Internal Revenue Bulletin 2006-47 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
6-47
November 20, 200
6
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2006–57, page 911.
Qualified transportation fringes; smartcards and debit
cards.This ruling provides guidance to employers on the use
of smartcards and debit cards to provide qualified transporta-
tion fringes under section 132(f) of the Code.
T.D. 9292,
page 914.
Final regu
lations under section 704 of the Code provide that
allocatio
ns of creditable foreign tax expenditures cannot have
substanti
al economic effect, and, therefore, must be allocated
in accord
ance with the partners’ interests in the partnership.
The regul
ations provide a safe harbor whereby allocations of
creditab
le foreign tax expenditures will be deemed to be in
accordan
ce with the partners’ interests in the partnership. To
satisfy t
he safe harbor, allocations of creditable foreign tax
expendi
tures must be in proportion to the distributive shares
of incom
e to which the taxes relate.
REG–141901–05, page 947.
Proposed regulations under section 72 of the Code provide
guidance on taxation of the exchange of property for an an-
nuity contract. The regulations would apply the same rule to
exchanges for both private annuities and commercial annuities,
but the regulations would not affect charitable gift annuities. A
public hearing is scheduled for February 16, 2007.
REG–136806–06, page 950.
Proposed regulations under section 141 of the Code provide
guidance relating to the standards for treating payments in lieu
of taxes as generally applicable taxes for purposes of the pri-
vate security or payment test. A public hearing is scheduled
for February 13, 2007.
Notice 2006–101, page 930.
This notice updates Notice 2003–69, 2003–2 C.B. 851, which
contains a list of the United States tax treaties that meet the
requirements of section 1(h)(11)(C)(i)(II) of the Code. Notice
2003–69 amplified and superseded.
Rev. Proc. 2006–42, page 931.
This document provides rules for taxpayers to obtain automatic
approval to change certain elections to apportion interest ex-
pense and research and experimentation expense under sec-
tion 861 of the Code as a result of new rules under the section
199 domestic production activities deduction.
Rev. Proc. 2006–51, page 945.
This procedure amplifies Rev. Proc. 2005–70, 2005–47 I.R.B.
979, to provide the maximum amount of foreign earned in-
come, as adjusted for inflation, that may be excluded from
gross income under section 911 of the Code for taxable years
beginning in 2006. Rev. Proc. 2005–70 amplified.
ADMINISTRATIVE
Notice 2006–103, page 931.
Because Patriots’ Day falls on Monday, April 16, this notice pro-
vides individual taxpayers residing in Maine, Maryland, Massa-
chusetts, New Hampshire, New York, Vermont, and the District
of Columbia an additional day to file their federal income tax
returns and make their payments (until April 17, 2007). The
additional day applies to the payment of the first installment of
estimated tax for 2007.
(Continued on the next page)
Fi
nding Lists begin on page ii.

Rev. Proc. 2006–48, page 934.
Guidance is provided concerning when information shown on a
return in accordance with the applicable forms and instructions
will be adequate disclosure for purposes of reducing an under-
statement of income tax under sections 6662(d) and 6694(a)
of the Code.
Rev. Proc. 2006–49, page 936.
Optional standard mileage rates.This procedure an-
nounces 48.5 cents as the optional rate for deducting or
accounting for expenses for business use of an automobile,
14 cents as the optional rate for use of an automobile as a
charitable contribution, and 20 cents as the optional rate for
use of an automobile as a medical or moving expense for
2007. The procedure also provides rules for substantiating
the deductible expenses of using an automobile for busi-
ness, moving, medical, or charitable purposes. Rev. Proc.
2005–78 superseded.
Rev. Proc. 2006–50, page 944.
Substantiation of expenses of Native Alaskan whaling
captains.This document provides the procedures for the sub-
stantiation of whaling expenses of an individual recognized as
a whaling captain by the Alaska Eskimo Whaling Commission.
Announcement 2006–90, page 953.
This document contains corrections to a notice of proposed
rulemaking (REG–124152–06, 2006–36 I.R.B. 368) and no-
tice of public hearing relating to the determination of who is
considered to pay a foreign tax for purposes of sections 901
and 903 of the Code.
Announcement 2006–91, page 953.
This document contains corrections to final and temporary reg-
ulations (T.D. 9244, 2006–8 I.R.B. 463) under sections 358
and 1502 of the Code regarding the determination of the basis
of stock or securities received in exchange for, or with respect
to, stock or securities in certain transactions.
November 20, 20062006–47 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2006–47 I.R.B.November 20, 2006

Place missing child here.
November 20, 20062006–47 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 62.—Adjusted
Gross Income Defined
26 CFR 1.62–2: Reimbursements and other expense
allowance arrangements.
Rules are provided under which a reimbursement
or other expense allowance arrangement for the cost
of operating an automobile for business purposes will
satisfy the requirements of section 62(c) of the Code
as a business connection, substantiation, and return-
ing amounts in excess of expenses. See Rev. Proc.
2006-49, page 936.
Section 132.—Certain
Fringe Benefits
26 CFR 1.132–9: Qualified Transportation Fringes.
(Also: 3121(a)(20), 3306(b)(16), 3401(a)(19).)
Qualified transportation fringes;
smartcards and debit cards.This ruling
provides guidance to employers on the use
of smartcards and debit cards to provide
qualified transportation fringes under sec-
tion 132(f) of the Code.
Rev. Rul. 2006–57
ISSUE
Whether, under the facts described,
employer-provided transportation bene-
fits provided through smartcards, debit
or credit cards, or other electronic media
are excluded from gross income under
§§ 132(a)(5) and 132(f) of the Internal
Revenue Code and from wages for em-
ployment tax purposes.
FACTS
Situation 1. For 2006, Employer A pro-
vides to its employees transportation bene-
fits in an amount not exceeding $105 each
month. Transit system X provides smart-
cards that may be used by employers in
the metropolitan area served by X as a
mechanism to provide fare media for tran-
sit system X to employees. The smart-
cards are plastic cards containing a mem-
ory chip that stores certain information in-
cluding the serial number of the card and
the value of the fare media stored on the
card. The amount stored as fare media
on the smartcard is not authorized to be
used to purchase anything other than fare
media for X. A uses the smartcards as a
mechanism to provide transportation ben-
efits to its employees. A makes monthly
payments to X on behalf of its employ-
ees who participate in the transportation
benefit program, which X then electroni-
cally allocates to each employee’s smart-
card as instructed by A. A does not require
its employees to substantiate their use of
the smartcards.
Situation 2. For 2006, Employer B pro-
vides to its employees transportation bene-
fits in an amount not exceeding $105 each
month. Debit card provider P provides
debit cards that may be used by employ-
ers to provide transportation benefits to
their employees. The debit cards are re-
stricted for use only at merchant terminals
at points of sale at which only fare media
for transit system Y is sold. B uses the
terminal-restricted debit cards provided by
P as a mechanism to provide transporta-
tion benefits to its employees. B makes
monthly payments to P on behalf of its em-
ployees who participate in the transporta-
tion benefit program, which P then elec-
tronically allocatesto each employee’s ter-
minal-restricted debit card as instructed by
B. B does not require its employees to sub-
stantiate their use of the debit cards.
Situation 3. For 2006, Employer C pro-
vides to its employees transportation bene-
fits in an amount not exceeding $105 each
month. Debit card provider Q provides
debit cards that may be used by employ-
ers as a mechanism to provide transporta-
tion benefits to their employees. Q re-
stricts the use of the debit cards to mer-
chants that have been assigned a merchant
category code (MCC) indicating that the
merchant sells fare media. The cards are
restricted for use at merchants that have
been assigned MCCs indicating the mer-
chant sells fare media for some or all of
the following categories: local and sub-
urban commuter passenger transport; pas-
senger railway; bus lines, excluding char-
ters and tours; and transportation service
(not elsewhere classified). The merchant
may or may not sell other merchandise.
The MCCs were developed by S, which
is a debit/credit card network. S deter-
mines and updates the MCC assigned to
a particular merchant based on informa-
tion provided by the merchant. C uses the
MCC-restricted debit cards provided by Q
as a mechanism to provide transportation
benefits to its employees. A voucher or
similar item exchangeable only for a tran-
sit pass is not otherwise readily available
for purchase by C for direct distribution
to C’s employees within the meaning of
§ 132(f)(3).
For the first month an employee par-
ticipates in the transportation benefit pro-
gram, the employee pays for fare media
with after-tax amounts. The employee
then substantiates to C the amount of fare
media expenses incurred during the month
following reasonable substantiation pro-
cedures implemented by C as described
in § 1.132–9(b) Q/A–16(c). C then re-
mits to Q an amount equal to the amount
of substantiated fare media expenses for
the prior month, which Q then electroni-
cally allocates to the debit card assigned
to the employee. For subsequent months,
C reimburses the employee for fare me-
dia expenses incurred by the employee
by providing funds to Q to be allocated
to the employee’s debit card equal to the
amount of fare media expenses substanti-
ated under the following procedures (not
exceeding the monthly limit provided un-
der § 132(f)(2)). With respect to expenses
for which employees seek reimbursement
that were paid using the MCC-restricted
debit card, C receives periodic statements
providing information on the use of each
debit card, which include information on
the identity of the merchants at which
the debit card was used, and the date and
amount of the debit card transactions. In
addition, for the first month the debit card
was used, prior to providing reimburse-
ment, C requires that the employee certify
that the debit card was used only to pur-
chase fare media. For subsequent months,
C does not require employee certifica-
tions prior to reimbursement of recurring
expenses that match expenses previously
substantiated under the procedures de-
scribed above as to seller and time period
(e.g., for an employee who purchases a
transit pass on a regular basis from the
same seller). However, C requires a re-
certification at least annually from each
2006–47 I.R.B.911November 20, 2006

employee that the debit card was used only
to purchase fare media. C reviews the pe-
riodic statements in combination with the
employee certifications to determine the
transit pass expenses incurred by each
employee through the use of the debit
card and reimburses each employee for
the expenses that have been substantiated
by transmitting funds to Q to be allo-
cated electronicallyto each employee’s
debit card. With respect to fare media
expenses for which C’s employees seek
reimbursement that were not paid using
the MCC-restricted debit card, the em-
ployees substantiate the amount of the fare
media expenses incurred following rea-
sonable substantiation procedures imple-
mented by C as described in § 1.132–9(b)
Q/A–16(c). For example, an employee
receiving reimbursements of less than the
maximum monthly excludable amount of
transportation expenses may increase his
or her reimbursements for future months
by paying for increased fare media ex-
penses by some method other than the
use of the debit card and substantiating
the additional amount using reasonable
substantiation procedures as described in
§ 1.132–(9)(b) Q/A–16(c).
Situation 4. The facts are the same as
in Situation 3, except in the following re-
spects. Employer C provides employees
with MCC-restricted debit cards as soon
as they begin work. Prior to using the
MCC-restricted debit cards, C’s employ-
ees certify that the card will be used only
to purchase transit passes. In addition,
written on each debit card is the statement
thatthecardistobeusedonlyfortran-
sit passes, and, by using the card, the em-
ployee certifies that the card is being used
only to purchase transit passes. At no time
do C’s employees substantiate to C the
amount of fare media expenses that have
been incurred.
LAW
Section 61(a)(1) of the Code provides
that, except as otherwise provided in subti-
tle A, gross income includes compensation
for services, including fees, commissions,
fringe benefits, and similar items.
Section 132(a)(5) provides that any
fringe benefit that is a qualified transporta-
tion fringe is excluded from gross income.
Section 132(f)(1) provides that the term
“qualified transportation fringe” means
(1) transportation in a commuter highway
vehicle between home and work, (2) any
transit pass, and (3) qualified parking. The
amount of the fringe benefit which may be
excluded from gross income and wages for
2006islimitedto$105permonthforthe
aggregate of transportation in a commuter
highway vehicle and transit passes, and
$205 per month for qualified parking. See
§ 132(f)(2); Rev. Proc. 2005–70, 2005–47
I.R.B. 979, § 3.12.
Section 132(f)(5)(A) provides that a
transit pass is any pass, token, farecard,
voucher or similar item entitling a person
to transportation (or transportation at a
reduced price) if such transportation is on
mass transit facilities or is provided by
any person in the business of transporting
persons for compensation or hire in a com-
muter highway vehicle. See § 132(f)(5)(B)
for the definition of a commuter highway
vehicle.
Section 132(f)(3) provides that a qual-
ified transportation fringe includes a cash
reimbursement by an employer to an em-
ployee for transit benefits. However, a
qualified transportation fringe includes
a cash reimbursement by an employer
to an employee for a transit pass only
if a voucher or similar item that may be
exchanged only for a transit pass is not
readily available for direct distribution by
the employer to the employee.
Section 1.132–9(b) Q/A–16(b)(1) of
the Income Tax Regulations provides that
if a voucher or similar item is readily
available, the requirement that a voucher
or similar item be distributed in-kind by
the employer is satisfied if the voucher
is distributed by the employer or by an-
other person on behalf of the employer
(for example, if a transit operator credits
amounts to the employee’s fare card as a
result of payments made to the operator
by the employer).
Section 1.132–9(b) Q/A–16(b)(2) pro-
vides that a transit system voucher is an
instrument that may be purchased by em-
ployers from a voucher provider that is ac-
cepted by one or more mass transit oper-
ators in an area as fare media or in ex-
change for fare media. Under § 1.132–9(b)
Q/A–16(b)(3), a voucher provider is any
person in the trade or business of selling
transit system vouchers to employers, or
any transit system or transit system opera-
tor that sells vouchers to employers for the
purpose of direct distribution to employ-
ees.
Section 1.132–9(b) Q/A–16(b)(4) pro-
vides that a voucher or similar item is
readily available for direct distribution by
an employer to employees if and only if
the employer can obtain it from a voucher
provider that does not impose fare me-
dia charges greater than 1 percent of the
average annual value of the voucher for
a transit system, and does not impose
other restrictions causing the voucher not
to be considered readily available. See
§ 1.132–9(b) Q/A–16(b)(5) and (b)(6).
Section 1.132–9(b) Q/A–16(a) pro-
vides that the term qualified transportation
fringe includes cash reimbursement for
transportation in a commuter highway
vehicle, transit passes (if permitted), and
qualified parking, provided the reimburse-
ment is made under abona fidereimburse-
ment arrangement. A payment made be-
fore the date an expense has been incurred
or paid is not a reimbursement. In addi-
tion, abona fidereimbursement arrange-
ment does not include an arrangement
that is dependent solely on the employee
certifying in advance that the employee
will incur expenses at some future date.
Under § 1.132–9(b) Q/A–16(c), whether
a reimbursement is made under abona
fidereimbursement arrangement depends
upon the facts and circumstances. The
employer must implement reasonable pro-
cedures to ensure that the amount equal
to the reimbursement was incurred for
transportation in a commuter highway ve-
hicle, transit passes, or qualified parking.
Section 1.132–9(b) Q/A–16(d) provides
that reasonable reimbursement procedures
include the collection of receipts from
employees or obtaining employee certi-
fications in appropriate circumstances.
The regulations provide that obtaining an
employee’s certification is a reasonable
reimbursement procedure if receipts are
not provided by the seller in the ordinary
course of business, and if the employer
has no reason to doubt the employee’s
certification.
Section 1.132–9(b) Q/A–18 provides
that there are no employee substantiation
requirements if an employer distributes a
transit pass (including a voucher or similar
item) in-kind to the employer’s employ-
ees.
Federal Insurance Contributions Act
(FICA) taxes, Federal Unemployment Tax
November 20, 20069122006–47 I.R.B.

