Internal Revenue Bulletin 2004-34 (PDF rendition): IRS Revenue Rulings

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

Bulletin No. 200
4-34
August 23, 2004
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2004–89, page 301.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period July through Septem-
ber 2004.This ruling announces the monthly bond factor
amounts to be used by taxpayers who dispose of qualified
low-income buildings or interests therein during the period July
through September 2004.
T.D. 9137
, page 308.
Final regu
lations under section 460 of the Code provide guid-
ance rega
rding the income tax consequences of certain part-
nership t
ransactions involving contracts accounted for under a
long-ter
m contract method of accounting.
Notice 2004–55, page 319.
This notice solicits public comments concerning whether the
existing final regulations under section 423 of the Code, con-
cerning options granted under an employee stock purchase
plan, should be amended.
Rev. Proc. 2004–54, page 325.
Specifications are set forth for the private printing of paper and
laser-printed substitutes for tax year 2004 Form W-2,Wage
and Tax Statement,andFormW-3,Transmittal of Wage and
Tax Statements. Rev. Proc. 2003–30 superseded.
EMPLOYEE PLANS
T.D. 9142, page 302.
REG–101447–04, page 344.
Final regulations under section 408(q) of the Code provide re-
quirements relating to deemed IRAs that may be included in
qualified employer plans, which are plans described in sections
401(a), 403(a), 403(b), and governmental plans under section
457(b). The regulations also amend section 408(a) with regard
to the requirements under section 408(a) for non-bank trustees
for deemed IRAs. Temporary and proposed regulations under
section 408(a) provide that the Commissioner may, in his dis-
cretion, allow governmental entities to act as qualified non-bank
trustees for deemed IRAs which are part of the entities’ quali-
fied employer plan within the meaning of section 408(q).
EMPLOYMENT TAX
Rev. Proc. 2004–53, page 320.
This procedure explains both the standard procedure and an
alternate procedure for preparing and filing Form W–2,Wage
and Tax Statement; Form 941,Employer’s Quarterly Federal
Tax Return;FormW–4,Employee’s Withholding Allowance Cer-
tificate;andFormW–5,Earned Income Credit Advance Pay-
ment Certificate, in certain acquisitions. It also provides guid-
ance on the new schedule (Schedule D (Form 941),Report of
Discrepancies Caused by Acquisitions, Statutory Mergers, or
Consolidations) that employers will be able to use to explain dis-
crepancies between Forms W–2 and 941. Rev. Proc. 96–60
superseded and Rev. Rul. 62–60 amplified.
(Continued on the next page)
Announcements of Disbarments and Suspensions begin on page 345.
Fi
nding Lists begin on page ii.

Rev. Proc. 2004–54, page 325.
Specifications are set forth for the private printing of paper and
laser-printed substitutes for tax year 2004 Form W-2,Wage
and Tax Statement,andFormW-3,Transmittal of Wage and
Tax Statements. Rev. Proc. 2003–30 superseded.
ADMINISTRATIVE
Rev. Rul. 2004–90, page 317.
Obsolete revenue rulings.This ruling obsoletes prior rul-
ings that are no longer considered determinative. Rev. Ruls.
58–120, 70–58, 79–64, and 80–366 obsoleted. Rev. Procs.
89–37 and 96–18 obsoleted.
Rev. Proc. 2004–52, page 319.
Low-income housing tax credit.This procedure publishes
the amounts of unused housing credit carryovers allocated to
qualified states under section 42(h)(3)(D) of the Code for cal-
endar year 2004.
Rev. Proc. 2004–55, page 343.
This procedure provides the domestic asset/liability percent-
ages and domestic investment yield percentages needed by
foreign insurance companies to compute their minimum effec-
tively connected net investment income for taxable years be-
ginning after December 31, 2002.
August 23, 20042004–34 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004–34 I.R.B.August 23, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satis-
factory bond; “bond factor” amounts
for the period July through September
2004.This ruling announces the monthly
bond factor amounts to be used by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the
period July through September 2004.
Rev. Rul. 2004–89
In Rev. Rul. 90–60, 1990–2 C.B.
3, the Internal Revenue Service provided
guidance to taxpayers concerning the gen-
eral methodology used by the Treasury
Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secre-
tary under § 42(j)(6) of the Internal Rev-
enue Code. It further announced that the
Secretary would publishintheInternal
Revenue Bulletin a table of bond factor
amounts for dispositions occurring during
each calendar month.
Rev. Proc. 99–11, 1999–1 C.B. 275,
established a collateral program as an al-
ternative to providing a surety bond for
taxpayers to avoid or defer recapture of
the low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculating
the amount of bond considered satisfactory
under § 42(j)(6) or the amount of United
States Treasury securities to pledge in a
Treasury Direct Account under Rev. Proc.
99–11 for dispositions of qualified low-in-
come buildings or interests therein during
the period July through September 2004.
Table 1
Rev. Rul. 2004–89
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19901991199219931994199519961997199819992000
Jul ’0414.7527.3838.2447.5255.4153.9653.4653.0552.7852.5652.43
Aug ’0414.7527.3838.2447.5255.4153.8553.3652.9552.6852.4752.35
Sep ’0414.7527.3838.2447.5255.4153.7553.2652.8652.5952.3852.27
Table 1 (cont’d)
Rev. Rul. 2004–89
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
2001200220032004
Jul ’0452.6153.0353.6454.15
Aug ’0452.5452.9753.5954.15
Sep ’0452.4752.9153.5454.15
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul.
98–3, 1998–1 C.B. 248; Rev. Rul.
2001–2, 2001–1 C.B. 255; Rev. Rul.
2001–53, 2001–2 C.B. 488; Rev. Rul.
2002–72, 2002–2 C.B. 759; and Rev. Rul.
2003–117, 2003–46 I.R.B. 1051. For
dispositions occurring during the period
January through March 2004, see Rev.
Rul. 2004–16, 2004–8 I.R.B. 503. For
dispositions occurring during the period
April through June 2004, see Rev. Rul.
2004–40, 2004–15 I.R.B. 716.
2004–34 I.R.B.301August 23, 2004

DRAFTING INFORMATION
The principal author of this revenue
ruling is David McDonnell of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. McDonnell at (202) 622–3040
(not a toll-free call).
Section 408.—Individual
Retirement Accounts
26 CFR 1.408–2: Individual retirement accounts.
T.D. 9142
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Deemed IRAs in Qualified
Retirement Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal regulations providing guidance under
section 408(q) regarding accounts or an-
nuities that are part of qualified employer
plans but are to be treated as individual
retirement plans. These regulations re-
flect changes made to the law by the Eco-
nomic Growth and Tax Relief Reconcilia-
tionActof2001andbytheJobCreation
and Worker Assistance Act of 2002. This
document also contains temporary regula-
tions under section 408(a) providing a spe-
cial rule for governmental units seeking
approval to serve as nonbank trustees of in-
dividual retirement accounts for purposes
of section 408(q). These regulations affect
administrators of, participants in, and ben-
eficiaries of qualified employer plans.
DATES:Effective Date:These regulations
are effective July 22, 2004.
Applicability Dates:For dates of
applicability, see §§1.408(q)–1(i) and
1.408–2T(e)(8)(iv).
FOR FURTHER INFORMATION
CONTACT: Linda Conway at (202)
622–6090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507) under control number
1545–1841. Responses to this collection
of information are required for taxpayers
who want to include individual retirement
plans as part of a qualified employer plan.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
The estimated annual burden per re-
spondent/recordkeeper is 50 hours.
Comments concerning the accuracy
of this burden estimate and sugges-
tions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
Part 1) under section 408(q) of the Inter-
nal Revenue Code (Code). On May 20,
2003, a notice of proposed rulemaking
(REG–157302–02, 2003–1 C.B. 1021)
was published in theFederal Register(68
FR 27493) under section 408(q). No pub-
lic hearing was requested or held. Written
comments responding to the notice of pro-
posed rulemaking were received. After
consideration of all the comments, the pro-
posed regulations are adopted as amended
by this Treasury decision.
This document also contains an amend-
ment to the regulations under section
408(a) regarding the approval of nonbank
trustees of individual retirement accounts.
Section 1.408–2(e)(5)(v)(A) of the reg-
ulations currently provides that a person
seeking approval to serve as a nonbank
trustee must demonstrate that, except
for investments pooled in a common in-
vestment fund, the investments of each
account will not be commingled with any
other property. Because section 408(q)(1)
expressly provides that deemed IRAs need
not satisfy the requirements of section
408(a)(5) regarding the commingling of
IRA and plan assets, §1.408–2(e)(5)(v)(A)
is modified to reflect the statutory rule.
In addition, this document contains
a temporary amendment to the regula-
tions under section 408(a) regarding the
approval of nonbank trustees. This tem-
porary amendment modifies the require-
ments for approval as a nonbank trustee
for certain governmental units that intend
to serve as the trustees of individual retire-
ment accounts subject to section 408(q).
Explanation of Provisions and
Summary of Comments
A.Overview
Section 408(q) provides that, if a qual-
ified employer plan allows employees to
make voluntary employee contributions to
a separate account or annuity established
under the plan and under the terms of the
qualified employer plan the account or an-
nuity meets the applicable requirements of
section 408 or section 408A for an indi-
vidual retirement account or annuity, then
the account or annuity is treated for pur-
poses of the Code in the same manner as
an individual retirement plan rather than as
a qualified employer plan. It further pro-
vides that contributions to such a “deemed
IRA” are treated as contributions to the
deemed IRA rather than to the qualified
employer plan. Section 408(q) also ex-
pressly provides that the requirements of
section 408(a)(5) regarding the commin-
gling of IRA assets with other property
shall not apply to deemed IRAs.
In general, the proposed regulations
provided that a qualified employer plan
and a deemed IRA would be treated as
August 23, 20043022004–34 I.R.B.

separate entities under the Code and that
each entity would be subject to the rules
generally applicable to that entity for
purposes of the Code. Thus, a qualified
employer plan (excluding the deemed IRA
portion of the plan), whether it is a plan
under section 401(a), 403(a), or 403(b), or
a governmental plan under section 457(b),
would be subject to the rules applicable to
that type of plan rather than to the rules
applicable to IRAs under section 408 or
408A. Similarly, the deemed IRA portion
of the qualified employer plan would gen-
erally be subject to the rules applicable to
traditional and Roth IRAs under sections
408 and 408A, respectively, and not to
the rules applicable to plans under section
401(a), 403(a), 403(b), or 457.
B.Separate Trusts
Section 1.408(q)–1(f)(2) of the pro-
posed regulations provided that any trust
holding deemed individual retirement ac-
count assets must be separate from the
trust holding the other assets of the qual-
ified employer plan. The separate trust
rule was intended to ensure better com-
pliance with the IRA requirements and
limit confusion of IRA and plan assets.
The proposed regulations also provided a
comparable rule for deemed IRAs that are
individual retirement annuities.
Several commentators argued that a
separate trust for deemed individual re-
tirement accounts should not be required
where the assets of the qualified employer
plan are already held in a trust. They
argued the plan’s trust could satisfy the
requirement of section 408 that the indi-
vidual retirement account be held in a trust
and that separate accounting would ensure
compliance with the IRA requirements
and avoid any confusion of IRA and plan
assets. Theyalsoarguedtherequirement
of a separate trust would unduly compli-
cate the administration of the plan and
lead to potentially higher costs for the plan
sponsor. In response to these comments,
the final regulations provide that a sepa-
rate trust is not required in those cases in
which the qualified employer plan main-
tains a trust but only if separate accounting
is maintained for each deemed IRA. Rev-
enue Procedure 2003–13, 2003–1 C.B.
317, which includes sample amendments
providing for separate trusts for deemed
IRAs, does not apply to the extent it pro-
vides to the contrary.
The regulations specify that if deemed
IRAs are held in a single trust that includes
the qualified employer plan, the trustee
must maintain a separate account for each
deemed IRA and the qualified employer
plan.
Permitting deemed IRAs that are indi-
vidual retirement accounts to be held in a
single trust that includes the qualified em-
ployer plan raises the issue of whether, if
the qualified employer plan portion of the
trust invests in life insurance contracts, the
deemed IRA would be considered to have
violated section 408(a)(3), which provides
that “no part of the trust funds will be
invested in life insurance contracts.” The
regulations clarify that, in that case, sec-
tion 408(a)(3) is treated as satisfied if no
part of the separate account of any of the
deemed IRAs is invested in life insurance
contracts.
Section 408A(b) and the regulations
thereunder set forth rules under which a
Roth IRA must be clearly designated as
a Roth IRA. Pursuant to the regulations
under §1.408A–2, Roth IRAs that are indi-
vidual retirement accounts must be trusts
separate from traditional IRAs. These
final regulations permit a departure from
these rules for deemed Roth IRAs, allow-
ingthemtobeheldinasingletrustwith
deemed traditional IRAs, provided that
the trustee maintains separate accounts for
the deemed Roth IRAs and deemed tradi-
tional IRAs of each participant, and each
of those accounts is clearly designated as
such. Thus, the rules under §§1.408A–2
and 1.408A–4 of the regulations, regard-
ing designation and redesignation of IRAs
as Roth IRAs, apply to deemed IRAs as if
the separate accounts maintained for the
deemed Roth IRAs and deemed traditional
IRAs were separate trusts.
The requirements for separate accounts
within a trust as described above are not
meant to imply that a trust that includes
deemed IRAs and a qualified employer
plan (or Roth and traditional IRAs) can
be segmented for other purposes. For ex-
ample, where a qualified employer plan
and deemed IRAs are included in the same
trust, there cannot be separate trustees for
each account, and the trustee for the trust
must be either a bank or a nonbank trustee
that satisfies the requirements of section
408(a)(2) and the regulations thereunder.
The proposed regulations included a
rule for individual retirement annuities
similar to that for individual retirement
accounts. Under the proposed regula-
tions, separate annuity contracts were to
be maintained for individual retirement
annuities when the qualified employer
plan also maintains annuity contracts.
However, unlike the rules applicable to
deemed individual retirement accounts
which provide for separate accounts and
not separate trusts, section 408(q)(1)(A)
expressly provides that a separate annuity
is to be established for a deemed individ-
ual retirement annuity. Accordingly, these
final regulations retain the rule in the pro-
posed regulations that a separate annuity
is to be established under the plan with
respect to deemed individual retirement
annuities.
C.Disqualification
Section 1.408(q)–1(g) of the proposed
regulations provided that the failure of any
of the deemed IRAs maintained by the plan
to satisfy the applicable requirements of
section 408 or 408A caused the plan as a
whole to fail to satisfy the plan’s qualifi-
cation requirements. The proposed regula-
tions further provided that, if the qualified
employer plan failed tosatisfy its qualifi-
cation requirements, the deemed IRA por-
tion would no longer be a deemed IRA
because section 408(q) does not apply if
the plan is not a qualified employer plan.
The proposed regulations provided, how-
ever, that although the account or annu-
ity that was intended to be a deemed IRA
was no longer a deemed IRA, it could still
be treated as a traditional or a Roth IRA
if it satisfied the applicable requirements
of section 408 or 408A (including the re-
quirements regarding the commingling of
assets under section 408(a)(5)).
Several commentators objected to this
rule as inconsistent with the general rule
that the qualified employer plan and the
deemed IRA portion of the plan are sep-
arate entities and with the requirement that
the deemed IRA assets and the other as-
sets of the qualified employer plan must
be maintained in separate trusts. Some
commentators objected in particular to the
rule that the failure of the qualification of
a deemed IRA could result in the failure
of the qualification of the plan as a whole.
They stated that various aspects of the op-
2004–34 I.R.B.303August 23, 2004

eration of deemed IRAs are not within the
control of the employer.
The final regulations provide that the
failure of either the qualified employer
plan portion or the deemed IRA portion
of the plan to satisfy the applicable qual-
ification rules of each will not cause the
other portion to be automatically disqual-
ified. This rule applies, however, only if
the deemed IRA portion and the qualified
employer plan portion are maintained as
separate trusts (or separate annuity con-
tracts, as required in the case of individual
retirement annuities). If both the deemed
IRA portion and the qualified plan por-
tion are included in separate trusts and the
qualified employer plan is disqualified,
the IRA portion cannot be a deemed IRA
under section 408(q) but it will not fail
to satisfy the applicable requirements of
section 408 or 408A if it satisfies the ap-
plicable requirements of those sections,
including, with respect to individual retire-
ment accounts, the requirements of section
408(a)(5). However, if the IRA assets and
the non-IRA assets have been commin-
gled (except in a common trust fund or
common investment fund as permitted by
section 408(a)(5)), the IRA portion will
fail to satisfy the requirements of section
408(a).
1
Likewise, if the IRA assets and
the non-IRA assets are commingled (ex-
cept as permitted by section 408(a)(5)),
and the IRA is disqualified, the plan will
also be disqualified.
D.Governmental Units as Nonbank
Trustees
As noted above, the proposed regula-
tions provided that a qualified employer
plan and a related deemed IRA are gen-
erally treated as separate entities under
the Code and each is subject to the rules
applicable to thatentity. Thus, under
the proposed regulations, an individ-
ual retirement account that is a deemed
IRA would be required to satisfy the re-
quirements of section 408(a) except for
the commingling limitations of section
408(a)(5). Consistent with this general
rule, §1.408(q)–1(f)(1) of the proposed
regulations provided that the trustee or
custodian of an individual retirement ac-
count must be a bank or other person that
receives approval from the Commissioner
to serve as a nonbank trustee pursuant to
§1.408–2(e) of the regulations.
Several commentators noted that be-
cause the nonbank trustee criteria were de-
signed to test private entities, it is diffi-
cult, if not impossible, for most state and
local governments to satisfy them. They
also argued that, although it may be pos-
sible for a state or local government to
appoint a bank or an approved nonbank
trustee for the deemed IRA portion of the
plan, this would impose unnecessary costs
and administrative hardships on these gov-
ernments that wouldoutweigh any corre-
sponding benefit and that such an appoint-
ment may contravene state law.
Several commentators argued that
governments should be exempt from the
nonbank trustee requirements, but the
IRS and Treasury continue to believe
that governments, like private entities,
must demonstrate to the satisfaction of
the Commissioner that the manner in
which the government will administer
the deemed IRA will be consistent with
the requirements of section 408(a). Ac-
cordingly, the final regulations adopt the
rule of the proposed regulations that the
trustee of the deemed IRA must be a
bank or a nonbank trustee approved by
the Commissioner. The IRS and Treasury
acknowledge, however, that §1.408–2(e)
of the regulations sets forth several crite-
ria that governments may have difficulty
satisfying. Accordingly, this document
temporarily amends §1.408–2(e) to pro-
vide that a governmental unit may serve as
the trustee of any deemed IRA established
by that governmental unit as part of its
qualified employer plan if that govern-
mental unit establishes to the satisfaction
of the Commissioner that the manner in
which it will administer the deemed IRA
will be consistent with the requirements of
section 408. The temporary amendment
also provides special rules regarding the
application of §1.408–2(e) to governmen-
tal units.
E.Other Comments
Other comments included one noting
that the proposed regulations require that
the plan document of the qualified em-
ployer plan must contain the deemed IRA
provisions and that Revenue Procedure
2003–13 provides that the deemed IRA
provisions must address every applica-
ble point in the IRA Listing of Required
Modifications. The commentator sug-
gested that plan sponsors be permitted
to incorporate by reference the terms of
separate IRA agreements or annuities. Al-
though incorporation by reference may be
possible in some circumstances, it is not
possible where the IRA document is in-
consistent with the provisions of the plan.
For example, assuming the deemed IRA
is to provide for commingling as allowed
under section 408(q), it is not possible to
incorporate an IRA document that pro-
hibits such commingling.
Various comments were received relat-
ing to administrative issues such as report-
ing and withholding rules and whether the
separate rules applicable to qualified em-
ployer plans and IRAs were to be applied.
As indicated in §1.408(q)–1(c) of the pro-
posed regulations, except as otherwise
provided in the regulations, the qualified
employer plan and the deemed IRA are
treated as separate entities under the Code
and they are subject to the separate rules
applicable to qualified employer plans
and IRAs, respectively. Accordingly, the
reporting and withholding rules on plan
and IRA distributions apply separately
depending on whether the distributions are
made from the deemed IRA or the qual-
ified employer plan. Thus, for example,
the reporting rules for required minimum
distributions apply separately for the two
portions of the plan. Similarly, a total dis-
tributionofamountsheldinthequalified
employer plan portion and the deemed
IRA portion is reported on two Forms
1099-R, “Distributions From Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.”,
one for the distribution from the deemed
IRA portion and one for the rest of the
distribution. Also, the 20% withholding
1
The Department of Labor has advised the IRS and Treasury that consistent with section 4(c) of the Employee Retirement Income Security Act (ERISA), accounts and annuities (and con-
tributions thereto) established in accordance with section 408(q) of theCode are not to be treated as part of the pension plan under which such accounts and annuities are allowed (or as a
separate pension plan) “for purposes of any provision of [title I of ERISA] other than § 403(c), 404, or 405 (relating to exclusive benefit, and fiduciary and co-fiduciary responsibilities) and
part 5 (relating to administration and enforcement).” Accordingly, fiduciaries need to take appropriate steps to ensure that they satisfy any fiduciary duties associated with implementation
and operation of a deemed IRA feature that is related to a plan covered under title I of ERISA. These duties may include, but are not limited to, a duty to monitor the activities of holders of
deemed IRAs in order to prevent disqualification of the deemed IRA feature and/or the qualified employer plan where the plan is intended to be maintained as a tax-qualified plan.
August 23, 20043042004–34 I.R.B.

