Internal Revenue Bulletin 2006-4 (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
6-4
January 23, 2006
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9234, page 329.
Final regulations under section 141 of the Code provide rules
in regulations section 1.141–13 for the application of the pri-
vate activity bond tests to bonds issued to refund prior bonds.
Section 1.141–13 was previously reserved when the compre-
hensive private activity bonds were released in 1997. The regu-
lations will generally be effective on the date they are published
in the Federal Register.
T.D. 9235
, page 338.
Final and
temporary regulations under section 7701 of the
Code make
additions to the list of foreign business entities
that are a
lways classified as corporations,persecorporations,
and, ther
efore, are not eligible to check the box to change their
classifi
cation.
REG–107722–00, page 354.
Proposed regulations under section 6655 of the Code provide
guidance to corporations on the requirements to make esti-
mated tax payments and withdraw proposed regulations un-
der section 6655 that the Service issued in 1984. These reg-
ulations reflect changes to the law since 1984 and address
abuses that are inherent in the current regulations. A public
hearing is scheduled for March 15, 2006.
Notice 2006–1, page 347.
Information reporting by organizations that receive
contributions of qualified vehicles.This notice provides
guidance to donee organizations that receive contributions of
qualified vehicles on their reporting obligations under section
170(f)(12)(D) of the Code. It instructs the donee organization
on how, where, and when to report to the IRS the information
contained in the contemporaneous written acknowledgment
that the donee organization provides to the donor. Notice
2005–44 supplemented.
Rev. Proc. 2006–14, page 350.
Use of replacement cost method to value parts inven-
tory of heavy equipment dealers.Heavy equipment deal-
ers may approximate the cost of their heavy equipment parts
inventory using the safe harbor replacement cost method de-
scribed in this revenue procedure. Procedures are provided for
heavy equipment dealers to obtain the automatic consent of
the Commissioner to change to this replacement cost method
of accounting. Rev. Proc. 2002–9 modified and amplified.
Rev. Proc. 2002–17 modified.
EXEMPT ORGANIZATIONS
Notice 2006–1, page 347.
Information reporting by organizations that receive
contributions of qualified vehicles.This notice provides
guidance to donee organizations that receive contributions of
qualified vehicles on their reporting obligations under section
170(f)(12)(D) of the Code. It instructs the donee organization
on how, where, and when to report to the IRS the information
contained in the contemporaneous written acknowledgment
that the donee organization provides to the donor. Notice
2005–44 supplemented.
Announcement 2006–5, page 378.
A list is provided of organizations now classified as private foun-
dations.
(Continued on the next page)
Fi
nding Lists begin on page ii.

TAX CONVENTIONS
Announcement 2006–6, page 340.
This document announces the memorandum of understanding
(MOU) signed by the U.S. and Japanese Competent Authorities
concerning the meaning of the term “investment bank” under
Article 11(3)(c)(i) of the U.S.–Japan income tax treaty.
Announcement
2006–7, page 342.
This document
announces the memorandum of understanding
(MOU) signed b
y the U.S. and Canadian Competent Authorities
concerning th
e principles, guidelines, and procedures to re-
solve disagre
ements about underlying facts and circumstances
in cases that
are referred to them under the mutual agreement
procedure (M
AP) article of the U.S.–Canada income tax treaty.
Announcement 2006–8, page 344.
This document announces the mutual agreement between the
U.S. and Mexican Competent Authorities that specifies the case
in which fiscally transparent entities are entitled to treaty ben-
efits and clarifies the procedures for claiming those benefits
under the U.S.–Mexico income tax treaty.
ADMINISTRA
TIVE
T.D. 9235, p
age 338.
Final and te
mporary regulations under section 7701 of the
Code make a
dditions to the list of foreign business entities
that are al
ways classified as corporations,persecorporations,
and, there
fore, are not eligible to check the box to change their
classific
ation.
Notice 2006–5, page 348.
This notice provides information to payees/filers who receive
payments of interest on qualified education loans who are un-
able to comply with the reporting requirements for loan orig-
ination fees and capitalized interest under section 6050S of
the Code and the regulations for calendar year 2005 returns.
The notice explains that a payee/filer who is unable to comply
with the reporting requirements for loan origination fees and
capitalized interest may request that the Service waive, upon a
showing of reasonable cause under section 6724 and the reg-
ulations, any penalty that might otherwise be imposed under
sections 6721 or 6722 for failure to report these amounts.
Rev. Proc. 2006–14, page 350.
Use of replacement cost method to value parts inven-
tory of heavy equipment dealers.Heavy equipment deal-
ers may approximate the cost of their heavy equipment parts
inventory using the safe harbor replacement cost method de-
scribed in this revenue procedure. Procedures are provided for
heavy equipment dealers to obtain the automatic consent of
the Commissioner to change to this replacement cost method
of accounting. Rev. Proc. 2002–9 modified and amplified.
Rev. Proc. 2002–17 modified.
January 23, 20062006–4 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2006–4 I.R.B.January 23, 2006

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 141.—Private
Activity Bond; Qualified
Bond
26 CFR 1.141–13: Refunding issues.
T.D. 9234
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Obligations of States and
Political Subdivisions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations on the definition of pri-
vate activity bond applicable to tax-ex-
empt bonds issued by State and local gov-
ernments. These regulations affect issuers
of tax-exempt bonds and provide needed
guidance for applying the private activity
bond restrictions to refunding issues.
DATES:Effective Date:These regulations
are effective February 17, 2006.
Applicability Date:For dates of appli-
cability, see §1.141–15(j) of these regula-
tions.
FOR FURTHER INFORMATION
CONTACT: Johanna Som de Cerff, (202)
622–3980 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income Tax
Regulations (26 CFR part 1) under section
141 of the Internal Revenue Code (Code)
by providing rules on the application of the
private activity bond tests to refunding is-
sues. This document also amends the In-
come Tax Regulations under sections 145,
149 and 150 by providing rules on certain
related matters.
On May 14, 2003, the IRS published in
theFederal Registeranoticeofproposed
rulemaking (REG–113007–99, 2003–1
C.B. 1004 [68 FR 25845]) (the proposed
regulations) relating to the matters ad-
dressed in this Treasury decision. A
public hearing on the proposed regula-
tions was scheduled for September 9,
2003. However, thepublic hearing was
cancelled because no requests to speak
were received. Written comments on the
proposed regulations were received. After
consideration of all the written comments,
the proposed regulations are adopted as
revisedbythisTreasurydecision(thefinal
regulations). The revisions are discussed
below.
Explanation of Provisions
A.Introduction
In general, under section 103, gross in-
come does not include the interest on any
State or local bond. However, this ex-
clusion does not apply to private activity
bonds (other than certain qualified bonds).
Section 141(a) defines a private activity
bond as any bond issued as part of an is-
sue that meets either (1) the private busi-
ness use test in section 141(b)(1) and the
private security or payment test in section
141(b)(2) (the private business tests) or (2)
the private loan financing test in section
141(c) (the private business tests and the
private loan financing test are referred to
collectively as the “private activity bond
tests”).
The private business use test is met if
more than 10 percent of the proceeds of an
issue are to be used for any private busi-
ness use. Section 141(b)(6) defines private
business use as use directly or indirectly in
a trade or business that is carried on by any
person other than a governmental unit.
The private security or payment test is
met if the payment of the principal of, or
the interest on, more than 10 percent of
the proceeds of an issue is directly or in-
directly (1) secured by an interest in prop-
erty used or to be used for a private busi-
ness use, (2) secured by an interest in pay-
ments in respect of such property, or (3) to
be derived from payments, whether or not
to the issuer, in respect of property, or bor-
rowedmoney,usedortobeusedforapri-
vate business use.
The private loan financing test is satis-
fied if more than the lesser of $5 million
or 5 percent of the proceeds of an issue are
to be used to make or finance loans to per-
sons other than governmental units.
On January 16, 1997, final regulations
(T.D. 8712, 1997–1 C.B. 15) relating to
the definition of private activity bonds
and related rules under sections 103, 141,
142, 144, 145, 147, 148, and 150 were
published in theFederal Register(62 FR
2275) (the 1997 regulations). Under the
1997 regulations, the amount of private
business use of property financed by an
issue is equal to the average percentage of
private business use of that property dur-
ing a defined measurement period. The
measurement period begins on the later
oftheissuedateoftheissueorthedate
that the property is placed in service and
ends on the earlier of the last date of the
reasonably expected economic life of the
property or the latest maturity date of any
bond of the issue financing the property
(determined without regard to any optional
redemption dates). In general, under the
1997 regulations, the amount of private
security or private payments is determined
by comparing the present value of the
private security or private payments to
the present value of the debt service to be
paid over the term of the issue, using the
bond yield as the discount rate. The 1997
regulations reserve §1.141–13 for rules
regarding the application of the private
business tests and the private loan financ-
ing test to refunding issues.
B.Application of Private Activity Bond
Tests to Refunding Issues
1.In general
The proposed regulations provide that,
in general, a refunding issue and a prior
issue are tested separately under section
141. Thus, the determination of whether
a refunding issue consists of private ac-
tivity bonds generally does not depend on
whether the prior issue consists of private
activity bonds.
Commentators supported this separate
testing principle. The final regulations re-
tain this approach.
2006–4 I.R.B.329January 23, 2006

2.Allocation of proceeds
The proposed regulations provide that,
in applying the private business tests and
the private loan financing test to a refund-
ing issue, the proceeds of the refunding is-
sue are allocated to the same purpose in-
vestments (including any private loan un-
der section 141(c)) and expenditures as the
proceeds of the prior issue.
Comments were not received on this al-
location provision. The final regulations
retain this rule.
3.Measurement of private business use
The proposed regulations generally
provide that the amount of private busi-
ness use of a refunding issue is determined
based on the separate measurement period
for the refunding issue under §1.141–3(g)
(for example, without regard to any private
business use that occurred before the issue
date of the refunding issue). Thus, for in-
stance, if an issuer refunds a taxable bond
or an exempt facility bond, any private
business use of the refinanced facilities
before the issue date of the refunding is-
sue is disregarded in applying the private
business use test to the refunding issue.
In the case of a refunding issue that re-
funds a prior issue of governmental bonds,
however, the amount of private business
use is generally determined based on a
combined measurement period. For pur-
poses of the proposed regulations, a gov-
ernmental bond is any bond that, when is-
sued, purported to be either a governmen-
tal bond, as defined in §1.150–1(b), or a
qualified 501(c)(3) bond, as defined in sec-
tion 145(a). The combined measurement
period is the period that begins on the first
day of the measurement period (as defined
in §1.141–3(g)) for the prior issue (or the
first issue of governmental bonds in the
case of a series of refundings of govern-
mental bonds) and ends on the last day of
the measurement period for the refunding
issue.
As an alternative to the combined mea-
surement period approach, the proposed
regulations permit issuers to measure pri-
vate business use based on the separate
measurement period of the refunding is-
sue, but only if the prior issue of govern-
mental bonds does not meet the private
business use test during a shortened mea-
surement period. The shortened measure-
ment period begins on the first day of the
measurement period of the prior issue (or
the first issue of governmental bonds in the
case of a series of refundings of govern-
mental bonds) and ends on the issue date of
the refunding issue. Whether a prior issue
meets the private business use test during
the shortened measurement period is deter-
mined based on the actual use of proceeds,
without regard to the reasonable expecta-
tions test of §1.141–2(d).
Commentators suggested that the pro-
posed regulations be modified with respect
to governmental bonds: (1) to delete the
shortened measurement period concept;
(2) to provide, absent any evidence to the
contrary, and subject to general anti-abuse
rules, a presumption that an issuer did not
exceed the ten percent private business use
limit; and (3) to specify that the amount
of private business use of the refunding
issue is the amount of private business use
during either the separate measurement
period for the refunding issue or the com-
bined measurement period.
These commentators suggested that a
separate measurement period approach
would not allow an issuer to increase
the amount of private business use without
jeopardizing the tax exemption of the prior
issue, and thus an issuer generally should
be permitted to measure private business
use of a refunding issue using a separate
measurement period. Nevertheless, these
commentators suggested that the regula-
tions include a general anti-abuse rule.
They noted, for example, that a separate
measurement period approach could per-
mit an issuer to have an additional ten
percent of private business use in con-
nectionwitharefundingissueafterthe
period of limitations for the prior bonds
has run. These commentators suggested
that, in such a situation, it would be fair
to consider the refunding issue to be an
abuse if the issuer is deliberately trying to
exploit the private business use limit.
The final regulations retain the basic ap-
proach of the proposed regulations to mea-
suring private business use. The final reg-
ulations do not adopt the suggestions to
delete the shortened measurement period
concept and to provide that private busi-
ness use may be measured during either a
separate or combinedmeasurement period.
These suggestions are not adopted because
they could result in more private business
use than otherwise would be permitted af-
ter the expiration of the period of limita-
tions for the prior issue.
The final regulations do not adopt the
suggestion to create a presumption that
the private business use limit was not ex-
ceeded with respect to prior bonds. It is
not clear such a presumption is warranted
in all cases.
The final regulations also do not adopt
the suggestion to add an anti-abuse rule.
The IRS and Treasury Department have
concluded that the bright-line rule in
the proposed regulations for determining
when issuers must apply a combined mea-
surement period and when issuers may
apply either a combined measurement pe-
riod or a separate measurement period is
an appropriate methodology for measur-
ing the private business use of a refunding
issue and provides more administrative
certainty than would be provided by an
anti-abuse rule.
Commentators expressed concern re-
garding an issuer’s ability to establish the
amount of private business use during a
combined measurement period if the pe-
riod begins a significant amount of time
before the refunding bonds are issued.
They noted that, in some cases, the re-
funded bonds may have been issued as
many as twenty years or more before the
refunding bonds are issued. These com-
mentators stated that document retention
policies vary by issuer and retaining or
locating the necessary information over
such long periods of time may be difficult.
The final regulations apply prospec-
tively and only to refunding bonds that
are subject to the 1997 regulations. In
general, under §1.141–15, the 1997 reg-
ulations apply to refunding bonds only
if, among other requirements, (1) the re-
funded bonds were originally issued on
or after May 16, 1997, (2) the weighted
average maturity of the refunding bonds is
longer than the weighted average maturity
of the refunded bonds, or (3) the issuer
chooses to apply the 1997 regulations to
the refunding bonds. Thus, the final reg-
ulations will not apply to any refunding
of bonds originally issued before May
16, 1997, unless the issuer extends the
weighted average maturity of the prior
bonds or otherwise chooses to have the
1997 regulations apply to the refunding
bonds (or an earlier issue of bonds).
In addition, to address commentators’
concerns, the final regulations provide
January 23, 20063302006–4 I.R.B.

transitional relief for refundings of bonds
originally issued before May 16, 1997 (the
effective date of the 1997 regulations).
Specifically, the final regulations provide
that, if the prior issue (or, in the case
of a series of refundings of governmen-
tal bonds, the first issue of governmental
bonds in the series) was issued before May
16, 1997, then the issuer, at its option, may
treat the combined measurement period
as beginning on the date (the transition
date) that is the earlier of (1) December
19, 2005, or (2) the first date on which the
prior issue (or an earlier issue in the case
of a series of refundings of governmental
bonds) became subject to the 1997 regula-
tions. This transitional relief, which was
not contained in the proposed regulations,
has been added to the final regulations in
response to concerns expressed by com-
mentators regarding an issuer’s ability
to establish the amount of private busi-
ness use during a combined measurement
period if the period begins a significant
amount of time before the refunding bonds
are issued.
Some commentators requested guid-
ance on how the private business tests
apply to the shortened and combined mea-
surement periods for refundings of bonds
originally issued before the effective date
of the Tax Reform Act of 1986, 100 Stat.
2085 (the 1986 Act), if the refunding does
not qualify for transitional relief under the
1986 Act or prior law. Specifically, com-
mentators requested guidance on whether
(1) the ten-percent private business use
limitation under the 1986 Act or (2) the
applicable private business use limitation
under prior law (for example, the 25-per-
cent limitation under the Internal Revenue
Code of 1954) applies in the case of a
non-transitioned refunding of a bond is-
sued under law in effect prior to the 1986
Act. The final regulations clarify in an ex-
ample that the 1986 Act limitations apply
to the shortened and combined measure-
ment periods. The issuer, however, may
treat these periods as beginning on the
transition date described above.
4.Measurement of private security and
private payments
Under the proposed regulations, if the
amount of private business use is deter-
mined based on the separate measurement
period for the refunding issue, then the
amount of private security and private
payments allocable to the refunding issue
is determined under §1.141–4 by treating
the refunding issue as a separate issue. On
the other hand, if the amount of private
business use is determined based on a
combined measurement period, then the
amount of private security and private pay-
ments allocable to the refunding issue is
determined under §1.141–4 by treating the
refunding issue and all earlier issues taken
into account in determining the combined
measurement period as a combined issue.
The proposed regulations contain specific
rules for determining the present value of
the debt service on, and the private secu-
rity and private payments allocable to, a
combined issue.
Commentators requested clarification
regarding how the private security or pay-
ment test applies under the combined issue
methodology in the case of a refunding
of only a portion of the original principal
amount of a prior issue. The final regula-
tions clarify that, in these circumstances,
(1) the refunded portion of the prior issue
is treated as a separate issue and (2) any
private security or private payments with
respect to the prior issue are allocated rat-
ably between the combined issue and the
unrefunded portion of the prior issue in a
consistent manner based on relative debt
service.
The proposed regulations also permit
an issuer to use the yield on a prior issue
of governmental bonds to determine the
present value of private security or private
payments under arrangements that were
not entered into in contemplation of the re-
funding issue. For this purpose, any ar-
rangement that was entered into more than
oneyearbeforetheissuedateofthere-
funding issue will be treated as not entered
into in contemplation of the refunding is-
sue.
Comments were not received on this
special rule for arrangements not entered
into in contemplation of the refunding is-
sue. The final regulations retain this pro-
vision.
5.Multipurpose issue allocations
Section 1.148–9(h) permits an issuer to
use a reasonable, consistently applied allo-
cation method to treat the portion of a mul-
tipurpose issue allocable to a separate pur-
pose as a separate issue for certain of the
arbitrage provisions of section 148. Sec-
tion 1.141–13(d) of the proposed regula-
tions allows an issuer to apply §1.148–9(h)
to a multipurpose issue for certain pur-
poses under section 141. An allocation
will not be reasonable for this purpose if it
achieves more favorable results under sec-
tion 141 than could be achieved with ac-
tual separate issues. In addition, alloca-
tions under the proposed regulations and
§1.148–9(h) must be consistent for pur-
poses of sections 141 and 148. The pro-
posed regulations do not permit allocations
for purposes of section 141(c)(1) (relating
to the private loan financing test) or sec-
tion 141(d)(1) (relating to certain restric-
tions on acquiring nongovernmental out-
put property).
Commentators supported the multipur-
pose allocation provisions in the proposed
regulations. The final regulations retain
those provisions. Commentators also re-
quested clarification that an allocation
under §1.141–13(d) may be made at any
time. The final regulations provide that
an allocation under §1.141–13(d) may be
made at any time, but once made may not
be changed. The final regulations also pro-
vide that the issue to be allocated and each
of the separate issues under the allocation
must consist of one or more tax-exempt
bonds. Thus, an allocation of a multi-
purpose issue into two or more separate
issues is not permitted under §1.141–13(d)
if, at the time of the allocation, the issue to
be allocated or any of the separate issues
under the allocation consists of taxable
private activity bonds.
6.Application of reasonable expectations
test to certain refunding bonds
Section 1.141–2(d) provides that an is-
sue consists of private activity bonds if the
issuer (1) reasonably expects, as of the is-
sue date, that the issue will meet either
the private business tests or the private
loan financing test, or (2) takes a deliberate
action, subsequent to the issue date, that
causes the conditions of either the private
business tests or the private loan financing
test to be satisfied. Section 1.141–2(d)(3)
provides, in general, that a deliberate ac-
tion is any action taken by the issuer that is
within its control.
The proposed regulations provide that
an action that would otherwise cause a re-
funding issue to satisfy the private busi-
2006–4 I.R.B.331January 23, 2006

ness tests or the private loan financing test
is not taken into account under the reason-
able expectations test of §1.141–2(d) if (1)
the action is not a deliberate action within
the meaning of §1.141–2(d)(3), and (2) the
weighted average maturity of the refund-
ing bonds is not greater than the remain-
ing weighted average maturity of the prior
bonds.
Commentators suggested that the lim-
itation on the weighted average maturity
of the refunding bonds to the remaining
weighted average maturity of the prior
bonds could penalize issuers for issuing
shorter-term obligations initially, or pro-
vide an incentive to issue longer-term
obligations initially. These commentators
requested that the weighted average matu-
rity of the refunding bonds be limited only
to 120 percent of the weighted average
reasonably expected economic life of the
property financed by the prior bonds. The
final regulations amend this provision to
provide that the weighted average matu-
rity of the refunding bonds may not exceed
the weighted average reasonably expected
economic life of the property financed by
the prior bonds.
Commentators also requested that an
example illustrating this provision be
added to the regulations. The final regula-
tions add such an example.
7.Refundings of certain general
obligation bonds
Section 1.141–2(d)(5) provides that the
determination of whether bonds of an is-
sue are private activity bonds may be based
solely on the issuer’s reasonable expec-
tations as of the issue date (and not on
whether there are any subsequent deliber-
ate actions) if, among other requirements,
the issue is an issue of general obligation
bonds of a general purpose governmental
unit that finances at least 25 separate pur-
poses.
Commentators suggested that a refund-
ing issue should not consist of private ac-
tivity bonds if the prior issue meets the re-
quirements of §1.141–2(d)(5). The final
regulations adopt this comment.
C.Treatment of Issuance Costs Financed
by Prior Issue of Qualified 501(c)(3)
Bonds
Under the 1997 regulations, the use of
proceeds of an issue of qualified 501(c)(3)
bonds to pay issuance costs of the issue is
treated as a private business use. The pro-
posed regulations provide that, solely for
purposes of applying the private business
use test to a refunding issue, the use of pro-
ceeds of the prior issue (or any earlier issue
in a series of refundings) to pay issuance
costsofthepriorissue(ortheearlierissue)
is treated as a government use.
Comments were not received on this
provision. The final regulations retain this
rule.
D.Limitation on Advance Refundings of
Private Activity Bonds
Under section 149(d)(2), interest on a
bond is not excluded from gross income
if any portion of the issue of which the
bond is a part is issued to advance refund
a private activity bond (other than a quali-
fied 501(c)(3) bond). The proposed regu-
lations provide that, for purposes of sec-
tion 149(d)(2), the term private activity
bond includes a qualified bond described
in section 141(e) (other than a qualified
501(c)(3) bond), regardless of whether the
refunding issue consists of private activity
bonds under the proposed regulations. The
proposed regulations also provide that, for
purposes of section 149(d)(2), the term pri-
vate activity bond does not include a tax-
able bond. Section 1.150–1(b) definestax-
able bondas any obligation the interest on
which is not excludable from gross income
under section 103.
Commentators recommended that the
regulations be modified to permit a tax-ex-
empt private activity bond to be advance
refunded by a governmental bond if the
nongovernmental entity’s participation in
the financing has been terminated and the
only beneficiary of the financing is the
governmental unit. Based on the plain lan-
guage of section 149(d)(2) and the policies
underlying that Code provision, the final
regulations do not adopt this comment.
Effective Date
The final regulations apply to bonds
that are (1) sold on or after February 17,
2006, and (2) subject to the 1997 regula-
tions.
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.
Drafting Information
The principal authors of these regu-
lations are Johanna Som de Cerff and
Laura W. Lederman, Office of Chief
Counsel (Tax-Exempt and Government
Entities), Internal Revenue Service and
Stephen J. Watson, Office of Tax Legisla-
tive Counsel, Department of the Treasury.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.141–0 is amended
by adding entries to the table in numerical
order for §§1.141–13 and 1.141–15(j) to
read as follows:
§1.141–0 Table of contents
*****
§1.141–13 Refunding issues.
(a) In general.
(b) Application of private business use
test and private loan financing test.
(1) Allocation of proceeds.
(2) Determination of amount of private
business use.
(c) Application of private security or
payment test.
(1) Separate issue treatment.
(2) Combined issue treatment.
(3) Special rule for arrangements not
enteredintoincontemplationofthere-
funding issue.
January 23, 20063322006–4 I.R.B.

(d) Multipurpose issue allocations.
(1) In general.
(2) Exceptions.
(e) Application of reasonable expecta-
tions test to certain refunding bonds.
(f) Special rule for refundings of certain
general obligation bonds.
(g) Examples.
*****
§1.141–15 Effective dates.
*****
(j) Effective dates for certain regula-
tions relating to refundings.
*****
Par. 3. In §1.141–1, paragraph (b) is
amended by revising the definition of gov-
ernmental bond to read as follows:
§1.141–1 Definitions and rules of general
application.
*****
(b) * * *
Governmental bondhas the same mean-
ing as in §1.150–1(b), except that, for pur-
poses of §1.141–13, governmental bond is
defined in §1.141–13(b)(2)(iv).
*****
Par. 4. Section 1.141–13 is added to
read as follows:
§1.141–13 Refunding issues
(a)In general. Except as provided in
this section, a refunding issue and a prior
issue are tested separately under section
141. Thus, the determination of whether
a refunding issue consists of private ac-
tivity bonds generally does not depend on
whether the prior issue consists of private
activity bonds.
(b)Application of private business use
test and private loan financing test—(1)
Allocation of proceeds. In applying the
private business use test and the private
loan financing test to a refunding issue, the
proceeds of the refunding issue are allo-
cated to the same expenditures and pur-
pose investments as the proceeds of the
prior issue.
(2)Determination of amount of private
business use—(i)In general. Except as
provided in paragraph (b)(2)(ii) of this sec-
tion, the amount of private business use
of a refunding issue is determined under
§1.141–3(g), based on the measurement
period for that issue (for example, without
regard to any private business use that oc-
curred prior to the issue date of the refund-
ing issue).
(ii)Refundings of governmental bonds.
In applying the private business use test to
a refunding issue that refunds a prior issue
of governmental bonds, the amount of pri-
vate business use of the refunding issue is
the amount of private business use—
(A) During the combined measurement
period; or
(B) At the option of the issuer, during
the period described in paragraph (b)(2)(i)
of this section, but only if, without re-
gard to the reasonable expectations test of
§1.141–2(d), the prior issue does not sat-
isfy the private business use test, based on
a measurement period that begins on the
first day of the combined measurement pe-
riod and ends on the issue date of the re-
funding issue.
(iii)Combined measurement pe-
riod—(A)In general. Except as pro-
vided in paragraph (b)(2)(iii)(B) of this
section, thecombined measurement pe-
riodis the period that begins on the first
day of the measurement period (as de-
fined in §1.141–3(g)) for the prior issue
(or, in the case of a series of refundings of
governmental bonds, the first issue of gov-
ernmental bonds in the series) and ends on
the last day of the measurement period for
the refunding issue.
(B)Transition rule for refundings of
bonds originally issued before May 16,
1997. If the prior issue (or, in the case
of a series of refundings of governmen-
tal bonds, the first issue of governmen-
tal bonds in the series) was issued before
May 16, 1997, then the issuer, at its op-
tion, may treat the combined measurement
period as beginning on the date (the tran-
sition date) that is the earlier of Decem-
ber 19, 2005, or the first date on which
the prior issue (or an earlier issue in the
case of a series of refundings of govern-
mental bonds) became subject to the 1997
regulations (as defined in §1.141–15(b)).
If the issuer treats the combined measure-
ment period as beginning on the transi-
tion date in accordance with this paragraph
(b)(2)(iii)(B), then paragraph (c)(2) of this
section shall be applied by treating the
transition date as the issue date of the earli-
est issue, by treating the bonds as reissued
on the transition date at an issue price equal
to the value of the bonds (as determined
under § 1.148–4(e)) on that date, and by
disregarding any private security or private
payments before the transition date.
(iv)Governmental bond. For purposes
of this section, the termgovernmental
bondmeans any bond that, when issued,
purported to be a governmental bond,
as defined in §1.150–1(b), or a quali-
fied 501(c)(3) bond, as defined in section
145(a).
(v)Special rule for refundings of qual-
ified 501(c)(3) bonds with governmental
bonds. For purposes of applying this para-
graph (b)(2) to a refunding issue that re-
funds a qualified 501(c)(3) bond, any use
of the property refinanced by the refunding
issuebeforetheissuedateoftherefunding
issue by a 501(c)(3) organization with re-
spect to its activities that do not constitute
an unrelated trade or business under sec-
tion 513(a) is treated as government use.
(c)Application of private security or
payment test—(1)Separate issue treat-
ment. If the amount of private business
useofarefundingissueisdetermined
based on the measurement period for
that issue in accordance with paragraph
(b)(2)(i) or (b)(2)(ii)(B) of this section,
then the amount of private security and
private payments allocable to the refund-
ing issue is determined under §1.141–4 by
treating the refunding issue as a separate
issue.
(2)Combined issue treatment.Ifthe
amount of private business use of a refund-
ing issue is determined based on the com-
bined measurement period for that issue
in accordance with paragraph (b)(2)(ii)(A)
of this section, then the amount of pri-
vate security and private payments alloca-
ble to the refunding issue is determined un-
der §1.141–4 by treating the refunding is-
sue and all earlier issues taken into account
in determining the combined measurement
period as a combined issue. For this pur-
pose, the present value of the private se-
curity and private payments is compared
to the present value of the debt service on
the combined issue (other than debt service
paid with proceeds of any refunding bond).
Present values are computed as of the is-
sue date of the earliest issue taken into ac-
count in determining the combined mea-
surement period (the earliest issue). Ex-
cept as provided in paragraph (c)(3) of this
section, present values are determined by
using the yield on the combined issue as
2006–4 I.R.B.333January 23, 2006

the discount rate. The yield on the com-
bined issue is determined by taking into ac-
count payments on the refunding issue and
all earlier issues taken into account in de-
termining the combined measurement pe-
riod (other than payments made with pro-
ceeds of any refunding bond), and based
on the issue price of the earliest issue. In
the case of a refunding of only a portion of
the original principal amount of a prior is-
sue, the refunded portion of the prior issue
is treated as a separate issue and any pri-
vate security or private payments with re-
spect to the prior issue are allocated ratably
between the combined issue and the unre-
funded portion of the prior issue in a con-
sistent manner based on relative debt ser-
vice. See paragraph (b)(2)(iii)(B) of this
section for special rules relating to certain
refundings of governmental bonds origi-
nally issued before May 16, 1997.
(3)Special rule for arrangements not
entered into in contemplation of the re-
funding issue. In applying the private se-
curity or payment test to a refunding issue
that refunds a prior issue of governmental
bonds, the issuer may use the yield on the
prior issue to determine the present value
of private security and private payments
under arrangements that were not entered
into in contemplation of the refunding is-
sue. For this purpose, any arrangement
that was entered into more than 1 year be-
fore the issue date of the refunding issue
is treated as not entered into in contempla-
tion of the refunding issue.
(d)Multipurpose issue allocations—(1)
In general. For purposes of section 141,
unless the context clearly requires other-
wise, §1.148–9(h) applies to allocations
of multipurpose issues (as defined in
§1.148–1(b)), including allocations in-
volving the refunding purposes of the
issue. An allocation under this paragraph
(d) may be made at any time, but once
made may not be changed. An allocation
is not reasonable under this paragraph (d)
if it achieves more favorable results under
section 141 than could be achieved with
actual separate issues. The issue to be
allocated and each of the separate issues
under the allocation must consist of one or
more tax-exempt bonds. Allocations made
under this paragraph (d) and §1.148–9(h)
must be consistent for purposes of section
141 and section 148.
(2)Exceptions. This paragraph (d)
does not apply for purposes of sections
141(c)(1) and 141(d)(1).
(e)Application of reasonable expecta-
tions test to certain refunding bonds.An
action that would otherwise cause a re-
funding issue to satisfy the private busi-
ness tests or the private loan financing test
is not taken into account under the reason-
able expectations test of §1.141–2(d) if—
(1) The action is not a deliberate action
within the meaning of §1.141–2(d)(3); and
(2) The weighted average maturity of
the refunding bonds is not greater than
the weighted average reasonably expected
economic life of the property financed by
the prior bonds.
(f)Special rule for refundings of certain
general obligation bonds. Notwithstand-
ing any other provision of this section, a
refunding issue does not consist of private
activity bonds if—
(1) The prior issue meets the require-
ments of §1.141–2(d)(5) (relating to cer-
tain general obligation bond programs that
finance a large number of separate pur-
poses); or
(2) The refunded portion of the prior
issue is part of a series of refundings of
all or a portion of an issue that meets the
requirements of §1.141–2(d)(5).
(g)Examples. The following examples
illustrate the application of this section:
Example 1.Measuring private business use.
In 2002, Authority A issues tax-exempt bonds
that mature in 2032 to acquire an office building.
The measurement period for the 2002 bonds under
§1.141–3(g) is 30 years. At the time A acquires the
building, it enters into a 10-year lease with a non-
governmental person under which the nongovern-
mental person will use 5 percent of the building in
its trade or business during each year of the lease
term. In 2007, A issues bonds to refund the 2002
bonds. The 2007 bonds mature on the same date
as the 2002 bonds and have a measurement period
of 25 years under §1.141–3(g). Under paragraph
(b)(2)(ii)(A) of this section, the amount of private
business use of the proceeds of the 2007 bonds is
1.67 percent, which equals the amount of private
business use during the combined measurement
period (5 percent of 1/3rd of the 30-year combined
measurement period). In addition, the 2002 bonds do
not satisfy the private business use test, based on a
measurement period beginning on the first day of the
measurement period for the 2002 bonds and ending
on the issue date of the 2007 bonds, because only 5
percent of the proceeds of the 2002 bonds are used
for a private business use during that period. Thus,
under paragraph (b)(2)(ii)(B) of this section, A may
treat the amount of private business use of the 2007
bonds as 1 percent (5 percent of 1/5th of the 25-year
measurement period for the 2007 bonds). The 2007
bonds do not satisfy the private business use test.
Example 2.Combined issue yield computation.
(i) On January 1, 2000, County B issues 20-year
bonds to finance the acquisition of a municipal au-
ditorium. The 2000 bonds have a yield of 7.7500
percent, compounded annually, and an issue price
and par amount of $100 million. The debt service
payments on the 2000 bonds are as follows:
DateDebt Service
1/1/01
$9,996,470
1/1/029,996,470
1/1/039,996,470
1/1/049,996,470
1/1/05
9,996,470
1/1/069,996,470
1/1/079,996,470
1/1/089,996,470
1/1/099,996,470
1/1/109,996,470
1/1/119,996,470
1/1/129,996,470
1/1/139,996,470
1/1/149,996,470
1/1/15
9,996,470
1/1/169,996,470
January 23, 20063342006–4 I.R.B.

