Internal Revenue Bulletin 2004-30 (PDF rendition): IRS Revenue Procedures

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

Bulletin No. 200
4-30
July 26, 2004
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2004–71, page 74.
Offsets under section 6402; Arizona and Wisconsin law.
This ruling provides guidance regarding the amount of an over-
payment from a joint tax return that the IRS may offset against
a spouse’s separate tax liability for taxpayers domiciled in Ari-
zona or Wisconsin. Arizona and Wisconsin are community prop-
erty states and, under the respective state laws, each spouse
has an undivided 50–percent interest in all community prop-
erty. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
Rev. Rul.
2004–72, page 77.
Offsets u
nder section 6402; California, Idaho, and
Louisian
alaw.This ruling provides guidance regarding the
amount of
an overpayment from a joint tax return that the
IRS may of
fset against a spouse’s separate tax liability for
taxpaye
rs domiciled in California, Idaho, or Louisiana. Califor-
nia, Ida
ho, and Louisiana are community property states and,
under th
e respective state laws, each spouse has an undivided
50–perc
ent interest in all community property. Rev. Ruls.
80–7 an
d 85–70 amplified and clarified.
Rev. Rul. 2004–73, page 80.
Offsets under section 6402; Nevada, New Mexico, and
Washington law.This ruling provides guidance regarding the
amount of an overpayment from a joint tax return that the IRS
may offset against a spouse’s separate tax liability for tax-
payers domiciled in Nevada, New Mexico, and Washington.
Nevada, New Mexico, and Washington are community prop-
erty states and, under the respective state laws, each spouse
has an undivided 50–percent interest in all community prop-
erty. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
Rev. Rul. 2004–74, page 84.
Offsets under section 6402; Texas law.This ruling pro-
vides guidance regarding the amount of an overpayment from
a joint tax return that the IRS may offset against a spouse’s
separate tax liability for taxpayers domiciled in Texas. Texas
is a community property state and, under the state law, each
spouse has an undivided 50–percent interest in all community
property. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
T.D. 9135, page 69.
Final regulations under section 61 of the Code amend section
1.61–8(b) of the regulations to authorize the Commissioner of
Internal Revenue to provide rules allowing for the inclusion of
advance rentals in gross income in a year other than the year
of receipt.
Notice 2004–48, page 88.
2004 marginal production rates.This notice announces
the applicable percentage under section 613A of the Code to
be used in determining percentage depletion for marginal prop-
erties for the 2004 calendar year.
Notice 2004–49, page 88.
2004 enhanced oil recovery credit.The enhanced oil re-
covery credit for taxable years beginning in the 2004 calendar
year is determined without regard to the phase-out for crude
oil price increases provided in section 43(b) of the Code.
(Continued on the next page)
Finding Lists begin on page ii.
Index for July begins on page iv.

EMPLOYEE PLANS
Notice 2004–51, page 89.
Weighted average interest rate update; corporate bond
indexes; 30-year Treasury securities.The weighted aver-
age interest rate for July 2004 and the resulting permissible
range of interest rates used to calculate current liability and to
determine the required contribution are set forth.
EXEMPT ORGANIZATIONS
Announcement 2004–62, page 103.
A list is provided of organizations now classified as private foun-
dations.
EXCISE TAX
T.D. 9134, pa
ge 70.
Final regula
tions, primarily under section 5891 of the Code,
provide the
manner and method of paying and reporting the
excise tax i
mposed on any person who acquires structured
settlement
payment rights in a structured settlement factor-
ing transac
tion if the transfer of the rights is not approved in
advance in a
qualified order.
ADMINISTRATIVE
Rev. Rul. 2004–71, page 74.
Offsets under section 6402; Arizona and Wisconsin law.
This ruling provides guidance regarding the amount of an over-
payment from a joint tax return that the IRS may offset against
a spouse’s separate tax liability for taxpayers domiciled in Ari-
zona or Wisconsin. Arizona and Wisconsin are community prop-
erty states and, under the respective state laws, each spouse
has an undivided 50–percent interest in all community prop-
erty. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
Rev. Rul.
2004–72, page 77.
Offsets u
nder section 6402; California, Idaho, and
Louisian
alaw.This ruling provides guidance regarding the
amount o
f an overpayment from a joint tax return that the
IRS may o
ffset against a spouse’s separate tax liability for
taxpaye
rs domiciled in California, Idaho, or Louisiana. Califor-
nia, Ida
ho, and Louisiana are community property states and,
under th
e respective state laws, each spouse has an undivided
50–per
cent interest in all community property. Rev. Ruls.
80–7 an
d 85–70 amplified and clarified.
Rev. Rul. 2004–73, page 80.
Offsets under section 6402; Nevada, New Mexico, and
Washington law.This ruling provides guidance regarding the
amount of an overpayment from a joint tax return that the IRS
may offset against a spouse’s separate tax liability for tax-
payers domiciled in Nevada, New Mexico, and Washington.
Nevada, New Mexico, and Washington are community prop-
erty states and, under the respective state laws, each spouse
has an undivided 50–percent interest in all community prop-
erty. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
Rev. Rul. 2004–74, page 84.
Offsets under section 6402; Texas law.This ruling pro-
vides guidance regarding the amount of an overpayment from
a joint tax return that the IRS may offset against a spouse’s
separate tax liability for taxpayers domiciled in Texas. Texas
is a community property state and, under the state law, each
spouse has an undivided 50–percent interest in all community
property. Rev. Ruls. 80–7 and 85–70 amplified and clarified.
Rev. Proc. 2004–41, page 90.
This procedure describes circumstances under which an insur-
ance company that makes incentive payments to health care
providers will be permitted to deduct those payments without
regard to section 404 of the Code. The procedure also pro-
vides automatic consent procedures for a taxpayer to change
its method of accounting for such payments. Rev. Proc.
2002–9 modified and amplified.
Announcement 2004–59, page 94.
This announcement contains the annual report concerning the
Pre-Filing Agreement program of the Large and Mid-Size Busi-
ness Division of the Service for Calendar Year 2003.
July 26, 20042004–30 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004–30 I.R.B.July 26, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–8: Rents and royalties.
T.D. 9135
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Rents and Royalties
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the inclusion
in gross income of advance rentals. The
regulations authorize the Commissioner to
provide rules allowing for the inclusion of
advance rentals in gross income in a year
other than the year of receipt. The reg-
ulations will affect taxpayers that receive
advance payments for the use of certain
items (such as intellectual property and
computer software) tobedesignatedbythe
Commissioner.
DATES:Effective Date: These regulations
are effective July 8, 2004.
Applicability Date: The amendments
made by these regulations apply after De-
cember 18, 2002.
FOR FURTHER INFORMATION
CONTACT: Edwin B. Cleverdon, (202)
622–7900 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 18, 2002, the IRS pub-
lished a notice of proposed rulemaking
(REG–151043–02, 2003–1 C.B. 300) in
theFederal Register(67 FR 77450),
proposing amendments to 26 CFR part 1
under section 61 of the Internal Revenue
Code (Code) regarding the inclusion in
gross income of advance rentals. The
notice of proposed rulemaking invited
comments and requests for a public hear-
ing, but no comments were received and
no public hearing was requested or held.
Contemporaneously with the publica-
tion of the notice of proposed rulemaking,
the IRS published a proposed revenue
procedure in Notice 2002–79, 2002–2
C.B. 964, that, when final, implements
the amendments made by these final
regulations. The proposed revenue pro-
cedure was finalized, with modifications,
as Rev. Proc. 2004–34, 2004–22 I.R.B.
991. Comments received in connection
with the proposed revenue procedure,
including comments concerning the pro-
posed treatment of advance rentals, are
addressed in Announcement 2004–48,
2004–22 I.R.B. 998,which accompanies
Rev. Proc. 2004–34.
Explanation of Provisions
This document contains amendments to
26 CFR part 1 relating to the inclusion
in gross income of advance rentals under
section 61 of the Code. Prior to amend-
ment, §1.61–8(b) provided that, except as
provided in section 467 and the regula-
tions thereunder, advance rentals must be
included in gross income in the year of re-
ceipt regardless of the period covered or
the method of accounting employed by the
taxpayer. The amendments authorize the
Commissioner to provide, through admin-
istrative guidance, rules for deferring in-
come inclusion of advance rentals to a tax-
able year other than the year of receipt.
This amendment ensures that the Commis-
sioner, in modifying Rev. Proc. 71–21,
1971–2 C.B. 549, may provide deferral
rules for the use of intellectual property
and computer software.
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, because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the notice of proposed rule-
making preceding this regulation was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
The Chief Counsel for Advocacy did not
submit any comments on the regulations.
Drafting Information
The principal author of these regula-
tions is Edwin B. Cleverdon of the Office
of Associate Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.61–8 [Amended]
Par. 2. The first sentence of §1.61–8(b)
is amended by adding the language “and
except as otherwise provided by the Com-
missioner in published guidance (see
§601.601(d)(2) of this chapter),” immedi-
ately after “thereunder,”.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved June 30, 2004.
Gregory Jenner,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on July 7, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 8, 2004, 69 F.R. 41192)
2004–30 I.R.B.69July 26, 2004

Section 404.—Deduction
for Contributions of an
Employer to an Employees’
Trust or Annuity Plan and
Compensation Under a
Deferred-Payment Plan
26 CFR 1.404(b)–1T: Method or arrangement of con-
tributions, etc., deferring the receipt of compensation
or providing for deferred benefits (Temporary).
26 CFR 1.404(d)–1T: Questions and answers relat-
ing to deductibility of deferred compensation and de-
ferred benefits for independent contractors (Tempo-
rary).
Circumstances under which an insurance com-
pany that makes incentive payments to health care
providers will be permitted to include those payments
in discounted unpaid losses without regard to section
404. See Rev. Proc. 2004-41, page 90.
Section 44
6.—General Rule
for Method
sofAccounting
26 CFR 1.4
46–1: General rule for methods of ac-
counting
.
Procedur
es under which an insurance com-
pany that
makes incentive payments to health care
provider
s may obtain automatic consent of the Com-
missione
r to change its method of accounting for
such paym
ents. See Rev. Proc. 2004-41, page 90.
Section 832.—Insurance
Company Taxable Income
26 CFR 1.832–4: Gross income.
Circumstances under which an insurance com-
pany that makes incentive payments to health care
providers will be permitted to include those payments
in discounted unpaid losses without regard to section
404. See Rev. Proc. 2004-41, page 90.
Section 846.—Discounted
Unpaid Losses Defined
Circumstances under which an insurance com-
pany that makes incentive payments to health care
providers will be permitted to include those payments
in discounted unpaid losses without regard to section
404. See Rev. Proc. 2004-41, page 90.
Section 5891.—Structured
Settlement Factoring
Transactions
26 CFR 157.5891–1: Imposition of excise tax on
structured settlement factoring transactions.
T.D. 9134
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 157and 602
Excise Tax Relating to
Structured Settlement
Factoring Transactions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to the manner and
method of reporting and paying the nonde-
ductible 40 percent excise tax imposed on
any person who acquires structured settle-
ment payment rights in a structured set-
tlement factoring transaction. The regu-
lations provide the guidance necessary to
comply with the reporting requirements of
theexcisetax.
DATES:Effective Date: These regulations
are effective July 8, 2004.
Applicability Dates: For dates of appli-
cability, see §157.5891–1(e).
FOR FURTHER INFORMATION
CONTACT: Shareen S. Pflanz of the Of-
fice of Associate Chief Counsel (Income
Tax and Accounting) at 202–622–4920
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1824. The collections of in-
formation in these final regulations are in
§§157.6001–1, 157.6011–1, 157.6081–1,
and 157.6161–1. This information is re-
quired by the IRS to verify that the excise
tax imposed under section 5891 is prop-
erly reported on Form 8876 and timely
paid. This information will be used for
that purpose.
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.
The burden is reflected in the burden
estimate on Form 8876. Suggestions for
reducing the burden of the collection of
information in these regulations should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
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 that replace the temporary regula-
tions in 26 CFR part 157. The regulations
provide guidance on the proper manner
and method of reporting and paying the 40
percent excise tax imposed under section
5891. The regulations reflect the addition
to the Internal Revenue Code (Code) of
chapter 55 and section 5891 by section
115 of the Victims of Terrorism Tax Relief
Act of 2001, Public Law 107–134, (115
Stat. 2427, 2436–2439). On February
19, 2003, temporary regulations (T.D.
9042, 2003–1 C.B. 564) adding a new
part 157, Excise Tax on Structured Set-
tlement Factoring Transactions, to title 26
of the Code of Federal Regulations were
published in theFederal Register(68 FR
7922). A notice of proposed rulemak-
ing (REG–139768–02, 2003–1 C.B. 583)
cross-referencing the temporary regula-
tions was also published in theFederal
Register(68 FR 7956). No public hear-
ing was requested or held. One written
July 26, 2004702004–30 I.R.B.

comment responding to the notice of pro-
posed rulemaking was received in which
the writer commended the issuance of
the temporary and proposed regulations
and urged that they be finalized without
change. The proposed regulations are
adopted by this Treasury decision without
any substantive changes.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5), does
not apply to these regulations. It is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based upon the expectation that the
excise tax imposed by section 5891 will
apply to few structured settlement factor-
ing transactions. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, the proposedregulations preced-
ing these final regulations were submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact.
Drafting Information
The principal author of these final reg-
ulations is Shareen S. Pflanz, Office of
Associate Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, title 26 CFR parts 157 and
602 are amended as follows:
Paragraph 1. Part 157 is revised to read
as follows:
PART 157—EXCISE TAX ON
STRUCTURED SETTLEMENT
FACTORING TRANSACTIONS
Subpart A — Tax on Structured
Settlement Factoring Transactions
Sec.
157.5891–1 Imposition of excise tax
on structured settlement factoring transac-
tions.
Subpart B — Procedure and
Administration
157.6001–1 Records, statements, and
special returns.
157.6011–1 General requirement of re-
turn, statement, or list.
157.6061–1 Signing of returns and
other documents.
157.6065–1 Verification of returns.
157.6071–1 Time for filing returns.
157.6081–1 Extension of time for filing
the return.
157.6091–1 Place for filing returns.
157.6151–1 Time and place for paying
of tax shown on returns.
157.6161–1 Extension of time for pay-
ing tax.
157.6165–1 Bonds where time to pay
tax has been extended.
Authority: 26 U.S.C. 7805.
Section 157.6001–1 also issued under
26 U.S.C. 6001.
Section 157.6011–1 also issued under
26 U.S.C. 6011.
Section 157.6061–1 also issued under
26 U.S.C. 6061.
Section 157.6071–1 also issued under
26 U.S.C. 6071.
Section 157.6091–1 also issued under
26 U.S.C. 6091.
Section 157.6161–1 also issued under
26 U.S.C. 6161.
Subpart A — Tax on Structured
Settlement Factoring Transactions
§157.5891–1 Imposition of excise tax
on structured settlement factoring
transactions.
(a)In general. Section 5891 imposes
on any person who acquires, directly or
indirectly, structured settlement payment
rights in a structured settlement factoring
transaction a tax equal to 40 percent of
the factoring discount with respect to such
factoring transaction.
(b)Exceptions for certain approved
transactions—(1)In general. The excise
tax shall not apply to a structured settle-
ment factoring transaction if the transfer
of structured settlement payment rights is
approved in advance in a qualified order.
(2)Qualified order dispositive.Aqual-
ified order shall be treated as dispositive
for purposes of this exception.
(c)Definitions—(1)Applicable state
statutemeans—
(i) A statute that is enacted by the state
in which the payee of the structured set-
tlement is domiciled and provides for the
entry of an order, judgment, or decree de-
scribed in paragraph (c)(4)(i) of this sec-
tion; or
(ii) If there is no such statute, a statute
that—
(A) Is enacted by the state in which ei-
ther the party to the structured settlement
(including an assignee under a qualified
assignment under section 130) or the per-
son issuing the funding asset for the struc-
tured settlement is domiciled or has its
principal place of business; and
(B) Provides for the entry of such an
order, judgment, or decree.
(2)Applicable state courtmeans, with
respect to any applicable state statute, a
court of the state that enacted such statute.
If the payee of the structured settlement is
not domiciled in the state that enacted the
statute, the term also includes a court of the
state in which the payee is domiciled.
(3)Factoring discountmeans an
amount equal to the excess of—
(i) The aggregate undiscounted amount
of structured settlement payments being
acquired in the structured settlement fac-
toring transaction; over
(ii) The total amount actually paid by
the acquirer to the person from whom
such structured settlement payments are
acquired.
(4)Qualified ordermeans a final order,
judgment, or decree that—
(i) Finds that the transfer of structured
settlement payment rights does not contra-
vene any Federal or state statute, or the or-
der of any court or responsible administra-
tive authority, and is in the best interest of
the payee, taking into account the welfare
and support of the payee’s dependents; and
(ii) Is issued under the authority of an
applicable state statute by an applicable
2004–30 I.R.B.71July 26, 2004

state court, or is issued by the responsible
administrative authority (if any) which has
exclusive jurisdiction over the underlying
action or proceeding which was resolved
by means of the structured settlement.
(5)Responsible administrative author-
itymeans the administrative authority that
had jurisdiction over the underlying action
or proceeding that was resolved by means
of the structured settlement.
(6)Stateincludes the Commonwealth
of Puerto Rico and any possession of the
United States.
(7)Structured settlementmeans an ar-
rangement—
(i) that is established by—
(A) Suit or agreement for the periodic
payment of damages excludable from the
gross income of the recipient under section
104(a)(2); or
(B) Agreement for the periodic pay-
ment of compensation under any work-
ers’ compensation law excludable from the
gross income of the recipient under section
104(a)(1); and
(ii) Under which the periodic payments
are—
(A) Of the character described in sec-
tion 130(c)(2)(A) and (B); and
(B) Payable by a person who is a party
to the suit or agreement or to the workers’
compensation claim or by a person who
has assumed the liability for such periodic
payments under a qualified assignment in
accordance with section 130.
(8)Structured settlement factoring
transactionmeans a transfer of structured
settlement payment rights (including por-
tions of structured settlement payments)
made for consideration by means of sale,
assignment, pledge, or other form of en-
cumbrance or alienation for consideration
other than—
(i) The creation or perfection of a secu-
rity interest in structured settlement pay-
ment rights under a blanket security agree-
mententeredintowithaninsureddepos-
itory institution in the absence of any ac-
tion to redirect the structured settlement
payments to such institution (or agent or
successor thereof) or otherwise to enforce
such blanket security interest as against the
structured settlement payment rights; or
(ii) A subsequent transfer of structured
settlement payment rights acquired in a
structured settlement factoring transaction.
(9)Structured settlement payment
rightsmeans rights to receive payments
under a structured settlement.
(d)Coordination with other provisions
of the Internal Revenue Code—(1)In gen-
eral. If the applicable requirements of sec-
tions 72, 104(a)(1), 104(a)(2), 130, and
461(h) were satisfied at the time the struc-
tured settlement involving structured set-
tlement payment rights was entered into,
the subsequent occurrence of a structured
settlement factoring transaction shall not
affect the application of the provisions of
such sections to the parties to the struc-
tured settlement (including an assignee un-
der a qualified assignment under section
130) in any taxable year.
(2)No withholding of tax. The provi-
sions of section 3405 regarding withhold-
ing of tax shall not apply to the person
making the payments in the event of a
structured settlementfactoring transaction.
(e)Effective dates. This section applies
to structured settlement factoring transac-
tions entered into on or after July 8, 2004.
For structured settlement factoring trans-
actions entered into before July 8, 2004,
see §157.5891–1T of this chapter (2003–1
C.B. 564. See §601.601(d)(2) of this chap-
ter.), as it appeared in the April 1, 2003,
edition of 26 CFR part 157.
Subpart B — Procedure and
Administration
§157.6001–1 Records, statements, and
special returns.
(a)In general. Any person subject
to tax under chapter 55 (Structured Set-
tlement Factoring Transactions) of the
Internal Revenue Code must keep such
complete and detailed records as are suf-
ficient to enable the Internal Revenue
Service (IRS) to determine accurately the
amount of liability under chapter 55.
(b)Notice by the IRS requiring returns,
statements, or the keeping of records.The
IRS may require any person, by notice
served upon him, to make such returns,
render such statements, or keep such spe-
cific records as will enable the IRS to de-
termine whether or not the person is liable
for tax under chapter 55.
(c)Retention of records. The records
requiredbythissectionmustbekeptat
all times available for inspection by the
IRS, and shall be retained so long as the
contents thereof may become material in
the administration of any internal revenue
law.
§157.6011–1 General requirement of
return, statement, or list.
Every person liable for tax under sec-
tion 5891 must file a return with respect to
the tax in accordance with the forms and
instructions provided by the Internal Rev-
enue Service.
§157.6061–1 Signing of returns and other
documents.
Any return, statement, or other docu-
ment required to be made with respect to a
tax imposed by chapter 55 (Structured Set-
tlement Factoring Transactions) of the In-
ternal Revenue Code or the regulations un-
der chapter 55 must be signed by the per-
sonrequiredtofilethereturn,statement,
or other document, or by the persons re-
quired or duly authorized to sign in accor-
dance with the regulations, forms, or in-
structions prescribed with respect to such
return, statement, or document. An in-
dividual’s signature on such return, state-
ment, or other document shall beprima fa-
cieevidence that the individual is autho-
rized to sign the return, statement, or other
document.
§157.6065–1 Verification of returns.
If a return, statement, or other docu-
ment made under the provisions of chapter
55 (Structured Settlement Factoring Trans-
actions) or of subtitle F of the Internal Rev-
enue Code, or the regulations under those
provisions with respect to any tax imposed
by chapter 55, or the form and instructions
issued with respect to such return, state-
ment, or other document, requires that it
shall contain or be verified by a written
declaration that it is made under the penal-
ties of perjury, it must be so verified by
thepersonorpersonsrequiredtosignsuch
return, statement, or other document. In
addition, any other statement or document
submitted under any provision of chapter
55 or subtitle F, or the regulations under
those provisions, with respect to any tax
imposed by chapter 55 may be required to
contain or be verified by written declara-
tion that it is made under the penalties of
perjury.
July 26, 2004722004–30 I.R.B.