rules of section 3405(c) do not apply to a
distribution from the deemed IRA portion
but would apply to a distribution from
the qualified employer plan portion, and
section 72(t) applies separately to the two
portions.
Questions were also raised regarding
who may participate in a deemed IRA.
For example, one commentator, noting
that the termemployeeis not defined by
section 408(q) or by the proposed regu-
lations, asked whether that term includes
self-employed individuals. Althoughem-
ployeeis not defined by section 408(q),
section 408(q)(3)(B) defines a voluntary
employee contribution, in part, as a con-
tribution by an individual “as an employee
under a qualified employer plan which
allows employees” to elect to make con-
tributions to a separate account under the
plan. Thus, these regulations provide that
to the extent a self-employed individual
is anemployeefor purposes of the qual-
ified employer plan, that individual will
be treated as an employee for purposes of
section 408(q). In the case of a qualified
plan under section 401(a) and a qualified
annuity plan under section 403(a),em-
ployeeincludes self-employed individuals
as defined in section 401(c). The only cir-
cumstance under which a self-employed
individual may participate in a section
403(b) plan is when a self-employed
ministerdescribedinsection414(e)(5)
participates in a retirement income ac-
count as described in section 403(b)(9). In
contrast, section 457(e)(2) permits inde-
pendent contractors as well as employees
to participate in a section 457 plan. How-
ever, since section408(q) permits only
employees to make contributions to a
deemed IRA, only employees (including
self-employed individuals) may be per-
mitted to participate in a deemed IRA
maintained by a governmental section 457
plan.
Another commentator asked whether an
employee can participate in a deemed IRA
if he or she does not participate in the
qualified employer plan, or even if the
employee is not eligible to participate in
the qualified employer plan. Again, as
noted above, the deemed IRA and the qual-
ified employer plan are generally treated as
separate entities under the Code. Section
408(q) does not impose a requirement that
an employee must participate in both por-
tions of the plan or that an employee must
be eligible to participate in both portions of
the plan. Accordingly, the two portions of
the plan may have different eligibility re-
quirements.
One commentator asked whether the
automatic enrollment principles applicable
to section 401(k), 403(b), and 457 plans
under Revenue Rulings 2000–8, 2000–1
C.B. 617; 2000–35, 2000–2 C.B. 138;
and 2000–33, 2000–2 C.B. 142, apply
to deemed IRAs. These revenue rulings
specify the criteria to be met in order for an
employee’s compensation to be automat-
ically reduced by a certain amount where
that amount is contributed as an elective
deferral to these three types of plans. The
IRS and Treasury agree that the automatic
enrollment principlesapplicable to section
401(k), 403(b), and 457 plans in the cited
revenue rulings may also be applied to
deemed IRAs.
With respect to the requirements for
approval as a nonbank trustee, one com-
mentator noted that §1.408–2(e)(5)(v)
requires that an applicant must demon-
strate that, except for investments pooled
in a common investment fund, the in-
vestments of each account will not be
commingled with any other property. The
commentator noted that this requirement
is inconsistent with the provisions of sec-
tion 408(q)(1), which provide that the
requirements of section 408(a)(5) regard-
ing commingling do not apply to deemed
IRAs. Accordingly, this document amends
§1.408–2(e)(5)(v) to provide that an ap-
plicant that intends to serve as a nonbank
trustee need not satisfy this requirement
with respect to any assets held in a deemed
IRA.
Finally, these regulations provide that
neither the assets held in the deemed IRA
portion of the qualified employer plan,
nor any benefits attributable thereto, shall
be taken into account for purposes of de-
termining the benefits of employees and
their beneficiaries under the plan (within
the meaning of section 401(a)(2)) or de-
termining the plan’s assets or liabilities
for purposes of section 404 or 412. The
Pension Benefit Guaranty Corporation
(PBGC) has advised the IRS and Treasury
that a deemed IRA feature that is related
to a qualified employer plan is not covered
by Title IV of ERISA. The PBGC has
further advised that the deemed IRA fea-
ture is treated as a separate entity from the
qualified employer plan for purposes of
Title IV. For example, neither the assets in,
nor the benefits attributable to, the deemed
IRA are taken into account in determining
the amount of the PBGC’s variable-rate
premium, and an individual who is a
participant in the deemed IRA but who
is not a participant in the qualified em-
ployer plan is not included in the PBGC’s
flat-rate participant count. In addition, for
purposes of Title IV, the deemed IRA will
be treated as separate from the qualified
employer plan in the event of termination
of the qualified employer plan, and the
fiduciary of the deemed IRA would con-
tinue to be responsible for the continued
operation, transfer, or termination of the
deemed IRA. The PBGC would allocate
the assets of the qualified employer plan to
the priority categories under section 4044
of ERISA without regard to any assets
in, or benefits attributable to, the deemed
IRA, and the PBGC would not serve as
trustee of the deemed IRA. Termination
of a deemed IRA would not be subject to
the rules governing plan termination under
Title IV of ERISA.
Effective Date
The regulations apply to accounts or an-
nuities established under section 408(q) on
or after August 1, 2003.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required.
It is hereby certified that the collection
of information in these final regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. The collection of information in
the regulations is in §1.408(q)–1(f)(2) and
consists of the optional requirement that
deemed IRAs may be held in trusts or an-
nuity contracts separate from the trust or
annuity contract of the qualified employer
plan. This certification is based on the fact
that the burden of reporting these separate
trusts and annuity contracts is small, par-
ticularly for small entities. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
2004–34 I.R.B.305August 23, 2004

Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
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. For the applicability of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) to the temporary regulations,
refer to the Special Analyses section of the
preamble to the cross-referencing notice of
proposed rulemaking (REG–101447–04)
published in this issue of the Bulletin. Pur-
suant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding
the final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for coment on
their impact on small business. The tem-
porary regulations will also be submitted
to the Chief Counsel for Advocacy for
such comment.
Drafting Information
The principal authors of these regula-
tions are Robert Walsh of the Tax Exempt
and Government Entities Division and
Linda Conway, Office of Division Coun-
sel/Associate Chief Counsel (Tax Exempt
and Government Entities). However,
other personnel from the IRS and Trea-
sury participated in the development of
these regulations.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1— INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.408–2 also issued under 26 U.S.C.
408(a)and26U.S.C.408(q).***
§1.408(q)–1 also issued under 26
U.S.C. 408(q). * * *
Par. 2. In §1.408–2, paragraph (e)(5)
(v)(A) is revised and (e)(8) is added to read
as follows:
§1.408–2 Individual retirement accounts
*****
(e) * * *
(5) * * *
(v)Custody of investments. (A) Except
for investments pooled in a common in-
vestment fund in accordance with the pro-
visions of paragraph (e)(5)(vi) of this sec-
tion and for investments of accounts es-
tablished under section 408(q) on or after
August 1, 2003, the investments of each
account will not be commingled with any
other property.
*****
(8) [Reserved]. For further guidance,
see §1.408–2T(e)(8).
Par. 3. Section 1.408–2T is added to
read as follows:
§1.408–2T Individual retirement accounts
(temporary).
(a) through (e)(7) [Reserved]. For fur-
ther guidance, see §1.408–2(a) through
(e)(7).
(8)Special rules for governmental
units. (i) A governmental unit that seeks
to qualify as a nonbank trustee of a deemed
IRA that is part of its qualified employer
plan must demonstrate to the satisfac-
tion of the Commissioner that it is able
to administer the trust in a manner that
is consistent with the requirements of
section 408. The demonstration must
be made by written application to the
Commissioner. Notwithstanding the re-
quirement of §1.408–2(e)(1) that a person
must demonstrate by written application
that the requirements of paragraphs (e)(2)
to (e)(6) of that section will be met in
order to qualify as a nonbank trustee, a
governmental unit that maintains a plan
qualified under section 401(a), 403(a),
403(b) or 457 need not demonstrate that
all of these requirements will be met
with respect to any individual retirement
accounts maintained by that governmen-
tal unit pursuant to section 408(q). For
example, a governmental unit need not
demonstrate that it satisfies the net worth
requirements of §1.408–2(e)(3)(ii) if it
demonstrates instead that it possesses tax-
ing authority under applicable law. The
Commissioner, in his discretion, may ex-
empt a governmental unit from certain
other requirements upon a showing that
the governmental unit is able to administer
the deemed IRAs in the best interest of
the participants. Moreover, in determining
whether a governmental unit satisfies the
other requirements of §1.408–2(e)(2) to
(e)(6), the Commissioner may apply the
requirements in a manner that is consistent
with the applicant’s status as a govern-
mental unit.
(ii)Governmental unit. For purposes
of this special rule, the termgovernmental
unitmeans a State, political subdivision of
a State, and any agency or instrumentality
of a State or political subdivision of a State.
(iii)Additional rules.TheCommis-
sioner may in revenue rulings, notices,
or other guidance of general applicability
provide additional rules for governmen-
tal units seeking approval as nonbank
trustees.
(iv)Effective date. This special rule
is applicable for written applications made
on or after August 1, 2003, or such earlier
application as the Commissioner deems
appropriate.
Par. 4. Section1.408(q)–1isaddedto
read as follows:
§1.408(q)–1 Deemed IRAs in qualified
employer plans.
(a)In general. Under section 408(q),
a qualified employer plan may permit em-
ployees to make voluntary employee con-
tributions to a separate account or annuity
established under the plan. If the require-
ments of section 408(q) and this section are
met, such account or annuity is treated in
the same manner as an individual retire-
ment plan under section 408 or 408A (and
contributions to such an account or annuity
are treated as contributions to an individ-
ual retirement plan and not to the qualified
employer plan). The account or annuity is
referred to as a deemed IRA.
(b)Types of IRAs. If the account or an-
nuity meets the requirements applicable to
traditional IRAs under section 408, the ac-
count or annuity is deemed to be a tradi-
tional IRA, and if the account or annuity
meets the requirements applicable to Roth
IRAs under section 408A, the account or
annuity is deemed to be a Roth IRA. Sim-
plified employee pensions (SEPs) under
section 408(k) and SIMPLE IRAs under
section 408(p) may not be used as deemed
IRAs.
(c)Separate entities. Except as pro-
vided in paragraphs (d) and (g) of this
section, the qualified employer plan and
the deemed IRA are treated as separate
entities under the Internal Revenue Code
August 23, 20043062004–34 I.R.B.

and are subject to the separate rules ap-
plicable to qualified employer plans and
IRAs, respectively. Issues regarding eli-
gibility, participation, disclosure, nondis-
crimination, contributions, distributions,
investments, and plan administration are
generally to be resolved under the sepa-
rate rules (if any) applicable to each entity
under the Internal Revenue Code.
(d)Exceptions. The following excep-
tions to treatment of a deemed IRA and the
qualified employer plan as separate enti-
ties apply:
(1) The plan document of the qualified
employer plan must contain the deemed
IRA provisions and a deemed IRA must
be in effect at the time the deemed IRA
contributions are accepted. Notwithstand-
ing the preceding sentence, employers that
provided deemed IRAs for plan years be-
ginning before January 1, 2004, (but af-
ter December 31, 2002) are not required
to have such provisions in their plan docu-
ments before the end of such plan years.
(2) The requirements of section
408(a)(5) regarding commingling of assets
do not apply to deemed IRAs. Accord-
ingly, the assets of a deemed IRA may
be commingled for investment purposes
with those of the qualified employer plan.
However, the restrictions on the commin-
gling of plan and IRA assets with other
assets apply to the assets of the qualified
employer plan and the deemed IRA.
(e)Application of distribution rules.
(1) Rules applicableto distributions from
qualified employer plans under the In-
ternal Revenue Code and regulations do
not apply to distributions from deemed
IRAs. Instead, the rules applicable to
distributions from IRAs apply to distri-
butions from deemed IRAs. Also, any
restrictions that a trustee, custodian, or
insurance company is permitted to impose
on distributions from traditional and Roth
IRAs may be imposed on distributions
from deemed IRAs (for example, early
withdrawal penalties on annuities).
(2) The required minimum distribution
rules of section 401(a)(9) must be met
separately with respect to the qualified
employer plan and the deemed IRA. The
determination of whether a qualified em-
ployer plan satisfies the required minimum
distribution rules of section 401(a)(9) is
made without regard to whether a par-
ticipant satisfies the required minimum
distribution requirements with respect to
the deemed IRA that is established under
such plan.
(f)Additional rules—(1)Trustee.The
trustee or custodian of an individual retire-
ment account must be a bank, as required
by section 408(a)(2), or, if the trustee is not
a bank, as defined in section 408(n), the
trustee must have received approval from
the Commissioner to serve as a nonbank
trustee or nonbank custodian pursuant to
§1.408–2(e). For further guidance regard-
ing governmental units serving as nonbank
trustees of deemed IRAs established under
section 408(q), see §1.408–2T(e)(8).
(2)Trusts. (i) General rule. Deemed
IRAs that are individual retirement ac-
counts may be held in separate individual
trusts, a single trust separate from a trust
maintained by the qualified employer
plan, or in a single trust that includes the
qualified employer plan. A deemed IRA
trust must be created or organized in the
United States for the exclusive benefit of
the participants. If deemed IRAs are held
in a single trust that includes the qualified
employer plan, the trustee must maintain a
separate account for each deemed IRA. In
addition, the written governing instrument
creating the trust must satisfy the require-
ments of section 408(a) (1), (2), (3), (4),
and (6).
(ii)Application of section 408(a)(3).If
deemed IRAs are held in a single trust that
includes the qualified employer plan, sec-
tion 408(a)(3) is treated as satisfied if no
part of the separate accounts of any of the
deemed IRAs is invested in life insurance
contracts, regardless of whether the sep-
arate account for the qualified employer
plan invests in life insurance contracts.
(iii)Separate accounts for traditional
and Roth deemed IRAs. The rules of sec-
tion 408A(b) and the regulations thereun-
der, requiring each Roth IRA to be clearly
designated as a Roth IRA, will not fail to
be satisfied solely because Roth deemed
IRAs and traditional deemed IRAs are held
in a single trust, provided that the trustee
maintains separate accounts for the Roth
deemed IRAs and traditional deemed IRAs
of each participant, and each of those ac-
counts is clearly designated as such.
(3)Annuity contracts. Deemed IRAs
that are individual retirement annuities
may be held under a single annuity con-
tract or under separate annuity contracts.
However, the contract must be separate
from any annuity contract or annuity con-
tracts of the qualified employer plan. In
addition, the contract must satisfy the re-
quirements of section 408(b) and there
must be separate accounting for the in-
terest of each participant in those cases
where the individual retirement annuities
are held under a single annuity contract.
(4)Deductibility. The deductibility
of voluntary employee contributions to a
traditional deemed IRA is determined in
the same manner as if they were made
to any other traditional IRA. Thus, for
example, taxpayers with compensation
that exceeds the limits imposed by section
219(g) may not be able to make contribu-
tions to deemed IRAs, or the deductibility
of such contributions may be limited in
accordance with sections 408 and 219(g).
However, section 219(f)(5), regarding the
taxable year in which amounts paid by an
employer to an individual retirement plan
are includible in the employee’s income,
is not applicable to deemed IRAs.
(5)Rollovers and transfers.Thesame
rules apply to rollovers and transfers to and
from deemed IRAs as apply to rollovers
and transfers to and from other IRAs.
Thus, for example, the plan may provide
that an employee may request and receive
a distribution of his or her deemed IRA
account balance and may roll it over to an
eligible retirement plan in accordance with
section 408(d)(3), regardless of whether
that employee may receive a distribution
of any other plan benefits.
(6)Nondiscrimination. The availability
of a deemed IRA is not a benefit, right
or feature of the qualified employer plan
under §1.401(a)(4)–4.
(7)IRA assets and benefits not taken
into account in determining benefits un-
der or funding of qualified employer plan.
Neither the assets held in the deemed IRA
portion of the qualified employer plan, nor
any benefits attributable thereto, shall be
taken into account for purposes of:
(i) determining the benefits of employ-
ees and their beneficiaries under the plan
(within the meaning of section 401(a)(2));
or
(ii) determining the plan’s assets or lia-
bilities for purposes of section 404 or 412.
(g)Disqualifying defects—(1)Single
trust. If the qualified employer plan fails to
satisfy the qualification requirements ap-
plicable to it, either in form or operation,
any deemed IRA that is an individual re-
tirement account and that is included as
2004–34 I.R.B.307August 23, 2004

part of the trust of that qualified employer
plan does not satisfy section 408(q). Ac-
cordingly, any account maintained under
such a plan as a deemed IRA ceases to be
a deemed IRA at the time of the disquali-
fying event. In addition, the deemed IRA
also ceases to satisfy the requirements of
sections 408(a) and 408A. Also, if any one
of the deemed IRAs fails to satisfy the ap-
plicable requirements of sections 408 or
408A, and the assets of that deemed IRA
are included as part of the trust of the qual-
ified employer plan, section 408(q) does
not apply and the plan will fail to satisfy
the plan’s qualification requirements.
(2)Separate trusts and annuities.Ifthe
qualified employer plan fails to satisfy its
qualification requirements, either in form
or operation, but the assets of a deemed
IRA are held in a separate trust (or where
a deemed IRA is an individual retirement
annuity), then the deemed IRA does not
automatically fail to satisfy the applica-
ble requirements of section 408 or 408A.
Instead, its status as an IRA will be de-
termined by considering whether the ac-
count or the annuity satisfies the applica-
ble requirements of sections 408 and 408A
(including, in the case of individual re-
tirement accounts, the prohibition against
the commingling of assets under section
408(a)(5)). Also, if a deemed IRA fails to
satisfy the requirements of a qualified IRA
and the assets of the deemed IRA are held
in a separate trust (or where the deemed
IRA is an individual retirement annuity),
the qualified employer plan will not fail the
qualification requirements applicable to it
under the Code solely because of the fail-
ure of the deemed IRA.
(h)Definitions. The following defini-
tions apply for purposes of this section:
(1)Qualified employer plan.Aquali-
fied employer planis a plan described in
section 401(a), an annuity plan described
in section 403(a), a section 403(b) plan, or
a governmental plan under section 457(b).
(2)Voluntary employee contribution.
Avoluntary employee contributionis any
contribution (other than a mandatory con-
tribution within the meaning of section
411(c)(2)(C)) which is made by an indi-
vidual as an employee under a qualified
employer plan that allows employees to
elect to make contributions to deemed
IRAs and with respect to which the in-
dividual has designated the contribution
as a contribution to which section 408(q)
applies.
(3)Employee.Anemployeeincludes
any individual who is an employee under
the rules applicable to the qualified em-
ployer plan under which the deemed IRA
is established.
(i)Effective date. This section applies
to accounts or annuities established under
section 408(q) on or after August 1, 2003.
PART 602 — OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 6. In § 602.101, paragraph (b)
is amended by adding the following entry
in numerical order to the table to read as
follows:
CFR part or section where
identified and described
Current OMB
control No.
*****
1.408(q)–1........................................................... 1545–1841
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 14, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(
Filed by the Office of the Federal Register on July 21, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 22, 2004, 69 F.R. 43735)
Section 460.—Special
Rules for Long-Term
Contracts
26 CFR 1.460–4: Methods of accounting for long-
term contracts.
T.D. 9137
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Partnership Transactions
Involving Long-Term Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to partnership trans-
actions involving contracts accounted for
under a long-term contract method of ac-
counting. The regulations are necessary
to resolve issues that were reserved in fi-
nal regulations under section 460 that were
published in theFederal Registeron May
15, 2002, addressing other mid-contract
changes in taxpayer engaged in complet-
ing such contracts. The effect of the regu-
lations is to explain the tax consequences
of these partnership transactions.
DATES:Effective Date:These regulations
are effective July 16, 2004.
Applicability Date:These regulations
apply to transactions on or after May 15,
2002.
FOR FURTHER INFORMATION
CONTACT: Richard Probst at (202)
622–3060 (not a toll-free number).
August 23, 20043082004–34 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
Section 460 of the Internal Revenue
Code generally requires that taxpayers de-
termine taxable income from a long-term
contract using the percentage-of-comple-
tion method (PCM). Under regulations
finalized in 2001 (T.D. 8929, 2001–1 C.B.
756), a taxpayer using the PCM generally
includes a portion of the total contract
price in income for each taxable year that
the taxpayer incurs contract costs allo-
cable to the long-term contract. More
specifically, to determine the income from
a long-term contract, the taxpayer first
computes the completion factor for the
contract, which is the percentage of the
estimated total allocable contract costs
that the taxpayer has incurred (based on
the all events test of section 461, including
economic performance, regardless of the
taxpayer’s method of accounting) through
the end of the taxable year. Second, the
taxpayer computes the amount of cumu-
lative gross receipts from the contract by
multiplying the completion factor by the
total contract price, which is the amount
that the taxpayer reasonably expects to
receive under the contract. Third, the tax-
payer computes the amount of current-year
gross receipts, which is the difference be-
tween the cumulative gross receipts for
the current taxable year and the cumu-
lative gross receipts for the immediately
preceding taxable year. This difference
may be a loss (a negative number) based
on revisions to estimates of total alloca-
ble contract costs or total contract price.
Fourth, the taxpayer takes into account
both the current-year gross receipts and
the amount of allocable contract costs ac-
tually incurred during the taxable year. To
the extent any portion of the total contract
price has not been included in taxable
income by the completion year, section
460(b)(1) and the regulations require the
taxpayer to include that portion in income
for the taxable year following the comple-
tion year.
A long-term contract or a portion of a
long-term contract that is exempt from the
PCM may be accounted for under any per-
missible method, including the completed
contract method (CCM). Under the CCM,
a taxpayer does not take into account the
gross contract price and allocable contract
costs until the contract is complete, even
though progress payments are received in
years prior to completion.
A taxpayer generally must allocate
costs to a contract subject to section 460(a)
in the same manner as direct and indirect
costs are capitalized to property produced
by a taxpayer under section 263A. The
regulations provide exceptions, however,
that reflect the differences in the cost allo-
cation rules of sections 263A and 460.
Section 460(h) directs the Secretary to
prescribe regulations to the extent neces-
sary or appropriate to carry out the purpose
of section 460, including regulations to
prevent a taxpayer from avoiding section
460 by using related parties, pass-through
entities, intermediaries, options, and other
similar arrangements.
On May 15, 2002, final regulations un-
der section 460 were issued to address a
mid-contract change in taxpayer engaged
in completing a contract accounted for un-
der a long-term contract method of ac-
counting (T.D. 8995, 2002–1 C.B. 1070).
The regulations divide the rules regarding
a mid-contract change in taxpayer into two
categories-constructive completion trans-
actions and step-in-the-shoes transactions.
In a constructive completion transac-
tion, the taxpayer that originally accounted
for the long-term contract (old taxpayer)
must recognize income from the contract
as of the time of the transaction. The con-
tract price used to determine the amount
of income recognized by the taxpayer is
the amount realized from the transaction,
reduced by any amounts paid by the old
taxpayer to the taxpayer subsequently ac-
counting for the long-term contract (new
taxpayer) that are allocable to the contract.
Similarly, the new taxpayer in a construc-
tive completion transaction is treated as
though it entered into a new contract as of
the date of the transaction. The new tax-
payer’s contract price is the amount that
the new taxpayer reasonably expects to re-
ceive under the contract, reduced by the
price paid by the new taxpayer for the con-
tract, and increased by any amounts paid
by the old taxpayer to the new taxpayer
that are allocable to the contract. In con-
trast, in a step-in-the-shoes transaction, the
old taxpayer’s obligation to account for the
contract terminates onthe date of the trans-
action and is assumed by the new taxpayer.
The new taxpayer must assume the old tax-
payer’s methods of accounting for the con-
tract, with both the contract price and al-
locable contract costs based on amounts
taken into account by both parties.
The final section 460 regulations pro-
vide that a contribution to a partnership in
a transaction described in section 721(a),
a transfer of a partnership interest, and
a distribution by a partnership to which
section 731 applies (other than a distribu-
tion of a contract accounted for under a
long-term contract method of accounting)
are step-in-the-shoes transactions. In a
notice issued concurrently with the final
regulations, Notice 2002–37, 2002–23
I.R.B. 1095, the Treasury Department and
IRS announced their intention to publish
regulations setting forth the special rules
that apply to these partnership transac-
tions and described many of these rules.
The notice further provided that these
regulations would apply to contributions,
transfers, and distributions occurring on
or after May 15, 2002. On August 6,
2003, a notice of proposed rulemaking
(REG–128203–02, 2003–41 I.R.B. 828)
relating to partnership transactions in-
volving contractsaccounted for under a
long-term contract method of accounting
was published in theFederal Register
(68 FR 46516). Comments were received
from the public in response to the notice of
proposed rulemaking. No public hearing
was requested or held. After consideration
of all comments, the proposed regulations
are adopted as amended by this Treasury
decision.
Explanation and Summary of Contents
The regulations proposed on August 6,
2003, provide that the constructive com-
pletion rules do not apply to a transfer
by a partnership (transferor partnership)
of all of its assets and liabilities to a
second partnership (transferee partner-
ship) in an exchange described in section
721, followed by a distribution of the
interest in the transferee partnership in
liquidation of the transferor partnership,
under §1.708–1(b)(4) (relating to ter-
minations under section 708(b)(1)(B))
or §1.708–1(c)(3)(i) (relating to certain
partnership mergers). One commentator
suggested clarifying that the constructive
completion rules apply to other distri-
butions of an interest in a partnership
(lower-tier partnership) holding one or
more contracts accounted for under a
2004–34 I.R.B.309August 23, 2004