DateDebt Service
1/1/179,996,470
1/1/189,996,470
1/1/199,996,470
1/1/209,996,470
$199,929,400
(ii) On January 1, 2005, B issues 15-year bonds to
refund all of the outstanding 2000 bonds maturing af-
ter January 1, 2005 (in the aggregate principal amount
of $86,500,000). The 2005 bonds have a yield of
6.0000 percent, compounded annually, and an issue
price and par amount of $89,500,000. The debt ser-
vice payments on the 2005 bonds are as follows:
DateDebt Service
1/1/06
$9,215,167
1/1/07
9,215,167
1/1/08
9,215,167
1/1/09
9,215,167
1/1/10
9,215,167
1/1/11
9,215,167
1/1/12
9,215,167
1/1/13
9,215,167
1/1/14
9,215,167
1/1/159,215,167
1/1/16
9,215,167
1/1/17
9,215,167
1/1/18
9,215,167
1/1/19
9,215,167
1/1/20
9,215,167
$138,227,511
(iii) In accordance with §1.141–15(h), B chooses
to apply §1.141–13 (together with the other provi-
sions set forth in §1.141–15(h)), to the 2005 bonds.
For purposes of determining the amount of private
security and private payments with respect to the
2005 bonds, the 2005 bonds and the refunded portion
of the 2000 bonds are treated as a combined issue
under paragraph (c)(2) of this section. The yield on
the combined issue is determined in accordance with
§§1.148–4, 1.141–4(b)(2)(iii) and 1.141–13(c)(2).
Under this methodology, the yield on the combined
issue is 7.1062 percent per year compounded annu-
ally, illustrated as follows:
Date
Previous Debt
Serv
ice on
Refunded
Portion of
Prio
r Issue
Refunding
Debt
Service
Total Debt
Serv
ice
Present Value
on 1/
1/00
1/1/0
0
($86
,500,000.00)
1/1/01
$6,689,793$6,689,793
6,245,945.33
1/1/026,689,7936,689,793
5,831,545.62
1/1/
03
6,68
9,793
6,68
9,793
5,4
44,640.09
1/1/046,689,7936,689,793
5,083,404.58
1/1/05
6,689,7936,689,793
4,746,135.95
1/1
/06
$9,
215,167
9,2
15,167
6,1
04,023.84
1/1/07
9,215,1679,215,1675,699,040.20
1/1/08
9,215,1679,215,1675,320,926.00
1/
1/09
9,
215,167
9,
215,167
4,
967,898.55
1/1/10
9,215,1679,215,167
4,638,293.40
1/1/11
9,215,1679,215,1674,330,556.57
1
/1/12
9
,215,167
9
,215,167
4
,043,237.15
1/1/13
9,215,1679,215,1673,774,980.51
1/1/14
9,215,1679,215,1673,524,521.90
1/1/159,215,1679,215,167
3
,290,680.46
1/1/16
9,215,1679,215,1673,072,353.70
1/1/17
9,215,1679,215,1672,868,512.26
1/1/18
9,215,1679,215,1672,678,195.09
1/1/19
9,215,1679,215,1672,500,504.89
2006–4 I.R.B.335January 23, 2006

Date
Previous Debt
Service on
Refunded
Portion of
Prior Issue
Refunding
Debt Service
Total Debt
Service
Present Value
on 1/1/00
1/1/20
9,215,1679,215,167
2,334,603.90
$33,448,965$138,227,511$171,676,476
0.00
Example 3.Determination of private payments
allocable to combined issue. The facts are the same
as inExample 2. In addition, on January 1, 2001, B
enters into a contract with a nongovernmental person
for the use of the auditorium. The contract results in
a private payment in the amount of $500,000 on each
January 1 beginning on January 1, 2001, and ending
on January 1, 2020. Under paragraph (c)(2) of this
section, the amount of the private payments allocable
to the combined issue is determined by treating the re-
funded portion of the 2000 bonds ($86,500,000 prin-
cipal amount) as a separate issue, and by allocating
the total private payments ratably between the com-
bined issue and the unrefunded portion of the 2000
bonds ($13,500,000 principal amount) based on rela-
tive debt service, as follows:
Date
Private
Payments
Debt Service on
Unrefunded Portion of
Prior Issue
Debt Service on
Combined Issue
Percentage of Private
Payments Allocable to
Combined Issue
Amount of Private Payments
Allocable to Combined Issue
1/1/01
$500,000$3,306,677$6,689,793
66.92%
$334,608
1/1/02
500,000
3,306,6776,689,79366.92334,608
1/1/03
500,000
3,306,6776,689,79366.92334,608
1/1/04
500,000
3,306,6776,689,79366.92334,608
1/1/05500,000
3,306,6776,689,79366.92334,608
1/1/06
500,0009,215,167
100.00
500,000
1/1/07
500,0009,215,167
100.00
500,000
1/1/08
500,0009,215,167
100.00
500,000
1/1/09
500,0009,215,167
100.00
500,000
1/1/10
500,0009,215,167
100.00
500,000
1/1/11
500,0009,215,167
100.00
500,000
1/1/12
500,0009,215,167
100.00
500,000
1/1/13
500,0009,215,167
100.00
500,000
1/1/14
500,0009,215,167
100.00
500,000
1/1/15500,0009,215,167
100.00
500,000
1/1/16
500,0009,215,167
100.00
500,000
1/1/17
500,0009,215,167
100.00
500,000
1/1/18
500,0009,215,167
100.00
500,000
1/1/19
500,0009,215,167
100.00
500,000
1/1/20
500,0009,215,167
100.00
500,000
$10,000,000$16,533,385$171,676,476$9,173,039
Ex
ample 4.Refunding taxable bonds and quali-
fied bonds. (i) In 1999, City C issues taxable bonds to
finance the construction of a facility for the furnishing
o
f water. The bonds are secured by revenues from the
facility. The facility is managed pursuant to a man-
agement contract with a nongovernmental person that
g
ives rise to private business use. In 2007, C termi-
nates the management contract and takes over the op-
eration of the facility. In 2009, C issues bonds to re-
fund the 1999 bonds. On the issue date of the 2009
bonds, C reasonably expects that the facility will not
be used for a private business use during the term of
the 2009 bonds. In addition, during the term of the
2009 bonds, the facility is not used for a private busi-
ness use. Under paragraph (b)(2)(i) of this section,
the 2009 bonds do not satisfy the private business
use test because the amount of private business use
is based on the measurement period for those bonds
and therefore does not take into account any private
business use that occurredpursuant to the manage-
ment contract.
(ii) The facts are the same as in paragraph (i) of
thisExample 4, except that the 1999 bonds are issued
as
exempt facility bonds under section 142(a)(4). The
2009 bonds do not satisfy the private business use
test.
E
xample 5.Multipurpose issue. In 2001, State
D issues bonds to finance the construction of two of-
fice buildings, Building 1 and Building 2. D expends
a
n equal amount of the proceeds on each building.
D enters into arrangements that result in 8 percent of
Building 1 and 12 percent of Building 2 being used
f
or a private business use during the measurement pe-
riod under §1.141–3(g). These arrangements result
in a total of 10 percent of the proceeds of the 2001
bonds being used for a private business use. In 2006,
D purports to allocate, under paragraph (d) of this sec-
tion, an equal amount of the outstanding 2001 bonds
to Building 1 and Building 2. D also enters into an-
other private business use arrangement with respect
to Building 1 that results in an additional 2 percent
(and a total of 10 percent) of Building 1 being used
for a private business use during the measurement pe-
riod. An allocation is not reasonable under paragraph
(d) of this section if it achieves more favorable re-
sults under section 141 than could be achieved with
ac
tual separate issues. D’s allocation is unreasonable
because, if permitted, it would result in more than 10
percent of the proceeds of the 2001 bonds being used
f
or a private business use.
Example 6.Non-deliberate action. In 1998, City
E issues bonds to finance the purchase of land and
c
onstruction of a building (the prior bonds). On the
issue date of the prior bonds, E reasonably expects
that it will be the sole user of the financed property
f
or the entire term of the bonds. In 2003, the federal
government acquires the financed property in a con-
demnation action. In 2006, E issues bonds to refund
the prior bonds (the refunding bonds). The weighted
average maturity of the refunding bonds is not greater
than the reasonably expected economic life of the fi-
nanced property. In general, under §1.141–2(d) and
this section, reasonable expectations must be sepa-
rately tested on the issue date of a refunding issue.
Under paragraph (e) of this section, however, the con-
demnation action is not taken into account in apply-
ing the reasonable expectations test to the refunding
bonds because the condemnation action is not a de-
liberate action within the meaning of §1.141–2(d)(3)
January 23, 20063362006–4 I.R.B.

and the weighted average maturity of the refunding
bonds is not greater than the weighted average rea-
sonably expected economic life of the property fi-
nanced by the prior bonds. Thus, the condemnation
action does not cause the refunding bonds to be pri-
vate activity bonds.
Example 7.Non-transitioned refunding of bonds
subject to 1954 Code. In 1985, County F issues bonds
to finance a court house. The 1985 bonds are sub-
ject to the provisions of the Internal Revenue Code
of 1954. In 2006, F issues bonds to refund all of the
outstanding 1985 bonds. The weighted average ma-
turity of the 2006 bonds is longer than the remaining
weighted average maturity of the 1985 bonds. In ad-
dition, the 2006 bonds do not satisfy any transitional
rule for refundings in the Tax Reform Act of 1986,
100 Stat. 2085 (1986). Section 141 and this section
apply to determine whether the 2006 bonds are pri-
vate activity bonds including whether, for purposes
of §1.141–13(b)(2)(ii)(B), the 1985 bonds satisfy the
private business use testbased on a measurement pe-
riod that begins on the first day of the combined mea-
surement period for the 2006 bonds and ends on the
issue date of the 2006 bonds.
Par. 5. Section 1.141–15 is amended
by revising paragraphs (b)(1), (c), (d) and
(h) and adding paragraph (j) to read as fol-
lows:
§1.141–15 Effective dates.
*****
(b)Effective dates—(1)In general.Ex-
cept as otherwise provided in this section,
§§1.141–0 through 1.141–6(a), 1.141–9
through 1.141–12, 1.141–14, 1.145–1
through 1.145–2(c), and the definition of
bond documents contained in §1.150–1(b)
(the 1997 regulations) apply to bonds is-
sued on or after May 16, 1997, that are
subject to section 1301 of the Tax Reform
Act of 1986 (100 Stat. 2602).
*****
(c)Refunding bonds. Except as oth-
erwise provided in this section, the 1997
regulations (defined in paragraph (b)(1) of
this section) do not apply to any bonds is-
sued on or after May 16, 1997, to refund a
bond to which those regulations do not ap-
ply unless—
(1) The refunding bonds are subject to
section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of
the refunding bonds is longer than—
(A) The weighted average maturity of
the refunded bonds; or
(B) In the case of a short-term obliga-
tion that the issuer reasonably expects to
refund with a long-term financing (such as
a bond anticipation note), 120 percent of
the weighted average reasonably expected
economic life of the facilities financed; or
(ii) A principal purpose for the issuance
of the refunding bonds is to make one or
more new conduit loans.
(d)Permissive application of regula-
tions. Except as provided in paragraph (e)
of this section, the 1997 regulations (de-
fined in paragraph (b)(1) of this section)
may be applied in whole, but not in part,
to actions taken before February 23, 1998,
with respect to—
(1) Bonds that are outstanding on May
16, 1997, and subject to section 141; or
(2) Refunding bonds issued on or after
May 16, 1997, that are subject to 141.
*****
(h)Permissive retroactive application.
Except as provided in paragraphs (d), (e)
or (i) of this section, §§1.141–1 through
1.141–6(a), 1.141–7 through 1.141–14,
1.145–1 through 1.145–2, 1.149(d)–1(g),
1.150–1(a)(3), the definition of bond doc-
uments contained in §1.150–1(b) and
§1.150–1(c)(3)(ii) may be applied by is-
suers in whole, but not in part, to—
(1) Outstanding bonds that are sold be-
fore February 17, 2006, and subject to sec-
tion 141; or
(2) Refunding bonds that are sold on
or after February 17, 2006, and subject to
section 141.
*****
(j)Effective dates for certain regu-
lations relating to refundings. Except
as otherwise provided in this section,
§§1.141–13, 1.145–2(d), 1.149(d)–1(g),
1.150–1(a)(3) and 1.150–1(c)(3)(ii) apply
to bonds that are sold on or after February
17, 2006, and that are subject to the 1997
regulations (defined in paragraph (b)(1) of
this section).
Par. 6. Section 1.145–0 is amended by
adding an entry to the table in numerical
order for §1.145–2(d) to read as follows:
§1.145–0 Table of contents.
*****
§1.145–2 Application of private activity
bond regulations
*****
(d) Issuance costs financed by prior is-
sue.
Par. 7. In §1.145–2, paragraph (d) is
added to read as follows:
§1.145–2 Application of private activity
bond regulations
*****
(d)Issuance costs financed by prior is-
sue. Solely for purposes of applying the
private business use test to a refunding is-
sue under §1.141–13, the use of proceeds
of the prior issue (or any earlier issue in a
series of refundings) to pay issuance costs
of the prior issue (or the earlier issue) is
treated as a government use.
Par. 8. Section 1.149(d)–1 is amended
by revising paragraph (g) and adding para-
graph (h) to read as follows:
§1.149(d)–1 Limitations on advance
refundings
*****
(g)Limitation on advance refundings
of private activity bonds. Under section
149(d)(2) and this section, interest on a
bond is not excluded from gross income if
any portion of the issue of which the bond
is a part is issued to advance refund a pri-
vate activity bond (other than a qualified
501(c)(3) bond). For this purpose, the term
private activity bond—
(1) Includes a qualified bond described
in section 141(e) (other than a qualified
501(c)(3) bond), regardless of whether the
refunding issue consists of private activity
bonds under §1.141–13; and
(2) Does not include a taxable bond.
(h)Effective dates—(1)In general.Ex-
cept as provided in this paragraph (h), this
section applies to bonds issued after June
30, 1993, to which §§1.148–1 through
1.148–11 apply, including conduit loans
that are treated as issued after June 30,
1993, under paragraph (b)(4) of this sec-
tion. In addition, this section applies to
any issue to which the election described
in §1.148–11(b)(1) is made.
(2)Special effective date for paragraph
(b)(3). Paragraph (b)(3) of this section ap-
plies to any advance refunding issue issued
after May 28, 1991.
(3)Special effective date for paragraph
(f)(3). Paragraph (f)(3) of this section ap-
plies to bonds sold on or after July 8, 1997,
and to any issue to which the election de-
scribed in §1.148–11(b)(1) is made. See
2006–4 I.R.B.337January 23, 2006

§1.148–11A(i) for rules relating to certain
bonds sold before July 8, 1997.
(4)Special effective date for paragraph
(g). See §1.141–15 for the applicability
date of paragraph (g) of this section.
Par. 9. Section 1.150–1 is amended by
revising paragraphs (a)(3) and (c)(3)(ii) to
read as follows:
§1.150–1 Definitions.
(a) * * *
(3)Exceptions to general effective date.
See §1.141–15 for the applicability date
of the definition of bond documents con-
tained in paragraph (b) of this section and
the effective date of paragraph (c)(3)(ii) of
this section.
*****
(c) * * *
(3) * * *
(ii)Exceptions. This paragraph (c)(3)
does not apply for purposes of sections
141, 144(a), 148, 149(d) and 149(g).
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved November 23, 2005.
Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 16,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 19, 2005, 70 F.R. 75028)
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446–1: General rule for methods of ac-
counting.
May heavy equipment dealers approximate the
cost of their heavy equipment parts inventory us-
ing a replacement cost method? Is so, can heavy
equipment dealers obtain the automatic consent of
the Commissioner to change to the replacement cost
method of accounting? See Rev. Proc. 2006-14,
page 350.
Section 471.—General
Rule for Inventories
26 CFR 1.471–3: Inventories at cost.
May heavy equipment dealers approximate the
cost of their heavy equipment parts inventory using
a replacement cost method of accounting? See Rev.
Proc. 2006-14, page 350.
Section 481.—Adjustments
Required by Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
Can heavy equipment dealers obtain the automatic
consent of the Commissioner to change to a replace-
ment cost method to approximate the cost of their
heavy equipment parts inventory? If so, is the change
made with a § 481(a) adjustment? See Rev. Proc.
2006-14, page 350.
Section 6050S.—Returns
Relating to Higher
Education
Tuition and
Related E
xpenses
26 CFR 1.60
50S–3: Information reporting for pay-
ments of i
nterest on qualified education loans.
A notice p
rovides information to payees/filers who
receive p
ayments of interest on qualified education
loans who
are unable to comply with the reporting
requirem
ents for loan origination fees and capitalized
interest
under section 6050S of the Code and the reg-
ulation
s for calendar year 2005 returns. See Notice
2006-5,
page 348.
Section 6724.—Waiver;
Definitions and Special
Rules
26 CFR 301.6724–1: Reasonable cause.
A notice explains that a payee/filer who is unable
to comply with the reporting requirements for loan
origination fees and capitalized interest may request
that the Service waive, upon a showing of reasonable
cause under section 6724 and the regulations, any
penalty that might otherwise be imposed under sec-
tions 6721 or 6722 for failure to report these amounts.
See Notice 2006-5, page 348.
Section 7701.—Definitions
26 CFR 301.7701–2: Business entities; definitions.
T.D. 9235
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Classification of Certain
Foreign Entities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and temporary
regulations.
SUMMARY: This document contains final
and temporary regulations relating to cer-
tain business entities included on the list
of foreign business entities that are always
classified as corporations for Federal tax
purposes.
DATES:Effective Date:These regulations
are effective on December 16, 2005.
Applicability Date:For the dates of
applicability of these regulations, see
§301.7701–2(e)(4).
FOR FURTHER INFORMATION
CONTACT: Ronald M. Gootzeit, (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On April 14, 2005, the IRS and Trea-
sury Department published in theFederal
Registertemporary regulations (T.D.
9197, 2005–18 I.R.B. 985 [70 FR 19697])
and a notice of proposed rulemaking
(REG–148521–04, 2005–18 I.R.B. 995
[70 FR 19722] under section 7701 of
the Internal Revenue Code (Code). The
regulations added certain foreign busi-
ness entities to the list of entities in
§301.7701–2(b)(8) (theper secorpora-
tion list) in response to the adoption by
the Council of the European Union of
a Council Regulation (2157/2001 2001
O.J. (L 294)) permitting a new business
entity, the European public limited li-
ability company (Societas Europaea or
January 23, 20063382006–4 I.R.B.

SE). Specifically, the temporary and pro-
posed regulations added the SE, Estonian
Aktsiaselts, Latvian Akciju Sabiedriba,
Lithuanian Akcine Bendroves, Slovenian
Delniska Druzba, and Liechtenstein
Aktiengesellschaft to theper selist of
corporations. For further background, see
T.D. 9197, 2005–18 I.R.B. 985 [70 FR
19697] and Notice 2004–68, 2004–2 C.B.
706.
Explanation of Provisions
No substantive comments were re-
ceived regarding the temporary and pro-
posed regulations. Accordingly, these
regulations finalize the proposed regula-
tions without modification and revise the
temporary regulations to cross reference
to the new provisions.
Special Analysis
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
and Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and,
because these regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the Notice of Pro-
posed Rulemaking preceding the final reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Ronald M. Gootzeit of the Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Amendments to
the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301 — PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701–2 is amended
by:
1. Adding six entries in alphabetical
order to paragraph (b)(8)(i).
2. Removing paragraph (b)(8)(vi).
3. Adding paragraphs (e)(3) and (4).
The additions read as follows:
§301.7701–2 Business entities;
definitions.
*****
(b) * * *
(8) * * *
(i) * * *
Estonia, Aktsiaselts
European Economic Area/European
Union, Societas Europaea
*****
Latvia, Akciju Sabiedriba
*****
Liechtenstein, Aktiengesellschaft
Lithuania, Akcine Bendroves
*****
Slovenia, Delniska Druzba.
*****
(e) * * *
(3) [Reserved]. For further guidance,
see §301.7701–2T(f).
(4) The reference to the Estonian,
Latvian, Liechtenstein, Lithuanian, and
Slovenian entities in paragraph (b)(8)(i) of
this section applies to such entities formed
on or after October 7, 2004, and to any
such entity formed before such date from
the date any person or persons, who were
not owners of the entity as of October 7,
2004, own in the aggregate a 50 percent or
greater interest in the entity. The reference
to the European Economic Area/European
Union entity in paragraph (b)(8)(i) of this
section applies to such entities formed on
or after October 8, 2004.
Par. 3. Section 301.7701–2T is
amended by:
1. Removing paragraph (b)(8)(vi).
2. Revising paragraph (e)(3).
The revision reads as follows:
§301.7701–2T Business entities;
definitions (temporary).
*****
(e) * * *
(3) [Reserved]. For further guidance,
see §301.7701–2(e)(4).
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 8, 2005.
Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 15,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 16, 2005, 70 F.R. 74658)
2006–4 I.R.B.339January 23, 2006

Part II. Treaties and Tax Legislation
Subpart A.—Tax Conventions and Other Related Items
Japan Investment
Bank Memorandum of
Understanding
Announcement 2006–6
The fol
lowing is a copy of the Mem-
orand
um of Understanding (“MOU”)
enter
ed into on December 27, 2005, by
the Co
mpetent Authorities of the United
State
s and Japan, regarding the term “in-
vestm
ent bank” in the U.S.-Japan income
tax t
reaty.
The te
xt of the MOU is as follows:
MEMORANDUM OF
UNDERSTANDING
The Competent Authorities of the
United States and Japan agree to the
following Guidelines (“Guidelines”) con-
cerning the meaning of the term “invest-
ment bank” under Article 11(3)(c)(i) of
the Convention Between the Government
of the United States of America and the
Government of Japan for the Avoidance
of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on
Income (the “Treaty”). These Guidelines
are entered into under paragraph 3 of Ar-
ticle 25 (Mutual Agreement Procedure).
In order to provide certainty to tax-
payers, the Competent Authorities of the
United States and Japan have confirmed
that:
A. As
used in Article 11(3)(c)(i) of the
Tr
eaty, the term “investment bank”
m
eans any person regularly engaged
i
n one or more of the following activ-
i
ties (“investment bank activities”) if
6
0% or more of its gross income for
e
ach of the three taxable years preced-
i
ng the taxable year the interest pay-
ment is made (or if it has been in exis-
tence for less than three taxable years,
for each business year of its existence)
arises from such activities:
1. Underwriting issues of stock,
debt instruments or other secu-
rities under best efforts or firm
commitment agreements for cus-
tomers.
2. Providing merger and acquisi-
tion advisory services, fiduciary
services, trust services, custo-
dial services, clearing services,
agency paying services, collec-
tion agency services, investment
or correspondent banking ser-
vices, financial or investment
advisory services, or investment
management services, including
fund management service.
3. Originating, structuring, purchas-
ing, selling, discounting, or ne-
gotiating on a regular basis notes,
drafts, checks, bills of exchange,
acceptances, mortgages, indus-
trial loans or other evidences of
indebtedness for customers in-
cluding structured, project, and
lease financing and factoring ev-
idences of indebtedness for un-
related parties; brokerage activi-
ties; purchasing or selling stock,
debt instruments, commodities,
interest rate, or currency, com-
modities or economic futures
or other securities or derivative
financial products (including no-
tional principal contracts) from
or to customers; holding stock,
debt instruments and other se-
curities as inventory for sale to
customers; arranging futures,
forwards, options, foreign ex-
change transactions, or notional
principal contracts for, or enter-
ing into such transactions with
customers; borrowing or lend-
ing stocks or securities for cus-
tomers, or engaging in securities
repurchase or reverse repurchase
transactions with customers; pro-
viding margin or any other fi-
nancing for a customer secured
by securities or money market in-
struments, including repurchase
agreements; providing financing
in connection with financial ser-
vices activities; and engaging in
hedging activities with respect
to the activities described in this
paragraph 3.
4. Repackaging financial assets, in-
cluding mortgages, into securi-
ties; purchasing and/or holding
such financial assets in contem-
plation of repackaging them; or
servicing activities with respect
to such financial assets (including
the accrual of interest incidental
to such activities).
B. Look-through rules:
1. Except to the extent provided in
paragraph 3 of this Section B,
for purposes of applying the 60%
gross income test of section A,
if an entity (tested entity) owns
or controls (directly or indirectly)
50% or more of another entity and
the tested entity is affiliated with
a registered securities dealer that
is resident in either the United
States or Japan, the tested entity
shall be treated as engaging in the
same activities as the other entity
and as directly earning its propor-
tionate share of the gross income
of the other entity with respect to
those activities. A tested entity is
affiliated with a registered securi-
ties dealer if
a. the tested entity either owns
or controls (directly or indi-
rectly) 80% or more of a reg-
istered securities dealer,
b. the tested entity is owned or
controlled (directly or indi-
rectly) 80% or more by a reg-
istered securities dealer, or
c. the tested entity, and a reg-
istered securities dealer, are
both commonly owned or
controlled (directly or indi-
rectly) 80% or more by an is-
suer of publicly traded debt
or equity securities.
2. For purposes of paragraphs B.1
and C.1.a, all gross income of
a bank shall be treated as gross
income arising from investment
bank activities and the tested en-
tity (for purposes of paragraph
January 23, 20063402006–4 I.R.B.

B.1) and owner (for purposes of
paragraph C.1.a) shall be treated
as directly earning its proportion-
ate share of such gross income.
3. The look-through rules of Sec-
tion B.1 do not apply to determine
the gross income of a tested en-
tity that otherwise meets the gross
income test under Section A. A
tested entity that meets the gross
income test under Section A or
this Section B must also meet the
group-wide tests under Section C.
C. Group-wide tests.
1. Gross income tests. For pur-
poses of these Guidelines, no en-
tity will be considered an “invest-
ment bank” unless
a. such entity and its affiliates,
considered as a single entity,
would qualify under Section
A (60-percent test), and
b. The gross income with re-
spect to the activities de-
scribedinparagraphsA.1,
A.2 and A.4, above, of such
entity and its affiliates (other
than banks), considered as
single entity, is equal to or
greater than 10% (ten-per-
cent) of all gross income
of such entity and its af-
filiates (other than banks)
other than the gross income
with respect to activities de-
scribedinparagraphsA.3,
above (10-percent test).
2. Activities tests. For purposes of
this Guidelines, no entity will be
considered an “investment bank”
unless
a. Such entity or an affiliate
is engaged in activities de-
scribed in paragraph A.1
above,
b. Such entity or an affiliate
is engaged in activities de-
scribed in paragraph A.2
above,
c. Such entity or an affiliate is
a member of one or more
recognized stock exchanges
within the meaning of Ar-
ticle 22(5)(b)(i) or (ii), or
such entity or an affiliate is a
market maker in one or more
Over-the-Counter (“OTC”)
markets located in either the
United States or Japan.
3. For purposes of paragraphs C.1
and C.2 above, two entities are
affiliates if:
a. One of the two entities owns
(directly or indirectly) 80%
or more of the other entity, or
b. Both entities are commonly
owned (directly or indi-
rectly) 80% or more by an-
other entity.
D. Publicly traded requirement
A tested entity must either (a) be an is-
suer of publicly traded debt or equity
securities, or (b) have at least 80 per-
cent of its equity owned directly or in-
directly by an issuer of publicly traded
debt or equity securities.
E. Confirmation of Benefits:
1. The Competent Authority of a
Contracting State shall make a
primary test (which shall consist
of a determination by such Com-
petent Authority that self-certifi-
cation has been properly submit-
ted according to any applicable
domestic procedures) of whether
an entity which is a resident of the
Contracting State and applies for
the treaty benefit under Article
11(3)(c)(i) meets the conditions
provided in these Guidelines, and
shall notify the Competent Au-
thority of the other Contracting
State, as promptly as practicable
after the self-certification, of the
name of each entity that has so
certified.
2. The list of the notified entities
shall be announced to the public
and renewed on an as-needed ba-
sis.
3. If an entity which is a resident of a
Contracting State ceases to meet
the conditions in these Guidelines
due to a material change in the
facts and circumstances, or if it
has been found to no longer meet
the conditions in these Guidelines
by the secondary assessment by
the Competent Authority of the
other Contracting State, such en-
tity shall lose the entitlement to
the treaty benefit under Article
11(3)(c)(i) retroactively to the
first day the entity does not meet
the conditions of these Guide-
lines.
2006–4 I.R.B.341January 23, 2006

Robert H. Green
Director, International (LMSB)
Internal Revenue Service
U. S. Competent Authority
December 27, 2005
Date
Keiji Aoyama
Deputy Commissioner, International
National Tax Agency
Japanese Competent Authority
December 27, 2005
Date
Canadian Memorandum of
Understanding on Mutual
Agreement Procedure
Announcement 2006–7
The following is a copy of the Mem-
orandum of Understanding (“MOU”)
entered into on December 8, 2005, by
the Competent Authorities of the United
States and Canada, providing guidelines
and procedures to resolve factual dis-
agreements under the Mutual Agreement
Procedure of the U.S.-Canada income tax
treaty.
The text of the MOU is as follows:
MEMORANDUM OF
UNDERSTANDING BETWEEN
THE COMPETENT AUTHORITIES
OF CANADA AND THE UNITED
STATES REGARDING FACTUAL
DISAGREEMENTS UNDER
THE MUTUAL AGREEMENT
PROCEDURE
The Competent Authorities of Canada
and the United States agree to the fol-
lowing principles, guidelines and proce-
dures to resolve disagreements in respect
of the underlying facts and circumstances
in cases that are referred to them under the
mutual agreement procedure (“MAP”) ar-
ticle of theCanada - United States Income
Tax Convention(1980), as amended from
time to time (the “Convention”).
Section I. Definitions
In this Memorandum of Understanding
(“MOU”):
“Appeals organization(s)” means either
the Appeals Branch of the Canada Rev-
enue Agency (CRA) or Appeals of the In-
ternal Revenue Service (IRS), or both;
“CA or CAs” means either the Cana-
dian or the U.S. Competent Authority, or
both;
“Assistant Commissioner of Appeals”
means the Assistant Commissioner, Ap-
peals Branch, CRA or his/her authorized
representative;
“Chief of Appeals” means the Chief of
Appeals, IRS or his/her authorized repre-
sentative; and
“Appeals Review Panel” (“ARP”)
means a joint panel comprised of officials
of the respective Appeals organizations
chosen by the Assistant Commissioner of
Appeals and the Chief of Appeals.
SectionII.PurposeandScopeofthe
MOU
1. The purpose of this MOU is to estab-
lish an independent review process for
resolving disagreements regarding the
underlying facts and circumstances
(“factual disagreement”) of a specific
MAP case for further negotiations by
the CAs.
A factual disagreement is a disagree-
ment concerning any of (i) whether a
fact has occurred (e.g., whether a party
made a payment or not), (ii) the rele-
vance of a fact agreed to exist (e.g.,if
the payment was made, is that fact rel-
evant to determining the transfer price
for transactions covered by the MAP
case), or (iii) the significance to be
accorded a fact agreed to exist (e.g.,
what significance should be given to
the fact that a payment was made).
2. Unless the CAs otherwise agree this
MOU will not apply to:
•MAP cases involving the interpre-
tation of treaty provisions; and
•MAP cases involving taxpayers
who fail to cooperate with either
of the CAs in providing relevant
information and data during the
MAP process.
Section III. Independent Review
Process
1. Independent Review
•Except as provided in the second
bullet of this part (III.1), if either
CA determines that the CAs have
been unable to agree on the un-
derlying facts and circumstances
of a specific MAP case within six
months after the first face-to-face
negotiating meeting for the case,
theCAsmustreferthecasetothe
independent review process.
•If mutually agreed by the CAs, a
referral to the ARP can be made at
a date that is earlier or later than
that provided in the first bullet of
this part (III.1). Each CA agrees to
consult promptly upon the request
of the other CA for early or late
referral.
2. Referral Request
•Unless the CAs mutually agree to
a different referral date, each CA
must refer any MAP case required
to be referred under the first bul-
let of part 1 of this section (III)
to its respective Appeals organiza-
tion by no later than 30 days after
the expiration of the six-month pe-
riod referenced therein, or, if one
or more face-to-face negotiating
meetings for the MAP case were
held prior to the full execution of
this MOU, then by no later than 6
months plus 30 days after full ex-
ecution of this MOU.
•Each referral will be in the form
of a written submission prepared
by the respective CA setting out
January 23, 20063422006–4 I.R.B.

