the APA. This paragraph does not
preclude the Service and the taxpayer from
agreeing to roll back the APA TPM, or the
Service’s use of any non-factual material
otherwise discoverable or obtained other
than in the APA process merely because
the parties considered the same or similar
material in the APA process.
.05Unless provided otherwise by writ-
ten agreement or regulations, the Service
and the taxpayer may not introduce a
proposed, cancelled, or revoked APA, or
any non-factual oral or written represen-
tations or submissions made during the
APA process, as an admission by the other
party, in any judicial or administrative
proceeding regarding any taxable year of
the requested APA term. This paragraph
does not preclude the Service’s use of any
non-factual material otherwise discover-
able or obtained other than in the APA
process merely because the APA Program
and the taxpayer considered the same or
similar material in the APA process.
SECTION 11: ADMINISTERING THE
APA
.01 Annual Reports
(1) For each taxable year covered by
the APA, the taxpayer must file a timely
and complete annual report describing its
actual operations for the year and demon-
strating compliance with the APA’s terms
and conditions. The report must include all
items required by the APA, describe any
pending or contemplated requests to re-
new, modify or cancel the APA, and report
any adjustments made pursuant to section
11.02. In addition, the annual report must
identify any material information submit-
ted while the APA request was pending
that the taxpayer discovers during the tax-
able year was false, incorrect, or incom-
plete. See section 5.02.
(2) The taxpayer must file an original
and four copies of the annual report by
the later of (a) 90 days after the time pre-
scribed by statute (including extensions)
for filing its federal income tax return for
the year covered by the report, or (b) 90
days after the effective date of the APA.
The Service and the taxpayer may agree
to alternative filing dates. The taxpayer
should file the original annual report and
copies with the APA Director in Washing-
ton, D.C., as indicated in section 4.11. For
bilateral or multilateral APAs, the Service
may require the taxpayer to file simultane-
ously a copy of the annual report with the
treaty partner or partners.
(3) The Service Operating Division or
the APA Program Office will contact the
taxpayer regarding an annual report if it is
necessary to clarify or complete the infor-
mation submitted in the annual report. The
taxpayer must supply the additional infor-
mation by the date specified.
(4) Any contact between the Service
Operating Division, or the APA Program
Office, and the taxpayer to clarify or com-
plete the information in an annual report is
not an examination or the commencement
of an examination of the taxpayer for pur-
poses of § 7605(b) or any other Code pro-
vision.
(5) If a filed annual report contains in-
complete or incorrect information, or re-
ports an incorrect application of the TPM,
the taxpayer must amend it within 45 days
after becoming aware of the need to amend
the report. The time may be extended for
good cause.
(6) An annual report must contain the
following declaration:
Under penalties of perjury, I declare
that I have examined this annual report
including accompanying documents,
and, to the best of my knowledge and
belief, this annual report contains all
the relevant facts relating to the annual
reporting requirements pursuant to the
APA, and such facts are true, correct,
and complete.
[If applicable: An adjustment to
conform taxable income and other rele-
vant items to reflect the results reported
herein has been reported to the appro-
priate responsible Service Operating
Division personnel.]
[If applicable: An amended income
tax return to conform taxable income
and other relevant items to reflect the
results reported herein [has been] [will
be] filed with the appropriate Internal
Revenue Service Center.]
(7) The taxpayer must sign the dec-
laration in compliance with sections 4.09
(Perjury Statement) and 4.10 (Signatures).
(8) Failure to file a timely, complete,
or accurate annual report may be grounds
for canceling or revoking the APA under
sections 11.06.
.02 APA Primary Adjustments, Sec-
ondary Adjustments, and Revenue Proce-
dure Treatment
(1) APA Primary Adjustments. The
APA provides the TPM for determin-
ing the proper amount of the taxpayer’s
gross or net income, deductions, credits,
or allowances with respect to the APA’s
covered transactions. In general, the tax-
payer’s actual covered transactions during
an APA year, as reported in its books and
records, should comply with the TPM
and be clearly reflected on the taxpayer’s
timely-filed original return for the year.
Under some TPMs, however, the taxpayer
may have to wait until the close of the tax-
able year to determine whether the inter-
company prices it actually paid or received
complied with the TPM (for example, a
comparable profits method providing for
a particular operating margin range). If
the taxpayer’s actual covered transactions
do not comply with the TPM, the taxpayer
must nonetheless report its taxable income
in an amount consistent with the TPM (an
“APA primary adjustment”) on either a
timely-filed original return or an amended
return. The generally applicable Code
rules, including additions to tax, penalties
and interest, apply with respect to an APA
primary adjustment. When the taxpayer
makes an APA primary adjustment, an ap-
propriate correlative adjustment will also
be made with respect to the related foreign
2006–2 I.R.B.289January 9, 2006

entity affected by the APA primary adjust-
ment. See § 1.482–1(g)(2). To the extent
the APA covers years for which federal
income tax returns were filed prior to, or
no later than 60 days after, the effective
date of the APA, the taxpayer must file,
unless otherwise agreed to in the APA,
an amended return or returns that reflect
any required primary adjustment and pay
any tax due because of such adjustments,
within 120 days of entering into the APA.
The generally applicable Code rules will
apply with respect to the primary adjust-
ment with respect to the APA years for
which federal income tax returns were
filed before the APA was executed, ex-
cept: (a) the computation of any required
estimated tax installments for the taxable
year will not take into account the primary
adjustment and related secondary adjust-
ments (see section 11.02(2)); and (b) the
taxpayer will not be subject to the failure
to pay penalties under §§ 6651 and 6655,
or the failure to make timely deposit of
taxes penalty under § 6656, by reason of
the primary adjustment and related sec-
ondary adjustments.
(2) Secondary Adjustments. Absent
an election of the APA revenue procedure
treatment described in section 11.02(3),
an APA primary adjustment requires a
secondary adjustment to conform the
taxpayer’s accounts. The secondary ad-
justment may result in additional tax
consequences. See§ 1.482–1(g)(3).
(3) APA Revenue Procedure Treat-
ment. If a taxpayer makes an APA primary
adjustment, the taxpayer and its related
foreign entity may elect APA revenue pro-
cedure treatment and avoid the possible
adverse tax consequences of a secondary
adjustment that would otherwise follow
the APA primary adjustment. Under APA
revenue procedure treatment, consistent
with the principles of Rev. Proc. 99–32,
1999–2 C.B. 296, the taxpayer will be per-
mitted to establish an account receivable
from, or payable to, its related foreign
entity in the amount of the APA primary
adjustment as of the last day of the taxable
year to which the APA primary adjustment
applies. The account will not bear interest
andmustbepaidwithin90daysofthe
later of (a) the date for timely filing (with
extensions) of the federal income tax re-
turn for the taxable year to which the APA
primary adjustment applies, or (b) the
APA’s effective date. The account must
be paid within the 90 day period to receive
revenue procedure treatment. Payment
must be in the form of money, a written
debt obligation payable at a fixed date and
bearing interest at an arm’s length rate as
provided in § 1.482–2(a)(2), or through an
accounting entry offsetting such account
against an existingbona fidedebt between
the U.S. taxpayer and the related foreign
entity. The taxpayer must document the
payment or offset of the account, and dis-
close it in the APA annual report for the
year of the payment.