long-term contract method of accounting
by another partnership (upper-tier partner-
ship). This comment has been adopted.
One commentator suggested that the
final regulations clarify the application of
the constructive completion rules if a part-
nership that holds a contract accounted
for under a long-term contract method
of accounting terminates under section
708(b)(1)(A) because the number of its
owners is reduced to one. In response to
this comment, the final regulations provide
that the entire contract will be treated as
being distributed from the partnership for
purposes of the constructive completion
rules, because the partnership ceases to ex-
ist for tax purposes. In addition, the final
regulations provide that the partnership
must apply the constructive completion
rules immediately prior to the transaction
or transactions resulting in the termination
of the partnership.
Consistent with §1.706–1(c)(2)(ii),
the proposed regulations generally pro-
vide that upon the transfer or liquida-
tion of an interest in a partnership hold-
ing a contract accounted for under a
long-term contractmethod of account-
ing, the step-in-the-shoes rules apply to a
contract accounted for under a long-term
contract method of accounting only if the
partnership’s books are properly closed
with respect to that contract under section
706. The proposed regulations provide
that if the partnership’s books are not
closed with respect to the contract, the
partnership shall compute its income or
loss from each contract accounted for
under a long-term contract method of
accounting for the period that includes
the date of the transfer or liquidation as
though no change in taxpayer had occurred
with respect to that contract, and may pro
rate income from the contract under a
reasonable method complying with sec-
tion 706. The proposed regulations also
provide similar rules for distributions of
property (other than a contract accounted
for under a long-term contract method of
accounting) from a partnership holding
a long-term contract, and for contribu-
tions of property (other than a contract
accounted for under a long-term contract
method of accounting) to a partnership
holding a contract accounted for under a
long-term contract method of accounting.
The proposed regulations requested
comments regarding whether similar rules
should be provided with respect to trans-
fersofstockinanScorporationholdinga
contract accounted for under a long-term
contract method of accounting. Under
section 1377(a)(1) and §1.1377–1(a), each
shareholder’spro ratashare of any S
corporation item for any taxable year is
generally the sum of the amounts deter-
mined with respect to the shareholder by
assigning an equal portion of the item
to each day of the S corporation’s tax-
able year, and then dividing that portion
pro rataamong the shares outstanding
on that day. Under section 1377(a)(2)
and §1.1377–1(b), an S corporation may
elect to close its books if a shareholder’s
entire interest in an S corporation is termi-
nated during the S corporation’s taxable
year, and the corporation and all affected
shareholders agree. No comments were
received.
The Treasury Department and IRS have
concluded that similar rules should be pro-
vided for transfers of S corporation stock
and conversions to and from S corpora-
tion status. Thus, the final regulations
generally provide that upon the transfer of
stock in an S corporation holding a con-
tract accounted for under a long-term con-
tract method of accounting, or the conver-
sion to or from S corporation status by a
corporation holding such a contract, the
step-in-the-shoes rules apply to the con-
tract only if the S corporation’s books are
closed under section 1362(e)(3), section
1362(e)(6)(C), section 1362(e)(6)(D), sec-
tion 1377(a)(2), or §1.1502–76. If the S
corporation’s books are not closed, the S
corporation computes its income or loss
from the contract for the period that in-
cludes the date of the transfer as though
no change in taxpayer had occurred with
respect to the contract, and must pro rate
income from the contract in accordance
with the rules generally applicable to such
transfers or conversions.
In Rev. Rul. 73–301, 1973–2 C.B. 215,
the IRS ruled that the progress payments
described in the ruling did not constitute
a liability within the meaning of section
752. See also Rev. Rul. 81–241, 1981–2
C.B. 146 (citing and following Rev. Rul.
73–301). The proposed regulations re-
quested comments regarding whether
there are circumstances under which the
receipt of progress payments under a con-
tract accounted for under a long-term
contract method of accounting could give
rise to a liability under section 752, and, if
so, how the regulations would need to be
revised to account for such liabilities. No
written comments were received. How-
ever, if a contract accounted for under a
long-term contract method of accounting
is contributed to a partnership, then, to
the extent that progress payments give
rise to a liability, section 752(b) would
require the transferring partner to reduce
its basis in its partnership by the amount
of that liability, either when the contract
is contributed (to the extent that the li-
ability is allocated to other partners) or
when the liability is extinguished. Thus,
because the proposed regulations require
the partner to reduce the partner’s basis in
its partnership interest by the amount of
progress payments received, the proposed
regulations could require two reductions
inbasisforthesamepayments.
Ordinarily, progress payments do not
give rise to liabilities within the meaning
of section 752 and the regulations thereun-
der. However, to the extent that there is
a case in which a progress payment gives
rise to such a liability, the Treasury Depart-
ment and IRS agree that taxpayers should
not be required to reduce their basis twice
for the same progress payment, and be-
lieve that a similar rule should be pro-
vided for transfers to corporations. Ac-
cordingly, upon a contribution of a con-
tract accounted for under a long-term con-
tract method of accounting to a partnership
or corporation, the final regulations pro-
vide that the required reduction in basis for
progress payments received does not apply
to the extent that such progress payments
give rise to a liability (other than a liability
described in section 357(c)(3)).
Finally, one commentator suggested
that the regulations clarify that the fair
market value of a contract contributed to
a partnership does not necessarily equal
the full amount of expected remaining
profit on the contributed contract. The
Treasury Department and IRS believe that
it is sufficiently clear under the proposed
regulations that the fair market value of
the contributed contract is determined
under general tax principles. Thus, this
comment has not been adopted.
Special Analysis
It has been determined that this Trea-
sury decision is not asignificant regula-
August 23, 20043102004–34 I.R.B.

tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, these regu-
lations were submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small businesses.
Drafting Information
The principal authors of these regula-
tions are Matthew Lay and Richard Probst
of the Office of the Associate Chief Coun-
sel (Passthroughs and Special Industries).
However, personnel from other offices of
the Treasury Department and IRS partici-
pated 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 1.460–0 is amended as
follows:
1. Revising the entry for paragraph
1.460–4(k)(2)(iv).
2. Adding entries for §1.460–4(k)(2)
(iv)(A) through (E).
3. Revising the entry for §1.460–4(k)
(3)(iv).
4. Revising the entry for §1.460–4(k)
(3)(iv)(A)(2) and adding entries for
§1.460–4(k)(3)(iv)(C) and (D).
5. Revising the entry for §1.460–4(k)
(3)(v).
6. Adding entries for §1.460–4(k)(3)
(v)(A) through (D).
7. Adding entries for §1.460–6(g)(3)
(ii)(D)(1)and(2).
The additions and revisions read as fol-
lows:
§1.460–0 Outline of regulations under
section 460.
*****
§1.460–4 Methods of accounting for
long-term contracts.
*****
(k) * * *
(2) * * *
(iv) Special rules relating to distribu-
tions of certain contracts by a partnership.
(A) In general.
(B) Old taxpayer.
(C) New taxpayer.
(D) Basis rules.
(E) Section 751.
(1) In general.
(2) Ordering rules.
(3) * * *
(iv) Special rules related to certain cor-
porate and partnership transactions.
(A)***
(2) Basis adjustment in excess of stock
or partnership interest basis.
*****
(C) Definition of old taxpayer and new
taxpayer for certain partnership transac-
tions.
(D) Exceptions to step-in-the-shoes
rules for S corporations.
(v) Special rules relating to certain part-
nership transactions.
(A) Section 704(c).
(1) Contributions of contracts.
(2) Revaluations of partnership prop-
erty.
(3) Allocation methods.
(B) Basis adjustments under sections
743(b) and 734(b).
(C) Cross reference.
(D) Exceptions to step-in-the-shoes
rules.
*****
§1.460–6 Look-back method.
*****
(g) * * *
(3) * * *
(ii) * * *
(D)***
(1) In general.
(2) Special rules for certain pass-
through entity transactions.
*****
Par. 3. Section 1.460–4 is amended as
follows:
1. Revising the sixth sentence in para-
graph (k)(1).
2. Revising paragraph (k)(2)(iv).
3. Removing the first word “The” in
paragraph (k)(3)(i), adding in its place
“Except as otherwise provided in para-
graph (k)(3)(v)(D) of this section, the”.
4. Revising paragraph (k)(3)(i)(I).
5. Redesignating paragraphs (k)(3)(i)
(J), (K) and (L) as paragraphs (k)(3)(i)(K),
(L) and (M), respectively.
6. Adding a new paragraph (k)(3)(i)(J).
7. Revising newly designated para-
graph (k)(3)(i)(K).
8. Revising paragraph (k)(3)(iv).
9. Revising paragraph (k)(3)(v).
10. Adding paragraph (k)(5)Example 9
throughExample 13.
11. Revising the first sentence in para-
graph (k)(6).
The additions and revisions read as fol-
lows:
§1.460–4 Methods of accounting for
long-term contracts.
*****
(k) * * *
(1) * * * Special rules relating to the
treatment of certain partnership transac-
tions are provided in paragraphs (k)(2)(iv)
and (k)(3)(v) of this section. * * *
(2) * * *
(iv)Special rules relating to distribu-
tions of certain contracts by a partnership
—(A)In general. The constructive com-
pletion rules of paragraph (k)(2) of this
section apply both to the distribution of a
contract accounted for under a long-term
contract method of accounting by a part-
nership to a partner and to the distribution
of an interest in a partnership (lower-tier
partnership) holding (either directly or
through other partnerships) one or more
contracts accounted for under a long-term
contract method of accounting by another
partnership (upper-tier partnership). Not-
withstanding the previous sentence, the
constructive completion rules of para-
graph (k)(2) of this section do not apply
to a transfer by a partnership (transferor
partnership) of all of its assets and liabil-
ities to a second partnership (transferee
partnership) in an exchange described in
2004–34 I.R.B.311August 23, 2004

section 721, followed by a distribution of
the interest in the transferee partnership
in liquidation of the transferor partner-
ship, under §1.708–1(b)(4) (relating to
terminations under section 708(b)(1)(B))
or §1.708–1(c)(3)(i) (relating to certain
partnership mergers). If a partnership that
holds a contract accounted for under a
long-term contract method of accounting
terminates under section 708(b)(1)(A) be-
cause the number of its owners is reduced
to one, the entire contract will be treated as
being distributed from the partnership for
purposes of the constructive completion
rules, and the partnership must apply para-
graph (k)(2) of this section immediately
prior to the transaction or transactions
resulting in the termination of the partner-
ship.
(B)Old taxpayer. The partnership that
distributes the contract is treated as the
old taxpayer for purposes of paragraph
(k)(2)(ii) of this section. For purposes
of determining the total contract price
(or gross contract price) under paragraph
(k)(2)(ii) of this section, the fair mar-
ket value of the contract is treated as the
amount realized from the transaction. For
purposes of determining each partner’s
distributive share of partnership items,
any income or loss resulting from the con-
structive completion must be allocated
among the partners of the old taxpayer as
though the partnership closed its books on
the date of the distribution.
(C)New taxpayer. The partner receiv-
ing the distributed contract is treated as the
new taxpayer for purposes of paragraph
(k)(2)(iii) of this section. For purposes
of determining the total contract price
(or gross contract price) under paragraph
(k)(2)(iii) of this section, the new tax-
payer’s basis in the contract (including
the uncompleted property, if applicable)
after the distribution (as determined under
section 732) is treated as consideration
paid by the new taxpayer that is allocable
to the contract. Thus, the total contract
price (or gross contract price) of the new
contract is reduced by the partner’s basis
in the contract (including the uncompleted
property, if applicable) immediately after
the distribution.
(D)Basis rules. For purposes of deter-
mining the new taxpayer’s basis in the con-
tract (including the uncompleted property,
if applicable) under section 732, and the
amount of any basis adjustment under sec-
tion 734(b), the partnership’s basis in the
contract (including the uncompleted prop-
erty, if applicable) immediately prior to the
distribution is equal to—
(1) The partnership’s allocable contract
costs (including transaction costs);
(2) Increased (or decreased) by the
amount of cumulative taxable income (or
loss) recognized by the partnership on the
contract through the date of the distribu-
tion (including amounts recognized as a
result of the constructive completion); and
(3) Decreased by the amounts that the
partnership has received or reasonably ex-
pects to receive under the contract.
(E)Section 751—(1)In general.Con-
tracts accounted for under a long-term con-
tract method of accounting are unrealized
receivables within the meaning of section
751(c). For purposes of section 751, the
amount of ordinary income or loss attrib-
utable to a contract accounted for under a
long-term contract method of accounting
is the amount of income or loss that the
partnership would take into account under
the constructive completion rules of para-
graph (k)(2) of this section if the contract
were disposed of for its fair market value in
a constructive completion transaction, ad-
justed to account for any income or loss
from the contract that is allocated under
section 706 to that portion of the taxable
year of the partnership ending on the date
of the distribution, sale, or exchange.
(2)Ordering rules. Because the distri-
bution of a contract accounted for under a
long-term contract method of accounting
is the distribution of an unrealized receiv-
able, section 751(b) may apply to the dis-
tribution. A partnership that distributes a
contract accounted for under a long-term
contract method of accounting must apply
paragraph (k)(2)(ii) of this section before
applying the rules of section 751(b) to the
distribution.
(3) * * *
(i) * * *
(I) Contributions ofcontracts accounted
for under a long-term contract method of
accounting to which section 721(a) ap-
plies;
(J) Contributions of property (other
than contracts accounted for under a
long-term contractmethod of account-
ing) to a partnership that holds a contract
accounted for under a long-term contract
method of accounting;
(K) Transfers of partnership interests
(other than transfers which cause the
partnership to terminate under section
708(b)(1)(A));
*****
(iv)Special rules related to certain
corporate and partnership transactions
—(A)Old taxpayer — basis adjustment
—(1)In general. Except as provided in
paragraph (k)(3)(iv)(A)(2) of this section,
in the case of a transaction described in
paragraph (k)(3)(i)(D), (E), or (I) of this
section, the old taxpayer must adjust its
basis in the stock or partnership interest of
the new taxpayer by —
(i) Increasing such basis by the amount
of gross receipts the old taxpayer has rec-
ognized under the contract; and
(ii) Reducing such basis by the amount
of gross receipts the old taxpayer has re-
ceived or reasonably expects to receive
under the contract (except to the extent
such gross receipts give rise to a liability
other than a liability described in section
357(c)(3)).
(2)Basis adjustment in excess of stock
or partnership interest basis. If the old
and new taxpayer do not join in the fil-
ing of a consolidated Federal income tax
return, the old taxpayer may not adjust
its basis in the stock or partnership inter-
est of the new taxpayer under paragraph
(k)(3)(iv)(A)(1) of this section below zero
and the old taxpayer must recognize or-
dinary income to the extent the basis in
the stock or partnership interest of the new
taxpayer otherwise would be adjusted be-
low zero. If the old and new taxpayer
join in the filing of a consolidated Fed-
eral income tax return, the old taxpayer
must create an (or increase an existing) ex-
cess loss account to the extent the basis
in the stock of the new taxpayer otherwise
would be adjusted below zero under para-
graph (k)(3)(iv)(A)(1)ofthissection.See
§§1.1502–19 and 1.1502–32(a)(3)(ii).
(3)Subsequent dispositions of certain
contracts. If the old taxpayer disposes of a
contract in a transaction described in para-
graph (k)(3)(i)(D), (E), or (I) of this section
that the old taxpayer acquired in a trans-
action described in paragraph (k)(3)(i)(D),
(E), or (I) of this section, the basis adjust-
ment rule of this paragraph (k)(3)(iv)(A)
is applied by treating the old taxpayer as
having recognized the amount of gross re-
ceipts recognized by the previous old tax-
August 23, 20043122004–34 I.R.B.

payer under the contract and any amount
recognized by the previous old taxpayer
with respect to the contract in connection
with the transaction in which the old tax-
payer acquired the contract. In addition,
the old taxpayer is treated as having re-
ceived or as reasonably expecting to re-
ceive under the contract any amount the
previous old taxpayer received or reason-
ably expects to receive under the contract.
Similar principles will apply in the case of
multiple successive transfers described in
paragraph (k)(3)(i)(D), (E), or (I) of this
section involving the contract.
(B)New Taxpayer—(1)Contract price
adjustment. Generally, payments between
the old taxpayer and the new taxpayer with
respect to the contract in connection with
the transaction do not affect the contract
price. Notwithstanding the preceding sen-
tence and paragraph (k)(3)(iii)(B) of this
section, however, in the case of transac-
tions described in paragraph (k)(3)(i)(B),
(D), (E), or (I) of this section, the total con-
tract price (or gross contract price) must be
reduced to the extent of any amount recog-
nized by the old taxpayer with respect to
the contract in connection with the trans-
action (e.g., any amount recognized under
section 351(b) or section 357 that is at-
tributable to the contract and any income
recognized by the old taxpayer pursuant
to the basis adjustment rule of paragraph
(k)(3)(iv)(A) of this section).
(2)Basis in contract. The new tax-
payer’s basis in a contract (including the
uncompleted property, if applicable) ac-
quired in a transaction described in para-
graphs (k)(3)(i)(A) through (E) or para-
graph (k)(3)(i)(I) of this section will be
computed under section 362, section 334,
or section 723, as applicable. Upon a new
taxpayer’s completion (actual or construc-
tive) of a CCM or a PCM contract ac-
quired in a transaction described in para-
graphs (k)(3)(i)(A) through (E) or para-
graph (k)(3)(i)(I) of this section, the new
taxpayer’s basis in the contract (including
the uncompleted property, if applicable) is
reduced to zero. The new taxpayer is not
entitledtoadeductionorlossinconnec-
tion with any basis reduction pursuant to
this paragraph (k)(3)(iv)(B)(2).
(C)Definition of old taxpayer and
new taxpayer for certain partnership
transactions. For purposes of paragraphs
(k)(3)(ii), (iii) and (iv) of this section,
in the case of a transaction described in
paragraph (k)(3)(i)(I) of this section, the
partner contributing the contract to the
partnership is treated as the old taxpayer,
and the partnership receiving the contract
from the partner is treated as the new tax-
payer.
(D)Exceptions to step-in-the-shoes
rules for S corporations.Uponatrans-
fer described in paragraph (k)(3)(i)(F)
of this section or a conversion described
in paragraph (k)(3)(i)(G) of this section,
paragraphs (k)(3)(ii) and (iii) of this sec-
tion apply to a contract accounted for
under a long-term contract method of ac-
counting only if the S corporation’s books
are closed under section 1362(e)(3), sec-
tion 1362(e)(6)(C), section 1362(e)(6)(D),
section 1377(a)(2), or §1.1502–76 on the
date of the transfer or conversion. In these
cases, the corporation is treated as both
the old taxpayer and the new taxpayer for
purposes of paragraphs (k)(3)(ii) and (iii)
of this section. In all other cases involving
these transfers, the corporation shall com-
pute its income or loss from each contract
accounted for under a long-term contract
method of accounting for the period that
includes the date of the transaction as
though no change in taxpayer had oc-
curred with respectto the contract, and
must allocate the income or loss from the
contract for that period in accordance with
the rules generally applicable to transfers
of S corporation stock and conversions
to or from S corporation status. This
paragraph (k)(3)(iv)(D) is applicable for
transactions on or after July 16, 2004. In
addition, this paragraph (k)(3)(iv)(D) may
be relied upon for transactions on or after
May 15, 2002.
(v)Special rules relating to certain
partnership transactions—(A)Section
704(c)—(1)Contributions of contracts.
The principles of section 704(c)(1)(A),
section 737, and the regulations thereun-
der apply to income or loss with respect to
a contract accounted for under a long-term
contract method of accounting that is con-
tributed to a partnership. The amount of
built-in income or built-in loss attributable
to a contributed contract that is subject
to section 704(c)(1)(A) is determined as
follows. First, the contributing partner
must take into account any income or loss
required under paragraph (k)(3)(ii)(A)
of this section for the period ending on
the date of the contribution. Second, the
partnership must determine the amount of
income or loss that the contributing part-
ner would take into account if the contract
were disposed of for its fair market value
in a constructive completion transaction.
This calculation is treated as occurring
immediately after the partner has applied
paragraph (k)(3)(ii)(A) of this section, but
before the contribution to the partnership.
Finally, this amount is reduced by the
amount of income, if any, that the con-
tributing partner is required to recognize
as a result of the contribution.
(2)Revaluations of partnership prop-
erty. The principles of section 704(c) and
§1.704–3 apply to allocations of income
or loss with respect to a long-term con-
tract that is revalued by a partnership un-
der §1.704–1(b)(2)(iv)(f). The amount of
built-in income or built-in loss attributable
to such a contract is equal to the amount
of income or loss that would be taken into
account if, at the time of the revaluation,
the contract were disposed of for its fair
market value in a constructive completion
transaction.
(3)Allocation methods. In the case of
a contract accounted for under the CCM,
any built-in income or loss under section
704(c) is taken into account in the year
the contract is completed. In the case of
a contract accounted for under a long-term
contract method ofaccounting other than
the CCM, any built-in income or loss under
section 704(c) must be taken into account
in a manner that reasonably accounts for
the section 704(c) income or loss over the
remaining term of the contract.
(B)Basis adjustments under sec-
tions 743(b) and 734(b).Forpur-
poses of §§1.743–1(d), 1.755–1(b), and
1.755–1(c), the amount of ordinary in-
come or loss attributable to a contract
accounted for under a long-term contract
method of accounting is the amount of
income or loss that the partnership would
take into account under the constructive
completion rules of paragraph (k)(2) of
this section if, at the time of the sale of
a partnership interest or the distribution
to a partner, the partnership disposed of
the contract for its fair market value in a
constructive completion transaction. If all
or part of the transferee’s basis adjustment
under section 743(b) or the partnership’s
basis adjustment under section 734(b) is
allocated to a contract accounted for under
a long-term contract method of account-
ing, the basis adjustment shall reduce or
2004–34 I.R.B.313August 23, 2004