§157.6071–1 Time for filing returns.
(a)In general. Except as provided in
paragraph (b) of this section, returns re-
quired by §157.6011–1 (relating to returns
of tax with respect to structured settlement
factoring transactions) must be filed on
or before the ninetieth day following the
receipt of structured settlement payment
rights in a structured settlement factoring
transaction.
(b)Returns relating to structured set-
tlement payment rights received before
February 19, 2003. Returns required by
§157.6011–1 that relate to structured set-
tlement payment rights received on or
before February 19, 2003, must be filed
on or before May 20, 2003.
§157.6081–1 Extension of time for filing
the return.
(a)Application for extension.Anappli-
cation for an extension of time for filing
the return required by §157.6011–1 (re-
latingtoreturnsoftaxwithrespectto
structured settlement factoring transac-
tions) must be completed in accordance
with the forms and instructions provided
by the Internal Revenue Service. It should
be made before the expiration of the time
within which the return otherwise must
be filed, and failure to do so may indicate
negligence and constitute sufficient cause
for denial. It should, where possible, be
made sufficiently early to permit consider-
ation of the matter and reply before what
otherwise would be the due date of the
return. An extension of time for filing a
return shall not extend the time for the
payment of the tax or any part thereof un-
less specified to the contrary in the grant
of the extension.
(b)Filing of return.Ifanextension
of time for filing the return is granted, a
return must be filed before the period of
extension expires.
§157.6091–1 Place for filing returns.
The return required by §157.6011–1
(relating to returns of tax with respect to
structured settlement factoring transac-
tions) must be filed at the place specified
in the forms and instructions provided by
the Internal Revenue Service.
§157.6151–1 Time and place for paying
of tax shown on returns.
The tax under chapter 55 (Structured
Settlement Factoring Transactions) of the
Internal Revenue Code shown on any re-
turn must, without assessment or notice
and demand, be paid at the time and place
specified in the forms and instructions pro-
vided by the Internal Revenue Service. For
provisions relating to the time and place
for filing such return, see §157.6071–1 and
§157.6091–1. For provisions relating to
the extension of time for paying the tax, see
§157.6161–1.
§157.6161–1 Extension of time for paying
tax.
(a)In general—(1)Tax shown or re-
quired to be shown on return. The Internal
Revenue Service may, at the request of the
taxpayer, grant a reasonable extension of
time for payment of the amount of any tax
imposed by chapter 55 (Structured Settle-
ment Factoring Transactions) of the Inter-
nal Revenue Code and shown or required
to be shown on any return. The period of
such extension shall not exceed 6 months
from the date fixed for payment of such
tax, except that in the case of a taxpayer
that is abroad, such extension may exceed
6months.
(2)Extension of time for filing distin-
guished. The granting of an extension of
time for filing a return does not extend the
time for the payment of the tax or any part
thereof unless so specified in the exten-
sion.
(b)Certainrulesrelatingtoextensionof
time for paying income tax to apply.The
provisions of §1.6161–1(b), (c), and (d) of
this chapter (relating to a requirement for
undue hardship, to the application for ex-
tension, and to payment pursuant to an ex-
tension) shall apply to extensions of time
for payment of the tax imposed by chapter
55 of the Code.
§157.6165–1 Bonds where time to pay tax
has been extended.
If an extension of time for payment is
granted under section 6161, the Internal
Revenue Service may, if it deems neces-
sary, require a bond for the payment, in
accordance with the terms of the exten-
sion, of the amount with respect to which
the extension is granted. However, the
bond shall not exceed double the amount
with respect to which the extension is
granted. For provisions relating to the
form of bonds, see the regulations under
section 7101 contained in part 301 (Regu-
lations on Procedure and Administration)
of this chapter.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 2. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 3. In §602.101, paragraph (b) is
amended by removing the entries
for “157.6001–1T,” “157.6011–1T,”
“157.6081–1T,” and “157.6161–1T” and
adding entries in numerical order to the
table to read, in part, as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
2004–30 I.R.B.73July 26, 2004

CFR part or section where
identified and described
Current OMB
control No.
*****
157.6001–1........................................................................... 1545–1824
157.6011–1........................................................................... 1545–1824
157.6081–1........................................................................... 1545–1824
157.6161–1........................................................................... 1545–1824
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved June 23, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 7, 2004,
8:45 a. m., and published in the issue of the Federal Register
for July 8, 2004, 69 F.R. 41192)
Section 6402.—Authority to
Make Credits or Refunds
26 CFR 301.6402–1: Authority to make credits or
refunds.
Offsets under section 6402; Arizona
and Wisconsin law.This ruling provides
guidance regarding the amount of an over-
payment from a joint tax return that the
IRS may offset against a spouse’s separate
tax liability for taxpayers domiciled in Ari-
zona or Wisconsin. Arizona and Wiscon-
sin are community property states and, un-
der the respective state laws, each spouse
has an undivided 50–percent interest in all
community property. Rev. Ruls. 80–7 and
85–70 amplified and clarified.
Rev. Rul. 2004–71
ISSUE
What amount of an overpayment
reported on a joint return may the In-
ternal Revenue Service apply against
one spouse’s separate tax liability if the
spouses are domiciled in Arizona or Wis-
consin?
This ruling addresses how offsets ap-
ply for taxpayers filing joint returns and
domiciled in Arizona or Wisconsin. Be-
cause these states have similar community
property laws, Arizona and Wisconsin
are addressed in one ruling. This ruling
makes assumptions about the operation
of state community property laws which
are highly dependent on facts and cir-
cumstances. Therefore, taxpayers are
cautioned to check current state law and
apply it to their particular facts. Tax-
payers domiciled in California, Idaho,
or Louisiana should refer to Rev. Rul.
2004–72; taxpayers domiciled in Nevada,
New Mexico or Washington should refer
to Rev. Rul. 2004–73; and taxpayers
domiciled in Texas should refer to Rev.
Rul. 2004–74.
FACTS
Situation 1, Arizona. In Year 1, Liable
Spouse, who is single, incurs a tax liabil-
ity of $20,000. Liable Spouse does not pay
this tax liability. In Year 2, Liable Spouse
and Non-Liable Spouse marry. In Year
4, Liable Spouse and Non-Liable Spouse
file a joint return for Year 3, reporting an
overpayment of $1,000. The overpayment
results from income taxes withheld from
Liable Spouse’s and Non-Liable Spouse’s
wages during Year 3. Liable Spouse and
Non-Liable Spouse are domiciled in Ari-
zona at all relevant times. The tax liability
incurred by Liable Spouse for Year 1 is a
separate debt under Arizona law. Apply-
ing Rev. Rul. 80–7, 1980–1 C.B. 296, the
Service determines that $750 of the over-
payment is attributable to income taxes
withheld from Liable Spouse’s wages, and
$250 of the overpayment is attributable to
income taxes withheld from Non-Liable
Spouse’s wages.
Arizona law provides that community
property is all property acquired during
marriage, except for property acquired by
a spouse by gift, devise, or descent.See
Ariz. Rev. Stat. section 25–211 (2003).
There is a rebuttable presumption under
Arizona law that all property acquired dur-
ing marriage is community property.See
Mitchell v. Mitchell, 732 P.2d 208, 212
(Ariz. 1987) (en banc). Arizona law de-
fines separate property as property owned
by a spouse before marriage and property
acquired during marriage by a spouse by
gift, devise, or descent.SeeAriz. Rev.
Stat. section 25–213 (2003). In addi-
tion, separate property includes any profits
or income derived from separate property
during marriage.SeeAriz. Rev. Stat. sec-
tion 25–213 (2003).
Arizona law provides that a creditor
may reach all of the liable spouse’s sep-
arate property and all of the community
property to satisfy a community debt.
SeeAriz. Rev. Stat. section 25–215(D)
(2003). In addition, a creditor may reach
all community property that would have
been the liable spouse’s separate prop-
erty but for marriage and all of the liable
spouse’s separate property to satisfy a
separate debt.SeeAriz. Rev. Stat. section
25–215(B) (2003). Further, the Service
may reach the liable spouse’s interest
in any community property that would
have been the non-liable spouse’s sepa-
rate property but for marriage to satisfy a
separate debt of the liable spouse.In re
Ackerman, 424 F.2d 1148 (9
th
Cir. 1970).
However, a creditor may not reach any of
the non-liable spouse’s separate property
to satisfy the liable spouse’s separate debt.
SeeAriz. Rev. Stat. section 25–215(A)
(2003).
Under Arizona law, community debts
are debts incurred during marriage for the
benefit of the community.SeeAriz. Rev.
Stat. section 25–215(D) (2003);Johnson
v. Johnson, 638 P.2d 705, 711–712 (Ariz.
1981). Arizona law presumes that a debt
incurred by a spouse during marriage is a
community debt.SeeInreMarriageof
Hrudka, 919 P.2d 179, 186–187 (Ariz. Ct.
App. 1995). If a debt is not a community
debt, then it is a separate debt.See id.at
187.
Situation 2, Wisconsin. In Year 1, Li-
able Spouse, who is single, incurs a tax
July 26, 2004742004–30 I.R.B.

liability of $20,000. Liable Spouse does
not pay this tax liability. In Year 2, Liable
Spouse and Non-Liable Spouse marry.
In Year 4, Liable Spouse and Non-Li-
able Spouse file a joint return for Year
3, reporting an overpayment of $1,000.
The overpayment results from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year
3. Liable Spouse and Non-Liable Spouse
are domiciled in Wisconsin at all relevant
times. The tax liability incurred by Liable
Spouse for Year 1 is a liability incurred be-
fore marriage that is attributable to action
or inaction before marriage under Wiscon-
sin law. Applying Rev. Rul. 80–7, 1980–1
C.B. 296, the Service determines that $750
of the overpayment is attributable to in-
come taxes withheld from Liable Spouse’s
wages, and $250 of the overpayment is
attributable to income taxes withheld from
Non-Liable Spouse’s wages.
Wisconsin law classifies property
owned by a spouse as either marital prop-
erty or individual property.SeeWis. Stat.
section 766.31 (2002). Marital property
is a form of community property, and
each spouse has a 50 percent interest in
the marital property.SeeWis. Stat. sec-
tion 766.31(3) (2002); Rev. Rul. 87–13,
1987–1 C.B. 20. Marital property includes
all property that is not individual property
and that was acquired after the determina-
tion date.SeeWis. Stat. section 766.31
(2002). The determination date is the
latest of either: (1) the date of marriage;
(2) the date both spouses are domiciled
in Wisconsin; or (3) January 1, 1986.
SeeWis. Stat. section 766.01(5) (2002).
Wisconsin law presumes that all property
owned by a spouse is marital property.See
Wis. Stat. section 766.31(2) (2002). This
presumption may be rebutted.See Lloyd
v. Lloyd, 487 N.W.2d 647, 652 (Wis. Ct.
App. 1992).
Wisconsin law defines individual prop-
erty as property owned by a spouse before
the determination date.SeeWis. Stat. sec-
tion 766.31(9) (2002). In addition, indi-
vidual property includes property acquired
during marriage and after the determina-
tion date if the property is: (1) received
by gift, bequest, or devise to one spouse;
(2) income paid to one spouse from a trust,
unless the trust provides otherwise; (3) re-
ceived in exchange for or obtained with
the proceeds of other individual property;
(4) designated as individual property by
decree, marital property agreement, or re-
classification pursuant to Wis. Stat. sec-
tion 766.31(10); or (5) recovered for per-
sonal injury.SeeWis. Stat. section
766.31(7) (2002).
Wisconsin law classifies debts incurred
by a spouse into three separate categories:
(1) debts incurred before or during mar-
riage that are attributable to action or in-
action before marriage; (2) debts incurred
during marriage for the benefit of the mar-
riage or family; and (3) debts incurred dur-
ing marriage that are not for the benefit of
marriage or family.SeeWis. Stat. sec-
tion 766.55 (2002). Wisconsin law pre-
sumes that a debt incurred during marriage
is for the benefit of the marriage or the
family.SeeWis. Stat. section 766.55(1)
(2002). If a spouse before marriage or
during marriage incurs a debt that is at-
tributable to action or inaction before mar-
riage, Wisconsin law allows that spouse’s
creditor to reach all marital property that
would have been that spouse’s individ-
ual property but for the marriage and all
individual property of that spouse.See
Wis. Stat. section 766.55(2)(c)(1) (2002).
Further, Wisconsin law allows the Ser-
vice to reach the liable spouse’s interest in
any marital property that would have been
the non-liable spouse’s individual property
but for marriage.Vorhies v. Z. Manage-
ment, Civil No. 86-C695-S (W.D. Wis.
1987). If a spouse incurs a debt for the
benefit of the marriage or the family, Wis-
consin law allows a creditor to reach all
marital property and all individual prop-
erty of that spouse.SeeWis. Stat. sec-
tion 766.55(2)(b) (2002);Sokaogon Gam-
ing Ent. v. Curda-Derickson,668N.W.2d
736 (Wis. Ct. App. 2003). If a debt in-
curred by a spouse was not for the ben-
efit of the marriage or the family, Wis-
consin law allows a creditor to reach that
spouse’s individual property and interest
in marital property.SeeWis. Stat. sec-
tion 766.55(2)(d) (2002).
Situation 3, Wisconsin.Liable Spouse
and Non-Liable Spouse are domiciled in
Wisconsin at all relevant times. In Year
1, Liable Spouse and Non-Liable spouse
are single and have no outstanding tax li-
abilities. In Year 2, Liable Spouse and
Non-Liable Spouse marry. For Year 2, Li-
able Spouse incurs a tax liability, that, un-
der Wisconsin law, is a liability incurred
during marriage but is not for the benefit
of marriage or family. Non-Liable Spouse
is not liable for this tax liability under Wis-
consin law.
In Year 4, Liable Spouse and Non-Li-
ableSpousefileajointreturnforYear
3, reporting an overpayment of $1,000.
The overpayment resulted from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year
3. Applying Rev. Rul. 80–7, the Service
determines that $750 of the overpayment
is attributable to income taxes withheld
from Liable Spouse’s wages, and $250 of
the overpayment is attributable to income
taxes withheld from Non-Liable Spouse’s
wages. Wisconsin community property
laws are the same as inSituation 2.
Situation 4, Wisconsin.SameasSitu-
ation 3, except that under Wisconsin law,
Liable Spouse’s Year 2 tax liability is a lia-
bility for the benefit of marriage or family.
LAW
Section 6402(a) of the Internal Rev-
enue Code provides that, in the case of any
overpayment, the Service may credit the
amount of the overpayment, including in-
terest, against any internal revenue tax lia-
bility on the part of the person who made
the overpayment and shall refund the bal-
ance to the person.
Revenue Ruling 74–611, 1974–2 C.B.
399, holds that if a husband and wife file
a joint return, each spouse has a sepa-
rate interest in the jointly reported income
and a separate interest in any overpayment.
However, filing a joint return does not cre-
ate a new property interest for the husband
or the wife.Id.
Revenue Ruling 80–7, 1980–1 C.B.
296, holds that if a husband and wife file a
joint return showing an overpayment, the
Service may credit one spouse’s interest
in the overpayment against that spouse’s
separate tax liability. The amount of the
spouse’s interest in the overpayment is cal-
culated by subtracting the spouse’s share
of the joint tax liability, determined under
a separate tax formula, from the spouse’s
contribution towards the joint tax liability.
Under the separate tax formula, a spouse’s
share of the joint tax liability is calculated
as follows:
2004–30 I.R.B.75July 26, 2004

Spouse’s Separate Tax
Total of Both Spouses’ Separate Tax
x JointTaxLiabilityReportedonReturn
Revenue Ruli
ng 85–70, 1985–1 C.B.
361, provide
s a two-step process to de-
termine the
amount of a joint overpay-
ment that th
e Service may offset against
one spouse’
s separate tax liability if the
spouses are
domiciled in a community
property s
tate. First, if the joint overpay-
ment is fro
m wages that are community
property i
ncome, then each spouse is con-
sidered to
be the recipient of one-half
of the aggr
egated wages regardless of
whether t
he spouses may have earned
differen
t amounts of wages (the one-half
rule). Ac
cordingly, each spouse has a
one-half
interest in the overpayment,
and the S
ervice may offset the liable
spouse’
s one-half interest in the overpay-
ment aga
inst the liable spouse’s separate
federal
tax liability regardless of whether
state l
aw provides that creditors may reach
commun
ity property to satisfy the separate
debts o
f a spouse.Id. Rev. Rul. 85–70
does no
t specifically address what portion
of each
spouse’s actual wages is treated as
havin
g been offset as a result of applying
the on
e-half rule. Under the facts of Rev.
Rul. 8
5–70, and specifically the assumed
state
laws, that analysis was not necessary.
Howev
er, applying the second step of Rev.
Rul. 8
5–70 in other cases may require
adet
ermination of the amount of each
spou
se’s actual wages that were offset
afte
r applying the one-half rule. For that
purp
ose, each spouse under the first step
of Rev. Rul. 8
5–70 is treated as receiving
onehalfofth
e wages from each com-
munity prop
erty source (or, collectively,
one-half of
the aggregated wages) and as
such being e
ntitled to receive one-half of
theincomet
ax withheld from each com-
munity pro
perty source.
Second, Rev
. Rul. 85–70 provides
that state
law may enable the Service to
offset an a
dditional portion of the joint
overpayme
nt from community property
sources to
satisfy a spouse’s separate fed-
eral tax l
iability. This additional right of
offset is
available if state law provides that
creditor
s may reach community property
to satisf
y the separate debts of a spouse.
(The amou
nt potentially available to be
offset u
nder the second step of Rev. Rul.
85–70 is
the amount remaining after ap-
plicati
on of the first step of that revenue
ruling.
) However, if state law provides that
commun
ity property may not be reached
to sati
sfy the premarital or other separate
debts o
f either spouse, then the Service
may not
offset any portion of the non-li-
able sp
ouse’s share of the overpayment
from c
ommunity property sources against
the li
able spouse’s separate tax liability.
Id.
Five-
step process to determine amount
of joi
nt overpayment that the Service may
offse
t against separate federal tax liability
of one
spouse.
A five-step p
rocess is required to deter-
mine the amou
nt of a joint overpayment
that the Ser
vice may, pursuant to section
6402(a), of
fset against the separate federal
tax liabili
ty of one spouse.
The first st
ep is to identify the underly-
ing source o
f the overpayment. The Ser-
vice looks t
othetaxpaymentsmadeby
the spouse
s, including income tax with-
holding an
d estimated tax payments and
other cred
its, such as the earned income tax
credit, th
at gave rise to the overpayment.
If the ear
ned income tax credit is a source
of the ove
rpayment,seeRev. Rul. 87–52,
1987–1 C.
B. 347, for guidance.
The secon
dstepistocharacterizethe
underlyi
ng source of the overpayment as
either se
parate or community property.
Because
an overpayment will be charac-
terized
in the same manner as the source
of the ov
erpayment, an overpayment will
be chara
cterized as community property,
separat
e property, or as part community
proper
ty and part separate property, de-
pendin
g on the character of the source of
the ove
rpayment. If the overpayment is
part co
mmunity property and part separate
proper
ty, the portion of the overpayment
attri
butable to a separate property source
must b
e subtracted from the remainder of
the ov
erpayment. The portion of the over-
payme
nt attributable to a separate property
sourc
e is calculated as follows:
Tax Payment From a Separate Property Source
Total Tax Payments
x Overpayment
The third step is to offset the liable
spouse’s share of the overpayment from a
community property source against the li-
able spouse’s separate tax liability. Under
Rev. Rul. 85–70, the Service may offset
the liable spouse’s 50-percent interest in
the overpayment from a community prop-
erty source to satisfy the liable spouse’s
separate tax liability.
The fourth step is to determine whether,
under state law, the Service may reach the
non-liable spouse’s share of the overpay-
ment from a community property source.
SeeRev. Rul. 85–70.
The fifth step is to determine whether
the Service may, under state law, reach a
portion of the overpayment from a separate
property source of the liable spouse or the
non-liable spouse.
ANALYSIS
Apply the five-step process to each situ-
ation.
(1)Step 1.
InSituation 1,Situation 2,Situation 3,
andSituation 4, the overpayment is from
income taxes withheld in Year 3 from Li-
able Spouse’s and Non-Liable Spouse’s
wages.
(2)Step 2.
Arizona and Wisconsin law presume
that all property acquired during mar-
riage by either spouse or both spouses,
including wages, is community property.
InSituation 1,Situation 2,Situation 3,
andSituation 4, the overpayment results
from income tax withholding from Liable
Spouse’s and Non-Liable Spouse’s wages.
Because state law presumes that wages are
community property, the entire overpay-
ment inSituation 1,Situation 2,Situation
July 26, 2004762004–30 I.R.B.