(4) The Service will give effect to an
APA primary adjustment, secondary ad-
justment, and payment under APA revenue
procedure treatment, if applicable, for all
U.S. income tax purposes. The tax treat-
ment of any such adjustment or payment
depends on the facts and circumstances of
the adjustment or payment. For example,
if a taxpayer’s APA primary adjustment in-
volves the reporting of an additional roy-
alty expense for a transaction with a re-
lated foreign entity, the Service will deem
a payment in the nature of a royalty in the
amount of the APA primary adjustment to
have been made by the taxpayer to the re-
lated foreign entity. This deemed payment
may be subject to U.S. withholding tax,
and interest would accrue on the tax re-
quired to be withheld from the due date
of the taxpayer’s federal income tax return
without regard to extensions. Similarly, a
taxpayer’s APA revenue procedure treat-
ment may involve the recharacterization of
a dividend paid by its foreign subsidiary
as a payment of an account receivable es-
tablished in connection with an APA pri-
mary adjustment. Any foreign tax with-
held from the payment may be treated as a
noncompulsory payment ineligible for the
foreign tax credit, unless the taxpayer ex-
hausts all effective and practical remedies,
including invocation of competent author-
ity procedures, to obtain consistent treat-
ment that would eliminate the foreign tax
liability. See § 1.901–2(e)(5).
(5) If the Service proposes a tax ad-
justment or the taxpayer files an amended
return that does not require an APA pri-
mary adjustment, generally applicable
Code rules will apply.
(6) If the taxpayer requests a bilateral
or multilateral APA, the U.S. Competent
Authority will discuss the principles of this
section with the appropriate foreign com-
petent authority to seek substantially iden-
tical treatment of the taxpayer’s related
foreign entity.
.03 Examination
(1) With respect to the application of
§ 482 to the covered transactions, the Ser-
vice will limit the examination of a tax-
payer’s income tax return for a tax year
coveredbyanAPAtotherequirementsde-
scribed in the next paragraph and will not
reconsider the TPM.
(2) For the year under examination, the
Service may require the taxpayer to estab-
lish: (a) compliance with the APA’s terms
and conditions; (b) validity and accuracy
of the annual report’s material representa-
tions; (c) correctness of the supporting data
and computations used to apply the TPM;
(d) satisfaction of thecritical assumptions;
and (e) consistent application of the TPM.
(3) The Service Operating Division
must inform the APA Director if the tax-
payer has not satisfied any requirement
in the prior paragraph. After consulting
with the appropriate Service Operating
Division personnel, the Associate Chief
Counsel (International) may decide to ap-
ply the terms of the APA, or revise (see
section 11.05), cancel, or revoke (see sec-
tion 11.06) the APA.
(4) The Service Operating Division
may audit and propose adjustments to
the taxpayer’s operating results as deter-
mined under the TPM without affecting
the APA’s validity or applicability. The
taxpayer may agree with the proposed
adjustments in the same manner as any
other adjustment, and the Service Oper-
ating Division will assess any resulting
additional tax or refund any resulting
overpayment of tax. If the taxpayer does
not agree with the proposed adjustment,
the taxpayer may contest it through the
normal administrative and judicial proce-
dures. The taxpayer must include the audit
adjustments as finally determined for the
purpose of applying the TPM and, as nec-
essary, make any APA primary, secondary
and correlative adjustments under section
11.02. APA revenue procedure treatment
under section 11.02(3) is unavailable for
audit adjustments.
.04 Record Retention
(1) The taxpayer must maintain books
and records sufficient to enable the Service
Operating Division to examine whether
the taxpayer has complied with the APA.
January 9, 20062902006–2 I.R.B.

The taxpayer’s compliance with this para-
graph fulfills the record-keeping require-
ments of §§ 6038A and 6038C as applied
to the covered transactions.
(2) Upon examination, the Service Op-
erating Division may submit a written re-
quest to the taxpayer requiring the sub-
mission of requested information or the
translation of specific documents within
30 days, as extended for good cause. The
fact that a foreign jurisdiction may impose
a penalty upon the taxpayer or other person
for disclosing the material will not consti-
tute reasonable cause for noncompliance
with the Service Operating Division’s re-
quest.
.05RevisingtheAPA
(1) An APA may be revised by agree-
ment of the parties, consistent with the
principles set forth herein and the inter-
ests of sound tax administration. The As-
sociate Chief Counsel (International) may
agree to revise an APA in lieu of canceling
or revoking it. If the parties agree to revise
the APA, the revised APA will indicate its
effective date.
(2) If the parties agree to revise a bilat-
eral or multilateral APA, the Team Leader
will submit the revised APA to the U.S.
Competent Authority to obtain the consent
of the foreign competent authority. If the
foreign competent authority refuses to ac-
cept the revised APA, or if the competent
authorities cannot agree on a revised APA
acceptable to all parties, the APA Director
and the taxpayer may agree to: (a) apply
the existing APA, if appropriate; (b) apply
the revised APA or agree to further revi-
sions; or (c) request the Associate Chief
Counsel (International) to cancel the APA
as of an agreed date. If the APA Director
and the taxpayer cannot agree on how to
proceed, the Associate Chief Counsel (In-
ternational) will cancel the APA pursuant
to section 11.06.
.06RevokingorCancelingtheAPA
(1) The Associate Chief Counsel (In-
ternational) may revoke an APA due
to fraud or malfeasance (as defined in
§ 7121), or disregard (as defined in
§ 6662(b)(1) and (c)) by the taxpayer
in connection with the APA, including,
but not limited to, fraud, malfeasance,
or disregard involving (a) material facts
in the request or subsequent submissions
(including an annual report) or (b) lack
of good faith compliance with the APA’s
terms and conditions.
(2) The Associate Chief Counsel (In-
ternational) may cancel an APA due to the
taxpayer’s misrepresentation, mistake as
to a material fact, failure to state a material
fact, failure to file a timely annual report,
or lack of good faith compliance with the
terms and conditions of the APA.
(3) Unless the parties agree to revise
the APA, the Associate Chief Counsel
(International) will cancel an APA in the
event of a failure of a critical assumption,
or a material change in governing case
law, statute, regulation, or a treaty (as de-
scribedinsection11.07).
(4) For purposes of this section
11.06(1) and (2) the Associate Chief
Counsel (International) will consider facts
as material if, for example, knowledge of
the facts could reasonably have resulted
in an APA with significantly different
terms and conditions. In regard to annual
reports, the Associate Chief Counsel (In-
ternational) will consider facts as material
if, for example, knowledge of the facts
would have resulted in (a) a materially
different allocation of income, deductions,
or credits than reported in the annual re-
port, or (b) the failure to meet a critical
assumption.
(5) The Associate Chief Counsel (In-
ternational) may waive cancellation if the
taxpayer can satisfactorily show good faith
and reasonable cause and agrees to make
any adjustment proposed to correct for the
misrepresentation, mistake as to a material
fact, failure to state a material fact, or non-
compliance.
(6) If the Associate Chief Counsel (In-
ternational) revokes an APA, the revoca-
tion relates back to the first day of the
APA’s first taxable year. The Service may:
(a) determine deficiencies in income taxes
and additions thereto; (b) deny relief under
Rev. Proc. 99–32, 1999–2 C.B. 296; (c)
allow the taxpayer relief under Rev. Proc.