increase, as the case may be, the affected
party’s income or loss from the contract.
In the case of a contract accounted for
under the CCM, the basis adjustment is
taken into account in the year in which
the contract is completed. In the case of a
contract accounted for under a long-term
contract method of accounting other than
the CCM, the portion of that basis adjust-
ment that is recovered in each taxable year
of the partnership must be determined by
the partnership in a manner that reason-
ably accounts for the adjustment over the
remaining term of the contract.
(C)Cross reference. See paragraph
(k)(2)(iv)(E) of this section for rules re-
latingtotheapplicationofsection751to
the transfer of an interest in a partnership
holding a contract accounted for under a
long-term contract method of accounting.
(D)Exceptions to step-in-the-shoes
rules. Upon a contribution described
in paragraph (k)(3)(i)(J) of this sec-
tion, a transfer described in paragraph
(k)(3)(i)(K) of this section, or a distribu-
tion described in paragraph (k)(3)(i)(L)
of this section, paragraphs (k)(3)(ii) and
(iii) of this section apply to a contract
accounted for under a long-term contract
method of accounting only if the part-
nership’s books are properly closed with
respect to that contract under section 706.
In these cases, the partnership is treated as
both the old taxpayer and the new taxpayer
for purposes of paragraphs (k)(3)(ii) and
(iii) of this section. In all other cases in-
volving these transactions, the partnership
shall compute its income or loss from each
contract accounted for under a long-term
contract method of accounting for the
period that includes the date of the trans-
action as though no change in taxpayer had
occurred with respect to the contract, and
must allocate the income or loss from the
contract for that period under a reasonable
method complying with section 706.
*****
(5) * * *
Example 9.Constructive completion—PCM—
distribution of contract by partnership—(i)Facts.
In Year 1, W, X, Y, and Z each contribute $100,000
to form equal partnership PRS. In Year 1, PRS enters
into a contract. The total contract price is $1,000,000
and the estimated total allocable contract costs are
$800,000. In Year 1, PRS incurs costs of $600,000
and receives $650,000 in progress payments under
the contract. Under the contract, PRS performed
all of the services required in order to be entitled
to receive the progress payments, and there was no
obligation to return the payments or perform any
additional services in order to retain the payments.
PRS properly accounts for the contract under the
PCM. In Year 2, PRS distributes the contract to X
in liquidation of X’s interest. PRS incurs no costs
and receives no progress payments in Year 2 prior
to the distribution. At the time of the distribution,
PRS’s only asset other than the long-term contract
and the partially constructed property is $450,000
cash ($400,000 initially contributed and $50,000 in
excess progress payments). The fair market value of
the contract is $150,000. Pursuant to the distribution,
X assumes PRS’s contract obligations and rights. In
Year 2, X incurs additional allocable contract costs
of $50,000. X correctly estimates at the end of Year
2 that X will have to incur an additional $75,000 of
allocable contract costs in Year 3 to complete the
contract (rather than $150,000 as originally estimated
by PRS). Assume that X properly accounts for the
contract under the PCM, that PRS has no income or
loss other than income or loss from the contract, and
that PRS has an election under section 754 in effect
in Year 2.
(ii)Tax consequences to PRS. For Year 1, PRS
reports receipts of $750,000 (the completion factor
multiplied by total contract price ($600,000/$800,000
x $1,000,000)) and costs of $600,000, for a profit of
$150,000, which is allocated equally among W, X, Y,
and Z ($37,500 each). Immediately prior to the dis-
tribution of the contractto X in Year 2, the contract
is deemed completed. Under paragraph (k)(2)(iv)(B)
of this section, the fair market value of the contract
($150,000) is treated as the amount realized from
the transaction. For purposes of applying the PCM
in Year 2, the total contract price is $800,000 (the
sum of the amounts received under the contract and
the amount treated as realized from the transaction
($650,000 + $150,000)) and the total allocable con-
tract costs are $600,000. Thus, in Year 2 PRS re-
ports receipts of $50,000 (total contract price minus
receipts already reported ($800,000 - $750,000)), and
costs incurred in Year 2 of $0, for a profit of $50,000.
Under paragraph (k)(2)(iv)(B) of this section, this
profit must be allocated among W, X, Y, and Z as
though the partnership closed its books on the date
of the distribution. Accordingly, each partner’s dis-
tributive share of this income is $12,500.
(iii)Tax consequences to X. X’s basis in its in-
terest in PRS immediately prior to the distribution
is $150,000 (X’s $100,000 initial contribution, in-
creased by $37,500, X’s distributive share of Year 1
income, and $12,500, X’s distributive share of Year
2 income). Under paragraph (k)(2)(iv)(D) of this
section, PRS’s basis in the contract (including the
uncompleted property, if applicable) immediately
prior to the distribution is equal to $150,000 (the
partnership’s allocable contract costs, $600,000,
increased by the amount of income recognized by
PRS on the contract through the date of the distri-
bution (including amounts recognized as a result of
the constructive completion), $200,000, decreased
by the amounts that the partnership has received or
reasonably expects to receive under the contract,
$650,000). Under section 732, X’s basis in the
contract (including the uncompleted property) af-
ter the distribution is $150,000. Under paragraph
(k)(2)(iv)(C) of this section, X’s basis in the con-
tract (including the uncompleted property) is treated
as consideration paid by X that is allocable to the
contract. X’s total contract price is $200,000 (the
amount remaining to be paid under the terms of the
contract less the consideration allocable to the con-
tract ($350,000 - $150,000)). For Year 2, X reports
receipts of $80,000 (the completion factor multiplied
by the total contract price [($50,000/$125,000) x
$200,000]) and costs of $50,000 (the costs incurred
after the distribution of the contract), for a profit of
$30,000. For Year 3, X reports receipts of $120,000
(the total contract price minus receipts already re-
ported ($200,000 - $80,000)) and costs of $75,000,
for a profit of $45,000.
(iv)Section 734(b). Because X’s basis in the
contract (including the uncompleted property) imme-
diately after the distribution, $150,000, is equal to
PRS’s basis in the contract (including the uncom-
pleted property) immediately prior to the distribution,
there is no basis adjustment under section 734(b).
Example 10. Constructive completion—CCM
—distribution of contract by partnership—(i)Facts.
The facts are the same as inExample 9, except that
PRS and X properly account for the contract under
the CCM.
(ii)Tax consequences to PRS. PRS reports no in-
come or costs from the contract in Year 1. Imme-
diately prior to the distribution of the contract to X
in Year 2, the contract is deemed completed. Under
paragraph (k)(2)(iv)(B) of this section, the fair mar-
ket value of the contract ($150,000) is treated as the
amount realized from the transaction. For purposes
of applying the CCM in Year 2, the gross contract
price is $800,000 (the sum of the amounts received
under the contract and the amount treated as realized
from the transaction ($650,000 + $150,000)) and the
total allocable contract costs are $600,000. Thus, in
Year 2 PRS reports profits of $200,000 ($800,000 -
$600,000). This profit must be allocated among W,
X, Y, and Z as though the partnership closed its books
on the date of the distribution. Accordingly, each
partner’s distributive share of this income is $50,000.
(iii)Tax consequences to X.X’sbasisinitsin-
terest in PRS immediately prior to the distribution
is $150,000 ($100,000 initial contribution, increased
by $50,000, X’s distributive share of Year 2 income).
Under paragraph (k)(2)(iv)(D) of this section, PRS’s
basis in the contract (including the uncompleted
property, if applicable) immediately prior to the
distribution is equal to $150,000 (the partnership’s
allocable contract costs, $600,000, increased by
the amount of cumulative taxable income recog-
nized by PRS on the contract through the date of
the distribution (including amounts recognized as
a result of the constructive completion), $200,000,
decreased by the amounts that the partnership has
received or reasonably expects to receive under the
contract, $650,000). Under section 732, X’s basis
in the contract (including the uncompleted property)
after the distribution is $150,000. Under paragraph
(k)(2)(iv)(C) of this section, X’s basis in the contract
is treated as consideration paid by X that is alloca-
ble to the contract. Under the CCM, X reports no
gross receipts or costs in Year 2. For Year 3, the
completion year, X reports its gross contract price of
$200,000 (the amount remaining to be paid under the
terms of the contract less the consideration allocable
to the contract ($350,000 - $150,000)) and its total
allocable contract costs of $125,000 (the allocable
contract costs that X incurred to complete the con-
tract ($50,000 + $75,000)), for a profit of $75,000.
August 23, 20043142004–34 I.R.B.

(iv)Section 734(b). The results under section
734(b)arethesameasinExample 9.
Example 11. Step-in-the-shoes—PCM—con-
tribution of contract to partnership—(i)Facts.In
Year 1, X enters into a contract that X properly ac-
counts for under the PCM. The total contract price
is $1,000,000 and the estimated total allocable con-
tract costs are $800,000. In Year 1, X incurs costs
of $600,000 and receives $650,000 in progress pay-
ments under the contract.Under the contract, X per-
formed all of the services required in order to be
entitled to receive the progress payments, and there
was no obligation to return the payments or perform
any additional services in order to retain the pay-
ments. In Year 2, X contributes the contract (includ-
ing the uncompleted property) with a basis of $0 and
$125,000 of cash to partnership PRS in exchange for
a one-fourth partnership interest. X incurs costs of
$10,000, and receives no progress payments in Year
2 prior to the contribution of the contract. X and the
other three partners of PRS share equally in its cap-
ital, profits, and losses. The parties determine that,
at the time of the contribution, the fair market value
of the contract is $160,000. Following the contribu-
tion in Year 2, PRS incurs additional allocable con-
tract costs of $40,000. PRScorrectly estimates at the
end of Year 2 that it will have to incur an additional
$75,000 of allocable contract costs in Year 3 to com-
plete the contract (rather than $150,000 as originally
estimated by PRS).
(ii)Tax consequences to X. For Year 1, X reports
receipts of $750,000 (the completion factor multi-
plied by the total contract price ($600,000/$800,000
x $1,000,000)) and costs of $600,000, for a profit
of $150,000. Because the mid-contract change in
taxpayer results from a transaction described in para-
graph (k)(3)(i)(I) of this section, X is not treated as
completing the contract in Year 2. Under paragraph
(k)(3)(ii)(A) of this section, for Year 2, X reports
receipts of $12,500 (the completion factor multiplied
by the total contract price ($610,000/$800,000 x
$1,000,000, or $762,500), decreased by receipts
already reported, $750,000) and costs of $10,000,
for a profit of $2,500. Under section 722, X’s initial
basis in its interest in PRS is $125,000. Pursuant to
paragraph (k)(3)(iv)(A)(1) of this section, X must
increase its basis in its interest in PRS by the amount
of gross receipts X recognized under the contract,
$762,500, and reduce its basis by the amount of gross
receipts X received underthe contract, the $650,000
in progress payments. Accordingly, X’s basis in its
interest in PRS is $237,500.
(iii)Tax consequences to PRS. Because the mid-
contract change in taxpayer results from a step-in-
the-shoes transaction, PRS must account for the con-
tract using the same methods of accounting used by X
prior to the transaction. The total contract price is the
sum of any amounts that X and PRS have received or
reasonably expect to receive under the contract, and
total allocable contract costs are the allocable con-
tract costs of X and PRS. For Year 2, PRS reports
receipts of $134,052 (the completion factor multi-
plied by the total contract price [($650,000/$725,000)
x $1,000,000], $896,552, decreased by receipts re-
ported by X, $762,500) and costs of $40,000, for a
profit of $94,052. For Year 3, PRS reports receipts of
$103,448 (the total contract price minus prior year re-
ceipts ($1,000,000 - $896,552)) and costs of $75,000,
for a profit of $28,448.
(iv)Section 704(c). The principles of section
704(c) and §1.704–3 apply to allocations of income
or loss with respect to the contract contributed by X.
In this case, the amount of built-in income that is sub-
ject to section 704(c) is the amount of income or loss
that the contributing partner would take into account
if the contract were disposed of for its fair market
value in a constructive completion transaction. This
calculation is treated as occurring immediately after
the partner has applied paragraph (k)(3)(ii)(A) of this
section, but before the contribution to the partnership.
In a constructive completion transaction, the total
contract price would be $810,000 (the sum of the
amounts received under the contract and the amount
realized in the deemed sale ($650,000 + $160,000)).
X would report receipts of $47,500 (total contract
price minus receipts already reported ($810,000 -
$762,500)) and costs of $0, for a profit of $47,500.
Thus, the amount of built-in income that is subject
to section 704(c) is $47,500. The partnership must
apply section 704(c) to this income in a manner that
reasonably accounts for the income over the remain-
ing term of the contract. For example, in Year 2, PRS
could allocate $26,810 to X under section 704(c) (the
amount of built-in income, $47,500, multiplied by a
fraction, the numerator of which is the completion
factor for the year, $650,000/$725,000, less the com-
pletion factor for the prior year, $610,000/$800,000,
and the denominator of which is 100 percent re-
duced by the completion factor for the taxable year
preceding the event creating the section 704(c) in-
come or loss, $610,000/$800,000). The remaining
$67,242 would be allocated equally among all of the
partners. In Year 3, the completion year, PRS could
allocate $20,690 to X under section 704(c) ($47,500
x [($725,000/$725,000 - $650,000/$725,000) / (100
percent - $610,000/$800,000)]). The remaining
$7,758 would be allocated equally among all the
partners.
Example 12. Step-in-the-shoes—CCM—con-
tribution of contract to partnership—(i)Facts.The
factsarethesameasinExample 11, except that X
and PRS properly account for the contract under the
CCM, and X has a basis of $610,000 in the contract
(including the uncompleted property).
(ii)Tax consequences to X. X reports no income
or costs from the contract in Years 1 or 2. X is not
treated as completing the contract in Year 2. Under
section 722, X’s initial basis in its interest in PRS is
$735,000 (the sum of $125,000 cash and X’s basis of
$610,000 in the contract (including the uncompleted
property)). Pursuant to paragraph (k)(3)(iv)(A)(1)(ii)
of this section, X must reduce its basis in its interest in
PRS by the amount of gross receipts X received under
the contract, or $650,000. Accordingly, X’s basis in
its interest in PRS is $85,000.
(iii)Tax consequences to PRS. PRS must account
for the contract using the same methods of account-
ing used by X prior to the transaction. Under the
CCM, PRS reports no gross receipts or costs in Year
2. For Year 3, the completion year, PRS reports its
gross contract price of $1,000,000 (the sum of any
amounts that X and PRS have received or reasonably
expect to receive under the contract), and total alloca-
ble contract costs of $725,000 (the allocable contract
costs of X and PRS), for a profit of $275,000.
(iv)Section 704(c). In this case, the amount of
built-in income that is subject to section 704(c) is the
amount of income or loss that the contributing part-
ner would take into account if the contract were dis-
posed of for its fair market value in a constructive
completion transaction. This calculation is treated
as occurring immediately after the partner has ap-
plied paragraph (k)(3)(ii)(A) of this section, but be-
fore the contribution to the partnership. In a construc-
tive completion transaction, X would report its gross
contract price of $810,000 (the sum of the amounts
received under the contract and the amount realized
in the deemed sale ($650,000 + $160,000)) and its to-
tal allocable contract costs of $610,000, for a profit of
$200,000. Thus, the amount of built-in income that is
subject to section 704(c) is $200,000. Out of PRS’s
income of $275,000, in Year 3, $200,000 must be al-
located to X under section 704(c), and the remaining
$75,000 is allocated equally among all of the partners.
Example 13. Step-in-the-shoes—PCM—trans-
fer of a partnership interest—(i)Facts.InYear1,W,
X, Y, and Z each contribute $100,000 to form equal
partnership PRS. In Year 1, PRS enters into a con-
tract. The total contract price is $1,000,000 and the
estimated total allocable contract costs are $800,000.
In Year 1, PRS incurs costs of $600,000 and receives
$650,000 in progress payments under the contract.
Under the contract, PRS performed all of the services
required in order to be entitled to receive the progress
payments, and there was no obligation to return the
payments or perform any additional services in order
to retain the payments. PRS properly accounts for
the contract under the PCM. In Year 2, W transfers
W’s interest in PRS to T for $150,000. Assume that
$10,000 of PRS’s Year 2 costs are incurred prior to
the transfer, $40,000 are incurred after the transfer;
and that PRS receives no progress payments in Year
2. Also assume that the fair market value of the con-
tract on the date of the transfer is $160,000, that PRS
closes its books with respect to the contract under sec-
tion 706 on the date of the transfer, and that PRS cor-
rectly estimates at the end of Year 2 that it will have
to incur an additional $75,000 of allocable contract
costs in Year 3 to complete the contract (rather than
$150,000 as originally estimated by PRS).
(ii)Income reporting for period ending on date
of transfer. For Year 1, PRS reports receipts of
$750,000 (the completion factor multiplied by total
contract price ($600,000/$800,000 x $1,000,000))
and costs of $600,000, for a profit of $150,000. This
profit is allocated equally among W, X, Y, and Z
($37,500 each). Under paragraph (k)(3)(ii)(A) of this
section, for the part of Year 2 ending on the date of
the transfer of W’s interest, PRS reports receipts of
$12,500 (the completion factor multiplied by the to-
tal contract price ($610,000/$800,000 x $1,000,000)
minus receipts already reported ($750,000)) and
costs of $10,000 for a profit of $2,500. This profit is
allocated equally among W, X, Y, and Z ($625 each).
(iii)Income reporting for period after transfer.
PRS must continue to use the PCM. For the part
of Year 2 beginning on the day after the transfer,
PRS reports receipts of $134,052 (the completion
factor multiplied by the total contract price decreased
by receipts reported by PRS for the period ending
on the date of the transfer [($650,000/$725,000 x
$1,000,000) - $762,500]) and costs of $40,000, for a
profit of $94,052. This profit is shared equally among
T, X, Y, and Z ($23,513 each). For Year 3, PRS re-
ports receipts of $103,448 (the total contract price
minus prior year receipts ($1,000,000 - $896,552))
and costs of $75,000, for a profit of $28,448. The
2004–34 I.R.B.315August 23, 2004

profit for Year 3 is shared equally among T, X, Y,
and Z ($7,112 each).
(iv)Tax consequences to W. W’s amount real-
ized is $150,000. W’s adjusted basis in its interest
in PRS is $138,125 ($100,000 originally contributed,
plus $37,500, W’s distributive share of PRS’s Year 1
income, and $625, W’s distributive share of PRS’s
Year 2 income prior to the transfer). Accordingly,
W’s income from the sale of W’s interest in PRS is
$11,875. Under paragraph (k)(2)(iv)(E) of this sec-
tion, for purposes of section 751(a), the amount of
ordinary income attributable to the contract is deter-
mined as follows. First, the partnership must deter-
mine the amount of income or loss from the contract
that is allocated under section 706 to the period end-
ing on the date of the sale ($625). Second, the part-
nership must determine the amount of income or loss
that the partnership would take into account under the
constructive completion rules of paragraph (k)(2) of
this section if the contract were disposed of for its fair
market value in a constructive completion transac-
tion. Because PRS closed its books under section 706
with respect to the contract on the date of the sale, this
calculation is treated as occurring immediately after
the partnership has applied paragraph (k)(3)(ii)(A) of
this section on the date of the sale. In a constructive
completion transaction, the total contract price would
be $810,000 (the sum of the amounts received under
the contract and the amount realized in the deemed
sale ($650,000 + $160,000)). PRS would report re-
ceipts of $47,500 (total contract price minus receipts
already reported ($810,000 - $762,500)) and costs of
$0, for a profit of $47,500. Thus, the amount of or-
dinary income attributable to the contract is $47,500,
and W’s share of that income is $11,875. Thus, under
§1.751–1(a), all of W’s $11,875 of income from the
sale of W’s interest in PRS is ordinary income.
(v)Tax consequences to T. T’s adjusted ba-
sis for its interest in PRS is $150,000. Under
§1.743–1(d)(2), the amount of income that would
be allocated to T if the contract were disposed of
for its fair market value (adjusted to account for
income from the contract for the portion of PRS’s
taxable year that ends on the date of the transfer)
is $11,875. Under §1.743–1(b), the amount of T’s
basis adjustment under section 743(b) is $11,875.
Under paragraph (k)(3)(v)(B) of this section, the
portion of T’s basis adjustment that is recovered in
Year2andYear3mustbedeterminedbyPRSin
a manner that reasonably accounts for the adjust-
ment over the remaining term of the contract. For
example, PRS could recover $6,703 of the adjust-
ment in Year 2 (the amount of the basis adjustment,
$11,875, multiplied by a fraction, the numerator
of which is the excess of the completion factor for
the year, $650,000/$725,000, less the completion
factor for the prior year, $610,000/$800,000, and
the denominator of which is 100 percent reduced by
the completion factor for the taxable year preceding
the transfer, $610,000/$800,000). T’s distributive
share of income in Year 2 from the contract would
be adjusted from $23,513 to $16,810 as a result of
the basis adjustment. In Year 3, the completion year,
PRS could recover $5,172 of the adjustment ($11,875
x [($725,000/$725,000 - $650,000/$725,000) / (100
percent - $610,000/$800,000)]). T’s distributive
share of income in Year 3, the completion year, from
the contract would be adjusted from $7,112 to $1,940
as a result of the basis adjustment.
*****
(6)Effective date. Except as provided
in paragraph (k)(3)(iv)(D) of this section,
this paragraph (k) is applicable for trans-
actions on or after May 15, 2002. * * * * *
Par. 4. Section 1.460–6 is amended
by revising paragraphs (g)(3)(ii)(D) and
(g)(4) to read as follows:
§1.460–6 Look-back method.
*****
(g) * * *
(3) * * *
(ii) * * *
(D)Information old taxpayer must pro-
vide—(1)In general. Except as provided
in paragraph (g)(3)(ii)(D)(2)ofthissec-
tion, in order to help the new taxpayer
to apply the look-back method with re-
spect to pre-transaction taxable years, any
old taxpayer that accounted for income
from a long-term contract under the PCM
or PCCM for either regular or alterna-
tive minimum tax purposes is required
to provide the information described in
this paragraph to the new taxpayer by
the due date (not including extensions) of
the old taxpayer’s income tax return for
the first taxable year ending on or after a
step-in-the-shoes transaction described in
§1.460–4(k)(3)(i). The required informa-
tion is as follows - -
(i) The portion of the contract reported
by the old taxpayer under PCM for regu-
lar and alternative minimum tax purposes
(i.e., whether the old taxpayer used PCM,
the 40/60 PCCM method, or the 70/30
PCCM method);
(ii) Any submethods used in the appli-
cation of PCM (e.g., the simplified cost-to-
cost method or the 10-percent method);
(iii) The amount of total contract price
reportedbyyear;
(iv) The numerator and the denominator
of the completion factor by year;
(v) The due date (not including exten-
sions) of the old taxpayer’s income tax re-
turns for each taxable year in which in-
come was required to be reported;
(vi) Whether the old taxpayer was a cor-
porate or a noncorporate taxpayer by year;
and
(vii) Any other information required by
the Commissioner by administrative pro-
nouncement.
(2)Special rules for certain pass-
through entity transactions. For purposes
of paragraph (g)(3)(ii)(D)(1) of this sec-
tion, in the case of a transaction described
in §1.460–4(k)(3)(i)(I), the contributing
partner is treated as the old taxpayer,
and the partnership is treated as the new
taxpayer. In the case of transactions de-
scribed in §1.460–4(k)(3)(i)(F), (G), (J),
(K), or (L), the old taxpayer is not required
to provide the information described in
paragraph (g)(3)(ii)(D)(1) of this section,
because information necessary for the new
taxpayer to apply the look-back method is
provided by the pass-through entity. This
paragraph (g)(3)(ii)(D) is applicable for
transactions on or after August 6, 2003.
*****
(4)Effective date. Except as provided
in paragraph (g)(3)(ii)(D) of this section,
this paragraph (g) is applicable for trans-
actions on or after May 15, 2002.
*****
Par. 5. In §1.704–3, a sentence is added
at the end of paragraph (a)(3)(ii) to read as
follows:
§1.704–3 Contributed property.
(a) * * *
(3) * * *
(ii)***See§1.460–4(k)(3)(v)(A)for
a rule relating to the amount of built-in in-
come or built-in loss attributable to a con-
tract accounted for under a long-term con-
tract method of accounting.
*****
Par. 6. Section 1.722–1 is amended by
adding a sentence between the sixth and
seventh sentences to read as follows:
§1.722–1 Basis of contributing partner’s
interest.
* * * See §1.460–4(k)(3)(iv)(A) for rules
relating to basis adjustments required
where a contract accounted for under a
long-term contract method of accounting
istransferredinacontributiontowhich
section 721(a) applies.
*****
Par. 7. A sentence is added at the end
of §1.723–1 to read as follows:
§1.723–1 Basis of property contributed to
partnership.
* * * See §1.460–4(k)(3)(iv)(B)(2)for
rules relating to adjustments to the basis of
August 23, 20043162004–34 I.R.B.