in detail the nature of the factual
disagreement and the views of the
CAs.
•If the CAs mutually agree for
any MAP case, they may make
a joint referral request that does
not disclose the country identity
of the subject taxpayer(s), and, for
such cases, alter the procedures
set forth in this MOU.
3. Acknowledgement of Referral
Each Appeals organization will,
within 30 days after the date that a
referral request is made pursuant to
part 2 of this section (III), advise its
CA in writing of the receipt of the
referral request and the identities of
the individuals selected, pursuant to
part 4 of this section (III), for the ARP
for the subject MAP case.
4. Selection of the ARP
•The Chief of Appeals and the
Assistant Commissioner of Ap-
peals will each appoint one voting
member from their respective Ap-
peals organizations to the ARP.
Those two individuals will have
independent authority to resolve
the factual disagreement involved
in the MAP case. The Chief of
Appeals and the Assistant Com-
missioner of Appeals may also
appoint one or more non-voting
member(s) from their respective
Appeals organization to the ARP.
The voting and non-voting mem-
bers of the ARP will, collectively,
be referred to as “Members”.
•Unless the CAs agree otherwise,
no ARP Member may have had
any previous involvement in an
audit of the subject taxpayer(s) or
in a resolution of objections filed
by such taxpayer(s).
5.Ex Parte Contacts
•The ARP may request supplemen-
tary information/representation
from any party possessing rele-
vant information.
•There will be noex-partecontact
with Members of the ARP by ei-
ther the CAs or the subject tax-
payers or their representatives un-
less at the request of the ARP.
If any prohibitedex-partecontact
occurs, the Member who was con-
tacted shall immediately disclose
such contact to the voting Mem-
ber(s).
•The work of the ARP is a govern-
ment-to-government process. Ac-
cordingly, the Appeals organiza-
tions will not disclose their pro-
cesses or findings to the subject
taxpayer(s), the taxpayer’(s’) rep-
resentatives or any person other
than the CAs.
6. Meetings and Timeframe
•If the ARP requires face-to-face
discussions, such discussions will
be held in Ottawa or Washington,
D.C., on an alternating basis.
•The ARP must conclude its work
and render its decision by no later
than 150 days after the date on
which the referral request is re-
quired or agreed to be made pur-
suant to part 2 of this section (III).
Either CA may grant an extension
upon request by the ARP.
7. ARP Decision
•If the voting members pursuant to
part 4 of this section (III) agree
on a resolution of the factual dis-
agreement(s), the ARP will issue
a written report that identifies the
subject taxpayer(s), describes the
factual disagreement(s), and sum-
marizes the resolution of the fac-
tual disagreement(s). The CAs
will follow the ARP’s resolution
of the factual disagreement(s).
•If the voting members pursuant to
part 4 of this section (III) can-
not agree on a resolution of the
factual disagreement(s), each Ap-
peals organization will provide a
written explanation of its voting
member’s finding.
8. Not to Be Used as Precedent
A decision by the ARP will not be
considered as establishing a precedent
for resolving other MAP cases.
9. Appeals Process
No Members of this ARP should par-
ticipate in any subsequent resolution
of the subject MAP case.
Section IV. Other
The CAs agree to publish this MOU to
demonstrate their mutual commitment to
improving the MAP process.
This MOU sets forth procedures to be
applied in addressing MAP cases under the
Convention. Nothing in this MOU shall
be construed as affecting taxpayers’ rights
under applicable domestic law.
This MOU is not to be interpreted as
creating or limiting any cause of action,
rights or benefits in favour of third parties
or taxpayers.
This MOU is effective when fully exe-
cuted. It may be terminated at any time by
either CA giving written notice to the other
CA and it may be modified at any time by
mutual agreement of the CAs.
The information furnished to the ARP
is provided under the terms of the Conven-
tion, which governs its disclosure and use.
For purposes of this MOU, the Members
will be delegated as members of the staff
of their respective CAs in accordance with
their administrative procedures.
2006–4 I.R.B.343January 23, 2006

Competent Authority for CanadaCompetent Authority for the United States
Frederick R. O’Riordan
Director General
International Tax Directorate
Canada Revenue Agency
Robert H. Green
Director-International
Large and Medium Size Business
Internal Revenue Service
Date:
Date:
Mexico LLC MAP Agreement
Announcement 2006–8
The following is a copy of the Mu-
tual Agreement entered into on December
22, 2005, by the Competent Authorities
of the United States and Mexico, regard-
ing fiscally transparent entities under the
U.S.-Mexico income tax treaty.
The text of the Agreement is as follows:
COMPETENT AUTHORITY MUTUAL AGREEMENT
The Competent Authorities of the United States and Mexico herebyenter into the following mutualagreement (“the Agreement”),
which supersedes and clarifies the Competent Authority Mutual Agreement entered into on Aug. 26, 2005, Announcement
2005–72, I.R.B. 2005–41. The Agreement specifies the cases where fiscally transparent entities are entitled to treaty benefits
and clarifies the procedure for claiming benefits from Mexico. The Agreement is entered intounder paragraph 3 of Article 26
(Mutual Agreement Procedure) of the Convention Between the United States of America and the Government of the United
Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
along with a Protocol, signed on September 18, 1992, and as amended by the Additional Protocol signed on September 8, 1994,
and the Second Additional Protocol signed on November 26, 2002 (the “Treaty”).
1)Eligibility of fiscally transparent entities for treaty benefits
Paragraph 2(b) of the Protocol provides:
For purposes of paragraph 1 of Article 4 it is understood that:
*****
b) a partnership, estate, or trust is a resident of a Contracting State only to the extent that the income it derives
is subject to tax in that State as the income of a resident, either in the hands of the partnership, estate or
trust, or in the hands of its partners or beneficiaries;
The Competent Authorities agree that in applying paragraph 2(b)of the Protocol, it is understood that income from sources within
one of the Contracting States received by an entity that is organized in either of the Contracting States, or a third state with which
Mexico has in force a comprehensive exchangeof information agreement, and that is treated as fiscally transparent under the laws
of either Contracting State will be treatedas income derived by a resident of the other Contracting State to the extent that such
income is subject to tax as the income of a resident of the other Contracting State.
For Mexican tax purposes, a fiscally transparent entity organized in the United States, such as a U.S. limited liability company
(LLC) that has elected to be treated as a partnership for federal tax purposes, will betreated as a U.S. resident for purposes of
paragraph 2(b) of the Protocol, and entitled to claim treaty benefits, to the extent that the income it derives is subject to tax as
the income of a U.S. resident in the hands of its members, owners,partners or beneficiaries. Similar rules will apply to a U.S.
subchapter S Corporation, an LLC that is disregarded as an entity separate from its owner, or a U.S. grantor trust.
For example, if a U.S. LLC that is treated asa partnership for U.S. federal tax purposes receives a royalty payment from Mexico,
and the U.S. LLC has two members with equal interests in the LLC, one Mexican and one U.S., the LLC may claim treaty benefits
as a U.S. resident with respect to 50% of the royalty payment because 50% of the payment is subject to tax in the United
States in the hands of a U.S. resident member.
January 23, 20063442006–4 I.R.B.

Consistent with this agreement, if a U.S. LLC that is treated asa partnership for U.S. federal tax purposes owns 99 percent of
the stock of a Mexican corporation, and the U.S. LLC has five members with equal interests in the LLC, under paragraph 4 of
Article 13 (Capital Gains), the gains derived by the LLC from the alienation of such shares may be taxed in Mexico because
the LLC had, at any time during the 12-monthperiod preceding such alienation, a participation, directly or indirectly, of at
least 25 percent in the capital of the company.
Mexico agrees to apply this Agreement with respect to amounts paid to an entity created and subject to the laws of a third state
or jurisdiction only where such third state or jurisdiction has in force a comprehensive exchange of information agreement as
provided in Mexican tax provisions and such information is effectively exchanged. The followingis the current list of countries
that Mexico has a comprehensive exchange of information in force. Such a list is published under Mexican administrative
regulations and may be amended from time to time.
•Belgium
•Canada
•Korea
•Israel
•Spain
•France
•Italy
•Norway
•Netherlands
•Singapore
•Sweden
•Finland
•Chile
•Ecuador
•Romania
•Czech Republic
Accordingly, if an LLC organized in one of the states listed above receives an interest payment from Mexico, and the LLC has
two member owners with equal interests in the LLC, one third jurisdiction resident and one U.S. resident, the LLC may claim
treaty benefits as a U.S. resident with respect to 50% of the interest payment because 50% of the payment is subject to tax in
the United States in the hands of a U.S. resident member.
2)U.S. Residency Certification for LLCs and other fiscally transparent entities
A LLC or
other entity organized within or without the United States that is treated asa partnership for U.S. tax purposes may
certi
fy U.S. residence for treaty purposes by obtaining a certificate of residence on Form 6166 in the same manner as a partnership.
AForm
6166 confirms the filing of Form 1065, U.S. Return of Partnership Income, by the LLC and includes a list of members of
the LL
C that are residents of the United States for U.S. federal tax purposes. The Form 6166 will inform the withholding agent to
conta
ct the LLC directly to provide information regarding theallocation of a particular payment to a specific member.
A LLC or other entity organized within or without the United States that is disregarded as an entity separate from its owner for
U.S. federal tax purposes may certify U.S. residence for treaty purposes by obtaining a Form 6166 that provides that the LLC is a
branch, division, or business unit of its single member owner, and that such single member owner is a resident of the United States.
A U.S. corporation that has made an election to be treated as anS Corporation for U.S. federal tax purposes may certify U.S.
residence for treaty purposes by obtaining a Form 6166 certificate of residence in a manner similarto that of a partnership. A Form
6166 confirms the filing of an information return, Form 1120S, U.S. Income Tax Return for an S Corporation, as required for a
domestic S Corporation, and includes a list ofshareholders that are residents of the United States for purposes of U.S. taxation.
3)E
ffective dates
Upon signature by both competent authorities, this Agreement is effective with respect to Mexican source payments made
to Mexican or U.S. entities to the extent the Mexican statute of limitations is open for such payments. This Agreement is
effective with respect to Mexican source payments made to entities organized in third countries or jurisdictions identified in the
Agreement as of January 1, 2006.
2006–4 I.R.B.345January 23, 2006

Agreed to by the undersignedCompetent Authorities:
Robert H. Green
U.S. Competent Authority
AnaBerthaThierry
Mexican Competent Authority
December 22, 2005December 22, 2005
January 23, 20063462006–4 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Informa
tion Reporting by
Organiz
ations That Receive
Charit
able Contributions of
Certai
n Motor Vehicles, Boats,
and Air
planes
Notice 2006–1
SECTION 1. PURPOSE
This n
otice provides guidance
on the
reporting requirements under
§170(
f)(12)(D) of the Internal Revenue
Code,
which apply to any donee organ-
izat
ion that receives a contribution of
a qua
lified vehicle after December 31,
2004
, the claimed value of which is more
than
$500.
Adon
ee organization is an organization
elig
ible to receive charitable contributions
as d
escribed in § 170(c).
A qua
lified vehicle is any: (i) mo-
tor
vehicle manufactured primarily for
use
on public streets, roads, and high-
way
s; (ii) boat; or (iii) airplane; but the
ter
m does not include any property de-
scr
ibed in § 1221(a)(1) (e.g.,property
hel
d primarily for sale to customers). See
§1
70(f)(12)(E).
Thi
s notice complements Notice
20
05–44, 2005–25 I.R.B. 1287, which
pr
ovides guidance under § 170(f)(12) on
th
e allowable deduction for a charitable
co
ntribution of a qualified vehicle and the
re
quirements applicable to the contempo-
r
aneous written acknowledgment that the
d
onee organization provides to the donor.
SECTION 2. BACKGROUND
Section 884 of the American Jobs
Creation Act of 2004, Pub. L. No.
108–357, 118 Stat. 1418 (AJCA), added
§§ 170(f)(12) and 6720 to the Internal
Revenue Code effective for contributions
of qualified vehicles made after December
31, 2004.
Section 170(f)(12)(A) disallows a de-
duction under § 170(a) for a contribution
of a qualified vehicle the claimed value of
which is more than $500 unless the donor
substantiates the contribution by a contem-
poraneous written acknowledgment that
meets the requirements of § 170(f)(12)(B).
Section 170(f)(12)(D) requires a donee
organization to provide the Secretary of the
Treasur
y or his delegate with the informa-
tion con
tained in the acknowledgment fur-
nished t
o the donor.
The Inte
rnal Revenue Service has
provide
d Form 1098–C for reporting
to the Se
rvice the information required
to be rep
orted under § 170(f)(12)(D).
Form 10
98–C can be viewed online at
http:/
/www.irs.gov/pub/irs-pdf/f1098c.pdf.
Form 10
98–C will be revised to take ac-
count o
f the Gulf Opportunity Zone Act
of 2005
, Pub. L. No. 109–135, 119 Stat.
2577 (G
O Zone Act), which was enacted
on Dec
ember 21, 2005. Section 403(gg)
of the
GO Zone Act contains a techni-
cal am
endment to § 884 of the AJCA.
The te
chnical amendment added clauses
(v) an
d (vi) to § 170(f)(12)(B). Section
170(
f)(12)(B)(v) requires the acknowledg-
ment
to include information concerning
whet
her the donee organization provided
any g
oods or services in consideration, in
who
le or in part, for the qualified vehicle.
In a
ddition, § 170(f)(12)(B)(vi) requires
the
acknowledgment to contain a descrip-
tio
n and good faith estimate of the value of
any
goods or services referred to in clause
(v)
or, if such goods or services consist
so
lely of intangible religious benefits (as
de
fined in § 170(f)(8)(B)), a statement to
th
at effect. Notwithstanding these report-
in
g requirements, as set forth below in Sec-
ti
on 5, donees may continue to use the cur-
r
ent version of Form 1098–C to satisfy the
r
equirements for a contemporaneous writ-
t
en acknowledgment until a new form is
p
rovided.
S
ECTION 3. INFORMATION
R
EPORTING TO THE INTERNAL
R
EVENUE SERVICE
I
f a donee organization receives a con-
tribution of a qualified vehicle with a
claimed value of more than $500 after De-
cember 31, 2004, the donee organization
is required to provide a contemporaneous
written acknowledgment to the donor. The
donee organization may use a completed
Form 1098–C for the contemporaneous
written acknowledgment. See section
3.03 of Notice 2005–44, 2005–25 I.R.B.
1287, for guidance on the information that
must be included in a contemporaneous
written acknowledgment and the deadline
for furn
ishing the acknowledgment to the
donor.
Any done
e organization that provides
acontem
poraneous written acknowledg-
ment to a
donor under this section is re-
quired t
o report to the Service the infor-
mation c
ontained in the acknowledgment.
The rep
ort is due by February 28 (March
31 if fi
ling electronically)oftheyearfol-
lowing
the year in which the donee organi-
zation
provides the acknowledgment to the
donor
.
The don
ee organization must file
the re
port on Copy A of the offi-
cial F
orm 1098–C. The official pa-
per Fo
rm 1098–C can be ordered on-
line a
tForms and Publications by U.S.
Mail(
http://www.irs.gov/formspubs/
page
/0,,id=10768,00.html)or by call-
ing 1
–800–829–3676.Instructions
for F
orm 1098–C are available at
http
://www.irs.gov/pub/irs-pdf/i1098c.pdf.
Gen
eral instructions on filing infor-
mat
ionreturnsandreportingonpa-
per
or electronic/magnetic media, in-
clu
ding instructions on where to file
For
m 1098–C, can be found in the
Gen
eral Instructions for Forms 1099,
10
98, 5498, and W–2G, which are
av
ailable athttp://www.irs.gov/pub/irs-
pd
f/i1099gi.pdf.
Ad
onee organization that files Form
10
98–C on paper should send it with Form
10
96,Annual Summary and Transmittal
of
U.S. Information Returns,totheInter-
n
al Revenue Service Center, Ogden, UT
8
4201–0027.
A
donee organization that is required
t
o file 250 or more Forms 1098–C during
t
he calendar year must file them elec-
t
ronically or magnetically. Specifica-
t
ions for Filing Forms 1098, 1099, 5498,
a
nd W–2G Electronically or Magneti-
cally can be found in Publication 1220 at
http://www.irs.gov/pub/irs-pdf/p1220.pdf.
Example. On December 31, 2006, D contributes
a qualified vehicle to O, an organization that is de-
scribed in § 170(c). On January 15, 2007, O sells
the qualified vehicle in an arm’s length transaction to
an unrelated party without any significant intervening
use or material improvement by O. On February 14,
2007, O provides D an acknowledgment that meets
the requirements of a contemporaneous written ac-
knowledgment under § 170(f)(12). D properly claims
the deduction allowable under § 170(f)(12) in taxable
year 2006 by attaching the acknowledgment to Form
1040,U.S. Individual Income Tax Return, that D files
by April 15, 2007. To meet its reporting requirements
2006–4 I.R.B.347January 23, 2006

under § 170(f)(12)(D), O must report the information
contained in the acknowledgment on Copy A of Form
1098–C and file the report with the Service by Febru-
ary 28, 2008. But if O files electronically, the report
is due on March 31, 2008.
The filing of Form 1098–C does not re-
lieve the donee organization of its obliga-
tion under § 6050L to report information
about dispositions of charitable deduction
property on Form 8282,Donee Informa-
tion Return.
SECTION 4. INTERIM
GUIDANCE FOR REPORTING A
CONTEMPORANEOUS WRITTEN
ACKNOWLEDGMENT FURNISHED
TOADONORIN2005
For any contemporaneous written ac-
knowledgment furnished to a donor on or
before December 31, 2005, a donee or-
ganization may report to the Service the
information contained in such acknowl-
edgment by filing either Copy A of Form
1098–C or a copy of the acknowledgment.
Electronic/magnetic media filing of Form
1098–C is permitted, but not required.
Reports filed on paper should be trans-
mitted with Form 1096 and sent to the
Internal Revenue Service Center, Ogden,
UT 84201–0027, by February 28, 2006.
Even though it files a copy of an acknowl-
edgment instead of a Form 1098–C, the
donee organization should check the box
on the transmittal Form 1096 that indicates
a Form 1098–C is being filed. But if a
donee organization already filed a report
with the Service ina reasonable manner
before January 6, 2006, it need not resub-
mit such report.
The guidance in this section supersedes
any instruction to the contrary in the 2005
Instructions for Form 1098–C.
SECTION 5. SPECIAL TRANSITION
RULE CONCERNING CONTENT OF
CONTEMPORANEOUS WRITTEN
ACKNOWLEDGMENT
Form 1098–C will be revised to reflect
the information described in clauses (v)
and (vi) of § 170(f)(12)(B) as added by
the GO Zone Act. Until Form 1098–C
is revised, a contemporaneous written
acknowledgment will be treated as meet-
ing the requirements of § 170(f)(12)(B)
even if it does not contain the informa-
tion described in clauses (v) and (vi) of
§ 170(f)(12)(B).
SECTION 6. SECTION 6720 PENALTY
Section 6720 imposes penalties on
any donee organization required under
§ 170(f)(12)(A) to furnish an acknowledg-
ment to a donor that knowingly furnishes
a false or fraudulent acknowledgment, or
knowingly fails to furnish an acknowl-
edgment in the manner, at the time, and
showing the information required under
§ 170(f)(12) or regulations thereunder.
The Service and the Treasury Department
intend to issue regulations under § 6720
clarifying that the donee organization in-
formation report described in section 3
of this notice is an integral part of the
acknowledgment requirement. The regu-
lations will clarify the application of the
§ 6720 penalties to a donee organization
that knowingly files a false or fraudulent
information report with the Service, or
that knowingly failsto file such informa-
tion report with the Service in the manner,
at the time, and showing the information
required under § 170(f)(12) or the reg-
ulations prescribedthereunder and this
notice. The regulations will be effective
as of the date of publication of this notice.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information in this
notice have been reviewed and approved
by the Office of Management and Bud-
get (OMB) in accordance with the Paper-
work Reduction Act (44 U.S.C. 3507) un-
der control number 1545–1980.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in sec-
tion 3 of this notice are required from
donee organizations to satisfy the donee
reporting requirementsof § 170(f)(12)(D).
The collections of information are manda-
tory. The likely respondents are tax-ex-
empt charitable organizations.
The estimated total annual reporting
burden is 21,500 hours for donee organi-
zations.
The estimated annual burden per donee
organization varies from 30 minutes to 16
hours, depending on individual circum-
stances. The estimated average annual
burdens are 5 hours for donee organiza-
tions. The estimated number of donee or-
ganizations is 4,300.
The estimated annual frequency of re-
sponses (used for reporting requirements
only) is annually.
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 return in-
formation are confidential, as required by
§ 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this notice is
Sean Barnett of the Exempt Organizations,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this notice, contact Mr. Barnett at (202)
283–8912 (not a toll-free call).
Waiver for Reasonable
Cause for Failure to Report
Loan Origination Fees and
Capitalized Interest on
Qualified Education Loans
Notice 2006–5
PURPOSE
This notice provides information for
payees/filers who receive payments of
interest on qualified education loans to
request a waiver of penalties for failure to
report payments of loan origination fees
and capitalized interest received in 2005
for qualified education loans made on or
after September 1, 2004.
BACKGROUND
Section 6050S requires certain payees
who receive payments of interest on one or
more qualified education loans, as defined
in section 221(d)(1), to file information
returns with the Internal Revenue Service
(Service) and to furnish information state-
ments to borrowers. In the case of interest
payments received or collected by a per-
son on behalf of a payee, the information
reporting requirements are generally im-
posed on that other person (filer) and not
the payee. See section 1.6050S–3(e)(3)(i)
of the Income Tax Regulations. For qual-
January 23, 20063482006–4 I.R.B.

ified education loans made on or after
September 1, 2004, payees/filers are re-
quired to report on Form 1098–E, “Student
Loan Interest Statement,” payments of in-
terest received on qualified education
loans, including payments of loan origi-
nation fees and capitalized interest. See
section 1.6050S–3(e)(1)(ii) of the regu-
lations (T.D. 9125, 2004–1 C.B. 1012),
published on May 7, 2004. 67 Fed. Reg.
25,489. A prior version of these regu-
lations (T.D. 8992, 2002–1 C.B. 981),
published on April 29, 2002, provided
that, for calendar year 2003 returns and
later years, payees/filers were not required
to report payments of loan origination fees
and capitalized interest for qualified edu-
cation loans made before January 1, 2004.
67 Fed. Reg. 20,901.
After publication of the amended final
section 1.6050S–3 regulations on May 7,
2004, the Treasury Department and Ser-
vice received comments that additional
time was required to make the program-
ming changes necessary to comply with
the reporting requirements for loan orig-
ination fees and capitalized interest un-
der those regulations. In response, the
Treasury Department and Service issued
Notice 2004–63, 2004–2 C.B. 597, which
provides that the Service will not assert
penalties under section 6721 or section
6722 for the failure to report on Form
1098–E returns payments attributable to
loan origination feesand capitalized in-
terest received in calendar year 2004 on a
qualified education loan made on or after
September 1, 2004. The notice explained
that the penalty relief was limited to calen-
dar year 2004 returns and would provide
payees/filers additional time to make the
necessary programming changes to cap-
ture information on and report payments
of loan origination fees and capitalized
interest received in 2005 and future cal-
endar years, consistent with the reporting
requirements of the section 6050S regula-
tions.
Some payees/filers have taken steps to
comply with the reporting requirements
for loan origination fees and capitalized
interest for calendar year 2005 returns.
However, some commentators have re-
quested additional relief to provide more
time to comply with the reporting require-
ments for calendar year 2005 returns.
REQUEST FOR WAIVER FOR
REASONABLE CAUSE
A payee/filer who is not able to com-
ply with the reporting requirements un-
der section 1.6050S–3 for loan origination
fees and capitalized interest for calendar
year 2005 returns may request that the Ser-
vice waive, under section 6724 and the
regulations thereunder, any penalty that
might otherwise be imposed under sec-
tion 6721 or section 6722 for failure to re-
port these amounts. Section 6724 autho-
rizes the Service to waive the penalties un-
der section 6721 (failure to file correct in-
formation returns) or section 6722 (fail-
ure to furnish correct payee statements) if
the failure was due to reasonable cause
and not due to willful neglect. Under
section 301.6724–1(a)(2) of the Regula-
tions on Procedure and Administration, a
payee/filer may establish reasonable cause
if there are significant mitigating factors
with respect to the failure, or if the failure
arose from events beyond the payee/filer’s
control. In addition,a payee/filer must
show that it acted in a responsible manner
both before and after the failure occurred.
A payee/filer seeking a waiver under
this notice should send its request in the
text of an e-mail to:1098ewaiver@irs.gov
on or before the due date of the information
returns. The Service will acknowledge re-
ceipt of a waiver request under this notice.
The waiver request must include the fol-
lowing information:
(1) a notation at the top of the request in
large letters stating,“Form 1098–E Waiver
Request under Notice 2006–5”;
(2) the payee/filer’s name, taxpayer
identification number, and mailing ad-
dress;
(3) a statement that describes:
(a) the steps the payee/filer has taken in
an attempt to report loan origination fees
and capitalized interest, including the date
on which the payee/filer first took steps
to attempt to implement systems to com-
ply with the reporting requirements and the
amount of time and resources devoted to
efforts to comply; and
(b) the undue hardship that would result
by complying with the obligation to report
loan origination fees and capitalized inter-
est, including an indication of the size of
the payee/filer’s student loan portfolio and
the revenue derived from the loan portfo-
lio;
(4) a statement that the payee/filer is in
compliance with the Additional Rules set
forth in this notice; and
(5) a statement, made under penalty of
perjury, that the information contained in
the waiver request is true, correct, and
complete to the best of the payee/filer’s
knowledge and belief. The perjury state-
ment must be signed by a person who is au-
thorized to sign federal tax returns on be-
half of the payee/filer by entering his or her
name and date of birth.
The Service currently anticipates that
it will decide, within six months after re-
ceipt of a complete request for a waiver,
whether to grant a waiver of penalties for
failure to report information required by
section 6050S and the regulations there-
under based on each payee/filer’s partic-
ular facts and circumstances as described
in the waiver request. For purposes of
this notice, the Service generally will
waive penalties if the payee/filer’s request
demonstrates that: (1) the payee/filer
acted in a responsible manner because it
took reasonable efforts sufficiently before
the due date of the information return to
attempt to implement necessary program-
ming changes to enable the payee/filer to
capture information on and report pay-
ments of loan origination fees and capital-
ized interest; and (2) there are significant
mitigating factors or the failure arose from
events beyond the payee/filer’s control,
including hardship resulting from incre-
mental costs to the payee/filer.
ADDITIONAL RULES
A payee/filer who is not able to comply
with the reporting requirements for loan
origination fees and capitalized interest re-
ceived in calendar year 2005 on a qualified
education loan made on or after September
1, 2004, and who seeks a penalty waiver
under this notice, must:
(1) file and furnish in a timely manner
a Form 1098–E (or other appropriate in-
formation statement) that (i) includes the
amount of interest (except for any loan
origination fees or capitalized interest) re-
ceived in 2005 in Box 1, (ii) does not in-
clude a check mark in Box 2, and (iii) in-
cludes all other required information; and
(2) furnish a statement to the borrower
indicating that the amount of interest re-
ported in Box 1 of Form 1098–E for calen-
dar year 2005 does not include payments
2006–4 I.R.B.349January 23, 2006

attributable to either loan origination fees
or capitalized interest received on qual-
ified education loans made on or after
September 1, 2004, and that the borrower
may be able to deduct amounts in addition
to the amounts reported in Box 1.
Notwithstanding sections 1.163–7(a)
and 1.1275–2(a), a borrower who receives
a Form 1098–E (or other appropriate infor-
mation statement) indicating that it does
not include payments of loan origination
fees may use any reasonable method to
allocate the loan origination fees over the
term of the loan for purposes of the de-
duction allowable under section 221. A
method that results in the double deduction
of the same portion of a loan origination
fee would not be reasonable.
PAPERWORK REDUCTION ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1996.
An agency may not conduct or sponsor,
and a person is not required to respond
to a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this no-
tice is required in order for a payee/filer to
receive a waiver of penalties for failure to
report loan origination fees and capitalized
interest. The collection of information is
required to obtain benefits. The likely re-
spondents are for profit organizations as
well as not for profit organizations.
The estimated total annual recordkeep-
ing and reporting burden is 5,000. The es-
timated annual recordkeeping and report-
ing burden per respondent is 10 hours. The
estimated number of respondents is 500.
Books or records relating to a collection
of information must be retained so long as
their contents may become material in ad-
ministration of any internal revenue law.
Generally, tax returns and return informa-
tion are confidential, as required by section
6103.
CONTACT INFORMATION
For further information regard-
ing a waiver of penalties, contact
Kelli Winegardner (Office of Penalties
and Interest Administration) at (202)
283–0454 (not a toll-free call). For further
information regarding this notice, contact
Donna Welch (Office of Associate Chief
Counsel (Procedure and Administration))
at (202) 622–4910 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 446, 471, 472, 481; 1.446–1,
1.471–3(d), 1.472–8, 1.481–1.)
Rev. Proc. 2006–14
SECTION 1. PURPOSE
This revenue procedure provides heavy
equipment dealers (as defined in section
4.05 of this revenue procedure) with a
safe harbor method of accounting for
their heavy equipment parts inventory (as
defined in section 4.06 of this revenue pro-
cedure). This safe harbor method permits
heavy equipment dealers to approximate
the cost of their heavy equipment parts
inventory using the replacement cost of
the heavy equipment parts pursuant to
the replacement cost method described
in section 4 of this revenue procedure.
This revenue procedure also provides pro-
cedures for heavy equipment dealers to
obtain the automatic consent of the Com-
missioner to change to the replacement
cost method.
SECTION 2. BACKGROUND
.01 Section 471 of the Internal Rev-
enue Code provides that inventories must
be taken on such basis as the Secretary may
prescribe as conforming as nearly as may
be to the best accounting practice in the
trade or business and as most clearly re-
flecting income.
.02 Section 1.471–3(d) of the Income
Tax Regulations provides that in any in-
dustry in which the usual rules for com-
putation of cost are inapplicable, cost may
be approximated upon such basis as may
be reasonable and in conformity with es-
tablished trade practice in the particular in-
dustry.
.03 Section 472(a) provides that a tax-
payer may use the last-in, first-out (LIFO)
inventory method. Under the LIFO inven-
tory method, a taxpayer treats those goods
remainingonhandatthecloseofthetax-
able year as being: First, those included in
the opening inventory of the taxable year
(in the order of acquisition) to the extent
thereof, and second, those acquired in the
taxable year. The change to, and use of,
the LIFO inventory method must be in ac-
cordance with such regulations as the Sec-
retary may prescribe as necessary in order
that the use of such method may clearly re-
flect income.
.04 Section 472(b)(2) provides that a
taxpayer using the LIFO inventory method
must inventory its goods at cost.
.05 Section 1.472–8(a) provides that a
taxpayer may elect to determine the cost
of its LIFO inventories under the dollar-
value LIFO method, provided such method
is used consistently and clearly reflects the
income of the taxpayer in accordance with
the rules of that section.
.06 Section 1.472–8(e)(2)(ii) provides
that the total current-year cost of items
making up a dollar-value LIFO pool may
be determined: (a) by reference to the ac-
tual cost of the goods most recently pur-
chased or produced; (b) by reference to
the actual cost of the goods purchased or
produced during the taxable year in the or-
der of acquisition; (c) by application of an
average unit cost equal to the aggregate
cost of all the goods purchased or produced
throughout the taxable year divided by the
total number of units so purchased or pro-
duced; or (d) pursuant to any other proper
method which, in the opinion of the Com-
missioner, clearly reflects income.
.07 Section 263A generally requires di-
rect costs and an allocable portion of in-
direct costs of certain property produced
or acquired for resale by a taxpayer to be
included in inventory costs, in the case of
property that is inventory, or to be capital-
ized, in the case of other property. Sec-
tion 1.263A–1(e)(2)(ii) provides that re-
sellers must capitalizethe acquisition costs
of property acquired for resale. In ad-
dition, resellers must capitalize the indi-
rect costs describedin § 1.263A–1(e)(3),
which are properly allocable to property
acquired for resale. These indirect costs
often include purchasing, handling, and
storage costs. See § 1.263A–3(c)(1).
.08 InMountain State Ford v.
Commissioner, 112 T.C. 58 (1999), the
Tax Court held that a taxpayer that sold
heavy truck parts and used the dollar-value
LIFO method to account for its parts in-
ventory was not entitled to determine
the current-year cost of the parts in its
ending inventory by reference to their
January 23, 20063502006–4 I.R.B.