3,andSituation 4isassumedtobefroma
community property source.
(3)Step 3.
Under Arizona and Wisconsin law,
each spouse has a present and equal in-
terest in all community property. InSit-
uation 1,Situation 2,Situation 3,and
Situation 4, $750 of the overpayment is
from income tax withholding from Liable
Spouse’s wages, and $250 of the overpay-
ment is from income tax withholding from
Non-Liable Spouse’s Year 3 wages. Ap-
plying Rev. Rul. 85–70, the Service may
offset $375 of the income tax withholding
attributable to Liable Spouse’s wages and
$125 of the income tax withholding at-
tributable to Non-Liable Spouse’s wages.
Therefore, inSituation 1,Situation 2,Sit-
uation 3,andSituation 4,theServicemay
offset $500 of the overpayment against
Liable Spouse’s separate tax liability.
(4)Step 4.
Under Arizona and Wisconsin law, the
amount of community property that a cred-
itor may reach depends on the character of
the debt.
InSituation 1, Liable Spouse’s Year
1 tax liability is a separate debt under
Arizona law. To satisfy a separate debt,
Arizona law provides that a creditor may
reach all community property that would
have been Liable Spouse’s separate prop-
erty but for marriage. Under Arizona
law, Liable Spouse’s wages and income
tax withholdings would have been Liable
Spouse’s separate property had Liable
Spouse and Non-Liable Spouse not mar-
ried. Therefore, a creditor may reach all
of Liable Spouse’s wages and income tax
withholdings to satisfy Liable Spouse’s
separate debt. Applying Arizona law in
Step 4, and in addition to the amount off-
set in Step 3, the Service may offset the
remaining $375 of the overpayment that is
attributable to Liable Spouse’s wages and
income tax withholdings.
InSituation 2, Liable Spouse’s Year 1
federal tax liability is a liability incurred
before marriage that is attributable to ac-
tion or inaction before marriage under
Wisconsin law. In this situation, Wis-
consin law provides that a creditor may
reach all marital property that would have
been Liable Spouse’s individual prop-
erty but for marriage. Under Wisconsin
law, Liable Spouse’s wages and income
tax withholding would have been Liable
Spouse’s separate property had Liable
Spouse and Non-Liable Spouse not mar-
ried. Therefore, a creditor may reach all
of Liable Spouse’s wages and income tax
withholding to satisfy Liable Spouse’s
Year 1 tax liability. Applying Wisconsin
law in Step 4, and in addition to the amount
offset in Step 3, the Service may offset the
remaining $375 of the overpayment that is
attributable to Liable Spouse’s wages and
income tax withholdings.
InSituation 3, Liable Spouse’s Year 2
tax liability is a liability that was incurred
during marriage but was not for the benefit
of the marriage or the family under Wis-
consin law. In this situation, Wisconsin
law provides that a creditor may reach Li-
able Spouse’s interest in marital property.
However, because the debt was not for the
benefit of the marriage or family, applying
Wisconsin law in this Step 4, the Service
may reach only Liable Spouse’s individual
property and interest in marital property,
and therefore may not offset any amount of
the overpayment in addition to the amount
offset in Step 3, from a community prop-
erty source. Accordingly, the additional
amount the Service may offset under Step
4 is zero.
InSituation 4, Liable Spouse’s Year 2
tax liability is a liability that was incurred
during marriage and was for the benefit of
the marriage or the family under Wiscon-
sin law. In this situation, Wisconsin law
provides that a creditor may reach all mari-
tal property. Accordingly, the Service may
offset the remaining $500 of the overpay-
ment against Liable Spouse’s Year 2 tax li-
ability.
(5)Step 5.
Under both Arizona and Wisconsin law,
a creditor may reach 100 percent of Li-
able Spouse’s separatepropertytosatisfy
Liable Spouse’s separate tax liability. A
creditor may not, however, reach any of
Non-Liable Spouse’s separate property to
satisfy Liable Spouse’s separate tax liabil-
ity. InSituation 1,Situation 2,Situation
3,andSituation 4, no part of the overpay-
ment is from a separate property source.
Accordingly, there is no separate property
that the Service may offset against the Li-
able Spouse’s separate tax liability.
HOLDING
Situation 1. The Service may offset
$875 of the overpayment against Liable
Spouse’s separate Year 1 tax liability.
Situation 2. The Service may offset
$875 of the overpayment against Liable
Spouse’s separate Year 1 tax liability.
Situation 3. The Service may offset
$500 of the overpayment against Liable
Spouse’s separate Year 2 tax liability.
Situation 4. The Service may offset
$1,000 of the overpayment against Liable
Spouse’s separate Year 2 tax liability.
EFFECT ON OTHER REVENUE
RULINGS
Revenue Ruling 80–7 and Rev. Rul.
85–70 are amplified and clarified.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael A. Skeen of the Office of
the Associate ChiefCounsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice Division. For
further information regarding this revenue
ruling, contact Michael A. Skeen at (202)
622–4910 (not a toll-free call).
26 CFR 301.6402–1: Authority to make credits or
refunds.
Offsets under section 6402; Califor-
nia, Idaho, and Louisiana law.This
ruling provides guidance regarding the
amount of an overpayment from a joint
tax return that the IRS may offset against
a spouse’s separate tax liability for tax-
payers domiciled in California, Idaho,
or Louisiana. California, Idaho, and
Louisiana are community property states
and, under the respective state laws, each
spouse has an undivided 50–percent inter-
est in all community property. Rev. Ruls.
80–7 and 85–70 amplified and clarified.
Rev. Rul. 2004–72
ISSUE
What amount of an overpayment
reported on a joint return may the In-
ternal Revenue Service apply against
one spouse’s separate tax liability if the
spouses are domiciled in California, Idaho,
or Louisiana?
This ruling addresses how offsets apply
for taxpayers filing joint returns and domi-
ciled in California, Idaho, or Louisiana.
Because these states have similar com-
munity property laws, California, Idaho,
2004–30 I.R.B.77July 26, 2004

and Louisiana are addressed in one rul-
ing. This ruling makes assumptions about
the operation of state community property
laws which are highly dependent on facts
and circumstances. Therefore, taxpayers
are cautioned to check current state law
and apply it to their particular facts. Tax-
payers domiciled in Arizona or Wisconsin
should refer to Rev. Rul. 2004–71; tax-
payers domiciled in Nevada, New Mex-
ico or Washington should refer to Rev.
Rul. 2004–73; and taxpayers domiciled in
Texas should refer to Rev. Rul. 2004–74.
FACTS
Situation 1, California. In Year 1, Li-
able Spouse, who is single, incurs a tax
liability of $20,000. Liable Spouse does
not pay this tax liability. In Year 2, Liable
Spouse and Non-Liable Spouse marry.
In Year 4, Liable Spouse and Non-Li-
able Spouse file a joint return for Year
3, reporting an overpayment of $1,000.
The overpayment results from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year
3. Liable Spouse and Non-Liable Spouse
are domiciled in California at all relevant
times.
Except as otherwise provided by
statute, California law provides that all
property, either real or personal, that is
acquired during marriage is community
property, and each spouse has a 50 percent
interest in the community property.See
Cal. Fam. Code sections 760, 751 (2003).
There is a rebuttable presumption under
California law that all property acquired
by a spouse during marriage is community
property.See In re Marriage of Haines,
39 Cal. Rptr. 2d 673, 681 (1995).
California law defines separate prop-
erty as all property owned by a spouse
prior to marriage, and all property acquired
by a spouse by gift, bequest, devise, or
descent.SeeCal. Fam. Code section
770(a)(1), (a)(2) (2003). In addition, Cal-
ifornia law provides that all rents, issues,
and profits from separate property are sep-
arate property.SeeCal. Fam. Code sec-
tion 770(a)(3) (2003).
California law provides that a creditor
may reach all of the community property to
satisfy a debt incurred by a spouse before
or during marriage.SeeCal. Fam. Code
section 910(a) (2003). A creditor may also
reach all of the liable spouse’s separate
property to satisfy a debt incurred by the
liable spouse; however, a creditor may not
reach any of the non-liable spouse’s sepa-
rate property.SeeCal. Fam. Code section
913 (2003).
Situation 2, Idaho. In Year 1, Liable
Spouse, who is single, incurs a tax liability
of $20,000. Liable Spouse does not pay
this tax liability. In Year 2, Liable Spouse
and Non-Liable Spouse marry. In Year
4, Liable Spouse and Non-Liable Spouse
file a joint return for Year 3, reporting an
overpayment of $1,000. The overpayment
results from income taxes withheld from
Liable Spouse’s and Non-Liable Spouse’s
wages during Year 3. Liable Spouse and
Non-Liable Spouse are domiciled in Idaho
at all relevant times.
Idaho law defines separate property
as all property owned by a spouse before
marriage, and all property acquired by a
spouse during marriage by gift, bequest,
devise or descent, or property acquired
with the proceeds of his or her separate
property.SeeIdaho Code section 32–903
(2003). Idaho law defines community
property as all otherproperty acquired by
either spouse during marriage.SeeIdaho
Code section 32–906(1) (2003). Idaho
law provides a rebuttable presumption
that property acquired during marriage
is community property, and the burden
of proof is on the party asserting that the
property is separate property.See Worzala
v. Worzala, 913 P.2d 1178, 1182 (Idaho
1996).
Idaho law provides that income gener-
ated during marriage from any property,
regardless of whether the property is sep-
arate or community property, is generally
community property, unless: (1) the con-
veyance by which the property is acquired
specifically identifies this property as the
separate property of one spouse; or (2)
both spouses agree in writing that the prop-
erty, and any income related to this prop-
erty, is the separate property of one spouse.
SeeIdaho Code section 32–906(1) (2003).
Idaho law provides that a creditor may
reach all of the community property; both
real and personal, to satisfy a spouse’s
separate debt.Bliss v. Bliss,898P.2d
1081, 1084 (Idaho 1995). If the husband
incurs a debt, a creditor may not reach
the wife’s separate property to satisfy this
debt.SeeIdaho Code section 32–911
(2003). Further, if the wife incurs a debt
before marriage, a creditor may not reach
the husband’s separate property to satisfy
this debt.SeeIdaho Code section 32–910
(2003).
Situation 3, Louisiana. In Year 1, Li-
able Spouse, who is single, incurs a tax
liability of $20,000. Liable Spouse does
not pay this tax liability. In Year 2, Liable
Spouse and Non-Liable Spouse marry.
In Year 4, Liable Spouse and Non-Li-
ableSpousefileajointreturnforYear
3, reporting an overpayment of $1,000.
The overpayment results from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year
3. Liable Spouse and Non-Liable Spouse
are domiciled in Louisiana at all relevant
times, and Liable Spouse’s tax liability
is a separate obligation as defined by
Louisiana law.
Louisiana law defines separate property
as including property acquired by a spouse
prior to marriage, property acquired with
that spouse’s separate property, property
acquired by a spouse through inheritance
or donation to that spouse individually,
damages awarded to a spouse in connec-
tion with the management of that spouse’s
separate property, and property acquired
by a spouse from a voluntary partition
of the community during marriage.See
La. Civ. Code Ann. art. 2341 (2003).
Louisiana law defines community prop-
erty as property acquired by a spouse
during marriage that is not separate prop-
erty.SeeLa. Civ. Code Ann. art. 2338
(2003). Louisiana law provides a rebut-
table presumption that all property in the
possession of either spouse is community
property.SeeLa.Civ.CodeAnn.art.
2340 (2003). Each spouse has a 50 per-
cent interest in community property.See
La. Civ. Code Ann. art. 2336 (2003).
Louisiana law provides that a creditor
may reach all of the community property
to satisfy separate and community obliga-
tions.SeeLa.Civ.CodeAnn.art.2345
(2003). In addition, a creditor may reach
all of the liable spouse’s separate property
to satisfy separate and community obliga-
tions.See Id.
Under Louisiana law, obligations in-
curred by a spouse are either community
obligations or separate obligations.See
La. Civ. Code Ann. art. 2359 (2003).
A community obligation is defined as an
obligation incurred during marriage for ei-
ther the common interest of both spouses
or for the interest of the other spouse.See
July 26, 2004782004–30 I.R.B.

La. Civ. Code Ann. art. 2360 (2003). A
separate obligation is defined as an obli-
gation that was incurred before marriage,
after marriage has terminated, or during
marriage, though not for the benefit of the
community.SeeLa.Civ.CodeAnn.art.
2363 (2003). Louisiana law provides a re-
buttable presumption that all obligations
incurred during marriage are community
obligations.SeeLa.Civ.CodeAnn.art.
2361 (2003).
LAW
Section 6402(a) of the Internal Rev-
enue Code provides that, in the case of any
overpayment, the Service may credit the
amount of the overpayment, including in-
terest, against any internal revenue tax lia-
bility on the part of the person who made
the overpayment and shall refund the bal-
ance to the person.
Revenue Ruling 74–611, 1974–2 C.B.
399, holds that if a husband and wife file
a joint return, each spouse has a sepa-
rate interest in the jointly reported income
and a separate interest in any overpayment.
However, filing a joint return does not cre-
ate a new property interest for the husband
or the wife.Id.
Revenue Ruling 80–7, 1980–1 C.B.
296, holds that if a husband and wife file a
joint return showing an overpayment, the
Service may credit one spouse’s interest
in the overpayment against that spouse’s
separate tax liability. The amount of the
spouse’s interest in the overpayment is cal-
culated by subtracting the spouse’s share
of the joint tax liability, determined under
a separate tax formula, from the spouse’s
contribution towards the joint tax liability.
Under the separate tax formula, a spouse’s
share of the joint tax liability is calculated
as follows:
Spouse’s Separate Tax
Total of Both Spouses’ Separate Tax
x JointTaxLiabilityReportedonReturn
Revenue Ruling 85–70, 1985–1 C.B.
361, provides a two-step process to de-
termine the amount of a joint overpay-
ment that the Service may offset against
one spouse’s separate tax liability if the
spouses are domiciled in a community
property state. First,if the joint overpay-
ment is from wages that are community
property income, then each spouse is con-
sidered to be the recipient of one-half
of the aggregated wages regardless of
whether the spouses may have earned
different amounts of wages (the one-half
rule). Accordingly, each spouse has a
one-half interest in the overpayment,
and the Service may offset the liable
spouse’s one-half interest in the overpay-
ment against the liable spouse’s separate
federal tax liability regardless of whether
state law provides that creditors may reach
community property to satisfy the separate
debts of a spouse.Id. Rev. Rul. 85–70
does not specifically address what portion
of each spouse’s actual wages is treated as
having been offset as a result of applying
the one-half rule. Under the facts of Rev.
Rul. 85–70, and specifically the assumed
state laws, that analysis was not necessary.
However, applying the second step of Rev.
Rul. 85–70 in other cases may require
a determination of the amount of each
spouse’s actual wages that were offset
after applying the one-half rule. For that
purpose, each spouse under the first step
of Rev. Rul. 85–70 is treated as receiving
one half of the wages from each com-
munity property source (or, collectively,
one-half of the aggregated wages) and as
such being entitled to receive one-half of
the income tax withheld from each com-
munity property source.
Second, Rev. Rul. 85–70 provides
that state law may enable the Service to
offset an additional portion of the joint
overpayment from community property
sources to satisfy a spouse’s separate fed-
eral tax liability. This additional right of
offset is available if state law provides that
creditors may reach community property
to satisfy the separate debts of a spouse.
(The amount potentially available to be
offset under the second step of Rev. Rul.
85–70 is the amount remaining after ap-
plication of the first step of that revenue
ruling.) However, if state law provides that
community property may not be reached
to satisfy the premarital or other separate
debts of either spouse, then the Service
may not offset any portion of the non-li-
able spouse’s share of the overpayment
from community property sources against
the liable spouse’s separate tax liability.
Id.
Five-step process to determine amount
of joint overpayment that the Service may
offset against separate federal tax liability
of one spouse.
A five-step process is required to deter-
mine the amount of a joint overpayment
that the Service may, pursuant to section
6402(a), offset against the separate federal
tax liability of one spouse.
The first step is to identify the underly-
ing source of the overpayment. The Ser-
vice looks to the tax payments made by
the spouses, including income tax with-
holding and estimated tax payments and
other credits, such as the earned income tax
credit, that gave rise to the overpayment.
If the earned income tax credit is a source
of the overpayment,seeRev. Rul. 87–52,
1987–1 C.B. 347, for guidance.
The second step is to characterize the
underlying source of the overpayment as
either separate or community property.
Because an overpayment will be charac-
terized in the same manner as the source
of the overpayment, an overpayment will
be characterized as community property,
separate property, or as part community
property and part separate property, de-
pending on the character of the source of
the overpayment. If the overpayment is
part community property and part separate
property, the portion of the overpayment
attributable to a separate property source
must be subtracted from the remainder of
the overpayment. The portion of the over-
payment attributable to a separate property
source is calculated as follows:
2004–30 I.R.B.79July 26, 2004

Tax Payment From a Separate Property Source
Total Tax Payments
x Overpayment
The third step is to offset the liable
spouse’s share of the joint overpayment
from a community property source against
the liable spouse’s separate tax liability.
Under Rev. Rul. 85–70, the Service may
offset the liable spouse’s 50-percent in-
terest in the overpayment from a commu-
nity property source to satisfy the liable
spouse’s separate tax liability.
The fourth step is to determine whether,
under state law, the Service may reach the
non-liable spouse’s share of the overpay-
ment from a community property source.
SeeRev. Rul. 85–70.
The fifth step is to determine whether
the Service may, under state law, reach a
portion of the overpayment from a separate
property source of the liable spouse or the
non-liable spouse.
ANALYSIS
Apply the five-step process to each situ-
ation.
(1)Step 1.
InSituation 1,Situation 2,andSituation
3, the overpayment is from income taxes
withheld in Year 3 from Liable Spouse’s
and Non-Liable Spouse’s wages.
(2)Step 2.
California, Idaho, and Louisiana law
presume that all property acquired during
marriage by either spouse or both spouses,
including wages, is community property.
InSituation 1,Situation 2,andSituation
3, the overpayment results from income
tax withholding from Liable Spouse’s and
Non-Liable Spouse’s wages. Because
state law presumes that wages are commu-
nity property, the entire overpayment in
Situation 1,Situation 2,andSituation 3is
assumed to be from a community property
source.
(3)Step 3.
Under California, Idaho, and Louisiana
law, each spouse has a present and equal
interest in all community property. InSit-
uation 1,Situation 2,andSituation 3,the
Service may offset Liable Spouse’s $500
share of the overpayment, which is from a
community property source against Liable
Spouse’s separate tax liability.
(4)Step 4.
InSituation 1andSituation 2, under
California and Idaho law respectively, a
creditor may reach all of the community
property to satisfy a debt incurred by Li-
able Spouse, regardless of whether the debt
was incurred before or after marriage. In
Situation 3, under Louisiana law, a creditor
may reach all of the community property
to satisfy a debt, regardless of whether the
debt is a separate or community debt. Ac-
cordingly, inSituation 1,Situation 2,and
Situation 3, the Service may offset the re-
maining $500 of the overpayment.
(5)Step 5.
Under California, Idaho, and Louisiana
law, a creditor may reach all of Liable
Spouse’s separate property to satisfy Li-
able Spouse’s separate tax liability. A
creditor may not, however, reach any of
Non-Liable Spouse’s separate property to
satisfy Liable Spouse’s separate tax liabil-
ity. InSituation 1,Situation 2,andSitua-
tion 3, no part of the overpayment is from
a separate property source. Accordingly,
there is no separate property that the Ser-
vice may offset against the Liable Spouse’s
separate tax liability.
HOLDING
Situation 1. The Service may offset
$1,000 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 2. The Service may offset
$1,000 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 3. The Service may offset
$1,000 of the overpayment against Liable
Spouse’s separate tax liability.
EFFECT ON OTHER REVENUE
RULINGS
Revenue Ruling 80–7 and Rev. Rul.
85–70 are amplified and clarified.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael A. Skeen of the Office of
the Associate Chief Counsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice Division. For
further information regarding this revenue
ruling, contact Michael A. Skeen at (202)
622–4910 (not a toll-free call).
26 CFR 301.6402–1: Authority to make credits or
refunds.
Offsets under section 6402; Nevada,
New Mexico, and Washington law.This
ruling provides guidance regarding the
amount of an overpayment from a joint
tax return that the IRS may offset against a
spouse’s separate tax liability for taxpay-
ers domiciled in Nevada, New Mexico,
and Washington. Nevada, New Mexico,
and Washington are community property
states and, under the respective state laws,
each spouse has an undivided 50–percent
interest in all community property. Rev.
Ruls. 80–7 and 85–70 amplified and clar-
ified.
Rev. Rul. 2004–73
ISSUE
What amount of an overpayment re-
ported on a joint return may the Inter-
nal Revenue Service apply against one
spouse’s separate tax liability if the
spouses are domiciled in Nevada, New
Mexico, or Washington?
This ruling addresses how offsets apply
for taxpayers filing joint returns and domi-
ciled in Nevada, New Mexico, or Wash-
ington. Because these states have similar
community property laws, Nevada, New
Mexico, and Washington are addressed in
one ruling. This ruling makes assump-
tions about the operation of state commu-
nity property laws which are highly depen-
dent on facts and circumstances. There-
fore, taxpayers are cautioned to check cur-
rent state law and apply it to their particu-
lar facts. Taxpayers domiciled in Arizona
or Wisconsin should refer to Rev. Rul.
2004–71; taxpayers domiciled in Califor-
nia, Idaho, or Louisiana should refer to
Rev. Rul. 2004–72; and taxpayers domi-
ciled in Texas should refer to Rev. Rul.
2004–74.
July 26, 2004802004–30 I.R.B.