contracts accounted for using a long-term
contract method of accounting that are
acquired in certain contributions to which
section 721(a) applies.
Par. 8. In §1.732–1, a sentence is added
at the end of paragraph (c)(1)(i) to read as
follows:
§1.732–1 Basis of distributed property
other than money.
*****
(c) * * *
(1) * * *
(i) * * * See §1.460–4(k)(2)(iv)(D) for a
rule determining the partnership’s basis in
a long-term contractaccounted for under a
long-term contract method of accounting.
*****
Par. 9. In §1.734–1, the undesig-
nated paragraph immediately following
paragraph (b)(1)(ii) is revised to read as
follows:
§1.734–1 Optional adjustment to basis of
undistributed partnership property.
*****
(b) * * *
(1) * * *
(ii) * * *
See §1.460–4(k)(2)(iv)(D) for a rule deter-
mining the partnership’s basis in a long-
term contract accounted for under a long-
term contract method of accounting. The
provisions of this paragraph (b)(1) are il-
lustrated by the following examples:
*****
Par. 10. Section 1.743–1 is amended as
follows:
1. A sentence is added at the end of
paragraph (d)(2).
2. A sentence is added at the end of
paragraph (j)(2).
The additions read as follows:
§1.743–1 Optional adjustment to basis of
partnership property.
*****
(d) * * *
(2)***See§1.460–4(k)(3)(v)(B)fora
rule relating to the computation of income
or loss that would be allocated to the trans-
feree from a contract accounted for under
a long-term contract method of accounting
as a result of the hypothetical transaction.
*****
(j) * * *
(2)***See§1.460–4(k)(3)(v)(B)for
rules relating to the effect of a basis ad-
justment under section 743(b) that is allo-
cated to a contract accounted for under a
long-term contract method of accounting
in determining the transferee’s distributive
share of income or loss from the contract.
*****
Par. 11. In §1.751–1, a sentence is
added at the end of paragraph (a)(2) to read
as follows:
§1.751–1 Unrealized receivables and
inventory items.
(a) * * *
(2) * * * See §1.460–4(k)(2)(iv)(E) for
rules relating to the amount of ordinary
income or loss attributable to a contract
accounted for under a long-term contract
method of accounting.
*****
Par. 12. Section 1.755–1 is amended as
follows:
1. Adding a sentence at the end of para-
graph (b)(1)(ii).
2. Paragraph (c)(5) is redesignated as
paragraph (c)(6).
3. New paragraph (c)(5) is added.
The additions read as follows:
§1.755–1 Rules for allocation of basis.
*****
(b) * * *
(1) * * *
(ii)***See§1.460–4(k)(3)(v)(B)fora
rule relating to the computation of income
or loss that would be allocated to the trans-
feree from a contract accounted for under
a long-term contract method of accounting
as a result of the hypothetical transaction.
*****
(c) * * *
(5)Cross reference. See §1.460–4(k)
(3)(v)(B) for a rule relating to the compu-
tation of unrealized appreciation or depre-
ciation in a contract accounted for under a
long-term contract method of accounting.
*****
Par. 13. Section 1.1362–3 is amended
by adding a sentence at the end of para-
graph (a) to read as follows:
§1.1362–3 Treatment of S termination
year.
(a) * * *See §1.460–4(k)(3)(iv)(D) for
rules relating to the computation of the S
corporation’s income or loss from a con-
tract accounted for under a long-term con-
tract method of accounting in the S termi-
nation year.
*****
Par. 14. Section 1.1377–1 is amended
by adding a sentence at the end of para-
graph (a)(1) to read as follows:
§1.1377–1 Pro Rata Share.
(a) * * *
(1) * * * See §1.460–4(k)(3)(iv)(
D) for
rules relating to the computatio
nofthe
shareholders’pro ratashare of t
he S cor-
poration’s income or loss from a
contract
accounted for under a long-term
contract
method of accounting.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 1, 2004.
Gregory Jenner,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 15, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 16, 2004, 69 F.R. 42551)
Section 7805.—Rules
and Regulations
26 CFR 301.7805-1: Rules and regulations.
Obsolete revenue rulings.This ruling
obsoletes prior rulings that are no longer
considered determinative. Rev. Ruls.
58–120, 70–58, 79–64, and 80–366 ob-
soleted. Rev. Procs. 89–37 and 96–18
obsoleted.
Rev. Rul. 2004–90
The Internal Revenue Service is con-
tinuing its program of reviewing rulings
(including revenue rulings, revenue proce-
dures and notices) published in the Internal
Revenue Bulletin to identify those rulings
that, although not specifically revoked
2004–34 I.R.B.317August 23, 2004

or superseded, are no longer considered
determinative because: (1) the applicable
statutory provisions or regulations have
been changed or repealed; (2) the ruling
position is specifically covered by statute,
regulations, or subsequent published po-
sition; or (3) the facts set forth no longer
exist or are not sufficiently described to
permit clear application of the current
statute and regulations.
This revenue ruling publishes a list of
rulings that have been identified under the
Service’s review program as no longer be-
ing determinative. The rulings are cat-
egorized by the Assistant Chief Counsel
offices in the Office of Associate Chief
Counsel (Procedure and Administration)
that have primary jurisdiction over the sub-
ject matter of the rulings that have been
identified as no longer being determina-
tive.
Accordingly, the rulings listed below
are hereby declared obsolete.
Assistant Chief Counsel (Administrative Provisions and Judicial Practice)
Ruling No.C.B. Citation
Rev. Rul. 80-3661980-2 C.B. 343
Rev. Proc. 89-37
1
1989-1 C.B. 919
Rev. Proc. 96-181996-1 C.B. 637
Assistant Chief Counsel (Disclosure and Privacy Law)
Ruling No.Citation
Rev. Rul. 58-1201958-1 C.B. 498
Rev. Rul. 70-58
2
1970-1 C.B. 268
Rev. Rul. 79-641979-1 C.B. 390
The Service will continue to review
other rulings to ascertain those that, for
the reasons stated above, are no longer de-
terminative. Therefore, failure to include
a particular ruling in the above list should
not be construed as an indication that the
ruling is determinative.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Sarah Tate of the Office of Asso-
ciate Chief Counsel, Procedure and Ad-
ministration (Disclosure & Privacy Law).
For further information regarding the rul-
ings obsoleted in this revenue ruling, con-
tact the following persons from the appro-
priate Assistant ChiefCounsel offices (not
toll-free calls):
NameAssistant Chief CounselTelephone No.
Blaise DusenberryAdministrative Prov. & Judicial Prac.202–622–7940
Sarah TateDisclosure & Privacy Law202–622–4570
1
The procedures described in Rev. Proc. 89-37 for obtaining employer identification numbers (EINs) have been supplanted by the Service’s Online EIN Application (I-EIN) process. EINs
also may be obtained through the Service’s Tele-TIN or Fax-TIN programs, or bysubmitting a Form SS-4 by mail to the appropriate IRS service center. Additional information regarding
EINs is available on the Service website atwww.irs.gov.
2
Subsequent statutory amendments address the issue in the revenue ruling.
August 23, 20043182004–34 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Options Granted Under an
Employee Stock Purchase
Plan (ESPP)
Notice 2004–55
I. PURPOSE
Since the issuance of proposed regula-
tions concerning incentive stock options
(ISO’s) on June 9, 2003 (68 FR 34,344),
1
the Internal Revenue Service and Trea-
sury Department have received questions
concerning whether the final regulations
concerning options granted under an em-
ployee stock purchase plan (ESPP) should
be interpreted consistently with the pro-
posed ISO regulations. The Service and
the Treasury Department are considering
whether to amend the final regulations
under § 423 of the Internal Revenue Code.
The Service and Treasury invite public
comment concerning whether the final
regulations under § 423 (the rules gov-
erning ESPP’s) should be amended, and
if so, what issues should be addressed or
clarified.
II. BACKGROUND
Section 423 of the Code was added to
the Code by section 221(a) of the Rev-
enue Act of 1964, Public Law No. 88–272.
Changes to the applicable law concern-
ing section 423 of the Code were made
by section 11801 of the Omnibus Budget
Reconciliation Act of 1989, Public Law
101–508; section 1114 of the Tax Reform
Act of 1986, Public Law No. 99–514; sec-
tion 1001 of the Deficit Reduction Act of
1984, Public Law No. 98–369; and section
1402 of the Tax Reform Act of 1976, Pub-
lic Law No. 94–455.
Regulations under § 423 of the Code
were published in theFederal Registeron
June 23, 1966 (T.D. 6887, 1966–2 C.B.
129). These regulations were amended on
September 27, 1979 (T.D. 7645, 1979–2
C.B. 198), October 31, 1980 (T.D. 7728,
1980–2 C.B. 236), and December 1, 1988
(T.D. 8235, 1989–1 C.B. 117).
III. COMMENTS REQUESTED
The Service and Treasury Department
have received questions about whether the
final regulations under § 423 should be
interpreted consistently with the proposed
regulations concerning ISO’s. Addition-
ally, the Service and Treasury have re-
ceived specific questions including the fol-
lowing:
1. Whether any subcategory of employ-
ees may be excluded from participa-
tion in an ESPP under § 423(b)(4) of
the Code, and if so, under what con-
ditions these employees should be ex-
cluded;
2. Whether additional rules concern
ing
the inadvertent exclusion of empl
oy-
ees should be included in the regu
-
lations, and if so, whether and ho
w
the excluded employees should be
al-
lowed to participate in past off
erings
under the plan;
3. Whether the calculation of the amount
of stock that may be purchased un-
der an ESPP (the $25,000 limit under
§ 423(b)(8)) should be determined in
a manner consistent with the $100,000
limitation for ISO’s described in the
§1.422–4;
4. Whether the participation rules in
§ 423(b)(4) and the equal rights and
privileges rules in § 423(b)(5) should
include additional rules for new em-
ployees or new participants (for ex-
ample, if an employee is hired on
the last day of the purchase period,
whether the purchase period should
be extended only for this individual);
5. Whether shareholder approval is re-
quired to add highly-compensated in-
dividuals to a plan under § 423(b)(2)
and § 1.423–2(c)(3);
6. Whether individuals should be al-
lowed to carryover amounts from
an earlier plan or offering to a new
plan or offering without violating the
equal rights and privileges provision
in § 423(b)(5);
7. Whether the regulations should in-
clude limitations on the increase or
decrease of contribution amounts un-
der an ESPP; and
8. Whether special rules concerning the
exclusion and equal rights and privi-
leges should be included in the regu-
lations for foreign employees.
The Service and Treasury Department
encourage comment on these issues and on
any other issues that should be addressed
or clarified in revising the final regulations
under § 423.
Comments should be submitted by Oc-
tober 1, 2004, to CC:PA:LPD:PR (Notice
2004–55), Room 5203, Internal Rev-
enue Service, POB 7604, Ben Franklin
Station, Washington, D.C. 20044. Com-
ments may be hand delivered between
the hours of 8 a.m. and 4 p.m., Monday
through Friday to CC:PA:LPD:PR (Notice
2004–55), Courier’s Desk, Internal Rev-
enue Service, 1111 Constitution Ave., NW,
Washington, D.C. Alternatively, com-
ments may be submitted via the Internet at
Notice.Comments@irscounsel.treas.gov.
All comments will be available for public
inspection.
IV. DRAFTING INFORMATION
The principal author of this notice is
Erinn Madden of the Office of the Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). However,
other personnel from the IRS and Trea-
sury Department participated in its devel-
opment. For further information regarding
this notice, please contact Erinn Madden at
(202) 622–6030 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, § 42; 1.42–14.)
Rev. Proc. 2004–52
SECTION 1. PURPOSE
This revenue procedure publishes the
amounts of unused housing credit carry-
1
Final regulations under §§ 421, 422, 424, and 6039 were filed with theFederal Registeron August 2, 2004.
2004–34 I.R.B.319August 23, 2004

overs allocated to qualified states under
§ 42(h)(3)(D) of the Internal Revenue
Code for calendar year 2004.
SECTION 2. BACKGROUND
Rev. Proc. 92–31, 1992–1 C.B. 775,
provides guidance tostate housing credit
agencies of qualified states on the pro-
cedure for requesting an allocation of
unused housing credit carryovers under
§ 42(h)(3)(D). Section 4.06 of Rev. Proc.
92–31 provides that the Internal Rev-
enue Service will publish in the Internal
Revenue Bulletin the amount of unused
housing credit carryovers allocated to
qualified states for a calendar year from
a national pool of unused credit authority
(the National Pool). This revenue proce-
dure publishes these amounts for calendar
year 2004.
SECTION 3. PROCEDURE
The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 2004 is as follows:
Qualified StateAmount Allocated
Alabama
$ 116,460
Arizona144,407
California918,183
Florida440,379
Georgia224,723
Idaho35,355
Illinois327,419
Indiana160,316
Kansas70,473
Kentucky106,551
Maine33,787
Maryland142,547
Massachusetts166,469
Minnesota130,915
Mississippi74,555
Missouri147,607
Nebra
ska
45,005
New Hampshire33,320
New Jersey223,524
New York496,557
North Carolina217,543
Ohio295,909
Ore
gon
92,10
7
South Carolina107,310
Tennessee151,159
Texas572,331
Utah60,846
Vermont16,020
Virginia191,126
Washington158,655
West Virginia46,844
Wisconsin141,599
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective
for allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state’s housing
credit ceiling for calendar year 2004.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Christopher J. Wilson of
the Office of Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this rev-
enue procedure, contact Mr. Wilson at
(808) 539–2874 or Susan Reaman at (202)
622–3040 (not toll-free calls).
26 CFR 601.602: Forms and instructions.
(Also Part I, §§ 6011, 6051, 6071; 31.6011(a)–4,
31.6051–1, 31.6071(a)–1.)
Rev. Proc. 2004–53
SECTION 1. PURPOSE
.01 This revenue procedure supersedes
Rev. Proc. 96–60, 1996–2 C.B. 399.
This revenue procedure explains both
August 23, 20043202004–34 I.R.B.

the standard procedure and an alternate
procedure for preparing and filing Form
W–2,Wage and Tax Statement; Form 941,
Employer’s Quarterly Federal Tax Re-
turn; Form W–4,Employee’s Withholding
Allowance Certificate; and Form W–5,
Earned Income Credit Advance Payment
Certificate, in certain acquisitions. This
revenue procedure applies when an em-
ployer (successor) acquires substantially
all the property (1) used in a trade or
business of another employer (predeces-
sor), or (2) used in a separate unit of a
trade or business of a predecessor, and, in
connection with or immediately after the
acquisition (but during the same calendar
year), the successor employs individuals
who immediately prior to the acquisition
were employed in the trade or business
of the predecessor. (The term “trade or
business,” for purposes of this revenue
procedure, may include the activity of a
nonprofit organization or of a federal or
state agency.)
.02 This revenue procedure provides
guidance on the new schedule (Schedule
D (Form 941),Report of Discrepancies
Caused by Acquisitions, Statutory Merg-
ers, or Consolidations)thattheInternal
Revenue Service is currently developing.
Employers will be able to use Schedule
D (Form 941) to explain the discrepan-
cies between Forms W–2 (Copy A) and
Forms 941 in the totals of social security
wages, Medicare wages and tips, social se-
curity tips, federal income tax withheld,
and advance earned income credit (EIC)
payments, caused byacquisitions, statu-
tory mergers, or consolidations. If Form
941 is filed electronically, an employer
will be able to file Schedule D (Form 941)
separately on paper, until the electronic
specifications for Schedule D (Form 941)
become available.
.03 This revenue procedure also ampli-
fies Rev. Rul. 62–60, 1962–1 C.B. 186.
Rev. Rul. 62–60 describes the informa-
tion a resultant corporation (now known
as a surviving corporation) should provide
on an absorbed corporation (now known
as an acquired corporation) after a statu-
tory merger or consolidation. If the surviv-
ing corporation completes and files Sched-
ule D (Form 941) to explain discrepancies
between the totals on Forms W–2 (Copy
A) and the totals on Forms 941, Schedule
D (Form 941) will also provide notice of
a statutory merger or consolidation under
Rev. Rul. 62–60.
SECTION 2. CHANGES FROM REV.
PROC. 96–60
.01 Section 5.03, provides that the pre-
decessor can file Schedule D (Form 941) to
explain discrepanciesunder the alternate
procedure, in lieu of a statement as was
described in Rev. Proc. 96–60. In ad-
dition, if Form 941 is filed electronically,
an employer will be able to file Schedule
D (Form 941) separately on paper, until
the electronic specifications for Schedule
D (Form 941) become available.
.02 Section 5.04, provides that the suc-
cessor can also file Schedule D (Form 941)
to explain discrepancies under the alter-
nate procedure, in lieu of a statement as
was described in Rev. Proc. 96–60 . In ad-
dition, if Form 941 is filed electronically,
an employer will be able to file Schedule
D (Form 941) separately on paper, until
the electronic specifications for Schedule
D (Form 941) become available.
.03 Section 5.08 is added to provide
procedures for transferring electronically
filed Forms W–5 from the predecessor to
the successor.
.04 Section 6.02 is added to amplify
Rev. Rul. 62–60 which describes the in-
formation a surviving corporation should
provide after a statutory merger or consol-
idation. Section 6.02 provides that, if the
surviving corporation completes and files
Schedule D (Form 941) to explain discrep-
ancies between the totals on Forms W–2
(Copy A) and the totals on Forms 941,
Schedule D (Form 941) will also provide
notice of a statutory merger or consolida-
tion under Rev. Rul. 62–60.
SECTION 3. BACKGROUND
.01 Section 6011(a) of the Internal Rev-
enue Code provides that any person made
liable for any tax, or for the collection of
the tax, must make a return or statement
according to the forms or regulations pre-
scribed by the Secretary.
.02 Section 31.6011(a)–1 of the Em-
ployment Tax Regulations prescribes
Form 941 as the form to use for persons
required to make a quarterly return under
the Federal Insurance Contributions Act
(FICA).
.03Section31.6011(a)–4prescribes
Form 941 as the form to use for persons
required to make a quarterly return of in-
come tax withheld from wages.
.04Section31.6011(a)–6providesthat
an employer who ceases to pay wages re-
portable on Form 941 shall file a final
Form 941.
.05 Section 31.6071(a)–1 provides that
the Form 941 generally must be filed on
or before the last day of the first calendar
month following the period for which it is
made.
.06 Section 6051(a)provides that (1)
every person required to deduct and with-
hold FICA or income tax, or who would
have been required to deduct and withhold
income tax if the employee had claimed
no more than 1 withholding exemption, or
(2) every employer engaged in a trade or
business who pays remuneration for ser-
vicesperformedbyanemployee,mustfur-
nish a written statement to an employee re-
garding the remuneration paid to the em-
ployee during the calendar year. Section
31.6051–1(a) provides that the statement is
Form W–2.
.07 Section 31.6051–1(d)(1)(i) pro-
vides that Form W–2 must be furnished
to the employee on or before January 31
of the following calendar year. If the em-
ployee’s employment is terminated before
the close of the calendar year, however,
and the employee requests the employer to
furnishtheFormW–2atanearliertime,
the Form W–2 must be furnished to the
employee on or before the later of the
30th day after the written request from the
employee or the 30th day after the day on
which the last payment of wages is made.
.08 Section 31.6051–1(d)(1)(ii) pro-
vides that an employer who is required to
file a final Form 941 must furnish Forms
W–2 to its employees on or before the
date required for filing the final Form
941. An employer is not permitted to
furnish Form W–2 pursuant to the rule
in § 31.6051–1(d)(1)(i) relating to writ-
ten requests by terminated employees for
Form W–2, if that would be at a time
later than that required under the rule in
§ 31.6051–1(d)(1)(ii)(B) for an employer
who ceases to pay wages.
.09 Section 31.6071(a)–1(a)(3)(i) pro-
vides the general rule that a Form W–2
(Copy A) must be filed on or before the last
day of February (or March 31 if filed elec-
2004–34 I.R.B.321August 23, 2004

tronically) of the year following the calen-
dar year for which it is made.
.10 Section 31.6071(a)–1(a)(3)(ii) pro-
vides that an employer who is required to
file a final Form 941 must file Forms W–2
(Copy A) on or before the last day of the
second calendar month following the pe-
riod for which the final Form 941 is filed.
.11 Section 31.6051–2 provides that
Forms W–2 (Copy A) must be filed with
the Social Security Administration (SSA).
.12 Section 31.3402(f)(5)–1(c) pro-
vides that an employer may establish a
system for its employees to submit Form
W–4 electronically.
.13 Announcement 99–3, 1999–1 C.B.
324, provides that an employer may estab-
lish a system for its employees to submit
Form W–5 electronically.
SECTION 4. STANDARD
PROCEDURE FOR PREDECESSORS
AND SUCCESSORS
.01In general. Under the standard pro-
cedure, the predecessor performs all the
reporting duties forthe wages and other
compensation it pays. These duties in-
clude the filing of quarterly Forms 941 and
the furnishing and filing of Forms W–2.
In connection with the successor’s acqui-
sition of property and hiring of employees
from the predecessor, as described in sec-
tion 1.01, the predecessor may cease to pay
any wages required to be reported on Form
941 (for example, the predecessor may go
out of business). In that case, the prede-
cessor must file the Form 941 for the quar-
ter of the acquisition as a final Form 941.
If the predecessor does not cease to pay
any wages required to be reported on Form
941, (for example, the predecessor remains
in business) a final Form 941 is not re-
quired. Instead, the predecessor would file
its quarterly Form 941 for the quarter of the
acquisition. The successor, under the stan-
dard procedure, performs all the reporting
duties for the wages and other compensa-
tion it pays.
.02Forms W–2.
(1)In general. If, under the circum-
stances described in section 1.01, the pre-
decessor is not required to file a final Form
941, the predecessor and successor both
must furnish Forms W–2 to their respec-
tive employees on or before January 31 of
the following calendar year. However, if
an employee, whose employment is ter-
minated before the close of the calendar
year, requests the Form W–2 earlier, the
Form W–2 must be furnished on or be-
fore the 30th day after the written request
or the 30th day after the final payment of
wages to the employee, whichever is later.
The predecessor and successor must file
Forms W–2 (Copy A) for their respective
employees with SSA on or before the last
day of February (or March 31 if filed elec-
tronically) of the following calendar year.
(2)Expedited Forms W–2. If, under
the circumstances described in section
1.01, the predecessor is required to file a
final Form 941, the predecessor must fur-
nish Forms W–2 to its former employees
on an expedited basis. Forms W–2 must
be furnished on or before the date required
for filing the final Form 941 (generally
one month after the end of the quarter).
However, if an employee, whose employ-
ment is terminated before the close of
the calendar year, requests the Form W–2
earlier, the predecessor must furnish Form
W–2 on or before the 30th day after the
written request or the 30th day after the
final payment of wages to the employee,
whichever is later. The predecessor must
also file Forms W–2 (Copy A) with SSA
on an expedited basis. The Forms W–2
(Copy A) must be filed on or before the
last day of the second calendar month fol-
lowing the period for which the final Form
941 is required to be filed.
.03Forms W–4. The predecessor must
keep on file the Forms W–4 provided by
its former employees. The transferred em-
ployees must provide the successor with
new Forms W–4 as the successor now be-
comes responsible for deducting and with-
holdingtaxfromwagespaidtothetrans-
ferred employees.
.04Forms W–5. The predecessor must
also keep on file the Forms W–5 provided
by its former employees. The transferred
employees must provide the successor
with new Forms W–5 for the current year.
SECTION 5. ALTERNATE
PROCEDURE FOR PREDECESSORS
AND SUCCESSORS
.01In general. If, in connection with
the circumstances described in section
1.01, the predecessor and successor so
agree, the predecessor will be relieved
from furnishing Forms W–2 to any em-
ployees who will be employed in the same
calendar year by the successor (acquired
employees). In such circumstances the ac-
quired employees presumably will be paid
wages by the successor in the same calen-
dar year and the Forms W–2 furnished to
the acquired employees by the successor
for the year will include wages paid, and
taxes withheld, by both the predecessor
and the successor. The predecessor will
also be relieved from filing Forms W–2
(Copy A) with SSA for the acquired em-
ployees. The predecessor’s entire Form
W–2 reporting obligations for the acquired
employees will be assumed by the succes-
sor. The predecessor remains responsible
for the Form W–2 reporting obligations
for those employees who are not employed
by the successor.
.02Forms W–2.
(1)In general. If, under the circum-
stances described in section 1.01, the pre-
decessor is not required to file a final Form
941, the predecessor must furnish Forms
W–2 on or before January 31 of the fol-
lowing calendar year to employees who
are not employed by the successor. How-
ever, if an employee, whose employment
is terminated before the close of the cal-
endar year, requests the Form W–2 earlier,
the predecessor must furnish Form W–2 on
or before the 30th day after the written re-
quest or the 30th day after the final pay-
ment of wages to the employee, whichever
is later. Forms W–2 (Copy A) filed by
the predecessor with SSA for employees
whoarenotemployedbythesuccessor
must be filed on or before the last day of
February (or March 31 if filed electroni-
cally) of the following calendar year. If the
successor assumes the predecessor’s obli-
gation to furnish Forms W–2 to the ac-
quired employees for a calendar year, the
successor must assume the predecessor’s
entire Form W–2 obligation for acquired
employees. Thus, Forms W–2 furnished
by the successor to the acquired employ-
ees must include the wages paid and the
taxes withheld by both the predecessor and
the successor. The successor must include
on the Form W–2 any amount reportable
by the predecessor, including “other com-
pensation” or uncollected employee social
security and Medicare taxes on tips, if ap-
plicable. Forms W–2 must be furnished by
the successor to its employees (both the ac-
quired employees and any other employ-
ees of the successor) on or before January
31 of the following calendar year. How-
August 23, 20043222004–34 I.R.B.