Act (FUTA) taxes, and Federal income tax
withholding are imposed on “wages.” See
§§ 3101, 3111, 3121(a), 3301, 3306(b),
3402, and 3401(a). Section 3121(a) de-
fines “wages” for FICA purposes as all
remuneration for employment including
the cash value of all remuneration (in-
cluding benefits) paid in any medium
other than cash, with certain specific ex-
ceptions. Sections 3306(b) and 3401(a)
define “wages” similarly for FUTA and
Federal income tax withholding purposes
respectively.
Section 3121(a)(20) excepts from the
definition of “wages” for FICA tax pur-
poses any benefit provided to or on behalf
of an employee if, at the time such benefit
is provided, it is reasonable to believe that
the employee will be able to exclude such
benefit from gross income under § 132.
Sections 3306(b)(16) and 3401(a)(19) pro-
vide similar exclusions for FUTA and Fed-
eral income tax withholding purposes re-
spectively.
ANALYSIS
In Situation 1, the fare media value
stored on the smartcards is useable only
as fare media for transit system X. Thus,
the smartcard qualifies as a transit system
voucher under § 1.132–9(b) Q/A–16(b)(2)
distributed in-kind by A to its employees.
In addition, the amount allocated to each
employee’s smartcard is within the amount
specified by § 132(f)(2)(A). Accordingly,
the value of the fare media provided by
A to its employees through the use of the
smartcards is excluded from the employ-
ees’ gross income as a qualified transporta-
tion fringe benefit within the meaning of
§ 132(a)(5) without requiring the employ-
ees to substantiate their use of the smart-
cards.
In Situation 2, the terminal-restricted
debit card provided by B to its employees
qualifies as a transit system voucher un-
der § 1.132–9(b) Q/A–16(b)(2) because it
can be used only at merchant terminals at
points of sale at which only fare media for
transit system Y can be purchased. In ad-
dition, the amount allocated to each em-
ployee’s debit card each month is within
the amount specified by § 132(f)(2)(A).
Therefore, the valueof the fare media pro-
videdbyBtoitsemployeesthroughthe
use of the terminal-restricted debit cards
is excluded from its employees’ gross in-
come as a qualified transportation fringe
benefit within the meaning of § 132(a)(5)
without requiring the employees to sub-
stantiate their use of the debit cards.
In Situation 3, the debit card provided
by C to its employees does not qualify as a
transit system voucher under § 1.132–9(b)
Q/A–16(b)(2) because it is possible that a
MCC-restricted debit card may be used to
purchase items other than transit passes. A
merchant properly classified to accept the
debit card as payment may sell merchan-
dise other than transit passes, and there is
nothing in the debit card technology which
prevents its use to purchase things other
than transit passes.
Because a voucher or similar item ex-
changeable only for fare media is not
readily available to C for direct distribu-
tion to its employees, § 132(f)(3) permits
C to provide qualified transportation ben-
efits in the form of cash reimbursements
for transit pass expenses, but only if the
reimbursements are provided under a
bona fidereimbursement arrangement.
With respect to expenses incurred during
the first month an employee participates
in the transportation benefit program,
and with respect to expenses not paid
using the MCC-restricted debit card, C
has implemented reasonable substantia-
tion procedures as described in § 1.132–9
Q/A–16(c). With respect to expenses paid
using the MCC-restricted debit card, C
receives periodic statements providing
information on the purchases made with
the debit card, including the identity of
the seller, and the date and amount of
the debit card transactions. In addition,
for the first month an employee uses the
MCC-restricted debitcard, C requires that
the employee certify that the card was used
only to purchase fare media. C does not
require monthly certifications with respect
to recurring items if the item described
in the periodic statement matches with
respect to seller and time period items that
have previously been substantiated as tran-
sit pass expenses. However, C requires at
least an annual recertification from each
employee that the debit card was used only
to purchase fare media. Prior to remitting
an amount to Q as reimbursement for
transit pass expenses for an employee, C
examines the periodic statements describ-
ing debit card transactions in combination
with employee certifications to determine
the transit pass expenses incurred by each
employee through the use of the debit
card. C provides funds to Q to be electron-
ically allocated to the debit cards only as
reimbursements for substantiated transit
pass expenses that have been incurred and
substantiated in this fashion. Based on the
facts and circumstances, C has established
abona fidereimbursement arrangement
for transit passes within the meaning of
§ 1.132–9 Q/A–16(c). In addition, the
amount of the monthly benefit is within
the amount specified by § 132(f)(2)(A).
Therefore, the value of the fare media
provided by C to its employees through
the use of the MCC-restricted debit cards
is excluded from its employees’ gross in-
come as a qualified transportation fringe
benefit within the meaning of § 132(a)(5).
In Situation 4, as discussed above,
the MCC-restricted debit card does not
qualify as a transit system voucher under
§ 1.132–9(b) Q/A–16(b)(2). Because a
voucher or similar item is not otherwise
readily available to C, C may provide qual-
ified transportation fringe benefits in the
form of cash reimbursements for transit
passes under abona fidereimbursement
arrangement. C provides the debit cards in
advance, requiring its employees to certify
that they will use the cards exclusively to
purchase transit passes. This arrangement
does not constitute abona fidereimburse-
ment arrangement under § 1.132–9(b)
Q/A–16(c) because it provides for ad-
vances rather than reimbursements and
because it relies solely on employee cer-
tifications provided before the expense is
incurred. Those certifications, standing
alone, do not provide the substantiation of
expenses incurred necessary for there to be
abona fidereimbursement arrangement.
Because C is providing restricted-use debit
cards that are not transit system vouch-
ers, and because C is not reimbursing its
employees for fare media expenses under
abona fidereimbursement arrangement,
the amounts C provides to its employees
through the use of the MCC-restricted
debit cards are included in its employees’
gross income and wages.
HOLDINGS
Situation 1. The value of the transit
pass benefits provided by A to its em-
ployees through the use of the smartcards
is excluded from gross income under
2006–47 I.R.B.913November 20, 2006

§ 132(a)(5) and from wages for employ-
ment tax purposes.
Situation 2. The value of the transit pass
benefits provided by B to its employees
through the use of the terminal-restricted
debit card is excluded from gross income
under § 132(a)(5) and from wages for em-
ployment tax purposes.
Situation 3. The value of the transit
pass benefits provided by C to its employ-
ees through the use of the MCC-restricted
debit card is excluded from gross income
under § 132(a)(5) and from wages for em-
ployment tax purposes.
Situation 4. The amounts provided
by C to its employees through the use
of the MCC-restricted debit cards are
not excluded from gross income under
§ 132(a)(5) and are wages for employment
tax purposes.
EFFECTIVE DATE
This revenue ruling is effective January
1, 2008. Employers and employees may
rely on this revenue ruling with respect to
transactions occurring prior to January 1,
2008. As discussed in Notice 2004–46,
2004–2 C.B. 46, if a debit card qualifies
as a voucher or similar item, then cash
reimbursement for transit pass expenses
would be precluded if such a debit card
were readily available. The Treasury De-
partment and the Internal Revenue Service
will continue to review this issue, includ-
ing the circumstances under which a termi-
nal-restricted debit card may be considered
not readily available because of implemen-
tation charges or other restrictions within
the meaning of § 1.132–9(b) Q/A–16(b)(6)
that effectively prevent the employer from
obtaining the debit card for distribution to
employees.
As terminal-restricted debit cards ap-
pear not to be widely used at present in ar-
eas where cash reimbursement is permissi-
ble, the Treasury Department and the Inter-
nal Revenue Service lack sufficient factual
context to develop guidance at this time
regarding when terminal-restricted debit
cards are readily available. As use of ter-
minal-restricted debit cards increases in
cash-reimbursement areas, we intend to is-
sue guidance clarifying under what situa-
tions the cards are considered to be read-
ily available and thus preclude cash re-
imbursement for transit benefits. Until
such guidance is issued, the Service will
not challenge the ability of employers to
provide qualified transportation fringes in
the form of cash reimbursement for transit
passes when the only available voucher or
similar item is a terminal-restricted debit
card.
DRAFTING INFORMATION
The principal authors of this rev-
enue ruling are David R. Ford and
John Richards of the Office of Associate
Chief Counsel (Tax Exempt & Govern-
ment Entities). For further information
regarding this revenue ruling, contact
John Richards at (202) 622–6040 (not a
toll-free call).
Section 162.—Trade or
Business Expenses
26 CFR 1.162–17: Reporting and substantiation of
certain business expenses of employees.
Rules are provided for substantiating the amount
of a deduction for an expense for business use of an
automobile. See Rev. Proc. 2006-49, page 936.
Section 170.—Charitable,
etc., Contributions and Gifts
26 CFR 1.170A–1: Charitable, etc., contributions
and gifts; allowance of deduction.
Rules are provided for substantiating the amount
of a deduction for an expense for charitable use of an
automobile. See Rev. Proc. 2006-49, page 936.
Section 213.—Medical,
Dental, etc., Expenses
26 CFR 1.213–1: Medical, dental, etc., expenses.
Rules are provided for substantiating the amount
of a deduction for an expense for use of an automobile
to obtain medical services. See Rev. Proc. 2006-49,
page 936.
Section 217.—Moving
Expenses
26 CFR 1.217–2: Moving expenses.
Rules are provided for substantiating the amount
of a deduction for an expense for use of an automobile
as part of a move. See Rev. Proc. 2006-49, page 936.
Section 274.—Disallowance
of Certain Entertainment,
etc., Expense
s
26 CFR 1.274–5
: Substantiation requirements.
Rules are prov
ided for substantiating the amount
of ordinary an
d necessary business expenses of an
employee for
automobile expenses when a payor pro-
vides a milea
ge allowance for the expenses. Rules are
also provide
d for employees and self-employed in-
dividuals to
use in substantiating a trade or business
deduction fo
r automobile expenses. See Rev. Proc.
2006-49, pa
ge 936.
Section 704.—Partner’s
Distributive Share
26 CFR 1.704–1: Partner’s distributive share.
T.D. 9292
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Partner’s Distributive Share:
Foreign Tax Expenditures
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations regarding the allocation
of creditable foreign tax expenditures by
partnerships. The regulations are neces-
sary to clarify the application of section
704(b) to allocations of creditable foreign
tax expenditures. Thefinal regulations
affect partnerships and their partners.
DATES:Effective Date:These regulations
are effective October 19, 2006.
Applicability Date:These regulations
apply to partnership taxable years begin-
ning on or after October 19, 2006.
FOR FURTHER INFORMATION
CONTACT: Timothy J. Leska at
202–622–3050 or Michael I. Gilman at
202–622–3850 (not toll-free numbers).
November 20, 20069142006–47 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR part 1 under section 704 of the In-
ternal Revenue Code (Code). On April 21,
2004, temporary regulations (T.D. 9121,
2004–1 C.B. 903) relating to the proper
allocation of partnership expenditures for
foreigntaxeswerepublishedintheFed-
eral Register(69 FR 21405). A notice of
proposed rulemaking (REG–139792–02,
2004–1 C.B. 926) cross-referencing the
temporary regulations was also published
in theFederal Register(69 FR 21454) on
April 21, 2004. A public hearing was re-
quested and held on September 14, 2004.
The IRS received a number of written
comments responding to the temporary
and proposed regulations. After consid-
eration of the comments, the proposed
regulations are adopted as revised by this
Treasury decision and the corresponding
temporary regulations are removed.
Section 704(a) provides that a partner’s
distributive share of income, gain, loss, de-
duction, or credit shall, except as otherwise
provided, be determined by the partnership
agreement. Section 704(b) provides that
a partner’s distributive share of income,
gain, loss, deduction, or credit (or item
thereof) shall be determined in accordance
with the partner’s interest in the partner-
ship (determined by taking into account all
facts and circumstances) if the allocation
to a partner under the partnership agree-
ment of income, gain, loss, deduction, or
credit (or item thereof) does not have sub-
stantial economic effect. Thus, in order to
be respected, partnership allocations either
must have substantial economic effect or
must be in accordance with the partners’
interests in the partnership.
In general, for an allocation to have
economic effect, it must be consistent with
the underlying economic arrangement of
the partners. This means that, in the event
there is an economic burden or benefit that
corresponds to the allocation, the partner
to whom the allocation is made must re-
ceive the economic benefit or bear such
economic burden. See §1.704–1(b)(2)(ii).
As a general rule, the economic effect of
an allocation (or allocations) is substantial
if there is a reasonable possibility that
the allocation (or allocations) will affect
substantially the dollar amounts to be re-
ceived, independent of tax consequences.
See §1.704–1(b)(2)(iii). Even if the al-
location affects substantially the dollar
amounts, the economic effect of the allo-
cation (or allocations) is not substantial if,
at the time the allocation (or allocations)
becomes part of the partnership agreement,
(1) the after-tax economic consequences
of at least one partner may, in present
value terms, be enhanced compared to
such consequences if the allocation (or
allocations) were not contained in the
partnership agreement, and (2) there is a
strong likelihood that the after-tax eco-
nomic consequences of no partner will, in
present value terms, be substantially di-
minished compared to such consequences
if the allocation (or allocations) were not
contained in the partnership agreement.
See §1.704–1(b)(2)(iii).
The temporary and proposed regu-
lations clarified the application of the
regulations under section 704 to foreign
taxes paid or accrued by a partnership and
eligible for credit under section 901(a)
(creditable foreign tax expenditures or
CFTEs). While allocations of CFTEs that
are disproportionate to the related income
may have economic effect in that they
reduce the recipient partner’s capital ac-
count and affect the amount the recipient
partner is entitled to receive on liquida-
tion, this effect will almost certainly not
be substantial after taking U.S. tax con-
sequences into account. For example,
the after-tax economic consequences to
a foreign or other tax-indifferent partner
whose share of the tax expense is borne
by a U.S. taxable partner will be enhanced
by reason of the allocation, and there is
a strong likelihood that the after-tax eco-
nomic consequences to a U.S. partner will
not be substantially diminished since the
allocation of the CFTE increases the al-
lowable foreign tax credit and results in a
dollar-for-dollar reduction in the U.S. tax
the partner would otherwise owe.
The temporary and proposed regula-
tions were based on the assumption that
partnerships specially allocate foreign
taxes where the recipient partner would
elect to claim the CFTE as a credit, rather
than as a deduction. As a matter of ad-
ministrative convenience, the regulations
applied to all allocations of CFTEs even
though, in rare instances, a partner may
instead elect to deduct the CFTEs. Thus,
the temporary and proposed regulations
provided that partnership allocations of
CFTEs cannot have substantial economic
effect and, therefore, must be allocated in
accordance with the partners’ interests in
the partnership.
The temporary and proposed regula-
tions provided a safe harbor under which
partnership allocations of CFTEs will
be deemed to be in accordance with the
partners’ interests in the partnership. Un-
der this safe harbor,if the partnership
agreement satisfies the requirements of
§1.704–1(b)(2)(ii)(b)or(d) (capital ac-
count maintenance, liquidation accord-
ing to capital accounts, and either deficit
restoration obligations or qualified income
offsets), then an allocation of CFTEs that
is proportionate to a partner’s distributive
share of the partnership income to which
such taxes relate (including income al-
located pursuant to section 704(c)) will
be deemed to be in accordance with the
partners’ interests in the partnership. If the
allocation of CFTEs does not satisfy this
safe harbor, then the allocation of CFTEs
will be tested under the partners’ interests
in the partnership standard set forth in
§1.704–1(b)(3).
Summary of Comments and
Explanation of Provisions
These final regulations retain the provi-
sions of the proposed and temporary reg-
ulations excluding allocations of CFTEs
from the substantial economic effect safe
harbor of §1.704–1(b)(2), and provide
a safe harbor under which allocations of
CFTEs will be deemed to be in accordance
with the partners’ interests in the partner-
ship. Asprovidedinthetemporaryand
proposed regulations, the final regulations
provide that allocations of CFTEs must be
in proportion to the distributive shares of
income to which the CFTEs relate in order
to satisfy the safe harbor.
The final regulations provide that the
income to which a CFTE relates is the net
income in the CFTE category to which
the CFTE is allocated and apportioned. A
CFTE category is a category of net income
attributable to one or more activities of the
partnership. The net income in a CFTE
category is the net income determined for
U.S. federal income tax purposes (U.S. net
income) attributableto each separate activ-
ity of the partnership that is included in the
CFTE category. Income from separate ac-
2006–47 I.R.B.915November 20, 2006

tivities is included in the same CFTE cate-
gory only if the U.S. net income from the
activities is allocated among the partners
in the same proportions. For this purpose,
income from a divisible part of a single ac-
tivity that is shared in a different ratio than
other income from that activity is treated
as income from a separate activity. CFTEs
are allocated and apportionedtoCFTEcat-
egories in accordancewith §1.904–6 prin-
ciples, as modified by the final regulations.
Therefore, CFTEs generally are allocated
to a CFTE category if the income on which
the CFTE is imposed (the net income rec-
ognized for foreign tax purposes) is in the
CFTE category.
Accordingly, the safe harbor of the final
regulations requires a three-step process
to determine the distributive share of in-
come to which a CFTE relates. First, the
partnership must determine its CFTE cat-
egories. Second, the partnership must de-
termine the U.S. net income in each CFTE
category. Third, the partnership must al-
locate and apportion CFTEs to the CFTE
categories based on the net income in the
CFTE categories that is recognized for for-
eign tax purposes. To satisfy the safe har-
bor, the partnership must allocate CFTEs
among the partners in the same proportion
as the allocations of U.S. net income in the
applicable CFTE category.
Summary of Comments
A number of comments were received
on the temporary and proposed regula-
tions. The comments included requests
for clarification and recommendations re-
lating to the following: (i) the definition
of CFTEs, (ii) the CFTE categories, (iii)
the distributive share of income to which
a CFTE relates, (iv) the application of the
principles of §1.904–6, (v) the partners’
interests in the partnership, (vi) the ef-
fective date and transition rule and (vii)
certain other matters. The comments and
final regulations are discussed in detail
below.
A.Creditable Foreign Tax Expenditures
(CFTEs)
The temporary and proposed regula-
tions provide that a CFTE is a foreign tax
paid or accrued by a partnership that is el-
igible for a credit under section 901(a). A
qualifying domestic corporate shareholder
may claim a credit under section 901(a) for
taxes paid or accrued by a foreign corpo-
ration and deemed paid by the shareholder
under section 902 or 960 upon distribution
or inclusion of the associated earnings.
Several commentators requested guidance
concerning whether taxes deemed paid
under section 902 or 960 are subject to
these regulations. Although a domestic
corporation may be eligible to claim a
credit for deemed-paid taxes with respect
to stock of a foreign corporation it owns
indirectly through a partnership, any such
deemed-paid taxes are determined directly
by the corporate partner based on the
partner’s distributive share of dividend
income or inclusion. Such deemed-paid
taxes, therefore, are not partnership items
and are not taxes paid or accrued (or
deemed paid or accrued) by a partnership.
Accordingly, foreign taxes deemed paid
under section 902 or 960 are not subject to
these regulations.
The final regulations retain the defini-
tion of CFTE contained in the temporary
and proposed regulations. In response to
the comment, the final regulations clarify
that a CFTE does not include foreign taxes
deemed paid by a corporate partner under
section 902 or 960. The final regulations
also clarify that the regulations do not ap-
ply to foreign taxes paid or accrued by a
partner (foreign taxes for which the part-
ner has legal liability within the meaning
of §1.901–2(f)). Finally, the final regula-
tions clarify that a CFTE does include a
foreign tax paid or accrued by a partner-
ship that is eligible for a credit under an
applicable U.S. income tax treaty.
B.CFTE Categories
Examples in the temporary and pro-
posed regulations illustrated that the deter-
mination of the income to which a CFTE
relates must be made separately for cer-
tain categories of income when the part-
nership agreement provides for different
allocations of such income. Commenta-
tors requested additional guidance regard-
ing the relevant categories for purposes
of the safe harbor, including clarification
that the safe harbor does not require the
partnership to determine its CFTE cate-
gories by reference to section 904(d) cat-
egories. Subject to the requirements of
section 704(b) and other applicable provi-
sions of U.S. law, partners are free to al-
locate income in any manner they choose.
Although partners must assign their dis-
tributive shares of partnership items (along
with their other items of income and ex-
pense) to section 904(d) categories to com-
pute the applicable limitations on the for-
eign tax credit, the CFTE categories need
not be determined by reference to section
904(d) categories. These principles were
illustrated by the examples in the tempo-
rary and proposed regulations. However,
the IRS and the Treasury Department agree
with commentators that it is appropriate to
provide additional guidance in determin-
ing a partnership’s relevant categories of
income. Accordingly, the final regulations
provide additional guidance for purposes
of making this determination. The addi-
tional guidance is also intended to assist in
the determination of the distributive share
of income to which a foreign tax relates.
See the discussion at section C in this pre-
amble. Consistent with the comments, the
rules provided for in the final regulations
rely to the extent possible on U.S. tax prin-
ciples.
The final regulations clarify that the rel-
evant category of income is the CFTE cat-
egory, defined in the final regulations as
U.S. net income attributable to one or more
activities of the partnership. In general, the
final regulations provide that U.S. net in-
come from all of the partnership’s activi-
ties is treated as income in a single CFTE
category. This general rule does not ap-
ply, however, if the partnership agreement
provides for an allocation of U.S. net in-
come from one or more activities that dif-
fers from the allocation of U.S. net income
from other activities. In that case, U.S. net
income from each activity or group of ac-
tivities that is subject to a different alloca-
tion is treated as net income in a separate
CFTE category. For this purpose, income
from a divisible part of a single activity is
treated as income from a separate activity
if such income is shared in a different ratio
than other income from the activity.
Thus, if a partnership agreement al-
locates all partnership items in the same
manner, the partnership will have a single
CFTE category, regardless of the num-
ber of activities in which the partnership
is engaged. Conversely, a partnership
agreement that provides for different al-
locations of net income with respect to
one or more activities will have multiple
CFTE categories. For example, assume
a partnership (AB) with two partners is
November 20, 20069162006–47 I.R.B.