99–32, but determine the interest on any
account receivable established under Rev.
Proc. 99–32, section 4.01, without mutual
agreement or correlative relief; (d) revoke
the APA as an “egregious case” under Rev.
Rul. 80–231, 1980–2 C.B. 219, so as to
deny the taxpayer a foreign tax credit; and
(e) not make available the unilateral relief
provisions of Rev. Proc. 2002–52 (see
section 12.07). The Service will seek to
coordinate any action concerning revoca-
tion of a bilateral or multilateral APA with
the foreign competent authority.
(7) If the Associate Chief Counsel (In-
ternational) cancels an APA, the cancella-
tion normally relates back to the beginning
of the year in which the critical assump-
tion failed, or the beginning of the year to
which the misrepresentation, mistake as to
a material fact, failure to state a material
fact, or noncompliance relates. If, how-
ever, the cancellation results from a change
in case law, statute, regulation, or treaty,
the cancellation normally relates back to
the beginning of the year that contains the
effective date of the change in case law,
statute, regulation, or treaty.
(8) As of the effective date of the can-
cellation, the APA has no further force
and effect with respect to the Service and
the taxpayer for U.S. income tax purposes.
The Service will seek to coordinate any ac-
tion concerning the cancellation of a bilat-
eral or multilateral APA with the foreign
competent authority.
.07 Change in Case Law, Statute, Reg-
ulation, or Treaty
If applicable U.S. case law, statutes,
regulations, or treaties change the federal
income tax treatment of any matter cov-
ered by the APA, the new case law, statute,
regulation, or treaty provision supersedes
inconsistent terms and conditions of the
APA.
SECTION 12: RENEWING THE APA
.01A taxpayer may request renewal of
an APA using the procedures for initial
APA requests. To expedite the preparation
andevaluationofanAPArenewalrequest,
however, taxpayers are encouraged to re-
quest a prefiling conference to discuss with
the APA Program the suitability of stream-
lined submission requirements. Taxpayers
are encouraged to file the renewal request
nine months before the expiration of the
APA term.
.02The APA Program will endeavor to
expedite the processing of a renewal APA.
Expedited processing will be most likely
where the taxpayer demonstrates that the
following conditions exist: (a) substan-
tially the same law and policy applied to
the existing APA; (b) no substantial dif-
ferences exist between the taxpayer’s pro-
posed TPM and the TPM under the exist-
ing APA; (c) no material changes occurred
2006–2 I.R.B.291January 9, 2006

in the taxpayer’s facts or circumstances
since the parties entered into the existing
APA; and (d) for a bilateral APA, a roll-
back or closed year considerations did not
influence the TPM in the existing APA.
.03If the conditions in the prior para-
graph exist, the APA Team begins its eval-
uation of the renewal APA by considering
the continuing applicability of the existing
APA, using updated comparables as appro-
priate. The APA Team will focus on any
changed facts and circumstances. While
the APA Team will endeavor to streamline
the renewal process, certain cases may re-
quire additional analysis. That is, experi-
ence and insight gained from applying the
TPM to actual data (for example, APA an-
nual reports) may provide insight that in-
dicates the need to modify the TPM. The
APA Program will use its best efforts to
advise the taxpayer at a prefiling confer-
ence whether a streamlined APA renewal
process will be achievable.
SECTION 13: DISCLOSURE
.01An APA, any background informa-
tion related to the APA, and the taxpayer’s
APA request for that APA, are return infor-
mation and are confidential. See §§ 6103,
6105, 894, and 7852(d).
.02An APA, any background informa-
tion related to the APA, and the taxpayer’s
APA request, are not “written determina-
tions,” and they are not open to public in-
spection. See § 6110.
.03The Secretary must prepare an
annual report for public disclosure. See
§ 521(b) of the Ticket to Work and Work
Incentives Improvement Act of 1999,
Pub. L. 106–170, 113 Stat. 1860, 1925.
That report includesspecifically desig-
nated information concerning all APAs,
but in a form that does not identify tax-
payers or their trade secrets or proprietary
or confidential business or financial infor-
mation.
.04An APA, any annual reports, and
any factual information contained in the
background files is subject to exchange of
information under income tax treaties or
tax information exchange agreements in
accordance with the terms of such treaties
and agreements (including terms regarding
relevancy, confidentiality and the protec-
tion of trade secrets). In cases where the
exchange of information would be discre-
tionary, information may be exchanged to
the extent consistent with sound tax ad-
ministration and the practices of the rele-
vant foreign competent authority, includ-
ing where relevant the existence and appli-
cation by the foreign competent authority
of rules similar to those described in sec-
tions 10.04 and 10.05.
SECTION 14: EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2004–40, 2004–2 C.B. 50,
is superseded.
SECTION 15: EFFECTIVE DATE
This revenue procedure will apply to
all APA requests, including requests for
renewal, received on or after February 1,
2006. By agreement, this revenue proce-
dure may apply to any APA resulting from
an APA request pending on such date.
SECTION 16: PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1503.
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 collections of information are in
sections 3.06, 4, 5, 8.03, 11.01, 11.02(1),
11.04, 11.05 and 12.01. This information
is required to provide the Service sufficient
information to evaluate and process the
APA request or request for renewal of an
existing APA, or to determine whether the
taxpayer is in compliance with the terms
and conditions of an APA. This informa-
tion will be used to evaluate the proposed
TPM, and the taxpayer’s compliance with
the terms and conditions of any APA to
which it is a party. The collections of infor-
mationarerequiredtoobtainanAPA.The
likely respondents are business or other
for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 8200
hours.
The estimated average burden for an
APA prefiling conference is 10 hours; the
estimated average burden for an APA re-
quest is 50 hours; and the estimated aver-
age burden for preparation of an annual re-
port by a party to an APA is 15 hours. The
estimated number of respondents and/or
recordkeepers is 230.
The estimated annual frequency of re-
sponses is one request or report per year
per applicant or party to an APA, except
that a taxpayer requesting an APA may
also request a prefiling conference.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by § 6103.
DRAFTING INFORMATION
The principal authors of this docu-
ment are various members of the Ad-
vance Pricing Agreement Program of
the Office of Associate Chief Counsel
(International). For further informa-
tion regarding this revenue procedure,
please contact Mr. Craig A. Sharon or
Mr. Craig R. Gilbert at (202) 435–5220
(not a toll-free number).
January 9, 20062922006–2 I.R.B.

26 CFR 301.6109–1: Guidance for qualification as an acceptance agent, and execution of an agreement between an acceptance agent and the Internal Revenue Service
(IRS) relating to the issuance of certain taxpayer identifying numbers.
Rev. Proc. 2006–10
TABLE OF CONTENTS
SECTION 1. PURPOSE
............................................................................................ 293
SECTION 2. BACKGROUND....................................................................................... 293
SECTION 3. DEFINITIONS......................................................................................... 294
SECTION 4. ACCEPTANCE AGENT................................................................................. 294
SECTION 5. CERTIFYING ACCEPTANCE AGENT.................................................................... 295
SECTION 6. SUITABILITY CHECK................................................................................. 296
SECTION 7. ACCEPTANCE AGENT AGREEMENT................................................................... 296
SECTION 8. EXPIRATION OF EXISTING ACCEPTANCE AGENT AGREEMENTS....................................... 297
SECTION 9. EF
FECTIVE DATE
...................................................................