FACTS
Situation 1, Nevada. In Year 1, Liable
Spouse, who is single, incurs a tax liability
of $20,000. Liable Spouse does not pay
this tax liability. In Year 2, Liable Spouse
and Non-Liable Spouse marry. In Year
4, Liable Spouse and Non-Liable Spouse
file a joint return for Year 3, reporting an
overpayment of $1,000. The overpayment
results from income taxes withheld from
Liable Spouse’s and Non-Liable Spouse’s
wages during Year 3. Liable Spouse
and Non-Liable Spouse are domiciled in
Nevada at all relevant times.
Nevada law presumes that property ac-
quired during marriage by either husband,
wife, or both, is community property,
subject to limited exceptions.SeeNev.
Rev. Stat. section 123.220 (2003). This
presumption may be rebutted.Forrest v.
Forrest, 668 P.2d 275, 277 (Nev. 1983).
Further, during marriage, each spouse has
a 50 percent interest in the community
property.SeeNev. Rev. Stat. sec-
tion 123.225 (2003). Generally, property
owned by one spouse before marriage, or
acquired during marriage by gift, bequest,
devise, descent, or an award for personal
damages, is separate property, and each
spouse has a 100 percent interest in his or
her separate property.SeeNev. Rev. Stat.
section 123.130 (2003).
Nevada law provides that a creditor
may reach all of a liable spouse’s separate
property and all of the community prop-
erty to satisfy the liable spouse’s debts that
arose during the marriage.See Hardy v.
United States, Civil No. CV–N–94–0824
(D. Nev. 1997);Nelson v. United States,
Civil No. CV–N–89–659 (D. Nev. 1993),
aff’d,53F.3d339(9
th
Cir. 1995);United
States v. ITT Consumer Financial Corp,
816 F.2d 487, n. 12 (9
th
Cir. 1987). How-
ever, a creditor maynot reach any of the
non-liable spouse’s separate property to
satisfy the liable spouse’s debt that arose
during the marriage.See Hardy v. United
States, Civil No. CV-N–94–0824 (D. Nev.
1997). In addition, Nevada law provides
that a creditor may not reach the non-li-
able spouse’s separate property or the
non-liable spouse’s share of the commu-
nity property to satisfy the liable spouse’s
separate debts incurred or contracted prior
to marriage.SeeNev. Rev. Stat. section
123.050 (2003).
Situation 2, New Mexico. In Year 1,
Liable Spouse, who is single, incurs a tax
liability of $20,000. Liable Spouse does
not pay this tax liability. In Year 2, Liable
Spouse and Non-Liable Spouse marry.
In Year 4, Liable Spouse and Non-Li-
able Spouse file a joint return for Year
3, reporting an overpayment of $1,000.
The overpayment results from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year 3.
Liable Spouse and Non-Liable Spouse are
domiciled in New Mexico at all relevant
times, and Liable Spouse’s tax liability is
a separate debt as defined by New Mexico
law.
New Mexico law provides that prop-
erty acquired during marriage by the
husband, wife, or both is presumed to
be community property, and each spouse
has a 50 percent interest in community
property.SeeN.M.Stat.Ann.section
40–3–12(A)(2002);Central Adjustment
Bureau, Inc. v. Thevenet, 686 P.2d 954,
957–958 (N.M. 1984). This presumption
may be rebutted.C & L Lumber and Sup-
ply, Inc. v. Texas American Bank/Galeria,
795 P.2d 502, 505 (N.M. 1990). Gener-
ally, property owned by a spouse before
marriage is separate property, and each
spouse has a 100 percent interest in all
of his or her separate property.SeeN.M.
Stat. Ann. section 40–3–8 (2002).
New Mexico law provides that a cred-
itor may reach all of the separate prop-
erty of the spouse or spouses who con-
tracted or incurred the debt, and all of the
community property to satisfy a commu-
nity debt.SeeN.M. Stat. Ann. section
40–3–11(A) (2002). However, a creditor
may not reach any of one spouse’s sepa-
rate property to satisfy a community debt
incurred by the other spouse.See Id.New
Mexico law provides that a creditor may
reach all of the liable spouse’s separate
property and all of the liable spouse’s share
of community property to satisfy a sep-
arate debt.SeeN.M. Stat. Ann. sec-
tion 40–3–10(A) (2002). However, a cred-
itor may not reach any of the non-liable
spouse’s separate property to satisfy the li-
able spouse’s separate debt.See Id.
Under New Mexico law, a separate debt
is defined as: (1) a debt contracted or
incurred either before marriage or after
entry of a decree of dissolution of mar-
riage; (2) a debt contracted or incurred af-
ter a court has entered a decree pursuant
to N.M. Stat. Ann. section 40–4–3 (pro-
ceeding for division of property, disposi-
tion of children or alimony without disso-
lution of marriage); (3) a debt designated
by a court as a separate debt; (4) a debt
contracted by a spouse during marriage
which, at the time of creation, is identified
to the creditor in writing as the separate
debt of the contracting spouse; (5) a debt
that arises from a tort committed either be-
fore marriage or after entry of a decree of
dissolution of marriage; or (6) a debt de-
clared unreasonable pursuant to N.M. Stat.
Ann. section 40–3–10.1 (certain debts that
did not contribute to the benefit of both
spouses or their dependents).SeeN.M.
Stat. Ann. section 40–3–9(A)(1) through
(6) (2002). Community debt is defined as
a debt, which is not a separate debt, con-
tracted or incurred by one or both spouses
during the marriage.SeeN.M. Stat. Ann.
section 40–3–9(B) (2002). New Mexico
law presumes that a debt incurred during
marriage is community debt.See In re
Fingado, 113 B.R. 37, 42 (Bankr. D.N.M.
1990),aff’d, 995 F.2d 175 (10
th
Cir. 1993).
Situation 3, Washington. In Year 1,
Liable Spouse, who is single, incurs a tax
liability of $20,000. Liable Spouse does
not pay this tax liability. In Year 2, Liable
Spouse and Non-Liable Spouse marry.
In Year 4, Liable Spouse and Non-Li-
ableSpousefileajointreturnforYear
3, reporting an overpayment of $1,000.
The overpayment results from income
taxes withheld from Liable Spouse’s and
Non-Liable Spouse’s wages during Year
3. Liable Spouse and Non-Liable Spouse
are domiciled in Washington state at all
relevant times, and Liable Spouse’s tax
liability is a separate debt as defined by
Washington state law.
Washington state law defines commu-
nity property as any property acquired dur-
ing marriage, by one or both spouses, that
is not separate property.SeeWash. Rev.
Code section 26.16.030 (2003). There is
a rebuttable presumption under Washing-
ton state law that all property acquired dur-
ing marriage is community property.See
Dean v. Lehman, 18 P.3d 523, 528 (Wash.
2001)(en banc). Each spouse has an un-
divided 50-percent interest in all commu-
nity property.See In re Towey’s Estate,
155 P.2d 273, 275 (Wash. 1945). Wash-
ington state law defines separate property
as property owned by a spouse before mar-
riage and property acquired during mar-
2004–30 I.R.B.81July 26, 2004

riage by a spouse by gift, bequest, de-
vise, or descent.SeeWash.Rev.Code
sections 26.16.010, 26.16.020 (2003). In
addition, Washington state law defines as
separate property any profits or income de-
rived from separate property during mar-
riage.SeeWash. Rev. Code sections
26.16.010, 26.16.020 (2003).
Under Washington state law, a creditor
may reach all of the community property,
including the earnings of both spouses,
to satisfy a community debt.See Pacific
Gamble Robinson Co. v. Lapp, 622 P.2d
850, 854 (Wash. 1980). A creditor may
reach all of a spouse’s separate property to
satisfyacommunitydebtincurredbythat
spouse; however, a creditor of a commu-
nity debt may not reach the other spouse’s
separate property.SeeWash. Rev. Code
sections 6.15.040, 26.16.010, 26.16.020
(2003). In general, under Washington
state law, a creditor may not reach any
of the community property to satisfy a
separate debt.SeeWash. Rev. Code
section 26.16.200 (2003);Pacific Gamble
Robinson Co., 622 P.2d at 854. However,
underUnited States v. Overman, 424 F.2d
1142 (9
th
Cir. 1970), the Service may
reach the liable spouse’s 50-percent inter-
est in the community property to satisfy a
separate tax liability of the liable spouse.
See also Draper v. United States,243
F. Supp. 563 (W.D. Wash. 1965).
Under Washington state law, a debt in-
curred during marriage, for the benefit of
the community, is a community debt.See
In re Marriage of Hurd, 848 P.2d 185,
195–196 (Wash. App. 1993). Washing-
ton state law presumes that a debt is a com-
munity debt.See Pacific Gamble Robinson
Co., 622 P.2d at 854. If a debt is not a com-
munity debt, then it is a separate debt.See
Id.
LAW
Section 6402(a) of the Internal Rev-
enue Code provides that, in the case of any
overpayment, the Service may credit the
amount of the overpayment, including in-
terest, against any internal revenue tax lia-
bility on the part of the person who made
the overpayment and shall refund the bal-
ance to the person.
Revenue Ruling 74–611, 1974–2 C.B.
399, holds that if a husband and wife file
a joint return, each spouse has a sepa-
rate interest in the jointly reported income
and a separate interest in any overpayment.
However, filing a joint return does not cre-
ate a new property interest for the husband
or the wife.Id.
Revenue Ruling 80–7, 1980–1 C.B.
296, holds that if a husband and wife file a
joint return showing an overpayment, the
Service may credit one spouse’s interest
in the overpayment against that spouse’s
separate tax liability. The amount of the
spouse’s interest in the overpayment is cal-
culated by subtracting the spouse’s share
of the joint tax liability, determined under
a separate tax formula, from the spouse’s
contribution towards the joint tax liability.
Under the separate tax formula, a spouse’s
share of the joint tax liability is calculated
as follows:
Spouse’s Separate Tax
Total of Both Spouses’ Separate Tax
x JointTaxLiabilityReportedonReturn
Revenue Ruling 85–70, 1985–1 C.B.
361, provides a two-step process to de-
termine the amount of a joint overpay-
ment that the Service may offset against
one spouse’s separate tax liability if the
spouses are domiciled in a community
property state. First,if the joint overpay-
ment is from wages that are community
property income, then each spouse is con-
sidered to be the recipient of one-half
of the aggregated wages regardless of
whether the spouses may have earned
different amounts of wages (the one-half
rule). Accordingly, each spouse has a
one-half interest in the overpayment,
and the Service may offset the liable
spouse’s one-half interest in the overpay-
ment against the liable spouse’s separate
federal tax liability regardless of whether
state law provides that creditors may reach
community property to satisfy the separate
debts of a spouse.Id. Rev. Rul. 85–70
does not specifically address what portion
of each spouse’s actual wages is treated as
having been offset as a result of applying
the one-half rule. Under the facts of Rev.
Rul. 85–70, and specifically the assumed
state laws, that analysis was not necessary.
However, applying the second step of Rev.
Rul. 85–70 in other cases may require
a determination of the amount of each
spouse’s actual wages that were offset
after applying the one-half rule. For that
purpose, each spouse under the first step
of Rev. Rul. 85–70 is treated as receiving
one half of the wages from each com-
munity property source (or, collectively,
one-half of the aggregated wages) and as
such being entitled to receive one-half of
the income tax withheld from each com-
munity property source.
Second, Rev. Rul. 85–70 provides
that state law may enable the Service to
offset an additional portion of the joint
overpayment from community property
sources to satisfy a spouse’s separate fed-
eral tax liability. This additional right of
offset is available if state law provides that
creditors may reach community property
to satisfy the separate debts of a spouse.
(The amount potentially available to be
offset under the second step of Rev. Rul.
85–70 is the amount remaining after ap-
plication of the first step of that revenue
ruling.) However, if state law provides that
community property may not be reached
to satisfy the premarital or other separate
debts of either spouse, then the Service
may not offset any portion of the non-li-
able spouse’s share of the overpayment
from community property sources against
the liable spouse’s separate tax liability.
Id.
Five-step process to determine amount
of joint overpayment that the Service may
offset against separate federal tax liability
of one spouse.
A five-step process is required to deter-
mine the amount of a joint overpayment
that the Service may, pursuant to section
6402(a), offset against the separate federal
tax liability of one spouse.
The first step is to identify the underly-
ing source of the overpayment. The Ser-
vice looks to the tax payments made by
the spouses, including income tax with-
holding and estimated tax payments and
other credits, such as the earned income tax
July 26, 2004822004–30 I.R.B.

credit, that gave rise to the overpayment.
If the earned income tax credit is a source
of the overpayment,seeRev. Rul. 87–52,
1987–1 C.B. 347, for guidance.
The second step is to characterize the
underlying source of the overpayment as
either separate or community property.
Because an overpayment will be charac-
terized in the same manner as the source
of the overpayment, an overpayment will
be characterized as community property,
separate property, or as part community
property and part separate property, de-
pending on the character of the source of
the overpayment. If the overpayment is
part community property and part separate
property, the portion of the overpayment
attributable to a separate property source
must be subtracted from the remainder of
the overpayment. The portion of the over-
payment attributable to a separate property
source is calculated as follows:
Tax Payment From a Separate Property Source
Total Tax Payments
x Overpayment
The third step is to offset the liable
spouse’s share of the overpayment from a
community property source against the li-
able spouse’s separate tax liability. Under
Rev. Rul. 85–70, the Service may offset
the liable spouse’s 50-percent interest in
the overpayment from a community prop-
erty source to satisfy the liable spouse’s
separate tax liability.
The fourth step is to determine whether,
under state law, the Service may reach the
non-liable spouse’s share of the overpay-
ment from a community property source.
SeeRev. Rul. 85–70.
The fifth step is to determine whether
the Service may, under state law, reach a
portion of the overpayment from a separate
property source of the liable spouse or the
non-liable spouse.
ANALYSIS
Apply the five-step process to each situ-
ation.
(1)Step 1.
InSituation 1,Situation 2,andSituation
3, the overpayment is from income taxes
withheld in Year 3 from Liable Spouse’s
and Non-Liable Spouse’s wages.
(2)Step 2.
Nevada, New Mexico, and Washing-
ton state law presume that all property ac-
quired during marriage by either spouse or
both spouses, including wages, is commu-
nity property. InSituation 1,Situation 2,
andSituation 3, the overpayment results
from income tax withholding from Liable
Spouse’s and Non-Liable Spouse’s wages.
Because state law presumes that wages are
community property, the entire overpay-
ment inSituation 1,Situation 2,andSitua-
tion 3isassumedtobefromacommunity
property source.
(3)Step 3.
Under Nevada, New Mexico, and
Washington state law, each spouse has a
present and equal interest in all commu-
nity property. InSituation 1,Situation 2,
andSituation 3, the Service may offset
Liable Spouse’s $500 share of the over-
payment against Liable Spouse’s separate
tax liability.
(4)Step 4.
Under Nevada, New Mexico, and
Washington state law, the amount of com-
munity property thata creditor may reach
depends on the character of the debt. In
Situation 1, Liable Spouse’s tax liability
arose before marriage. Nevada law dis-
tinguishes between debts that arose before
or during the marriage. For debts that
arose before marriage, a creditor may not
reach either Non-Liable Spouse’s portion
of community property or Non-Liable
Spouse’s separate property. Accordingly,
the Service may not offset any portion of
Non-Liable Spouse’s share of the overpay-
ment against Liable Spouse’s tax liability.
InSituation 2, Liable Spouse’s tax lia-
bility is a separate debt under New Mexico
law. In Situation 3, Liable Spouse’s tax li-
ability is a separate debt under Washington
state law. New Mexico and Washington
state law distinguish between community
debts and separate debts. For a community
debt (e.g., a tax liability of one spouse that
arose during the marriage by filing sepa-
rate returns), a creditor may reach Liable
Spouse’s and Non-Liable Spouse’s share
of community property to satisfy the Li-
able Spouse’s separate tax liability. How-
ever, if the debt is a separate debt (e.g.,a
tax liability of one spouse that arose be-
fore marriage), a creditor may reach Li-
able Spouse’s share of community prop-
erty, but a creditor may not reach Non-Li-
able Spouse’s share of community prop-
erty. Because Liable Spouse’s tax liability
is a separate debt inSituation 2andSitua-
tion 3, the Service may not offset any por-
tion of Non-Liable Spouse’s share of the
overpayment against Liable Spouse’s sep-
arate tax liability.
(5)Step 5.
Under Nevada, New Mexico, and
Washington state law, a creditor may
reach all of Liable Spouse’s separate prop-
erty to satisfy Liable Spouse’s separate
tax liability. A creditor may not, however,
reach any of Non-Liable Spouse’s separate
property to satisfy Liable Spouse’s sepa-
rate tax liability. InSituation 1,Situation
2,andSituation 3, no part of the overpay-
ment is from a separate property source.
Accordingly, there is no separate property
that the Service may offset against the
Liable Spouse’s separate tax liability.
HOLDING
Situation 1. The Service may offset
$500 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 2. The Service may offset
$500 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 3. The Service may offset
$500 of the overpayment against Liable
Spouse’s separate tax liability.
EFFECT ON OTHER REVENUE
RULINGS
Revenue Ruling 80–7 and Rev. Rul.
85–70 are amplified and clarified.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael A. Skeen of the Office of
the Associate ChiefCounsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice Division. For
2004–30 I.R.B.83July 26, 2004