engaged in two activities and that the
partnership agreement provides that all
partnership items are shared 50–50. In
such a case, the partnership has a single
CFTE category. However, the partnership
would have two CFTE categories if the
items from one activity were shared 50–50
and the items from the second activity
were shared 80–20.
Different allocations of the partner-
ship’s U.S. net income from separate activ-
ities and, thus, multiple CFTE categories
may result if the partnership agreement
contains special allocations. For example,
assume that AB partnership agreement
allocates all items other than depreciation
50–50, and that deductions for deprecia-
tion are allocated 100 percent to one of the
partners. In such a case, the allocations
of U.S. net income from the two activities
will differ if AB’s deductions for depre-
ciation relate solely to one activity or if
the deductions relate disproportionately
to the activities. See paragraph (b)(5)
Example 22. A preferential allocation of
income will not result in multiple CFTE
categories if the allocation relates to all of
the partnership’s net income. For exam-
ple, assume partnership AB allocates $100
of gross income each year to one of the
partners and all remaining items 50–50. In
such a case, the special allocation of $100
of gross income affects the overall sharing
ratio of partnership net income, but does
not result in different sharing ratios with
respect to income from the partnership’s
two activities. Accordingly, the U.S. net
income attributable to the two activities is
included in a single CFTE category. See
paragraph (b)(5)Example 25.
Whether the partnership has different
sharing ratios with respect to income from
one or more activities, and therefore has
more than one CFTE category, depends on
the facts and circumstances. Therefore,
the final regulations provide that whether
a partnership has one or more activities,
and the scope of those activities, must be
determined in a reasonable manner tak-
ing into account all the facts and circum-
stances. In evaluating whether aggregat-
ing or disaggregating income from particu-
lar business or investment operations con-
stitutes a reasonable method of determin-
ing the scope of an activity, the principal
consideration is whether or not the pro-
posed determination has the effect of sep-
arating CFTEs from the related foreign in-
come. Accordingly, relevant facts and cir-
cumstances include whether the partner-
ship conducts business or investment op-
erations in more thanone geographic lo-
cation or through more than one entity or
branch, and whether certain types of in-
come are exempt from foreign tax or sub-
ject to preferential foreign tax treatment.
In addition, income from a divisible part of
a single activity is treated as income from
a separate activity if necessary to prevent
the separation of CFTEs from the related
foreign income. Finally, the final regula-
tions provide that the partnership’s activi-
ties must be determined consistently from
year to year absent a material change in
facts and circumstances.
C.Distributive Share of Income to Which
a CFTE Relates
The temporary and proposed regula-
tions required the allocation of a CFTE
to be in proportion to the partner’s dis-
tributive share of income to which it
relates. Several commentators requested
that the final regulations provide addi-
tional guidance in determining a partner’s
distributive share of income for purposes
of the safe harbor. Some commentators
believed that it was unclear whether allo-
cations of CFTEs must be proportionate
to allocations of income as determined
for U.S. tax purposes or as determined
under foreign law. One comment recom-
mended that, at least in cases where there
is a preferential allocation of income, in-
come as determined for U.S. tax purposes
should control. Other commentators re-
quested that the final regulations clarify
whether allocations of CFTEs must follow
allocations of gross or net income, and
that the final regulations clarify the effect
of special allocations and allocations of
separately stated items on allocations of
CFTEs under the safe harbor. Commenta-
tors also requested clarifications regarding
section 704(c) allocations, income allo-
cations that are deductible under foreign
law, guaranteed payments, and situations
in which certain partners’ allocable shares
of partnership income are excluded from
the foreign tax base. In response to the
comments, the final regulations provide
several clarifications regarding the deter-
mination of a partner’s distributive share
of income to which a CFTE relates.
1.Net income in a CFTE category
The final regulations clarify that the
net income in a CFTE category is the
net income for U.S. Federal income tax
purposes, determined by taking into ac-
count all items attributable to the relevant
activity or group of activities (or portion
thereof). The final regulations provide
that the items of gross income included in
a CFTE category must be determined in
a consistent manner under any reasonable
method taking into account all the facts
and circumstances. Expenses, losses or
other deductions generally must be allo-
cated and apportioned to gross income
included in a CFTE category in accor-
dance with the rules of §§1.861–8 and
1.861–8T.
Sections 1.861–8 and 1.861–8T re-
quire taxpayers to use special rules con-
tained in §§1.861–9 through 1.861–13T
and §1.861–17 to allocate and apportion
deductions for interest expense and re-
search and development (R&D) costs.
See §§1.861–8(e)(3) and 1.861–8T(e)(2).
Those provisions generally require tax-
payers to allocate and apportion such
deductions at the partner level and do not
provide rules for allocating and appor-
tioning the deductions at the partnership
level. See §§1.861–9T(e) and 1.861–17(f).
Therefore, the finalregulations permit a
partnership to allocate and apportion de-
ductions for interest and R&D costs for
purposes of determining net income in
a CFTE category under any reasonable
method, including but not limited to the
rules contained in §§1.861–9 through
1.861–13T and §1.861–17.
The final regulations clarify that in ap-
plying U.S. Federal income tax principles
to determine the net income attributable to
an activity of a branch, the only items of
gross income taken into account are items
of gross income that are recognized by the
branch for U.S. federal income tax pur-
poses. Therefore, a payment from one
branch to another does not increase the
gross income attributable to the activity of
the recipient. See paragraph (b)(5)Exam-
ple 24. Similarly, because U.S. tax prin-
ciples apply to determine net income at-
tributable to an activity of a branch, the
inter-branch payment does not reduce the
gross income of the payor. See paragraph
(b)(4)(viii)(c)(3)(B) and paragraph (b)(5)
Example 24.
2006–47 I.R.B.917November 20, 2006

The discussion in this preamble ad-
dresses the effect of the following factors
on the determination of net income in a
CFTE category: (a) section 704(c) alloca-
tions, (b) preferential income allocations
and guaranteed payments, and (c) the ex-
clusion of income of certain partners from
the foreign tax base.
(a)Section 704(c) allocations
Several commentators requested clari-
fication of when section 704(c) allocations
should be taken into account. Some com-
mentators believed that section 704(c) al-
locations should only be taken into account
where the built-in gain or loss is also rec-
ognized in the foreign jurisdiction. A num-
ber of commentators suggested further that
section 704(c) allocations should be taken
into account only upon the disposition of
the section 704(c) property, while other
commentators believed that section 704(c)
allocations should also be taken into ac-
count as the section 704(c) property is de-
preciated or amortized over time.
After consideration of these comments,
the final regulations retain the general
principle that all section 704(c) allocations
must be taken into account when determin-
ing net income in the relevant category.
The IRS and the Treasury Department
concluded that any attempt to trace the
impact of built-in gain (or loss) under for-
eign tax principles to corresponding items
under U.S. tax principles would be diffi-
cult to do and impractical to administer.
Because allocations of net income from a
CFTE category are allocations of the net
income recognized for U.S. tax purposes,
the IRS and the Treasury Department be-
lieve that all section 704(c) allocations
(including “reverse” section 704(c) allo-
cations and section 704(c) allocations that
are made prior to an asset’s disposition)
must be taken into account in determining
a partner’s distributive share of income.
Thus, the final regulations provide that the
net income in a CFTE category is the net
income for U.S. income tax purposes, de-
termined by taking into account all items
attributable to the relevant activity, includ-
ing, among other items, items allocated
pursuant to section 704(c). See paragraph
(b)(5)Example 26.
(b)Preferential income allocations and
guaranteed payments
Several commentators requested that
the final regulations provide guidance
regarding the treatment of preferential
income allocations and guaranteed pay-
ments when applying the safe harbor. In
particular, clarification was requested as to
the relevance of the deductibility of such
items under foreign law in determining
whether CFTEs are related to such items.
The final regulations generally provide
that the income to which a CFTE relates
is the net income in the CFTE category to
which the CFTE is allocated and appor-
tioned. However, if an allocation of part-
nership income is treated as a deductible
payment under foreign law, then no CFTEs
are related to that income because it is not
included in the foreign tax base. To reflect
this principle, the final regulations provide
that income attributable to an activity shall
not include an item of partnership income
to the extent the allocation of such item of
income (or payment thereof) to a partner
results in a deduction under foreign law.
By removing the income associated with
a preferential income allocation that is de-
ductible under foreign law from the net in-
come in a CFTE category, this provision of
the final regulations ensures that no CFTE
will be related to such income, which is not
included in the base upon which the cred-
itable foreign tax is imposed.
The principle that no CFTEs are re-
lated to income if the allocation of such
income results in a deduction under for-
eign law applies with equal force to cases
in which a guaranteed payment made by
a partnership to a partner is deductible by
the partnership under foreign law. Con-
versely, where a partner receives a guar-
anteed payment and the guaranteed pay-
ment is not deductible by the partnership
under foreign law (and thus does not re-
duce the foreign tax base), CFTEs should
relate to the guaranteed payment. Accord-
ingly, the final regulations contain two pro-
visions to reflect these principles. First,
under the final regulations, a guaranteed
payment is treated as income in a CFTE
category to the extent that the payment
is not deductible by the partnership under
foreign law. Second, the final regulations
provide that such a guaranteed payment is
treated as a distributive share of income for
purposes of the safe harbor. Consequently,
the final regulations provide that CFTEs
relate to income taken into account as a
guaranteed payment to the extent the pay-
ment is not deductible under foreign law,
and therefore CFTEs must be allocated to
the partner receiving the guaranteed pay-
ment.
One commentator requested guidance
concerning the source and character of
guaranteed payments for other U.S. tax
purposes. These issues are clearly impor-
tant, but they are beyond the scope of this
project and are not addressed in these final
regulations.
(c)Taxes imposed on certain partners’
income
A foreign jurisdiction may impose tax
with respect to partnership income that is
allocable to certain partners and not with
respect to partnership income allocable to
other partners. For example, as was the
case inVulcan Materials Co. v. Comm’r,
96 T.C. 410 (1991),aff’d in unpublished
opinion, 959 F.2d 973 (11
th
Cir. 1992),
nonacq. 1995–2 C.B. 2, a foreign jurisdic-
tion may impose tax solely with respect to
the nonresident partners’ shares of partner-
ship income. One commentator suggested
that the final regulations provide that in
these situations, allocations of CFTEs sat-
isfy the safe harbor if they are allocated to
the partner or partners whose income is in-
cluded in the foreign tax base. The final
regulations adopt thiscomment, and pro-
vide that income in a CFTE category does
not include net income that foreign law
would exclude from the foreign tax base
as a result of the status of the partner. By
removing such income from a CFTE cate-
gory, this provision of the final regulations
ensures that CFTEs will be related only to
income of those partners whose income is
included in the base upon which the cred-
itable foreign tax is impos.ed.
2.Distributive share of income
The final regulations provide that a
partner’s distributive share of income gen-
erally is the portion of the net income in
a CFTE category that is allocated to the
partner. Therefore, a partner’s distribu-
tive share of income is determined under
U.S. tax principles, taking into account
the modifications described in section C1
under “Net income in a CFTE category.”
November 20, 20069182006–47 I.R.B.

The final regulations provide a special
rule for cases in which more than one
partner receives positive income alloca-
tions (income in excess of expenses) from
a CFTE category and the aggregate of
such positive income allocations exceeds
the net income in the CFTE category
because one or more other partners is al-
located a net loss (expenses in excess of
income). Because in this situation the sum
of the positive income allocations from the
CFTE category exceeds 100 percent of the
net income in the category, an adjustment
to the safe harbor formula is required to
ensure that aggregate allocations of CFTEs
do not exceed 100 percent of the CFTEs in
the category. Accordingly, solely for pur-
poses of allocating CFTEs under the safe
harbor, the final regulations limit the dis-
tributive share of income of each partner
that receives a positive income allocation
to the partner’s positive income allocation
attributable to the CFTE category, divided
by the aggregate positive income alloca-
tions attributable to the CFTE category,
multiplied by the net income in the CFTE
category. For example, assume that the
partnership has $100 of net income ($130
of gross income and $30 of expenses) in
a CFTE category and that partner A is
allocated $65 of gross income, partner
B is allocated $45 of gross income and
partner C is allocated $20 of gross income
and $30 of expenses. In this case, solely
for purposes of the safe harbor, partner
A’s distributive share of income is $59
($65/$110 x $100) and partner B’s dis-
tributive share of income is $41 ($45/$110
x $100).
3.No net income
The final regulations contain a special
rule for cases in which CFTEs are allo-
cated and apportioned to a CFTE category
that does not have any net income for U.S.
tax purposes in the year the foreign taxes
are paid or accrued. In such cases, there
is no net income in the CFTE category to
which the CFTEs relate. In the absence of
a special rule, allocations of such CFTEs
among the partners would not fall within
the general safe harbor of the final regu-
lations and would be required to be allo-
cated in accordance withthe partners’ in-
terests in the partnership. To eliminate un-
certainty in this situation, the final regula-
tions include a rule that relates such CFTEs
to net income recognized for U.S. tax pur-
poses in other years or in other CFTE cate-
gories. (For rules relating to the allocation
and apportionment of CFTEs to a CFTE
category, see section D below.)
Under the final regulations, CFTEs al-
located and apportioned to a CFTE cate-
gory that has no net income for U.S. tax
purposes will be deemed to relate to the
aggregate net income (if any) recognized
by the partnership in that CFTE category
during the preceding three-year period (not
taking into account years in which there is
a net loss in the CFTE category for U.S.
tax purposes). Accordingly, the CFTEs
in these situations generally must be al-
located among the partners in the same
proportion as the allocations of such net
income for the prior three-year period to
satisfy the safe harbor. If the partnership
does not have net income in the applica-
ble CFTE category in either the current
year or any of the previous three taxable
years, the CFTEs must be allocated among
the partners in the same proportion that the
partnership reasonably expects to allocate
net income in the applicable CFTE cate-
gory over the succeeding three years. If
the partnership does not reasonably expect
to have net income in the applicable CFTE
category in the succeeding three years, the
CFTEs must be allocated among the part-
ners in the same proportion as the total
partnership net income for the year is al-
located. If the CFTE cannot be allocated
under any of the foregoing rules, it must
be allocated in proportion to the partners’
outstanding capital contributions.
D.Allocation and Apportionment of
CFTEs to CFTE Categories
The temporary and proposed regula-
tions provided that the income to which a
CFTE relates is determined in accordance
with the principles of §1.904–6. Section
1.904–6, which contains rules for allocat-
ing and apportioning foreign taxes to the
categories of income described in section
904(d), provides generally that a foreign
tax is related to income if the income is in-
cluded in the base upon which the foreign
tax is imposed. Section 1.904–6(a)(1)(ii)
contains special rules for apportioning
taxes among categories of income when
the income on which the foreign tax is
imposed includes income in more than
one category. It also provides special rules
for allocating a foreign tax that is imposed
on an item that would be income under
U.S. tax principles in another year (timing
difference) or an item that does not con-
stitute income under U.S. tax principles
(base differences).
A number of comments were received
requesting clarification of the §1.904–6
principles that apply for purposes of these
regulations. In particular, commentators
requested guidance concerning the ap-
plicability of the related party interest
expense rule in §1.904–6(a)(1)(ii), tim-
ing and base differences, and inter-branch
payments.
The final regulations retain the rule
that the determination of the income to
which a CFTE relates is made in accor-
dance with the principles of §1.904–6.
In response to the comments, however,
the final regulations contain several clar-
ifications and modifications regarding
how the principles of §1.904–6 apply in
allocating foreign taxes to CFTE cate-
gories. The final regulations clarify that
in applying §1.904–6 for purposes of the
safe harbor, the relevant categories are
the CFTE categories determined under
the rules described in section B in this
preamble. Therefore, the final regulations
clarify that application of the principles of
§1.904–6 requires a CFTE to be allocated
to a CFTE category if the net income on
which the tax is imposed (the net income
recognized for foreign tax purposes) is in
the CFTE category. The final regulations
also provide guidance on (a) the appor-
tionment rule in §1.904–6(a)(1)(ii), (b) the
rules for timing differences, (c) the rules
for base differences and (d) the treatment
of inter-branch payments.
1.Apportionment of CFTEs
Section 1.904–6(a)(1)(ii) provides that
where foreign taxes are imposed on in-
come that relates to more than one separate
category, the foreign taxes must be appor-
tioned among the separate categoriespro
ratabased on the amount of net income in
each category. Subject to a special rule for
related party interest expense, the net in-
come in each category generally is deter-
mined under foreign law. If foreign law
does not provide rules for the allocation
and apportionment of expenses, losses or
other deductions to a particular category
of income, then such items must be allo-
2006–47 I.R.B.919November 20, 2006