replacement cost. In so doing, the court
found that the taxpayer’s replacement cost
method was not in accordance with the
method elected on its Form 970,Appli-
cation To Use LIFO Inventory Method.
The taxpayer’s Form 970 indicated that it
would determine the current-year cost of
the items in its ending inventory by refer-
ence to the actual cost of the goods most
recently purchased or produced in accor-
dance with § 1.472–8(e)(2)(ii)(a). The
court further concluded that even if the
taxpayer had elected to use another proper
method under § 1.472–8(e)(2)(ii)(d), it
could not use the replacement cost of the
parts to determine current-year cost be-
cause replacement cost does not determine
current-year cost on the basis of, or by ref-
erence to, actual cost (or in some instances
a reasonable approximation of actual cost)
in accordance with § 472(b).
.09 Subsequent to theMountain State
Forddecision, the Internal Revenue Ser-
vice gave careful consideration to the fol-
lowing unique circumstances surrounding
the use of replacement cost by automobile
dealers:
(1)Industry practice. It has been the
long-standing and widespread practice of
automobile dealers to use replacement cost
to determine the cost of their vehicle parts
inventory both for financial accounting
and federal income tax purposes.
(2)Use of replacement cost required by
third party. Automobile dealers are com-
monly required by their franchisors (i.e.,
the vehicle’s manufacturer) to value their
vehicle parts inventory using replacement
cost, rather than actual cost.
(3)Substantial burden associated with
switchingtoactualcost. The automobile
dealer industry has represented that auto-
mobile dealers that are presently using re-
placement cost to value their vehicle parts
inventory likely would incur substantial
expense if they were required to modify
their existing record keeping systems to
determine the cost of such inventory using
actual cost.
(4)Replacement cost approximates ac-
tual cost in this industry.Theautomo-
bile dealer industry has provided data to
demonstrate that, on average, in their in-
dustry, due to relatively low inflation and
high inventory turnover, the replacement
cost of vehicle parts approximates the ac-
tual cost of such parts.
.10 Consideration of these factors led
the Service to conclude that, for reasons
of administrative convenience, burden re-
duction, and avoidance of further contro-
versy in this area, a safe harbor method of
accounting to determine the cost of vehi-
cle parts inventory using replacement cost
to approximate actual cost should be pro-
vided to automobile dealers. Accordingly,
automobile dealers were provided a safe
harbor method of accounting in Rev. Proc.
2002–17, 2002–1 C.B. 676. The Service
stated in Rev. Proc. 2002–17 that it was
willing to consider requests of other indus-
tries for similar safe harbors if the facts
of those industries are similar to those de-
scribed above.
.11 Subsequent to the publication of
Rev. Proc. 2002–17, the heavy equip-
ment dealer industry asked the Service to
provide a similar safe harbor that would
allow heavy equipment dealers to value
their heavy equipment parts inventories at
replacement cost. The information sub-
mitted on behalf of the heavy equipment
dealers has led the Service to conclude
that the circumstances in the heavy equip-
ment dealer industry are similar to those
described in section 2.09 of this revenue
procedure. Accordingly, the Service has
concluded, for reasons of administrative
convenience and burden reduction, that a
safe harbor method of accounting to deter-
mine the cost of heavy equipment parts in-
ventory, using replacement cost to approx-
imate actual cost, should be provided to
heavy equipment dealers. The safe har-
bor method is provided in section 4 of
this revenue procedure and is available to
heavy equipment dealers described in sec-
tion 4.05 of this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to any
heavy equipment dealer that is engaged
in the trade or business of selling heavy
equipment parts at retail and that is autho-
rized under an agreement with one or more
heavy equipment manufacturers or distrib-
utors to sell new heavy equipment.
SECTION 4. REPLACEMENT COST
METHOD
.01In General. A taxpayer that is
within the scope of this revenue procedure
is permitted to use the replacement cost
method to approximate the actual cost
of its heavy equipment parts inventory.
Under the replacement cost method, a tax-
payer must determine the cost of the heavy
equipment parts in its inventory by refer-
ence to the replacement cost of the heavy
equipment parts as defined in section 4.02
of this revenue procedure, determine the
replacement cost using a standard price list
as defined in section 4.03 of this revenue
procedure, and satisfy the book conformity
requirementasdescribedinsection4.04of
this revenue procedure. Taxpayers within
the scope of this revenue procedure may
use the replacement cost method in con-
junction with either the first-in, first-out
inventory method or the LIFO inventory
method. Taxpayers that use the replace-
ment cost method provided by this section
4 and that are subject to the provisions of
§ 263A must include in inventory costs
the additional amounts that are required by
§§ 1.263A–1 and 1.263A–3 (e.g.,freight
costs).
.02Replacement Cost. Replacement
cost means the amount provided in a stan-
dard price list at which a heavy equipment
part may be purchased by the taxpayer on
the date of the inventory. If, on the date of
the inventory, the heavy equipment part is
not provided in a standard price list, the re-
placement cost for the part is equal to the
last amount provided in a standard price
list (i.e., the price at which the part was
last offered for purchase in a standard price
list).
.03Use of Standard Price List.A“stan-
dard price list” is a price list that is widely
recognized and used for business purposes
in the heavy equipment dealer industry and
that is used by the taxpayer in the ordi-
nary course of its business to purchase the
heavy equipment parts for which it is de-
termining the cost.
.04Book Conformity. A taxpayer sat-
isfies the book conformity requirement if
it determines the cost of heavy equipment
parts in its inventory using the replace-
ment cost of the heavy equipment parts
asdefinedinsection4.02whenitas-
certains the income, profit, or loss of its
trade or business for purposes of its books,
records, and reports (including financial
statements) to its shareholders, partners,
other proprietors, beneficiaries, and cred-
itors.
.05Heavy Equipment Dealer Defined.
For purposes of this revenue procedure,
2006–4 I.R.B.351January 23, 2006

a taxpayer is a “heavy equipment dealer”
only if it sells new heavy equipment un-
der an agreement with one or more heavy
equipment manufacturers or distributors
and earns a majority of its revenue from
the sale, or sale and lease, of new heavy
equipment. Heavy equipment is defined
as those items that fall within the Bureau
of Labor Statistics Producer Price Indices
WPU111 and WPU112.
.06Heavy Equipment Parts Inventory.
For purposes of this revenue procedure,
“heavy equipment parts inventory” means
goods held as inventory that are, or could
be, used to replace original parts on heavy
equipment, are necessary for the proper
operation of that heavy equipment, and are
not accessories.
.07Future Reconsideration of the
Use of Replacement Cost.IftheService
later determines that circumstances have
changed so that the replacement cost of
heavy equipment parts no longer approxi-
mates the actual cost of heavy equipment
parts, the Service may reconsider the safe
harbor replacement cost method provided
in this section 4 of this revenue procedure
and may modify or revoke the method for
future taxable years.
SECTION 5. AUDIT PROTECTION
FOR TAXPAYERS CURRENTLY
USING THE REPLACEMENT COST
METHOD
A taxpayer within the scope of this rev-
enue procedure that is using the replace-
ment cost method provided in section 4
of this revenue procedure on January 4,
2006, may continue to use this safe harbor
method for taxable years ending on or af-
ter April 30, 2005, without filing a Form
3115,Application for Change in Account-
ing Method. Such taxpayer’s method of
using replacement cost to determine cost
for its heavy equipment parts inventory
will not be raised as an issue by the Ser-
vice in a taxable year that ends before April
30, 2005. Moreover, if such taxpayer’s
method of using replacement cost to de-
termine cost for its heavy equipment parts
inventory is already an issue under consid-
eration in a taxable year that ends before
April 30, 2005, the issue will not be fur-
ther pursued by the Service.
SECTION 6. CHANGE IN METHOD
OF ACCOUNTING
.01In General. A change to the replace-
ment cost method provided by this revenue
procedure is a change in method of ac-
counting to which the provisions of §§ 446
and 481 and the regulations thereunder ap-
ply. Therefore, a taxpayer within the scope
of this revenue procedure that does not use
the replacement cost method provided in
section 4 of this revenue procedure on Jan-
uary 4, 2006, but wants to use this safe har-
bor method may do so for a taxable year
ending on or after April 30, 2005, and must
file a Form 3115.
.02Automatic change to the replace-
ment cost method. A taxpayer within the
scope of this revenue procedure that wants
to change its method of determining cost to
the replacement cost method provided by
this revenue procedure must follow the au-
tomatic change in accounting method pro-
visions of Rev. Proc. 2002–9, 2002–1
C.B. 327, as modified and clarified by An-
nouncement 2002–17, 2002–1 C.B. 561,
modified and amplified by Rev. Proc.
2002–19, 2002–1 C.B. 696, and ampli-
fied, clarified, and modified by Rev. Proc.
2002–54, 2002–2 C.B. 432, with the fol-
lowing 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
its first or second taxable year ending on or
after April 30, 2005;
(2) A change to the replacement cost
method under the provisions of Rev. Proc.
2002–9 must be effected on a cut-off
method. Thus, the change in method of
accounting is made without a § 481(a)
adjustment;
(3) A taxpayer making a change under
this section 6.02 of this revenue procedure
for its first taxable year ending on or af-
ter April 30, 2005, that before February
3, 2006, filed its original federal income
tax return for such year is not required to
comply with the filing requirement in sec-
tion 6.02(3)(a) of Rev. Proc. 2002–9, pro-
vided the taxpayer complies with the fol-
lowing filing requirement. The taxpayer
must complete and file a Form 3115 in du-
plicate. The original must be attached to an
amended federal income tax return for the
taxpayer’s first taxable year ending on or
after April 30, 2005. This amended return
must be filed no later than July 3, 2006. A
copy of the Form 3115 must be filed with
the national office (see section 6.02(6) of
Rev. Proc. 2002–9) no later than when the
taxpayer’s amended return is filed; and
(4) For purposes of Line 1a of Form
3115, the designated number for the auto-
matic accounting method change autho-
rized by this revenue procedure is “96.” A
taxpayer making the automatic change in
method of accounting authorized by this
revenue procedure and another automatic
change in method of accounting under
§ 263A for the same taxable year may
file one Form 3115 to make both changes,
but must comply with the ordering rules of
§ 1.263A–7(b)(2), and must enter the auto-
matic accounting method change numbers
for both changes on Line 1a of Form 3115.
.03Audit Protection. If a taxpayer com-
plies with the requirements of this revenue
procedure and changes its method of deter-
mining cost for its heavy equipment parts
inventory to the replacement cost method
provided in section 4 of this revenue pro-
cedure, the taxpayer will receive audit pro-
tection for any taxable year before the year
of change with respect to the taxpayer’s
method of determining cost for its heavy
equipment parts inventory under § 471 or
472. See section 7 of Rev. Proc. 2002–9.
However, if this change in method of ac-
counting is made for the taxpayer’s first
or second taxable year ending on or after
April 30, 2005, and the taxpayer’s method
of determining cost (other than by use of
replacement cost) for its heavy equipment
parts inventory under § 471 or 472 is an
issue under consideration as of January 4,
2006, in a taxable year that ends before
April 30, 2005, the taxpayer will not re-
ceive audit protection.
SECTION 7. RECORD KEEPING
Section 6001 provides that every per-
son liable for any tax imposed by the
Code, or for the collection thereof, must
keep such records, render such statements,
make such returns, and comply with such
rules and regulations as the Secretary may
from time to time prescribe. The books
or records required by § 6001 must be
kept at all times available for inspection
by authorized internal revenue officers or
employees, and must be retained so long as
the contents thereof may become material
in the administration of any internal rev-
enue law. Section 1.6001–1(e). In order
January 23, 20063522006–4 I.R.B.

to satisfy the record keeping requirements
of § 6001 and the regulations thereunder,
a taxpayer that uses the replacement cost
method should maintain records support-
ing all aspects of its inventory valuation
including, but not limited to, the price
list described in section 4 of this revenue
procedure.
SECTION 8. MODIFICATION OF REV.
PROC. 2002–17
Rev. Proc. 2002–17 is amended by
adding the following new section 4.05:
Future Reconsideration of the Use of Re-
placement Cost. If the Service later deter-
mines that circumstances have changed so
that the replacement cost of vehicle parts
no longer approximates the actual cost of
vehicle parts, the Service may reconsider
the safe harbor replacement cost method
provided in this section 4 of this revenue
procedure and may modify or revoke the
method for future taxable years.
SECTION 9. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic change
in section 10.02 of the APPENDIX.
Rev. Proc. 2002–17 is modified.
SECTION 10. EFFECTIVE DATE
This revenue procedure generally is ef-
fective for taxable years ending on or after
April 30, 2005.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Richard Shevak of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Shevak at (202) 622–4930 (not a
toll-free number).
2006–4 I.R.B.353January 23, 2006

Part IV. Items of General Interest
PartialWithdrawalofPrevious
Proposed Rules, Notice of
Proposed Rulemaking, and
Notice of Public Hearing
Corporate Estimated Tax
REG–107722–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of previous
proposed rules, notice of proposed rule-
making, and notice of public hearing.
SUMMARY: This document withdraws
proposed regulations relating to corpo-
rate estimated taxes. This document also
contains new proposed regulations that
provide guidance to corporations with re-
spect to estimated tax requirements. These
proposed regulations generally affect cor-
porate taxpayers who are required to make
estimated tax payments. These proposed
amendments reflect changes to the law
since 1984. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written or electronic comments
must be received by February 22, 2006.
Outlines of topics to be discussed at the
public hearing scheduled for March 15,
2006, must be received by February 22,
2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–107722–00),
room 5203, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of
8a.m.and4p.m. to: CC:PA:LPD:PR
(REG–107722–00), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–107722–00). The public hear-
ing will be held in the Auditorium, Internal
Revenue Service Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Joseph P. Dewald, (202)
622–4910; concerning the submissions
of comments, the hearing, and/or to be
placed on the building access list to at-
tend the hearing, Robin Jones at (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document withdraws §§1.6152–1
(a)(1), 1.6654–2(d)(1)(i), 1.6655–1,
1.6655–2, 1.6655–3, 1.6655–4, 1.6655–5,
1.6655–6, and 301.6655–1 in the notice
of proposed rulemaking (LR–228–82,
1984–1 C.B. 760) relating to corporate
estimated taxes under section 6655 that
was published in theFederal Register(49
FR 11186) on March 26, 1984 (referred to
as the 1984 proposed regulations). This
document also contains new proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) and the Procedure
and Administration Regulations (26 CFR
Part 301) relating tocorporate estimated
taxes under section 6425 and section 6655
of the Internal Revenue Code. The IRS
is withdrawing the 1984 proposed reg-
ulations because significant changes to
the law since 1984 have caused them to
become outdated.
These proposed regulations reflect
changes to the law made by the Deficit Re-
duction Act of 1984, Public Law 98–369
(98 Stat. 494), the Superfund Amend-
ments and Reauthorization Act of 1986,
Public Law 99–499 (100 Stat. 1613),
the Tax Reform Act of 1986, Public Law
99–514 (100 Stat. 2085), the Omnibus
Budget Reconciliation Act of 1987, Public
Law 100–203 (101 Stat. 1330), the Rev-
enue Act of 1987, Public Law 100–203
(101 Stat. 1330–382), the Omnibus Trade
and Competitiveness Act of 1988, Pub-
lic Law 100–418 (102 Stat. 1107), the
Technical and Miscellaneous Revenue Act
of 1988, Public Law 100–647 (102 Stat.
3342), the Omnibus Budget Reconcilia-
tion Act of 1989, Public Law 101–239
(103 Stat. 2106), the Omnibus Budget
Reconciliation Act of 1990, Public Law
101–508 (104 Stat. 1388), the Tax Ex-
tension Act of 1991, Public Law 102–227
(105 Stat. 1686), the Act of Feb. 7, 1992,
Public Law 102–244 (106 Stat. 3), the Un-
employment Compensation Amendments
of 1992, Public Law 102–318 (106 Stat.
290), the Omnibus Budget Reconciliation
Act of 1993, Public Law 103–66 (107 Stat.
312), the Uruguay Round Agreements Act
of 1994, Public Law 103–465 (108 Stat.
4809), the Small Business Job Protection
Act of 1996, Public Law 104–188 (110
Stat. 1755), the Taxpayer Relief Act of
1997, Public Law 105–34 (111 Stat. 788),
the Ticket to Work and Work Incentives
Improvement Act of 1999, Public Law
106–170 (113 Stat. 1860), the Community
Renewal Tax Relief Act of 2000, Pub-
lic Law 106–554 (114 Stat. 2763), the
Economic Growth and Tax Relief Recon-
ciliation Act of 2001, Public Law 107–16
(115 Stat. 38), the Jobs and Growth Tax
Relief Reconciliation Act of 2003, Pub-
lic Law 108–27 (117 Stat. 752), and the
American Jobs Creation Act of 2004, Pub-
lic Law 108–357 (118 Stat. 1418).
The existing regulations under section
6655 do not reflect significant changes to
the tax law since 1984, most notably the
enactment of the economic performance
rules under section 461(h). Since the en-
actment of section 461(h), the determina-
tion of when economic performance must
occur for taxpayers to take a deduction
into account for purposes of computing
a quarterly estimated tax payment has
been unclear, particularly for taxpayers
that compute their quarterly estimated tax
payments using an annualization method.
In addition, the IRS and Treasury
Department have become aware of tech-
niques employed by taxpayers, partic-
ularly those taxpayers computing their
estimated tax payments using an an-
nualization method,that reduce, if not
eliminate, estimated tax payments for one
or more installments for a taxable year.
The proposed regulations provide rules
that the IRS and Treasury Department be-
lieve result in a more accurate reflection
of annualized income than methods that
taxpayers may currently be employing.
For example, the proposed regulations
make it clear that taxpayers may not, for
any purpose, determine taxable income
foranannualizationperiodoranadjusted
January 23, 20063542006–4 I.R.B.

seasonal installment period as though the
period is a short taxable year. The pro-
posed regulations provide specific rules
for determining taxable income for any an-
nualization period, including how section
461(h) is to be applied in computing tax-
able income for any annualization period.
For example, with respect to an item of
income or gain, the proposed regulations
provide that the item must be taken into
account in computing annualized taxable
income for a particular annualization pe-
riod if the item is includible in computing
taxable income in accordance with section
451 on or before the last day of the annual-
ization period. With respect to an item of
deduction, the proposed regulations gen-
erally provide that an accrual method tax-
payer may take into account a deduction
in computing annualized taxable income
for a particular annualization period only
to the extent the item is incurred under
§1.461–1(a)(2) on or before the last day of
the annualization period. For purposes of
determining whether a deduction may be
taken into account by an accrual method
taxpayer in determining annualized tax-
able income for a particular annualization
period, the provisions of section 170(a)(2)
and §1.170A–11(b) (charitable contribu-
tions by accrual method corporations),
§1.461–4(d)(6)(ii) (provision of services
or property to a taxpayer), §1.461–5 (re-
curring item exception), and any other
provision that has a similar effect are not
taken into account in determining whether
the item of deduction has been incurred
under §1.461–1(a)(2) and is deductible in
computing annualized taxable income for
an annualization period.
Revenue Ruling 76–450, 1976–2 C.B.
444, provides that state property tax and
franchise tax are deductible from the in-
comeforanannualizationperiodonthe
date the taxpayer accrues the taxes under
the taxpayer’s method of accounting. Rev-
enue Ruling 76–450 was issued prior to
the enactment of section 461(h) and does
not take into account the application of
the economic performance requirements
of section 461(h) for purposes of comput-
ing an estimated tax payment using the an-
nualized income installment method. The
proposed regulations address the applica-
tion of section 461(h) for purposes of the
annualized income installment method and
provide that a taxpayer using an accrual
method of accounting cannot take a deduc-
tion into account unless the deduction has
been incurred under §1.461–1(a)(2) and
is otherwise deductible in computing tax-
able income for the applicable annualiza-
tion period. As a result of the rules pro-
vided in the proposed regulations regard-
ing the application of section 461(h) to
the annualized incomeinstallment method,
Rev. Rul. 76–450 is no longer applicable
and will be obsoleted when these regula-
tions are effective.
For purposes of section 404 and the reg-
ulations, regardless of the overall method
of accounting employed by the taxpayer,
theapplicable2-,3-,4-,5-,6-,7-,8-,
9-, 10- or 11-month annualization period
shall not be treated as a short taxable year
and the rules of section 404 and the reg-
ulations shall be applied on the basis of
the taxpayer’s taxable year for which es-
timated tax is being determined. Thus, the
determination of whether a payment to an
employee is deferred compensation under
§1.404(b)–1T shall be made by reference
to whether the payment is received by the
employee more than a brief period of time
after the last day of the taxable year for
which estimated tax is being determined,
and not the last day of the annualization pe-
riod. With respect to contributions to qual-
ified plans governed by section 404 and
the regulations, in determining whether an
item is paid or incurred by the end of
an annualization period, economic perfor-
mance is satisfied only to the extent such
item is paid by the last day of the annu-
alization period (without regard to section
404(a)(6)) and does not, in combination
with other such items paid during the annu-
alization period, exceed the applicable de-
duction limit of section 404(a) for the tax-
able year. For purposes of sections 419 and
419A and the regulations, regardless of the
overall method of accounting employed by
the taxpayer, the applicable 2-, 3-, 4-, 5-,
6-, 7-, 8-, 9-, 10-, or 11-month annualiza-
tion period shall not be treated as a short
taxable year and the rules of sections 419
and 419A and the regulations shall be ap-
plied on the basis of the taxpayer’s taxable
year for which estimated tax is being deter-
mined. With respect to contributions to a
welfare benefit fund governed by sections
419 and 419A and the regulations, in deter-
mining whether an item is paid or incurred
by the end of an annualization period, eco-
nomic performance is satisfied only to the
extent such item is paid by the last day
of the applicable annualization period and
does not, in combination with other such
items paid during the annualization period,
exceed the applicable deduction limit of
section 419 for the taxable year.
The proposed regulations provide guid-
ance for annual expenses paid or incurred
at the end of the taxable year, or after the
end of the taxable year that are deemed
paid or incurred during the taxable year.
Section 1.6655–2(f)(2)(i) of the proposed
regulations provides that if an accrual
method taxpayer has a history of incurring
a specific item of expense (or paying a
specific item of expense, in the case of a
cash method taxpayer) that, while attrib-
utable to income earned throughout the
current taxable year, is not incurred (or
paid, in the case of a cash method tax-
payer) until the end of the taxable year or
after the end of the current taxable year
and is deemed incurred (or paid, in the
case of a cash method taxpayer) during
the current taxable year (taking into ac-
count, as applicable, section 170(a)(2)
and §1.170A–11(b), section 404(a)(6),
§1.461–4(d)(6)(ii), §1.461–5, and any
other provision that has a similar effect),
then the taxpayer may take into account
a proportionate part of the specific item
of expense for each annualization pe-
riod. In such case the taxpayer may take
into account a proportionate part of the
specific item of expense for each annu-
alization period only if the portion of the
annual expense taken into account is de-
termined with reasonable accuracy and
the expense is properly deducted by the
taxpayer for the current taxable year under
the taxpayer’s method of accounting. For
purposes of §1.6655–2(f)(2)(i), a taxpayer
has a history of incurring or paying a spe-
cific item of expense at the end of the
taxable year, or after the end of the taxable
year that is deemed incurred or paid dur-
ing the taxable year, if, in each of the two
taxable years immediately preceding the
current taxable year (or the immediately
preceding taxable year if the taxpayer was
not in existence for the two preceding tax-
able years), the taxpayer incurred or paid
the specific item of expense at the end of
each taxable year, or after the end of each
taxable year that was deemed incurred or
paid during such taxable year. For pur-
poses of §1.6655–2(f)(2)(i), the term “the
end of the taxable year” means the period
2006–4 I.R.B.355January 23, 2006

between and including the 15
th
and last
day of the last month of the taxable year.
The proposed regulations also provide
guidance regarding the treatment of spe-
cific items for purposes of computing an-
nualized taxable income for an annualiza-
tion period. For example, net operating
loss carryovers must be taken into account
in computing an annualized income in-
stallment after placing the taxable income
for the annualization period on an annual-
ized basis, and section 481(a) adjustments
must be recognized ratably over the appli-
cable adjustment period.
Revenue Ruling 67–93, 1967–1 C.B.
366, provides that a taxpayer should
deduct a net operating loss (NOL) carry-
over from the income for an annualization
period before annualizing the income for
that period. As previously stated, the IRS
and Treasury Department believe that it
is not appropriate for taxpayers to deter-
mine taxable income for an annualization
period or an adjusted seasonal installment
period as though the period is a short
taxable year. As a result, the IRS and
Treasury Department now believe that it
is a more appropriate reflection of annu-
alized taxable income if a NOL carryover
is deducted after annualizing the taxable
income for an applicable annualization
period or adjusted seasonal installment
period. Accordingly, the proposed reg-
ulations provide that a taxpayer must
annualize taxable income before taking
into account a NOL carryover and reduce
the annualized amount by the NOL carry-
over. As a result, Rev. Rul. 67–93 will
be obsoleted when these regulations are
effective.
In addition, the proposed regulations
provide guidance on the amount of de-
preciation and amortization (depreciation)
expense that a taxpayer may take into
account for an annualization period. The
proposed regulations generally provide
that a proportionate amount of a taxpayer’s
estimated annual depreciation expense
shall be taken into account when deter-
mining any annualized income installment
for the taxable year. In determining the
estimated annual depreciation expense, a
taxpayer may take into account purchases,
sales or other dispositions, changes in use,
depreciation permitted by sections 168(k)
and 1400L, and other similar events that,
based on all of the relevant information
available as of the last day of the annu-
alization period (such as capital spending
budgets, financial statement data and pro-
jections, or similarreports that provide
evidence of the taxpayer’s capital spend-
ing plans for the current taxable year),
the taxpayer reasonably expects to occur
during the taxable year. As an alternative
to estimating annual depreciation expense
based on events that are reasonably ex-
pected to occur, the proposed regulations
provide that, in general, a taxpayer may
claim for an annualization period at least a
proportionate amount of 50 percent of the
taxpayer’s estimated depreciation expense
for the current taxable year attributable
to assets that the taxpayer had in service
on the last day of the preceding taxable
year, that remain in service on the first day
of the current taxable year, and that are
subject to the half-year convention. The
proposed regulations also provide that an
annualization period cannot be treated as a
short taxable year, including for purposes
of determining the depreciation allowance
for such annualization period.
The proposed regulations also provide
guidance regarding short taxable years, in-
cluding the due dates for required install-
ments for a short taxable year (including
a taxpayer’s initial taxable year), the com-
putation of such installments, and the ap-
plicable percentage of the annual tax due
with each installment.
Proposed Effective Date
These regulations are proposed to ap-
ply to taxable years beginning after the
date that is 30 days after the date the fi-
nal regulations are published in theFed-
eral Register. Until the final regulations
become effective, taxpayers may rely on
these proposed rules for taxable years be-
ginning on or after the date this notice of
proposed rulemaking is published in the
Federal Register, provided, however, that
the taxpayer applies all of these proposed
rules in determining its required install-
ments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. Except
with respect to §1.6655–5, which deals
with the rules applicable to a short tax-
able year, it has been determined that sec-
tion 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not ap-
ply to these regulations, and because these
provisions do not impose a collection of in-
formation on small businesses, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. With respect to §1.6655–5,
it is hereby certified that this provision of
the regulations will not have a significant
economic impact on a substantial num-
ber of small entities. This certification is
based on the fact that not many small busi-
nesses are going to be subject to the short
taxable year rules because: (1) existing
small businesses generally are not targets
of mergers and acquisitions, which result
in a short taxable year; (2) start-up small
businesses with a short taxable year of less
than four months do not have to pay esti-
mated taxes; and (3) start-up small busi-
nesses with a short taxable year of four
months or more are not likely to have tax-
able income that would be subject to the
corporate estimated tax rules. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
nesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be made
easier to understand. In particular, the IRS
and Treasury Department request com-
ments on whether the 52–53 week taxable
year rules under §1.6655–2(e) should be
simplified. The IRS and Treasury Depart-
ment also request comments on whether
the final regulations should include an ad-
ditional exception, similar to the exception
provided in §1.6655–2(f)(2)(i), that would
permit a taxpayer to take into account for
an annualization period a proportionate
amount of a specific item of expense that
is attributable to income earned through-
January 23, 20063562006–4 I.R.B.