.................. 297
SECTION 10. EFFECT ON OTHER DOCUMENTS.................................................................... 297
SECTION 11. PAPERWORK REDUCTION ACT....................................................................... 297
SECTION 12. DRAFTING INFORMATION........................................................................... 298
SECTION 1. PURPOSE
This revenue procedure describes the
application procedures for becoming an
acceptance agent and the requisite agree-
ment that an acceptance agent must exe-
cute with the IRS. Persons may wish to
become an acceptance agent for purposes
of facilitating the issuance of (1) IRS in-
dividual taxpayer identification numbers
(ITINs) to alien individuals who are in-
eligible to obtain social security numbers
(SSNs), or (2) employer identification
numbers (EINs) to other foreign persons
who need an EIN for Federal tax purposes.
This revenue procedure supersedes Rev.
Proc. 96–52, 1996–2 C.B. 372.
The four major changes to the revenue
procedure for becoming an acceptance
agent are as follows:
.01 Acceptance agent applicants may
be required to submit to suitability checks,
as explained in section 6 of this revenue
procedure.
.02 An acceptance agent agreement en-
tered into after the publication of this rev-
enue procedure will expire on December
31 of the fourth full calendar year after the
year in which the agreement goes into ef-
fect, as explained in section 7.02(8)(a) of
this revenue procedure. Accordingly, ac-
ceptance agents will have to periodically
reapply to retain their acceptance agent
status.
.03 Existing acceptance agent agree-
ments in effect on the date of publication
of this revenue procedure will expire
on December 31, 2006, as explained in
section 8 of this revenue procedure. Ac-
ceptance agents subject to those expiring
agreements must reapply to retain their
acceptance agent status.
.04 Acceptance agents may request to
be included on a public list of acceptance
agents published periodically by the IRS,
as explained in section 4.02(3)(b)(vii) of
this revenue procedure.
S
ECTION 2. BACKGROUND
.01 Section 301.6109–1(d)(3) of the
Procedure and Administration Regula-
tions provides general procedures for an
alienindividualtoobtainanITINthat
require the submission of an application
form (Form W–7), together with docu-
mentation considered as evidence of the
alien individual’s identity and alien status.
Section 301.6109–1(d)(2) of the regu-
lations provides general procedures for
obtaining an EIN that require the submis-
sion of an application form (Form SS–4)
together with any supplementary state-
ment as may be required. The regulations
require that an applicant for an ITIN or an
EIN furnish the information required by
the form, the accompanying instructions,
and any applicable regulations. An appli-
cant for an ITIN or an EIN may submit the
application form directly to the IRS or, as
provided in §301.6109–1(d)(3)(iv), may
apply with the assistance of an acceptance
agent.
.02 In Rev. Proc. 96–52, the IRS pro-
vided guidance regarding the qualification
requirements for acceptance agents and
the execution of an agreement between an
acceptance agent and the IRS. Acceptance
agents facilitate and expedite the issuance
of ITINs and EINs by verifying the foreign
status and identity of the applicants. Since
the program’s inception, hundreds of ac-
ceptance agents have successfully assisted
individuals who are ineligible to obtain
SSNs to obtain ITINs. The IRS is pleased
with the success of the acceptance agent
program and values the contributions
made by acceptance agents. This revenue
procedure modifies screening require-
ments to ensure that acceptance agents
2006–2 I.R.B.293January 9, 2006

are adequately qualified to serve ITIN and
EIN applicants. Acceptance agent appli-
cants now may be required to undergo
a suitability check, which includes a re-
view of their tax filing histories to ensure
compliance with their tax obligations and,
in some cases, a credit history and FBI
background check. The new procedures
also call for the acceptance agent agree-
ment to expire at the end of the fourth full
calendar year. These new requirements
are intended to ensure that ITIN and EIN
applicants continue to receive assistance
from credible and responsible acceptance
agents.
SECTION 3. DEFINITIONS
For purposes of this revenue procedure,
the terms listed below are defined as fol-
lows.
.01 Anacceptance agentis a person
(i.e., an individual or an entity) who, pur-
suant to a written agreement with the IRS,
is authorized to assist alien individuals and
other foreign persons in obtaining ITINs or
EINs from the IRS. See section 4.01 of this
revenue procedure for the role of an accep-
tance agent. A person acting in its capacity
as an acceptance agent does not act as an
agent of the IRS and is not authorized to
hold itself out as an agent of the IRS.
.02 Acertifying acceptance agentis a
person (i.e., an individual or an entity)
who, pursuant to a written agreement with
the IRS, is authorized to assist alien indi-
viduals and other foreign persons in ob-
taining ITINs from the IRS and who also
assumes a greater responsibility than an
acceptance agent in facilitating the appli-
cation process for obtaining ITINs. The
certifying acceptance agent process does
not apply to obtaining EINs. See section
5.01 of this revenue procedure for the role
of a certifying acceptance agent. A person
acting in its capacity as a certifying accep-
tance agent does not act as an agent of the
IRS and is not authorized to hold itself out
as an agent of the IRS.
.03 Analien individualis an individual
who is not a citizen or a national of the
United States (U.S.).
.04 Aforeign personis a nonresident
alien individual, a foreign corporation, a
foreign partnership, a foreign trust, a for-
eign estate, or any other person that is not
a U.S. person.
.05Alien statusrefers to an individual’s
status as a non-U.S. citizen or non-U.S.
national.
.06Identityrefers to the fact of be-
ing the same individual as is represented,
claimed, or described.
.07TIN(taxpayer identifying number)
refers to both ITINs and EINs.
.08Form W–7refers to IRS Form W–7,
Application for IRS Individual Taxpayer
Identification Number, including the Span-
ish-language version, IRS Form W–7(SP).
.09Form SS–4refers to IRS Form
SS–4,Application for Employer Identifi-
cation Number.
SECTION 4. ACCEPTANCE AGENT
.01Role of acceptance agent.Therole
of an acceptance agent is to facilitate the
application process for the issuance of
TINs to alien individuals and other foreign
persons who need TINs for Federal tax
purposes. An acceptance agent facilitates
the ITIN application process by forward-
ing the completed Form W–7 (together
with the required documentary evidence)
to the IRS at the address listed in the Form
W–7 instructions. An acceptance agent
facilitates the EIN application process
by submitting to the IRS a Form SS–4
(together with any supplementary state-
ment if required) by following one of the
procedures described in the Form SS–4
instructions.
.02Application process for acceptance
agent.
(1)Eligible persons. Persons eligi-
ble to become acceptance agents include
a financial institution defined in section
265(b)(5) of the Internal Revenue Code
(Code) or §1.165–12(c)(1)(iv) of the reg-
ulations, a college or university that is
an educational organization defined in
§1.501(c)(3)–1(d)(3)(i), a federal agency
defined in section 6402(g) of the Code,
persons that provide assistance to taxpay-
ers in the preparation of their tax returns,
and any other person or categories of per-
sons that may be authorized by regulations
or IRS procedures. An eligible person
maybeaU.S.personoraforeignperson.