cated and apportioned in accordance with
the rules of §§1.861–8 through 1.861–14T.
Commentators requested clarifica-
tion that the apportionment rule in
§1.904–6(a)(1)(ii), which apportions for-
eign taxes among categories based on
relative amounts of net income as de-
termined under foreign law, applies for
purposes of apportioning taxes among
the categories of income created by the
partnership agreement. Commentators
recommended that the related party in-
terestexpenserulebedisregardedfor
purposes of the apportionment rule.
In response to these comments, the fi-
nal regulations clarify that the principles
of §1.904–6(a)(1)(ii) require a taxpayer
to apportion foreign taxes among the
CFTE categories based on the relative
amounts of net income as determined un-
der foreign law in each CFTE category. In
addition, the final regulations modify the
apportionment rule in two respects. See
§1.704–(b)(4)(viii)(d)(1).
The final regulations adopt the rec-
ommendation to disregard the related
party interest expense rule contained in
§1.904–6(a)(1)(ii) for purposes of appor-
tioning taxes among the CFTE categories
on the basis of foreign net income. The
IRS and the Treasury Department agree
that this rule, which coordinates the char-
acterization of taxes and income for sec-
tion 904(d) purposes, is not relevant for
purposes of apportioning CFTEs to CFTE
categories. Rather, the apportionment of
CFTEs is based on the partnership in-
come, as determined under foreign law, in
the CFTE categories, which may include
partnership items in one or more section
904(d) categories.
The final regulations also provide that if
foreign law does not provide rules for the
allocation and apportionment of expenses,
losses or other deductions allowed under
foreign law to a CFTE category of income,
then such expenses, losses or other deduc-
tions must be allocated and apportioned
to gross income as determined under for-
eign law in a manner that is consistent with
the allocation and apportionment of such
items for purposes of determining the net
income in the CFTE category for U.S. tax
purposes.
2.Timing differences
A timing difference arises when an item
subject to foreign tax is recognized as in-
come under U.S. tax principles in a differ-
ent year. The temporary and proposed reg-
ulations did not contain a specific textual
rule regarding the application of the tim-
ing difference rule of §1.904–6(a)(1)(iv) in
the context of section 704(b). However,
the temporary and proposed regulations in-
cluded an example that involved a timing
difference (Example 27), which indicated
that a current year CFTE attributable to
an item of income recognized in the prior
year for U.S. tax purposes related to, and
thus must be allocated in accordance with,
the income allocated under the partnership
agreement in the prior year.
Upon further consideration, the IRS and
the Treasury Department have concluded
that relating foreign taxes paid or accrued
in one year to income recognized for U.S.
tax purposes in another year would be dif-
ficult for taxpayers to comply with and for
the IRS to administer. In many instances,
it would be difficult to identify accurately
the extent of timing differences and the
years in which such differences would be
reversed. Moreover, where income allo-
cations change from year to year, it of-
ten would be impossible for partnerships
to determine how the partners would share
related U.S. income in subsequent years.
Accordingly, the final regulations provide
for a more administrable rule that requires
the partnership to allocate a CFTE attrib-
utable to a timing difference among the
partners in the same proportions as the al-
locations of income recognized for U.S.
tax purposes in the relevant CFTE cate-
gory in the year such taxes are paid or ac-
crued. See paragraph (b)(5)Example 23
(reflecting modifications toExample 27in
the temporary and proposed regulations).
This approach should result in allocations
of CFTEs that are generally in proportion
to the partners’ distributive shares of U.S.
taxable income over time, and therefore is
consistent with the underlying purposes of
the foreign tax credit rules to mitigate dou-
ble taxation. See the discussion at sec-
tion E in this preamble under “Partners’
Interests in the Partnership” for cases in
which the partnership agreement allocates
CFTEs attributable to a timing difference
among the partners in proportion to al-
locations of U.S. income in an earlier or
later year when the income with respect to
whichtheforeigntaxisimposedisrecog-
nized for U.S. tax purposes.
In addition, the final regulations ex-
pressly incorporate the timing difference
rule of §1.904–6(a)(1)(iv). Therefore, a
CFTE attributable to a timing difference is
allocated to the CFTE category to which
the income would be assigned if the in-
come were recognized for U.S. tax pur-
poses in the year in which the foreign tax
is imposed.
3.Base differences
A base difference arises when an item
subject to foreign tax is not income under
U.S. tax principles. Several commentators
observed that the base difference rule un-
der §1.904–6(a)(1)(iv) provides little in-
dication of how a CFTE attributable to a
base difference should be allocated for pur-
poses of the safe harbor. The IRS and the
Treasury Department agree that this issue
should be clarified. In the absence of any
income to which such a CFTE relates, the
final regulations provide that a CFTE at-
tributable to a base difference is related to
the income recognized for U.S. tax pur-
poses in the relevant CFTE category in
the year such taxes are paid or accrued.
For this purpose, a CFTE attributable to
a base difference is allocated and appor-
tioned to the CFTE category that includes
the partnership items attributable to the ac-
tivity with respect to which the creditable
foreign tax is imposed. Thus, the final
regulations adopt similar rules for dealing
with timing and base differences. These
changes are intended to provide greater
certainty for taxpayers and simplify the ad-
ministration of the safe harbor.
4.Inter-branch transactions
Several commentators requested addi-
tional guidance regarding the application
of the final regulations to transactions be-
tween branches (including disregarded en-
tities owned by the partnership) that are
disregarded for U.S. tax purposes. In re-
sponse to this comment, the final regula-
tions provide that if a branch of the partner-
ship (including a disregarded entity owned
by the partnership) is required to include in
income under foreign law a payment (in-
ter-branch payment) it receives from the
partnership or another branch of the part-
nership, any CFTE imposed with respect
November 20, 20069202006–47 I.R.B.

to the payment relates to the income in the
CFTE category that includes the items at-
tributable to the recipient. In cases where
the partnership agreement results in more
than one CFTE category with respect to
the recipient, such tax is allocated to the
CFTE category that includes the items at-
tributable to the activity to which the in-
ter-branch payment relates. A similar rule
applies to payments received by the part-
nership from a branchof the partnership.
This rule is consistent with the timing and
base difference rules in the final regula-
tions because it associates foreign tax im-
posed on the recipient with net income of
the recipient as determined under U.S. tax
principles, notwithstanding differences in
U.S. and foreign tax rules. Like the timing
and base difference rules, this rule avoids
the need for complex tracing rules.
It is possible that this approach might
result in distortions of the effective for-
eign tax rates on the partners’ distributive
shares of income in certain cases. Never-
theless, the IRS and the Treasury Depart-
ment have concluded that imposing a re-
quirement to trace taxes imposed on the
recipient with respect to such inter-branch
payments to income recognized under U.S.
tax principles by the payor would be diffi-
cult for taxpayers to comply with and for
the IRS to administer.
Some commentators recommended that
at least in cases where the income alloca-
tions take such inter-branch payments into
account in determining the partners’ dis-
tributive shares of income, the allocation
of CFTEs should be respected if made in
proportion to income allocations that re-
flect such payments. The final regula-
tions do not adopt this comment, as the
approach suggested by these commenta-
tors would require taxpayers and the IRS
to identify the inter-branch payments and
relate such amounts to items of income
ofthepayorandtoCFTEsimposedon
the recipient to substantiate that CFTEs of
the payor and recipient were properly allo-
cated. The IRS and the Treasury Depart-
ment concluded that this approach would
be difficult to administer and was there-
fore ill-suited to inclusion in a safe harbor.
See the discussion at section E under “Part-
ners’ Interests in the Partnership” for cases
in which the partnership agreement allo-
cates partnership items of income to reflect
inter-branch payments.
E.Partners’ Interests in the Partnership
Some commentators suggested that
allocations of CFTEs that are not propor-
tionate to allocationsof the related income
(and therefore fail to satisfy the safe har-
bor) will nevertheless be valid as in ac-
cordance with the partners’ interests in the
partnership standard of §1.704–1(b)(3).
According to these commentators, the
partners’ interests in the partnership with
respect to a CFTE are conclusively de-
termined by the manner in which the
CFTE is allocated under the partnership
agreement. The IRS and the Treasury
Department believe that this view of the
partners’ interests in the partnership is
incorrect, particularly in the context of a
CFTE that is allocated to a partner who
can use the associated foreign tax credit.
In such a situation, the partner is relieved
of a corresponding amount of U.S. tax,
and thus does not bear the economic bur-
den of the CFTE. Because of this lack of
economic burden, the allocation of the
CFTE is meaningless in the determination
of the partners’ interests in the partnership
with respect to the CFTE and with respect
to any other partnership item that has a
material effect on the amount of CFTE
that would be allocated to a partner under
the safe harbor of the final regulations.
Consequently, the final regulations clarify
that in determining the partners’ interests
in the partnership with respect to an alloca-
tion of a partnership item, the allocation of
the CFTE itself must be disregarded. This
rule does not apply where the partners to
whom the taxes are allocated reasonably
expect to claim a deduction for such taxes
in determining their U.S. tax liabilities.
As indicated in the preamble to the tem-
porary regulations, the IRS and the Trea-
sury Department believe that only in un-
usual circumstances (such as where the
CFTEs are deducted and not credited) will
allocations that fail to satisfy the safe har-
bor be in accordance with the partners’ in-
terests in the partnership. As discussed in
this preamble, for administrative reasons,
the final regulations do not adopt a trac-
ing approach for timing differences or in-
ter-branch payments. Allocations of for-
eign taxes in such situations that are based
on a tracing approach may constitute an
unusual situation where the safe harbor is
not satisfied, but the allocations are in ac-
cordance with the partners’ interests in the
partnership.
When a CFTE is attributable to a timing
difference, the CFTE category to which the
CFTE is allocated may or may not have in-
come for U.S. tax purposes in the year the
foreign tax is paid or accrued. In either
case, allocations of such CFTEs that are
proportionate to allocations of the income
at the time such income is recognized for
U.S. tax purposes may not qualify for safe
harbor treatment, but nonetheless be in ac-
cordance with the partners’ interests in the
partnership.
Allocations of CFTEs imposed on the
payor of an inter-branch payment may fail
the safe harbor, but nonetheless be in ac-
cordance with the partners’ interests in the
partnership if the allocations of the CFTEs
are in the same proportions as the alloca-
tions of the income of the payor, other than
income that is eliminated from the foreign
tax base because the inter-branch payment
is deductible under foreign law. See para-
graph (b)(5)Example 24(iv). Similarly,
allocations of CFTEs imposed on the re-
cipient with respect to an inter-branch pay-
ment may fail the safe harbor, but nonethe-
less be in accordance with the partners’ in-
terests in the partnership, if such alloca-
tions are proportionate to the allocations of
income recognized for U.S. tax purposes
out of which the payment is made. See
paragraph (b)(5)Example 24(iii).
Several commentators also requested
guidance regarding whether a reallocation
of CFTEs will cause the IRS to reallo-
cate other partnership items so that the
partners’ ending capital account balances
will remain unchanged. If the reallocation
of the CFTEs causes the partners’ capital
accounts not to reflect their contemplated
economic arrangement, the partners may
need to reallocate other partnership items
to ensure the tax consequences of the
partnership allocations are consistent with
their contemplated economic arrange-
ment. Consistent with the principles of
the proposed and temporary regulations,
the final regulations clarify that the IRS
generally will not reallocate other partner-
ship items in the year in which a CFTE is
reallocated. See paragraph (b)(5)Example
25(ii). This treatment is also consistent
with the results arising from and approach
taken with respect to reallocations of other
items of income, gain, loss or deduction
that are not sustained under section 704(b).
2006–47 I.R.B.921November 20, 2006

The IRS and the Treasury Department be-
lieve the parties and not the government
should determine whatallocations should
be changed to reflect their economic ar-
rangement.
F.Effective Date and Transition Rule
The provisions of these final regula-
tions generally apply for partnership tax-
able years beginning on or after October
19, 2006. A transition rule is provided
for existing partnerships. Under the tran-
sition rule, if a partnership agreement was
entered into before April 21, 2004, then
the partnership may apply the provisions
of §1.704–1(b) as if the amendments made
by these final regulations had not occurred.
If the partnership agreement is materially
modified on or after April 21,2004, how-
ever, transition relief is no longer afforded,
and the rules of §1.704–1T(b)(4)(xi) or
these final regulations apply, depending
upon the date on which the material mod-
ification occurs and the tax year at issue.
For this purpose, a material modification
includes any change in ownership of the
partnership. This transition rule does not
apply if, as of April 20, 2004, persons that
are related to each other (within the mean-
ing of sections 267(b) and 707(b)) collec-
tively have the power to amend the part-
nership agreement without the consent of
any unrelated party. However, taxpayers
may rely on the provisions of paragraph
(b)(4)(viii) of this section for partnership
taxable years beginning on or after April
21, 2004.
As stated in this preamble, the tempo-
rary and proposed regulations included a
limited transition relief provision which
ceases to apply upon a material modifica-
tion of the partnershipagreement, includ-
ing any change in ownership. In addition,
transition relief was not provided to part-
nerships owned by related parties who col-
lectively have the power to amend the part-
nership agreement. One commentator re-
quested that the IRS and the Treasury De-
partment consider modifying the transition
relief provision to indicate that a change
in ownership is not a material modifica-
tion unless there is more than a 50 per-
cent change in ultimate beneficial owner-
ship over a three-year period. The com-
mentator also requested that the final reg-
ulations include a rule providing transition
relief to partnerships owned by related par-
ties who collectively have the power to
amend the partnership agreement only in
a way that does not adversely impact unre-
lated partners.
After careful consideration of these
comments, the IRS and the Treasury De-
partment have decided not to expand the
transition relief described in the proposed
and temporary regulations. Accordingly,
the final regulations do not adopt these
comments.
G.Other Comments
One commentator suggested that where
the partners are unrelated, the safe har-
bor should permit the partnership to al-
locateCFTEsinthesameproportionas
all other partnership expenses (rather than
in proportion to related income). Sec-
tion 1.704–1(b)(4)(ii) requires partnership
credits to be allocated in the same propor-
tions as items giving rise to the credits.
Allocating CFTEs in proportion to other
partnership expenses would be inconsis-
tent with §1.704–1(b)(4)(ii). Moreover,
such an approach would result in the in-
appropriate separation of CFTEs from the
income to which such CFTEs relate. Thus,
the final regulations do not incorporate this
comment.
The temporary and proposed regula-
tions provided that the safe harbor is avail-
able if the partnershipagreement satisfied
the requirements of §1.704–1(b)(2)(ii)(b)
or (d) (capital account maintenance, liq-
uidation according to capital accounts,
and either deficit restoration obligation or
qualified income offsets) and the partner-
ship agreement provided for the allocation
of the CFTE in proportion to the part-
ner’s distributive share of partnership
income. Commentators suggested that
the safe harbor also should be available
if the partnership allocations satisfy the
economic effect equivalence standard of
§1.704–1(b)(2)(ii)(i).
The purpose of the safe harbor is to pro-
vide assurance that allocations of CFTEs
will be respected if the CFTEs are al-
located in proportion to the income to
which such CFTEs relate. This purpose
is satisfied as long as CFTEs are allo-
cated in proportion to valid allocations
of net income, regardless of whether the
partnership maintains capital accounts or
liquidates in accordance with them. Ac-
cordingly, the final regulations adopt these
comments by eliminating the requirement
that the partnership allocations satisfy the
requirements of §1.704–1(b)(2)(ii)(b)or
(d), and instead condition eligibility for
the safe harbor on the validity of income
allocations, as described in this preamble.
One commentator suggested that the fi-
nal regulations clarify that the underlying
allocation of income to which the foreign
tax relates itself must be valid in order
to qualify for the safe harbor. The com-
mentator pointed out that an income allo-
cation may be valid because it has sub-
stantial economic effect, or because it is
in accordance with (or is deemed to be
in accordance with) the partners’ interests
in the partnership. If income allocations
are not valid, allocations of CFTEs based
on such allocations will not be in propor-
tion to the income to which the CFTEs re-
late. Accordingly, it is appropriate to clar-
ify that the allocations of other items must
be valid. However, the IRS and the Trea-
sury Department believe that invalid allo-
cations of other items should not disqual-
ify allocations of CFTEs for safe harbor
treatment unless the invalid allocations, in
the aggregate, materially affect the alloca-
tion of CFTEs. Therefore, the final regu-
lations provide that allocations of CFTEs
may qualify for safe harbor treatment so
long as allocations of all other partnership
items that, in the aggregate, have a material
effect on the amount of CFTEs allocated to
the partners are valid.
Commentators suggested that the safe
harbor should be available if the partner-
ship agreement is silent with regard to the
allocation of CFTEs, but actual allocations
of CFTEs are made in proportion to related
income. The IRS and the Treasury Depart-
ment agree. Accordingly, the final regu-
lations allow safe harbor treatment if the
CFTE is allocated (whether or not pursuant
to an express provision in the partnership
agreement) and reported on the partner-
ship return in proportion to the distributive
shares of income to which the CFTE re-
lates.
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
November 20, 20069222006–47 I.R.B.

istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because these regulations do not impose
on small entities a collection of informa-
tion requirement, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of rulemaking preceding these regu-
lations was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal authors of this regulation
are Timothy J. Leska, Office of the Asso-
ciate Chief Counsel (Passthroughs & Spe-
cial Industries) and Michael I. Gilman, Of-
fice of the Associate Chief Counsel (Inter-
national). However, other personnel from
the IRS and the Treasury Department par-
ticipated in its 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 1.704–1 is amended as
follows:
1. Paragraph (b)(0) is amended by
redesignatingtheentryinthetableof
contents for §1.704–1(b)(4)(xi) as the
entry for §1.704–1(b)(4)(viii) and by
adding entries following the entry for
§1.704–1(b)(4)(viii). The entries for
§§1.704–1(b)(4)(ix) and 1.704–1(b)(4)(x)
are removed.
2. The heading and text of para-
graphs (b)(1)(ii)(b) and (b)(5)Examples
25through28are revised.
3. Paragraphs (b)(3)(iv), (b)(4)(viii)
and (b)(5)Examples 20through24are
added.
4. Paragraph (b)(4)(xi) is removed.
The additions and revisions read as fol-
lows:
§1.704–1 Partner’s distributive share.
*****
(b)***(0)***
HeadingSection
*****
Allocationofcreditableforeigntaxes ........................................ 1.704–1(b)(4)(viii)
Ingeneral.............................................................. 1.704–1(b)(4)(viii)(a)
Creditableforeigntaxexpenditures(CFTEs)............................... 1.704–1(b)(4)(viii)(b)
IncometowhichCFTEsrelate............................................ 1.704–1(b)(4)(viii)(c)
Ingeneral........................................................... 1.704–1(b)(4)(viii)(c)(1)
CFTEcategory....................................................... 1.704–1(b)(4)(viii)(c)(2)
NetincomeinaCFTEcategory........................................ 1.704–1(b)(4)(viii)(c)(3)
Distributivesharesofincome.......................................... 1.704–1(b)(4)(viii)(c)(4)
NonetincomeinaCFTEcategory..................................... 1.704–1(b)(4)(viii)(c)(5)
AllocationandapportionmentofCFTEstoCFTEcategories................. 1.704–1(b)(4)(viii)(d)
Ingeneral.............................................................. 1.704–1(b)(4)(viii)(d)(1)
Timingandbasedifferences.............................................. 1.704–1(b)(4)(viii)(d)(2)
Specialrulesforinter-branchpayments.................................... 1.704–1(b)(4)(viii)(d)(3)
*****
(1) * * *
(ii) * * *
(b)Rules relating to foreign tax expen-
ditures—(1)In general. The provisions
of paragraphs (b)(3)(iv) and (b)(4)(viii) of
this section (regarding the allocation of
creditable foreign taxes) apply for partner-
ship taxable years beginning on or after
October 19, 2006. The rules that apply
to allocations of creditable foreign taxes
made in partnership taxable years begin-
ning before October 19, 2006 are con-
tained in §§1.704–1T(b)(1)(ii)(b)(1)and
1.704–1T(b)(4)(xi) as in effect prior to Oc-
tober 19, 2006 (see 26 CFR part 1 revised
as of April 1, 2005). However, taxpayers
may rely on the provisions of paragraphs
(b)(3)(iv) and (b)(4)(viii) of this section for
partnership taxable years beginning on or
after April 21, 2004.
(2)Transition rule. Transition relief
is provided herein to partnerships whose
agreements were entered into prior to
April 21, 2004. In such case, if there has
been no material modification to the part-
nership agreement on or after April 21,
2004, then the partnership may apply the
provisions of paragraph (b) of this section
as if the amendments made by paragraphs
(b)(3)(iv) and (b)(4)(viii) of this section
had not occurred. If the partnership agree-
ment was materially modified on or after
April 21, 2004, then the rules provided in
paragraphs (b)(3)(iv) and (b)(4)(viii) of
this section shall apply to the later of the
taxable year beginning on or after October
19, 2006, or the taxable year within which
the material modification occurred, and to
all subsequent taxable years. If the part-
nership agreement was materially modi-
fied on or after April 21, 2004, and before
a tax year beginning on or after October
19, 2006, see §§1.704–1T(b)(1)(ii)(b)(1)
and 1.704–1T(b)(4)(xi) as in effect prior
to October 19, 2006 (26 CFR part 1 re-
vised as of April 1, 2005). For purposes of
this paragraph (b)(1)(ii)(b)(2), any change
in ownership constitutes a material mod-
ification to the partnership agreement.
This transition rule does not apply to any
taxable year (and all subsequent taxable
years) in which persons that are related to
each other (within the meaning of section
267(b) and 707(b)) collectively have the
power to amend the partnership agreement
without the consent of any unrelated party.
2006–47 I.R.B.923November 20, 2006

*****
(3) * * *
(iv)Special rule for creditable foreign
tax expenditures. In determining whether
an allocation of a partnership item is in
accordance with the partners’ interests in
the partnership, the allocation of the cred-
itable foreign tax expenditure (CFTE) (as
defined in paragraph (b)(4)(viii)(b)ofthis
section) must be disregarded. This para-
graph (b)(3)(iv) shall not apply to the ex-
tent the partners to whom such taxes are
allocated reasonably expect to claim a de-
duction for such taxes in determining their
U.S. tax liabilities.
(4) * * *
(viii)Allocation of creditable foreign
taxes—(a)In general. Allocations of cred-
itable foreign taxes donot have substantial
economic effect within the meaning of
paragraph (b)(2) of this section and, ac-
cordingly, such expenditures must be
allocated in accordance with the partners’
interests in the partnership. See paragraph
(b)(3)(iv) of this section. An allocation
of a creditable foreign tax expenditure
(CFTE) will be deemed to be in accor-
dance with the partners’ interests in the
partnership if—
(1) The CFTE is allocated (whether or
not pursuant to an express provision in the
partnership agreement) and reported on the
partnershipreturninproportiontothedis-
tributive shares of income to which the
CFTE relates; and
(2) Allocations of all other partnership
items that, in the aggregate, have a ma-
terial effect on the amount of CFTEs al-
located to a partner pursuant to paragraph
(b)(4)(viii)(a)(1) of this section are valid.
(b)Creditable foreigntax expenditures
(CFTEs). For purposes of this section, a
CFTE is a foreign tax paid or accrued by
a partnership that is eligible for a credit
under section 901(a) or an applicable
U.S. income tax treaty. A foreign tax is a
CFTE for these purposes without regard to
whether a partner receiving an allocation
of such foreign tax elects to claim a credit
for such tax. Foreign taxes paid or accrued
by a partner with respect to a distributive
share of partnershipincome, and foreign
taxes deemed paid under section 902 or
960 by a corporate partner with respect
to stock owned, directly or indirectly, by
or for a partnership, are not taxes paid or
accrued by a partnership and, therefore,
are not CFTEs subject to the rules of this
section. See paragraphs (e) and (f) of
§1.901–2 for rules for determining when
and by whom a foreign tax is paid or ac-
crued.
(c)Income to which CFTEs relate—(1)
In general. For purposes of paragraph
(b)(4)(viii)(a)ofthissection,CFTEs
are related to net income in the part-
nership’s CFTE category or categories
to which the CFTE is allocated and ap-
portioned in accordance with the rules
of paragraph (b)(4)(viii)(d)ofthissec-
tion. Paragraph (b)(4)(viii)(c)(2)ofthis
section provides rules for determining
a partnership’s CFTEcategories. Para-
graph (b)(4)(viii)(c)(3)ofthissection
provides rules for determining the net in-
come in each CFTE category. Paragraph
(b)(4)(viii)(c)(4)ofthissectionprovides
guidance in determining a partner’s dis-
tributive share of income in a CFTE cat-
egory. Paragraph (b)(4)(viii)(c)(5)ofthis
section provides a special rule for allocat-
ing CFTEs when a partnership has no net
income in a CFTE category.
(2)CFTE category—(i)Income from
activities. A CFTE category is a cate-
gory of net income (or loss) attributable to
one or more activities of the partnership.
Net income (or loss) from all the partner-
ship’s activities shall be included in a sin-
gle CFTE category unless the allocation of
net income (or loss) from one or more ac-
tivities differs from the allocation of net
income (or loss) from other activities, in
which case income from each activity or
group of activities that is subject to a dif-
ferent allocation shall be treated as net in-
come (or loss) in a separate CFTE cate-
gory.
(ii
)Different allocations.Different
allocations of net income (or loss) gen-
erally will result from provisions of the
partnership agreement providing for dif-
ferent sharing ratios for net income (or
loss) from separate activities. Different
allocations of net income (or loss) from
separate activities generally will also re-
sult if any partnership item is shared in a
different ratio than any other partnership
item. A guaranteed payment described
in paragraph (b)(4)(viii)(c)(3)(ii)ofthis
section, gross income allocation, or other
preferential allocation will result in differ-
ent allocations of net income (or loss) from
separate activities only if the amount of the
payment or the allocation is determined
by reference to income from less than all
of the partnership’s activities. For pur-
poses of this paragraph (b)(4)(viii)(c)(2),
a partnership item shall not include any
item that is excludedfrom income attrib-
utable to an activity pursuant to the second
sentence of paragraph (b)(4)(viii)(c)(3)(ii)
of this section (relating to allocations or
payments that result in a deduction under
foreign law).
(iii)Activity. Whether a partnership
has one or more activities, and the scope
of each activity, shall be determined in a
reasonable manner taking into account all
the facts and circumstances. In evaluat-
ing whether aggregating or disaggregat-
ing income from particular business or in-
vestment operations constitutes a reason-
able method of determining the scope of
an activity, the principal consideration is
whether the proposed determination has
the effect of separating CFTEs from the
related foreign income. Accordingly, rel-
evant considerationsinclude whether the
partnership conducts business in more than
one geographic location or through more
than one entity or branch, and whether cer-
tain types of income are exempt from for-
eign tax or subject to preferential foreign
tax treatment. In addition, income from
a divisible part of a single activity shall
be treated as income from a separate ac-
tivity if necessary to prevent separating
CFTEs from the related foreign income.
The partnership’s activities must be deter-
mined consistently from year to year ab-
sent a material change in facts and circum-
stances.
(3)Net income in a CFTE category—(i)
In general. The net income in a CFTE cat-
egory means the net income for U.S.
Federal income tax purposes, determined
by taking into account all partnership
items attributable to the relevant activity
or group of activities, including items of
gross income, gain, loss, deduction, and
expense and items allocated pursuant to
section 704(c). The items of gross income
attributable to an activity shall be deter-
mined in a consistent manner under any
reasonable method taking into account all
the facts and circumstances. Except as oth-
erwise provided below, expenses, losses
or other deductions shall be allocated and
apportioned to gross income attributable
to an activity in accordance with the rules
of §§1.861–8 and 1.861–8T. Under these
rules, if an expense, loss or other deduc-
tion is allocated to gross income from
November 20, 20069242006–47 I.R.B.

more than one activity, such expense, loss
or deduction must be apportioned among
each such activity using a reasonable
method that reflects to a reasonably close
extent the factual relationship between
the deduction and the gross income from
such activities. See §1.861–8T(c). For
purposes of determining net income in a
CFTE category, the partnership’s interest
expense and research and experimental
expenditures described in section 174 may
be allocated and apportioned under any
reasonable method, including but not lim-
ited to the methods prescribed in §1.861–9
through §1.861–13T (interest expense)
and §1.861–17 (research and experimental
expenditures). For purposes of deter-
mining the net income attributable to any
activity of a branch, the only items of gross
income taken into account in applying this
paragraph (b)(4)(viii)(c)(3)arethoseitems
of gross income recognized by the branch
for U.S. income tax purposes. See para-
graph (b)(5)Example 24of this section
(relating to inter-branch payments).
(ii)Special rules. Income attributable
to an activity shall include the amount in-
cluded in a partner’s income as a guaran-
teed payment (within the meaning of sec-
tion 707(c)) from the partnership to the
extent that the guaranteed payment is not
deductible by the partnership under for-
eign law. See paragraph (b)(5)Example
25(iv) of this section. Except for an in-
ter-branch payment described in paragraph
(b)(4)(viii)(d)(3) of this section, income at-
tributable to an activity shall not include
an item of partnership income to the ex-
tent the allocation of such item of income
(or payment thereof) results in a deduction
under foreign law. See paragraph (b)(5)
Example 25(iii) and (iv) of this section.
Similarly, income attributable to an activ-
ity shall not include net income that for-
eign law would exclude from the foreign
tax base as a result of the status of a part-
ner. See paragraph (b)(5)Example 27of
this section.
(4)Distributive shares of income.For
purposes of paragraph (b)(4)(viii)(a)(1)of
this section, distributive share of income
means the net income from each CFTE
category, determined in accordance with
paragraph (b)(4)(viii)(c)(3) of this section,
that is allocated to a partner. A guaranteed
payment shall be treated as a distributive
share of income for purposes of paragraph
(b)(4)(viii)(a)(1)ofthissectiontotheex-
tent that the guaranteed payment is treated
as income attributable to an activity pur-
suant to paragraph (b)(4)(viii)(c)(3)(ii)of
this section. See paragraph (b)(5)Exam-
ple 25(iv) of this section. If more than one
partner receives positive income alloca-
tions (income in excess of expenses) from
a CFTE category, which in the aggregate
exceed the total net income in the CFTE
category, then for purposes of paragraph
(b)(4)(viii)(a)(1)ofthissectionsuchpart-
ner’s distributive share of income from the
CFTE category shall equal the partner’s
positive income allocation from the CFTE
category, divided by the aggregate positive
income allocations from the CFTE cate-
gory, multiplied by the net income in the
CFTE category.
(5)No net income in a CFTE category.
If a CFTE is allocated or apportioned to
a CFTE category that does not have net
income for the year in which the foreign
tax is paid or accrued, the CFTE shall be
deemed to relate to the aggregate of the
net income (disregarding net losses) recog-
nized by the partnership in that CFTE cate-
gory in each of the three preceding taxable
years. Accordingly, except as provided be-
low, such CFTE must be allocated in the
current taxable yearin the same propor-
tion as the allocation of the aggregate net
income for the prior three-year period in
order to satisfy the requirements of para-
graph (b)(4)(viii)(a)(1) of this section. If
the partnership does not have net income in
the applicable CFTE category in either the
current year or any of the previous three
taxable years, the CFTE must be allocated
in the same proportion that the partnership
reasonably expects to allocate the aggre-
gate net income (disregarding net losses)
in the CFTE category for the succeeding
three taxable years. If the partnership does
not reasonably expect to have net income
in the CFTE category for the succeeding
three years and the partnership has net in-
come in one or more other CFTE cate-
gories for the year in which the foreign
tax is paid or accrued, the CFTE shall be
deemed to relate to such other net income
and must be allocated in proportion to the
allocations of such other net income. If
any CFTE is not allocated pursuant to the
above provisions of this paragraph then the
CFTE must be allocated in proportion to
the partners’ outstanding capital contribu-
tions.
(d)Allocation and apportionment of
CFTEs to CFTE categories—(
1)In gen-
eral. CFTEs are allocated and appor-
tioned to CFTE categories in accordance
with the principles of §1.904–6. Under
these principles, a CFTE is related to in-
come in a CFTE category if the income
is included in the base upon which the
foreign tax is imposed. In accordance
with §1.904–6(a)(1)(ii) as modified by
this paragraph (b)(4)(viii)(d), if the for-
eign tax base includes income in more
than one CFTE category, the CFTEs are
apportioned among the CFTE categories
based on the relative amounts of taxable
income computed under foreign law in
each CFTE category. For purposes of
this paragraph (b)(4)(viii)(d), references
in §1.904–6 to a separate category or
separate categories shall mean “CFTE
category” or “CFTE categories” and the
rules in §1.904–6(a)(1)(ii) are modified as
follows:
(i) The related party interest expense
rule in §1.904–6(a)(1)(ii) shall not apply in
determining the amount of taxable income
computed under foreign law in a CFTE
category.
(ii) If foreign law does not provide for
the direct allocation or apportionment of
expenses, losses or other deductions al-
lowed under foreign law to a CFTE cate-
gory of income, then such expenses, losses
or other deductions must be allocated and
apportioned to gross income as determined
under foreign law in a manner that is con-
sistent with the allocation and apportion-
ment of such items for purposes of deter-
mining the net income in the CFTE cat-
egories for U.S. tax purposes pursuant to
paragraph (b)(4)(viii)(c)(3) of this section.
(2)Timing and base differences.Afor-
eign tax imposed on an item that would
be income under U.S. tax principles in an-
other year (a timing difference) is allocated
to the CFTE category that would include
the income if the income were recognized
for U.S. tax purposes in the year in which
the foreign tax is imposed. A foreign tax
imposed on an item that would not con-
stitute income under U.S. tax principles in
any year (a base difference) is allocated to
the CFTE category that includes the part-
nership items attributable to the activity
with respect to which the foreign tax is im-
posed. See paragraph (b)(5)Example 23of
this section.
2006–47 I.R.B.925November 20, 2006