ever, if an employee,whose employment
is terminated before the close of the cal-
endar year, requests the Form W–2 earlier,
the successor must furnish Form W–2 on
or before the 30th day after the written re-
quest or the 30th day after the final pay-
ment of wages to the employee, whichever
is later. Forms W–2 (Copy A) must be
filed by the successor with SSA on or be-
fore the last day of February (or March 31
if filed electronically) of the following cal-
endar year.
(2)Expedited Forms W–2. If, under
the circumstances described in section
1.01, the predecessor is required to file
a final Form 941, the predecessor must
furnish Forms W–2 to the employees who
are not employed by the successor on an
expedited basis. Forms W–2 must be fur-
nished on or before the date required for
filing the final Form 941 (generally one
month after the end of the quarter). How-
ever, if an employee,whose employment
is terminated before the close of the calen-
dar year, requests the Form W–2 earlier,
the predecessor must furnish the Form
W–2 on or before the 30th day after the
written request or the 30th day after the
final payment of wages to the employee,
whichever is later. Forms W–2 (Copy A)
filed with SSA by the predecessor must
also be filed on an expedited basis. Forms
W–2(CopyA)mustbefiledonorbefore
the last day of the second calendar month
following the period for which the final
Form 941 is required to be filed. The
successor is not required to either furnish
Forms W–2 to the acquired employees or
to file the Forms W–2 (Copy A) with SSA
on an expedited basis.
.03Form 941 filed by predecessor.To
the extent the wages paid and the taxes
withheld by the predecessor are to be in-
cluded on the Forms W–2 (Copy A) filed
by the successor for the acquired employ-
ees, there will be a difference between
the amounts shown on the predecessor’s
Forms W–2 (Copy A) and its Forms 941.
The predecessor should complete a Sched-
ule D (Form 941) to explain the discrepan-
cies (between Forms W–2 (Copy A) and
Forms 941 in the totals of social secu-
rity wages, Medicare wages and tips, so-
cial security tips, federal income tax with-
held, and advance earned income credit
(EIC) payments). Schedule D (Form 941)
should include the date of the acquisition
and the name, trade name, address, tele-
phone number, and employer identifica-
tion number of the successor. Schedule
D (Form 941) should be filed after Forms
W–2 (Copy A) are prepared. Thus, Sched-
ule D (Form 941) should be filed with the
first quarter return for the year after the cal-
endar year of the acquisition, or with the
final Form 941 if the predecessor is filing
a final Form 941 and it is due before the
first quarter return for the year after the cal-
endar year of the acquisition. For exam-
ple, if the acquisition occurred in the third
quarter of 2006 and the predecessor’s busi-
ness is continuing to operate, the predeces-
sor would file Schedule D (Form 941) with
the Form 941 for the first quarter of 2007.
However, if the predecessor’s business did
not continue to operate, the predecessor
would file Schedule D (Form 941) with the
predecessor’s final Form 941 which would
also be the Form 941 for the third quarter
of 2006. If Form 941 is filed electronically,
an employer will be able to file Schedule
D (Form 941) separately on paper, until
the electronic specifications for Schedule
D (Form 941) become available.
.04Form 941 filed by successor.To
the extent the wages paid and the taxes
withheld by the predecessor are to be in-
cluded on the Forms W–2 (Copy A) filed
by the successor for the acquired employ-
ees, there will be a difference between the
amounts shown on the successor’s Forms
W–2 (Copy A) and its Forms 941. When
the successor files its Form 941, it should
also file Schedule D (Form 941) to explain
the discrepancies between Forms W–2
(Copy A) and Forms 941 in the totals of
social security wages, Medicare wages
and tips, social security tips, federal in-
come tax withheld, and advance earned
income credit (EIC) payments. Schedule
D (Form 941) should include the date of
the acquisition and the name, trade name,
address, telephone number, and employer
identification number of the predecessor.
Schedule D (Form 941) should be filed
after Forms W–2 (Copy A) are prepared.
Thus, Schedule D (Form 941) should be
filed with the first quarter return for the
year after the calendar year of the acqui-
sition, or with the final Form 941 if the
successor is filing a final return and it is
due before the first quarter return for the
year after the calendar year of the acqui-
sition. If Form 941 is filed electronically,
an employer will be able to file Schedule
D (Form 941) separately on paper, until
the electronic specifications for Sched-
ule D (Form 941) become available. For
instructions relating to the annual wage
limitation, see § 31.3121(a)(1)–1.
.05Forms W–4. The predecessor must
transfer to the successor all current Forms
W–4 that were provided to the predecessor
by the acquired employees and any written
notices received from the Service under
§ 31.3402(f)(2)–1(g)(5). The successor
must keep the transferred Forms W–4 on
file. Generally, the successor employer
must deduct and withhold from the wages
it pays to the acquired employees accord-
ingtotheinformationsuppliedonthe
transferred Forms W–4 until an employee
submits a revised form. The successor
employer must submit to the Service, in
accordance with § 31.3402(f)(2)–1(g),
copies of the Forms W–4 received by
the predecessor during the current cal-
endar quarter and the preceding calendar
quarter. The successor employer must
comply with all other requirements un-
der § 31.3402(f)(2)–1(g). For example,
the successor employer must withhold
amounts from the employees on the basis
of the maximum number specified in any
written notices from the Service under
§ 31.3402(f)(2)–1(g)(5).
.06Transfer of Forms W–4 furnished
electronically. If the predecessor and suc-
cessor both maintain an electronic system
for use by employees in filing Forms W–4,
and the systems are compatible, the pre-
decessor may electronically transfer the
Forms W–4 of the acquired employees to
the successor. The successor may also
choose to acquire and maintain the prede-
cessor’s system. If these options do not
apply, an acquired employee must provide
the successor with a new Form W–4, either
electronically or on paper, as prescribed by
the successor.
.07Forms W–5. The predecessor must
transfer to the successor all Forms W–5 for
the current year that were provided to the
predecessor by the acquired employees.
.08Transfer of Forms W–5 furnished
electronically. If the predecessor and suc-
cessor both maintain an electronic system
for use by employees in furnishing Forms
W–5, and the systems are compatible, the
predecessor may electronically transfer the
Forms W–5 of the acquired employees to
the successor. The successor may also
choose to acquire and maintain the prede-
cessor’s system. If these options do not
2004–34 I.R.B.323August 23, 2004

apply, an acquired employee must provide
the successor with a new Form W–5, either
electronically or on paper, as prescribed by
the successor.
SECTION 6. PROCEDURE
AFTER STATUTORY MERGER
OR CONSOLIDATION
.01Surviving corporation.Aftera
statutory merger or consolidation, if the
wages paid and the taxes withheld by the
acquired corporation are to be included
on the Forms W–2 (Copy A) filed by the
surviving corporation, there will be a dif-
ference between the amounts shown on
the surviving corporation’s Forms W–2
(Copy A) and its Forms 941. The sur-
viving corporation should use Schedule
D (Form 941) to explain the discrepan-
cies between Forms W–2 (Copy A) and
Forms 941 in the totals of social security
wages, Medicare wages and tips, social
security tips, federalincome tax withheld,
and advance earned income credit (EIC)
payments. Schedule D (Form 941) should
be filed after Forms W–2 (Copy A) are
prepared. Thus, Schedule D (Form 941)
should be filed with the first quarter re-
turn for the year after the calendar year of
the statutory merger or consolidation, or
with the final Form 941 if the surviving
corporation is filing a final return and it is
due before the first quarter return for the
year after the calendar year of the statu-
tory merger or consolidation. If Form 941
is filed electronically, an employer will
be able to file Schedule D (Form 941)
separately on paper, until the electronic
specifications for Schedule D (Form 941)
become available.
.02Notice under Rev. Rul. 62–60.
As described in Rev. Rul. 62–60, a sur-
viving corporation should provide certain
information to the Service after a statu-
tory merger or consolidation. A completed
Schedule D (Form 941) will include notice
that a statutory merger or consolidation has
taken place, the date of the change, and
the name, trade name, address, telephone
number, and employer identification num-
ber of the acquired corporation. Thus, if
the surviving corporation completes and
files Schedule D (Form 941) to explain
discrepancies between the totals on Forms
W–2 (Copy A) and the totals on Forms
941, Schedule D (Form 941) will also pro-
vide notice of a statutory merger or consol-
idation under Rev. Rul. 62–60.
.03Acquired corporation.Totheex-
tent the wages paid and the taxes with-
held by the acquired corporation are to be
included in the Forms W–2 (Copy A) by
the surviving corporation, there may be
amounts shown on the acquired corpora-
tion’s Forms 941 which are not shown on
Forms W–2 (Copy A) reported under the
employer identification number of the ac-
quired corporation. If an acquired cor-
poration files a final Form 941, it should
also file a Schedule D (Form 941) with
the Form 941 to explain any discrepan-
cies between Forms W–2 (Copy A) and
Forms 941 in the totals of social security
wages, Medicare wages and tips, social se-
curity tips, federal income tax withheld,
and advance earned income credit (EIC)
payments. Schedule D (Form 941) should
include notice that a statutory merger or
consolidation has taken place, the date of
the statutory merger or consolidation, and
the name, trade name, address, telephone
number, and employer identification num-
ber of the surviving corporation. If Form
941 is filed electronically, an employer
will be able to file Schedule D (Form 941)
separately on paper, until the electronic
specifications for Schedule D (Form 941)
become available.
SECTION 7. EFFECT ON OTHER
REVENUE PROCEDURES
Rev. Proc. 96–60 is superseded. Rev.
Rul. 62–60 is amplified to provide that,
if the surviving corporation completes and
files Schedule D (Form 941) to explain
discrepancies between the totals on Forms
W–2 (Copy A) and the totals on Forms
941, Schedule D (Form 941) will also pro-
vide notice of a statutory merger or consol-
idation under Rev. Rul. 62–60.
SECTION 8. EFFECTIVE DATES
.01Schedule D (Form 941) - Acqui-
sitions, statutory mergers, or consolida-
tions effective after December 31, 2004.
Schedule D (Form 941) should be used to
explain the discrepancies between Forms
W–2 (Copy A) and Forms 941 in the totals
of social security wages, Medicare wages
and tips, social security tips, federal in-
come tax withheld, and advance earned in-
come credit (EIC) payments caused by ac-
quisitions, statutory mergers, or consolida-
tions that are effective after December 31,
2004.
.02Forms W–5 - Transfer of Forms W–5
furnished electronically.Employersare
permitted to apply the rules in section 5.08
regarding Forms W–5 submitted electron-
ically by employees on or after January 19,
1999, the date Announcement 99–3 was
published in the Internal Revenue Bulletin.
SECTION 9. ADDITIONAL
INFORMATION
.01 After December 31, 2004, an em-
ployer may obtain Schedule D (Form 941)
from the IRS Distribution Center by call-
ing (800) TAX-FORM ((800) 829–3676)
or from the IRS web site (www.irs.gov).
.02 An employer may obtain infor-
mation on the submission of Schedule D
(Form 941) by calling the Business and
Specialty Tax Line (800–829–4933).
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Margaret A. Owens and
A. G. Kelley of the Office of the Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this
revenue procedure, contact Ms. Owens
or Mr. Kelley at (202) 622–6040 (not a
toll-free call).
August 23, 20043242004–34 I.R.B.

NOTE: This revenue procedure will be reprinted as the next revision of IRS Publication 1141,General Rules and Specifications
for Substitute Forms W-2 and W-3.
26 CFR 601.602: Tax forms and instructions.
(Also Part I, Sections 6041, 6051, 6071, 6081, 6091; 1.6041–1, 1.6041–2, 31.6051–1, 31.6051–2, 31.6071(a)–1, 31.6081(a)–1, 31.6091–1.)
Rev. Proc. 2004-54
TABLE OF CONTENTS
Part A. General
SECTION 1. PURPOSE............................................................................................ 325
SECTION 2. WHAT’S NEW......................................................................................... 326
SECTION 3. GENERAL RULES FOR PAPER FORMS W-2 AND W-3.................................................... 327
SECTION 4. GENERAL RULES FOR FILING FORMS W-2 (COPY A) OR W-3 MAGNETICALLY OR
ELECTRONICALLY
................................................................................... 328
Part B. Specifications for Substitute Forms W-2 and W-3
SECTION 1A. SPECIFICATIONS FOR “RED-INK” SUBSTITUTE FORM W-2 (COPY A) AND FORM W-3
FILED WITH THE SSA
................................................................................. 328
SECTION 1B. SPECIFICATIONS FOR “LASER-PRINTED” SUBSTITUTE FORM W-2 (COPY A) AND
FORM W-3 FILED WITH THE SSA
...................................................................... 330
SECTION 2. REQUIREMENTS FOR SUBSTITUTE FORMS FURNISHED TO EMPLOYEES (COPIES B, C,
AND 2 OF FORM W-2)
................................................................................. 331
Part C. Additional Instructions
SECTION 1. ADDITIONAL INSTRUCTIONS FOR FORM PRINTERS................................................... 334
SECTION 2. INSTRUCTIONS FOR EMPLOYERS..................................................................... 334
SECTION 3. OMB REQUIREMENTS FOR BOTH RED-INK AND LASER-PRINTED SUBSTITUTE FORMS.................. 335
SECTION 4. COPIES OF FORMS................................................................................... 335
SECTION 5. EFFECT ON OTHER DOCUMENTS..................................................................... 336
Part A. General
Section 1. Purpose
.01The purpose of this revenue procedure is to provide general rules and specifications from the Internal Revenue Service (IRS)
and the Social Security Administration (SSA) for paper substitute forms for Form W-2, Wage and Tax Statement, and Form W-3,
Transmittal of Wage and Tax Statements, for wages paid during the 2004 calendar year.
.02For purposes of this revenue procedure, substitute Form W-2 (Copy A) and substitute Form W-3 are forms that are not printed
by the IRS. Copy A or any other copies of a substitute Form W-2or a substitute Form W-3 must conform to the specifications in
this revenue procedure to be acceptable to the IRS and the SSA. No IRS office is authorized to allow deviations from this revenue
procedure. Preparers should also refer to the separate 2004 Instructions for Forms W-2 and W-3 for details on how to complete
these forms. See Part C, Section 4, for information on obtaining the official IRS forms and instructions. See Part B, Section 2, for
requirements for the copies of substitute forms furnished to employees.
.03For purposes of this revenue procedure, the official, IRS-printed red dropout ink Forms W-2 (Copy A) and W-3 and their exact
substitutes are referred to as “red-ink.” TheSSA-approved, laser-printed, black-and-white Forms W-2 (Copy A) and W-3 are referred
to as “laser-printed.”
Any questions about the red-ink Form W-2 (Copy A) and Form W-3 should be emailed to*
taxforms@irs.govor sent to:
2004–34 I.R.B.325August 23, 2004

Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:T:T:SP, Room 6516
1111 Constitution Ave., N.W.
Washington, DC 20224
Any questions about the black-and-white laser-printed Form W-2 (Copy A) and Form W-3 should be emailed to
l
aser.forms@ssa.govor sent to:
Social Security Administration
Data Operations Center
Attn: Laser Forms Approval, Room 359
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997
Also, see Sections 3.05 and 3.06 of Part I.
Note.You should receive a response within 30 days from either the IRS or the SSA.
.04The IRS maintains a centralized call site at its Martinsburg Computing Center (IRS/MCC) to answer questions related to in-
formation returns (Forms W-2, W-3, 1099 series, 1096, etc.). You can reach the call site at304-263-8700 (not a toll-free number) or
1-866-455-7438 (toll-free). The Telecommunication Device forthe Deaf (TDD) number is 304-267-3367 (not a toll-free number).
The hours of operation are Monday through Friday from 8:30 a.m. to 4:30 p.m. Eastern time. You may also send questions to the call
site via the Internet atm
ccirp@irs.gov. IRS/MCC does not process Forms W-2 (Copy A). Forms W-2 (Copy A) prepared on paper
and/or magnetically/electronically must be filed with the SSA. IRS/MCC does, however, process waiver requests (Form 8508, Request
for Waiver From Filing Information Returns Magnetically) and extension of time to file requests (Form 8809, Request for Extension
of Time To File Information Returns) for Forms W-2 (Copy A) and requests for an extension of time to furnish the employee copies
of Form W-2. See Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G Electronically or Magnetically, for
information on waivers and extensions of time.
.05The following publications provide detailed filingprocedures for certaininformation returns:
•2004 Instructions for Forms W-2 and W-3,
•Instructions for Forms W-2c and W-3c (Rev. December 2002), and
•Publication 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c.
Section 2. What’s New
.01The IRS has changed the dimensions of the 2004 Forms W-2 (Copy A) and W-3 (Exhibits A and B) to match those shown for
SSA laser-printed forms in Exhibits E and F.
.02The width of red-ink Forms W-2 and W-3 is now 7.5 inches.
.03The top and side margins for red-ink Forms W-2 and W-3 are now .5 inches.
Note.The top margin of red-ink Form W-3 is .5 inches from the top line of the form to the top of the page.
.04The space between the two Forms W-2 (Copy A) on both the red-ink and laser-printed versions of substitute Form W-2 should
be 1.33 inches.
.05On both red-ink Forms W-2 (Copy A) and W-3, the combined width of the “Control number” (box a) and form identification
number (“22222” or “33333”) boxes has been reduced to 2.5 inches.
.06Dollar signs and shading in dollar-entry boxes have been removed from red-ink Form W-2 (Copy A) and Form W-3 to provide
more space.
.07The Privacy Act and Paperwork Reduction Act Notice has been moved to the back of Copy D of Form W-2.
.08Other changes to dimensions and format of red-ink Forms W-2 (Copy A) and W-3 have been made for 2004. (See Exhibits A
and B.)
.09Electronic payee statements (Copies B, C, and 2 of Form W-2) may be furnished if employees give their consent (as described
in Treasury Regulations Section 31-6501-1(j)). See Publication 15-A, Employer’s Supplemental Tax Guide, for details.
.10Sections 3 and 4 of Part A of the last revision of Publication 1141 were reversed in this revision. Some subsections were moved
and renumbered for better readability.
.11Editorial changes were made. Redundancies were eliminated as much as possible.
August 23, 20043262004–34 I.R.B.