out the current taxable year and is paid or
incurred during the taxable year but after
the applicable annualization period. If
such an exception is appropriate, the IRS
and Treasury Department request com-
ments on what specific types of expenses
would meet the requirements of the rule,
and whether the exception should provide
for any additional limitations, such as a
requirement that a minimum percentage of
the annual amount of the expense be paid
or incurred on a particular day during the
taxable year. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled for
March 15, 2006, beginning at 10:00 a.m.
in the Auditorium of the Internal Revenue
Service Building, 1111 Constitution Av-
enue, NW, Washington, DC. Due to build-
ing security procedures, visitors must enter
at the Constitution Avenue entrance. In ad-
dition, all visitors must present photo iden-
tification to enter the building. Because
of access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 30 minutes before the hear-
ing starts. For information about having
your name placed on the building access
list to attend the hearing, see the “FOR
FURTHER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit elec-
tronic or written comments and an outline
of the topics to be discussed and time to
be devoted to each topic (a signed origi-
nal and eight (8) copies) by February 22,
2006. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are Robert A. Desilets, Jr., formerly
of the Office of Associate Chief Coun-
sel (Procedure and Administration), Ad-
ministrative Provisions and Judicial Prac-
tice Division, and Joseph P. Dewald, Of-
fice of Associate Chief Counsel (Proce-
dure and Administration), Administrative
Provisions and Judicial Practice Division.
*****
Partial Withdrawal of a Previous Notice
of Proposed Rulemaking
Accordingly, under the authority
of 26 U.S.C. 7805, §§1.6152–1(a)(1),
1.6654–2(d)(1)(i), 1.6655–1, 1.6655–2,
1.6655–3, 1.6655–4, 1.6655–5, 1.6655–6,
and 301.6655–1 in the notice of proposed
rulemaking published in theFederal Reg-
isteron March 26, 1984, (LR–228–82)
(49 FR 11186) are withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6655–5 also issued under 26
U.S.C. 6655(i)(2). * * *
Par. 2. In §1.56–0, the heading for
paragraph (e)(5) is added to read as fol-
lows:
§1.56–0 Table of contents to §1.56–1,
adjustment for book income of
corporations.
*****
(e) * * *
(5) Effective date.
Par. 3. In §1.56–1, paragraph (e)(4)
is revised and paragraph (e)(5) is added to
read as follows:
§1.56–1 Adjustment for the book income
of corporations.
*****
(e) * * *
(4)Estimatingthebookincomeadjust-
ment for purposes of the estimated tax li-
ability. See §1.6655–7, as issued by T.D.
8307, 1990–2 C.B. 9 (55 FR 33671), for
special rules for estimating the corporate
alternative minimum tax book income ad-
justment under the annualization excep-
tion.
(5)Effective date. Paragraph (e)(4) of
this section is applicable for taxable years
beginning after the date that is 30 days af-
ter the date the final regulations are pub-
lished in theFederal Register.
Par. 4. In §1.6425–2, paragraph (a) is
revised and paragraph (c) is added to read
as follows:
§1.6425–2 Computation of adjustment of
overpayment of estimated tax.
(a)Income tax liability defined.For
purposes of §§1.6425–1 through 1.6425–3
and 1.6655–7, relating to excessive adjust-
ment, the termincome tax liabilitymeans
the excess of—
(1) The sum of—
(i) The tax imposed by section 11 or
1201(a), or subchapter L of chapter 1 of
the Internal Revenue Code, whichever is
applicable; plus
(ii) The tax imposed by section 55; over
(2) The credits against tax provided by
part IV of subchapter A of chapter 1 of the
Internal Revenue Code.
*****
(c)Effective date. Paragraph (a) of this
section is applicable to applications for ad-
justments of overpayments of estimated
income tax that are filed in taxable years
beginning after the date that is 30 days af-
ter the date the final regulations are pub-
lished in theFederal Register.
Par. 5. Section 1.6425–3 is amended
by:
1. Revising paragraphs (f)(1) and
(f)(2).
2. Adding paragraph (f)(3).
The revisions and addition read as fol-
lows:
§1.6425–3 Allowance of adjustments.
*****
(f)Effect of adjustment.(1)Forpur-
poses of all sections of the Internal Rev-
enue Code except section 6655, relating
to additions to tax for failure to pay esti-
mated income tax, any adjustment under
section 6425 is to be treated as a reduc-
tion of prior estimated tax payments as of
the date the credit is allowed or the re-
fund is paid. For the purpose of sections
6655(a) through (g), (i), and (j), credit or
refund of an adjustment is to be treated as if
not made in determining whether there has
been any underpayment of estimated in-
come tax and, if there is an underpayment,
the period during which the underpayment
existed. However, an excessive adjust-
ment under section 6425 shall be taken into
2006–4 I.R.B.357January 23, 2006

account in applying the addition to tax un-
der section 6655(h).
(2) For the effect of an excessive adjust-
ment under section 6425, see §1.6655–7.
(3) This paragraph (f) is applicable to
applications for adjustments of overpay-
ments of estimated income tax that are
filed in taxable years beginning after the
date that is 30 days after the date the fi-
nal regulations are published in theFed-
eral Register.
Par. 6. Section 1.6655–0 is added to
read as follows:
§1.6655–0 Table of contents.
This section lists the table of contents
for §§1.6655–1 through 1.6655–7.
§1.6655–1 Addition to the tax in the case
of a corporation.
(a) In general.
(b) Amount of underpayment.
(c) Period of the underpayment.
(d) Amount of required installment.
(e) Large corporation required to pay
100 percent of current year tax.
(1) In general.
(2) May use last year’s tax for 1
st
in-
stallment.
(f) Required installment due dates.
(1) Number of required installments.
(2) Time for payment of installments.
(i) Calendar year.
(ii) Fiscal year.
(iii) Short taxable year.
(iv) Partial month.
(g) Definitions.
(h) Special rules for consolidated re-
turns.
(i) Overpayments applied to subsequent
taxable year’s estimated tax.
(1) In general.
(2) Subsequent examinations.
(j) Examples.
(k) Effective date.
§1.6655–2 Annualized income installment
method.
(a) In general.
(b) Determination of annualized in-
come installment—In general.
(c) Special rules.
(1) Applicable percentage.
(2) Partial month.
(d) Election of different annualization
periods.
(e) 52–53 week taxable year.
(f) Determination of taxable income for
an annualization period.
(1) In general.
(2) Exceptions.
(i) Annual expenses paid or incurred at
or after the end of the taxable year.
(ii) Net operating loss carryover.
(iii) Credit carryover.
(iv) Section 481(a) adjustment.
(v) Depreciation and amortization.
(A) General rule.
(B) Short taxable years.
(vi) Member of partnership.
(3) Examples.
(g) Items that substantially affect tax-
able income but cannot be determined ac-
curately by the installment due date.
(1) In general.
(2) Example.
(h) Events arising after installment due
date that were not reasonably foreseeable.
(1) In general.
(2) Example.
(i) Effective date.
§1.6655–3 Adjusted seasonal installment
method.
(a) In general.
(b) Limitation on application of section.
(c) Determination of amount.
(d) Special rules.
(1) Base period percentage.
(2) Filing month.
(3) Application of the rules related
to the annualized income installment
method to the adjusted seasonal install-
ment method.
(e) Example.
(f) Effective date.
§1.6655–4 Large corporations.
(a) Large corporation defined.
(b) Testing period.
(c) Computation of taxable income dur-
ing testing period.
(1) Short taxable year.
(2) Computation of taxable income in
taxable year when there occurs a transac-
tion to which section 381 applies.
(d) Members of controlled group.
(1) In general.
(2) Aggregation.
(3) Allocation rule.
(4) Controlled group members.
(e) Effect on a corporation’s taxable in-
come of items that may be carried back or
carried over from any other taxable year.
(f) Consolidated returns. [Reserved]
(g) Example.
(h) Effective date.
§1.6655–5 Short taxable year.
(a) In general.
(b) Exception to payment of estimated
tax.
(c) Installment due dates.
(1) In general.
(i) Taxable year of four months but less
than twelve months.
(ii) Exception.
(2) Early termination of taxable year.
(i) In general.
(ii) Exception.
(d) Amount due for required install-
ment.
(1) In general.
(2) Tax shown on the return for the pre-
ceding taxable year.
(3) Applicable percentage.
(e) Examples.
(f) 52 or 53 week taxable year.
(g) Use of annualized income or sea-
sonal installment method.
(1) In general.
(2) Computation of annualized income
installment.
(3) Annualization period for final re-
quired installment.
(4) Examples.
(h) Preceding taxable year a short tax-
able year.
(i) Effective date.
§1.6655–6 Methods of accounting.
(a) In general.
(b) Exceptions.
(1) Automatic accounting method
changes.
(2) Non-automatic accounting method
changes.
(c) Examples.
(d) Effective date.
§1.6655–7 Addition to tax on account of
excessive adjustment under section 6425.
Par. 7. Sections 1.6655–1, 1.6655–2,
and 1.6655–3 are revised to read as fol-
lows:
January 23, 20063582006–4 I.R.B.

§1.6655–1 Addition to the tax in the case
of a corporation.
(a)In general. Section 6655 imposes an
addition to the tax under chapter 1 of the
Internal Revenue Code in the case of any
underpayment of estimated tax by a corpo-
ration. An addition to tax due to the under-
payment of estimated taxes is determined
by applying the underpayment rate estab-
lished under section 6621 to the amount
of the underpayment, for the period of the
underpayment. This addition to the tax
is in addition to any applicable criminal
penalties and is imposed whether or not
there was reasonable cause for the under-
payment.
(b)Amount of underpayment.The
amount of the underpayment for any re-
quired installment is the excess of—
(1) The required installment; over
(2) The amount, if any, of the install-
ment paid on or before the last date pre-
scribed for such payment.
(c)Period of the underpayment.The
period of the underpayment of any re-
quired installment runs from the date the
installment was required to be paid to the
15
th
day of the 3
rd
month following the
close of the taxable year, or to the date
such underpayment is paid, whichever is
earlier. For purposes of determining the
period of the underpayment—
(1) The date prescribed for payment of
any installment of estimated tax shall be
determined without regard to any exten-
sion of time; and
(2) A payment of estimated tax will
be credited against unpaid required install-
ments in the order in which such install-
ments are required to be paid.
(d)Amount of required installment.Ex-
cept as otherwise provided in this section
and §§1.6655–2 through 1.6655–7, the
amount of any required installment is 25
percentofthelesserof—
(1) 100 percent of the tax shown on the
return for the taxable year (or, if no return
is filed, 100 percent of the tax for such
year); or
(2) 100 percent of the tax shown on the
return of the corporation for the preceding
taxable year.
(3) Paragraph (d)(2) of this section shall
not apply if the preceding taxable year was
not a taxable year of 12 months or the cor-
poration did not file a return for such pre-
ceding taxable year showing a liability for
tax.
(e)Large corporation required to pay
100 percent of current year tax—(1)In
general. Except as provided in para-
graph (e)(2) of this section, paragraph
(d)(2) of this section shall not apply in the
case of a large corporation (as defined in
§1.6655–4).
(2)May use last year’s tax for first in-
stallment. Paragraph (e)(1) of this section
shall not apply for purposes of determin-
ing the amount of the 1
st
required install-
ment for any taxable year. Any reduc-
tion in such 1
st
installment by reason of
the preceding sentence shall be recaptured
by increasing the amount of the next re-
quired installment determined under para-
graph (d)(1) of this section by the amount
of such reduction and, if the next required
installment is reduced by use of the an-
nualized income installment method under
§1.6655–2 or the adjusted seasonal install-
ment method under §1.6655–3, by increas-
ing subsequent required installments deter-
mined under paragraph (d)(1) of this sec-
tion to the extent that the reduction has not
previously been recaptured.
(f)Required installment due dates—(1)
Number of required installments.Unless
otherwise provided, corporations must
make 4 required installments for each tax-
able year.
(2)Time for payment of install-
ments—(i)Calendar year. In the case
of a calendar year taxpayer, the due dates
of the required installments are as follows:
1st .................................... April15
2nd.................................... June15
3rd.................................... September15
4th.................................... December 15
(ii)Fiscal year. In the case of a taxpayer
other than a calendar year taxpayer, the due
dates of the required installments are as
follows:
1st ........................ 15thdayof4
th
month of the taxable year
2nd........................ 15thdayof6
th
month of the taxable year
3rd........................ 15thdayof9
th
month of the taxable year
4th........................ 15thdayof12
th
month of the taxable year
(iii)Short taxable year. See §1.6655–5
for rules regarding required installments
for corporations with a short taxable year.
(iv)Partial month. Except as otherwise
provided, for purposes of determining the
due date of any required installment a par-
tial month shall be treated as a full month.
(g)Definitions.(1)Thetermtaxas used
in this section and §§1.6655–2 through
1.6655–7 means the excess of—
(i) The sum of—
(A) The tax imposed by section 11, sec-
tion 1201(a), or subchapter L of chapter 1
of the Internal Revenue Code, whichever
is applicable;
(B) The tax imposed by section 55; plus
(C) The tax imposed by section 887;
over
2006–4 I.R.B.359January 23, 2006

(D) The credits against tax provided by
part IV of subchapter A of chapter 1 of the
Internal Revenue Code.
(ii) In the case of a foreign corporation
subject to taxation under section 11, sec-
tion 1201(a), or subchapter L of chapter 1
of the Internal Revenue Code, the tax im-
posed by section 881 shall be treated as a
tax imposed by section 11.
(iii) In the case of a partnership that is
treated, pursuant to regulations issued un-
der section 1446(f)(2), as a corporation for
purposes of this section, the tax imposed
by section 1446 shall be treated as a tax
imposedbysection11.
(2) For the purposes of paragraph (d)(2)
of this section, the termreturn for the pre-
ceding taxable yearmeans the Federal in-
come tax return for such taxable year that
is required by section 6012(a)(2). How-
ever, if an amended Federal income tax re-
turn has been filed before the due date for
an installment, then the termreturn for the
preceding taxable yearmeans the Federal
income tax return as amended. Paragraph
(d)(2) of this section will apply without re-
gard to whether the taxpayer’s Federal in-
come tax return for the preceding taxable
year is filed in a timely manner.
(3) If the tax rates for the current tax-
able year for which estimated tax is being
determined differ from the rates applicable
to the preceding taxable year, the tax deter-
mined for the preceding taxable year shall
be recomputed using the rates applicable to
the current taxable year.
(h)Special rules for consolidated re-
turns. For special rules relating to the de-
termination of the amount of the underpay-
ment in the case of a corporation whose in-
come is included in a consolidated return,
see §1.1502–5(b).
(i)Overpayments applied to subsequent
taxable year’s estimated tax—(1)In gen-
eral. If a taxpayer elects under the provi-
sions of sections 6402(b) and 6513(d) and
the regulations to apply an overpayment in
year one against the estimated tax liability
for year two, the overpayment will be ap-
plied to the required installment payments
for year two in the order due and to the ex-
tent necessary to satisfy such installments,
similartothemannerinwhichanactual
overpayment of one installment is carried
forward to the next installment. No inter-
est is accrued or paid on an overpayment
if the election to apply the overpayment
against estimated tax is made.
(2)Subsequent examinations.Ifadefi-
ciency is determined in an examination of
a return for a taxable year that originally
reflected an overpayment that was applied
against estimated tax for the succeeding
taxable year, interest on the deficiency
will not begin to accrue on an amount
applied until that amount is used to satisfy
a required estimated tax payment in such
taxable year. Regardless of whether the
taxpayer anticipated the application of
such overpayment from the prior taxable
year in calculating and paying its required
estimated tax installment liabilities for
the current taxable year, the subsequently
determined underpayment and interest
computation thereon will not change the
taxpayer’s original election to apply the
overpayment against the estimated tax
liability of the succeeding taxable year.
Any changes to the usage of the origi-
nal overpayment from the prior taxable
year are hypothetical only and solely for
the purpose of computing deficiency in-
terest. Overpayment interest will not
be impacted. For further guidance, see
Rev. Rul. 99–40, 1999–2 C.B. 441, (see
§601.601(d)(2)(ii)(b) of this chapter).
(j)Examples. The method prescribed in
paragraphs (d) through (g) of this section
maybeillustratedbythefollowingexam-
ples:
Example 1. X, a calendar yearcorporation, es-
timates its tax liability for its taxable year ending
December 31, 2006, will be $85,000. X is not a large
corporation as defined in section 6655(g)(2) and
§1.6655–4. X reported a liability of $74,900 on its
return for the taxable year ended December 31, 2005,
with no credits against tax. X paid four installments
of estimated tax, each in the amount of $18,725 (25
percent of $74,900), on April 17, 2006, June 15,
2006, September 15, 2006, and December 15, 2006,
respectively. X reported a tax liability of $88,900
on its return due March 15, 2007. X had a $5,000
credit against tax for tax year 2006 as provided by
part IV of subchapter A of chapter 1 of the Internal
Revenue Code. X did not underpay its estimated tax
for tax year 2006 for any of the four installments,
determined as follows:
(i) Tax as defined in paragraph (g) of this section for 2006 ($88,900-$5,000)$83,900
(ii) Tax as defined in paragraph (g) of this section for 200574,900
(iii) 100% of the lesser of this paragraph (j),Example 1(i)or(ii)74,900
(iv) Amount of estimated tax required to be paid on or before each
installment date (25% of $74,900)18,725
(v) Deduct amount paid on or before each installment date
18,725
(vi) Amount of underpayment for each installment date0
Example 2.(i)Facts. Y, a calendar year corpora-
tion, estimates its tax liability for its taxable year end-
ing December 31, 2006, will be $70,000. Y is not a
large corporation as defined in section 6655(g)(2) and
§1.6655–4. Y reported a Federal income tax liability
of $90,000 for its taxable year ending December 31,
2005. Y paid no installment of estimated tax on or
before April 17, 2006, June 15, 2006, or September
15, 2006, but made a payment of $63,000 on Decem-
ber 15, 2006. On March 15, 2007, Y filed its income
tax return showing a tax of $70,000. Y had no credits
against tax for tax year 2006. Of the $63,000 paid by
Y on December 15, 2006, $17,500 is applied to each
of the first three installments due on April 15, June 15,
and September 15, 2006, and the remaining $10,500
is applied to the fourth installment. Y has an under-
payment of estimated tax for each of the first three
installments of $17,500 and for the fourth installment
of $7,000. The addition to tax under section 6655(a)
is computed as follows:
(A) Tax as defined in paragraph (g) of this section for 2006
$70,000
(B) Tax as defined in paragraph (g) of this section for 200590,000
(C) 100% of the lesser of this paragraph (j),Example 2(i)(A) or (i)(B)70,000
January 23, 20063602006–4 I.R.B.

(D) Amount of estimated tax required to be paid on or before each
installment date (25% of $70,000)17,500
(E) Amount paid on or before the first, second, and third installment dates0
(F) Amount paid on or before the fourth installment date63,000
(G) Amount of underpayment for the first, second, and third installment dates
17,500
(H) Amount of underpayment for the fourth installment date7,000
(ii)Addition to tax. Assuming that neither the an-
nualized income installment method nor the adjusted
seasonal installment method described in §§1.6655–2
and 1.6655–3 would result in a lower payment for any
installment period, and the addition to tax is com-
puted under section 6621(a)(2) at the rate of 8 per-
cent per annum for the applicable periods of under-
payment, the addition to tax is determined as follows:
(A) First installment (underpayment period 4–16–06 through 12–15–06), computed as 244/365 X $17,500 X 8%$936
(B) Second installment (underpayment period 6–16–06 through 12–15–06), computed as 183/365 X $17,500
X8%702
(C) Third installment (underpayment period 9–16–06 through 12–15–06), computed as 91/365 X $17,500 X 8%349
(D) Fourth installment (underpayment period 12–16–06 through 3–15–07), computed as 90/365 X $7,000 X 8%138
(E) Total of this paragraph (j),Example 2(ii)(A) through (D)
2,125
(k)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
§1.6655–2 Annualized income installment
method.
(a)In general. In the case of any re-
quired installment, if the corporation es-
tablishes that the annualized income in-
stallment determined under this section,
or the adjusted seasonalinstallment deter-
mined under §1.6655–3, is less than the
amount determined under §1.6655–1—
(1) The amount of such required install-
ment shall be the annualized income in-
stallment (or, if less, the adjusted seasonal
installment); and
(2)Anyreductioninarequiredinstall-
ment resulting from the application of this
section will be recaptured by increasing
the amount of the next required install-
ment determined under §1.6655–1 by the
amount of such reduction (and, if the next
required installment is similarly reduced,
by increasing subsequent required install-
ments to the extent that the reduction has
not previously been recaptured).
(b)Determination of annualized in-
come installment—In general. In the case
of any required installment, the annualized
income installment is the excess (if any)
of—
(1) The product of the applicable per-
centage and the tax for the taxable year
computed by annualizing the taxable in-
come and alternative minimum taxable in-
come—
(i) For the first 3 months of the taxable
year, in the case of the first required install-
ment;
(ii) For the first 3 months of the taxable
year, in the case of the second required
installment;
(iii) For the first 6 months of the tax-
able year in the case of the third required
installment; and
(iv) For the first 9 months of the taxable
year, in the case of the fourth required in-
stallment; over
(2) The aggregate amount of any prior
required installments for the taxable year.
(c)Special rules—(1)Applicable per-
centage. Except as otherwise provided in
§1.6655–5(d) with respect to short taxable
years—
In the case of the following
required installments:
The applicable
percentage is:
1st...................................................................25
2nd..................................................................50
3rd...................................................................75
4th...................................................................100
(2)Partial month. Except as otherwise
provided, for purposes of paragraph (b) of
this section a partial month shall be treated
as a month.
(d)Election of different annualization
periods. (1) If the taxpayer timely files
Form 8842, “Election To Use Different
Annualization Periods for Corporate Es-
timated Tax,” in accordance with section
6655(e)(2)(C)(iii), and elects Option 1—
(i) Paragraph (b)(1)(i) of this section
will be applied by using the language “2
months” instead of “3 months”;
(ii) Paragraph (b)(1)(ii) of this section
will be applied by using the language “4
months” instead of “3 months”;
(iii) Paragraph (b)(1)(iii) of this section
will be applied by using the language “7
months” instead of “6 months”; and
2006–4 I.R.B.361January 23, 2006

(iv) Paragraph (b)(1)(iv) of this section
will be applied by using the language “10
months” instead of “9 months”.
(2) If the taxpayer timely files
Form 8842, in accordance with section
6655(e)(2)(C)(iii), and elects Option 2—
(i) Paragraph (b)(1)(ii) of this section
will be applied by using the language “5
months” instead of “3 months”;
(ii) Paragraph (b)(1)(iii) of this section
will be applied by using the language “8
months” instead of “6 months”; and
(iii) Paragraph (b)(1)(iv) of this section
will be applied by using the language “11
months” instead of “9 months”.
(e)52–53 week taxable year. (1) Gen-
erally, in the case of a taxpayer whose tax-
able year constitutes 52 or 53 weeks in ac-
cordance with section441(f), the rules pre-
scribed by §1.441–2 shall be applicable in
determining—
(i) Whether a taxable year is a taxable
year of 12 months; and
(ii) When the 2-, 3- ,4-, 5-, 6-, 7-, 8-,
9-, 10-, or 11-month period (whichever
is applicable) commences and ends for
purposes of paragraphs (b)(1), (d)(1) and
(d)(2) of this section.
(2) If a taxpayer employs four 13-week
periods or thirteen 4-week accounting pe-
riods and the end of any accounting period
employed by the taxpayer does not corre-
spond to the end of the 2-, 3- ,4-, 5-, 6-, 7-,
8-, 9-, 10-, or 11-month period (whichever
is applicable), then, provided the taxpayer
has at least one full 4-week or 13-week ac-
counting period, as appropriate, within the
applicable period, annualized taxable in-
come for the applicable period shall be—
(i) [(x/(y*13))*z], in the case of a tax-
payer using four 13-week periods, if—
(A) x = Taxable income for the number
of full 13-week periods in the applicable
period;
(B) y = The number of full 13-week
periods in the applicable period; and
(C) z = The number of weeks in the
taxable year; or
(ii) [(x/(y*4))*z], in the case of a tax-
payer using thirteen 4-week periods, if—
(A) x = Taxable income for the full
4-week periods in the applicable period;
(B) y = The number of full 4-week pe-
riods in the applicable period; and
(C) z = The number of weeks in the
taxable year.
(3)Ifataxpayeremploysfour13-week
periods and the taxpayer does not have
at least one 13-week period within the
applicable 2-, 3- ,4-, 5-, 6-, 7-, 8-, 9-, 10-,
or 11-month period, the taxpayer shall be
permitted to determine annualized taxable
income for the applicable period based
upon—
(i) The taxable income for the number
of weeks in the applicable period; or
(ii) The taxable income for the full
13-week periods that end before the due
date of the required installment.
(4) The following examples illustrate
the rules of this paragraph (e):
Example 1. Taxpayer A, an accrual method tax-
payer, uses a 52/53 week year-end ending on the last
Friday in December and uses four thirteen-week pe-
riods. For its year beginning December 30, 2006, A
uses the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate all of its required
installments. For purposes of computing its first and
second required installments, the first 3 months of A’s
taxable year under paragraph (b)(1)(i) of this section
will end on March 30
th
, the thirteenth Friday of A’s
taxable year. For purposes of its third required in-
stallment, the first 6 months of A’s taxable year will
endonJune29
th
, the twenty-sixth Friday of A’s tax-
able year. For purposes of its fourth required install-
ment, the first 9 months of A’s taxable year will end
on September 28
th
, the thirty-ninth Friday of A’s tax-
able year.
Example 2. Same facts asExample 1except that
A uses thirteen four-week periods and there are 52
weeks during A’s taxable year beginning December
30, 2006, and ending December 28, 2007. For pur-
poses of computing A’s first and second required in-
stallments, A’s annualized taxable income for the first
three months will be the taxable income for the first
three four-week periods of A’s taxable year (Decem-
ber 30, 2006, through March 23, 2007) divided by 12
(number of full four-week periods in the first three
months (3) multiplied by 4) and multiplied by 52 (the
number of weeks in the taxable year). For purposes
of computing A’s third required installment, A’s an-
nualized taxable income for the first six months will
be the taxable income for the first six four-week peri-
ods of A’s taxable year (December 30, 2006, through
June 15, 2007) divided by 24 and multiplied by 52.
For purposes of computing A’s fourth required in-
stallment, A’s annualized taxable income for the first
nine months will be the taxable income for the first
nine four-week periods of A’s taxable year (Decem-
ber 30, 2006, through September 7, 2007) divided by
36 and multiplied by 52.
(5) The application of the annualized
income installment method is illustrated
by the following example:
Example. (i) X, a calendar year corporation, had
a taxable year of less than twelve months for tax year
2005 and no credits against tax for tax year 2006. X
made an estimated tax payment of $15,000 on the
installment dates of April 17, 2006, June 15, 2006,
September 15, 2006, and December 15, 2006, respec-
tively. Assume that, underparagraph (d)(1) of this
section, X elected Option 1 by timely filing Form
8842, in accordance with section 6655(e)(2)(C)(iii),
and determined that its taxable income for the first 2,
4, 7 and 10 months was $25,000, $64,000, $125,000,
and $175,000 respectively. The income for each pe-
riod is annualized as follows:
$25,000 X 12/2=$150,000
$64,000 X 12/4=$192,000
$125,000 X 12/7=$214,286
$175,000 X 12/10=$210,000
(ii)(A) To determine whether the installment pay-
ment made on April 17, 2006, equals or exceeds the
amount that would have been required to have been
paid if the estimated tax were equal to 100 percent
of the tax computed on the annualized income for the
2-month period, the following computation is neces-
sary:
(1) Annualized income for the 2 month period
$150,000
(2) Tax on this paragraph (e)(5),Example(ii)(A)(1)41,750
(3) 100% of this paragraph (e)(5),Example(ii)(A)(2)41,750
(4) 25% of this paragraph (e)(5),Example(ii)(A)(3)10,438
(B) Because the total amount of estimated tax that
was timely paid on or before the first installment date
($15,000) exceeds the amount required to be paid on
or before this date if the estimated tax were 100 per-
cent of the tax determined by placing on an annual-
ized basis the taxable income for the first 2-month
period, the exception described in paragraphs (a) and
(b) of this section applies, and no addition to tax will
be imposed for the installment due on April 15, 2006.
(iii)(A) To determine whether the installment pay-
ments made on or before June 15, 2006, equal or ex-
ceed the amount that would have been required to
have been paid if the estimated tax were equal to 100
percent of the tax computed on the annualized income
for the 4-month period, the following computation is
necessary:
January 23, 20063622006–4 I.R.B.

(1) Annualized income for the 4 month period
$192,000
(2) Tax on this paragraph (e)(5),Example(iii)(A)(1)58,130
(3) 100% of this paragraph (e)(5),Example(iii)(A)(2)58,130
(4) 50% of this paragraph (e)(5),Example(iii)(A)(3) less $10,438
(amount due with the first installment)18,627
(B) Because the total amount of estimated tax ac-
tually paid on or before the second installment date
($19,562 ($15,000 second required installment pay-
ment plus $4,562 overpayment of first required in-
stallment)) exceeds the amount required to be paid
on or before this date if the estimated tax were 100
percent of the tax determined by placing on an annu-
alized basis the taxable income for the first 4-month
period, the exception described in paragraphs (a) and
(b) of this section applies, and no addition to tax will
be imposed for the installment due on June 15, 2006.
(iv)(A) To determine whether the installment pay-
ments made on or before September 15, 2006, equal
or exceed the amount that would have been required
to have been paid if the estimated tax were equal to
100 percent of the tax computed on the annualized
income for the 7-month period, the following com-
putation is necessary:
(1) Annualized income for the 7 month period
$214,286
(2) Tax on this paragraph (e)(5),Example(iv)(A)(1)66,821
(3) 100% of this paragraph (e)(5),Example(iv)(A)(2)66,821
(4) 75% of this paragraph (e)(5),Example(iv)(A)(3) less $29,065
(amount due with the first and second installment)21,051
(B) Because the total amount of estimated tax
actually paid on or before the third installment date
($15,935 ($15,000 third required installment pay-
ment plus $935 overpayment of second required
installment)) does not equal or exceed the amount
required to be paid on or before this date if the esti-
mated tax were 100 percent of the tax determined by
placing on an annualized basis the taxable income
for the first 7-month period, the exception described
in paragraphs (a) and (b) of this section does not
apply, and an addition to tax will be imposed with
respect to the underpayment of the September 15,
2006, installment unless another exception applies to
this installment payment.
(v)(A) To determine whether the installment pay-
ments made on or before December 15, 2006, equal
or exceed the amount that would have been required
to have been paid if the estimated tax were equal to
100 percent of the tax computed on the annualized
income for the 10-month period, the following com-
putation is necessary:
(1) Annualized income for the 10 month period
$210,000
(2) Tax on this paragraph (e)(5),Example(v)(A)(1)65,150
(3) 100% of this paragraph (e)(5),Example(v)(A)(2)65,150
(4)100% of this paragraph (e)(5),Example(v)(A)(3) less $50,116
(amount due with the first, second, and third installment)15,034
(B) Because the total amount of estimated tax
payments made on or before the fourth installment
date that is available to be applied to the estimated
tax due for the fourth installment ($9,884 ($15,000
fourth required installment payment less $5,116 un-
derpayment for the third installment of estimated tax
($21,051 third installment of estimated tax due less
$15,935 payments available to be applied to the third
installment of estimated tax))) does not equal or ex-
ceed the amount required to be paid on or before this
date if the estimated tax were 100 percent of the tax
determined by placing on an annualized basis the tax-
able income for the first 10-month period, the excep-
tion described in paragraphs (a) and (b) of this section
does not apply, and an addition to tax will be imposed
with respect to the underpayment of the December 15,
2006, installment unless another exception applies to
this installment payment.
(vi) Assuming that no other exceptions apply
and the addition to tax is computed under section
6621(a)(2) at the rate of 8 percent per annum for the
applicable periods of underpayment, the amount of
the addition to tax is as follows:
(A) First installment (no underpayment)
(B) Second installment (no underpayment
)
(C) Third installment (underpayment pe
riod 9–16–06 through 12–15–06), computed as 91/365 X $5,116 X 8%
102
(D) Fourth installment (underpayment pe
riod 12–16–06 through 3–15–07), computed as 90/365 X $5,150 X 8%
102
(E) Total of this paragraph (e)(5),Exam
ple(vi)(A) through (D)
204
(f)Determination of taxable income
for an annualization period—(1)In gen-
eral. In determining the applicability of
the exception described in paragraphs (a)
and (b) of this section (relating to the
annualization of income) and the excep-
tion described in §1.6655–3 (relating to
annualization of income for corporations
with seasonal income), and for purposes
of computing a taxpayer’s taxable income
(and applicable tax), an item must be
taken into account in computing a tax-
payer’s taxable income for the taxable
year for which the estimated tax is being
determined, and must be properly taken
into account in determining a taxpayer’s
taxable income (and applicable tax) for
the applicable annualization period by the
2006–4 I.R.B.363January 23, 2006

last day of the such period. Generally,
except as provided in paragraph (f)(2) of
this section, for an item to be taken into
account during an annualization period,
the following must occur on or before the
last day of the applicable annualization pe-
riod (determined based on the accounting
period employed by the taxpayer):
(i) With respect to an item of gross in-
come, such income is includible in com-
puting taxable income in accordance with
section 451 or the appropriate provision of
the Internal Revenue Code (for example,
section 453 for installment sales or section
460 for long-term contracts).
(ii) With respect to an item of loss, the
loss must be permitted to be taken into
account under the appropriate provision of
the Internal Revenue Code.
(iii) With respect to an item of de-
duction, for taxpayers using the cash
receipts and disbursements method of
accounting, the deduction must be paid
under §1.461–1(a)(1) and otherwise de-
ductible in computing taxable income for
the annualization period or, for taxpayers
using an accrual method of accounting,
the deduction must be incurred under
§1.461–1(a)(2) and otherwise deductible
in computing taxableincome for the annu-
alization period. In the case of an accrual
method taxpayer, the provisions of section
170(a)(2) and §1.170A–11(b) (charitable
contributions by accrual method corpo-
rations), §1.461–4(d)(6)(ii) (provision
of services or property to a taxpayer),
§1.461–5 (recurring item exception), and
any other provision that has a similar effect
can not be used in determining whether
the item of deduction has been incurred
under §1.461–1(a)(2) and is otherwise
deductible for purposes of computing tax-
able income for an annualization period.
For purposes of section 404 and the reg-
ulations, regardless of the overall method
of accounting employed by the taxpayer,
the applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-,
10- or 11-month period shall not be treated
as a short taxable year and the rules of
section 404 and the regulations shall be
applied on the basis of the taxpayer’s tax-
able year for which estimated tax is being
determined. Thus, the determination of
whether a payment to an employee is de-
ferred compensation under §1.404(b)–1T
shall be made by reference to whether
the payment is received by the employee
more than a brief period of time after the
last day of the taxable year for which es-
timated tax is being determined and not
the last day of the applicable annualiza-
tion period. With respect to contributions
to qualified plans governed by section
404 and the regulations, in determining
whetheranitemispaidorincurredbythe
end of an annualization period, economic
performance is satisfied only to the extent
suchitemispaidbythelastdayofthe
applicable annualization period (without
regard to section 404(a)(6)) and does not,
in combination with other such items paid
during the applicable annualization pe-
riod, exceed the applicable deduction limit
of section 404(a) for the taxable year. For
purposes of sections 419 and 419A and
the regulations, regardless of the overall
method of accounting employed by the
taxpayer, the applicable 2-, 3-, 4-, 5-, 6-,
7-, 8-, 9-, 10-, or 11-month period shall
not be treated as a short taxable year and
the rules of sections 419 and 419A and the
regulations shall be applied on the basis
of the taxpayer’s taxable year for which
estimated tax is being determined. With
respect to contributions to a welfare ben-
efit fund governed by sections 419 and
419A and the regulations, in determining
whetheranitemispaidorincurredbythe
end of an annualization period, economic
performance is satisfied only to the extent
suchitemispaidbythelastdayofthe
applicable annualization period and does
not, in combination with other such items
paid during such annualization period,
exceed the applicable deduction limit of
section 419 for the taxable year.
(iv) With respect to depreciation and
amortization (depreciation) expense, a
taxpayer shall take into account deprecia-
tion expense only as provided in paragraph
(f)(2)(v) of this section.
(v) With respect to any item taken into
account in computing taxable income for
the annualization period that is not de-
scribed in paragraphs (f)(1)(i), (ii), (iii),
and (iv) of this section, the item is includi-
ble in computing taxable income in accor-
dance with the appropriate provision of the
Internal Revenue Code.
(vi) With respect to an item of credit,
the amounts upon which the credit is com-
puted must have been taken into account
in computing taxable income for the an-
nualization period pursuant to paragraphs
(f)(1)(i), (ii), (iii), (iv), and (v) of this sec-
tion, as applicable.
(2)Exceptions—(i)Annual expenses
paid or incurred at or after the end of the
taxable year. (A) Except as otherwise pro-
vided in paragraphs (f)(2)(ii) through (vi)
of this section, if an accrual method tax-
payer has a history of incurring a specific
item of expense under §1.461–1(a)(2) (or
a cash method taxpayer has a history of
paying a specific item of expense under
§1.461–1(a)(1)) that, while attributable
to income earned throughout the current
taxable year, is not incurred (or paid, in
the case of a cash method taxpayer) until
the end of the taxable year, or after the end
of the current taxable year and is deemed
incurred (or paid, in the case of a cash
method taxpayer) during the current tax-
able year (taking into account, as applica-
ble, section 170(a)(2) and §1.170A–11(b),
section 404(a)(6), §1.461–4(d)(6)(ii),
§1.461–5, and any other provision that has
a similar effect), then the taxpayer may,
in lieu of any amount determined under
paragraph (f)(1) of this section, take into
account for the applicable annualization
period the amount of such expense prop-
erly allocable to such period provided the
amount so allocated to such annualization
period is determinable with reasonable
accuracy and the amount of the item so
allocated is properlydeducted by the tax-
payer during the current taxable year under
the taxpayer’s method of accounting.
(B) For purposes of this paragraph
(f)(2)(i), the portion of an annual expense
item allocable to an annualization pe-
riod will be considered to be determined
with reasonable accuracy if such item is
allocated evenly throughout the taxable
year unless the taxpayer is able to clearly
demonstrate such item is more appropri-
ately allocable to an annualization period
by some other method including, for ex-
ample, in proportion to the earning of
revenue, the use of property, or the pro-
vision of services. For purposes of this
paragraph (f)(2)(i), a taxpayer has a his-
tory of incurring or paying a specific item
of expense at the end of the taxable year,
or after the end of the taxable year that is
deemed incurred or paid during the taxable
year, if, in each of the two taxable years
immediately preceding the current taxable
year (or the immediately preceding taxable
year if the taxpayer was not in existence
for the two preceding taxable years), the
taxpayer incurred or paid the specific item
of expense at the end of each taxable year,
January 23, 20063642006–4 I.R.B.