(3)Special rules for inter-branch pay-
ments. Notwithstanding any other provi-
sion of this paragraph (d), the rules of this
paragraph (b)(4)(viii)(d)(3)shallapplyif
a branch (including an entity described in
§301.7701–2(c)(2)(i) of this chapter) of
the partnership is required to include in in-
come under foreign law a payment it re-
ceives from another branch of the partner-
ship. The foreign tax imposed on such
payments (“inter-branch payments”) is al-
located to the CFTE category that includes
the items attributable to the relevant ac-
tivities of the recipient branch. In cases
where the partnership agreement results in
more than one CFTE category with re-
spect to activities of the recipient branch,
such tax is allocated to the CFTE cate-
gory that includes the items attributable to
the activity to which the inter-branch pay-
ment relates. The rules of this paragraph
(b)(4)(viii)(d)(3) shall also apply to pay-
ments between a partnership and a branch
of the partnership. See paragraph (b)(5)
Example 24of this section.
***
(xi) [Reserved].
(5) * * *
Example 20. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chap-
ter), treated as a partnership for U.S. tax purposes.
AB operates business M in country X and earns
income from passive investments in country X.
Country X imposes a 40 percent tax on business
M income, which tax is a CFTE, but exempts from
tax income from passive investments. In 2007,
AB earns $100,000 of income from business M
and $30,000 from passive investments and pays or
accrues $40,000 of country X taxes. For purposes
of section 904(d), the income from business M is
general limitation income and the income from the
passive investments is passive income. Pursuant
to the partnership agreement, all partnership items,
including CFTEs, from business M are allocated 60
percent to A and 40 percent to B, and all partnership
items, including CFTEs, from passive investments
are allocated 80 percent to A and 20 percent to B.
Accordingly, A is allocated 60 percent of the business
M income ($60,000) and 60 percent of the country
X taxes ($24,000), and B is allocated 40 percent of
the business M income ($40,000) and 40 percent of
the country X taxes ($16,000). The income from the
passive investments is allocated $24,000 to A and
$6,000 to B. Assume that allocations of all items
other than CFTEs are valid.
(ii) Because the partnership agreement provides
for different allocations of the net income attribut-
able to business M and the passive investments, the
net income attributable to each is income in a sepa-
rate CFTE category. See paragraph (b)(4)(viii)(c)(2)
of this section. AB must determine the net income in
each CFTE category and the CFTEs allocable to each
CFTE category. Under paragraph (b)(4)(viii)(c)(3)of
this section, the net income in the business M CFTE
category is the $100,000 attributable to business M
and the net income in the passive investments CFTE
category is the $30,000 attributable to the passive in-
vestments. Under paragraph (b)(4)(viii)(d)ofthis
section, the $40,000 of country X taxes is allocated
to the business M CFTE category and no portion of
the country X taxes is allocated to the passive in-
vestments CFTE category. Therefore, the $40,000 of
country X taxes are related to the $100,000 of net in-
come in the business M CFTE category. See para-
graph (b)(4)(viii)(c)(1)ofthissection.BecauseAB’s
partnership agreement allocates the net income from
the business M CFTE category 60 percent to A and 40
percent to B, and the country X taxes 60 percent to A
and 40 percent to B, the allocations of the CFTEs are
in proportion to the distributive shares of income to
which the CFTEs relate. Because AB satisfies the re-
quirement of paragraph (b)(4)(viii) of this section, the
allocations of the country X taxes are deemed to be in
accordance with the partners’ interests in the partner-
ship. Because the business M income is general limi-
tation income, all $40,000 of taxes are attributable to
the general limitation category. See §1.904–6.
Example 21. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chap-
ter), treated as a partnership for U.S. tax purposes.
AB operates business M in country X and business
NincountryY.CountryXimposesa40percenttax
on business M income, country Y imposes a 20 per-
cent tax on business N income, and the country X
and country Y taxes are CFTEs. In 2007, AB has
$100,000 of income from business M and $50,000 of
income from business N. Country X imposes $40,000
of tax on the income from business M and country
Y imposes $10,000 of tax on the income of business
N. Pursuant to the partnership agreement, all partner-
ship items, including CFTEs, from business M are al-
located 75 percent to A and 25 percent to B, and all
partnership items, including CFTEs, from business N
are split evenly between Aand B (50 percent each).
Accordingly, A is allocated 75 percent of the income
from business M ($75,000), 75 percent of the coun-
try X taxes ($30,000), 50 percent of the income from
business N ($25,000), and 50 percent of the coun-
try Y taxes ($5,000). B is allocated 25 percent of
the income from business M ($25,000), 25 percent
of the country X taxes ($10,000), 50 percent of the
income from business N ($25,000), and 50 percent of
the country Y taxes ($5,000). Assume that allocations
of all items other than CFTEs are valid. The income
from business M and business N is general limitation
income for purposes of section 904(d).
(ii) Because the partnership agreement provides
for different allocations of the net income attributable
to businesses M and N, the net income attributable to
each business is income in a separate CFTE category
even though all of the income is in the general limita-
tion category for section 904(d) purposes. See para-
graph (b)(4)(viii)(c)(2) of this section. Under para-
graph (b)(4)(viii)(c)(3) of this section, the net income
in the business M CFTE category is the $100,000 at-
tributable to business M and the net income in the
business N CFTE category is $50,000 attributable to
business N. Under paragraph (b)(4)(viii)(d)ofthis
section, the $40,000 of country X taxes is allocated
to the business M CFTE category and the $10,000 of
country Y taxes is allocated to the business N CFTE
category. Therefore, the $40,000 of country X taxes
are related to the $100,000 of net income in the busi-
ness M CFTE category and the $10,000 of coun-
try Y taxes are related to the $50,000 of net income
in the business N CFTE category. See paragraph
(b)(4)(viii)(c)(1) of this section. Because AB’s part-
nership agreement allocates the $40,000 of country X
taxes in the same proportion as the net income in the
business M CFTE category, and the $10,000 of coun-
try Y taxes in the same proportion as the net income in
the business N CFTE category, the allocations of the
country X taxes and the country Y taxes are in pro-
portion to the distributive shares of income to which
the foreign taxes relate. Because AB satisfies the re-
quirements of paragraph (b)(4)(viii) of this section,
the allocations of the country X and country Y taxes
are deemed to be in accordancewith the partners’ in-
terests in the partnership.
Example 22. (i) The facts are the same as inEx-
ample 21, except that the partnership agreement pro-
vides for the following allocations. Depreciation at-
tributable to machine X, which is used in business M,
is allocated 100 percent to A. B is allocated the first
$20,000 of gross income attributable to business N,
which allocation does not result in a deduction under
foreign law. All remaining items, except CFTEs, are
allocated 50 percent to A and 50 percent to B. For
2007, assume that business M generates $120,000 of
income, before taking into account depreciation at-
tributable to machine X. The total amount of depre-
ciation attributable to machine X is $20,000, which
results in $100,000 of net income attributable to busi-
ness M for U.S. and country X tax purposes. Business
N generates $70,000 of gross income and has $20,000
of expenses, resulting in $50,000 of net income for
U.S. and country Y tax purposes. Pursuant to the part-
nership agreement, A is allocated $40,000 of the net
income attributable to business M ($60,000 of busi-
ness M income less $20,000 of depreciation attribut-
able to machine X), and $15,000 of the net income
attributable to business N. B is allocated $60,000 of
the net income attributable to business M and $35,000
of the net income attributable to business N ($20,000
of gross income, plus $15,000 of net income).
(ii) As a result of the special allocations, the net
income attributable to business M ($100,000) is allo-
cated 40 percent to A and 60 percent to B. The net
income attributable to business N ($50,000) is allo-
cated 30 percent to A and 70 percent to B. Because
the partnership agreement provides for different allo-
cations of the net income attributable to businesses M
and N, the net income from each of businesses M and
N is income in a separate CFTE category. See para-
graph (b)(4)(viii)(c)(2) of this section. Under para-
graph (b)(4)(viii)(c)(3) of this section, the net income
in the business M CFTE category is the $100,000 of
net income attributable to business M and the net in-
come in the business N CFTE category is the $50,000
of net income attributable to business N. Under para-
graph (b)(4)(viii)(d)(1) of this section, the $40,000 of
country X taxes is allocated to the business M CFTE
category and the $10,000 of country Y taxes is al-
located to the business N CFTE category. There-
fore, the $40,000 of country X taxes relates to the
$100,000 of net income in the business M CFTE and
the $10,000 of country Y taxes relates to the $50,000
of net income in the business N CFTE category. See
paragraph (b)(4)(viii)(c)(1) of this section. The allo-
cations of the country X taxes will be in proportion
to the distributive shares of income to which they re-
late and will be deemed to be in accordance with the
November 20, 20069262006–47 I.R.B.

partners’ interests in the partnership if such taxes are
allocated40percenttoAand60percenttoB.Theal-
locations of the country Y taxes will be in proportion
to the distributive shares of income to which they re-
late and will be deemed to be in accordance with the
partners’ interests in the partnership if such taxes are
allocated 30 percent to A and 70 percent to B.
(iii) Assume that for 2008, all the facts are the
same as in paragraph (i) of thisExample 22, except
that business M generates $60,000 of income before
taking into account depreciation attributable to ma-
chine X and country X imposes $16,000 of tax on
the $40,000 of net income attributable to business M.
Pursuant to the partnership agreement, A is allocated
25 percent of the income from business M ($10,000),
and B is allocated 75 percent of the income from busi-
ness M ($30,000). Allocations of the country X taxes
will be in proportion to the distributive shares of in-
come to which they relate and will be deemed to be in
accordance with the partners’ interests in the partner-
ship if such taxes are allocated 25 percent to A and
75 percent to B.
Example 23. (i) The facts are the same as inEx-
ample 21, except that AB does not actually receive
the $50,000 of income accrued in 2007 with respect
to business N until 2008 and AB accrues and receives
an additional $100,000 with respect to business N in
2008. Also assume that A, B, and AB each report tax-
able income on an accrual basis for U.S. tax purposes
and AB reports taxable income using the cash receipts
and disbursements method of accounting for country
X and country Y purposes. In 2007, AB pays or ac-
crues country X taxes of $40,000. In 2008, AB pays
or accrues country Y taxesof $30,000. Pursuant to
the partnership agreement, in 2007, A is allocated 75
percent of business M income ($75,000) and country
X taxes ($30,000) and 50 percent of business N in-
come ($25,000). B is allocated 25 percent of business
M income ($25,000) and country X taxes ($10,000)
and 50 percent of business N income ($25,000). In
2008, A and B are each allocated 50 percent of the
business N income ($50,000) and country Y taxes
($15,000).
(ii) For 2007, the $40,000 of country X taxes paid
or accrued by AB relates to the $100,000 of net in-
come in the business M CFTE category. No portion
of the country X taxes paid or accrued in 2007 relates
to the $50,000 of net income in the business N CFTE
category. For 2008, the net income in the business N
CFTE category is the $100,000 attributable to busi-
ness N. See paragraph (b)(4)(viii)(c)(3)ofthissec-
tion. Under paragraph (b)(4)(viii)(d)(1) of this sec-
tion, $20,000 of the country Y tax paid or accrued
in 2008 is allocated to the business N CFTE cate-
gory. The remaining $10,000 of country Y tax is al-
located to the business N CFTE category under para-
graph (b)(4)(viii)(d)(2) of this section (relating to tim-
ing differences). Therefore, the $30,000 of country Y
taxes paid or accrued by AB in 2008 is related to the
$100,000 of net income in the business N CFTE cate-
gory for 2008. See paragraph (b)(4)(viii)(c)(1)ofthis
section. Because AB’s partnership agreement allo-
cates the $40,000 of country X taxes and the $30,000
of country Y taxes in proportion to the distributive
shares of income to which the taxes relate, the allo-
cations of the country X and country Y taxes satisfy
the requirements of paragraphs (b)(4)(viii)(a)(1)and
(2) of this section and the allocations of the country X
and Y taxes are deemed to be in accordance with the
partners’ interests in the partnership under paragraph
(b)(4)(viii) of this section.
Example 24. (i) The facts are the same as inEx-
ample 21, except that businesses M and N are con-
ducted by entities (DE1 and DE2, respectively) that
are corporations for country X and Y tax purposes
and disregarded entities for U.S. tax purposes. Also,
assume that DE1 makes payments of $75,000 during
2007 to DE2 that are deductible by DE1 for coun-
try X tax purposes and includible in income of DE2
for country Y tax purposes. As a result of such pay-
ments, DE1 has taxable income of $25,000 for coun-
try X purposes on which $10,000 of taxes are imposed
and DE2 has taxable income of $125,000 for country
Y purposes on which $25,000 of taxes are imposed.
For U.S. tax purposes, $100,000 of AB’s income is
attributable to the activities of DE1 and $50,000 of
AB’s income is attributable to the activities of DE2.
Pursuant to the partnershipagreement, all partnership
items, including CFTEs, from business M are allo-
cated 75 percent to A and 25 percent to B, and all
partnership items, including CFTEs, from business N
are split evenly between Aand B (50 percent each).
Accordingly, A is allocated 75 percent of the income
from business M ($75,000), 75 percent of the coun-
try X taxes ($7,500), 50 percent of the income from
business N ($25,000), and 50 percent of the coun-
try Y taxes ($12,500). B is allocated 25 percent of
the income from business M ($25,000), 25 percent of
the country X taxes ($2,500), 50 percent of the in-
come from business N ($25,000), and 50 percent of
the country Y taxes ($12,500).
(ii) Because the partnership agreement provides
for different allocations of the net income attribut-
able to businesses M and N, the net income attrib-
utable to each of business M and business N is in-
come in separate CFTE categories. See paragraph
(b)(4)(viii)(c)(2) of this section. Under paragraph
(b)(4)(viii)(c)(3) of this section, the $100,000 of net
income attributable to business M is in the business
M CFTE category and the $50,000 of net income at-
tributable to business N is in the business N CFTE
category. Under paragraph (b)(4)(viii)(d)(1) of this
section, the $10,000 of country X taxes is allocated
to the business M CFTE category and $10,000 of
the country Y taxes is allocated to the business N
CFTE category. Under paragraph (b)(4)(viii)(d)(3)
of this section, the additional $15,000 of country Y
tax imposed with respect to the inter-branch payment
is assigned to the business NCFTE category. There-
fore, the $10,000 of country X taxes is related to the
$100,000 of net income in the business M CFTE cat-
egory and the $25,000 of country Y taxes is related
to the $50,000 of net income in the business N CFTE
category. See paragraph (b)(4)(viii)(c)(1)ofthissec-
tion. Because AB’s partnership agreement allocates
the $10,000 of country X taxes in the same propor-
tion as the distributive shares of income to which the
taxes relate and the $25,000 of country Y taxes in the
same proportion as the distributive shares of income
to which the taxes relate, AB satisfies the require-
ments of paragraph (b)(4)(viii) of this section and the
allocations of the country X and country Y taxes are
deemed to be in accordance with the partners’ inter-
ests in the partnership. No inference is intended with
respect to the application of other provisions to ar-
rangements that involve disregarded payments. See
paragraph (b)(1)(iii) of this section (relating to the ef-
fect of sections of the Internal Revenue Code other
than section 704(b)).
(iii) Assume that the facts are the same as para-
graph (i) of thisExample 24, except that the partner-
ship agreement provides that the $15,000 of country
Y tax imposed with respect to the inter-branch pay-
ment is allocated 75 percent to A ($11,250) and 25
percent to B ($3,750) and that the remaining $10,000
of country Y tax is allocated 50 percent to A ($5,000)
and 50 percent to B ($5,000). Thus, the country Y
taxes are allocated 65 percent to A and 35 percent
to B while the income in the business N CFTE cate-
gory is allocated 50 percent to A and 50 percent to B.
The allocations of the country Y tax are not deemed
to be in accordance with the partners’ interests be-
cause they are not in proportion to the allocations of
the distributive shares of income from the business N
CFTE category. However, upon sufficient substanti-
ation that $15,000 of country Y tax paid by DE2 with
respect to the $75,000 inter-branch payment relates
to income that is recognized by DE1 for U.S. tax pur-
poses, the allocations of the country Y taxes may be
established to be actuallyin accordance with the part-
ners’ interests in the partnership. The allocations of
the $10,000 of country X taxes are deemed to be in
accordance with the partners’ interests in the partner-
ship because the country X taxes are allocated in the
same proportion as the distributive shares of income
to which they relate.
(iv) Assume that the facts are the same as in para-
graph (i) of thisExample 24, except that in order to re-
flect the $75,000 payment from DE1 to DE2, the part-
nership agreement allocates $75,000 of the income
attributable to business M equally between A and B
(50 percent each). Therefore,the total income attrib-
utable to business M is allocated 56.25 percent to A
(75 percent of $25,000 plus 50 percent of $75,000)
and 43.75 percent to B (25 percent of $25,000 and
50 percent of $75,000). The allocation of the country
X taxes (75 percent to A and 25 percent to B) is not
deemed to be in accordance with the partners’ inter-
ests because it is not in proportion to the allocations of
the distributive shares of income from the business M
CFTE category. However, upon sufficient substanti-
ation that all $10,000 of country X tax paid by DE1
relates to the $25,000 of DE1’s income that is shared
in the same 75–25 ratio, the allocations of the country
X taxes may be established to be actually in accor-
dance with the partners’ interests in the partnership.
The allocations of the $25,000 of country Y taxes are
deemed to be in accordance with the partners’ inter-
ests in the partnership because the country Y taxes
are allocated in the same proportion as the distribu-
tive shares of income to which they relate.
Example 25. (i) A contributes $750,000 and B
contributes $250,000 to form AB, an eligible entity
(as defined in §301.7701–3(a)of this chapter), treated
as a partnership for U.S. tax purposes. AB operates
business M in country X. Country X imposes a 20 per-
cent tax on the net income from business M, which tax
is a CFTE. In 2007, AB earns $300,000 of gross in-
come, has deductible expenses of $100,000, and pays
or accrues $40,000 of country X tax. Pursuant to the
partnership agreement, the first $100,000 of gross in-
come each year is allocated to A as a return on excess
capital contributed by A. All remaining partnership
items, including CFTEs, are split evenly between A
and B (50 percent each). The gross income allocation
is not deductible in determining AB’s taxable income
2006–47 I.R.B.927November 20, 2006