Section 3. General Rules for Paper Forms W-2 and W-3
.01Employers not filing magnetically or electronically must file paper Forms W-2 (Copy A) along with Form W-3 with the SSA
by using either the official IRS form or a substitute form that exactly meets the specifications shown in Parts B and C of this revenue
procedure.
Note.Substitute territorial forms (W-2AS, W-2GU, W-2VI) shouldalso conform to the specifications as outlined in this revenue
procedure. These forms require the form designation (“W-2AS,” “W-2GU,” “W-2VI”) on Copy A to be in black ink. Also, you must
use bond paper for Copies 1 and B of Form W-2VI.
Employers who file with the SSA magnetically, electronically, or on paper may design their own statements to furnish to employees.
These employee statements designed by employers must comply with the requirements shown in Parts B and C.
.02Red-ink substitute forms that completely conform to the specifications contained in this revenue procedure may be privately
printed without prior approval from the IRS or the SSA. Only the black-and-white laser-printed forms need to be submitted to the
SSAforapproval(seeSection1BofPartB).
.03As in the past, Form W-2 (Copy A) and Form W-3 may be generated using a laser-printer by following all guidelines and
specifications (also see Section 1B of Part B). In general, regardless of the method of entering data, using black ink on Forms W-2
and W-3 provides better readability for processing by scanning equipment. Colorsother than black are not easily read by the scanner
and may result in delays or errors in the processing of Forms W-2 (Copy A) and W-3. The printing of the data should be centered
within the boxes. Type must be substantially identical in size (not below 10-point) and shape to the official forms.
Note.With the exception of the identifying number and the corner register marks, the preprinted form layout for the red-ink Forms
W-2 (Copy A) and W-3, must be in Flint J-6983 red OCR dropout ink or an exact match. (See Section 1A.03 of Part B.)
.04Substitute forms filed with the SSA and substitute copies furnished to employees that do not conform to these specifications
are unacceptable. Forms W-2 (Copy A) and W-3 filed with the SSA that do not conform may be returned. In addition, penalties may
be assessed for not complying with the form specifications.
.05If you are uncertain of any specification and want it clarified:
(1) Submit a letter or email citing the specific
ation to the addresses in the next section,
(2) State your interpretation of that specification, and
(3) Enclose an example (if appropriate) of how the form would appear if produced using your understanding of the specification.
(4) Be sure to include your name, complete address, phone number, and if applicable, your email address with your correspon-
dence.
.06Any questions about the specifications, especially those for the red-ink Form W-2 (Copy A) and Form W-3, should be emailed
to*
taxforms@irs.govor sent to:
Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:T:T:SP, Room 6516
1111 Constitution Ave., N.W.
Washington, DC 20224
Any questions about the black-and-white laser-printed Form W-2 (Copy A) and Form W-3 should be emailed to
l
aser.forms@ssa.govor sent to:
Social Security Administration
Data Operations Center
Attn: Laser Forms Approval, Room 359
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997
Note.You should receive a response within 30 days from either the IRS or the SSA.
.07Forms W-2 and W-3 are subject to annual review and possible change. Therefore, employers arecautioned against overstocking
supplies of privately-printed substitutes.
.08Separate instructions for Forms W-2 and W-3 are provided inthe 2004 Instructions for Forms W-2 and W-3. Form W-3 should
be used only to transmit paper Forms W-2 (Copy A). Form W-3 is a single sheet including only essential filing information. Be sure
2004–34 I.R.B.327August 23, 2004

to make a copy of your completed Form W-3 for your records. Copies of the current year official IRS Forms W-2 and W-3, and the
instructions for those forms, may be obtained from most IRS offices or by calling 1-800-829-3676. The IRS provides only cutsheet
sets of Forms W-2 and cutsheets of Form W-3. The instructions and information copies of the forms may be found on the IRS website
atw
ww.irs.gov.
.09Because substitute Forms W-2 (Copy A) and W-3 are machine-imaged and scanned by the SSA, the forms must meet the same
specifications as the official IRS Forms W-2 and W-3 (as shown in the exhibits).
Section 4. General Rules for Filing Forms W-2 (Copy A) or W-3 Magnetically or Electronically
.01Employers must file Forms W-2 (Copy A) with the SSA electronically or with magnetic media if they file 250 or more cal-
endar year 2004 Forms W-2 (Copy A). The SSA publication MMREF-1, Magnetic Media Reporting andElectronic Filing, contains
specifications and procedures for filing Form W-2 information with the SSA magneticallyor electronically. Employers are cautioned
to obtain the most recent revision of MMREF-1 (and supplements)due to any subsequent changes in specifications and procedures.
.02You may obtain a copy of the MMREF-1 by:
•Accessing the SSA website atwww.socialsecurity.gov/employer/pub.htm,
•Writing to:
Social Security Administration
OCO, DES; Attn: Employer Reporti
ng Services Center
300 North Greene Street
Baltimore, MD 21290-0300
•Calling your local SSA Employer Services Liaison Officer (ESLO) (the ESLOs’ phonenumbers are available atwww.socialse-
curity.gov/employer/wage_reporting_specialists.htm), or
•Calling the SSA’s Employer Reporting Assistance staff at 1-800-772-6270.
.03Magnetic media or electronic filers do not file a paper Form W-3. See the SSA publication MMREF-1 for guidance on trans-
mitting Form W-2 (Copy A) information to SSA magnetically or electronically.
.04Employers who do not comply with the magnetic media or electronic filing requirements for Form W-2 (Copy A) and who are
not granted a waiver by the IRS may be subject to penalties. Employers who file Form W-2 information with the SSA on magnetic
media or electronically must not send the same data to the SSAon paper Forms W-2 (Copy A). Any duplicate reporting may subject
filers to unnecessary contacts by the SSA or the IRS.
Part B. Specifications for Substitute Forms W-2 and W-3
Section 1A. Specifications for “Red-Ink” Substitute Form W-2 (Copy A) and Form W-3 Filed
with the SSA
.01The official IRS-printed red dropout ink Form W-2 (Copy A) andW-3 and their exact substitutes are referred to as “red-ink”
in this revenue procedure. Employers may file substitute Forms W-2 (Copy A) and W-3 with the SSA. The substitute forms must be
exact replicas of the official IRS forms with respect to layoutand content because they will be read by scanner equipment.
.02Paper used for cutsheets and continuous-pinfed forms for substitute Form W-2 (Copy A) and Form W-3 that are to be filed with
the SSA must be white 100% bleached chemical wood, 18-20 pound paper only, optical characterrecognition (OCR) bond produced
in accordance with the following specifications:
• Acidity:Phvalue,average,notlessthan ....................................................4.5
• BasisWeight:17x22inch500cutsheets,pound ............................................18-20
•Metric equivalent—gm./sq. meter
(atoleranceof+5pct.isallowed)..........................................................68-75
•Stiffness: Average, each direction, not less than—milligrams
• Crossdirection...........................................................................50
• Machinedirection........................................................................80
•Tearing strength: Average, each direction, not less than—grams................................40
August 23, 20043282004–34 I.R.B.

• Opacity:Average,notlessthan—percent....................................................82
• Reflectivity:Average,notlessthan—percent................................................68
• Thickness:Average—inch ................................................................0.0038
• Metricequivalent—mm...................................................................0.097
(a tolerance of +0.0005 inch (0.0127 mm) is allowed), paper cannot vary more than 0.0004 inch
(0.0102 mm) from one edge to the other.
• Porosity:Average,notlessthan—seconds...................................................10
•Finish (smoothness): Average, each side—seconds...........................................20-55
(forinformationonly)theSheffieldequivalent—units ........................................170-d200
•Dirt: Average, each side, not to exceed—parts per million.....................................8
Note.Reclaimed fiber in any percentage is permitted, provided the requirements of this standard are met.
.03All printing of substitute Forms W-2 (Copy A) and W-3 must be in Flint red OCR dropout ink except as specified below. The
following must be printed in nonreflective black ink:
•Identifying number “22222” or “33333” at the top of the forms.
•Tax year at the bottom of the forms using 24-point OCR-A font.
•The four (4) corner register marks on the forms.
•The jurat and “Signature, Title, Date” line at the bottom of Form W-3.
•The form identification number (“W-3”) at the bottom of Form W-3.
•All the instructions below Form W-3beginning with “Send this entire page....” line to the bottom of Form W-3.
.04The vertical and horizontal spacing for all federal payment and data boxes on Forms W-2 and W-3 must meet specifications.
On Form W-3 and Form W-2 (Copy A), all the perimeter rules must be 1-point (0.014-inch), while all other rules must be one-half
point (0.007-inch). Vertical rules must be parallel to the left edge of the form; horizontal rules parallel to the top edge.
.05The official red-ink Form W-3 and Form W-2 (Copy A) are 7.5inches wide. Employers filing Forms W-2 (Copy A) with the
SSA on paper must also file a Form W-3. Form W-3 must be the same width (7.5 inches) as the Form W-2. One Form W-3 is printed
on a standard-size, 8.5 x 11-inch page. Two official Forms W-2 (Copy A) are contained on a single 8.5 x 11-inch page (exclusive of
any snap-stubs).
.06The top, left, and right margins for the Form W-2 (Copy A) and Form W-3 are .5 inches (
1
/2inch). All margins must be free of
printing except for the words “DO NOT STAPLE OR FOLD” on red-ink Form W-3. The space between the two Forms W-2 (Copy
A) is 1.33 inches.
.07The identifying numbers are “22222” for Form W-2 (Copies A (and 1)) and “33333” for Form W-3. No printing should appear
anywhere near the identifying numbers. For both Form W-2 (Copy A) and Form W-3, the combination width of box a (Control
number) and the box containing the identifying number must be 2.5 inches.
Note.The identifying number must be printed in nonreflective black ink in OCR-A font of 10 characters per inch.
.08The depth of the individual scannable image on a page must be the same as that on the official IRS forms. The depth from the
top line to the bottom line of an individual Form W-2 (Copy A) must be 4.17 inches and the depth from the top line to the bottom line
of Form W-3 must be 4.67 inches. (See Exhibits A and B.)
.09Continuous-pinfed Forms W-2 (Copy A) must be separated into 11-inch deep pages. The pinfed strips must be removed when
Forms W-2 (Copy A) are filed with the SSA. The two Forms W-2 (CopyA) on the 11-inch page must not be separated (only the pages
are to be separated (burst)). The words “Do Not Cut, Fold, or Staple Forms on This Page” must be printed twice between the two
Forms W-2 (Copy A) in Flint red OCR dropout ink. Perforations are required on all other copies (Copies 1, B, C, 2, and D) to enable
the separation of individual forms.
.10Box 12 of Form W-2 (Copy A) contains four entry boxes – 12a, 12b, 12c, and 12d. Do not make more than one entry per box.
Enter your first code in box 12a (for example, enter Code D in box 12a, not 12d, if it is your first entry). If more than four items need
to be reported in box 12, use a second Form W-2 to report the additional items (see “Multiple forms” in the 2004 Instructions for
Forms W-2 and W-3). Do not report the same federal tax data to the SSA on more than one Form W-2 (Copy A). However, repeat
the identifying information (employee’s name and SSN, employer’s name, address, and EIN) on each additional form.
2004–34 I.R.B.329August 23, 2004

.11The checkboxes in box 13 of Form W-2 (Copy A)must be .14 inches each; the space before the 1
st
checkbox is .20 inches; the
spacing on each remaining side of the 3 checkboxes is .36 inches (see Exhibit A). The checkboxes in box b of Form W-3 must also
be .14 inches (see Exhibit B for other dimensions in box b).
Note.More than 50% of an applicable checkboxmustbecoveredbyan“X.”
.12All substitute Forms W-2 (Copy A) and W-3 in the red-ink formatmust have the tax year, form number, and form title printed
on the bottom face of each form using type identical to that of the official IRS form. The red-ink substitute Form W-2 (Copy A) and
Form W-3 must have the form producer’s EIN entered directly to the left of “Department of the Treasury,” in red.
.13The words “For Privacy Act and Paperwork Reduction Act Notice, see back of Copy D.” must be printed in Flint red OCR
dropout ink in the same location as on the official Form W-2 (Copy A). The words “For Privacy Act and Paperwork Reduction Act
Notice, see back of Copy D of Form W-2.” must be printed at the bottom of the page of Form W-3.
.14The Office of Management and Budget (OMB) Number must be printed on substitute Forms W-3 and W-2 (on each ply) in the
same location as on the official IRS forms.
.15All substitute Forms W-3 must include the instructions that are printed on the same sheet below the official IRS form.
.16The back of substitute Form W-2 (Copy A) and Form W-3 must be free of all printing.
.17All copies must be clearly legible. Hot wax and cold carbon spots are not permitted for Form W-2 (Copy A). Interleaved carbon
should be black and must be of good quality to assure legibility onall copies and to avoid smudging. Fading must be minimized to
assure legibility.
.18Chemical transfer paper is permitted for Form W-2 (Copy A) only if the following standards are met:
•Only chemically-backed paper is acceptable for Form W-2 (Copy A). Front and back chemically-treated paper cannot be pro-
cessed properly by scanning equipment.
•Chemically-transferred images must be black.
•Carbon-coated forms are not permitted.
.19The Government Printing Office (GPO) symbol and the CatalogNumber (Cat. No.) must be deleted from substitute Form W-2
(Copy A) and Form W-3.
Section 1B. Specifications for “Laser-Printed” Substitute Form W-2 (Copy A) and Form W-3
Filed with the SSA
.01The SSA-approved, laser-printed, black-and-white Forms W-2(Copy A) and W-3 are referred to as “laser-printed.” Specifica-
tions for the laser-printed black-and-white Forms W-2 (Copy A) and W-3 are similar to the red-ink forms (Part B, Section 1A) except
for the items that follow (see Exhibits E and F). Exhibits are samples only and must not be downloaded to meet tax obligations.
(1) Forms must be printed on 8.5 x 11-inch single-sheet paper only, not on continuous-feed using a laser printer. There must be
two Forms W-2 (Copy A) printed on a page. There must be no horizontal perforations between the two Forms W-2 (Copy A) on each
page.
(2) All forms and data must be printed in nonreflective black ink only.
(3) The data and forms must be programmed to print simultaneously. Forms cannot be produced separately from wage data entries.
(4) The forms must not contain corner register marks.
(5) The forms must not contain any shaded areas including those boxes that are entirely shaded on the red-ink forms.
(6) Identifying numbers on both Form W-2 (“22222”) and Form W-3 (“33333”) must be preprinted in 14-point Arial bold font or
a close approximation.
(7) The form numbers (“W-2” and “W-3”) must be in 18-point Arial font or a close approximation. The tax year (“2004”) on Forms
W-2 (Copy A) and W-3 must be in 20-point Arial font or a close approximation.
(8) No part of the box titles or the data printed on the forms may touch any of the vertical or horizontal lines, nor should any of the
data intermingle with the box titles. The data should be centered in the boxes.
August 23, 20043302004–34 I.R.B.

(9) Do not print any information in the margins of the laser-printed forms (for example, do not print “DO NOT STAPLE OR FOLD”
in the top margin of Form W-3).
(10) The word “Code” must not appear in box 12 on Form W-2 (Copy A).
(11) A 4-digit vendor code preceded by four zeros and a slash (for example, 0000/1234) must appear in 12-point Arial font, or
a close approximation, under the tax year in place of the Cat. No. on Form W-2 (Copy A) and in the bottom right corner of the
“For Official Use Only” box at the bottom of Form W-3. Do not display the form producer’s EIN to the left of “Department of the
Treasury.” The vendor code will be used to identify the form producer.
(12) Do not print Catalog Numbers (Cat. No.) on either form (10134D for Form W-2 (Copy A); 10159Y for Form W-3).
(13) Do not print the checkboxes in:
•Box b of Form W-3. The “X” should be programmed to be printed and centered directly below the applicable “Kind of Payer.”
•The “Void” box of Form W-2 (Copy A). The“X” should be programmed to be printed to the right of “Void” because of space
limitations.
•Box13ofFormW-2(CopyA).The“X”shouldbeprogrammedtobe printed and centered directly below the applicable box
title.
(14) Do not print dollar signs. If there are no money amounts being reported, the entire field should be left blank.
(15) The space between the two Forms W-2 (Copy A) is 1.33 inches.
.02You must submit samples of your laser-printed substitute forms to the SSA. Only laser-printed, black-and-white substitute
Forms W-2 (Copy A) and W-3 for tax year 2004 will be accepted for approval by the SSA. Questions regarding other forms (that is,
red-ink Forms W-2c, W-3c, 1099 series, 1096, etc.) must be directed to the IRS.
.03You will be required to send one set of blank and one set of dummy-data, laser-printed substitute Forms W-2 (Copy A) and
W-3 for approval. Sample data entries should be filled in to the maximum length for each box entry, preferably using numeric data
or alpha data, depending upon the type required to be entered. Include in your submission the name, telephone number, fax number,
and email address of a contact person who can answer questions regarding your sample forms.
.04To receive approval, you may first contact the SSA atl
aser.forms@ssa.govto obtain a template and further instructions in pdf
or Excel format. You may also send your 2004 sample, laser-printed substitute forms to:
Social Security Administration
Data Operations Center
Attn: Laser Forms Approval, Room 359
1150 E. Mountain Drive
Wilkes-Barre, PA 18702–7997
Send your sample forms via private mail carrier or certified mail in order to verify their receipt. You can expect appr
oval (or
disapproval) by the SSA within 30 days of receipt of your sample forms.
.05The 4-digit vendor code preceded by four zeros and a slash (0000/) must be preprinted on the sample, laser-printed
substitute
forms. Forms not containing a vendor code will be rejected and will not be submitted for testing or approval. If you do n
ot have a
vendor code, you may contact the National Association of Computerized Tax Processors via email atp
resident@nactp.
org.
.06 If you use forms produced by a vendor and have questions concerning approval,do not send the forms to the SSA for
approval. Instead, you may contact the software vendor to obtain a copy of SSA’s dated approval notice supplied to tha
tvendor.
Section 2. Requirements for Substitute Forms Furnished to Employees (Copies B, C, and
2ofFormW-2)
Note.Printers are cautioned that therules in Part B, Section 2, apply only to employee copies of Form W-2 (Copies B, C, and 2).
Paper filers who send Forms W-2 (Copy A) to the SSA must follow the requirements in Part B, Sections 1A and/or 1B.
.01All employers (including those who file on magnetic media or electronically) must furnish employees with at least two copies
of Form W-2 (three or more for employees required to file a state, city, or local income tax return). The following rules are guidelines
for preparing employee copies.
2004–34 I.R.B.331August 23, 2004

The dimensions of these copies (Copies B, C, and 2), but not Copy A, may differ from the dimensions of the official IRS form to
allow space for reporting additional information, including additional entries such as withholding for health insurance, union dues,
bonds, or charity in box 14. The limitation of a maximum of four items in box 12 of Form W-2 applies only to Copy A, which is filed
with the SSA.
Note.Electronic payee statements (Copies B, C, and 2 of Form W-2) may now be furnished if employees give their consent (as
described in Treasury Regulations Section 31-6501-1(j)). See Publication 15-A, Employer’s Supplemental TaxGuide, for details.
.02The minimum dimensions for employee copies only (not Copy A) of Form W-2 should be 2.67 inches deep by 4.25 inches
wide. The maximum dimensions should be no more than 6.5 inches deep by no more than 8.5 inches wide.
Note.The maximum and minimum size specifications are for tax year 2004 only and may change in future years.
.03Either horizontal or vertical format is permitted (see Exhibit D).
.04The paper for all copies must be white and printed in black ink. The substitute Copy B, which employees are instructed to
attach to their federal income tax returns, should be at least 9-pound paper (basis 17 x 22-500). Other copies furnished to employees
should also be at least 9-pound paper (basis 17 x 22-500).
.05Employee copies of Form W-2 (Copies B, C, and 2), including those that are printed on a single sheet of paper, must be easily
separated. Providing perforations between the individual copies satisfies this requirement, but using scissors to separate Copies B, C,
and 2 does not.
Note.The perforation requirement in this section does not apply to printouts of copies of Forms W-2that are furnished electron-
ically to employees (as described in Treasury Regulations Section 31-6051-1(j)). However, these employees should be cautioned to
carefully separate the copies of Form W-2. See Publication 15-A, Employer’s Supplemental Tax Guide, for information on electron-
ically furnishing Forms W-2 to employees.
.06Interleaved carbon and chemical transferpaper employee copies must be clearly legible. Hot wax and cold-carbon spots are
not permitted for employee copies. All copies must be able to bephotocopied. Interleaved carbonshouldbeblackandmustbeof
good quality to assure legibility on all copies and to avoid smudging. Fading must be minimized to assure legibility.
.07The electronic tax logo on the IRS official employee copies is not required on any of the substitute form copies. To avoid
confusion and questions by employees, employers are encouraged to delete the identifying number (“22222”) and the word “Void”
and its associated checkbox from the employee copies of Form W-2.
.08All substitute employee copies must contain boxes, box numbers, and box titles that match the official IRS Form W-2. Boxes
that do not apply can be deleted. However, certain core boxes must be included. The placement, numbering, and size of this informa-
tion is specified as follows:
•The items and box numbers that constitute the core data are:
Box 1 — Wages, tips, other compensation,
Box 2 — Federal income tax withheld,
Box 3 — Social security wages,
Box 4 — Social security tax withheld,
Box 5 — Medicare wages and tips, and
Box 6 — Medicare tax withheld.
The core boxes must be printed in the exact order shown on the official IRS form.
•The core data boxes (1 through 6) must be placed in the upper rightof the form. Substitute vertical-format copies may have the
core data across the top of the form (see Exhibit D). In no instance, will boxes or other information be permitted to the right of
thecoredata.
•The form title, number, or copy designation (B, C, or 2) may be at the top of the form. Also, a reversed or blocked-out area to
accommodate a postal permit number or other postalconsiderations is allowed in the upper-right.
•Boxes 1 through 6 must each be a minimum of 1
3
/8inches wide x
1
/4inch deep.
August 23, 20043322004–34 I.R.B.

•Other required boxes are:
b) Employer identification number (EIN),
c) Employer’s name, address, and ZIP code,
d) Employee’s social security number,
e) Employee’s name, and
f) Employee’s address and ZIP code.
Identifying items must be present on the form and be in boxes similar to those on the official IRS form. However, they may be
placed in any location other than the top or upper right. You do not need to use the lettering system (b-f) used on the official IRS form.
The employer identification number (EIN) may be included with the employer’s name and address and not in a separate box.
Note.Box a (“Control number”) is not required.
.09All copies of Form W-2 furnished to employees must clearly showthe form number, the form title, and the tax year prominently
displayed together in one area of the form. The title of Form W-2 is“Wage and Tax Statement.” It is recommended (but not required)
that this be located on the bottom left of substitute Forms W-2. Thereference to the “Department of the Treasury — Internal Revenue
Service” must be on all copies of substitute Forms W-2 furnishedto employees. It is recommended (but not required) that this be
located on the bottom right of Form W-2.
.10If the substitute employee copies are labeled, the forms must contain the applicable description:
•“Copy B, To Be Filed With Employee’s FEDERAL Tax Return.”
•“Copy C, For EMPLOYEE’S RECORDS.”
•“Copy 2, To Be Filed With Employee’s State, City, or Local Income Tax Return.”
It is recommended (but not required) that these be located on the lower left of Form W-2. If the substitute employee copies are not
labeled as to the disposition of the copies, then written notification using similar wordingmust be provided to each employee.
.11The tax year (2004) must be clearly printed in nonreflective black ink on all copies of substitute Form W-2. It is recommended
(but not required) that this information be in the middle at the bottom of the Form W-2. The use of 24-pt. OCR-A font is recommended
(but not required).
.12Boxes1,2,and9(ifapplicable)onCopyBmustbeoutlinedinbold 2-point rule or highlighted in some manner to distinguish
them. If “Allocated tips” are being reported, it is recommended (but not required) that box 8 also be outlined. If reported, “Social
security tips” (box 7) must be shown separately from “Social security wages” (box 3).
Note.Boxes 8 and 9 may be omitted if not applicable.
.13If employers are required to withhold and report state or local income tax, the applicable boxes are also considered core infor-
mation and must be placed at the bottom of the form. State information is included in:
•Box 15 (State, Employer’s state ID number)
•Box 16 (State wages, tips, etc.)
•Box17(Stateincometax)
Local information is included in:
•Box 18 (Local wages, tips, etc.)
•Box 19 (Local income tax)
•Box20(Localityname)
.14Boxes 7 through 14 may be omitted from substitute employee copies unless the employer must report any of that information to
the employee. For example, if an employee did not have “Social security tips” (box 7), the form could be printed without that box. But
if an employer provided dependent care benefits, the amount must be reported separately, shown in box 10, and labeled “Dependent
care benefits.”
.15Employers may enter more than four codes in box 12 of substitute Copies B, C, and 2 (and 1 and D) of Form W-2, but each
entry must use Codes A-W (see the 2004 Instructions for Forms W-2 and W-3).
2004–34 I.R.B.333August 23, 2004

.16If an employer has employees in any of the three categories inbox 13, all checkboxes must be shown and the proper checkmark
made, when applicable.
.17Employers may use box 14 for any other information that they wish to give to their employees. Each item must be labeled.
(See the instructions for box 14 in the 2004 Instructions for Forms W-2 and W-3.)
.18The front of Copy C of a substitute Form W-2 must contain the note “This information is being furnished to the Internal Revenue
Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable
and you fail to report it.”
.19Instructions similar to those contained on the back of Copies B and C of the official IRS Form W-2 must be provided to
each employee. An employer may modify or delete instructions thatdo not apply to its employees. (For example, remove Railroad
Retirement Tier 1 and Tier 2 compensation information for nonrailroad employees orinformation about dependent care benefits that
the employer does not provide.)
.20Employers must notify their employees who have no income tax withheld that theymay be able to claim a tax refund because
of the earned income credit (EIC). They will meet this notification requirement if they furnish a substitute Form W-2 with the EIC
notice on the back of Copy B, IRS Notice 797, Possible FederalTax Refund Due to the Earned Income Credit (EIC), or on their
own statement containing the same wording. They may also change the font on Copy C so that the EIC notification and Form W-2
instructions fit entirely on the back. For more information about notification requirements, see Notice 1015, Have You Told Your
Employees About the Earned Income Credit (EIC)?
Part C. Additional Instructions
Section 1. Additional Instructions for Form Printers
.01If magnetic or electronic media is not used for filing with the SSA, the substitute copies of Forms W-2 (either red-ink or
laser-printed) should be assembled in the same order as the official IRS Forms W-2. Copy A should be first, followed sequentially
by perforated sets (Copies 1, B, C, 2, and D).
.02The substitute form to be filed by the employer with the SSA must carry the designation “Copy A.”
Note.Magnetic media/electronic filers do not submit either red-inkorlaser-printedpaperFormW-2(CopyA)orFormW-3tothe
SSA.
.03Substitute forms (red-ink or laser-printed) do not require a copy to be retained by employers (Copy D of Form W-2). However,
employers must be prepared to verify or duplicate the information if it is requested by the IRS or the SSA. Paper filers who do not
keep a Form W-2 (Copy D) should be able to generate a facsimile of Form W-2 (Copy A) in case of loss.
.04Except for copies in the official assembly, no additional copies that may be prepared by employers should be placed ahead of
Form W-2 (Copy C) “For EMPLOYEE’S RECORDS.”
.05Instructions similar to those contained on the back of Copies B and C of theofficial IRS Form W-2 must be provided to each
employee. These instructions may be printed on the back of the substitute Copies B and C or may be provided to employees on a
separate statement. Do not print these instructions on the back of Copy 1 or 2 that is to be filed with the employee’s state, city, or
local income tax return. Any Forms W-2 (Copy A) and W-3 that are filed with the SSA must have no printing on the reverse side.
Instructions similar to those provided as part of the IRS official forms must be provided as part of any substitute Form W-2 (Copy A)
or Form W-3.
Section 2. Instructions for Employers
.01Only originals of Form W-2 (Copy A) and Form W-3 may be filedwith the SSA. Carbon copies and photocopies are unaccept-
able.
.02Employers should type or machine-print data entries on the non-laser-generated forms wheneverpossible. Ensure good quality
by using a high-quality type face, inserting data in the middle of blocks that are well separated from other printing and guidelines, and
taking any other measures that willguarantee clear, sharp images. Black ink must be used with no script type, inverted font, italics or
dual-case alpha characters.
Note.12-point Courier font is preferred by the SSA.
.03Form W-2 (Copy A) requires decimal entries for wage data. Dollar signs should not be printed with money amounts on the
Forms W-2 (Copy A) and W-3.
.04The employer must provide a machine-scannable Form W-2 (Copy A). The employer must also provide payee copies (Copies
B, C, and 2) that are legible and able to be photocopied (by the employee). Do not print any data in the top margin of the payee copies
of the forms.
August 23, 20043342004–34 I.R.B.