further information regarding this revenue
ruling, contact Michael A. Skeen at (202)
622–4910 (not a toll-free call).
26 CFR 301.6402–1: Authority to make credits or
refunds.
Offsets under section 6402; Texas
law.This ruling provides guidance re-
garding the amount of an overpayment
from a joint tax return that the IRS may
offset against a spouse’s separate tax li-
ability for taxpayersdomiciled in Texas.
Texas is a community property state and,
under the state law, each spouse has an
undivided 50–percent interest in all com-
munity property. Rev. Ruls. 80–7 and
85–70 amplified and clarified.
Rev. Rul. 2004–74
ISSUE
What amount of an overpayment
reported on a joint return may the In-
ternal Revenue Service apply against
one spouse’s separate tax liability if the
spouses are domiciled in Texas?
This ruling addresses how offsets apply
for taxpayers filing joint returns and domi-
ciled in Texas. This ruling makes assump-
tions about the operation of Texas commu-
nity property laws which are highly depen-
dent on facts and circumstances. There-
fore, taxpayers are cautioned to check cur-
rent state law and apply it to their particu-
lar facts. Taxpayers domiciled in Arizona
or Wisconsin should refer to Rev. Rul.
2004–71; taxpayers domiciled in Califor-
nia, Idaho, or Louisiana should refer to
Rev. Rul. 2004–72; and taxpayers domi-
ciled in Nevada, New Mexico or Washing-
ton should refer to Rev. Rul. 2004–73.
FACTS
Situation 1. In Year 1, Liable Spouse,
who is single, incurs a federal tax liability
of $20,000. Liable Spouse does not pay
this tax liability. In Year 2, Liable Spouse
and Non-Liable Spouse marry. In Year
4, Liable Spouse and Non-Liable Spouse
file a joint return for Year 3, claiming an
overpayment of $1,000. This overpayment
results from income taxes withheld from
Liable Spouse’s and Non-Liable Spouse’s
wages during Year 3. Liable Spouse and
Non-Liable Spouse are domiciled in Texas
at all relevant times.
Applying Rev. Rul. 80–7, 1980–1 C.B.
296, the Service determines that $750 of
the overpayment is attributable to commu-
nity property subject to Liable Spouse’s
sole management, control, and disposition,
and $250 of the overpayment is attribut-
able to community property subject to
Non-Liable Spouse’s sole management,
control, and disposition.
Texas law defines separate property
as property owned by a spouse before
marriage; propertyacquiredbyspouse
during marriage by gift, devise or descent;
and any damages recovered by a spouse
for personal injuries that do not represent
loss of earning capacity during marriage.
SeeTex. Fam. Code Ann. section 3.001
(2002). Texas law defines community
property as property, other than separate
property, acquired by either spouse dur-
ing marriage.SeeTex. Fam. Code Ann.
section 3.002 (2002). Each spouse has a
50-percent interest in community prop-
erty.See Broday v. United States,455
F.2d 1097 (5
th
Cir. 1972). There is a re-
buttable presumption under Texas law that
all property acquired during marriage is
community property.SeeTex. Fam. Code
Ann. section 3.003 (2002).
Texas law distinguishes between com-
munity property subject to the joint man-
agement, control, and disposition of both
spouses, and community property subject
to one spouse’s sole management, control,
and disposition.SeeTex. Fam. Code
Ann. section 3.102 (2002). A spouse
has sole management,control, and disposi-
tion over community property that spouse
would have owned if that spouse were sin-
gle.SeeTex. Fam. Code Ann. section
3.102(a) (2002). This community prop-
erty includes personal earnings; revenue
from separate property; damages recov-
ered from personal injuries; and the in-
crease in value, mutations and revenue of
all property subject to a spouse’s sole man-
agement, control,and disposition.See
Tex. Fam. Code Ann. section 3.102(a)(1)
through (4) (2002). Texas law defines
community property subject to joint man-
agement, control, and disposition as all
community property that is not subject to
a spouse’s sole management, control, and
disposition, and is not otherwise subject
to an agreement of the spouses.SeeTex.
Fam. Code Ann. section 3.102(c) (2002).
Although each spouse has a 50 percent
interest in the community property, Texas
law limits the types of community prop-
erty that a creditor may reach to satisfy a
spouse’s separate liability.SeeTex. Fam.
Code Ann. section 3.202 (2002). Texas
law allows a creditor to reach all of the
community property subject to the liable
spouse’s sole management, control, and
disposition to satisfy the spouse’s sepa-
rate liability.SeeTex. Fam. Code Ann.
section 3.202(c) (2002). In addition, a
creditor may reach all community property
subject to the spouses’ joint management,
control, and disposition, and all of the li-
able spouse’s separate property, whether
the debt was incurred before or during
marriage.SeeTex. Fam. Code Ann.
section 3.202(c) (2002). A creditor may
not reach any portion of the community
property subject to the non-liable spouse’s
sole management, control, and disposition,
or the non-liable spouse’s separate prop-
erty.SeeTex. Fam. Code Ann. section
3.202(c) (2002). However, underMedaris
v. United States, 884 F.2d 832 (5
th
Cir.
1989), the Service may reach the liable
spouse’s 50-percent interest in the non-li-
able spouse’s sole management commu-
nity property to satisfy a separate federal
tax liability of the liable spouse.
Situation 2. Same facts asSituation
1, except that $250 of the overpayment
is attributable to community property sub-
ject to Liable Spouse’s sole management,
control, and disposition, and $750 of the
overpayment is attributable to community
property subject to Non-Liable Spouse’s
sole management, control, and disposition.
Situation 3. Same facts asSituation 1,
except that the entire overpayment resulted
solely from income tax withholding from
Non-Liable Spouse’s wages, and the entire
overpayment is attributable to community
property subject to Non-Liable Spouse’s
sole management, control, and disposition.
LAW
Section 6402(a) of the Internal Rev-
enue Code provides that, in the case of any
overpayment, the Service may credit the
amount of the overpayment, including in-
terest, against any internal revenue tax lia-
bility on the part of the person who made
the overpayment and shall refund the bal-
ance to the person.
July 26, 2004842004–30 I.R.B.

Revenue Ruling 74–611, 1974–2 C.B.
399, holds that if a husband and wife file
a joint return, each spouse has a sepa-
rate interest in the jointly reported income
and a separate interest in any overpayment.
However, filing a joint return does not cre-
ate a new property interest for the husband
or the wife.Id.
Revenue Ruling 80–7, 1980–1 C.B.
296, holds that if a husband and wife file a
joint return showing an overpayment, the
Service may credit one spouse’s interest
in the overpayment against that spouse’s
separate tax liability. The amount of the
spouse’s interest in the overpayment is cal-
culated by subtracting the spouse’s share
of the joint tax liability, determined under
a separate tax formula, from the spouse’s
contribution towards the joint tax liability.
Under the separate tax formula, a spouse’s
share of the joint tax liability is calculated
as follows:
Spouse’s Separate Tax
Total of Both Spouses’ Separate Tax
x JointTaxLiabilityReportedonReturn
Revenue Ruling 85–70, 1985–1 C.B.
361, provides a two-step process to de-
termine the amount of a joint overpay-
ment that the Service may offset against
one spouse’s separate tax liability if the
spouses are domiciled in a community
property state. First,if the joint overpay-
ment is from wages that are community
property income, then each spouse is con-
sidered to be the recipient of one-half
of the aggregated wages regardless of
whether the spouses may have earned
different amounts of wages (the one-half
rule). Accordingly, each spouse has a
one-half interest in the overpayment,
and the Service may offset the liable
spouse’s one-half interest in the overpay-
ment against the liable spouse’s separate
federal tax liability regardless of whether
state law provides that creditors may reach
community property to satisfy the separate
debts of a spouse.Id. Rev. Rul. 85–70
does not specifically address what portion
of each spouse’s actual wages is treated as
having been offset as a result of applying
the one-half rule. Under the facts of Rev.
Rul. 85–70, and specifically the assumed
state laws, that analysis was not necessary.
However, applying the second step of Rev.
Rul. 85–70 in other cases may require
a determination of the amount of each
spouse’s actual wages that were offset
after applying the one-half rule. For that
purpose, each spouse under the first step
of Rev. Rul. 85–70 is treated as receiving
one half of the wages from each com-
munity property source (or, collectively,
one-half of the aggregated wages) and as
such being entitled to receive one-half of
the income tax withheld from each com-
munity property source.
Second, Rev. Rul. 85–70 provides
that state law may enable the Service to
offset an additional portion of the joint
overpayment from community property
sources to satisfy a spouse’s separate fed-
eral tax liability. This additional right of
offset is available if state law provides that
creditors may reach community property
to satisfy the separate debts of a spouse.
(The amount potentially available to be
offset under the second step of Rev. Rul.
85–70 is the amount remaining after ap-
plication of the first step of that revenue
ruling.) However, if state law provides that
community property may not be reached
to satisfy the premarital or other separate
debts of either spouse, then the Service
may not offset any portion of the non-li-
able spouse’s share of the overpayment
from community property sources against
the liable spouse’s separate tax liability.
Id.
Five-step process to determine amount
of joint overpayment that the Service may
offset against separate federal tax liability
of one spouse.
A five-step process is required to deter-
mine the amount of a joint overpayment
that the Service may, pursuant to section
6402(a), offset against the separate federal
tax liability of one spouse.
The first step is to identify the under-
lying source of the overpayment. The Ser-
vice looks to the tax payments made by the
spouses, including income tax withhold-
ing and estimated tax payments and other
credits. If the earned income tax credit is a
source of the overpayment,seeRev. Rul.
87–52, 1987–1 C.B. 347, for guidance.
The second step is to characterize the
underlying source of the overpayment as
either separate or community property.
Because an overpayment will be charac-
terized in the same manner as the source
of the overpayment, an overpayment will
be characterized as community property,
separate property, or as part community
property and part separate property, de-
pending on the character of the source of
the overpayment. If the overpayment is
part community property and part separate
property, the portion of the overpayment
attributable to a separate property source
must be subtracted from the remainder of
the overpayment. The portion of the over-
payment attributable to a separate property
source is calculated as follows:
Tax Payment From a Separate Property Source
Total Tax Payments
x Overpayment
The third step is to offset the liable
spouse’s share of the overpayment from a
community property source against the li-
able spouse’s separate tax liability. Under
Rev. Rul. 85–70, the Service may offset
the liable spouse’s 50-percent interest in
the overpayment from a community prop-
erty source to satisfy the liable spouse’s
separate tax liability.
The fourth step is to determine whether,
under state law, the Service may reach any
other portion of the overpayment from a
community property source.SeeRev. Rul.
85–70.
The fifth step is to determine whether
the Service may, under state law, reach any
portion of the overpayment from a separate
2004–30 I.R.B.85July 26, 2004

property source of the liable spouse or the
non-liable spouse.
ANALYSIS
Apply the five-step process to each situ-
ation.
(1)Step 1.
InSituation 1,Situation 2,andSituation
3, the Year 3 joint overpayment is from in-
come taxes withheld in Year 3 from Liable
Spouse’s and Non-Liable Spouse’s wages.
(2)Step 2.
Texas law presumes that all property ac-
quired during marriage by either spouse or
both spouses, including wages, is commu-
nity property. InSituation 1,Situation 2,
andSituation 3, the overpayment results
from income tax withholding from Liable
Spouse’s and Non-Liable Spouse’s wages.
Because Texas law presumes that wages
are community property, the entire over-
payment inSituation 1,Situation 2,and
Situation 3isassumedtobefromacom-
munity property source.
(3)Step 3.
Under Texas law, each spouse has a
present and equal interest in all commu-
nity property. InSituation 1,theService
applies Rev. Rul. 80–7 and determines
that $750 of the overpayment is attribut-
able to community property subject to Li-
able Spouse’s sole management, control,
and disposition, and $250 of the overpay-
ment is attributable to community property
subject to Non-Liable Spouse’s sole man-
agement, control, and disposition. Ap-
plying Rev. Rul. 85–70 andMedaris
v. United States, 884 F.2d 832 (5
th
Cir.
1989), the Service may offset $375 of the
income tax withholding attributable to Li-
able Spouse’s wages and $125 of the in-
come tax withholding attributable to Non-
Liable Spouse’s wages. Accordingly, in
Situation 1, the Service may offset $500 of
the overpayment against Liable Spouse’s
Year 1 tax liability.
InSituation 2, the Service applies Rev.
Rul. 80–7 and determines that $250 of the
overpayment is attributable to community
property subject to Liable Spouse’s sole
management, control, and disposition, and
$750 of the overpayment is attributable
to community property subject to Non-
Liable Spouse’s sole management, con-
trol, and disposition. Applying Rev. Rul.
85–70 andMedaris, the Service may offset
$125 of the income tax withholding attrib-
utable to Liable Spouse’s wages and $375
of the income tax withholding attributable
to Non-Liable Spouse’s wages. Accord-
ingly, inSituation 2, the Service may off-
set $500 of the overpayment against Liable
Spouse’s Year 1 tax liability.
InSituation 3, the Service applies Rev.
Rul. 80–7 and determines that none of the
overpayment is attributable to community
property subject to Liable Spouse’s sole
management, control, and disposition, and
$1,000 of the overpayment is attributable
to community property subject to Non-
Liable Spouse’s sole management, con-
trol, and disposition. Applying Rev. Rul.
85–70 andMedaris, the Service may offset
$500 of the income tax withholding attrib-
utable to Non-Liable Spouse’s wages. Ac-
cordingly, inSituation 3,theServicemay
offset $500 of the overpayment against Li-
able Spouse’s Year1 tax liability.
(4)Step 4.
Under Texas law, the amount of com-
munity property thata creditor may reach
depends on the nature of the property. In
Situation 1,Situation 2,andSituation 3,
under Texas law, the Service may reach
all community property subject to Liable
Spouse’s sole management, control, and
disposition, and all community property
subject to Liable Spouse’s and Non-Liable
Spouse’s joint management, control, and
disposition.
InSituation 1, $750 of the overpayment
is attributable to community property sub-
ject to Liable Spouse’s sole management,
control, and disposition. Applying Texas
law in Step 4, and in addition to the amount
offset in Step 3, the Service may offset the
remaining $375 of the $750 overpayment
that is attributable to community property
subject to Liable Spouse’s sole manage-
ment, control, and disposition.
Further, $250 of the overpayment is at-
tributable to community property subject
to Non-Liable Spouse’s sole management,
control, and disposition. Applying Texas
law in Step 4, in addition to the amount
offset in Step 3, the Service may not offset
the remaining portion of the overpayment
from community property sources subject
to Non-Liable Spouse’s sole management,
control, and disposition.
InSituation 2, $250 of the overpayment
is attributable to community property sub-
ject to Liable Spouse’s sole management,
control, and disposition. Applying Texas
law in Step 4, and in addition to the amount
offset in Step 3, the Service may offset the
remaining $125 of the $250 overpayment
that is attributable to community property
subject to Liable Spouse’s sole manage-
ment, control, and disposition.
Further, $750 of the overpayment is at-
tributable to community property subject
to Non-Liable Spouse’s sole management,
control, and disposition. Applying Texas
law in Step 4, in addition to the amount
offset in Step 3, the Service may not offset
the remaining portion of the overpayment
from community property sources subject
to Non-Liable Spouse’s sole management,
control, and disposition.
InSituation 3, none of the overpayment
is attributable to community property sub-
ject to Liable Spouse’s sole management,
control, and disposition. Applying Texas
law in Step 4, in addition to the amount
offset in Step 3, the Service may not offset
the remaining portion of the overpayment
from community property sources.
(5)Step 5.
Under Texas state law, a creditor may
reach 100 percent of Liable Spouse’s sep-
arate property to satisfy Liable Spouse’s
separate tax liability. A creditor may
not, however, reach any of Non-Liable
Spouse’s separate property to satisfy Li-
able Spouse’s separate tax liability. In
Situation 1,Situation 2,andSituation 3,
no part of the overpayment is from a sepa-
rate property source. Accordingly, there is
no separate property that the Service may
offset against the Liable Spouse’s separate
tax liability.
HOLDING
Situation 1. The Service may offset
$875 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 2. The Service may offset
$625 of the overpayment against Liable
Spouse’s separate tax liability.
Situation 3. The Service may offset
$500 of the overpayment against Liable
Spouse’s separate tax liability.
EFFECT ON OTHER REVENUE
RULINGS
Revenue Ruling 80–7 and Rev. Rul.
85–70 are amplified and clarified.
July 26, 2004862004–30 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael A. Skeen of the Office of
the Associate Chief Counsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice Division. For
further information regarding this revenue
ruling, contact Michael A. Skeen at (202)
622–4910 (not a toll-free call).
2004–30 I.R.B.87July 26, 2004

Part III. Administrative, Procedural, and Miscellaneous
2004 Marginal Production
Rates
Notice 2004–48
Section 613A(c)(6)(C) of the Internal
Revenue Code definesthe term “applica-
ble percentage” for purposes of determin-
ing percentage depletion for oil and gas
produced from marginal properties. The
applicable percentage is the percentage
(not greater than 25 percent) equal to the
sum of 15 percent, plus one percentage
point for each whole dollar by which $20
exceeds the reference price (determined
under § 29(d)(2)(C)) for crude oil for
the calendar year preceding the calendar
year in which the taxable year begins.
The reference price determined under
§ 29(d)(2)(C) for the 2003 calendar year
is $27.56.
Table 1 contains the applicable percent-
ages for marginal production for taxable
years beginning in calendar years 1991
through 2004.
Notice 2004–48 Table 1
APPLICABLE PERCENTAGE FOR MARGINAL PRODUCTION
Calendar YearApplicable Percentage
199115 percent
199218 percent
199319 percent
199420 percent
199521 percent
199620 percent
199716 percent
199817 percent
199924 percent
200019 percent
200115 percent
200215 percent
200315 percent
200415 percent
The principal author of this notice is
Eric B. Lee of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Mr. Lee at
(202) 622–3120 (not a toll-free call).
2004 Section 43 Inflati
on
Adjustment
Notice 2004–49
Section 43(b)(3)(B) of the Internal
Revenue Code requires the Secretary to
publish an inflation adjustment factor.
The enhanced oil recovery credit under
§ 43 for any taxable year is reduced if
the “reference price,” determined under
§ 29(d)(2)(C), for the calendar year pre-
ceding the calendar year in which the
taxable year begins, is greater than $28
multiplied by the inflation adjustment fac-
tor for that year.
The term “inflation adjustment factor”
means, with respect to any calendar year,
a fraction the numerator of which is the
GNP implicit price deflator for the preced-
ing calendar year and the denominator of
which is the GNP implicit price deflator
for 1990.
Because the referenceprice for the 2003
calendar year ($27.56) does not exceed
$28 multiplied by the inflation adjustment
factor for the 2004 calendar year, the en-
hanced oil recovery credit for qualified
costspaidorincurredin2004isdeter-
mined without regard to the phase-out for
crude oil price increases.
Table 1 contains the GNP implicit price
deflator used for the 2004 calendar year,
as well as the previously published GNP
implicit price deflators used for the 1991
through 2003 calendar years.
July 26, 2004882004–30 I.R.B.

Notice 2004–49 TABLE 1
GNP IMPLICIT PRICE DEFLATORS
Calendar YearGNP Implicit Price Deflator
1990112.9 (used for 1991)
1991117.0 (used for 1992)
1992120.9 (used for 1993)
1993124.1 (used for 1994)
1994126.0 (used for 1995)
1995107.5 (used for 1996)
1996109.7 (used for 1997)
1997112.35 (used for 1998)
1998112.64 (used for 1999)
1999104.59 (used for 2000)
2000106.89 (used for 2001)
2001109.31 (used for 2002)
2002110.63 (used for 2003)
2003105.67 (used for 2004)
* Beginning in 1995, the GNP implicit
price deflator was rebased relative to 1992.
The 1990 GNP implicit price deflator used
to compute the 1996 § 43 inflation adjust-
ment factor is 93.6.
** Beginning in 1997, two digits follow
the decimal point in the GNP implicit price
deflator. The 1990 GNP price deflator
used to compute the 1998 § 43 inflation ad-
justment factor is 93.63.
*** Beginning in 1999, the GNP implicit
price deflator was rebased relative to 1996.
The 1990 GNP implicit price deflator used
to compute the 2000 § 43 inflation adjust-
ment factor is 86.53.
Table 2 contains the inflation adjust-
ment factor and the phase-out amount
for taxable years beginning in the 2004
calendar year as well as the previously
published inflation adjustment factors and
phase-out amounts for taxable years be-
ginning in 1991 through 2003 calendar
years.
Notice 2004–49 TABLE 2
INFLATION ADJUSTMENT FACTORS AND
PHASE-OUT AMOUNTS
Calendar
Year
Inflation Adjustment
Factor
Phase-out
Amount
19911.00000
19921.03630
19931.07080
19941.09920
19951.11600
19961.14850
19971.17200
19981.19990
19991.20300
20001.20870
20011.23530
20021.26330
20031.27850
20041.29520
DRAFTING INFORMATION
The principal author of this notice is
Eric B. Lee of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Mr. Lee at
(202) 622–3120 (not a toll-free call).
Weighted Average Interest
Rates Update
Notice 2004–51
This notice provides guidance as to the
corporate bond weighted average interest
rate and the permissible range of interest
rates specified under §412(b)(5)(B)(ii)(II)
of the Internal Revenue Code. In ad-
dition, it provides guidance as to the
interest rate on 30-year Treasury securi-
ties under § 417(e)(3)(A)(ii)(II), and the
weighted average interest rate and permis-
sible ranges of interest rates based on the
30-year Treasury securities rate.
2004–30 I.R.B.89July 26, 2004