or after the end of each taxable year that
was deemed incurred or paid during such
taxable year. In addition, for purposes of
this paragraph (f)(2)(i), the term “the end
of the taxable year” means the period be-
tween and including the 15
th
and last day
of the last month of the taxable year.
(ii)Net operating loss carryover.Any
net operating loss carryover to the current
taxable year shall be taken into account in
computing an annualized income install-
ment only after annualizing the taxable in-
come for the annualization period.
(iii)Credit carryover. Any credit car-
ryover to the current taxable year shall be
taken into account in computing an annu-
alized income installment only after annu-
alizing the taxable income for the annual-
ization period and computing the applica-
ble tax, and before applying the applicable
percentage.
(iv)Section 481(a) adjustment.(A)
Any section 481(a) adjustment required to
be recognized during the taxable year shall
be recognized ratably over the number of
months in the taxable year.
(B) With respect to a Form 3115,
“Application for Change in Accounting
Method,” filed during the current taxable
year or a preceding taxable year, if the
change in method of accounting—
(1)Ispermittedtobemadewiththeau-
tomatic consent of the Commissioner, the
appropriate portion of the section 481(a)
adjustment determined under paragraph
(f)(2)(iv)(A) of this section shall be taken
into account in determining an annualized
income installment if, and only if, the copy
of the Form 3115 has been mailed to the
IRS National Office on or before the last
day of the annualization period; or
(2) Requires the prior consent of the
Commissioner, the appropriate portion of
the section 481(a) adjustment determined
under paragraph (f)(2)(iv)(A) of this sec-
tion shall be taken into account in deter-
mining an annualized income installment
if, and only if, the consent agreement re-
flecting the Commissioner’s consent to the
change in method of accounting and the
prescribed terms and conditions for effect-
ing such change has been signed by the
taxpayer and mailed to the IRS National
Office on or before the last day of the an-
nualization period.
(v)Depreciation and amortiza-
tion—(A)General rule. In determin-
ing any annualized income installment,
a proportionate amount of the taxpayer’s
estimated annual depreciation and amor-
tization (depreciation) expense shall be
taken into account. For purposes of the
preceding sentence, estimated annual
depreciation expense is the estimated de-
preciation expense to be properly taken
into account in determining the taxpayer’s
taxable income for the taxable year. In
determining the estimated annual depre-
ciation expense, a taxpayer may take into
account purchases, sales or other dispo-
sitions, changes in use, depreciation de-
ductions permitted under sections 168(k)
and 1400L(b), and other similar events
and provisions (for example, section 179)
that, based on all the relevant information
available as of the last day of the annu-
alization period (such as capital spending
budgets, financial statement data and pro-
jections, or similarreports that provide
evidence of the taxpayer’s capital spend-
ing plans for the current taxable year), are
reasonably expected to occur or apply dur-
ing the taxable year. For purposes of the
additional first-yeardepreciation deduc-
tion under sections 168(k) and 1400L(b),
only a proportionate amount of the current
year’s additional first-year depreciation
deduction to be taken into account in de-
termining a taxpayer’s taxable income
for the taxable year is taken into account
in computing taxable income for an an-
nualization period. As an alternative to
estimating annual depreciation expense
based on events that are reasonably ex-
pected to occur, a taxpayer may claim
for an annualization period at least a pro-
portionate amount of 50 percent of the
taxpayer’s estimated depreciation expense
for the current taxable year attributable to
assets that a taxpayer had in service on the
last day of the preceding taxable year, that
remain in service on the first day of the
current taxable year, and that are subject
to the half-year convention.
(B)Short taxable years. Unless the tax-
able year is, or will be, a short taxable year,
in no circumstance may an annualization
period be treated as a short taxable year
for purposes of determining the deprecia-
tion allowance for such annualization pe-
riod. If the taxable year is, or will be (based
on all relevant information available as of
the last day of the annualization period),
a short taxable year, annual depreciation
expense shall be computed using the rules
applicable for computing depreciation dur-
ing a short taxable year for purposes of de-
termining the annual depreciation expense
to be allocated to an annualization period.
For this purpose, the rules applicable for
computing depreciation during a short tax-
able year shall be applied on the basis of
the date the taxable year is expected to end
based on all relevant information available
as of the last day of the annualization pe-
riod. See Rev. Proc. 89–15, 1989–1
C.B. 816, (see §601.601(d)(2)(ii)(b) of this
chapter).
(vi)Member of partnership. In deter-
mining a partner’s distributive share of
partnership items that must be taken into
account during an annualization period,
the rules set forth in §1.6654–2(d)(2) are
applicable.
(3)Examples. The provisions of this
paragraph (f) are illustrated by the follow-
ing examples:
Example 1. Corporation A, a calendar year
taxpayer, uses an accrual method of accounting
and uses the annualized income installment method
under section 6655(e)(2)(A)(i) to calculate its first
required installment payment for its 2006 taxable
year. Consistent with its historical practice, the board
of directors of A, on or before March 31, 2006,
make a binding, irrevocable commitment to fund a
minimum contribution of $10,000,000 to A’s quali-
fied retirement plan by March 15, 2007, which fixes
A’s liability to make the $10,000,000 contribution.
Similarly, consistent with A’s historical practice, A
plans to remit payments to the retirement plan of
$1,000,000 on January 2, 2007, and $9,000,000 on
March 1, 2007. The $10,000,000 commitment is not
taken into account for purposes of determining A’s
first annualized income installment, which is based
on the income and deductions from the first three
months of the taxable year, because A did not make
any payments by March 31, 2006 (and therefore did
not satisfy the economic performance requirements
of §1.461–4(d)(2)(iii) by March 31, 2006), in accor-
dance with paragraph (f)(1)(iii) of this section. The
$10,000,000 is not treated as paid on or before March
31, 2006, under section 404(a)(6) because, pursuant
to paragraph (f)(1)(iii) of this section, the last day of
the annualization period is not to be treated as the
last day of A’s taxable year. However, pursuant to
paragraph (f)(2)(i)(A) of this section, because A has
historically incurred a retirement plan expense during
the taxable year pursuant to section 404 that, but for
the deeming rule of section 404(a)(6), would have
been incurred after the end of the taxable year, and be-
cause A satisfies the other requirements of paragraph
(f)(2)(i)(A) of this section, A may take into account
a $2,500,000 retirement plan expense for purposes
of determining A’s taxable income to be annualized
in computing A’s first annualized income installment
for 2006 ($10,000,000/12 X 3 = $2,500,000) unless,
pursuant to paragraph (f)(2)(i)(B) of this section, A
is able to clearly demonstrate that the retirement plan
expense is more appropriately allocable by some
other method.
2006–4 I.R.B.365January 23, 2006

Example 2. Same facts asExample 1except
that, consistent with its historical practice, A remits
$9,000,000 to the retirement plan on June 30, 2006,
and$1,000,000totheretirementplanonSeptember
30, 2006. For purposes of determining A’s first and
second required installments for 2006, which are
based on the income and deductions from the first
three months of the taxable year, A may not take into
account any of the retirement plan expense because
A did not make any payments by March 31, 2006
(and therefore did not satisfy the economic perfor-
mance requirements of §1.461–4(d)(2)(iii) by March
31, 2006), in accordance with paragraph (f)(1)(iii)
of this section. For A’s third required installment,
which is based on the income and deductions from
the first six months of the taxable year, A may take
into account a $9,000,000 retirement plan expense
for purposes of determining A’s annualized taxable
income because A incurred the $9,000,000 expense
by June 30, 2006. For A’s fourth required install-
ment, which is based on the income and deductions
from the first nine months of the taxable year, A
may take into account a $10,000,000 retirement plan
expense for purposes of determining A’s annualized
taxable income because A incurred the$10,000,000
retirement plan expense by September 30, 2006.
Example 3. Corporation B, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate its first required install-
ment. In each of the three preceding taxable years, B
has paid annual bonuses on the Friday immediately
preceding December 25 to those employees of B that
provided services to B during the taxable year and
were employed by B on the date such bonuses were
paid. At the beginning of 2006, consistent with its
historical experience, B’s board of directors pass a
resolution that B will pay cash bonuses of $6,000,000
to those employees that have provided services to
B during 2006 and are employed by B on Decem-
ber 22, 2006, the Friday immediately preceding De-
cember 25, 2006. B plans to pay, and does pay, the
cash bonuses to eligible employees on March 1, 2007.
The bonuses, pursuant to paragraph (f)(1)(iii) of this
section, are not treated asdeferred compensation for
the taxable year or the annualization period under
§1.404(b)–1T because the last day of the annualiza-
tion period is not to be treated as the last day of B’s
taxable year. Because the bonuses are not treated as
deferred compensation, the bonuses are not subject
to section 404, and instead are treated as service lia-
bilities under §1.461–4(d)(2)(i) rather than employee
benefit liabilities under §1.461–4(d)(2)(iii). Thus,
the bonuses are incurred when all the events have
occurred that establish the fact of the liability, the
amount of the liability can be determined with rea-
sonable accuracy, and the services are provided to B
by B’s employees. If B’s first required installment
is made under the provisions of section 6655(e)(1),
the $6,000,000 is not taken into account for purposes
of determining B’s first annualized income install-
ment, which is based on the income and deductions
from the first three months of the taxable year, be-
cause B did not incur any liability for bonus pay-
ments for the current taxable year by March 31, 2006,
in accordance with paragraph (f)(1)(iii) of this sec-
tion. However, pursuant to paragraph (f)(2)(i)(A)
of this section, because B has historically incurred a
bonus expense at the end of the taxable year, and be-
cause B satisfies the other requirements of paragraph
(f)(2)(i)(A) of this section, B may take into account a
$1,500,000 bonus expense for purposes of determin-
ing B’s taxable income to be annualized in comput-
ing B’s first annualized income installment for 2006
($6,000,000/12 X 3 = $1,500,000) unless, pursuant
to paragraph (f)(2)(i)(B) of this section, B is able to
clearly demonstrate that the bonus expense is more
appropriately allocable by some other method.
Example 4. Corporation C, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate its first required install-
ment for its 2006 taxable year. C has a net operating
loss carryover to 2006 of $400,000. C’s taxable in-
come from January 1, 2006, through March 31, 2006,
without regard to any net operating loss carryover,
is $500,000. For purposes of determining C’s first
annualized income installment, C’s annualized tax-
able income is $1,600,000, determined by placing C’s
first three months of taxable income from January 1,
2006, through March 31, 2006, on an annualized ba-
sis ($500,000 X 12/3 = $2,000,000) and reducing the
resulting amount of $2,000,000 by the $400,000 net
operating loss carryover to 2006.
Example 5. Corporation D, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required install-
ment payments for its 2006 taxable year. On April 15,
2005, D filed a Form 3115, “Application for Change
in Accounting Method,” to request the consent of the
Commissioner to change its method of accounting for
recognizing revenue. The Commissioner consented
to D’s requested change, and D signed and mailed
the consent letter to the IRS National Office on De-
cember 15, 2005. The method change resulted in
a positive section 481(a) adjustment of $200,000 to
be taken into account over four taxable years begin-
ning in 2005. D’s taxable income from January 1,
2006, through March 31, 2006, prior to any section
481(a) adjustment, is $500,000. For purposes of de-
termining D’s first annualized income installment for
its 2006 taxable year, D’s annualized taxable income
is $2,050,000, determined by placing the sum of D’s
first three months of taxable income from January
1, 2006, through March 31, 2006, ($500,000) plus,
pursuant to paragraph (f)(2)(iv) of this section, the
portion of the section 481(a) adjustment required to
be recognized during the taxable year ($200,000/4 =
$50,000) that is attributable to the period from Jan-
uary 1, 2006, through March 31, 2006, ($50,000 X
3/12 = $12,500) on an annualized basis ($512,500 X
12/3 = $2,050,000).
Example 6. Corporation E, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required install-
ment payments for its 2006 taxable year. E’s tax-
able income from January 1, 2006, through March
31, 2006, prior to any section 481(a) adjustment, is
$500,000. On June 30, 2006, E filed a copy of the
Form 3115 with the IRS National Office to request a
change in method of accounting that was permitted to
be made with the automatic consent of the Commis-
sioner and resulted in a negative section 481(a) ad-
justment of $400,000 to be taken into account entirely
in 2006. For purposes of determining E’s first annu-
alized income installment for its 2006 taxable year,
E’s annualized taxable income is $2,000,000, deter-
mined by placing E’s first three months of taxable in-
come from January 1, 2006, through March 31, 2006,
($500,000) on an annualized basis ($500,000 X 12/3
= $2,000,000). Because E did not file the accounting
method change request until after the last day of the
annualization period, no portion of the section 481(a)
adjustment is taken into account in computing E’s
first annualized income installment.
Example 7. Same facts asExample 6except that
E’s taxable income from January 1, 2006, through
June 30, 2006, prior to any section 481(a) adjustment,
is $800,000. For purposes of determining E’s third
annualized income installment for its 2006 taxable
year, E’s annualized taxable income is $1,200,000,
determined by placing the sum of E’s first six months
of taxable income from January 1, 2006, through
June 30, 2006, ($800,000) less, pursuant to para-
graph (f)(2)(iv) of this section, the portion of the
2006 section 481(a) adjustment required to be recog-
nized during the taxable year that is attributable to
the period from January 1, 2006, through June 30,
2006 ($400,000 X 6/12 = $200,000) on an annualized
basis ($600,000 X 12/6 = $1,200,000).
Example 8. Same facts asExample 7except that
E’s request for change in method of accounting re-
quired the prior consent of the Commissioner and the
Form 3115 was filed with the IRS National Office on
June 30, 2006. On December 10, 2006, E received
the consent of the Commissioner to change its method
of accounting. E signed and mailed the consent let-
ter to the IRS National Office on December 15, 2006.
For purposes of determining E’s third annualized in-
come installment for its 2006 taxable year, E’s annu-
alized taxable income is $1,600,000, determined by
placing E’s first six months of taxable income from
January 1, 2006, through June 30, 2006, on an an-
nualized basis ($800,000 x 12/6 = $1,600,000). No
portion of the section 481(a) adjustment is taken into
account in computing E’s third annualized income in-
stallment because, although E filed the accounting
method change request on or before the last day of
E’s third annualization period, E did not receive the
Commissioner’s consent to change its method of ac-
counting, and E did not sign and mail the consent
agreement to the IRS National Office, on or before
the last day of E’s third annualization period.
Example 9. Corporation F, a calendar year
taxpayer that began business on January 1, 2003,
adopted an accrual method of accounting and will
use the annualized income installment method un-
der section 6655(e)(2)(A)(i) to calculate its first
required installment payment for its 2003 taxable
year. As of March 31, 2003, F has purchased and
placed in service $100,000 of “5-year property,” as
defined in section 168(e), and anticipates purchasing
and placing in service another $100,000 of “5-year
property” before December 31, 2003. F does not
anticipate being subject to the mid-quarter conven-
tion for the 2003 taxable year, does not anticipate
making any depreciation elections for this class of
property, does not anticipate making a section 179
election, will deduct the 30% additional first year
depreciation deduction, does not anticipate any sales
or other dispositions of depreciable property, and
no events have occurred, and, based on all relevant
information available as of the due date of F’s first
required installment, F does not know of any event
that will cause F’s taxable year to be a short taxable
January 23, 20063662006–4 I.R.B.

year. F’s annual depreciation expense for 2003 is
estimated to be $88,000 (total depreciation deduc-
tion under section 168(k) of $60,000 ($200,000 X
30% = $60,000) plus annual depreciation of $28,000
(($200,000 minus $60,000) X 20%)). For purposes
of determining F’s first annualized income install-
ment for its 2003 taxable year, in accordance with
paragraph (f)(2)(v)(A) of this section, depreciation
expense of $22,000 ($88,000 x 3/12 = $22,000) may
be taken into account in computing F’s January 1,
2003, through March 31, 2003, taxable income to be
annualized. Under paragraph (f)(2)(v)(B) of this sec-
tion, F may not consider its first annualization period
to be a short taxable year for purposes of determining
the depreciation allowance for such annualization
period.
Example 10. Corporation G, a calendar year
taxpayer that began business on January 5, 2004,
adopted an accrual method of accounting and will
use the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate its first required
installment payment for its 2005 taxable year. On
January 5, 2004, G purchased and placed in service an
asset that cost $30,000, qualifies as “5-year property”
as defined in section 168(e), is eligible for the 50%
additional first year depreciation deduction under
section 168(k), and is subject to the half-year con-
vention. G will deduct the 50% additional first year
depreciation deduction with respect to the “5-year
property.” For tax year 2004, G takes a depreciation
deduction under section 168(k) of $18,000 ($15,000
($30,000 X 50% = $15,000) plus annual depreciation
of $3,000 ($15,000 X 20% = $3,000)). G does not
anticipate being subject to the mid-quarter conven-
tion for the 2004 taxable year, does not anticipate
making any depreciation elections for this class of
property, does not anticipate making a section 179
election, will deduct the 50% additional first year
depreciation deduction, does not anticipate any sales
or other dispositions of depreciable property, and
no events have occurred, and, based on all relevant
information available as of the due date of G’s first
required installment, G does not know of any event
that will cause G’s taxable year to be a short taxable
year. G’s annual depreciation expense for 2005 is es-
timated to be $4,800 ($15,000 X 32% = $4,800). For
purposes of determining G’s first annualized income
installment for its 2005 taxable year, in accordance
with paragraph (f)(2)(v)(A) of this section, depreci-
ation expense of $1,200 ($4,800 x 3/12 = $1,200)
may be taken into account in computing G’s January
1, 2005, through March 31, 2005, taxable income
to be annualized. As an alternative to estimating
annual depreciation expense based on events that are
reasonably expected to occur, depreciation expense
of at least $600 ($4,800 x 50% x 3/12 = $600) may
be taken into account in computing G’s January 1,
2005, through March 31, 2005, taxable income to
be annualized. Under paragraph (f)(2)(v)(B) of this
section, G may not consider its first annualization
period to be a short taxable year for purposes of
determining the depreciation allowance for such
annualization period.
Example 11. Corporation H, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required in-
stallment payments for its 2006 taxable year. H has
owned real property in State Y since 2002 and has
used the real property in its trade or business. H’s
method of accounting for real estate taxes is to deduct
the taxes on the lien date, subject to the recurring item
exception of §1.461–5. Based on historical practice
for the past five years, for the 2006 calendar year State
Y imposes a lien for real estate taxes on real property
owned in State Y on March 15, 2006, with 90% of the
tax due on June 30, 2006, and the remaining 10% of
the tax due on June 29, 2007. Based on the value of
H’s real property in State Y, H’s real estate tax liabil-
ity lien imposed on March 15, 2006, is $100,000. H
pays the first 90% of this liability on June 30, 2006,
and the remaining 10% on June 29, 2007. Under para-
graph (f)(1)(iii) of this section, the $100,000 real es-
tate tax liability is not taken into account for purposes
of determining H’s first annualized income install-
ment, which is based on the income and deductions
from the first three months of the taxable year, be-
cause economic performance with respect to the real
estate tax liability did not occur by March 31, 2006.
However, pursuant to paragraph (f)(2)(i)(A) of this
section, because H has historically incurred a real es-
tate tax expense after the end of the taxable year and
the real estate tax expense was deemed incurred in
2006 pursuant to §1.461–5, and because H satisfies
the other requirements of paragraph (f)(2)(i)(A) of
this section, a $2,500 real estate tax expense may be
taken into account for purposes of determining H’s
taxable income to be annualized in computing H’s
first annualized income installment ($10,000/12 X 3
= $2,500) unless, pursuant to paragraph (f)(2)(i)(B)
of this section, H is able to clearly demonstrate that
the real estate tax expense is more appropriately allo-
cable by some other method.
Example 12. Same facts asExample 11, except
that H is computing its third required installment pay-
ment for H’s 2006 taxable year. Pursuant to para-
graph (f)(1)(iii) of this section, H may take into ac-
count $90,000 ($100,000 real estate tax liability X
90% paid on June 30, 2006) for purposes of determin-
ing the taxable income to be annualized in computing
H’s third annualized income installment because eco-
nomic performance with respect to $90,000 of the real
estate tax liability occurred by June 30, 2006. In addi-
tion, pursuant to paragraph (f)(2)(i)(A) of this section,
because H has historically incurred a real estate tax
expense after the end of the taxable year and the real
estate tax expense was deemed incurred in 2006 pur-
suant to §1.461–5, and because H satisfies the other
requirements of paragraph (f)(2)(i)(A) of this section,
a $5,000 real estate tax expense also may be taken
into account for purposes of determining H’s taxable
income to be annualized in computing H’s third annu-
alized income installment ($10,000/12 X 6 = $5,000)
unless, pursuant to paragraph (f)(2)(i)(B) of this sec-
tion, H is able to clearly demonstrate that $10,000 of
the real estate tax expense is more appropriately allo-
cable by some other method. Therefore, pursuant to
paragraphs (f)(1)(iii) and (f)(2)(i)(A) of this section,
H may take into account $95,000 of the real estate tax
liability for purposes of computing the third required
installment payment for H’s 2006 taxable year.
Example 13. Same facts asExample 11, except
that H pays 90% of the real estate tax liability on June
30, 2006, and the remaining 10% of the real estate
tax liability on November 30, 2006. Under paragraph
(f)(1)(iii) of this section, the $100,000 real estate tax
liability is not taken into account for purposes of de-
termining H’s first annualized income installment,
which is based on the income and deductions from
the first three months of the taxable year, because eco-
nomic performance with respect to the real estate tax
liability did not occur by March 31, 2006. In addi-
tion, although H has a history of incurring a real es-
tate tax expense after the end of the taxable year that
is deemed incurred duringthe taxable year, H does
not meet the requirements of paragraph (f)(2)(i)(A) of
this section in order to take a real estate tax expense
into account for purposes of determining H’s first an-
nualized income installment because H does not incur
arealestatetaxattheendofthecurrenttaxableyear
or after the end of the current taxable year that will be
deemed incurred during the current taxable year.
Example 14.SamefactsasExample 13except
that H is computing its third required installment pay-
ment for H’s 2006 taxable year. Pursuant to para-
graph (f)(1)(iii) of this section, H may take into ac-
count $90,000 ($100,000 real estate tax liability X
90% paid on June 30, 2006) for purposes of determin-
ing the taxable income to be annualized in computing
H’s third annualized incomeinstallment because eco-
nomic performance with respect to $90,000 of the real
estate tax liability occurred by June 30, 2006.
Example 15. Corporation I, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required install-
ment payments for its 2006 taxable year. As of De-
cember 31, 2005, I had a $1,000,000 account receiv-
able due from Z related to the sale of goods from I to
Z during 2005. I has traditionally incurred bad debt
expense for worthless accounts receivable and, as of
January 1, 2006, I projects that it will have a bad debt
expense of $1,600,000 under section 166 and the reg-
ulations for its calendar year 2006. On March 31,
2006, I determined that its receivable from Z was to-
tally worthless under section 166 and the regulations.
No other receivables were determined to be worthless
between January 1, 2006, and March 31, 2006. In ac-
cordance with paragraph (f)(1)(ii) of this section, a
$1,000,000 bad debt write-off is taken into account
for purposes of determining the taxable income to be
annualized in computing I’s first annualized income
installment.
Example 16.SamefactsasExample 15except
that I determines that its receivable from Z was to-
tally worthless under section 166 and the regulations
on April 10, 2006. As of March 31, 2006, I had not
determined that any receivables were worthless under
section 166 and the regulations. In accordance with
paragraph (f)(1)(ii) of this section, the $1,000,000 bad
debt expense attributableto the receivable from Z is
not taken into account for purposes of determining the
taxable income to be annualized in computing I’s first
annualized income installment, which is based on the
income and deductions from the first three months of
the taxable year, because the receivable from Z be-
came totally worthless after the last day of I’s annu-
alization period. Furthermore, I may not take the bad
debt expense into account for purposes of determin-
ing the taxable income to be annualized in computing
I’s first annualized incomeinstallment because the re-
ceivable from Z does not meet the requirements of
paragraph (f)(2)(i) of this section.
Example 17. Corporation J, a calendar year tax-
payer, uses an accrual method of accounting and the
annualized income installment method under section
6655(e)(2)(A)(i) to calculate its first required install-
2006–4 I.R.B.367January 23, 2006

ment payment for its 2006 taxable year. J projects
its annualized tax for its 2006 taxable year, based on
annualizing J’s taxable income for its first annualiza-
tion period from January 1, 2006, through March 31,
2006, to be $1,500,000 before reduction for any cred-
its. J has an unused credit for increasing research ac-
tivities from 2005 of $500,000 that is carried over
to 2006. For purposes of determining J’s first an-
nualized income installment, J’s annualized tax for
2006 is $1,000,000, determined as the tax for the tax-
able year computed by placing on an annualized ba-
sis J’s taxable income from its first annualization pe-
riod from January 1, 2006, through March 31, 2006,
($1,500,000) reduced by the $500,000 credit carry-
over from 2005.
Example 18. Corporation K, a calendar year
taxpayer, uses an accrual method of accounting and
the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate its first required
installment payment for its 2006 taxable year. K
projects its annualized tax for its 2006 taxable year,
based on annualizing K’s taxable income for its first
annualization period from January 1, 2006, through
March 31, 2006, to be $2,000,000 before reduction
for any credits. K has historically earned a credit
for increasing research activities and, for 2006, K
estimates that it will earn a credit for increasing
research activities under section 41 of $1,200,000.
However, pursuant to paragraph (f)(1)(vi) of this
section, if K were to annualize all components in-
volved in computing the current year credit based on
K’s activity from January 1, 2006, through March
31, 2006, K would generate a credit of $1,600,000
for 2006. For purposes of determining K’s first
annualized income installment, K’s annualized tax
for 2006 is $400,000, determined as the tax for the
2006 taxable year ($2,000,000) computed by placing
on an annualized basis K’s taxable income from its
first annualization period January 1, 2006, through
March 31, 2006, reduced by a $1,600,000 current
year credit from increasing research activities.
Example 19. Same facts asExample 18except
that K does not begin any research activities until
April 3, 2006, and will not incur any research ex-
penses described in paragraph (f)(2)(i) of this section.
As a result, if K were to annualize all components
involved in computing the current year credit based
on K’s activity from January 1, 2006, through March
31, 2006, K would generate no section 41 research
credit for purposes of determining its first annualized
income installment. Pursuant to paragraph (f)(1)(vi)
of this section, K can not take into account any credit
for its first annualization period because K did not in-
cur the credit by the last day of the first annualization
period. Accordingly, for purposes of determining K’s
first annualized income installment, K’s annualized
tax for its first annualization period January 1, 2006,
through March 31, 2006, is $2,000,000.
Example 20. Corporation L, a calendar year
taxpayer, uses an accrual method of accounting and
the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate its first required
installment payment for its 2006 taxable year. L has
licensed technology from Corporation M for the past
five years. Pursuant to the license agreement, L pays
alicensefeetoMequalto$.01foreverydollarof
gross receipts earned by L. For 2006, L projects gross
receipts of $200,000,000,of which $100,000,000
is earned by March 31, 2006, and no portion of L’s
license fee expense is described in paragraph (f)(2)(i)
of this section. Pursuant to paragraph (f)(1)(iii) of
this section, a license fee expense of $1,000,000
($100,000,000 X $.01) is incurred by March 31,
2006, and may be taken into account for purposes of
determining the taxable income to be annualized in
computing L’s first annualized income installment.
Example 21. Same facts asExample 20except
that L does not earn any gross receipts by March 31,
2006. In accordance with paragraph (f)(1)(iii) of this
section, because the license fee expense was not in-
curred under §1.461–1(a)(2) by the last day of the
annualization period, no license fee expense is taken
into account for purposes of determining the taxable
income to be annualized in computing L’s first an-
nualized income installment, which is based on the
income and deductions from the first three months of
the taxable year.
Example 22. Corporation N is a calendar year
taxpayer that producesand sells candy bars. N
uses an accrual method of accounting and the an-
nualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required install-
ment payments for its 2007 taxable year. N annually
conducts, and will conduct for 2007 and 2008, a
contest for its customers whereby N awards, on a
quarterly basis, a cash prize of $100,000, $200,000,
$300,000, and $400,000 to the first, second, third,
and fourth quarter winners, respectively. Winners are
announced on the last day of each calendar quarter
and the prize is payable on the last day of the month
following the announcement of the winner. N uses
the recurring item exception of section 461(h) and
the regulations with respect to its liability to the
prize winner. On December 31, 2006, N announced
its fourth quarter winner and remitted payment of
$400,000 to the winner on January 31, 2007. Al-
though the contest liabilityis incurred in accordance
with §1.461–4(g)(4) on January 31, 2007, at the time
payment is made to the award winner, N may not
take such item into account in computing N’s first
annualized income installment for 2007 because, pur-
suant to the recurring item exception, the $400,000 is
deductible in determining N’s 2006 taxable income
andisnottakenintoaccountindeterminingN’s
taxable income for 2007, as required pursuant to
paragraph (f)(1) of this section. However, because N
has historically incurredan annual prize expense of
$400,000 that is described in paragraph (f)(2)(i)(A)
of this section, $100,000 may be taken into account
for purposes of determining the taxable income to be
annualized in computing N’s first annualized income
installment for N’s 2007 taxable year based on the
$400,000 liability N will incur for the 2007 taxable
year when N makes the payment in January of 2008
to the 2007 fourth quarter winner ($400,000/12 X 3 =
$100,000), unless, pursuant to paragraph (f)(2)(i)(B)
of this section, N is able to clearly demonstrate that
the annual prize expense is more appropriately allo-
cable by some other method.
(g)Items that substantially affect tax-
able income but cannot be determined ac-
curately by the installment due date—(1)
In general. In determining the appli-
cability of the annualization exceptions
described in paragraphs (a) and (b) of this
section and §1.6655–3, reasonable esti-
mates may be made from existing data
for items that substantially affect income
if the amount of such items cannot be
determined accurately by the installment
due date. Examples of these items are
the inflation index for taxpayers using
the dollar-value LIFO (last-in, first-out)
inventory method, intercompany adjust-
ments for taxpayers that file consolidated
returns, and the liquidation of a LIFO layer
at the installment date that the taxpayer
reasonably believes will be replaced at the
end of the year.
(2)Example. The following example
illustrates the rules of this paragraph (g):
Example. Corporation X accounts for its inven-
tory using the dollar-value LIFO method of account-
ing. If, when computing its first annualized income
installment, no reliable inflation index exists for the
period January 1, 2006, through March 31, 2006, X
may interpolate from an available inflation index for
the same months in the previous year to calculate its
cost of goods sold.
(h)Events arising after installment
due date that were not reasonably fore-
seeable—(1)In general. Events arising
subsequent to an installment due date that
cause the taxpayer’s computation of its
taxable income for a prior installment pe-
riod to be understated will not result in a
recomputation of its taxable income for
the prior installment period. The preced-
ing sentence applies only if, based on all
the facts and circumstances as of the due
date of an installment payment, it was not
reasonably foreseeable that these subse-
quent events would occur.
(2)Example. The following example
illustrates the rules of this paragraph (h):
Example. Assume that Congress enacts retroac-
tively effective legislation that causes the taxable in-
come for the applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-,
10- or 11-month period to be understated. This event,
which occurs after the applicable installment due date
and was not reasonably foreseeable at the time the in-
stallment payment was made, will not result in a re-
computation of a corporation’s taxable income for the
applicable installment period because such an event
was not reasonably foreseeable.
(i)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
§1.6655–3 Adjusted seasonal installment
method.
(a)In general. In the case of any re-
quired installment, the amount of the ad-
January 23, 20063682006–4 I.R.B.