(2)Pre-application conference.Prior
to submitting a formal application, a per-
son interested in becoming an acceptance
agent may, but is not required to, request a
telephone or in-person conference with the
IRS to explore informally the benefits and
burdens associated with the role of an ac-
ceptance agent. Requests for pre-applica-
tion conferences should be directed to the
Commissioner of the Wage and Investment
Division at (404) 338–8963 (not a toll-free
number).
(3)Written application.
(a)Where to apply. A person may apply
to become an acceptance agent by submit-
ting a written request to:
Internal Revenue Service
Mail Stop 983
Andover, MA 05501
(b)Contentofapplication.Theap-
plication shall indicate that the person
is requesting permission to execute an
agreement with the IRS pursuant to
§301.6109–1(d)(3)(iv) of the regulations,
and in accordance with this revenue pro-
cedure. The application shall include the
following information:
(i) The applicant’s complete legal
name, street address, city, state, country,
zip code, EIN, and SSN or ITIN if an indi-
vidual, and Electronic Filing Identification
Number (EFIN), if available. All accep-
tance agents must have EINs. Therefore,
if the applicant does not have an EIN, the
applicant must obtain an EIN by follow-
ing one of the procedures described in the
Form SS–4 instructions;
(ii) A description of the type of per-
son(s) the applicant expects to help obtain
aTIN(e.g., visiting professors, nonresi-
dent gaming winners, etc.) and the approx-
imate number of persons the applicant ex-
pects to help during each calendar year;
(iii) A description of the applicant,
including the professional status of the
applicant (e.g., financial institution, edu-
cational organization, federal agency, tax
preparer, attorney,certified public accoun-
tant (CPA), etc.), the organizational status
of the applicant (e.g., corporation, partner-
ship, sole proprietorship, etc.) and if the
applicant is an entity, the state, including
the District of Columbia (or if outside the
United States, the country) under whose
laws the entity is created or organized;
(iv) A list of the offices or branches, if
any, intended to be covered by the agree-
ment and their locations, including mailing
addresses;
(v) A description of the business re-
lationship the applicant has with the per-
January 9, 20062942006–2 I.R.B.

sons whom it expects to assist in obtaining
TINs;
(vi) The name, telephone number, fax
number, and e-mail address of an individ-
ual the IRS can contact regarding the ap-
plication; and
(vii) If the applicant assists with the
preparation of tax returns, the applicant
may request to be included on a public
list of acceptance agents published period-
ically by the IRS.
(c)Standard application form.Appli-
cation should be made on Form 13551 (re-
vised),Application to Participate in the
IRS Acceptance Agent Program.
(4)IRS review of application.
(a)Request for additional information.
Upon review of the application, the IRS
may request additional information.
(b)Determination and notification of
status. The IRS will determine whether
the applicant qualifies to become an ac-
ceptance agent and will notify the appli-
cant in writing of this determination upon
completion of a suitability check as de-
scribed in section 6 of this revenue proce-
dure. If the applicant is approved as an ac-
ceptance agent, the IRS will provide writ-
ten instructions to the applicant regarding
the procedures for entering into the accep-
tance agent agreement with the IRS.
SECTION 5. CERTIFYING
ACCEPTANCE AGENT
.01Role of a certifying acceptance
agent. A certifying acceptance agent is a
person that is authorized under an agree-
ment with the IRS to submit a Form W–7
to the IRS on behalf of an ITIN applicant
without furnishing supporting documen-
tary evidence. Instead, when a certifying
acceptance agent submits a Form W–7 to
the IRS, it certifies to the IRS that it has
reviewed the appropriate documentation
evidencing the ITIN applicant’s identity
and alien status, and that it is maintaining
a record of such documentation. In addi-
tion, the certifying acceptance agent must
certify that, to the best of its knowledge
and belief, the documentation is authen-
tic, complete, and accurate. As part of
the certification, the certifying acceptance
agent must describe the documentation
upon which it is relying. The certification
is not binding on the IRS, and, in appro-
priate cases, the IRS may request to see
appropriate documentation before issuing
an ITIN.
.02Application process for certifying
acceptance agent.
(1)Written application.IRSpermis-
sion to act as a certifying acceptance agent
is conditioned upon the acceptance agent’s
agreeing to verify documentation support-
ing the identity and alien status of an ITIN
applicant, maintain certain records, and
submit certain information to the IRS upon
request. As a result, in addition to the in-
formation required to be submitted with
an application to become an acceptance
agent as outlined in section 4.02(3) of this
revenue procedure, an applicant also must
state that it is applying for certifying ac-
ceptance agent status.
(2)Pre-application conference.Prior
to submitting a formal application, a per-
son interested in becoming a certifying
acceptance agent may, but is not required
to, request a telephone or in-person con-
ference with the IRS. Such a conference
provides an opportunity to address such
matters as the scope of the agreement,
corresponding obligations for the ap-
plicant that arise under the agreement,
and the nature of documentation, record
maintenance, and verification procedures
that arise under the agreement. Requests
for pre-application conferences should
be directed to the Commissioner of the
Wage and Investment Division at (404)
338–8963 (not a toll-free number).
.03Agreement. The terms of a cer-
tifying acceptance agent agreement may
vary from case to case depending upon
such factors as local laws and practices,
know-your-customer procedures, supervi-
sory controls, and the types of internal con-
trols and recordkeeping procedures in ef-
fect in the normal course of the business
of the certifying acceptance agent. Gener-
ally, the certifying acceptance agent agree-
ment will contain the terms and conditions
necessary to insure proper administration
oftheprocess,describedinsection7.02
of this revenue procedure, by which the
IRS issues ITINs to alien individuals. The
following terms for certifying acceptance
agents are in addition to those outlined in
section 7 of this revenue procedure for all
acceptance agents.
(1)Procedures for collecting, review-
ing, and maintaining a record of required
documentation for assignment of an ITIN.
A certifying acceptance agent agreement
will describe the procedures by which the
certifying acceptance agent will verify the
identity and alien status of ITIN applicants
and submit a certification to the IRS. To
the extent possible, procedures already in
place to identify persons for local regu-
latory purposes or as part of the certify-
ing acceptance agent’s normal course of
business will be used to support the repre-
sentations made by the applicant regarding
these matters. To theextent applicable, a
certifying acceptance agent may use docu-
mentation evidencing citizenship, nation-
ality, residency, or immigration status to
support its determination of the alien sta-
tus of ITIN applicants. The reliability of
any documentation should be evaluated by
the certifying acceptance agent on the ba-
sis of the type of information stated on the
document, the source of the document, and
the ease with which the document could be
counterfeited. If the IRS determines that
these requirements or practices are not suf-
ficient, it may require that additional pro-
cedures and documentation be established.
The certifying acceptance agent will
agree to maintain a record of the documen-
tation obtained and reviewed pursuant to
the obligations set forth in the agreement.
All documentation submitted with respect
to an ITIN applicant shall be maintained
for a reasonable period, as prescribed in
the agreement.