CORPORATE BOND WEIGHTED
AVERAGE INTEREST RATE
Sections 412(b)(5)(B)(ii) and 412(l)
(7)(C)(i), as amended by the Pension
Funding Equity Act of 2004, provide that
the interest rates used to calculate current
liability and to determine the required
contribution under § 412(l) for plan years
beginning in 2004 or 2005 must be within
a permissible range based on the weighted
average of the rates of interest on amounts
invested conservatively in long term in-
vestment grade corporate bonds during the
4-year period ending on the last day before
the beginning of the plan year.
Notice 2004–34, 2004–18 I.R.B. 848,
provides guidelines for determining the
corporate bond weighted average interest
rate and the resulting permissible range
of interest rates used to calculate current
liability. That notice establishes that the
corporate bond weighted average is based
on the monthly composite corporate bond
rate derived from designated corporate
bond indices.
The composite corporate bond rate for
June 2004 is 6.18 percent. Pursuant to No-
tice 2004–34, the Service has determined
this rate as the average of the monthly
yields for the included corporate bond in-
dices for that month.
The following corporate bond weighted
average interest rate was determined for
plan years beginning in the month shown
below.
For Plan Years
Corporate
Bond90% to 110%
Beginning in:WeightedPermissible
MonthYearAverageRange
July20046.325.69 to 6.32
30-YEAR TREASURY SECURITIES
WEIGHTED AVERAGE INTEREST
RATE
Section 417(e)(3)(A)(ii)(II) defines
the applicable interest rate, which must
be used for purposes of determining the
minimum present value of a participant’s
benefit under § 417(e)(1) and (2), as the
annual rate of interest on 30-year Treasury
securities for the month before the date
of distribution or such other time as the
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income
Tax Regulations provides that the applica-
bleinterestrateforamonthistheannual
interest rate on 30-year Treasury securi-
ties as specified by the Commissioner for
that month in revenue rulings, notices or
other guidance published in the Internal
Revenue Bulletin.
Section 404(a)(1) of the Code, as
amended by the Pension Funding Eq-
uity Act of 2004, permits an employer
to elect to disregard subclause (II) of
§ 412(b)(5)(B)(ii) to determine the max-
imum amount of the deduction allowed
under § 404(a)(1).
The rate of interest on 30-year Treasury
securities for June 2004 is 5.41 percent.
Pursuant to Notice 2002–26, 2002–1 C.B.
743, the Service has determined this rate
as the monthly average of the daily deter-
mination of yield on the 30-year Treasury
bond maturing in February 2031.
The following 30-year Treasury rates
were determined for the plan years begin-
ning in the month shown below.
For Plan Years
30-Year
Treasury90% to 105%90% to 110%
Beginning in:WeightedPermissiblePermissible
MonthYearAverageRangeRange
July20045.174.65 to 5.434.65 to 5.69
Drafting Information
The principal authors of this notice
are Paul Stern and Tony Montanaro of
the Employee Plans, Tax Exempt and
Government Entities Division. For fur-
ther information regarding this notice,
please contact the Employee Plans’ tax-
payer assistance telephone service at
1–877–829–5500 (a toll-free number),
between the hours of 8:00 a.m. and
6:30 p.m. Eastern time, Monday through
Friday. Mr. Stern may be reached at
1–202–283–9703. Mr. Montanaro may
be reached at 1–202–283–9714. The tele-
phone numbers in the preceding sentences
are not toll-free.
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also: Part I, §§ 404, 832, 846; 1.404(b)–1T,
1.404(d)–1T, 1.832–4.)
Rev. Proc. 2004–41
SECTION 1. PURPOSE
This revenue procedure sets forth cir-
cumstances under which an insurance
company that makes incentive payments
to health care providers will be permitted
to include those payments in discounted
unpaid losses without regard to § 404 of
the Internal Revenue Code. The revenue
procedure also provides procedures under
which a taxpayer may obtain automatic
consent of the Commissioner to change its
method of accounting for such payments.
SECTION 2. BACKGROUND
.01 Section 404(a) provides that if com-
pensation is paid or accrued on account of
any employee under a plan deferring the
receipt of compensation, the compensation
is not deductible under chapter 1 of subtitle
A (§§ 1 through 1400L), but if the compen-
sation would otherwise be deductible, it is
July 26, 2004902004–30 I.R.B.

deductible under § 404, subject to the limi-
tations imposed by § 404 as to the amounts
deductible in any year.
.02 Section 404(a)(5) provides the gen-
eral rule that compensation paid under a
nonqualified plan (contributions to which
are not deductible under §§ 404(a)(1), (2),
or (3)) of deferred compensation is de-
ductible in the taxable year in which an
amount attributable to the contribution is
includible in the gross income of employ-
ees participating in the plan.
.03 Section 404(b) provides that if there
is no plan, but there is a method or arrange-
ment that has the effect of a plan deferring
the receipt of compensation, § 404(a) shall
apply as if there were a plan.
.04 Section 404(d) extends the appli-
cation of § 404(a) to benefits or compen-
sation paid to nonemployees by provid-
ing that if a plan would be covered by
§ 404(a) (as modified by § 404(b)) but for
the fact that no employer-employee rela-
tionship exists, the contributions or com-
pensation (if otherwise deductible under
chapter 1 of subtitle A) shall be deductible
for the taxable year in which an amount at-
tributable to the compensation is includi-
ble in the gross income of the persons par-
ticipatingintheplan.
.05 Section 1.404(b)–1T, Q&A–1, of
the temporary Income Tax Regulations
provides, in part, that section 404(a) and
(d) govern the deduction of compensation
paid or incurred with respect to plans, or
methods or arrangements, however de-
nominated, that defer the receipt of any
amount of compensation or benefit, in-
cluding fees and other payments. Under
§§ 404(a) and (b), if otherwise deductible,
acontributionpaidorincurredwithre-
spect to a nonqualified plan, or method or
arrangement, is deductible in the taxable
year of the employer in which or with
which ends the taxable year of the em-
ployee in which the amount attributable to
the contribution is includible in the gross
income of the employee (without regard
to any applicable exclusions under chapter
1, Subtitle A).
.06 Section 1.404(d)–1T provides, in
part, that in the case of deferred benefits
or compensation for service providers with
respect to which there is no employer-em-
ployee relationship, §§ 404(a) and (b) and
the regulations thereunder apply as if the
person providing the services were the em-
ployee and the person to whom the ser-
vices are provided were the employer.
.07 Section 1.404(b)–1T, Q&A–2(a),
provides that a plan, or method or arrange-
ment, defers the receipt of compensation
or benefits to the extent an employee
receives compensation or benefits there-
under more than a brief period of time
after the end of the employer’s taxable
year in which the services creating the
right to such compensation or benefits are
performed. The determination whether a
plan, or method or arrangement, defers
the receipt of compensation or benefits is
made separately with respect to each em-
ployee and each amount of compensation
or benefit.
.08 Section 1.404(b)–1T, Q&A–
2(b)(1), provides that a plan, or method
or arrangement, is presumed to be one
that defers the receipt of compensation
for more than a brief period of time after
the end of an employer’s taxable year to
the extent that compensation is received
after the 15
th
day of the third month after
the end of the employer’s taxable year in
which the services are rendered (the 2
1
/2
month period).
.09 Under § 1.404(b)–1T, Q&A–
2(b)(2), the taxpayer may rebut this pre-
sumption only by demonstrating that it
was impracticable to avoid the deferral of
the receipt by an employee of the amount
of compensation or benefits beyond the
applicable 2
1
/2month period and that, as
of the end of the employer’s taxable year,
such impracticabilitywas unforeseeable.
.10 Section 832(a) defines the taxable
income of an insurance company subject
to tax under § 831 as the gross income
defined in § 832(b)(1), less the deductions
authorized by § 832(c).
.11 Section 832(b)(1) provides that the
gross income of an insurance company
subject to tax under § 831 includes the
combined gross amount earned during the
taxable year from investment income and
from underwriting income, computed on
the basis of the underwriting and invest-
ment exhibit of the annual statement ap-
proved by the National Association of In-
surance Commissioners.
.12 Section 832(b)(3) defines under-
writing income as the premiums earned
on insurance contracts during the taxable
year, less losses incurred and expenses
incurred.
.13 Section 832(c)(4) authorizes a de-
duction for “losses incurred” on insurance
contracts during the taxable year, as de-
fined in § 832(b)(5).
.14 Section 832(b)(5) defines losses in-
curred during the taxable year on insur-
ance contracts as follows: (1) from losses
paid during the taxable year, deduct sal-
vage and reinsurance recovered; (2) to the
results so obtained, add all unpaid losses
on life insurance contracts plus all dis-
counted unpaid losses (as defined in § 846)
outstanding at the end of the taxable year
and deduct all unpaid losses on life insur-
ance contracts plus all discounted unpaid
losses outstanding at the end of the preced-
ing taxable year; (3) to the results so ob-
tained, add estimated salvage and reinsur-
ance recoverable as of the end of the pre-
ceding taxable year and deduct estimated
salvage and reinsurance recoverable as of
the end of the taxable year.
.15 Section 1.832–4(b) provides, in
part, that the part of the deduction for
losses incurred that represents unpaid
losses must comprise only actual unpaid
losses. These losses must be stated in
amounts that, based on the facts of each
case and the company’s experience with
similar cases, represent a fair and reason-
able estimate of the amount the company
will be required to pay. Amounts included
in, or added to, the estimates of unpaid
losses that, in the opinion of the director,
are in excess of a fair and reasonable es-
timate will be disallowed as a deduction.
The director may require any insurance
company to submit such detailed informa-
tion with respect to its actual experience as
is deemed necessary to establish the rea-
sonableness of the deduction for “losses
incurred.”
.16 Section 846 provides that the
amount of discounted unpaid losses as
of the end of the taxable year attributable
to any accident year is equal to the present
value of the losses, determined by using
the amount of undiscounted unpaid losses
at such time, the applicable interest rate,
and the applicable loss payment pattern.
Section 846(b)(1) provides, in general,
that the term “undiscounted unpaid losses”
means the unpaid losses shown in the an-
nual statement filed by the taxpayer for the
year ending with or within the taxable year
of the taxpayer. For purposes of determin-
ing discounted unpaid losses attributable
to accident and health insurance contracts
2004–30 I.R.B.91July 26, 2004

(other than certain disability insurance
contracts), § 846(f)(6)(B) provides that
the unpaid losses are considered to be paid
in the middle of the taxable year following
the accident year.
.17 Under § 446(e) and § 1.446–
1(e)(2)(i), a taxpayer generally must se-
cure the consent of the Commissioner
before changing a method of account-
ing for federal income tax purposes.
Section 1.446–1(e)(3)(ii) authorizes the
Commissioner to prescribe administra-
tive procedures setting forth the terms
and conditions necessary to obtain con-
sent to change a method of accounting.
Rev. Proc. 2002–9, 2002–1 C.B. 327 (as
modified and clarified by Announcement
2002–17, 2002–1 C.B. 561, modified and
amplified by Rev. Proc. 2002–19, 2002–1
C.B. 696, and amplified, clarified, and
modified by Rev. Proc. 2002–54, 2002–2
C.B. 432), provides procedures by which
a taxpayer may obtain automatic consent
to change to a method of accounting de-
scribed in the Appendix of Rev. Proc.
2002–9.
.18 Many taxpayers that are taxable un-
derPartIIofsubchapterLofChapter
1, including both health insurance com-
panies and health maintenance organiza-
tions (HMOs), have developed arrange-
ments with physicians and other health
care providers that encourage participating
providers to providequality health care to
subscribers in a cost-efficient manner. Un-
der one such arrangement, a portion of the
provider’s fees is held back and paid af-
ter the end of the insurer’s taxable year
if certain objectives are met. Under an-
other such arrangement, the provider is en-
titled to a bonus payment if specified ob-
jectives are met. The objectives set by the
insurer often relate to cost savings, prof-
itability, number of claims, quality of care,
or preventive medicine. The terms of these
incentive programs are not negotiated be-
tween the taxpayers and the health care
providers and the taxpayers do not offer
providers the alternative of not participat-
ing in these arrangements.
.19 The incentive payments described
in Section 2.18 often are based on data for
a performance period that can only be col-
lected after the end of the taxpayer’s tax-
able year. As a result, the payments of-
ten are made to providers more than 2
1
/2
months after the end of the taxpayer’s tax-
able year.
.20 For purposes of the annual state-
ments filed with their state insurance
commissioners, health insurers and HMOs
treat the amount of incentive payments
made to health care providers during the
year as part of claims paid. The taxpayers
also are required to include estimates of
the liability for incentive payments in-
curred during the year as part of their total
incurred but not paid claims reserves. The
taxpayers usually determine the liability
for incentive payments on the basis of an
actuarial calculation,taking into account
the relevant contractual arrangements with
health care providers, the contractually de-
fined experience outcomes by which the
incentive payments will become payable
to the health care providers, and an analy-
sis of the taxpayers’aggregate health care
costs through the valuation date.
.21 Applying § 404 and the regulations
thereunder to incentive payments made by
the taxpayers would create a substantial
administrative burden for the taxpayers
and the Service, since the liabilities for
incentive payments shown on the annual
statements filed by health insurance com-
panies and HMOs generally are not broken
down into amounts that will be owed to
specific health care providers. In light
of existing rules and limitations placed
on the deductibility of loss reserves un-
der subchapter L, and in order to reduce
controversy regarding the treatment of
these incentive payments, the Service has
decided that it will not apply § 404 to
provider incentive payments described in
section 4 of this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to tax-
payers using or changing to the method
of accounting for provider incentive pay-
ments set forth in section 5 of this revenue
procedure.
SECTION 4. PROVIDER INCENTIVE
PAYMENTS
A payment by a taxpayer to a health
care provider is a “provider incentive pay-
ment” within the meaning of this revenue
procedure if—
.01 the taxpayer is taxable as an insur-
ance company under Part II of subchapter
L;
.02 the payment is made pursuant to a
written arrangement the purpose of which
is to encourage participating health care
providers to provide quality health care to
the taxpayer’s subscribers in a cost-effi-
cient manner;
.03 the taxpayer’s liability for the pay-
ment is dependent on the attainment of one
or more preestablished goals during a per-
formance period consisting of not more
than 12 consecutive months;
.04 the terms of the arrangement pur-
suant to which the payment is made are
established unilaterally by the taxpayer,
and are not negotiated with the health care
providers;
.05 the taxpayer normally makes pay-
ments to health care providers under the ar-
rangement within 12 months after the close
of the performance period referred to in
section 4.03 of this revenue procedure;
.06 deferring the receipt of income by
the health care provider or otherwise pro-
viding a tax benefit to the provider is not a
principal purpose of the arrangement;
.07 the taxpayer records a liability for
the payment on its annual statement filed
for state regulatory purposes, and includes
this liability in the determination of dis-
counted unpaid losses under § 846; and
.08 the health care provider is not an
employee, and is not providing health care
as an agent, of the taxpayer.
SECTION 5. APPLICATION
A taxpayer that makes provider in-
centive payments within the meaning of
this revenue procedure is permitted to in-
clude those payments in discounted unpaid
losses without regard to § 404.
SECTION 6. CHANGE IN METHOD
OF ACCOUNTING AND AUDIT
PROTECTION
.01Change in method of accounting.A
change in an insurance company’s method
of deducting provider incentive payments
to the method provided in section 5 of this
revenue procedure is a change in method
of accounting to which the provisions of
§§ 446 and 481 apply. If a taxpayer within
the scope of this revenue procedure wants
to change its method of deducting the li-
ability for provider incentive payments to
themethodprovidedinsection5ofthis
revenue procedure, the taxpayer must fol-
July 26, 2004922004–30 I.R.B.

low the automatic change in method of ac-
counting provisions of Rev. Proc. 2002–9,
with the following modifications:
(1) The scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply to
a taxpayer that wants to make the change
for either its first or second taxable year
ending on or after December 31, 2003.
(2) A taxpayer that wants to make the
change for its first taxable year ending on
or after December 31, 2003, and that on or
before September 24, 2004, files its origi-
nal federal income tax return for that year,
and that did not change to the method de-
scribed in section 5 of this revenue pro-
cedure on that return is not required to
comply with the filing requirement in sec-
tion 6.02(3)(a) of Rev. Proc. 2002–9,
provided the taxpayer complies with the
following filing requirements. The tax-
payer must instead complete and file the
Form 3115,Application for Change in Ac-
counting Method, in duplicate. The orig-
inal Form 3115 must be attached to an
amended federal income tax return for the
taxpayer’s first taxable year ending on or
after December 31, 2003. This amended
return must be filed no later than January
24, 2005. The copy of the Form 3115 must
be filed with the national office (see sec-
tion 6.02(6) of Rev. Proc. 2002–9 for the
address) no later than when the taxpayer’s
amended return is filed; and
(3) For purposes of Line 1a of Form
3115, the designated number for the auto-
matic accounting method change is “90”.
.02Audit protection. If a taxpayer
within the scope of this revenue procedure
currently uses a method consistent with
the method described in section 5 of this
revenue procedure, the method of account-
ing for the taxpayer’s provider incentive
payments will not be raised as an issue
by the Service in a taxable year that ends
before December 31, 2003. Also, if a tax-
payer currently uses a method consistent
with the method described in section 5 of
this revenue procedure, and its use of that
method is an issue under consideration
(within the meaning of section 3.09 of
Rev. Proc. 2002–9) in examination, be-
fore an appeals office, or before the U.S.
Tax Court for any taxable year that ends
before December 31, 2003, that issue will
not be further pursued by the Service.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after December
31, 2003.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic change
in method of accounting in section 4B of
the APPENDIX.
SECTION 9. DRAFTING
INFORMATION
The principal authors of this rev-
enue procedure are Gary E. Geisler of
the Office of Associate Chief Counsel
(Financial Institutions & Products) and
William C. Schmidt of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt & Government Entities).
For further information regarding this rev-
enue procedure, contact Mr. Geisler at
(202) 622–3970 (not a toll-free call) or
Mr. Schmidt at (202) 622–6030 (not a
toll-free call).
2004–30 I.R.B.93July 26, 2004

Part IV. Items of General Interest
Announcement and Report
Concerning Pre-Filing
Agreements
Announcement 2004–59
Introduction
This Announcement is issued pur-
suant to the Conference Report to H.R.
4577 (Pub. L. 106–554),The Community
Renewal Tax Relief Act of 2000,which
requires that the Secretary of the Trea-
sury make publicly available an annual
report relating to the Pre-Filing Agree-
ment (“PFA”) program operations for the
preceding calendar year. The Conference
Report states that the report is to include:
(1) the number of pre-filing agreements
completed, (2) the number of applications
received, (3) the number of applications
withdrawn, (4) the types of issues which
are resolved by completed agreements,
(5) whether the program is being utilized
by taxpayers who were previously subject
to audit, (6) the average length of time
required to completean agreement, (7) the
number, if any, and subject of technical
advice and Chief Counsel advice memo-
randa issued to address issues arising in
connection with any pre-filing agreement,
(8) any model agreements, and (9) any
other information the Secretary deems
appropriate. This is the fourth annual re-
port. It provides information concerning
activity under the permanent PFA program
(Rev. Proc. 2001–22, 2001–1 C.B. 745),
during calendar year 2003.
Background
The Large and Mid-Size Business Di-
vision (“LMSB”) within the Internal Rev-
enue Service serves corporations and part-
nerships with assets greater than $10 mil-
lion. In 2003, approximately 150,000 cor-
porations and partnerships filed returns re-
porting assets in this range. The returns
filed by these taxpayers present a wide va-
riety of complex issues. The largest of
these taxpayers deal with the IRS on a con-
tinuous basis.
One of LMSB’s strategic initiatives
is issue management. Through effective
issue management, LMSB seeks to re-
solve issues of tax controversy on a more
current basis. This includes, but is not
limited to, increasing the efficiency of the
examination process and seeking alterna-
tive issue resolution tools. The Pre-Filing
Agreement program was designed to sup-
port LMSB’s issue management strategy.
LMSB believes the Pre-Filing Agreement
program reduces taxpayer burden and
makes more effective use of IRS resources
by resolving or eliminating tax contro-
versy before the tax return is filed.
The PFA program is designed to per-
mit a taxpayer to resolve, before the fil-
ing of a return, the treatment of an issue
that otherwise would likely be disputed in
a post-filing examination. The PFA pro-
gram is intended to produce agreement on
factual issues and apply settled legal prin-
ciples to those facts. A PFA is a specific
matter closing agreement under § 7121 of
the Internal RevenueCode and resolves
the subject of the PFA for a specified tax-
able period. Execution of a PFA that re-
solves issues prior to filing permits taxpay-
ers to avoid costs, burdens and delays that
are frequently incident to post-filing exam-
ination disputes between taxpayers and the
IRS.
PFA Program
As a result of the success of a pilot
program, the IRS established a permanent
PFA Program with the issuance of Rev.
Proc. 2001–22. Although many of the
procedures remainedthe same, there were
some significant changes, including:
1. All taxpayers, both Coordinated Issue
and Industry cases, within the juris-
diction of LMSB are eligible to par-
ticipate;
2. More issues are considered appropri-
ate;
3. There are fewer excludible circum-
stances;
4. Certain international issues are now
considered appropriate; and
5. A user fee was implemented for those
taxpayers accepted into the program.
PFA Process
The PFA process is managed and con-
ducted by LMSB Industry Directors and
field staff, with support from the Office
of Pre-Filing and Technical Guidance in
LMSB Headquarters. The PFA Program
Manager receives all applications and,
with the assistance of the Technical Ad-
visors and the Office of Chief Counsel,
ensures that the issues presented are appro-
priate for inclusion in the PFA program.
The Industry Director with jurisdiction
over the taxpayer makes the final decision
whether to accept a taxpayer’s request for
participation in the PFA program. The cri-
teria for selecting a request include:
a. The suitability of the issue presented
by the taxpayer;
b. The direct or indirect impact of a PFA
upon other years, issues, taxpayers, or
related cases;
c. The availability of IRS resour
ces;
d. The ability and willingness of the tax-
payer to dedicate sufficient resources
to the process;
e. The likelihood that the PFA may result
in contrary positions with respect to an
item or transaction (“whipsaw”); and
f. The probability of completing the ex-
amination of the issue and entering
into a PFA by the target date.
For the cases selected, a mandatory
orientation session for the examination
team and the taxpayer is conducted. Sub-
sequently, the taxpayer and examination
team convene a joint planning meeting to
reach agreement on a proposed timeframe,
to identify and arrange for IRS access to
relevant records and testimony, and to de-
fine the potential scope and nature of the
PFA.
The examination team conducts the fac-
tual determination and issue development
consistent with IRS auditing standards.
Based upon an examination of the issue,
the Team Manager prepares a PFA recom-
mendation for the Industry Director. The
Industry Director’s decision to execute a
PFA Closing Agreement is based on the
July 26, 2004942004–30 I.R.B.