justed seasonal installment is the excess (if
any) of—
(1) 100 percent of the amount deter-
mined under paragraph (c) of this section;
over
(2) The aggregate amount of all prior
required installments for the taxable year.
(b)Limitation on application of sec-
tion. This section shall apply only if the
base period percentage (as defined in sec-
tion 6655(e)(3)(D)(i) and paragraph (d)(1)
of this section) for any six consecutive
months of the taxable year equals or ex-
ceeds seventy percent.
(c)Determination of amount.The
amount determined under this section for
any installment will be determined in the
following manner—
(1) Take the taxable income for all
months during the taxable year preceding
the filing month;
(2) Divide such amount by the base pe-
riod percentage for all months during the
taxable year preceding the filing month;
(3) Determine the tax on the amount
determined under paragraph (c)(2) of this
section; and
(4) Multiply the tax computed under
paragraph (c)(3) of this section by the base
period percentage for the filing month and
all months during the taxable year preced-
ing the filing month.
(d)Special rules—(1)Base period per-
centage. The base period percentage for
any period of months shall be the aver-
age percent that the taxable income for the
corresponding months in each of the three
preceding taxable years bears to the tax-
able income for the three preceding taxable
years.
(2)Filing month.Thetermfiling month
means the month in which the installment
is required to be paid.
(3)Application of the rules related
to the annualized income installment
method to the adjusted seasonal install-
ment method. The rules governing the
computation of taxable income (and re-
sulting tax) for purposes of determining
any required installment payment of es-
timated tax under the annualized income
installment methodunder §1.6655–2 shall
apply to the computation of taxable in-
come (and resulting tax) for purposes of
determining any required installment pay-
ment of estimated tax under the adjusted
seasonal installment method.
(e)Example. The provisions of this sec-
tion may be illustrated by the following ex-
ample:
Example. (i) X, a corporation that reports on
a calendar year basis, expected that it would have
an estimated tax liability of $1,200,000 for its tax-
able year ending December 31, 2006. On its 2005
tax return, X reported a tax liability of $652,800.
X paid four installments of estimated tax, each in
the amount of $250,000, $250,000, $250,000, and
$450,000 on April 17, 2006, June 15, 2006, Septem-
ber 15, 2006, and December 15, 2006, respectively.
X reported a tax liability of $1,152,600 on its re-
turn due March 15, 2007, with no credits against tax.
Under the general provision of section 6655(b) and
section 6655(d), there was an underpayment in the
amount of $76,300 for the second installment through
September 15, 2006, and $114,450 for the third in-
stallment through December 15, 2006, determined as
follows:
(A) Tax as defined in section 6655(g)
$1,152,600
(B) 100% of this paragraph (e),Example(i)(A)
1,152,600
(C) Amount of estimated tax required to be paid on or before the first installment (25% of $652,800)163,200
(D) Deduct amount timely paid on or before the first installment due date under the general rule of
section 6655(b)250,000
(E) Amount of overpaid estimated tax for the first installment date86,800
(F) Amount of estimated tax required to be paid on or before the second installment (25% of
$1,152,60
0 plus the recapture amount under section 6655(d)(2)(B) of $124,950 (25% of
$1,152,600 less 163,200))413,100
(G) Deduct amount paid on or before the due date of the second installment less amount applied
towards the first installment under the general rule of section 6655(b) ($250,000 paid in each of
the first a
nd second installments less this paragraph (e),Example(i)(C))
336,800
(H) Amount o
f underpayment for the second installment date
76,300
(I) Amount
of estimated tax required to be paid on or before the third installment (25% of $1,152,600)
288,150
(J) Deduct a
mount paid on or before the due date of the third installment less amount applied towards
the first and second installments under the general rule of section 6655(b) ($250,000 paid in each of the
first, second, and third installments less this paragraph (e),Example(i)(C) less this paragraph (e),
Example(i)
(F))
173,700
(K) Amount o
f underpayment for the third installment date
114,450
(L) Amount o
f estimated tax required to be paid on or before the fourth installment (25% of
$1,152,600)288,150
(M) Deduct amount paid on or before the due date of the fourth installment less amount applied towards
the first, second, and third installments under the general rule of section 6655(b) ($250,000 paid in
each of the fi
rst, second, and third installments plus $450,000 paid in the fourth installment less
this paragraph (e),Example(i)(C) less this paragraph (e),Example(i)(F) less this paragraph (e),
Example(i)(I))335,550
(N) Amount of overpaid estimated tax for the fourth installment date47,400
(ii) X wants to determine if it qualifies for the
adjusted seasonal installment method. X determines
that its monthly taxable income for the preceding three taxable years and for the current taxable year
2006 is as follows:
2006–4 I.R.B.369January 23, 2006

January
February MarchApril
MayJune
July
August
September OctoberNovember December
20032003
$100,000 $90,000$80,000$70,000$60,000$20,000$10,000$10,000$10,000$10,000$10,000$10,000
20042004
200,000 170,000170,000130,000
125,00045,000
21,00019,00020,00020,00020,00020,000
20052005
410,000
350,000
330,000270,000240,00080,00040,00040,00040,00040,00040,00040,000
20062006
600,000 680,000
650,000560,000
460,000170,00070,00060,000
50,000
40,00030,00020,000
(iii) X must initially determine if its base period
percentage for the same 6 consecutive months of the 3
preceding taxable years equals or exceeds 70 percent
(see section 6655(e)(3) and paragraphs (b) and (c) of
this section). By using its taxable income for the first
6 months of 2003, 2004, and 2005, X qualifies for the
adjusted seasonal installment method because its base
period percentage is 87.5 percent (which exceeds 70
percent) computed as follows:
(A) Taxable income for first 6 months of 2003
$420,000
(B) Total taxable income for 2003480,000
(C) Divide this paragraph (e),Example(iii)(A) by this paragraph (e),Example(iii)(B)
.875
(D) Taxable income for first 6 months of 2004840,000
(E) Total taxable income for 2004960,000
(F) Divide this paragraph (e),Example(iii)(D) by this paragraph (e),Example(iii)(E)
.875
(G) Taxable income for first 6 months of 20051,680,000
(H) Total taxable income for 20051,920,000
(I) Divide this paragraph (e),Example(iii)(G) by this paragraph (e),Example(iii)(H)
.875
(J) Add this paragraph (e),Example(iii)(C), (F), and (I)
2.625
(K) Divide this paragraph (e),Example(iii)(J) by 3
.875
(iv) To determine the amount of the first install-
ment under the rules of section 6655(e)(3) and para-
graph (a) of this section, the following computation
is necessary:
(A) Taxable income for first 3 months of 2006
$1,930,000
(B) Taxable income for first 3 months of 2003 ($270,000) divided by total taxable income for 2003 ($480,000).5625
(C) Taxable income for first 3 months of 2004 ($540,000) divided by total taxable income for
2004 ($960,000).5625
(D) Taxable income for first 3 months of 2005 ($1,090,000) divided by total taxable income
for 2005 ($1,920,000).5677
(E) Add this paragraph (e),Example(iv)(B), (C), and (D) and divide by 3
.5642
(F) Divide this paragraph (e),Example(iv)(A) by this paragraph (e),Example(iv)(E)3,420,773
(G) Determine the tax on this paragraph (e),Example(iv)(F)1,163,049
(H) Taxable income for first 4 months of 2003 ($340,000) divided by total taxable income
for 2003 ($480,000).7083
(I) Taxable income for first 4 months of 2004 ($670,000) divided by total taxable income
for 2004 ($960,000).6979
(J) Taxable income for first 4 months of 2005 ($1,360,000) divided by total taxable income
for 2005 (1,920,000).7083
(K) Add this paragraph (e),Example(iv)(H), (I), and (J) and divide by 3.7048
(L) Multiply this paragraph (e),Example(iv)(G) by this paragraph (e),Example(iv)(K)819,717
(M) 100% of this paragraph (e),Example(iv)(L)819,717
(N) Amount of all prior required installments for 20060
(O) Amount of adjusted seasonal installment for the first installment payment
(this paragraph (e),Example(iv)(M) less this paragraph (e),Example(iv)(N))819,717
January 23, 20063702006–4 I.R.B.

(v) To determine the amount of the second install-
ment under the rules of section 6655(e)(3) and para-
graph (a) of this section, the following computation
is necessary:
(A) Taxable income for first 5 months of 2006
$2,950,000
(B) Taxable income for first 5 months of 2003 ($400,000) divided by total taxable income for 2003 ($480,000).8333
(C) Taxable income for first 5 months of 2004 ($795,000) divided by total taxable
income for 2004 ($960,000).8281
(D) Taxable income for first 5 months of 2005 ($1,600,000) divided by total taxable
income for 2005 ($1,920,000).8333
(E) Add this paragraph (e),Example(v)(B), (C), and (D) and divide by 3.8316
(F) Divide this paragraph (e),Example(v)(A) by this paragraph (e),Example(v)(E)
3,547,379
(G) Determine the tax onthis paragraph (e),Example(v)(F)1,206,109
(H) Taxable income for first 6 months of 2003 ($420,000) divided by total taxable
income for 2003 ($480,000).875
(I) Taxable income for first 6 months of 2004 ($840,000) divided by total taxable
income for 2004 ($960,000).875
(J) Taxable income for first 6 months of 2005 ($1,680,000) divided by total taxable
income for 2005 ($1,920,000).875
(K) Add this paragraph (e),Example(v)(H), (I), and (J) and divide by 3
.875
(L) Multiply this paragraph (e),Example(v)(G) by this paragraph (e),Example(v)(K)
1,055,345
(M) 100% of this paragraph (e),Example(v)(L)
1,055,345
(N) Amount of all prior required installments for 2006163,200
(O) Amount of adjusted seasonal installment for the second installment payment
(this paragraph (e),Example(v)(M) less this paragraph (e),Example(v)(N))892,145
(vi) To determine the amount of the third install-
ment under the rules of section 6655(e)(3) and para-
graph (a) of this section, the following computation
is necessary:
(A) Taxable income for first 8 months of 2006
$3,250,000
(B) Taxable income for first 8 months of 2003 ($440,000) divided by total taxable
income for 2003 ($480,000).9167
(C) Taxable income for first 8 months of 2004 ($880,000) divided by total taxable
income for 2004 ($960,000).9167
(D) Taxable income for first 8 months of 2005 ($1,760,000) divided by total taxable
income for 2005 ($1,920,000).9167
(E) Add this paragraph (e),Example(vi)(B), (C), and (D) and divide by 3.9167
(F) Divide this paragraph (e),Example(vi)(A) by this paragraph (vi)(E)
3,545,326
(G) Determine the tax on this paragraph (e),Example(vi)(F)
1,205,411
(H) Taxable income for first 9 months of 2003 ($450,000) divided by total taxable
income for 2003 ($480,000).9375
(I) Taxable income for first 9 months of 2004 ($900,000) divided by total taxable
income for 2004 ($960,000).9375
(J) Taxable income for first 9 months of 2005 ($1,800,000) divided by total taxable
income for 2005 ($1,920,000).9375
(K) Add this paragraph (e),Example(vi)(H), (I), and (J) and divide by 3
.9375
(L) Multiply this paragraph (e),Example(vi)(G) by this paragraph (e),Example(vi)(K)1,130,073
(M) 100% of this paragraph (e),Example(vi)(L)1,130,073
(N) Amount of all prior required installments for 2006
576,300
(O) Amount of adjusted seasonal installment for the third installment payment
(this paragraph (e),Example(vi)(M) less this paragraph (e),Example(vi)(N))553,773
2006–4 I.R.B.371January 23, 2006

(vii) To determine the amount of the fourth install-
ment under the rules of section 6655(e)(3) and para-
graph (a) of this section, the following computation
is necessary:
(A) Taxable inc
ome for first 11 months of 2006
$3,370,000
(B) Taxable inc
ome for first 11 months of 2003 ($470,000) divided by total taxable income
for 2003 ($480,000).9792
(C) Taxable income for first 11 months of 2004 ($940,000) divided by total taxable income
for 2004 ($960,000).9792
(D) Taxable income for first 11 months of 2005 ($1,880,000) divided by total taxable income
for 2005 ($1,92
0,000)
.9792
(E) Add this par
agraph (e),Example(vii)(B), (C), and (D) and divide by 3
.9792
(F) Divide this
paragraph (e),Example(vii)(A) by this paragraph (e),Example(vii)(E)
3,441,585
(G) Determine t
he tax on this paragraph (e),Example(vii)(F)
1,170,139
(H) Taxable inc
ome for first 12 months of 2003 ($480,000) divided by total taxable
income for 2003 ($480,000)1.0000
(I) Taxable income for first 12 months of 2004 ($960,000) divided by total taxable
income for 2004 ($960,000)1.0000
(J) Taxable income for first 12 months of 2005 ($1,920,000) divided by total taxable
income for 2005 (
$1,920,000)
1.0000
(K) Add this par
agraph (e),Example(vii)(H), (I), and (J) and divide by 3
1.0000
(L) Multiply th
is paragraph (e),Example(vii)(G) by this paragraph (e),Example(vi)(K)
1,170,139
(M) 100% of this
paragraph (e),Example(vii)(L)
1,170,139
(N) Amount of all
prior required installments for 2006
864,450
(O) Amount of adj
usted seasonal installment for the fourth installment payment
(this paragraph (e),Example(vii)(M) less this paragraph (e),Example(vii)(N))305,689
(viii) Because the total amount of each required
estimated tax payment determined under section
6655(e)(3) and paragraph (a) of this section exceeds
the amount of each required estimated tax payment
determined under section 6655(d) and §1.6655–1(d)
and (e), the exception described in section 6655(e)
and this section does not apply and the addition to
the tax with respect to the underpayment for the June
15, 2006, and September 15, 2006, installments will
be imposed unless another exception (for example,
see section 6655(e)(2)) applies with respect to these
installments.
(f)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
Par. 8. Section 1.6655–4 is added to
read as follows:
§1.6655–4 Large corporations.
(a)Large corporation defined.The
termlarge corporationmeans any corpo-
ration (or a predecessor corporation) that
had taxable income of at least $1,000,000
for any taxable year during the testing
period. For purposes of this section, a pre-
decessor corporation is the distributor or
transferor corporation in a transaction to
which section 381 (relating to carryovers
in certain corporate acquisitions) applies.
(b)Testing period. For purposes of
paragraph (a) of this section, the termtest-
ing periodmeans the 3 taxable years im-
mediately preceding the taxable year for
which estimated tax is being determined
(the current taxable year) or, if less, the
number of taxable years the taxpayer has
been in existence.
(c)Computation of taxable income dur-
ing testing period—(1)Short taxable year.
In the case of a corporation (or predecessor
corporation) that had a short taxable year
during the testing period, for purposes
of determining whether the $1,000,000
amount referred to in paragraph (a) of this
section is equaled or exceeded, the taxable
income for the short taxable year is com-
puted by—
(i) Multiplying the taxable income for
the short taxable year by 12; and
(ii) Dividing the resulting amount by
the number of months in the short taxable
year.
(2)Computation of taxable income in
taxable year when there occurs a trans-
actiontowhichsection381applies.(i)
For purposes of determining whether an
acquiring corporation had taxable income
of $1,000,000 or more for a taxable year in
which there occurs a transaction to which
section 381 applies, the acquiring corpora-
tion’s taxable income will be the sum of—
(A) The taxable income of the acquiring
corporation for its taxable year; plus
(B) The taxable income of the dis-
tributor or transferorcorporation for that
portion of the acquiring corporation’s tax-
able year up to and including the date
of distribution or transfer (as defined in
§1.381(b)–1(b)).
(ii) For purposes of determining
whether a transferor or distributor corpo-
ration had taxable income of $1,000,000
or more for a taxable year in which there
occurs a transaction to which section 381
applies, the distributor or transferor corpo-
ration’s taxable income shall be reduced
by the amount of its taxable income for that
portion of its taxable year corresponding
to the acquiring corporation’s taxable year
up to and including the date of distribution
or transfer (as defined in §1.381(b)–1(b)).
(d)Members of controlled group—(1)
In general. For purposes of applying
January 23, 20063722006–4 I.R.B.

paragraph (a) of this section, the taxable
income of members of a controlled group
of corporations (as defined in section
1563(a)) must be aggregated for each year
of the testing period. The provisions of
this section shall not apply to a controlled
group for any taxable year in which the
aggregate taxable income of the mem-
bers of the controlled group is less than
$1,000,000.
(2)Aggregation. For purposes of para-
graph (d)(1) of this section, a taxable loss
of any member of the controlled group for
a taxable year during the testing period is
not taken into account.
(3)Allocation rule. If the aggregate tax-
able income of members of a controlled
group computed pursuant to paragraph
(d)(1) of this section exceeds $1,000,000
during the testing period, the $1,000,000
amount that is relevant for purposes of
determining, under paragraph (a)(1) of
this section, whether a corporation is a
large corporation shall be divided equally
among the component members of such
group (including component members
excluded pursuant to paragraph (d)(2) of
this section) unless all of such component
members consent to an apportionment plan
providing for an alternative allocation of
such amount. The procedure for making
and filing this plan will be the same as the
procedure used for making and filing an
apportionment plan under section 1561.
See section 1561 and the regulations.
(4)Controlled group members.(i)In
the case of any corporation that was a
member of a controlled group of corpora-
tions at any time during the testing period
but is not a member of such group during
the taxable year involved, the taxable in-
come of the former member for the test-
ing period is determined as if such corpo-
ration were not a member of a group at any
time during that period. With respect to
the controlled group, the taxable income of
its former member will not be taken into
account in determining such group’s tax-
able income for any taxable year during
the testing period for purposes of applying
paragraph (a)(1) of this section.
(ii) For purposes of paragraph (d)(4)(i)
of this section, the determination of
whether a corporation is a member of
a controlled group during the testing pe-
riod is based on whether the corporation
was a member of the controlled group on
the last day of the month preceding the
due date of the required installment.
(e)Effect on a corporation’s taxable in-
come of items that may be carried back or
carried over from any other taxable year.
In determining whether a corporation (or
predecessor corporation) is a large corpo-
ration for its current taxable year, items
that could offset taxable income during a
taxable year included in the testing period
(for example, those described in sections
172 and 1212) are not to be taken into ac-
count and the taxable income of a corpora-
tion for any taxable year during the testing
period shall be determined without regard
to items carried back or carried over from
any other taxable year.
(f)Consolidated returns. [Reserved].
(g)Example. The provisions of this
section may be illustrated by the following
example:
Example. Y Corporation and Z Corporation are
calendar year taxpayers. In 2006, Z acquires all of the
assets of Y in a transaction to which section 381 ap-
plies. Z’s taxable income for both 2004 and 2005 was
less than $1,000,000. Y’s taxable income for 2006 is
determined under paragraph (c)(2) of this section to
be $300,000 for that portion of the acquiring corpo-
ration’s taxable year up to and including the date of
transfer. Z’s taxable income for 2006 is $800,000.
Under the provisions of paragraph (c)(2) of this sec-
tion, Z’s 2006 taxable income for purposes of de-
termining whether it is a large corporation for tax-
able year 2007 is $1,100,000 ($800,000 + $300,000).
Thus, Z is a large corporation for the 2007 taxable
year. In addition, if Z’s 2006 taxable income, as de-
termined under paragraph (c)(2) of this section, had
been less than $1,000,000 but Y’s taxable income in
2004 or 2005 had been $1,000,000 or more, Z would
be a large corporation fortaxable year 2007 because
Y is a predecessor corporation.
(h)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
§1.6655–7 [Removed]
Par. 9. Section 1.6655–7 is removed.
§1.6655–5 [Redesignated as §1.6655–7]
Par. 10. Section 1.6655–5 is redesig-
nated as §1.6655–7.
Par. 11. Sections 1.6655–5 and
1.6655–6 are added to read as follows:
§1.6655–5 Short taxable year.
(a)In general. Except as otherwise pro-
vided in this section, the provisions of sec-
tion 6655 and the regulations are applica-
ble in the case of a short taxable year (in-
cluding an initial taxable year) for which a
payment of estimated tax is required to be
made.
(b)Exception to payment of estimated
tax. In the case of a short taxable year, no
payment of estimated tax is required if—
(1) The short taxable year is a period of
less than 4 full calendar months; or
(2)Thetaxshownonthereturnforsuch
taxable year (or, if no return is filed, the
tax) is less than $500.
(c)Installment due dates—(1)In gen-
eral—(i)Taxableyearoffourmonthsbut
less than twelve months. Except as other-
wise provided, in the case of a short taxable
year, if such year results in a taxable year
of four or more full calendar months but
less than twelve full calendar months, the
due dates prescribed in §1.6655–1(f)(2)
shall apply.
(ii)Exception. If the date determined
under paragraph (c)(1)(i) of this section
for the first required installment due dur-
ing the taxpayer’s short taxable year is ear-
lier than the 15th day of the fourth month
of the taxpayer’s short taxable year, the
taxpayer’s first required installment shall
be due on the first due date otherwise de-
termined under paragraph (c)(1)(i) of this
section that is on or after the 15
th
day of
the fourth month of the short taxable year.
(2)Early termination of taxable
year—(i)In general. Except as provided
in paragraph (c)(2)(ii) of this section, if a
taxable year ends early (for example, as
a result of an acquisition or a change in
taxable year), the due date for the final
required installment shall be the date that
would have been the due date of the next
required installment if the event that gave
rise to the short taxable year had not oc-
curred.
(ii)Exception. If the date determined
under paragraph (c)(2)(i) of this section is
within thirty days of the last day of the
short taxable year, the due date for the fi-
nal required installment shall be the fif-
teenth day of the second month following
the month that includes the last day of the
short taxable year.
(d)Amount due for required install-
ment—(1)In general. The amount due for
any required installment determined under
section 6655(d)(1)(B)(i) for a short taxable
year shall be 100% of the required annual
payment for the short taxable year divided
2006–4 I.R.B.373January 23, 2006

by the number of required installments
due (as determined under this section) for
the short taxable year.
(2)Tax shown on the return for the pre-
ceding taxable year. If the current taxable
year is a short taxable year, the amount due
for any required installment determined
under section 6655(d)(1)(B)(ii) shall be
determined in the following manner—
(i) Take 100% of the tax shown on the
return of the corporation for the preceding
taxable year;
(ii) Multiply such amount by the num-
ber of full calendar months in the current
short taxable year and divide by 12; and
(iii) Divide the amount determined un-
der paragraph (d)(2)(ii) of this section by
the number of required installments due
(as determined under this section) for the
current short taxable year.
(3)Applicable percentage. In the case
of any required installment determined
under section 6655(e), the applicable per-
centage under section 6655(e)(2)(B)(ii)
shall be—
(i) 25%, 50%, 75%, and 100% for the
first, second, third, and fourth (last) re-
quired installments, respectively, if the
taxpayer will have four required install-
ments due for the short taxable year;
(ii) 33.33%, 66.67%, and 100% for
the first, second, and third (last) required
installments, respectively, if the taxpayer
will have three required installments due
for the short taxable year;
(iii) 50% and 100% for the first and
second (last) requiredinstallments, respec-
tively, if the taxpayer will have two re-
quired installments due for the short tax-
able year; or
(iv) 100% for the first (and last) re-
quired installment if the taxpayer will have
one required installment for the short tax-
able year.
(e)Examples. The following examples
illustrate the rules of this section:
Example 1. A corporation is a calendar year tax-
payer that was acquired by B corporation on April 16,
2007, resulting in A having a short taxable year from
January 1 through April 16, 2007. Because A has a
taxable year of less than four full calendar months,
no estimated tax payments are required by A for the
short taxable year.
Example 2. B corporation began business on Jan-
uary 10, 2007, and adopted a calendar year as its
taxable year. B computes its required installments
based on 100 percent of the tax shown on the re-
turn for the taxable year in accordance with section
6655(d)(1)(B)(i). Pursuant to §1.6655–1(f)(2)(i), the
due dates of B’s required installments for B’s ini-
tial taxable year from January 10, 2007, through De-
cember 31, 2007, are April 15, 2007, June 15, 2007,
September 15, 2007, and December 15, 2007. How-
ever, because the due dates for the first, third, and
fourth required installments fall on a weekend, B’s
required installment payments will be timely if paid
on or before the first business day following the actual
due date of the required installments, that is, April 16,
2007, September 17, 2007, and December 17, 2007,
respectively, for the first, third, and fourth required
installments. Pursuant to paragraph (d)(1) of this sec-
tion, the amount due with each required installment is
25% of the required annual payment for B’s first re-
quired installment, 50% of the required annual pay-
ment for B’s second required installment, 75% of the
required annual payment for B’s third required in-
stallment, and 100% of the required annual payment
for B’s fourth required installment.
Example 3. Corporation C began business on
February 12, 2007, and adopted a calendar year as
its taxable year. C computes its required installments
based on 100 percent of the tax shown on the re-
turn for the taxable year in accordance with section
6655(d)(1)(B)(i). Pursuant to §1.6655–1(f)(2)(i),
the due dates of C’s required installments for C’s
initial taxable year from February 12, 2007, through
December 31, 2007, are April 15, 2007, June 15,
2007, September 15, 2007, and December 15, 2007.
However, in accordance with paragraph (c)(1)(ii)
of this section, C’s first required installment is due
June 15, 2007, because April 15, 2007, is earlier than
the fifteenth day of the fourth month of C’s taxable
year. As a result, C’s second required installment
is due September 15, 2007, and C’s third (and last)
installment is due December 15, 2007. However, be-
cause the due dates for the second and third (and last)
required installments fall on a weekend, C’s required
installment payments will be timely if paid on or
before the first business day following the actual due
date of the required installments, that is, September
17, 2007, and December 17, 2007, respectively, for
the second and third (and last) required installments.
Pursuant to paragraph (d)(1) of this section, the
amount due with each required installment is 33.33%
of the required annual payment for C’s first required
installment, 66.67% of the required annual payment
for C’s second required installment, and 100% of
the required annual payment for C’s third (and last)
required installment.
Example 4. Same facts asExample 3except C be-
gan business on April 10, 2007. In accordance with
paragraph (c)(1)(ii) of this section, C’s first required
installment is due September 15, 2007, because April
15, 2007, and June 15, 2007, are earlier than the fif-
teenth day of the fourth month of C’s taxable year. As
a result, C’s second (and last) required installment is
due December 15, 2007. However, because the due
dates for the first and second (and last) required in-
stallments fall on a weekend, C’s required installment
payments will be timely if paid on or before the first
business day following the actual due date of the re-
quired installments, that is, September 17, 2007, and
December 17, 2007, respectively, for the first and
second (and last) required installments. Pursuant to
paragraph (d)(1) of this section, the amount due with
each required installment is 50% of the required an-
nual payment for C’s first required installment, and
100% of the required annual payment for C’s second
(and last) required installment.
Example 5. D corporation began business on
February 12, 2007, and adopted a fiscal year end-
ing October 31 as its taxable year. D computes its
required installments based on 100 percent of the
tax shown on the return for the taxable year in ac-
cordance with section 6655(d)(1)(B)(i). Pursuant to
§1.6655–1(f)(2)(ii), the due dates of D’s required in-
stallments for D’s initial taxable year from February
12, 2007, through October 31, 2007, are February
15, 2007, April 15, 2007, July 15, 2007, and October
15, 2007. However, in accordance with paragraph
(c)(1)(ii) of this section, D’s first required installment
is due July 15, 2007, becauseFebruary 15, 2007, and
April 15, 2007, are earlier than the fifteenth day of
the fourth month of D’s taxable year. As a result,
D’s second (and last) installment is due October 15,
2007. However, because the due date for the first
required installment falls on a weekend, D’s first
required installment payment will be timely if paid
on or before the first business day following the
actual due date of the required installment, that is,
July 16, 2007. Pursuant to paragraph (d)(1) of this
section, the amount due with each required install-
ment is 50% of the required annual payment for D’s
first required installment, and 100% of the required
annual payment for D’s second (and last) required
installment.
Example 6. Same facts asExample 5except D
corporation began business on May 10, 2007. In ac-
cordance with paragraph (c)(1)(ii) of this section, D’s
first (and last) installment is due October 15, 2007,
because July 15, 2007, is earlier than the fifteenth
day of the fourth month of D’s taxable year. Pursuant
to paragraph (d)(1) of this section, the amount due
with D’s required installment is 100% of the required
annual payment, computed as 100% divided by the
number of required installments due for the short tax-
able year.
Example 7. E corporation is a calendar year
taxpayer that computes its required installments
basedon100percentofthetaxshownonthere-
turn for the taxable year in accordance with section
6655(d)(1)(B)(i). E computes its 2007 required
installments based on a projected 2007 total tax lia-
bility of $600,000. On July 31, 2007, E is acquired
by F corporation resulting in E having a short taxable
year from January 1, 2007, through July 31, 2007.
E determines that its total tax liability for the short
period is $350,000. The due dates for E’s first and
second required installments are April 15, 2007, and
June 15, 2007, respectively. However, because the
due date for the first required installment falls on
a weekend, E’s first required installment payment
will be timely if paid on or before the first business
day following the actual due date of the required
installment, that is, April 16, 2007. Pursuant to
section 6655(d)(1)(A),E paid $150,000 with each
required installment. Pursuant to paragraph (c)(2) of
this section, E’s third (and last) required installment
of estimated tax is due on September 15, 2007, and
the percentage of the required annual payment due
with such installment is 100% pursuant to paragraph
(d)(1) of this section. However, because the due date
for the third (and last) required installment falls on
a weekend, E’s third (and last) required installment
payment will be timely if paid on or before the first
business day following the actual due date of the
required installment, that is, September 17, 2007.
Accordingly, E is required to pay $50,000 with its
January 23, 20063742006–4 I.R.B.