under country X law. Assume that allocations of all
items other than CFTEs are valid.
(ii) AB has a single CFTE category because all
of AB’s net income is allocated in the same ratio.
See paragraph (b)(4)(viii)(c)(2). Under paragraph
(b)(4)(viii)(c)(3) of this section, the net income in the
single CFTE category is $200,000. The $40,000 of
taxes is allocated to the single CFTE category and,
thus, related to the $200,000 of net income in the
single CFTE category. In 2007, AB’s partnership
agreement allocates $150,000 or 75 percent of the
net income to A ($100,000 attributable to the gross
income allocation plus $50,000 of the remaining
$100,000 of net income) and $50,000 or 25 percent
of the net income to B. AB’s partnership agreement
allocates the country X taxes in accordance with the
partners’ shares of partnership items remaining after
the $100,000 gross income allocation. Therefore,
AB allocates the country X taxes 50 percent to A
($20,000) and 50 percent to B ($20,000). AB’s
allocations of country X taxes are not deemed to be
in accordance with the partners’ interests in the part-
nership under paragraph (b)(4)(viii) of this section,
because they are not in proportion to the allocations
of the distributive shares of income to which the
country X taxes relate. Accordingly, the country X
taxes will be reallocated according to the partners’
interest in the partnership. Assuming that the part-
ners do not reasonably expect to claim a deduction
for the CFTE in determining their U.S. tax liabilities,
a reallocation of the CFTEs under paragraph (b)(3)
of this section would be 75 percent to A ($30,000)
and 25 percent to B ($10,000). If the reallocation of
the CFTEs causes the partners’ capital accounts not
to reflect their contemplated economic arrangement,
the partners may need to reallocate other partnership
items to ensure that the tax consequences of the
partnership’s allocations are consistent with their
contemplated economic arrangement over the term
of the partnership. The Commissioner will not real-
locate other partnership items after the reallocation
of the CFTEs.
(iii) The facts are the same as in paragraph (i) of
thisExample 25, except that the $100,000 allocation
of gross income is deductible under country X law
and that AB pays or accrues $20,000 of foreign tax.
Under paragraph (b)(4)(viii)(c)(3)ofthissection,
the net income in the single CFTE category is the
$100,000 of net income, determined by disregard-
ing the $100,000 of gross income that is allocated
to A and deductible in determining AB’s taxable
income under the law of country X. See paragraph
(b)(4)(viii)(c)(3)(ii) of this section. The $20,000
of country X tax is allocated to the single CFTE
category, and, thus, related to the $100,000 of net
income in the single CFTE category. See paragraphs
(b)(4)(viii)(c)(1) and (d) of this section. No portion
of the tax is related to the $100,000 of gross income
allocated to A. Pursuant to the partnership agree-
ment, AB allocates the country X taxes 50 percent
to A ($10,000) and 50 percent to B ($10,000). AB’s
allocations of country X taxes are deemed to be in
accordance with the partners’ interests in the partner-
ship under paragraph (b)(4)(viii) of this section.
(iv) The results in (ii) and (iii) of thisExample 25
would be the same assuming all of the facts except
that, rather than being a preferential gross income al-
location, the $100,000 was a guaranteed payment to
A within the meaning of section 707(c). See para-
graph (b)(4)(viii)(c)(3)ofthissection.
Example 26. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chapter),
treated as a partnership for U.S. tax purposes. AB
operates business M in country X and business N
in country Y. A, a U.S. corporation, contributes a
building with a fair market value of $200,000 and
an adjusted basis of $50,000 for both U.S. and coun-
try X purposes. The building contributed by A is
used in business M. B, a country X corporation,
contributes $800,000 cash. The AB partnership
agreement provides that AB will make allocations
under section 704(c) using the traditional method
under §1.704–3(b) and that all other items, excluding
creditable foreign taxes, will be allocated 20 percent
to A and 80 percent to B. The partnership agree-
ment provides that creditable foreign taxes will be
allocated in proportion to the partners’ distributive
shares of net income in each CFTE category, which
shallbedeterminedbytakingintoaccountitems
allocated pursuant to section 704(c). Country X and
Country Y impose tax at a rate of 20 percent and
40 percent, respectively, and such taxes are CFTEs.
In 2007, AB sells the building contributed by A
for $200,000, thereby recognizing taxable income
of $150,000 for U.S. and country X purposes, and
recognizes $250,000 of other income from the op-
eration of business M. AB pays or accrues $80,000
of country X tax on such income. Also in 2007,
business N recognizes $100,000 of taxable income
for U.S. and country Y purposes and pays or accrues
$40,000 of country Y tax. Pursuant to the partnership
agreement, A is allocated $200,000 of business M
income ($150,000 of taxable income in accordance
with section 704(c) and $50,000 of other business
M income) and $40,000 of country X tax, and 20
percent of both business N income ($20,000) and
country Y tax ($8,000). B is allocated $200,000
of business M income and $40,000 of country X
tax and 80 percent of both the business N income
($80,000) and country Y tax ($32,000). Assume that
allocations of all items other than CFTEs are valid.
(ii) The net income attributable to business M
($400,000) is allocated 50 percent to A and 50 per-
cent to B while the net income attributable to busi-
ness N ($100,000) is allocated 20 percent to A and 80
percent to B. Because the partnership agreement pro-
vides for different allocations of the net income attrib-
utable to businesses M and N, the net income attrib-
utable to each activity is income in a separate CFTE
category. See paragraph (b)(4)(viii)(c)(2)ofthissec-
tion. Under paragraph (b)(4)(viii)(c)(3) of this sec-
tion, the net income in the business M CFTE category
is the $400,000 of net income attributable to business
M and the net income in the business N CFTE cat-
egory is the $100,000 of net income attributable to
business N. Under paragraph (b)(4)(viii)(d)(1) of this
section, the $80,000 of country X tax is allocated to
the business M CFTE category and the $40,000 of
country Y tax is allocated to the business N CFTE
category. Therefore, the $80,000 of country X tax re-
lates to the $400,000 of net income in the business
M CFTE category and the $40,000 of country Y tax
relates to the $100,000 of net income in the business
N CFTE category. See paragraph (b)(4)(viii)(c)(1)of
this section. Because AB’s partnership agreement al-
locates the $80,000 of country X taxes and $40,000
of country Y taxes in proportion to the distributive
shares of income to which such taxes relate, the al-
locations are deemed to be in accordance with the
partners’ interest in the partnership under paragraph
(b)(4)(viii) of this section.
Example 27. (i) A, a U.S. citizen, and B, a country
X citizen, form AB, a country X eligible entity (as de-
fined in §301.7701–3(a) of this chapter), treated as a
partnership for U.S. tax purposes. AB’s only activity
is business M, which it operates in country X. Coun-
try X imposes a 40 percent tax on the portion of AB’s
business M income that is the allocable share of AB’s
owners that are not citizens of country X, which tax is
a CFTE. The partnership agreement provides that all
partnership items, excluding CFTEs, from business
M are allocated 40 percent to A and 60 percent to B.
CFTEs are allocated 100 percent to A. In 2007, AB
earns $100,000 of net income from business M and
pays or accrues $16,000 of country X taxes on A’s al-
locable share of AB’s income ($40,000). Pursuant to
the partnership agreement, A is allocated 40 percent
of the business M income ($40,000) and 100 percent
of the country X taxes ($16,000), and B is allocated
60 percent of the business M income ($60,000) and
no country X taxes. Assume that allocations of all
items other than CFTEs are valid.
(ii) AB has a single CFTE category because all
of AB’s net income is allocated in the same ratio.
See paragraph (b)(4)(viii)(c)(2). Under paragraph
(b)(4)(viii)(c)(3) of this section, the $40,000 of busi-
ness M income that is allocated to A is included
in the single CFTE category. Under paragraph
(b)(4)(viii)(c)(3)(ii) of this section, no portion of
the $60,000 allocated to B is included in the single
CFTE category. Under paragraph (b)(4)(viii)(d)of
this section, the $16,000 of taxes is allocated to the
single CFTE category.
Therefore, the $16,000 of country X taxes is
related to the $40,000 of net income in the single
CFTE category that is allocated to A. See paragraph
(b)(4)(viii)(c)(1) of this section. Because AB’s
partnership agreement allocates the country X taxes
in proportion to the distributive share of income
to which the taxes relate, AB satisfies the require-
ment of paragraph (b)(4)(viii) of this section, and
the allocation of the country X taxes is deemed to
be in accordance with the partners’ interests in the
partnership.
*****
§1.704–1T [Removed]
Par. 3. Section 1.704–1T is removed.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved September 12, 2006.
Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on October 18,
2006, 8:45 a.m., and published in the issue of the Federal
Register for October 19, 2006, 71 F.R. 61648)
November 20, 20069282006–47 I.R.B.

Section 1016.—Adjust-
ments to Basis
26 CFR 1.1016–3: Exhaustion, wear and tear, ob-
solescence, amortization, and depletion for periods
since February 28, 1913.
Rules are provided for reduction of basis for busi-
ness use of an automobile under either the optional
standard mileage rate method or a mileage allowance
under a reimbursement or other expense allowance
arrangement. See Rev. Proc. 2006-49, page 936.
Section 6662.—Imposition
of Accuracy-Related
Penalty on Underpayments
Guidance is provided concerning when informa-
tion shown on a return in accordance with the applica-
ble forms and instructions will be adequate disclosure
under section 6662(d) for purposes of reducing an un-
derstatement of income tax. See Rev. Proc. 2006-48,
page 934.
Section 6694.—Under-
statement of Taxpayer’s
Liability by Income Tax
Return Preparer
Guidance is provided concerning when informa-
tion shown on a return in accordance with the appli-
cable forms and instructions will be adequate disclo-
sure under section 6694(a) for purposes of reducing
an understatement of income tax due to a return pre-
parer’s unrealistic position. See Rev. Proc. 2006-48,
page 934.
2006–47 I.R.B.929November 20, 2006

Part III. Administrative, Procedural, and Miscellaneous
United States Income Tax
Treaties That Meet the
Requirements of Section
1(h)(11)(C)(i)(II)
Notice 2006–101
1. SUMMARY
The Jobs and Growth Tax Relief Rec-
onciliation Act of 2003 (P.L. 108–27, 117
Stat. 752) (the “2003 Act”) was enacted
on May 28, 2003. Subject to certain lim-
itations, the 2003 Act generally provides
thatadividendpaidtoanindividualshare-
holder from either a domestic corporation
or a “qualified foreign corporation” is sub-
ject to tax at the reduced rates applicable
to certain capital gains. A qualified for-
eign corporation includes certain foreign
corporations that are eligible for benefits
of a comprehensive income tax treaty with
the United States that the Secretary deter-
mines is satisfactory for purposes of this
provision and that includes an exchange
of information provision. On October
20, 2003, the Service published Notice
2003–69, 2003–2 C.B. 851, which con-
tains a list of the U.S. tax treaties that met
these requirements at that time. This no-
tice updates the list of U.S. tax treaties that
meet these requirements to reflect new
U.S. income tax treaties and protocols that
have entered into force since the publica-
tion of Notice 2003–69.
2. ANALYSIS
Section 1(h)(1) of the Internal Revenue
Code (the “Code”) generally provides that
a taxpayer’s “net capital gain” for any tax-
able year will be subject to a maximum tax
rate of 15 percent (or 5 percent in the case
of certain taxpayers). The 2003 Act added
section 1(h)(11), which provides that net
capital gain for purposes of section 1(h)
means net capital gain (determined with-
out regard to section 1(h)(11)) increased
by “qualified dividend income.” Quali-
fied dividend income means dividends
received during the taxable year from
domestic corporations and “qualified for-
eign corporations.” Section 1(h)(11)(B)(i).
Subject to certain exceptions, a qualified
foreign corporation is any foreign corpo-
ration that is either (i) incorporated in a
possession of the United States, or (ii)
eligible for benefits of a comprehensive
income tax treaty with the United States
that the Secretary determines is satisfac-
tory for purposes of this provision and
that includes an exchange of informa-
tion program (the “treaty test”). Section
1(h)(11)(C)(i).
A foreign corporation that does not sat-
isfy either of these two tests is treated as a
qualified foreign corporation with respect
toanydividendpaidbysuchcorporationif
the stock with respect to which such divi-
dend is paid is readily tradable on an es-
tablished securities market in the United
States. Section 1(h)(11)(C)(ii). See Notice
2003–71, 2003–2 C.B. 922, for the defini-
tion, for taxable years beginning on or after
January 1, 2003, of “readily tradable on an
established securities market in the United
States.”
A qualified foreign corporation does
not include any foreign corporation that
for the taxable year of the corporation in
which the dividend was paid, or the pre-
ceding taxable year, is a passive foreign
investment company (as defined in sec-
tion 1297). Section 1(h)(11)(C)(iii). A
dividend from a qualified foreign corpo-
ration is also subject to the other limita-
tionsinsection1(h)(11). Forexample,a
shareholder receiving a dividend from a
qualified foreign corporation must satisfy
the holding period requirements of section
1(h)(11)(B)(iii).
The appendix to this notice sets forth
the current list of U.S. income tax treaties
that meet the requirements of section
1(h)(11)(C)(i)(II). Three U.S. income tax
treaties do not meet the requirements of
section 1(h)(11)(C)(i)(II). The tax treaties
with Bermuda and the Netherlands An-
tilles are not comprehensive income tax
treaties within the meaning of section
1(h)(11). The U.S.-U.S.S.R. income tax
treaty, which was signed on June 20,
1973, and currently applies to certain for-
mer Soviet Republics, does not include an
information exchange program.
At the time Notice 2003–69 was pub-
lished, the income tax treaty with Barba-
dos was determined not to be satisfactory
for purposes of section 1(h)(11) because of
concern that the treaty may have operated
to provide benefits that were intended to
mitigate or eliminate double taxation in
cases where there was no risk of double
taxation.See,e.g., H.R. Rep. 108–126,
108
th
Cong., 1
st
Sess., at 42 (2003) (con-
ference report on the 2003 Act). On July
14, 2004, the United States and Barbados
signed a Second Protocol to the U.S.-Bar-
bados income tax treaty (the “Second
Protocol”), which entered into force on
December 20, 2004. The Second Proto-
col amended the U.S.-Barbados income
tax treaty by substituting a new limitation
on benefits article that reflected devel-
opmentsinU.S.treatypolicyandwas
designed to eliminate in particular the
availability of certain inappropriate ben-
efits under the existing treaty. Following
the changes made by the Second Proto-
col, the income tax treaty with Barbados
has been determined to be satisfactory for
purposes of section 1(h)(11).
The updated list in the appendix to this
notice also contains two U.S. income tax
treaties that entered into force after the
publication of Notice 2003–69: the U.S.
income tax treaties with Sri Lanka (which
entered into force on July 12, 2004) and
Bangladesh (which entered into force on
August 7, 2006).
Treasury and the IRS intend to update
this list, as appropriate. Situations that
may result in changes to the list include the
entry into force of new income tax treaties
and the amendment or renegotiation of ex-
isting tax treaties. Further, Treasury and
the IRS continue to study the operation of
each of our income tax treaties, including
the implications of any change in the do-
mestic laws of the treaty partner, to ensure
that the treaty accomplishes its intended
objectives and continues to be satisfactory
for purposes of this provision. It is antici-
pated that any changes to the list of income
tax treaties that meet the requirements of
section 1(h)(11)(C)(i)(II) will apply only
to dividends paid after the date of publi-
cationoftherevisedlist.
Finally, in order to be treated as a qual-
ified foreign corporation under the treaty
test, a foreign corporation must be eligi-
ble for benefits of one of the U.S. income
tax treaties listed in the Appendix. Ac-
cordingly, the foreign corporation must be
a resident within the meaning of such term
under the relevant treaty and must satisfy
any other requirements of that treaty, in-
November 20, 20069302006–47 I.R.B.

cluding the requirements under any appli-
cable limitation on benefits provision.
3. EFFECTIVE DATE
This notice is effective with respect to
Bangladesh for dividends paid on or af-
ter August 7, 2006. This notice is effec-
tive with respect to Barbados for dividends
paid on or after December 20, 2004. This
notice is effective with respect to Sri Lanka
for dividends paid on or after July 12,
2004. This notice is effective with respect
to all other U.S. income tax treaties listed
in the Appendix for taxable years begin-
ning after December 31, 2002.
4. EFFECT ON OTHER DOCU-
MENTS
Notice 2003–69 is amplified and super-
seded.
5. CONTACT INFORMATION
The principal author of this notice is
Ana C. Guzman of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Ms. Guzman at (202) 622–3880 (not a
toll-free call).
APPENDIX
U. S. INCOME T
AX TREATIES SATISFYING THE REQUIREMENTS OF
SECTION 1(h)
(11)(C)(i)(II)
AustraliaGermanyLithuaniaSlovenia
AustriaGreeceLuxembourgSouth Afric
a
BangladeshHungaryMexicoSpain
BarbadosIcelandMoroccoSri Lanka
BelgiumIndiaNetherlan
ds
Sweden
CanadaIndonesiaNew ZealandSwitzerland
ChinaIrelandNorwayThailand
CyprusIsraelPakistanTrinidad a
nd Tobago
Czech RepublicItalyPhilippinesTunisia
DenmarkJamaicaPolandTurkey
EgyptJapanPortugalUkraine
EstoniaKazakhstanRomaniaUnited Kingdom
FinlandKoreaRussian FederationVenezuela
FranceLatviaSlovak R
epublic
Patriots’ Day Filings and
Payments
Notice 2006–103
This notice provides guidance regard-
ing the impact of Patriots’ Day on the April
16, 2007 due date for filing Federal tax
documents and making Federal tax pay-
ments. Individual income taxpayers resid-
ing in Maine, Massachusetts, New Hamp-
shire, New York, Vermont, Maryland, and
the District of Columbia have until Tues-
day, April 17, 2007, to file documents in
paper or electronic form that are other-
wise due on April 16, 2007. These doc-
uments include U.S. individual income tax
returns in the Form 1040 series and Form
4868,Application for Automatic Extension
of Time To File U.S. Individual Income Tax
Return. Individual income taxpayers in
these states and the District of Columbia
also have until April 17, 2007, to make
Federal tax payments otherwise due on
April 16, 2007, including the first install-
ment of estimated tax for tax year 2007.
The additional time provided in this no-
tice for filing returns and paying tax is not
available to individuals residing in other
states, regardless of whether they file re-
turns in paper or electronic form. Also, the
additional time provided by this notice is
not available for filing, or paying tax re-
ported on, returns of taxpayers who are not
individuals, such as Form 1041,U.S. In-
come Tax Return for Estates and Trusts,
and Form 1065,U.S. Return of Partnership
Income, even though the taxpayer may be
located in Massachusetts or Maine.
The principal author of this notice is
John M. Moran of the Office of Associate
Chief Counsel (Procedure & Administra-
tion). For further information regarding
this notice, contact John M. Moran at (202)
622–4940 (not a toll-free call).
26 CFR 1.861–8: Computation of taxable income
from sources within the United States and from other
sources and activities.
Rev. Proc. 2006–42
SECTION 1. PURPOSE
This revenue procedure sets forth the
administrative procedures for taxpayers
described in § 4 of this revenue pro-
cedure to obtain automatic approval to
change certain elections relating to the
apportionment of interest expense under
§§ 1.861–8T(c)(2) and 1.861–9(i)(2) and
research and experimental expenditures
(R&E) under § 1.861–17(e). A taxpayer
complying with this revenue procedure
will be deemed to have obtained the ap-
proval of the Commissioner of the Inter-
nal Revenue Service (Commissioner) to
change those elections.
S
ECTION 2. BACKGROUND
.01 DEDUCTION ATTRIBUTABLE
TO DOMESTIC PRODUCTION ACTIV-
ITIES.
(1) IN GENERAL. Section 199 of the
Internal Revenue Code (Code), enacted as
part of the American Jobs Creation Act of
2004, provides for a deduction attributable
to domestic production activities. The de-
duction is equal to 9 percent (3 percent
in the case of taxable years beginning in
2005 or 2006, and 6 percent in the case
of taxable years beginning in 2007, 2008,
or 2009) of the lesser of (A) the qualified
production activities income (QPAI) of the
taxpayer for the taxable year, or (B) tax-
able income (determined without regard to
2006–47 I.R.B.931November 20, 2006