Team Manager’s recommendation and
discussions with the PFA Program Man-
ager, Chief Counsel attorneys, appropriate
Technical Advisors and the taxpayer. Fol-
lowing Chief Counsel review to ensure
that the proposed PFA conforms with
guidance provided in Rev. Proc. 68–16
(regarding closing agreements), the Indus-
try Director could execute a PFA if he or
she determines that:
a. Entering into the PFA is consistent
with the goals of the PFA program as
stated in Rev. Proc. 2001–22;
b. The resolution in the PFA reflects set-
tled legal principles and correctly ap-
plies those principles (or positions au-
thorized under Delegation Order Nos.
4–24 or 4–25) to facts found by the ex-
amination team; and
c. There appears to be an advantage in
having the issue(s) permanently and
conclusively closed for the taxable pe-
riod covered by the PFA, or that the
taxpayer shows good and sufficient
reasons for desiring a closing agree-
ment and that the United States would
sustain no disadvantage through con-
summationofsuchanagreement(see
§ 301.7121–1(a) of the Procedure and
Administration Regulations).
Program Oversight
A designated PFA Program Manager
assigned to the Office of Pre-Filing and
Technical Guidance in LMSB Headquar-
ters provides oversight for the PFA pro-
gram. The PFA Program Manager pro-
vides assistance to taxpayers, Industry Di-
rectors and Team Managers throughout the
process.
Pre-Filing Agreement Program
Accomplishments
Statistical Overview of PFA Program —
Calendar Year 2003
The table below reflects activity con-
cerning those PFA requests which were re-
ceived in calendar year 2002 or prior and
carried over into calendar year 2003.
Overview of PFA Applications Received Prior to Calendar Year 2003Totals
Applications Pending Acceptance/Rejection on January 1, 20033
Applications In-Process on January 1, 200320
Applications Rejected in 20030
Applications Withdrawn in 20036
Applications for Which There Were Closing Agreements in 20039
Applications Pending Acceptance/Rejection on December 31, 20030
Applications In-Process on December 31, 20038
The table below reflects the status of
PFA requests received in calendar year
2003.
Overview of PFA Applications Received in Calendar Year 2003Totals
Applications Received in 200342
Applications Accepted in 200329
Applications Rejected in 20035
Applications Withdrawn before Acceptance/Rejection in 20031
Applications Withdrawn after Acceptance in 20031
Applications for Which There Were Closing Agreements in 20039
Applications Pending Acceptance/Rejection on December 31, 20037
Applications in-Process on December 31, 200319
Description of Applications Received in
Calendar Year 2003
The 42 applications that were received
for the PFA program in calendar year 2003
came from taxpayers in each LMSB indus-
try segment and involved a variety of is-
sues as provided in the tables below.
2004–30 I.R.B.95July 26, 2004

Number of Requests Received and Accepted by Industry Segment
Industry SegmentReceivedAccepted
Financial Services (FS)42
Retailers, Fo
od, Pharmaceuticals & Healthcare (RFP&H)
1310
Natural Resources & Construction (NR&C)63
Communications, Technology & Media (CT&M)107
Heavy Manufa
cturing & Transportation (HM&T)
97
Total4229
Types of Issues Received
IssueReceived
Utilizati
on of Net Operating Loss
2
Fair Market Value of Donated Intangibles6
Gain or Loss on Sale of Stock1
Research a
nd Experimental Credit
10
Automatic Waiver of Reconsolidation1
Corporate Restructuring1
Sale of As
sets — Ordinary vs. Capital Loss
2
Worthless Securities and Bad Debts5
Start-up Costs and Operating Expenses1
Invento
ry Write Down
1
Real Property Contribution2
Method of Accounting for Delay Rental Payments — Capital vs. Expense1
Fair Ma
rket Value of Stock Contributed to Pension Plan
1
Asset Class Life1
Conversion of C Corp to S Corp — Fair Market Value of Stock1
Synth
etic Fuel Credit
1
Computation of Original Issue Discount1
Sale vs. Lease Treatment1
Sect
ion 481 Adjustment — Change in Method of Accounting
1
Transfer Pricing — Allocation to Home Office1
Fair Market Value of Shares Exchanged1
Tota
l
42
Reasons Why Applications Received in
Calendar Year 2003 Were Not Accepted
Five of the applications received in
2003 were not considered appropriate for
the PFA program.
July 26, 2004962004–30 I.R.B.

Reasons for Non-acceptanceApplications
Not Well-Settled Law3
Interrelated Transactions1
Issue Not Suitable or Ineligible1
Total5
Taxpayer Withdrawals (4)
In accordance with procedures set forth
in Section 8 of Rev. Proc. 2001–22, 4
taxpayers withdrew from the PFA process
— three after their requests had been ac-
cepted and one prior to acceptance. Due
to tax legislation enacted in 2003 regard-
ing dividends, one taxpayer withdrew its
PFA request regarding a conversion from
a C corporation to a partnership. Another
case concerning the fair market value of
a qualified conservation contribution was
withdrawn because the taxpayer could not
reach an agreement as to fair market value.
In another case, regarding the account-
ingmethodtobeusedforqualifiedre-
search expenses, the taxpayer could not
reach an agreement regarding the appro-
priate project accounting methodology to
be used. In another case, concerning the
research and experimental credit, after an
initial informal meeting with the examina-
tion team, the taxpayer determined that its
facts were not appropriate and withdrew its
PFA request before the Industry Director
made a decision to accept the request.
IRS Withdrawal (2)
The Service withdrew from the PFA
process in two cases. In one case, the exis-
tence of an open regulations project within
the Office of Chief Counsel relating to IRC
§ 4271 indicated that the legal issue to be
addressed by the PFA was not well settled.
In another case, the taxpayer and the Ser-
vice could not agree to the facts regarding
products held for sale that were subject to
excise taxes.
Mutual Withdrawal (2)
The Service and the taxpayer mutually
agreed to terminate the PFA process in 2
cases. In the first instance, the taxpayer
and the Service were unable to agree on the
methodology for computing the net operat-
ing loss carryover relating to stock acqui-
sitions. In the other case, the taxpayer and
the Service were unable to reach an agree-
ment regarding the fair market value of
contributed patents and intellectual prop-
erty.
PFAs Executed (18)
Eighteen PFAs were completed in cal-
endar year 2003, resulting in the execution
of closing agreements.
The Office of Chief Counsel provided
advice to the examination teams and as-
sisted in the drafting and review of the
PFA closing agreements. No Technical
Advice or Chief Counsel Advice Memo-
randa were issued for issues addressed in
the PFA process. The executed PFAs in-
volved the following issues:
PFAs Executed by Issue
Year Application
Received
IssueNumber
2001Fair Market Value of Assets for Purposes of determining Built-in Gain1
20
02
20
03
Fa
ir Market Value of Donated Intangibles
1
2
2002
2003
Amount of Qualified Research Expenditure and Credit2
1
2002Fair Market Value of Assets Exchanged for Stock in a Tax-Free Exchange Pursuant
to a Plan of Reorganization
2
2002Deductibility of Fees Incurred inconnection with a Reorganization1
2
002
B
ad Debt Deduction for Intercompany Advances
1
2002Abandonment Losses1
2003Utilization of Net Operating Loss2
2003Gain or Loss on Sale of Stock1
2003Start-up costs and Operating Expenses1
2003Worthless Securities and Bad Debts1
2003Fair Market Value of Stock Contributed to Pension Plan1
Total18
2004–30 I.R.B.97July 26, 2004

Fair Market Value of Assets for Purposes
of Determining Built-in Gain
The taxpayer requested a factual deter-
mination regarding the fair market value
of the taxpayer’s assets for purposes of
computing built-in gain pursuant to IRC
§ 1374. Prior to the taxpayer’s election to
be treated as a small business corporation
under IRC § 1362, the taxpayer was taxed
as a C corporation. IRC § 1374 imposes a
tax on an S corporation that has a net rec-
ognized built-in gain during the recogni-
tion period. A closing agreement was ex-
ecuted specifying the fair market value of
the property identified in the agreement.
Donation of Intangibles (3)
In each of these unrelated cases, the tax-
payers sought an agreement as to the fair
market value of certain patented technol-
ogy donated to qualified organizations. In
each of the cases, a closing agreement was
executed specifying the fair market value
of the property contributed.
Amount of Qualified Research Expenditure
and Credit (3)
Three taxpayers requested an agree-
ment regarding the proper amount, if any,
of qualified research expenses and the
research credit under IRC § 41 as well as
the amount of experimental expenditures
under IRC § 174. Closing agreements
were executed with all three taxpayers.
The closing agreements did not address
the methodology to be used for subsequent
years.
Fair Market Value of Assets Exchanged
for Stock in a Tax-Free Exchange (2)
The taxpayer requested agreements
concerning two separate transactions in-
tended to qualify as tax-free transfers of
assets and stock under IRC § 351. A
closing agreement was executed for each
transaction that specified the taxable status
of each transfer and the fair market value
of the transferred stock and assets.
Deductibility of Fees Incurred in
connection with a Reorganization
The taxpayer requested an agreement
regarding the tax treatment of fees and
other expenditures incurred in connection
with the following transactions: (1) an ac-
quisition of stock in a reverse triangular
merger; (2) an acquisition of separately
acquired businesses for cash; and (3) a
disposition of a portion of the acquired
businesses in response to antitrust con-
cerns. A closing agreement was executed
specifying the nature and treatment of the
fees and expenditures and whether such
costs were currently deductible under IRC
§ 162, amortizable under IRC § 195 or cap-
italized under IRC § 263.
Bad Debt Deduction for Intercompany
Advances
The taxpayer requested an agreement
concerning whether certain advances
made to the taxpayer’s wholly owned
foreign subsidiary and treated as loans
were worthless during the taxable year. A
closing agreement was executed specify-
ing the amount ofbona fideindebtedness
and the amount considered a bad debt and
allowable under IRC § 166.
Abandonment Losses
The taxpayer requested an agreement
regarding the existence, amount and de-
ductibility under IRC § 165 of abandon-
ment losses incurred. A closing agree-
ment was executed specifying the amount
of abandonment loss.
Utilization of Net Operating Loss (2)
The taxpayer requested an agreement
concerning the potential application of
IRC § 382 with respect to prior-year net
operating loss carryforwards in the case
of an ownership change of greater than
50 percent occurring over a three-year
period. A closing agreement was executed
specifying that an ownership change did
not occur and that the taxpayer was not
subject to the limitation. In an unrelated
request, the taxpayer requested an agree-
ment regarding the number of ownership
changes. A closing agreement was exe-
cuted specifying the number of ownership
changes.
Gain or Loss on Sale of Stock
The taxpayer requested an agreement
concerning the tax consequences of the
sale of the taxpayer’s entire interest in a
foreign subsidiary for cash along with a
discharge of various liabilities. A clos-
ing agreement was executed specifying
the amount of the capital loss under IRC
§ 165 and the amount of ordinary and nec-
essary business expense deductible under
IRC § 162.
Start-up Costs and Operating Expenses
The taxpayer requested an agreement
regarding the proper treatment of start-up
costs and operating expenses. A clos-
ing agreement was executed specifying the
amounts amortizable under IRC §§ 195
and 709, the amounts depreciable under
IRC § 167 and the amounts deductible un-
der IRC § 162.
Worthless Securities and Bad Debts
The taxpayer, the parent of a consol-
idated group, requested an agreement
regarding amounts deductible as ordinary
losses on the worthlessness of stock and
notes in its foreign subsidiary. A clos-
ing agreement was executed specifying
that the stock and notes of the subsidiary
were worthless, the amount of loss on the
stock deductible under IRC § 165 and the
amount of bad debt expense deductible
under IRC § 166.
Fair Market Value of Stock Contributed
to Pension Plan
A taxpayer requested an agreement
regarding the fair market value and de-
ductibility of stock contributed to pension
plans administered by the taxpayer. A
closing agreement was executed specify-
ing the value to be used for purposes of
IRC §§ 162 and 404.
Closing Agreements
Apro formaor model agreement does
not exist for a PFA Closing Agreement.
A PFA represents a specific matter clos-
ing agreement under § 7121. The clos-
ing agreements entered into under this pro-
gram were prepared with assistance from
the Office of Chief Counsel and conform
to the guidance provided in Rev. Proc.
68–16.
PFA Program Utilization
The PFA Program is available to all
taxpayers under the jurisdiction of LMSB.
July 26, 2004982004–30 I.R.B.

During calendar year 2003, 42 taxpayers
submitted PFA requests. These taxpayers
included both Coordinated Industry Case
(CIC) taxpayers that are typically subject
to examination on a continuing basis and
Industry Case (IC) taxpayers that are sub-
ject to examination on a less frequent ba-
sis. Of the 42 requests, 34 were from CIC
taxpayers and eight were from IC taxpay-
ers. Of the 18 cases that resulted in clos-
ing agreements during calendar year 2003,
13 were with CIC taxpayers and five were
with IC taxpayers.
Processing Statistics
The average elapsed time to resolve the
18 cases that resulted in closing agree-
ments in calendar year 2003 (the appli-
cations for which were received in 2001,
2002 and 2003) was 299.4 days.
Average Processing Time for Eighteen
Closing Agreements Executed in 2003
Range
(Elapsed Days)
Average
(Elapsed Days)
Phase I — Application Screening Process26–11659.1
Phase II — PFA Evaluation Process41–716240.3
Total Time to Close a PFA Case100–808299.4
Phase I — Application Screening Process
Phase I is the screening process to de-
termine if an application is appropriate for
inclusion in the PFA program. This screen-
ing process includes obtaining comments
from various LMSB functions and Chief
Counsel, the review of these comments
and the acceptance or rejection of an ap-
plication by the Industry Director. Of the
42 applications received during the calen-
dar year 2003, 34 applications completed
the Phase I Application Screening Process.
Of these 34 applications, the average time
from the date an application was received
by the IRS until the Industry Director ren-
dered a decision to accept or reject an
application was 65.8 days. For the 18
cases that resulted in closing agreements in
2003, the average time for completing the
Phase I process was 59.1 days.
Phase II — PFA Evaluation Process
The second (and final) phase in the PFA
program process is theevaluation phase.
This phase begins when the Industry Di-
rector accepts an application into the PFA
program and ends when a PFA closing
agreement is executed or the process ter-
minates as a result of a withdrawal. The
average elapsed time during the Phase II
Evaluation Process for the 18 cases that
resulted in closing agreements in calendar
year 2003 was 240.3 days.
Program Evaluation
The PFA Program Manager ensures that
an evaluation of all of the PFA program
cases, based on feedback from LMSB em-
ployees and taxpayer participants, is so-
licited. As a part of this program eval-
uation, LMSB and taxpayer participants
were asked to provide the direct examina-
tion time expended to complete the PFA
and an estimate of the direct examination
time it would have taken to resolve the is-
sue in a post-filing context. The table be-
low indicates the results for those that pro-
vided a response.
Cumulative Hours
(Executed PFAs)
Taxpayer
(Hours)
LMSB
(Hours)
Actual Hours Expended — PFA Process19,65514,881
Estimated Hours Required To Be Expended — Post-Filing Process37,75521,298
Time Savings — Actual PFA Process vs.Estimated Post-Filing18,1006,417
Percentage Savings — Actual PFA Process vs. Estimated Post-Filing
(Average)
47.9%30.1%
Estimated Time Savings Percentage Range(20%)–66.7%10.2%–66.7%
2004–30 I.R.B.99July 26, 2004

Comparative Analysis — Processing
Statistics
The average total time to conclude the
18 cases that resulted in closing agree-
ments in calendar year 2003 was 299.4
days. The range was from 100 to 808 days.
Illustrated below are the average elapsed
time (in days) processing statistics for the
11 cases that resulted in closing agree-
ments under the pilot program, the seven
cases that resulted in closing agreements
in calendar year 2001,the 12 cases that
resulted in closing agreements in calendar
year 2002 and the 18 cases that resulted in
closing agreements in calendar year 2003.
Average Processing Time for PFAs
(Days)
Overall
Pilot
(11 cases)
Program
CY 2001
(7 cases)
Program
CY 2002
(12 cases)
Program
CY 2003
(18 cases)
Phase I — Application Screening Process38.346.652.859.1
Phase II — PFA Evaluation Process242.2126.1182.6240.3
Total Time to Complete a PFA280.5172.7235.4299.4
The increased processing time for 2003
can be attributed to the greater degree of
complexity of the issues and the time nec-
essary to develop the factual background.
Generally, the more complex and fact in-
tensivetheissueis,thegreaterthetime
necessary to complete the process.
Taxpayer Satisfaction Survey
An additional aspect of the evaluation
process is soliciting responses from tax-
payersregardingsatisfactionwiththePFA
process in a questionnaire. Responses to
the questionnaire were received from 14
ofthe18taxpayerswhoexecutedclosing
agreements for calendar year 2003. These
responses were converted to mathemati-
cal equivalents based on the level of satis-
faction, were arrayed and a mean average
to each question was calculated. The re-
sponses received are summarized below.
1Overall level of satisfaction with the PFA process.
Very Diss
atisfied
Dissatis
fied
NeitherSatisfie
d
Very Sati
sfied
Does Not A
pply
Count0 006 8 0
Percent0.00%0.00%0.00%42.86%57.14%0.00%
Mean Ave
rage:4.57
2Likelihood of taxpayer recommending the PFA Process to others.
Very UnlikelyUnlikelyPerhapsLikelyVery LikelyDoes not Apply
Count0 005 9 0
Percent0.00%0.00%0.00%35.71%64.29%0.00%
Mean Average:4.64
3The PFA process was clearly communicated during the orientation session.
Strongly DisagreeDisagreeNeitherAgreeStrongly AgreeDoes Not Apply
Count0 007 7 0
Perc
ent
0.00
%
0.00
%
0.00
%
50.0
0%
50.0
0%
0.00
%
Mean Average:4.50
4During the orientation session, questions regarding the PFA process were completely addressed.
Strongly DisagreeDisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count0 006 8 0
Percent0.00%0.00%0.00%42.86%57.14%0.00%
Mean Average:4.57
July 26, 20041002004–30 I.R.B.