.05Any printing in box a (Control number) on Forms W-2 or W-3 may not touch any vertical or horizontal lines and should be
centered in the box.
.06The filer’s employer identification number (EIN) must be entered in box b of Form W-2 and box e of Form W-3. The EIN
entered on Form(s) W-2 (box b) and Form W-3 (box e) must be the same as on Forms 941, 943, CT–1, Schedule H (Form 1040), or
any other corresponding forms filed with the IRS. Be sure to use EIN format (00-0000000) rather than SSN format (000-00-0000).
.07The employer’s name, address, and EIN may be preprinted.
.08Employers should use the official IRS-preprinted FormW-3 that they received with Publication 393 or Publication 2184, if
available, when filing red-ink Forms W-2 (Copy A) with the SSA.
Section 3. OMB Requirements for Both Red-Ink and Laser-Printed Substitute Forms
.01The Paperwork Reduction Act (the Act) of 1995 (Public Law 104-13) requires that:
•The OMB approves all IRS tax forms that are subject to the Act.
•Each IRS form contains (in or near the upper right corner) theOMB approval number, if any. (The official OMB numbers may
be found on the official IRS printed forms and are also shown on the forms in Exhibits A, B, C, E, and F.)
•Each IRS form (or its instructions) states:
(1) Why the IRS needs the information,
(2) How it will be used, and
(3) Whether or not the information is required to be furnished to the IRS.
This information must be provided to any users of official or substitute IRS forms or instructions.
.02The OMB requirements for substitute IRS forms are:
•Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official IRS form.
•For Form W-2 (Copy A) and Form W-3, the OMB number must appear exactly as shown on the official IRS form.
•For any copy of Form W-2 other than Copy A, the OMB number must use one of the following formats.
(1) OMB No. XXXX-XXXX (preferred) or
(2) OMB # XXXX-XXXX (acceptable).
.03Any substitute Form W-2 (Copy A only) must state “For Privacy Act and Paperwork Reduction Act Notice, see back of Copy
D.” Any substitute Form W-3 must state “For Privacy Act and Paperwork Reduction Act Notice, see back of Copy D of Form W-2.”
If no instructions are provided to users of your forms, you must furnish them with the exact text of the Privacy Act and Paperwork
Reduction Act Notice.
Section 4. Copies of Forms
.01You can obtain official IRS forms and information copies of federal tax materials at local IRS offices or by calling the IRS
Distribution Center at 1-800-829-3676. Other ways to get federal tax material include:
•The Internet atwww.irs.gov.
•IRS Fax Forms at 703-368-9694.
•The IRS’ CD-ROM.
Only contact the IRS, not the SSA, for forms.
Note.Many IRS forms are provided electronically by fax, on the IRSwebsite, and on the Federal Tax Forms CD-ROM. But copies of
Form W-2 (Copy A) and Form W-3 cannot be used for filing with the IRS or SSA when obtained this way because the forms do not
meet the specific printing specifications as described in this publication. Copies of Forms W-2 and W-3 obtained from these sources
are for information purposes only.
.02You can access the IRS via the World Wide Web usingw
ww.irs.gov.
2004–34 I.R.B.335August 23, 2004

.03The IRS also offers an alternative to downloading electronic files and provides current and prior-year access to tax forms and
instructions through its Federal Tax Forms CD-ROM. The CD will be available for the upcoming filing season. Order Publication
1796, IRS Federal Tax Products CD-ROM, by using the IRS website atw
ww.irs.gov/cdordersor by calling 1-877-CDFORMS (1-877-
233-6767).
Section5.EffectonOtherDocuments
.01Revenue Procedure 2003-30, 2003-17 I.R.B. 822, dated April 28, 2003 (reprinted as Publication 1141, Revised 5-2003), is
superseded.
ListofExhibits
Exhibit A — Form W-2 (Copy A) (Red-Ink)
Exhibit B — Form W-3 (Red-Ink)
Exhibit C — Form W-2 (Copy B)
Exhibit D — Form W-2 (Alternative Employee Copies) (Illustrating Horizontal and Vertical Formats)
Exhibit E — Form W-2 (Copy A) (Laser-Printed)
Exhibit F — Form W-3 (Laser-Printed)
August 23, 20043362004–34 I.R.B.

2004–34 I.R.B.337August 23, 2004

August 23, 20043382004–34 I.R.B.

2004–34 I.R.B.339August 23, 2004

August 23, 20043402004–34 I.R.B.

2004–34 I.R.B.341August 23, 2004

August 23, 20043422004–34 I.R.B.

26 CFR 1.601–105: Examination of returns and
claims for refund, credit, or abatement; determina-
tion of correct tax liability.
Rev. Proc. 2004–55
SECTION 1. PURPOSE
This revenue procedure provides the
domestic asset/liability percentages and
domestic investment yields needed by for-
eign life insurance companies and foreign
property and liability insurance compa-
nies to compute their minimum effectively
connected net investment income under
section 842(b) of the Internal Revenue
Code for taxable years beginning after
December 31, 2002. Instructions are pro-
vided for computing foreign insurance
companies’ liabilities for the estimated tax
and installment payments of estimated tax
for taxable years beginning after Decem-
ber 31, 2002. For more specific guidance
regarding the computation of the amount
of net investment income to be included by
a foreign insurance company on its U.S. in-
come tax return, see Notice 89–96, 1989–2
C.B. 417. For the domestic asset/liability
percentage and domestic investment yield,
as well as instructions for computing for-
eign insurance companies’ liabilities for
estimated tax and installment payments of
estimated tax for taxable years beginning
after December 31, 2001, see Rev. Proc.
2003–70, 2003–34 I.R.B. 406.
SECTION 2. CHANGES
.01 DOMESTIC ASSET/LIABILITY
PERCENTAGES FOR 2003. The Secre-
tary determines the domestic asset/liabil-
ity percentage separately for life insurance
companies and property and liability in-
surance companies. For the first taxable
year beginning after December 31, 2002,
the relevant domestic asset/liability per-
centages are:
125.9 percent for foreign life insurance
companies, and
170.9 percent for foreign property and
liability insurance companies.
.02 DOMESTIC INVESTMENT
YIELDS FOR 2003. The Secretary is
required to prescribe separate domestic in-
vestment yields for foreign life insurance
companies and for foreign property and
liability insurance companies. For the first
taxable year beginning after December 31,
2002, the relevant domestic investment
yields are:
6.8 percent for foreign life insurance
companies, and
5.0 percent for foreign property and li-
ability insurance companies.
.03 SOURCE OF DATA FOR 2003.
The section 842(b) percentages to be used
for the 2003 tax year are based on tax re-
turn data following the same methodology
used for the 2002 year.
SECTION 3. APPLICATION-
ESTIMATED TAXES
To compute estimated tax and the in-
stallment payments of estimated tax due
for taxable years beginning after Decem-
ber 31, 2002, a foreign insurance com-
pany must compute its estimated tax pay-
ments by adding to its income other than
net investment income the greater of (i) its
net investment income as determined un-
der section 842(b)(5), that is actually ef-
fectively connected with the conduct of a
trade or business within the United States
for the relevant period, or (ii) the mini-
mum effectively connected net investment
income under section 842(b) that would re-
sult from using the most recently available
domestic asset/liability percentage and do-
mestic investment yield. Thus, for install-
ment payments due after the publication of
this revenue procedure, the domestic as-
set/liability percentages and the domestic
investment yields provided in this revenue
procedure must be used to compute the
minimum effectively connected net invest-
ment income. However, if the due date of
an installment is less than 20 days after the
date this revenue procedure is published
in the Internal Revenue Bulletin, the as-
set/liability percentages and domestic in-
vestment yields provided in Rev. Proc.
2003–70 may be used to compute the mini-
mum effectively connected net investment
income for such installment. For further
guidance in computing estimated tax, see
Notice 89–96.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for
taxable years beginning after December
31, 2002.
SECTION 5. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Garrett D. Gregory of the
Office of Associate Chief Counsel (In-
ternational). For further information
regarding this revenue procedure, con-
tact Garrett D. Gregory at (202) 622–3870
(not a toll-free call), or write to the Internal
Revenue Service, Office of the Associate
Chief Counsel (International), 1111 Con-
stitution Avenue, NW, Washington, DC
20224, Attention: CC:INTL:Br5, Room
4554.
2004–34 I.R.B.343August 23, 2004

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Deemed IRAs in Governmental
Plans/Qualified Nonbank
Trustee Rules
REG–101447–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulema
king
by cross-reference to temporary r
egula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9142) relating to qualification of
governmental units as qualified nonbank
trustees for deemed IRAs under section
408(q). The text of those regulations also
serves as the text of these proposed regu-
lations.
DATES: Written or electronic comments
must be received by October 20, 2004.
ADDRESSES: The public may sub-
mit comments in three ways. Send
submissions to:CC:PA:LPD:PR
(REG–101447–04), room 5203, Inter-
nal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–101447–04),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or send electronically, via
the IRS Internet site atwww.irs.gov/regs
or via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–101447–04).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Linda L. Conway, (202)
622–6090; concerning submissions
of comments, Treena Garrett, (202)
622–3401 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
The temporary regulations in this issue
of the Bulletin amend 26 CFR part 1 relat-
ing to section 408(a). The temporary reg-
ulations set forth special rules for a gov-
ernmental unit that maintains a plan qual-
ified under section 401(a), 403(a), 403(b)
or 457 to qualify as a nonbank trustee for
deemed IRAs under section 408(q). The
text of those regulations also serves as the
text of these proposed regulations. The
preamble of the temporary regulations ex-
plains the amendments and these proposed
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and because the proposed regulations do
not impose a collection of information by
small entities, the provisions of the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
do not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request comments
on the clarity of the proposed rule and how
it may be made easier to understand. All
comments will be available for public in-
spection and copying. A public hearing
will be scheduled if requested in writing
by any person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.
Drafting Information
The princip
al author of these regula-
tions is Li
nda L. Conway, Office of Assis-
tant Chief
Counsel (Tax Exempt & Gov-
ernment En
tities). However, other person-
nel from th
e IRS and Treasury Department
particip
ated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 1.408–2(e)(8)T is added to
read as follows:
§1.408–2 - Special rules for governmental
entities.
[The text of proposed §1.408–2 para-
graph (e)(8) is the same as the text of
§1.408–2(e)(8)T published elsewhere in
this issue of the Bulletin].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 21, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 22, 2004, 69 F.R. 43786)
August 23, 20043442004–34 I.R.B.

Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2004-63
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individu-
als have been disbarred from practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Banister, Joseph R.San Jose, CACPAJune 25, 2004
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Stukes, Donald A.Pound Ridge, NYCPAMay 13, 2004
to
May 11, 2005
Moore, EarlRiverview, FLCPAMarch 26, 2004
to
March 24, 2006
2004–34 I.R.B.345August 23, 2004

Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent, or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Bell, Don W.Grand Junction, COEnrolled AgentIndefinite
from
April 1, 2004
Lentz, Carole A.Mastic, NYEnrolled AgentIndefinite
from
April 23, 2004
Cummiskey Jr., Edward R. Warwick, NYEnrolled AgentIndefinite
from
April 23, 2004
Goble, Dennis R.Valparaiso, INCPAIndefinite
from
April 26, 2004
Grant, Elaine C.Woodway, WAEnrolled AgentMay 1, 2004
to
October 31, 2004
Rivera, Eduardo M.Torrence, CAAttorneyMay 1, 2004
to
October 29, 2006
Masengale, Thomas J.Indianapolis, INEnrolled AgentIndefinite
from
May 1, 2004
Cohick, Jeffrey S.Newville, PAEnrolled AgentMay 1, 2004
to
October 30, 2004
Bach, Royce E.Deer Park, TXEnrolled AgentIndefinite
from
May 27, 2004
McMillin, JuanellAustin, TXEnrolled AgentIndefinite
from
May 28, 2004
Silva, Hesmeregildo V.Livermore, CAEnrolled AgentIndefinite
from
May 28, 2004
Grossman, RichardDurham, NCAttorneyIndefinite
from
June 1, 2004
August 23, 20043462004–34 I.R.B.

NameAddressDesignationDate of Suspension
Schnieders, Joseph A.St. Louis, MOEnrolled AgentIndefinite
from
June 1, 2004
Rahn, Miriam C.Hutchinson, MNEnrolled AgentIndefinite
from
June 8, 2004
Tarantur, Dale B.Glenview, ILCPAIndefinite
from
June 15, 2004
Derby, MarkWest Newton, MACPAIndefinite
from
June 15, 2004
Miller, Winfred J.Harrisonburg, VACPAIndefinite
from
June 30, 2004
Croom, John A.Austin, TXCPAIndefinite
from
July 1, 2004
Dion, PaulMiddletown, RICPAIndefinite
from
July 8, 2004
Todd, Debra R.Leander, TXEnrolled AgentIndefinite
from
August 30, 2004
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Somerville, Sally L.Havre de Grace, MDAttorneyIndefinite
from
May 3, 2004
Simon, Laurence M.Englishtown, NJCPAIndefinite
from
May 10, 2004
Taylor, Joelle T.Carolina Beach, NCCPAIndefinite
from
May 10, 2004
2004–34 I.R.B.347August 23, 2004

NameAddressDesignationDate of Suspension
Becker, Joseph C.Austin, TXCPAIndefinite
from
May 10, 2004
Maffongelli Jr., JosephMontclair, NJAttorneyIndefinite
from
May 10, 2004
Lence, John A.Kalispell, MTCPAIndefinite
from
May 21, 2004
McWade, Kenneth W.Kaliua, HIAttorneyIndefinite
from
June 9, 2004
Sims, William A.Sausalito, CAAttorneyIndefinite
from
June 9, 2004
Sommer, Peter J.Baltimore, MDAttorneyIndefinite
from
June 21, 2004
Eisenberg, Alan D.Whitefish Bay, WIAttorneyIndefinite
from
June 21, 2004
Litwin, Martin E.Highland Park, ILAttorneyIndefinite
from
June 21, 2004
Kiernat, Bruce E.St. Paul, MNAttorneyIndefinite
from
July 1, 2004
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Resignation
Murphy, Claire A.Viera, FLMay 10, 2004
Murphy, John W.Viera, FLMay 10, 2004
August 23, 20043482004–34 I.R.B.

Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Clifton, Michael J.Augusta, KSCPAMay 12, 2004
Flaherty, Patrick J.Traverse City, MICPAMay 19, 2004
Monroy, FrancesPetaluma, CAEnrolled AgentMay 27, 2004
Pearson, Michael N.Houston, TXEnrolled AgentJune 7, 2004
2004–34 I.R.B.349August 23, 2004

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
August 23, 2004i2004–34 I.R.B.

Numerical Finding List
1
Bulletins 2004–27 through 2004–34
Announcements:
2004-55, 2004-27 I.R.B.15
2004-56, 2004-28 I.R.B.41
2004-57, 2004-27 I.R.B.15
2004-58, 2004-29 I.R.B.66
2004-59, 2004-30 I.R.B.94
2004-60, 2004-29 I.R.B.43
2004-61, 2004-29 I.R.B.67
2004-62, 2004-30 I.R.B.103
2004-63, 2004-31 I.R.B.149
2004-65, 2004-33 I.R.B.300
Notices:
2004-41, 2004-28 I.R.B.31
2004-43, 2004-27 I.R.B.10
2004-44, 2004-28 I.R.B.32
2004-45, 2004-28 I.R.B.33
2004-46, 2004-29 I.R.B.46
2004-47, 2004-29 I.R.B.48
2004-48, 2004-30 I.R.B.88
2004-49, 2004-30 I.R.B.88
2004-50, 2004-33 I.R.B.196
2004-51, 2004-30 I.R.B.89
2004-52, 2004-32 I.R.B.168
2004-53, 2004-33 I.R.B.209
2004-54, 2004-33 I.R.B.209
2004-55, 2004-34 I.R.B.319
Proposed Regulations:
REG-153841-02, 2004-31 I.R.B.145
REG-131486-03, 2004-28 I.R.B.36
REG-150562-03, 2004-32 I.R.B.175
REG-101447-04, 2004-34 I.R.B.344
REG-117307-04, 2004-28 I.R.B.39
Revenue Procedures:
2004-38, 2004-27 I.R.B.10
2004-39, 2004-29 I.R.B.49
2004-40, 2004-29 I.R.B.50
2004-41, 2004-30 I.R.B.90
2004-42, 2004-31 I.R.B.121
2004-43, 2004-31 I.R.B.124
2004-44, 2004-31 I.R.B.134
2004-45, 2004-31 I.R.B.140
2004-46, 2004-31 I.R.B.142
2004-47, 2004-32 I.R.B.169
2004-48, 2004-32 I.R.B.172
2004-49, 2004-33 I.R.B.210
2004-50, 2004-33 I.R.B.211
2004-51, 2004-33 I.R.B.294
2004-52, 2004-34 I.R.B.319
2004-53, 2004-34 I.R.B.320
Revenue Procedures— Continued:
2004-54, 2004-34 I.R.B.325
2004-55, 2004-34 I.R.B.343
Revenue Rulings:
2004-63, 2004-27 I.R.B.6
2004-64, 2004-27 I.R.B.7
2004-65, 2004-27 I.R.B.1
2004-66, 2004-27 I.R.B.4
2004-67, 2004-28 I.R.B.28
2004-68, 2004-31 I.R.B.118
2004-71, 2004-30 I.R.B.74
2004-72, 2004-30 I.R.B.77
2004-73, 2004-30 I.R.B.80
2004-74, 2004-30 I.R.B.84
2004-75, 2004-31 I.R.B.109
2004-76, 2004-31 I.R.B.111
2004-77, 2004-31 I.R.B.119
2004-78, 2004-31 I.R.B.108
2004-79, 2004-31 I.R.B.106
2004-80, 2004-32 I.R.B.164
2004-81, 2004-32 I.R.B.161
2004-83, 2004-32 I.R.B.157
2004-84, 2004-32 I.R.B.163
2004-85, 2004-33 I.R.B.189
2004-86, 2004-33 I.R.B.191
2004-87, 2004-32 I.R.B.154
2004-88, 2004-32 I.R.B.165
2004-89, 2004-34 I.R.B.301
2004-90, 2004-34 I.R.B.317
Tax Conventions:
2004-60, 2004-29 I.R.B.43
Treasury Decisions:
9131, 2004-27 I.R.B.2
9132, 2004-28 I.R.B.16
9133, 2004-28 I.R.B.25
9134, 2004-30 I.R.B.70
9135, 2004-30 I.R.B.69
9136, 2004-31 I.R.B.112
9138, 2004-32 I.R.B.160
9140, 2004-32 I.R.B.159
9137, 2004-34 I.R.B.308
9142, 2004-34 I.R.B.302
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin
2004–26, dated June 28, 2004.
2004–34 I.R.B.iiAugust 23, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–27 through 2004–34
Notices:
98-65
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
2001-50
Modified by
Rev. Proc. 2004-46, 2004-31 I.R.B.142
2004-2
Modified by
Notice 2004-50, 2004-33 I.R.B.196
Revenue Procedures:
79-61
Superseded by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
89-37
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
94-64
Superseded by
Rev. Proc. 2004-38, 2004-27 I.R.B.10
96-18
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
96-53
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
96-60
Superseded by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
2000-37
Modified by
Rev. Proc. 2004-51, 2004-33 I.R.B.294
2002-9
Modified and amplified by
Rev. Proc. 2004-41, 2004-30 I.R.B.90
2003-30
Superseded by
Rev. Proc. 2004-54, 2004-34 I.R.B.325
2003-52
Superseded by
Rev. Proc. 2004-50, 2004-33 I.R.B.211
2004-4
Modified by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
Revenue Rulings:
54-379
Superseded by
Rev. Rul. 2004-68, 2004-31 I.R.B.118
58-120
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
62-60
Amplified by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
70-58
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
73-354
Obsoleted by
Rev. Rul. 2004-76, 2004-31 I.R.B.111
78-371
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
79-64
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
80-7
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
80-366
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
81-100
Clarified and modified by
Rev. Rul. 2004-67, 2004-28 I.R.B.28
85-70
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
92-105
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin 2004–26, dated June 28, 2004.
August 23, 2004iii2004–34 I.R.B.
*U.S. Government Printing Office: 2004—304–778/60149