(2)Procedures for IRS compliance
checks of certifications. A certifying ac-
ceptance agent must also agree to furnish
supporting documentary evidence to the
IRS upon request in such manner as the
IRS and the certifying acceptance agent
will establish. In order to conduct pe-
riodic compliance checks, the IRS may
rely on sampling techniques and/or ver-
ification by random selection with ITIN
recipients to assure reliability of the cer-
tifying acceptance agent’s certifications
while limiting the disruption and burden
to the acceptance agent. The certifying
acceptance agent agreement will spec-
ify the manner in which IRS compliance
checks will take place (i.e., either on site
or through correspondence). Where the
certifying acceptance agent resides out-
side of the United States, in appropriate
cases, assistance may be obtained from
the tax authorities of the country where
the acceptance agent resides.
2006–2 I.R.B.295January 9, 2006

SECTION 6. SUITABILITY CHECK
In general, applicants for approval as an
acceptance agent or certifying acceptance
agent must pass a suitability background
check before being admitted into the ac-
ceptance agent program.
.01Suitability Background Check.
(1)In general. Acceptance agent and
certifying acceptance agent applicants will
be subject to an IRS review of the appli-
cant’s tax filing history to determine if the
applicant is in full compliance with filing
and payment responsibilities under the In-
ternal Revenue Code and its regulations.
(2)Additional requirements.
(a) The acceptance agent or certifying
acceptance agent applicant or the appli-
cant’s representative who has the author-
ity to sign the acceptance agent or certify-
ing acceptance agent agreement, if appli-
cable, will be subject to the following re-
quirements:
(i) A credit history check; and
(ii) An FBI background check.
(b) Any individual who is authorized to
practice before the IRS under Circular 230
and provides evidence of current profes-
sional status will not be subject to the re-
quirements under section 6.01(2)(a)(i) or
(ii) for purposes of becoming an accep-
tance agent or certifying acceptance agent.
.02Exceptions.
(1) Financial institutions, as defined
in section 265(b)(5) of the code or
§1.165–12(c)(1)(iv) of the Income Tax
Regulations, colleges and universities that
qualify as educational organizations under
§1.501(c)(3)–1(d)(3)(i), and casinos will
not be subject to the requirements under
section 6.01 of this revenue procedure, but
the IRS may consider the tax filing history
of the entity in evaluating an application
from such entity;
(2) Applicants who have passed the
suitability check for Electronic Return
Originator (ERO) status and who remain
in good standing with the IRS will not be
subject to the requirements under section
6.01 of this revenue procedure; and
(3) Federal agencies, as defined in sec-
tion 6402(g) of the Code, will not be sub-
ject to the requirements under section 6.01
of this revenue procedure.
SECTION 7. ACCEPTANCE AGENT
AGREEMENT
.01In general. An acceptance agent
agreement described in §301.6109–
1(d)(3)(iv)(A) of the regulations is an
agreement between the IRS and a person
authorized to act as an acceptance agent
on behalf of an alien individual or other
foreign person with respect to their need
to obtain TINs from the IRS. The Com-
missioner of the Wage and Investment
Division or his/her designee will sign the
agreement on behalf of the IRS. If the
acceptance agent is a person other than an
individual, the agreement must be signed
by an authorized representative of the ac-
ceptance agent.
.02Terms and procedures.Thetermsof
an acceptance agent agreement may vary
depending upon such factors as the pro-
fessional status of the applicant (e.g.,fi-
nancial institution, educational organiza-
tion, U.S. federal agency, tax preparer, at-
torney, CPA, etc.), the organizational sta-
tus of the applicant (e.g., corporation, part-
nership, sole proprietorship, etc.), and the
place of residence or organization of the
applicant (i.e., inside or outside the United
States). The acceptance agent agreement
will generally contain the following terms
and conditions to ensure proper adminis-
tration of the process by which the IRS is-
sues TINs to alien individuals and other
foreign persons.
(1)Procedures for providing TIN appli-
cation forms. An acceptance agent shall
agree to maintain a supply of Forms W–7
for obtaining ITINs, and of Forms SS–4
for obtaining EINs. The acceptance agent
may use a substitute form that is approved
by the IRS. For example, if the acceptance
agent is a financial institution, the Form
W–7 or Form SS–4 may be incorporated
as part of an account opening package. See
Rev. Proc. 2004–62, 2004–2 C.B. 730, for
the procedures governing the use of substi-
tute forms.
(2)Procedures for assisting in comple-
tion of TIN application forms. An ac-
ceptance agent shall agree to assist in the
preparation of the TIN application form.
For example, the acceptance agent should
confirm that every item included on the
application form has been completed and
should assist the TIN applicant in under-
standing the information required by the
application form. The acceptance agent
should contact the IRS for assistance re-
garding any questions about the forms, ap-
plication process, the requirement to have
TINs, etc., that it cannot reasonably an-
swer. Questions regarding such matters
should be directed to the Commissioner of
the Wage and Investment Division at (404)
338–8963 (not a toll-free number).
(3)Procedures for IRS communication
with acceptance agent.The ITIN appli-
cant’s signature on the Form W–7 autho-
rizes the acceptance agent to communi-
cate with the IRS regarding only the ITIN
applicant’s application. The acceptance
agent may act as an agent for the ITIN ap-
plicant with regard to any additional com-
munication with the IRS that is necessary
for completion of the application form.
However, an EIN applicant must complete
and execute Form 2848,Power of Attorney
and Declaration of Representative,toau-
thorize an acceptance agent to communi-
cate with the IRS on the applicant’s behalf
in connection with a completed Form SS–4
application.
(4)Procedures for submitting TIN ap-
plication forms. An acceptance agent shall
agree to submit promptly the TIN appli-
cation forms or approved substitute forms
(together with the required documentation
for ITINs or the supplementary statement,
if required, for EINs) to the IRS at the mail-
ing address specified in the agreement.
(5)Procedures for collecting and re-
viewing required documentation for as-
signment of an ITIN.AFormW–7must
be accompanied by documentary evidence
of the ITIN applicant’s alien status and
identity. The types of acceptable docu-
mentary evidence may vary depending
upon such factors as the ITIN applicant’s
country of citizenship or nationality, the
ITIN applicant’s residency at the time of
the application (i.e., inside or outside the
United States), etc. The acceptance agent
must review the ITIN applicant’s docu-
mentation in order to determine whether
the documentation is of a type which the
IRS regards as reliable evidence of alien
status and identity. Examples of accept-
able documentary evidence are provided
in the Form W–7 instructions. Generally,
ITIN applicants must submit the required
documentation during a personal interview
with the acceptance agent. The agreement
generally will require that original (or
certified copies of the original) documen-
tation be submitted to the IRS with Form
January 9, 20062962006–2 I.R.B.

W–7. All valid original documents will be
returned to the acceptance agent. Copies
of original documents, if allowed to be
submitted under the acceptance agent
agreement, will not be returned to the ac-
ceptance agent.
(6)Procedures for assisting taxpayers
with notification procedures in the event of
a change of alien status. When an accep-
tance agent knows that an individual as-
signed an ITIN has become eligible to ob-
tain (or has, in fact, obtained) a SSN, such
acceptance agent shall agree to inform the
individual of the obligation to (1) apply for
a SSN, (2) stop using the previously-as-
signed ITIN upon receipt of the new SSN,
and (3) notify the IRS of this change in
alien status. The acceptance agent’s duty
with respect to this matter shall apply only
to situations in which the acceptance agent
has a continuing business relationship with
the individual. An alien individual may
become eligible to obtain a SSN if, for ex-
ample, such individual has become a U.S.
citizen or a permanent U.S. resident (i.e.,
“green card” holder), or is lawfully permit-
tedtoworkintheUnitedStates.