5The PFA audit plan was developed with input from both the IRS and the taxpayer.
Strongly Disag
ree
DisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count0 224 6 0
Percent0.00%14.29%14.29%28.57%42.86%0.00%
Mean Average:
4.00
6The IRS requests for information were relevant to resolve the PFA issue.
Strongly DisagreeDisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count0 006 8 0
Percent0.00%0.00%0.00%42.86%57.14%0.00%
Mean Average:4.57
7The time taken by the IRS to review information during theentire “Factual Development” stage of the PFA process was
appropriate.
Strongly DisagreeDisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count0 107 6 0
Percent0.00%7.14%0.00%50.00%42.86%0.00%
Mean Average:4.29
8The time taken by the IRS to complete the “Closing Agreement” stage of the PFA process was appropriate.
Strongly DisagreeDisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count1 333 4 0
Percent7.14%21.43%21.43%21.43%28.57%0.00%
Mean Average:3.43
9IRS team members were accessible during the process to resolve the PFA issue.
Strongly DisagreeDisagreeNeitherAgreeStrongly Agree
Does Not Apply
Nor Known
Count0 002 12 0
Percent0.00%0.00%0.00%14.29%85.71%0.00%
Mean Average:4.86
10The
total number of staff days or hours actually expended as compared to the expected staff days or hours.
Significantly
MoreMoreAbout the SameLess
Significantly
Less
Does Not Apply
Nor Known
Count0 134 6 0
Percent0.00%7.14%21.43%28.57%42.86%0.00%
Mean Average:4.07
2004–30 I.R.B.101July 26, 2004

11The total elapsed time to complete the PFA process as compared to the expected time to complete the process.
Significantly
MoreMoreAbout the SameLess
Significantly
Less
Does Not Apply
Nor Known
Count0 213 8 0
Percent0.00%14.29%7.14%21.43%57.14%0.00%
Mean Average:
4.21
12The spirit of cooperation between IRS andthe company as a result of the PFA process.
Significantly
LessLessAbout the SameImproved
Significantly
Improved
Does Not Apply
Nor Known
Count0 039 2 0
Percent0.00%0.00%21.43%64.29%14.29%0.00%
Mean Average:3.93
13The ability to reach agreement at the lowest (managerial) level.
Significantly
LessLessAbout the SameGreater
Significantly
Greater
Does Not Apply
Nor Known
Count0 127 4 0
Percent0.00%7.14%14.29%50.00%28.57%0.00%
Mean Average:4.00
14The ease of effort in reaching agreement as compared to the expected ease on post-filing.
Significantly
LessLessAbout the SameGreater
Significantly
Greater
Does Not Apply
Nor Known
Count0 037 4 0
Percent0.00%0.00%21.43%50.00%28.57%0.00%
Mean Average:4.07
15Monetary costs incurred to resolve the issue compared to expected cost to resolve issues through the post-filing process.
Significantly
MoreMoreAbout the SameLess
Significantly
Less
Does Not Apply
Nor Known
Count0 064 4 0
Percent0.00%0.00%42.86%28.57%28.57%0.00%
Mean Average:3.86
16The
ability to present an accurate tax return for financial statement purposes as a result of the pre-filing process.
Significantly
LessLessAbout the SameImproved
Significantly
Improved
Does Not Apply
Nor Known
Count0 034 7 0
Percent0.00%0.00%21.43%28.57%50.00%0.00%
Mean Average:4.29
Pre-Filing Agreement Program
Summary
Overall, the PFA program is meeting
the LMSB strategic program objectives as
provided in its issue management strategic
initiative. The following benchmarks re-
flect the overall progress of the PFA Pro-
gram:
•The increasing number of issues re-
solved through the PFA Program,
which has grown steadily since the
program became fully operational;
July 26, 20041022004–30 I.R.B.

•The high degree of overall satisfac-
tion of taxpayers participating in the
PFA Program and the likelihood that
those participants would recommend
this process to other taxpayers.
Although the number of cases resolved
in the PFA Program increased in 2003, the
total processing time has also increased,
particularly in the Phase II PFA Evalua-
tion Process. This trend, which is due in
part to the increasing complexity of issues
presented by taxpayers for PFA considera-
tion, has continued since the PFA Program
became fully operational in 2001. LMSB
is assessing how it might reduce the to-
tal amount of time elapsed during the PFA
process and improve the efficacy of the
PFA process in general.
The principal author of this announce-
ment is J. Michael Mann, in the Office
of Pre-Filing and Technical Guidance,
Large and Mid-Size Business Division.
For further information regarding this an-
nouncement, contact Mr. Mann at (202)
283–8424 (not a toll-free call).
Foundations Status of Certain
Organizations
Announcement 2004–62
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
Achondroplasia Information Source,
Hubbard, TX
African Communities Sustainable
Development Foundation, Inc.,
St. Mountain, GA
Aging Well Foundation, Inc.,
New York, NY
Alumni of Hammond LA Black Schools,
Hammond, LA
American Cabin Girls, Saylorsburg, PA
American Foundation Researching
International Conservation of Anim,
Slaughter, LA
American Friends of the Shakespeare
Birthplace Trust, Inc., Alexandria, VA
American Lhasa Apso Health & Education
Trust Fund, Reston, VA
Anani Cultural Healing Arts Center,
Compton, CA
Angel of Grace Ministry, Inc.,
Johnstown, PA
Animal Haven, Inc., Yuma, AZ
Aquakids, Inc., Conway, AR
Art for All, Purcellville, VA
Association for Deaf Children, Inc.,
Draper, UT
Beacon Foundation, Brentwood, TN
Buffalos Green Gold Development
Corporation, Buffalo, NY
Building Kitsap Families, Silverdale, WA
Bush Street Synagogue Cultural Center,
San Francisco, CA
Canaan Corporation, Victorville, CA
Caribbean Unity Fund, New York, NY
Carl & Sandie Spann Ministries,
Kilgore, TX
Center for God, Terrytown, LA
Center for Orhtotic & Prosthetic
Rehabilitation Institute, Inc.,
Louisville, KY
Center for Research on the Origins of Art
and Religion, Richmond, ME
Central Indiana Skywarn Association,
Inc., Brownsburg, IN
Chance Group Company, St. Paul, MN
Chibb Foundation, McLean, VA
Chijan International Charitable
Foundation, Macon, GA
Child Protection Education of America,
Inc., Tampa, FL
Children First, Bellingham, WA
Choctawhatchee Coastal Conservancy
Corporation, Niceville, FL
Christian Unity International Association,
North Charleston, SC
Coastal Carolina Partners, Inc.,
Wilmington, NC
Collie Rescue Foundation of New
Mexico, Los Alamos, NM
Colorado House of Ruth, Incorporated,
Aurora, CO
Columbia County Fair Foundation,
Cambria, WI
Common Care Foundation, Brooklyn, NY
Community Addiction Services,
Chicago, IL
Community Housing Assistance Corp.,
Cape Canaveral, FL
Community Resource Group,
Elk Grove, CA
Convergence Health Institute,
Santa Monica, CA
Disability Center, Lakewood, CA
Divine Angels Daycare, Inc., Bronx, NY
Douglas C. Petan Victim Assistance Fund,
Joliet, IL
Eagle Life Christian Academy,
Waldorf, MD
Eatonville Lion’s Club Holliday Memorial
Park, Puyallup, WA
Economic Housing Resources, Inc.,
Conway, SC
Elite Counseling Services, Inc.,
San Antonio, TX
Elizabethtown Christian Academy,
Elizabethtown, KY
Emsor 3/4, Inc., Elkview, WV
Estacada Exotic Animal Sanctuary,
Estacada, OR
ETP International, Inc., East Granby, CT
Foundation for Advanced Craniofacial
Education, Inc., Glendale, WI
Foundation for Family Happiness,
Arlington, VA
Foundation for Teaching and Education
Excellence, Dover, DE
Friends of the Clark County Fair,
Vancouver, WA
Friends of the Weehawken Waterfront,
Inc., Weehawken, NJ
Futures Institute for Sustainable
Development, Inc., Glastonbury, CT
Gateway Community Preparatory School,
Boynton Beach, FL
Global Electronic Institute, Inc.,
Capital Heights, MD
Gospel Music on the Move, Inc.,
Des Moines, IA
Grace Economic Development, Inc.,
Opa Locka, FL
Greater Life Community Development
Corporation, Detroit, MI
Greater Light Church of Christ,
Chesterfield, VA
Hareds Helpful Hands, Minneapolis, MN
Herbert Johnson Jr. Ministries, Inc.,
West Palm Beach, FL
2004–30 I.R.B.103July 26, 2004

Historical Society of the Town of East
Bloomfield, East Bloomfield, NY
In His Presence Unto All Nations, Inc.,
Elizabeth, NJ
International Public Management
Network, Salem, OR
J. Hannah Bergin Productions, Inc.,
Austin, TX
Justa Foundation, Austin, TX
Kingsland Park, Inc., Kingsland, TX
Lakeland Village/Wildomar Taxpayer
Association, Wildomar, CA
Leadership Council on Health and Safety,
Inc., Washington, DC
Live Ocean Foundation,
Arroyo Grande, CA
Lone Star Stories, Inc., San Antonio, TX
Long Island Hispanic Chamber of
Commerce Charitable Fund, Inc.,
Kings Park, NY
Los Angeles Academy for Career
Enhancement, Inglewood, CA
Mabryer Foundation, Richvale, CA
Mason Foundation – Seniors With Pets,
Federal Way, WA
Masters Group Foundation, Salem, OR
Mauldin Scholarship Fund Account,
North Little Rock, AR
Messiahs House, Inc., Armonk, NY
Moms and Babes Too MSSP ISSP, Inc.,
Detroit, MI
MSMBC, Inc., East St. Louis, IL
Mujahid Daoud Foundation Building
Islam Masjids, Baton Rouge, LA
Murry League Gospel Ministries,
Ore City, TX
Nashville Hornets Booster Club,
Nashville, NC
New Beginnings Christian Child
Development Center, Inc., Detroit, MI
New Church Ministries, Delano, MN
New Hope Christian Ministries, Inc.,
Grenada, MS
New Life Development Center,
Mobile, AL
New Life in Jesus Ministries, Egan, LA
New York Menopause Foundation,
New York, NY
Nicaraguan Association of Palm Beach
County, Inc., West Palm Beach, FL
Norpoint Soccer Club, Tacoma, WA
NW4 Kids, Hollywood, CA
Park Windsor Developmental
Corporation, Los Angeles, CA
Pasagajo Corporation, Chicago, IL
Pathway to Peace Program, Inc.,
Panama City, FL
Pearl Software Educational Foundation,
Inc., Valley Forge, PA
People’s Help Institute, Inc.,
Melrose Park, PA
Peter Brendsel Fund for Children’s
Literacy, Vienna, VA
Philadelphia Center for Schools of
Choice, Philadelphia, PA
Physics-Intuition-Applications, Inc.,
Woodland Hills, CA
Police Athletic League of Palm Springs,
Palm Springs, FL
Prairie Village Living Center, Inc.,
Orlando, FL
Press Freedom Foundation,
North Miami, FL
Princeton Ministries, Inc., Princeton, NJ
Project Afric Rural Development
International, Inc., Deerfield Beach, FL
Protecting Adult Welfare Foundation,
West Hollywood, CA
Public Lands Equal Access Alliance,
Springville, UT
Rainbow Children’s Home, Inc.,
Dahlonega, GA
REACH Center, Inc., Marietta, GA
Reflections of Youth, Angleton, TX
Repairer of Broken Walls Ministry,
Laredo, TX
Riverside Community Foundation,
Incorporated, Washington, IA
Robbins Community Help Agency, Inc.,
Robbins, IL
Rodney James Shull Memorial
Foundation, Los Olivos, CA
Rxaprescription Anonymous, Inc.,
Powder Springs, GA
Samaritan Foundation, Inc., Pierson, FL
Samaritan Housing Foundation, Inc.,
Atlanta, GA
San Diego Montessori Society, Inc.,
Denver, CO
San Miguel Education Foundation,
San Miguel, CA
Save Haven Hill, West Bloomfield, MI
Saving Our Sons and Daughters,
Woodbridge, VA
Scott Villa Living Center, Inc.,
Orlando, FL
Somali American Development Agency,
Minneapolis, MN
South Atlanta Civic League II, Inc.,
Atlanta, GA
South Carolina Health Initiative, Inc.,
West Columbia, SC
Southern Springs, Inc., Tallahassee, FL
Southwestern Development Corporation,
Memphis, TN
Strength Through Empowering People,
Inc., Fairborn, OH
Supportive Home Management, Inc.,
New Orleans, LA
Swiss Villa Living Center, Inc.,
Orlando, FL
Talbot Lacrosse Association, Inc.,
Eaton, MD
Teen Expressions and Acceptance
Movement, Nashville, TN
Tibetan Medical Foundation, Inc.,
Weslaco, TX
Times of Refreshing Community
Development Corporation,
Southfield, MI
Transafrican Education Network,
Edina, MN
Transitional Services, Inc., Secretary, MD
Tri-County Affordable Housing, Inc.,
N. Lauderdale, FL
Tri-County Native American Substance
Abuse Program, Bakersfield, CA
Trinity Foundation, Inc.,
Montgomery Village, MD
Trinity Housing Development, Inc.,
Atlanta, GA
Two Shores Cultural Institute,
Palo Alto, CA
Up-N-Coming Sports, Inc.,
Los Angeles, CA
USA Tennis Classic, San Bruno, CA
Victory Deliverance Community
Improvement Corporation,
Lakeland, FL
Vishva Gayatri, A Not for Profit
Corporation, Mt. Prospect, IL
Vision Christian Community Services,
Silvercreek, MS
Vision Street Outreach Ministries, Inc.,
Iron City, GA
Vocational Support Services, Inc.,
Wallace, ID
VSP Foundation, Chesnee, SC
Wactor Gardens, Inc., Washington, NC
Waimanalo Canoe Club, Waimanalo, HI
Wealthsmart Institute, Inc.,
White Plains, NY
Wesley African Methodist Episcopal
Charities, Pittsburgh, PA
West Columbus Development Corp.,
Cerro Gordo, NC
Western Area Tennis Association, Inc.,
Fairfield, AL
Wildrose Retreat Center, Inc., Council, ID
World Care, Inc., Grand Junction, CO
World Concern With Compassion, Inc.,
Mineola, NY
July 26, 20041042004–30 I.R.B.

Young Mother of Today Maternity Home
– Shelter, Wichita, KS
Young-Sanders Center Foundation,
Baton Rouge, LA
Youth Cultural Arts Foundation,
Bellflower, CA
Youth Resources, Inc., Salome, AZ
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
2004–30 I.R.B.105July 26, 2004

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
July 26, 2004i2004–30 I.R.B.

Numerical Finding List
1
Bulletins 2004–27 through 2004–30
Announcements:
2004-55, 2004-27 I.R.B.15
2004-56, 2004-28 I.R.B.41
2004-57, 2004-27 I.R.B.15
2004-58, 2004-29 I.R.B.66
2004-59, 2004-30 I.R.B.94
2004-60, 2004-29 I.R.B.43
2004-61, 2004-29 I.R.B.67
2004-62, 2004-30 I.R.B.103
Notices:
2004-41, 2004-28 I.R.B.31
2004-43, 2004-27 I.R.B.10
2004-44, 2004-28 I.R.B.32
2004-45, 2004-28 I.R.B.33
2004-46, 2004-29 I.R.B.46
2004-47, 2004-29 I.R.B.48
2004-48, 2004-30 I.R.B.88
2004-49, 2004-30 I.R.B.88
2004-51, 2004-30 I.R.B.89
Proposed Regulations:
REG-131486-03, 2004-28 I.R.B.36
REG-117307-04, 2004-28 I.R.B.39
Revenue Procedures:
2004-38, 2004-27 I.R.B.10
2004-39, 2004-29 I.R.B.49
2004-40, 2004-29 I.R.B.50
2004-41, 2004-30 I.R.B.90
Revenue Rulings:
2004-63, 2004-27 I.R.B.6
2004-64, 2004-27 I.R.B.7
2004-65, 2004-27 I.R.B.1
2004-66, 2004-27 I.R.B.4
2004-67, 2004-28 I.R.B.28
2004-71, 2004-30 I.R.B.74
2004-72, 2004-30 I.R.B.77
2004-73, 2004-30 I.R.B.80
2004-74, 2004-30 I.R.B.84
Tax Conventions:
2004-60, 2004-29 I.R.B.43
Treasury Decisions:
9131, 2004-27 I.R.B.2
9132, 2004-28 I.R.B.16
9133, 2004-28 I.R.B.25
9134, 2004-30 I.R.B.70
9135, 2004-30 I.R.B.69
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin
2004–26, dated June 28, 2004.
2004–30 I.R.B.iiJuly 26, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–27 through 2004–30
Notices:
98-65
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
Revenue Procedures:
94-64
Superseded by
Rev. Proc. 2004-38, 2004-27 I.R.B.10
96-53
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
2002-9
Modified and amplified by
Rev. Proc. 2004-41, 2004-30 I.R.B.90
Revenue Rulings:
80-7
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
81-100
Clarified and modified by
Rev. Rul. 2004-67, 2004-28 I.R.B.28
85-70
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin 2004–26, dated June 28, 2004.
July 26, 2004iii2004–30 I.R.B.

INDEX
Internal Revenue Bulletins 2004–27 through
2004–30
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Exemption from tax, section 457(b), group or pooled trusts (RR
67) 28,28
Full funding limitations, weighted average interest rate for:
July 2004 (Notice 51) 30,89
Health benefits, defined benefit plan, waiver (RR 65) 27,1
QJSA, relative value, retroactive annuity starting date (Ann 58)
29,66
Qualified retirement plans, age discrimination, pending with-
drawal of proposed regulations (Ann 57) 27,15
ESTATE TAX
Tax reimbursement clause, gift and estate tax consequences (RR
64) 27,7
EXCISE TAX
Advance notice of proposed rulemaking requesting information
about technologies, services, and methods for transmitting
voice and data communications (Ann 61) 29,67
Regulations:
26 CFR 157.5891–1, added; 157.5891–1T, removed;
157.6001–1, added; 157.6001–1T, removed; 157.6011–1,
added; 157.6011–1T, removed; 157.6061–1, added;
157.6061–1T, removed; 157.6065–1, added; 157.6065–1T,
removed; 157.6071–1, added; 157.6071–1T, removed;
157.6081–1, added; 157.6081–1T, removed; 157.6091–1,
added; 157.6091–1T, removed; 157.6151–1, added;
157.6151–1T, removed; 157.6161–1, added; 157.6161–1T,
removed; 157.6165–1, added; 157.6165–1T, removed;
EXCISE TAX—Cont.
602.101, amended; excise tax relating to structured settle-
ment factoring transactions (TD 9134) 30,70
Structured settlement factoring transactions (TD 9134) 30,70
EXEMPT ORGANIZATIONS
List of organizations classifiedas private foundations (Ann 62)
30,103
Revocations (Ann 55) 27,15
Suspension of tax-exempt statusof terrorist organization (Ann
56) 28,41
GIFT TAX
Tax reimbursement clause, gift and estate tax consequences (RR
64) 27,7
INCOME TAX
Adjustment to net unrealized built-in gain (REG–131486–03) 28,
36
Annual income recertification of tenant income under section
42(g)(8)(B), waiver (RP 38) 27,10
APA Program, administration (RP 40) 29,50
Charitable contributions, conservation easements (Notice 41) 28,
31
Corporate reorganizations, stock basis computation (Notice 44)
28,32
Credits, enhanced oil recovery credit, 2004 inflation adjustment
(Notice 49) 30,88
Depreciation:
MACRS, changes in use (TD 9132) 28,16
Of vans and light trucks (TD 9133) 28,25
Frivolous tax returns, U. S. Virgin Islands, meritless filing posi-
tion based on sections 932(c)and 934(b) (Notice 45) 28,33
Gross income, advance payments, year of inclusion (TD 9135)
30,69
Health Coverage Tax Credit (HCTC), information reporting for
advance payments (Notice 47) 29,48
Health Savings Accounts (HSAs), transition relief for state man-
dates (Notice 43) 27,10
Insurance companies, deduction of incentive payments made to
health care providers (RP 41) 30,90
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
July 2004 (RR 66) 27,4
Rates, farm real property, special use value (RR 63) 27,6
Marginal production rates, 2004 (Notice 48) 30,88
Methods of accounting, change in section 481(a) adjustment pe-
riods (TD 9131) 27,2
Offsets of refunds for taxpayers domiciled in:
Arizona or Wisconsin (RR 71) 30,74
California, Idaho, or Louisiana (RR 72) 30,77
Nevada, New Mexico, or Washington (RR 73) 30,80
2004–30 I.R.B.ivJuly 26, 2004

INCOME TAX—Cont.
Texas (RR 74) 30,84
Pre-Filing Agreement program, annual report for CY 2003,
Large and Mid-Size Business Division (LMSB) (Ann 59) 30,
94
Private foundations, organizations now classified as (Ann 62) 30,
103
Proposed Regulations:
26 CFR 1.864–4, revised; stock held by foreign insurance
companies (REG–117307–04) 28,39
26 CFR 1.1374–3, amended; 1.1374–10, revised; adjustment
to net unrealized built-in gain (REG–131486–03) 28,36
Qualified residential rental projects, obligations of states and po-
litical subdivisions (RP 39) 29,49
Qualified transportation fringes, use of a debit card (Notice 46)
29,46
Regulations:
26 CFR 1.61–8, amended; rents and royalties (TD 9135) 30,
69
26 CFR 1.168(i)–0, –1, –1T, amended; 1.168(i)–4, added;
changes in use under section 168(i)(5) (TD 9132) 28,16
26 CFR 1.263A–7, revised; 1.448–1, amended; administra-
tive simplification of section481(a) adjustment periods in
various regulations (TD 9131) 27,2
26 CFR 1.280F–1T, –2T, –3T, –4T, –5T, –6, –7, amended;
1.280F–6T redesignated as 1.280F–6; depreciation of vans
and light trucks (TD 9133) 28,25
Revocations, exempt organizations (Ann 55) 27,15
Stock held by foreign insurance companies (REG–117307–04)
28,39
Tax conventions, guidance on effective dates under Japan treaty
(Ann 60) 29,43
July 26, 2004v2004–30 I.R.B.
*U.S. Government Printing Office: 2004—304–778/60145

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