final required installment on September 17, 2007
($350,000 total tax liability for the short taxable year
less prior installment payments of $300,000).
Example 8. Same facts asExample 7except that
E is acquired by F corporation on August 31, 2007.
Pursuant to paragraph (c)(2)(ii) of this section, E’s
third (and last) required installment of estimated tax
is due on October 15, 2007, because September 15,
2007, the date that would have been the due date of
E’s next required installment if F’s acquisition of E
had not occurred, is within thirty days of the last day
of E’s short taxable year, and 100% of the required
annual payment is due with such installment.
Example 9. F corporation is a calendar year
taxpayer that computes its required installments
based on 100 percent of the tax shown on the re-
turn for the taxable year in accordance with section
6655(d)(1)(B)(i). F computes its 2007 estimated
tax payments based on a projected 2007 total tax
liability of $900,000. OnDecember 3, 2007, F is
acquired by G corporation resulting in F having a
short taxable year from January 1, 2007, through
December 3, 2007. F determined its total tax liability
for the short period to be $800,000. The due dates
for F’s first, second, and third required installments
are April 15, 2007, June 15, 2007, and September
15, 2007, respectively. However, because the due
dates for the first and third required installments fall
on a weekend, F’s requiredinstallment payments
will be timely if paid on or before the first business
day following the actual due date of the required
installments, that is, April 16, 2007, and September
17, 2007, respectively, for the first and third required
installments. Pursuant to section 6655(d)(1)(A), F
paid $225,000 with each required installment. Pur-
suant to paragraph (c)(2)(ii) of this section, F’s fourth
(and last) required installment of estimated tax is due
on February 15, 2008, and the percentage of the
required annual payment due with such installment
is 100% pursuant to paragraph (d)(1) of this section.
Accordingly, F is required to pay $125,000 with its
final required installment due February 15, 2008
($800,000 total tax liability for the short taxable year
less prior installment payments of $675,000).
Example 10. G corporation, a calendar year tax-
payer, reported a tax liability of $75,000 on its re-
turn for the taxable year ending December 31, 2006,
and is not a large corporation as defined in section
6655(g). On July 31, 2007, G makes a final dis-
tribution of its assets, in connection with a plan of
complete liquidation, resulting in a short taxable year
from January 1, 2007, through July 31, 2007. To
satisfy the requirements of the exception described
in section 6655(d)(1)(B)(ii) for payments determined
by reference to the tax shown on the return of the
corporation for the preceding taxable year, pursuant
to paragraph (d)(2) of this section, G must pay in a
proportionate amount of its 2006 tax liability based
on the number of months in the current taxable year.
Accordingly, G must pay $43,750 ($75,000 X 7/12)
through payments of estimated tax payments in 2007,
with $14,583 due on April 15, 2007, June 15, 2007,
and September 15, 2007. However, because the due
dates for the first and third required installments fall
on a weekend, G’s required installment payments will
be timely if paid on or before the first business day
following the actual due date of the required install-
ments, that is, April 16, 2007, and September 17,
2007, respectively, for the first and third required in-
stallments.
Example 11. Same facts asExample 10except
that G makes a final distribution of its assets, in con-
nection with a plan of complete liquidation, on Oc-
tober 1, 2007, resulting in a short taxable year from
January 1, 2007, through October 1, 2007. To satisfy
the requirements of the exception described in sec-
tion 6655(d)(1)(B)(ii), G must pay $56,250 ($75,000
x 9/12) through payments of estimated tax in 2007,
with $14,063 due on April 15, 2007, June 15, 2007,
September 15, 2007, and December 15, 2007, respec-
tively. However, because the due dates for the first,
third, and fourth required installments fall on a week-
end, G’s required installment payments will be timely
if paid on or before the first business day following
the actual due date of the required installments, that
is, April 16, 2007, September 17, 2007, and Decem-
ber 17, 2007, respectively, for the first, third, and
fourth required installments.
Example 12. H corporation began business on
February 15, 2007, and adopted a calendar year. H
computes its required installments based on 100 per-
cent of the tax shown on the return for the taxable year
in accordance with section6655(d)(1)(B)(i). H esti-
mated at the beginning of its short taxable year that
its estimated tax liability for short taxable year Feb-
ruary 15, 2007, through December 31, 2007, would
be $180,000. H paid its first required installment of
estimated tax of $60,000 on June 15, 2007, its second
required installment of estimated tax of $60,000 on
September 17, 2007, and its third (and last) required
installment of estimated tax of $60,000 on December
17, 2007 ($180,000 total estimated tax liability for
the short taxable year less prior installment payments
of $120,000). H reported a tax liability of $240,000
on its return for the short period February 15, 2007,
through December 31, 2007, with no credits against
tax. There was an underpayment in the amount of
$20,000 on the first installment date through Septem-
ber 15, 2007, $40,000 on the second installment date
through December 15, 2007, and $60,000 on the third
(and last) installment date through March 15, 2008,
determined as follows:
(i) Tax as defined in section 6655(d)(1)(B)(i)
$240,000
(ii) 100% of this paragraph (e),Example 12(i)240,000
(iii) Amount of estimated tax required to be paid by the first installment date (33.33% of $240,000)80,000
(iv) Amount of estimated tax required to be paid by the second installment date (66.67% of
$240,000 less $80,000 (amount due with first installment))80,000
v) Amount of estimated tax required to be paid by the third installment date (100% of $240,000
less $16
0,000 (amount due with first and second installment))
80,000
(vi) Ded
uct amount paid on or before the first installment date
60,000
(vii) Am
ount of underpayment for the first installment date (this paragraph (e),Example 12(iii)
minus this paragraph (e),Example 12(vi))20,000
(viii) Deduct amount available for the second installment date ($60,000 second installment payment
less this paragraph (e),Example 12(vii) applied towards the first installment underpayment)40,000
(ix) Amount of underpayment for the second installment date (this paragraph (e),Example 12(iv)
minus thi
s paragraph (e),Example 12(viii))
40,000
(x) Deduc
t amount available for the third installment date ($60,000 third installment payment
less this paragraph (e),Example 12(ix) applied towards the second installment underpayment)20,000
(xi) Amount of underpayment for the third installment date (this paragraph (e),Example 12(v)
minus this paragraph (e),Example 12(x))60,000
2006–4 I.R.B.375January 23, 2006

(f)52 or 53 week taxable year.For
purposes of this section, a taxable year of
52 or 53 weeks shall be deemed a period
of 12 months in the case of a corporation
that computes its taxable income in accor-
dance with the election permitted by sec-
tion 441(f).
(g)Use of annualized income or sea-
sonal installment method—(1)In gen-
eral. Regardless of the annual accounting
period used by a corporation (for ex-
ample, calendar year, fiscal year) the
taxpayer may use the method described in
§1.6655–2 (annualized income installment
method) or §1.6655–3 (adjusted seasonal
installment method) to compute its re-
quired installments of estimated tax when
the current taxable year is a short taxable
year.
(2)Computation of annualized income
installment. To the extent a short tax-
able year includes an annualization period
elected by the taxpayer, the taxpayer shall
compute its annualizedincome installment
by determining the tax on the basis of such
annualized income for the annualization
period multiplied by the number of months
in the short taxable year divided by 12.
(3)Annualization period for final re-
quired installment. For purposes of deter-
mining the final required installment (as
described in paragraph (c)(2) of this sec-
tion) for a short taxable year, annualized
taxable income shall be determined by
placing on an annualized basis the taxable
income for the last complete annualization
period that occurs within the short taxable
year.
(4)Examples. The provisions of para-
graph (g) of this section may be illustrated
by the following examples:
Example 1. X corporation began business on Feb-
ruary 12, 2007, and adopted a calendar year as its tax-
able year. X adopts an accrual method of accounting
and uses the annualized income installment method
under section 6655(e)(2)(A)(i) to calculate all of its
required installment payments for its 2007 taxable
year. Pursuant to §1.6655–1(f)(2)(i), the due dates
of X’s required installments for X’s initial taxable
year from February 12, 2007, through December 31,
2007, are April 15, 2007, June 15, 2007, Septem-
ber 15, 2007, and December 15, 2007. However, in
accordance with paragraph (c)(1)(ii) of this section,
X’s first required installment is due June 15, 2007.
As a result, X’s second required installment is due
September 15, 2007, and X’s third (and last) required
installment is due December 15, 2007. However, be-
cause the due dates for the third and fourth required
installments fall on a weekend, X’s required install-
ment payments will be timely if paid on or before the
first business day following the actual due date of the
required installments, that is, September 17, 2007,
and December 17, 2007, respectively, for the third
and fourth required installments. The amount of X’s
first and second required installments are each based
on annualizing X’s taxable income from February 12,
2007, through April 30, 2007, (the first three months
of X’s taxable year) and X’s third (and last) required
installment is based on annualizing X’s taxable in-
come from February 12, 2007, through July 31, 2007
(the first six months of X’s taxable year). Because X
will have three required installments due for its short
taxable year, pursuant to paragraph (d)(3)(ii) of this
section, the applicable percentage is 33.33% for X’s
first required installment, 66.67% for X’s second re-
quired installment, and 100% for X’s third (and last)
required installment.
Example 2. Y, a calendar year corporation, made
a final distribution of its assets, in connection with a
plan of complete liquidation, on August 1, 2007. Y
filed a timely election to use the alternative annualiza-
tion periods described under section 6655(e)(2)(C)(i)
and determined that its taxable income for the first
2, 4 and 7 months of the taxable year was $25,000,
$50,000 and $140,000. The due dates for Y’s re-
quired installments for its short taxable year January
1, 2007, through August 1, 2007, are April 15, 2007,
June 15, 2007, and September 15, 2007. However,
because the due dates for the first and third required
installments fall on a weekend, Y’s required install-
ment payments will be timely if paid on or before
the first business day following the actual due date
of the required installments, that is, April 16, 2007,
and September 17, 2007, respectively, for the first
and third required installments. Y made installment
payments of $10,000, $10,000, and $20,000, respec-
tively, on April 16, 2007, June 15, 2007, and Septem-
ber 17, 2007. The taxable income for each period is
annualized as follows:
$25,000 X 12/2 = $150,000
$50,000 X 12/4 = $150,000
$140,000 x 12/7 = $240,000
(i)(A) To determine whether the first required in-
stallment equals or exceeds the amount that would
have been required to have been paid if the estimated
tax were equal to one hundred percent of the tax com-
puted on the annualized income for the 2-month pe-
riod taking into account the number of months in the
short taxable year, the following computation is nec-
essary:
(1) Annualized income for the 2 month period
$150,000
(2) Tax on this paragraph (g)(4),Example 2(i)(A)(1)
39,250
(3) Tax determined under this paragraph (g)(4),Example 2(i)(A)(2) multiplied by 7
(the number of months in the short taxable year) divided by 1222,896
(4) 100% of this paragraph (g)(4),Example 2(i)(A)(3)22,896
(5) 33.33% of this paragraph (g)(4),Example 2(i)(A)(4)7,631
(B) Because the total amount of estimated tax that
is timely paid on or before the first installment date
($10,000) exceeds the amount required to be paid
on or before this date if the estimated tax were one
hundred percent of the tax determined by placing on
an annualized basis the taxable income for the first
2-month period taking into account the number of
months in the short taxable year, the exception de-
scribed in §1.6655–2(a) applies and no addition to tax
will be imposed for the installment due on April 15,
2007.
(ii)(A) To determine whether the required install-
ments made on or before June 15, 2007, equal or ex-
ceed the amount that would have been required to
have been paid if the estimated tax were equal to one
hundred percent of the tax computed on the annual-
ized income for the 4-month period taking into ac-
count the number of months in the short taxable year,
the following computation is necessary:
January 23, 20063762006–4 I.R.B.

(1) Annualized income for the 4 month period
$150,000
(2) Tax on this paragraph (g)(4),Example 2(ii)(A)(1)
39,250
(3) Tax determined under this paragraph (g)(4),Example 2(ii)(A)(2) multiplied
by 7 (the number of months in the short taxable year) divided by 1222,896
(4) 100% of this paragraph (g)(4),Example 2(ii)(A)(3)22,896
(5) 66.67% of this paragraph (g)(4),Example 2(ii)(A)(4) less $7,631 (amount
due with first in
stallment)
7,631
(B) Because the total amount of estimated tax
available to apply towards the amount due for the sec-
ond installment ($12,369 ($10,000 paid on the second
installment date plus $2,369 overpayment of the first
installment)) exceeds the amount required to be paid
on or before this date if the estimated tax were one
hundred percent of the tax determined by placing on
an annualized basis the taxable income for the first
4-month period for the taxable year taking into ac-
count the number of months in the short taxable year,
the exception described in §1.6655–2(a) applies and
no addition to tax will be imposed for the installment
due on June 15, 2007.
(iii)(A) Pursuant to paragraph (c) and (d) of
this section, the final required installment is due by
September 15, 2007, and the applicable percent-
age due for the final required installment is 100%.
However, because the due date for the final required
installment falls on a weekend, Y’s final required
installment payment will be timely if paid on or
before the first business day following the actual due
date of the required installment, that is, September
17, 2007. To determine whether the installment pay-
ments made on or before September 17, 2007, equal
or exceed the amount that would have been required
to have been paid if the estimated tax were equal
to one hundred percent of the tax computed on the
annualized income for the 7-monthperiodtakinginto
account the number of months in the short taxable
year, the following computation is necessary:
(1) Annualized income for the 7 month period
$240,000
(2) Tax on this paragraph (g)(4),Example 2(iii)(A)(1)
56,100
(3) Tax determined under this paragraph (g)(4),Example 2(iii)(A)(2) multiplied
by 7 (the number of months in the short taxable year) divided by 1232,725
(4) 100% of this paragraph (g)(4),Example 2(iii)(A)(3)
32,725
(5) 100% of this paragraph (g)(4),Example 2(iii)(A)(4) less $15,262 (amount due with
first and second installment)17,463
(B
) Because the total amount of estimated tax
available to apply towards the amount due for the fi-
nal installment ($24,738 ($20,000 that is timely paid
on
the third installment date plus $4,738 overpayment
of the second installment)) exceeds the amount re-
quired to be paid on or before this date if the estimated
t
ax were one hundred percent of the tax determined
by placing on an annualized basis the taxable income
for the first 7-month period for the taxable year tak-
i
ng into account the number of months in the short
taxable year, the exception described in §1.6655–2(a)
applies and no addition to tax will be imposed for the
final installment due on September 15, 2007.
(
h)Preceding taxable year a short tax-
able year. If the preceding taxable year re-
ferred to in section 6655(d)(1) was a short
taxable year, the tax computed on the ba-
sis of the facts shown on the return for
such preceding year, for purposes of de-
termining the applicability of the excep-
tion described in section 6655(d)(2), shall
be the tax computed on the annual basis in
the manner described in section 443(b)(1)
(prior to the reduction of the tax liability in
the manner described in the last sentence).
(i)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
§1
.6655–6 Methods of accounting.
(a)In general. In computing any re-
quired installment, a corporation must use
the methods of accounting used in comput-
ing taxable income for the taxable year for
which estimated tax is being determined
(the current taxable year).
(b)Exceptions—(1)Automatic ac-
counting method changes. If a taxpayer is
making a change in method of accounting
for the current taxable year that is permit-
ted to be made with the automatic consent
of the Commissioner, the new method of
accounting shall be used in determining
any required installment if, and only if,
the copy of the Form 3115, “Application
for Change in Accounting Method,” has
been mailed to the IRS National Office on
or before the last day of the annualization
period.
(2)Non-automatic accounting method
changes. If a taxpayer is making a change
in method of accounting for the current
taxable year that requires the prior con-
sent of the Commissioner, the new method
of accounting shall be used in determining
any required installment if, and only if, the
consent agreement reflecting the Commis-
si
oner’s consent to the change in method
of
accounting and the prescribed terms and
co
nditions for effecting such change has
be
en signed by the taxpayer and mailed to
t
he IRS National Office on or before the
l
ast day of the annualization period.
(
c)Examples. The following examples
i
llustrate the rules of this section:
Example 1. X corporation, a calendar year tax-
payer, uses an accrual method of accounting and the
a
nnualization method under section 6655(e)(2)(A)(i)
to calculate its 2006 required installments. X receives
advance payments each taxable year with respect to
a
greements for the sale of goods properly includible
in X’s inventory. The advance payments received by
X qualify for deferral under §1.451–5(c). Although
X is eligible to defer the advance payments in accor-
dance with §1.451–5(c), X’s method of accounting
with respect to the advance payments is to include the
advance payments in income when received. If, as of
the last day of the annualization period, X’s method
of accounting for advance payments is to include the
advance payments in income when received, and the
requirementsofparagraph(b)(1)or(b)(2)ofthissec-
tion, as applicable, are not met, then X must use that
method of accounting for purposes of computing such
required installment.
Example 2. Y corporation, a calendar year tax-
payer, uses an accrual method of accounting and the
annualization method under section 6655(e)(2)(A)(i)
to calculate its 2006 required installments. Y com-
putes its annual taxable income by deducting its li-
ability for state income taxes in the taxable year the
2006–4 I.R.B.377January 23, 2006

taxes are paid, without regard to the recurring item ex-
ception of section 461(h) and the regulations. If, as of
the last day of the annualization period, Y’s method
of accounting for state income taxes is to deduct such
taxes in the taxable year the taxes are paid without
regard to the recurring item exception, and the re-
quirements of paragraph (b)(1) or (b)(2) of this sec-
tion, as applicable, are not met, then Y must use that
method of accounting for purposes of computing such
required installment.
(d)Effective date. This section applies
to taxable years beginning after the date
that is 30 days after the date the final reg-
ulations are published in theFederal Reg-
ister.
Par. 12. Newly designated §1.6655–7
is revised to read as follows:
§1.6655–7 Addition to tax on account of
excessive adjustment under section 6425.
(a) Section 6655(h) imposes an addition
to the tax under chapter 1 of the Internal
Revenue Code in the case of any exces-
sive amount (as defined in paragraph (c)
of this section) of an adjustment under sec-
tion 6425 that is made before the 15th day
of the third month following the close of
a taxable year beginning after December
31, 1967. This addition to tax is imposed
whether or not there was reasonable cause
for an excessive adjustment.
(b) If the amount of an adjustment un-
der section 6425 is excessive, there shall
be added to the tax under chapter 1 of the
Internal Revenue Code for the taxable year
an amount determined at the annual rate re-
ferred to in the regulations under section
6621 upon the excessive amount from the
date on which the credit is allowed or re-
fund paid to the 15
th
day of the third month
following the close of the taxable year. A
refund is paid on the date it is allowed un-
der section 6407.
(c) The excessive amount is equal to the
lesser of the amount of the adjustment or
the amount by which—
(1) The income tax liability (as defined
in section 6425(c)) for the taxable year, as
shown on the return for the taxable year;
exceeds
(2) The estimated income tax paid
during the taxable year, reduced by the
amount of the adjustment.
(d) The computation of the addition to
thetaximposedbysection6425ismade
independent of, and does not affect the
computation of, any addition to the tax
that a corporation may otherwise owe for
an underpayment of an installment of esti-
mated tax.
(e) The following example illustrates
the rules of this section:
Example. (i) Corporation X, a calendar year tax-
payer, had an underpayment as defined in section
6655(b), for its fourth installment of estimated tax
that was due on December 15, 2006, in the amount of
$10,000. On January 2, 2007, X filed an application
for adjustment of overpayment of estimated income
tax for 2006 in the amount of $20,000.
(ii) On February 16, 2007, the IRS, in response
to the application, refunded $20,000 to X. On March
15, 2007, X filed its 2006 tax return and made a pay-
ment in settlement of its total tax liability. Assum-
ing that the addition to tax is computed under section
6621(a)(2) at a rate of 8% per annum for the applica-
ble periods of underpayment, under section 6655(a),
X is subject to an addition to tax in the amount of $197
(90/365 X $10,000 X 8%) on account of X’s Decem-
ber 15, 2006, underpayment. Under section 6655(h),
X is subject to an addition to tax in the amount of
$118 (27/365 X $20,000 X 8%) on account of X’s ex-
cessive adjustment under section 6425. In determin-
ing the amount of the addition to tax under section
6655(a) for failure to pay estimated income tax, the
excessive adjustment under section 6425 is not taken
into account.
(f) An adjustment is generally to be
treated as a reduction of estimated income
tax paid as of the date of the adjustment.
However, for purposes of §1.6655–1
through §1.6655–6, the adjustment is to
be treated as if not made in determining
whether there has been any underpayment
of estimated income tax and, if there is an
underpayment, the period during which
the underpayment existed.
(g) This section applies to taxable years
beginning after the date that is 30 days af-
ter the date the final regulations are pub-
lished in theFederal Register.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 13. The authority citation for part
301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 14. Section 301.6655–1 is revised
to read as follows:
§301.6655–1 Failure by corporation to
pay estimated income tax.
(a) For regulations under section 6655,
see §§1.6655–1 through 1.6655–7 of this
chapter.
(b) This section applies to taxable years
beginning after the date that is 30 days af-
ter the date the final regulations are pub-
lished in theFederal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 7,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 12, 2005, 70 F.R. 73393)
Foundations Status of Certain
Organizations
Announcement 2006–5
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 maynot, 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 that are not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
2nd Chance Young Adult Organization,
Seattle, WA
29 11 Student Ministries, Mars Hill, NC
E. 107th St. Oldtimers Alumni,
New York, NY
A. E. Thomas Foundation for Integrative
Medicine, Albuquerque, NM
After School Tutoring Homework
Assistance Program, Hazelton, PA
AGAPE, Hobbs, NM
America Health Care Resuscitation
Organization, New York, NY
Association of Priest, Inc.,
Jacksonville, FL
Avalon R & D, Inc., Williamsville, NY
Baskets of Hope, Brecksville, OH
Ben Rush Elementary School Foundation,
Redmond, WA
Bexar County Youth in Action,
San Antonio, TX
Bright Future Foundation,
Beverly Hills, CA
Broadcast Freedom International, Inc.,
Blandford, MA
January 23, 20063782006–4 I.R.B.

Bucks County Affordable Housing
Corporation, Doylestown, PA
Buffalo Soldiers Foundation, Ft. Myer, FL
Capoeira Arts Foundation, Inc.,
Berkeley, CA
Carequest Group, Inc., Memphis, TN
Carl Aven Ministries, Inc., Catoosa, OK
Casa Major, Inc., Fountain Valley, CA
Center for US-Japan Comparative Social
Studies, San Diego, CA
Chicago Metropolitan Development
Association, Aurora, IL
Child & Family Development Services,
Inc.,Tulsa,OK
Childrens Amputee Foundation, Inc.,
Greensboro, NC
City Youth Adventures, Cincinnati, OH
Compassion Unlimited IC, Chico, CA
Connections to Success, Houston, TX
Costa Rica-Latin America School
Supplies, Inc., Palm Bay, FL
Daughters of the King of Judah Ministry,
Albany, GA
Destiny Foundation, Moss Point, MS
Doc Communications Media Group,
Somerset, NJ
Educators Basketball Association, Inc.,
Boyds, MD
El Segundo Youth Football &
Cheerleading, Inc., Redondo Beach, CA
Elementary Decisions, Inc.,
Richmond, VA
Fathers on Rights for Custody Equality,
Louisville, KY
Firearms Owners Against Crime
Educational Fund, Inc., McDonald, PA
First Homebuyers Group, Inc.,
Greensboro, NC
Fort Smith Christian School Foundation,
Fort Smith, AR
Garden City Boxing Club,
Garden City, KS
Gehazi Group Home, Inc., Railto, CA
Georgia Guides, Inc., Reidsville, GA
Grace Foundation, Folsom, CA
Great American Duck Race of Deming,
Inc., Deming, NM
Greater Houston Charismatic Youth
Center, Inc., Pasadena, TX
Harris Low Income Medication Assistance
Organization, Huntington, WV
Hawthorne Smith House Lil Bit of
Heaven, Dallas, TX
Hokkaido International School
Endowment Fund, Inc., Portland, OR
Homes for the Hopeless,
Rocky Mount, NC
Hope and a Future, Inc., Suitland, MD
House of Dreams, Inc., Rockmart, GA
Humanitarian Force, Fayetteville, NC
Illinois State Police Heritage Foundation,
Incorporated, Springfield, IL
Images for Nonprofit,Inc., Wilmette, IL
Inland Mom & Dad Mission, Ontario, CA
Inspiring Excellence, Tucson, AZ
Institute for the Study of American
Religion, Santa Barbara, CA
International Healing Network, Inc.,
Houston, TX
International Museum of Military History,
Dighton, MA
Islam & the Community of Sacramento,
Sacramento, CA
Jeremiah Group, Inc.,
Pontevedra Beach, FL
Justus Curry Foundation, Husum, WA
Kansas City Eritrean Development
Foundation, Kansas City, MO
Kimberly Asther Ministries, Roland, AR
King Works, Inc., Tampa, FL
Kitchen K – A Design Gallery, Inc.,
Washington, DC
Last Resort Foundation, Inc.,
Hercules, CA
Lay Claim Gods New Covenant Ministry,
St. Louis, MO
Liberty Historical Society, Inc.,
Kansas City, MO
Life’s Blood Ministry,
Colorado Springs, CO
Light of the Trinity Montessori School,
Inc., West Orange, NJ
Literacy Indiana, Inc., Bloomington, IN
Memorable Moments Wishes and Youth
Services, Inc., Birmingham, AL
Men Against Domestic Violence,
Bonifay, FL
Meristem, Inc., Brooklyn, NY
Metropolitan Alliance, Inc.,
Washington, DC
Metropolitan New York Chapter Delaware
State Univ. Alumni Assoc., Bronx, NY
Mid-Texas Cultural Center, Inc.,
New Braunfels, TX
Mission Endowment Fund of Malta
Lutheran Church, Malta, MT
Mount Olive Adult Day Care Home,
Charlotte, NC
MusicWithaMission,Inc.,
Lexington, KY
New Future Education Fund,
San Marino, CA
New Jerusalem Assistance Ministries,
Houston, TX
Norman Borlaug Heritage Foundation,
Cresco, IA
North Firefighters Benevolent Fund, Inc.,
Naples, FL
North Hills Jaycees Foundation Charitable
Trust, Simi Valley, CA
Northeast Mississippi Heritage Tr,
Corinth, MS
Northern Tier Neighborhood Crime
Watch, Great Bend, PA
Northwest Action Council, Inc.,
Chicago, IL
NSI-Hannibal Riverbluff, Inc.,
Bowling Green, MO
Oak Center Neighborhood Association,
Oakland, CA
Oklahoma Film Academy, Tulsa, OK
Ole Gilliam Mill Park, Sandford, NC
Omentum Research Foundation,
San Gabriel, CA
On My Way, Atlanta, GA
One Accord Asset Development Fund,
Hilliard, OH
One By One, Inc., Clarkston, GA
Open Door Society, Inc.,
N. Hollywood, CA
Organization for Islamic Learning,
Charlottesville, VA
Peace B Still Foundation, Inc.,
Lehigh Acres, FL
Pennfield Parent Teacher and Student
Organization, Battle Creek, MI
People Awareness Council, Inc.,
American Falls, ID
Planet Dog Philanthropy, Portland, ME
Prescott Center for Nonviolent
Communication, Prescott, AZ
Pro Desarrollo Comunitario Prodecom,
Inc., Los Angeles, CA
Project R O S E – B U D S, Inc.,
Romeoville, IL
Prop Development Group,
Missouri City, TX
Real Malibu Players, Malibu, CA
Residents Council of Harriet Tubman
Terrace Apartments, Detroit, MI
Resource Alliance, Inc., Washington, DC
Right One Corporation, Los Angeles, CA
Rocky Mountain Horse Foundation,
Tabernash, CO
Rowland Youth Club, Greentown, PA
Saegertown Heritage Society,
Saegertown, PA
Saints Helping Saints Community
Outreach, Inc., Victorville, CA
Selective Multi-Services, Inc., Bronx, NY
Sequel Mental Health, Detroit, MI
Serenity Village, Inc., Eastman, GA
Sierra Watch, Piedmont, CA
2006–4 I.R.B.379January 23, 2006

Sociedad HumantariaPro-Animales, Inc.,
Guayama, PR
Sons of Thunder Ministries,
Lathrup Village, MI
St. Mark Development Corporation, Inc.,
Cincinnati, OH
Sunshine Ethority, Far Rockaway, NY
The Way, Norman, OK
Threshold–The Next Step, Inc.,
Reedville, VA
Triad of West Virginia, Inc.,
Charleston, WV
Turning Point Emergency Shelter,
Houston, TX
United Cancer Research Foundation,
Longhorne, PA
Victoria Lions Fastpitch Association,
Victoria, MN
West End Clinic, Inc., St. Louis, MO
West Tallahatchie County Consortium,
Inc., Webb, MS
Wilson Community Development Corp.,
Phoenix, AZ
Winters Institute, Winters, CA
Witness,Inc.,Albuquerque,NM
Woodruff-Adams Foundation,
Poplar Bluff, MO
World of Wonders, Port St. Lucie, FL
Wound Biotechnology Foundation, Inc.,
Boston, MA
Yeshua Foundation, Inc., Elgin, IL
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-
nalRevenueServicewillissuearulingor
determinationletterwiththerevisedclas-
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.
January 23, 20063802006–4 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that 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.
2006–4 I.R.B.iJanuary 23, 2006

Numerical Finding List
1
Bulletin 2006–1 through 2006–4
Announcements:
2006-1, 2006-1 I.R.B.260
2006-2, 2006-2 I.R.B.300
2006-3, 2006-3 I.R.B.327
2006-4, 2006-3 I.R.B.328
2006-5, 2006-4 I.R.B.378
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
Notices:
2006-1, 2006-4 I.R.B.347
2006-2, 2006-2 I.R.B.278
2006-3, 2006-3 I.R.B.306
2006-4, 2006-3 I.R.B.307
2006-5, 2006-4 I.R.B.348
Proposed Regulations:
REG-107722-00, 2006-4 I.R.B.354
REG-137243-02, 2006-3 I.R.B.317
REG-133446-03, 2006-2 I.R.B.299
Revenue Procedures:
2006-1, 2006-1 I.R.B.1
2006-2, 2006-1 I.R.B.89
2006-3, 2006-1 I.R.B.122
2006-4, 2006-1 I.R.B.132
2006-5, 2006-1 I.R.B.174
2006-6, 2006-1 I.R.B.204
2006-7, 2006-1 I.R.B.242
2006-8, 2006-1 I.R.B.245
2006-9, 2006-2 I.R.B.278
2006-10, 2006-2 I.R.B.293
2006-11, 2006-3 I.R.B.309
2006-12, 2006-3 I.R.B.310
2006-13, 2006-3 I.R.B.315
2006-14, 2006-4 I.R.B.350
Revenue Rulings:
2006-1, 2006-2 I.R.B.261
2006-2, 2006-2 I.R.B.261
2006-3, 2006-2 I.R.B.276
2006-4, 2006-2 I.R.B.264
2006-5, 2006-3 I.R.B.302
Tax Conventions:
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
Treasury Decisions:
9231, 2006-2 I.R.B.272
Treasury Decisions— Continued:
9232, 2006-2 I.R.B.266
9233, 2006-3 I.R.B.303
9234, 2006-4 I.R.B.329
9235, 2006-4 I.R.B.338
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin
2005–52, dated December 27, 2005.
January 23, 2006ii2006–4 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2006–1 through 2006–4
Notices:
2005-44
Supplemented by
Notice 2006-1, 2006-4 I.R.B.347
Proposed Regulations:
REG-138647-04
Corrected by
Ann. 2006-4, 2006-3 I.R.B.328
Revenue Procedures:
96-52
Superseded by
Rev. Proc. 2006-10, 2006-2 I.R.B.293
97-27
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2002-9
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
Rev. Proc. 2006-14, 2006-4 I.R.B.350
2002-17
Modified by
Rev. Proc. 2006-14, 2006-4 I.R.B.350
2004-23
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2004-40
Superseded by
Rev. Proc. 2006-9, 2006-2 I.R.B.278
2005-1
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-2
Superseded by
Rev. Proc. 2006-2, 2006-1 I.R.B.89
2005-3
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-4
Superseded by
Rev. Proc. 2006-4, 2006-1 I.R.B.132
Revenue Procedures— Continued:
2005-5
Superseded by
Rev. Proc. 2006-5, 2006-1 I.R.B.174
2005-6
Superseded by
Rev. Proc. 2006-6, 2006-1 I.R.B.204
2005-7
Superseded by
Rev. Proc. 2006-7, 2006-1 I.R.B.242
2005-8
Superseded by
Rev. Proc. 2006-8, 2006-1 I.R.B.245
2005-9
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2005-12
Section10modifiedandsupersededby
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-61
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-68
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
Rev. Proc. 2006-3, 2006-1 I.R.B.122
Revenue Rulings:
74-503
Revoked by
Rev. Rul. 2006-2, 2006-2 I.R.B.261
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,
2005.
2006–4 I.R.B.iiiJanuary 23, 2006
U.S. GPO: 2006—320–797/20041