(7)Procedures for IRS verification of
compliance with acceptance agent agree-
ment. The acceptance agent agreement
will specify the procedures by which the
IRS will verify the acceptance agent’s
compliance with the agreement. In par-
ticular, the procedures must enable the
IRS to verify that the acceptance agent
has adequate procedures in effect to as-
sist applicants properly. The procedures
also must enable the IRS to verify that
the acceptance agent is complying with
any record retention requirements relat-
ing to the issuance of TINs. Verification
of compliance with the acceptance agent
agreement does not constitute an exam-
ination of the books and records of the
acceptance agent.
(8)Procedures regarding expiration
and termination of acceptance agent
agreement.
(a)Expiration. An acceptance agent
agreement shall be in effect on the date
the agreement is signed by an authorized
representative of the IRS and shall expire
on December 31 of the fourth full calendar
year after the year in which the agreement
became effective. Acceptance agents sub-
ject to expiring agreements who wish to re-
tain their acceptance agent status must en-
ter into new acceptance agent agreements
pursuant to the procedures set forth in this
revenue procedure. In order to avoid a
lapse in acceptance agent status, a new ap-
plication should be filed with the IRS at
least six months prior to the expiration of
an acceptance agent agreement.
(b)Termination. In general, either the
acceptance agent or the IRS may terminate
the agreement after delivery of a notice of
termination to the other party. The deci-
sion to terminate an agreement is solely
within the discretion of the party giving
such notice. However, the IRS gener-
ally will not terminate an agreement un-
less the acceptance agent knowingly fails
to comply with procedures required by the
agreement or to perform any duty or obli-
gation required in theagreement (includ-
ing failing to exercise due diligence under
the agreement) and such failure constitutes
material non-compliance. In addition, the
IRS may terminate an agreement if the ac-
ceptance agent has misrepresented mate-
rial information provided on its acceptance
agent application or on a TIN application.
Further, the IRS may terminate an agree-
ment if the acceptance agent accepts a TIN
application with knowledge that material
information on the form is false. The ac-
ceptance agent may request that the IRS
reinstate the acceptance agent agreement
by submitting, within 30 days of termina-
tion, a written explanation to the ITIN Pro-
gram Office, 401 West Peachtree Street,
Atlanta, GA 30308, of how the acceptance
agent proposes to correct the violation and,
if appropriate, of how it proposes to mod-
ify its procedures to ensure that such a vio-
lation will not occur in the future. The IRS
shall accept or reject the request, or make a
counterproposal, within 30 days of receipt
of the request. This decision is not subject
to appeal.
SECTION 8. EXPIRATION OF
EXISTING ACCEPTANCE AGENT
AGREEMENTS
Acceptance agent agreements and cer-
tifying acceptance agent agreements that
are in effect on the date of the publication
of this revenue procedure will expire on
December 31, 2006. Acceptance agents
and certifying acceptance agents subject
to expiring agreements who wish to re-
tain their acceptance agent status must en-
ter into new acceptance agent agreements
pursuant to the procedures set forth in this
revenue procedure. To avoid a lapse in ac-
ceptance agent status, a new application
should be filed with the IRS by June 30,
2006.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective on
the date of publication.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 96–52 is superseded.
SECTION 11. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1499.
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 collection of information con-
tained in this revenue procedure is in
section 4.02(3), section 5.02(1), and sec-
tion 7.02(6). This information is required
to assist the IRS in issuing TINs to certain
alien individuals and foreign persons. In
addition, this information will be used
to enable the IRS to determine whether
persons qualify as acceptance agents. The
collection of information is required to
obtain an acceptance agent agreement.
The likely respondents are state or local
governments, business or other for-profit
institutions, federal agencies, and non-
profit institutions.
The estimated total annual report-
ing/recordkeeping burden is 24,960 hours.
The estimated average annual burden
per respondent/recordkeeper is 3 hours, 12
minutes. The estimated number of respon-
dents/recordkeepers is 8,000.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
2006–2 I.R.B.297January 9, 2006

information are confidential, as required
by 26 U.S.C. 6103.
SECTION 12. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Ethan A. Atticks of the Of-
fice of Associate Chief Counsel (Interna-
tional). For further information regarding
this revenue procedure, contact the Com-
missioner of the Wage and Investment
Division at (404) 338–8963 (not a toll-free
call).
January 9, 20062982006–2 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations,
Notice of Proposed
Rulemaking, and Notice
of Public Hearing
Guidance on Passive Foreign
Investment Company (PFIC)
Purging Elections
REG–133446–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions, notice of proposed rulemaking, and
notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9232) that provide certain elections
for taxpayers, who in limited circum-
stances, continue to be subject to the
excess distribution regime of section 1291
even though the foreign corporation in
whichtheyownstockisnolongertreated
as a PFIC under section 1297(e). The
regulations are necessary to provide guid-
ance about purging the PFIC taint for such
foreign corporations. The regulations will
affect U.S. persons that hold stock in a
PFIC. The text of those temporary reg-
ulations also serves as the text of these
proposed regulations. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by March 8, 2006. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for March 22, 2006,
at 10 a.m. must be received by March 1,
2006.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–133446–03), room
5203, Internal Revenue Building, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered between the hours of
8a.m.and4p.m. toCC:PA:LPD:PR
(REG–133446–03), Courier’s Desk, In-
ternal Revenue Building, 1111 Consti-
tution Avenue, NW, Washington, DC,
electronically via the IRS Internet site
atwww.irs.gov/regsor via the Federal
Rulemaking Portal athttp://www.regula-
tions.gov(IRS REG–133446–03). The
public hearing will be held in the Audi-
torium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Ethan Atticks at (202) 622–3840, con-
cerning submissions and the hearing,
LaNita Van Dyke (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rulemak-
ing have been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk Of-
ficer for the Department of the Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collections of
information should be received by Febru-
ary 6, 2006. Comments are specifically
requested concerning:
Whether the proposed collections of in-
formation are necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may be
minimized, including through the appli-
cation of automated collection techniques
or other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information
in these proposed regulations is in
§1.1297–3(c)(5)(ii). This information
is required to enable the IRS to verify that
a taxpayer is reporting the correct amount
of income, gain or loss from that tax-
payer’s interest in the foreign corporation.
The collections of information are manda-
tory. The respondents are shareholders of
PFICs.
Estimated total annual reporting bur-
den: 250 hours.
The estimated annual burden per re-
spondent is 1 hour.
Estimated number of respondents: 250.
The estimated annual frequency of re-
sponses: one time.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Temporary regulations in this issue of
the Bulletin providecertain elections for
taxpayers that continue to be subject to
the excess distribution regime of section
1291 even though the foreign corpora-
tion in which they own stock is no longer
treated as a PFIC under section 1297(e) or
section 1298(b)(1). The text of the tempo-
rary regulations also serves as the text of
these proposed regulations. The preamble
to the temporary regulations explains the
temporary regulations and these proposed
regulations.
2006–2 I.R.B.299January 9, 2006

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing is scheduled for March
22, 2006, beginning at 10 a.m. in the Au-
ditorium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the Constitution Av-
enue entrance. In addition, all visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the entrance more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
"FOR FURTHER INFORMATION CON-
TACT" portion of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to this hearing. Persons who wish to
presentoralcommentsmustsubmitwrit-
ten comments and an outline of the topics
tobediscussedandthetimetobedevoted
to each topic (a signed original and eight
(8) copies) by March 1, 2006. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for reviewing
outlines has passed. Copies of the agenda
will be available free of charge at the hear-
ing.
Drafting Information
The principal author of this regula-
tion is Ethan Atticks, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.1291–9, paragraph
(j)(2)(v) is revised to read as follows:
§1.1291–9 Deemed dividend election.
*****
(j) * * *
(2) * * *
(v) [The text of the proposed amend-
ment to §1.1291–9(j)(2)(v) is the same as
the text for §1.1291–9T(j)(2)(v) published
elsewhere in this issue of the Bulletin.]
*****
Par. 3. Section 1.1297–0 is revised to
read as follows:
§1.1297–0 Table of contents.
[The text of proposed §1.1297–0 is the
same as the text of §1.1297–0T published
elsewhere in this issue of the Bulletin.]
Par. 4. Section 1.1297–3 is added to
read as follows:
§1.1297–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a section 1297(e) PFIC.
[The text of proposed §1.1297–3 is the
same as the text of §1.1297–3T published
elsewhere in this issue of the Bulletin.]
Par. 5. Section 1.1298–0 is revised to
read as follows:
§1.1298–0 Table of contents.
[The text of proposed §1.1298–0 is the
same as the text of §1.1298–0T published
elsewhere in this issue of the Bulletin].
Par. 6. In §1.1298–3, paragraphs (e)
and (f) are revised to read as follows:
§1.1298–3 Deemed sale or deemed
dividend election by a U.S. person that is
a shareholder of a former PFIC.
*****
(e) [The text of the proposed revision
to §1.1298–3(e) is the same as the text of
§1.1298–3T(e) published elsewhere in this
issue of the Bulletin].
(f) [The text of the proposed revision
to §1.1298–3(f) is the same as the text of
§1.1298–3T(f) published elsewhere in this
issue of the Bulletin].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December
7,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 8, 2005, 70 F.R. 72952)
Low-Income Housing Credit
Information for Housing Credit
Agencies and Building Owners
Announcement 2006–2
This announcement is to advise hous-
ing credit agencies and building owners of
changes reflected in the December 2005
revision of Form 8609,Low-Income Hous-
ing Credit Allocation and Certification,
and to inform claimers of the low-income
housing credit of new Form 8609–A,An-
nual Statement for Low-Income Housing
Credit.
Form 8609—Housing Credit Agencies
Generally, the December 2005 revision
of Form 8609 is to be used for allocations
made in 2005 or later. In the case of carry-
over allocations, theDecember 2005 revi-
sion of Form 8609 is to be used for build-
ings placed in service in 2005 or later. In
the case of buildings financed with tax-ex-
empt bonds, the December 2005 revision
of Form 8609 is to be used for bonds is-
sued or buildings placed in service in 2005
January 9, 20063002006–2 I.R.B.

or later. However, if for 2005 the hous-
ing credit agency used the November 2003
revision of Form 8609, the housing credit
agency does not have to issue an amended
Form 8609.
Form 8609—Building Owners
With the December 2005 revision,
Form 8609 is no longer attached to the
building owner’s tax return for each year
of the 15-year compliance period. Instead,
the building owner will make a one-time
submission of the appropriate revision of
Form 8609 to the Low-Income Housing
Credit Unit at the IRS Philadelphia cam-
pus. This one-time submission must take
place by the due date (including exten-
sions) of the first tax return with which
the building owner is filing Form 8609–A.
This one-time submission must be made
even if the building owner has filed Form
8609 with a prior tax return.
The procedures are explained in detail
on the December 2005 revision of Form
8609. Follow the submission instructions
set forth in the December 2005 revision
that correspond with the revision date
found on the Form 8609 that the housing
credit agency sent to you. The December
2005 revision of Form 8609 (including
instructions) can be found atwww.irs.gov.
Although a housing credit agency may
have used the November 2003 revision of
Form 8609 for 2005, the building owner
still must follow the submission proce-
dures detailed in the instructions on the
December 2005 revision.
Form 8609–A
For tax years beginning after 2004,
Form 8609–A replaces Schedule A (Form
8609),Annual Statement. Please see Form
8609–A for detailed instructions on com-
pleting and filing the form.
2006–2 I.R.B.301January 9, 2006

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
January 9, 2006i2006–2 I.R.B.

Numerical Finding List
1
Bulletin 2006–1 through 2006–2
Announcements:
2006-1, 2006-1 I.R.B.260
2006-2, 2006-2 I.R.B.300
Notices:
2006-2, 2006-2 I.R.B.278
Proposed Regulations:
REG-133446-03, 2006-2 I.R.B.299
Revenue Procedures:
2006-1, 2006-1 I.R.B.1
2006-2, 2006-1 I.R.B.89
2006-3, 2006-1 I.R.B.122
2006-4, 2006-1 I.R.B.132
2006-5, 2006-1 I.R.B.174
2006-6, 2006-1 I.R.B.204
2006-7, 2006-1 I.R.B.242
2006-8, 2006-1 I.R.B.245
2006-9, 2006-2 I.R.B.278
2006-10, 2006-2 I.R.B.293
Revenue Rulings:
2006-1, 2006-2 I.R.B.261
2006-2, 2006-2 I.R.B.261
2006-3, 2006-2 I.R.B.276
2006-4, 2006-2 I.R.B.264
Treasury Decisions:
9231, 2006-2 I.R.B.272
9232, 2006-2 I.R.B.266
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin
2005–52, dated December 27, 2005.
2006–2 I.R.B.iiJanuary 9, 2006

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2006–1 through 2006–2
Revenue Procedures:
96-52
Superseded by
Rev. Proc. 2006-10, 2006-2 I.R.B.293
2004-40
Superseded by
Rev. Proc. 2006-9, 2006-2 I.R.B.278
2005-1
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-2
Superseded by
Rev. Proc. 2006-2, 2006-1 I.R.B.89
2005-3
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-4
Superseded by
Rev. Proc. 2006-4, 2006-1 I.R.B.132
2005-5
Superseded by
Rev. Proc. 2006-5, 2006-1 I.R.B.174
2005-6
Superseded by
Rev. Proc. 2006-6, 2006-1 I.R.B.204
2005-7
Superseded by
Rev. Proc. 2006-7, 2006-1 I.R.B.242
2005-8
Superseded by
Rev. Proc. 2006-8, 2006-1 I.R.B.245
2005-12
Section 10 modified and superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-61
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-68
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
Rev. Proc. 2006-3, 2006-1 I.R.B.122
Revenue Rulings:
74-503
Revoked by
Rev. Rul. 2006-2, 2006-2 I.R.B.261
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,
2005.
January 9, 2006iii2006–2 I.R.B.
U.S. GPO: 2006—320–797/20039