section 199) for the taxable year (or, in the
case of an individual, adjusted gross in-
come (AGI)).
(2) DETERMINATION OF QPAI.
To determine QPAI for a taxable year, a
taxpayer must subtract from its domes-
tic production gross receipts (DPGR) the
cost of goods sold allocable to DPGR
and other expenses, losses, or deductions
(deductions) that are properly allocable
to DPGR. Section 1.199–4(d) provides
that a taxpayer generally must determine
deductions allocable to DPGR, or to gross
income attributable to DPGR, under the
section 861 regulations.
.02 RULES FOR ALLOCATION AND
APPORTIONMENT OF DEDUCTIONS.
(1) IN GENERAL. The section 861
regulations provide guidance for the allo-
cation and apportionment of deductions
in determining the taxable income of a
taxpayer from specific sources and activ-
ities under sections of the Code, referred
to as operative sections. Section 199 is
treated as an operative section for pur-
poses of the section 861 regulations. See
§ 1.199–4(d)(1).
(2) CONFORMITY OF APPLICA-
TION. Where more than one operative
section applies, the taxpayer may be re-
quired to apply the section 861 regulations
separately for each applicable operative
section. In that case, § 1.861–8(f)(2)(i)
provides that the taxpayer is required
to use the same method of allocation
and the same principles of apportion-
ment for all operative sections. See also
§ 1.199–4(d)(1).
.03 ALLOCATION AND APPOR-
TIONMENT OF INTEREST EXPENSE.
(1) IN GENERAL. Taxpayers generally
are required under §§ 1.861–8T(c)(2) and
1.861–9 to apportion interest expense on
the basis of assets. Section 1.861–8T(c)(2)
provides that the apportionment must be
made either on the basis of the tax book
value of the assets or on the fair market
value of the assets. Section 1.861–9(i)(1)
permits a taxpayer to elect to determine tax
book value using the alternative tax book
value method.
(2) BINDING ELECTION. Under
§ 1.861–8T(c)(2), once the taxpayer
uses the fair market value method, the
taxpayer and all related persons must
continue to use that method unless ex-
pressly authorized by the Commissioner
to change methods. Similarly, under
§ 1.861–9(i)(2)(i), ifa taxpayer elects to
use the alternative tax book value method,
the taxpayer and all related persons may
not, during the year of election and the
four taxable years thereafter, determine tax
book value under another method without
the consent of the Commissioner. In Rev.
Proc. 2005–28, 2005–1 C.B. 1093, the
Commissioner provided automatic con-
sent for taxpayers to change from the fair
market value method to the alternative tax
book value method, provided that certain
requirements were met.
.04 ALLOCATION AND APPOR-
TIONMENT OF RESEARCH AND EX-
PERIMENTAL EXPENDITURES.
(1) IN GENERAL. Pursuant to
§ 1.861–17, after allocating legally man-
dated R&E, if any, under § 1.861–17(a)(4)
and exclusively apportioning applicable
R&E, if any, under § 1.861–17(b)(1)(i),
the remaining R&E of the taxpayer is ap-
portioned under either the sales method
of § 1.861–17(c) or one of the two gross
income methods of § 1.861–17(d).
(2) BINDING ELECTION. Under
§ 1.861–17(e), a taxpayer may choose ei-
ther the sales method or the optional gross
income methods for the original return for
its first taxable year to which § 1.861–17
applies. Once the method is elected, the
taxpayer is required to use the method for
that year and for the four taxable years
thereafter. A taxpayer may not revoke
its election of either method during the
five-year period without the consent of the
Commissioner.
.05 PREAMBLE OF FINAL REG-
ULATIONS UNDER SECTION 199.
The preamble to the final regulations
under section 199 states that the Trea-
sury Department and the IRS intend to
issue a revenue procedure granting auto-
matic consent to change elections under
§§ 1.861–8T(c)(2) and 1.861–9(i)(1), re-
spectively, to apportion interest expense
and under § 1.861–17(e) to apportion
R&E expense. Accordingly, this revenue
procedure provides rules for obtaining that
automatic consent.
SECTION 3. SCOPE
This revenue procedure applies to
any taxpayer requesting to change (1)
from the fair market value method un-
der § 1.861–8T(c)(2) or from the al-
ternative tax book value method under
§ 1.861–9(i)(1) to apportion interest ex-
pense or (2) from the sales method or
the optional gross income methods under
§ 1.861–17(c) and (d) to apportion R&E
expense. Notwithstanding these rules
for obtaining automatic consent, a tax-
payer may request under the regular ruling
process the consent of the Commissioner
to change one or more elections and, in
the case of a taxpayer within the scope of
Rev. Proc. 2005–28, obtain the consent
of the Commissioner to change from the
fair market value method by meeting the
requirements of that revenue procedure.
SECTION 4. GENERAL APPLICATION
PROCEDURES
.01 APPROVAL. The consent of the
Commissioner is hereby granted, provided
the taxpayer complies with all the applica-
ble provisions of this revenue procedure, to
any taxpayer within the scope of this rev-
enue procedure to change its election:
(1) INTEREST EXPENSE. From
the fair market value method under
§ 1.861–8T(c)(2) or the alternative tax
book value method under § 1.861–9(i) of
apportioning interest expense to another
method; or
(2) R&E EXPENSE. From the sales
method or the optional gross income meth-
ods under § 1.861–17(c) and (d) of appor-
tioning R&E expense to another method.
.02 STATEMENT REQUIREMENT.
(1) A corporation shall request to
change an election within the scope of
this revenue procedure on a Form 1118
by attaching to Form 1118 the applica-
ble statement set forth in § 4.02(2) of
this revenue procedure. In the case of
such taxpayers electronically filing Form
1118, the statement must be included in
the electronic version of Form 1118. A
taxpayer, other than a corporation, shall
request to change an election within the
scope of this revenue procedure on Form
1116 by attaching to Form 1116 one of
the three statements, whichever is applica-
ble, set forth in § 4.02(2) of this revenue
procedure. In the case of such taxpayers
electronically filing Form 1116, the state-
ment must be entered into the Election
Explanation Record of the electronic ver-
sion of Form 1040, Form 1041, or other
relevant form.
November 20, 20069322006–47 I.R.B.

(2) The statement referred to in
§ 4.02(1) of this revenue procedure shall
provide as follows:
(i) INTEREST EXPENSE FROM
FAIR MARKET VALUE METHOD.
“For the immediately preceding taxable
year, [name of taxpayer] valued assets for
purposes of interest expense apportion-
ment using the fair market value method.
Pursuant to Rev. Proc. 2006–42, [name of
taxpayer] is changing from the fair mar-
ket value method to the tax book value
[alternative tax book value] method of
asset valuation. This change to the tax
book value [alternative tax book value]
method applies beginning with [name of
taxpayer]’s [XXXX] taxable year,”
(ii) INTEREST EXPENSE FROM
ALTERNATIVE TAX BOOK VALUE
METHOD. “For the immediately pre-
ceding taxable year, [name of taxpayer]
valued assets for purposes of interest ex-
pense apportionment using the alternative
tax book value method. Pursuant to Rev.
Proc. 2006–42, [name of taxpayer] is re-
voking its election to determine tax book
value using the alternative tax book value
method. This change to the tax book value
method applies beginning with [name of
taxpayer]’s [XXXX] taxable year,” and/or
(iii) R&E EXPENSE. “For the immedi-
ately preceding taxable year, [name of tax-
payer] apportioned R&E expense using the
sales method as described in § 1.861–17(c)
[one of the optional gross income meth-
ods as described in § 1.861–17(d)]. Pur-
suant to Rev. Proc. 2006–42, [name of tax-
payer] is changing from the sales method
[one of the optional gross income meth-
ods] to one of the optional gross income
methods [sales method]. This change ap-
plies beginning with [name of taxpayer]’s
[XXXX] taxable year.
.03 DOCUMENTATION. Any tax-
payer that changes methods under this
revenue procedure must maintain all docu-
mentation necessary to establish its change
in method or methods and its eligibility
for the benefits of this revenue procedure.
SECTION 5. REVIEW OF STATEMENT
The appropriate director of the Inter-
nal Revenue Service (within the mean-
ing of § 1.01(3) of Rev. Proc. 2006–1,
2006–1 I.R.B. 1) may ascertain if the tax-
payer changed its election(s) in compli-
ance with all the applicable provisions of
this revenue procedure. A taxpayer chang-
ing its election(s) pursuant to this revenue
procedure without complying with all the
provisions (including the terms and condi-
tions) of this revenue procedure ordinarily
will be deemed to have initiated the change
in election(s) without the approval of the
Commissioner. Upon examination, a tax-
payer that has initiated an unauthorized
change of election(s) may be denied the
change. For example, the taxpayer may be
required to redetermine its apportioned in-
terest and/or R&E expense in accordance
with its former election(s).
SECTION 6. EFFECTIVE DATE,
DEADLINE, AND TRANSITION RULE
.01 EFFECTIVE DATE. This revenue
procedure is effective for either:
(1) a taxpayer’s first taxable year be-
ginning after December 31, 2004 (the tax-
payer’s 2005 taxable year); or
(2) a taxpayer’s first taxable year imme-
diately following the taxpayer’s 2005 tax-
able year, but only with respect to elections
that first took effect in a taxable year pre-
ceding the taxpayer’s 2005 taxable year.
.02 DEADLINE. This revenue proce-
dure is effective only if the taxpayer sub-
mits the statement(s) required by § 4.02
of this revenue procedure by the later of
(i) one year after October 30, 2006, or (ii)
the due date (including extensions) of the
taxpayer’s income tax return to which the
statement(s) relates.
.03 TRANSITION RULE. If a taxpayer
within the scope of this revenue proce-
dure filed an application to change an elec-
tion(s) to which the revenue procedure ap-
plies with the national office and the ap-
plication is pending with the national of-
fice on October 30, 2006, the taxpayer may
obtain approval under this revenue proce-
dure. However, the national office will
process the application in accordance with
the authority under which it was filed, un-
less the taxpayer notifies the national of-
fice that the taxpayer wants to use this rev-
enue procedure before the national office
issues the letter ruling granting or deny-
ing approval for the change. If the tax-
payer timely notifies the national office
that it wants to use this revenue procedure,
thenationalofficewillcloseoutthepre-
viously filed application. In addition, any
user fee that was submitted with the previ-
ously filed application will be refunded to
the taxpayer.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–2040. An agency may not conduct
or sponsor, and a person is not required
to respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number. The
collections of information in this revenue
procedurearefoundin§4.02and.03of
this revenue procedure. The information
is required in order to determine whether
the taxpayer properly obtained automatic
approval to change an election within the
scope of this revenue procedure. The
likely respondents are the following: cor-
porations, partnerships, S corporations,
and individuals. The estimated total an-
nual reporting burden for the requirements
contained in § 4.02 and .03 of this revenue
procedure is 100 hours: the estimated
annual burden per respondent is 30 min-
utes; the estimated number of respondents
is 200; and the estimated frequency of
response is occasional. 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 con-
fidential, as required by 26 U.S.C. § 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Richard L. Chewning of
the Office of Associate Chief Counsel
(International). For further information
regarding this revenue procedure, contact
Richard L. Chewning at (202) 622–3850
(not a toll-free call).
2006–47 I.R.B.933November 20, 2006

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(Also: Part 1, §§ 6662, 6694; 1.6662–4, 1.6694–2.)
Rev. Proc. 2006–48
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2005–75, 2005–50 I.R.B. 1137, and
identifies circumstances under which the
disclosure on a taxpayer’s return with re-
spect to an item or a position is adequate
for the purpose of reducing the understate-
ment of income tax under section 6662(d)
of the Internal Revenue Code (relating to
the substantial understatement aspect of
the accuracy-related penalty), and for the
purpose of avoiding the preparer penalty
under section 6694(a) (relating to under-
statements due to unrealistic positions).
This revenue procedure does not apply
with respect to any other penalty pro-
visions (including the disregard provi-
sions of the section 6662 accuracy-related
penalty, which are subject to an exception
for adequate disclosure).
This revenue procedure applies to any
returnfiledon2006taxformsforataxable
year beginning in 2006, and to any return
filed on 2006 tax forms in 2007 for short
taxable years beginning in 2007.
SECTION 2. CHANGES FROM REV.
PROC. 2005–75
.01. Editorial changes have been made
in updating Rev. Proc. 2005–75.
.02. Section 4.02(3) concerning differ-
ence in book and income tax reporting is
expanded by adding new Schedules M–3
for Forms 1065,U.S. Return of Partner-
ship Income, 1120–L,U.S. Life Insurance
Company Income Tax Return, 1120–PC,
U.S. Property and Casualty Insurance
Company Income Tax Return, 1120S,U.S.
Income Tax Return for an S Corporation,
which reconcile net income (loss) in the
financial statements to that shown on an
entity’s return.
SECTION 3. BACKGROUND
.01 If section 6662 applies to any por-
tion of an underpayment of tax required
to be shown on a return, an amount equal
to 20 percent of the portion of the under-
payment to which the section applies is
added to the tax. (The penalty rate is 40
percent in the case of gross valuation mis-
statements under section 6662(h).) Sec-
tion 6662(b)(2) applies to the portion of
an underpayment of taxthat is attributable
to a substantial understatement of income
tax.
.02 Section 6662(d)(1) provides that
there is a substantial understatement of in-
come tax if the amount of the understate-
ment exceeds the greater of 10 percent of
the amount of tax required to be shown on
the return for the taxable year or $5,000.
Section 6662(d)(1)(B) provides special
rules for corporations. A corporation
(other than an S corporation or personal
holding company) has a substantial under-
statement of income tax if the amount of
the understatement exceeds the lesser of
10 percent of the tax required to be shown
on the return for a taxable year (or, if
greater, $10,000) or $10,000,000. Section
6662(d)(2) defines an understatement as
the excess of the amount of tax required to
be shown on the return for the taxable year
over the amount of the tax that is shown on
the return reduced by any rebate (within
the meaning of section 6211(b)(2)).
.03 In the case of an item not at-
tributable to a tax shelter, section
6662(d)(2)(B)(ii) provides that the amount
of the understatement is reduced by the
portion of the understatement attribut-
able to any item with respect to which
the relevant facts affecting the item’s tax
treatment are adequately disclosed in the
return or in a statement attached to the re-
turn, and there is a reasonable basis for the
tax treatment of the item by the taxpayer.
.04 Section 6694 imposes a penalty of
$250 on an income tax return preparer
for filing a return or claim for refund that
results in an understatement of liability
due to a position for which the preparer
knew or should have known that there
was not a realistic possibility of being sus-
tained on the merits and the position was
not disclosed in accordance with section
6662(d)(2)(B)(ii).
.05 In general, this revenue proce-
dure provides guidance for determining
when disclosure is adequate for purposes
of section 6662(d)(2)(B)(ii) and section
6694(a)(3). For purposes of this revenue
procedure, the taxpayer must furnish all
required information in accordance with
the applicable forms and instructions, and
the money amounts entered on these forms
must be verifiable. Annual guidance under
Treas. Reg. § 1.6662–4(f)(2) and Treas.
Reg. § 1.6694–3(e)(1) and (2) for returns
filed on 2005, 2004, and 2003 tax forms
is provided in Rev. Proc. 2005–75, Rev.
Proc. 2004–73, 2004–2 C.B. 999, and
Rev. Proc. 2003–77, 2003–2 C.B. 964,
respectively.
.06 Fiscal and short tax year returns. (a)
In general. This revenue procedure may
apply to a return for a fiscal tax year that
begins in 2006 and ends in 2007. This rev-
enue procedure may also apply to a short
year return for a period beginning in 2007
where the return is to be filed before the
2007 forms are available. (Note that indi-
viduals are generally not put in this posi-
tion as a decedent’s final return for a frac-
tional part of a year is due the fifteenth day
of the fourth month following the close of
the12-month period which began with the
first day of such fractional part of the year.
SeeTreas. Reg. section 1.6072–1(b).) In
the case of fiscal year and short year re-
turns, the taxpayer must take into account
any tax law changes that are effective for
tax years beginning after December 31,
2006, even though these changes are not
reflected on the form.
(b) Tax law changes effective after De-
cember 31, 2006. This document does
not take into account the effect of tax law
changes effective for tax years beginning
after December 31, 2006. If a line ref-
erenced in this revenue procedure is af-
fected by such a change and requires ad-
ditional reporting, a taxpayer may have
to file Form 8275,Disclosure Statement,
or Form 8275–R,Regulation Disclosure
Statement, until the Service prescribes cri-
teria for complying with the requirement.
SECTION 4. PROCEDURE
.01 General.
(1) Additional disclosure of facts rel-
evant to, or positions taken with respect
to, issues involving any of the items set
forth below is unnecessary for purposes
of reducing any understatement of income
tax under section 6662(d) (except as other-
wise provided in section 4.02(3) concern-
ing Schedules M–1 and M–3), provided
that the forms and attachments are com-
pleted in a clear manner and in accordance
with their instructions.
November 20, 20069342006–47 I.R.B.

(2) The money amounts entered on the
forms must be verifiable, and the informa-
tion on the return must be disclosed in the
manner described below. For purposes of
this revenue procedure, a number is verifi-
able if, on audit, the taxpayer can demon-
strate the origin of the number (even if
that number is not ultimately accepted by
the Internal RevenueService) and the tax-
payer can show good faith in entering that
number on the applicable form.
(3) The disclosure of an amount as pro-
vided in section 4.02 below is not ade-
quate when the understatement arises from
a transaction between related parties. If an
entry may present a legal issue or contro-
versy because of a related party transac-
tion, then that transaction and the relation-
ship must be disclosed on a Form 8275,
Disclosure Statement, or Form 8275–R,
Regulation Disclosure Statement.
(4) Where the amount of an item is
shown on a line that does not have a
preprinted description identifying that
item (such as on an unnamed line under an
“Other Expense” category) the taxpayer
must clearly identify the item by including
the description on that line. For example,
to disclose a bad debt for a sole propri-
etorship, the words “bad debt” must be
written or typed on the line of Schedule
C that shows the amount of the bad debt.
Also, for Schedule M–3 (Form 1120),
Part II, line 25, Other income (loss) items
with differences, or Part III, line 35, Other
expense/deduction items with differences,
the entry must provide descriptive lan-
guage; for example, “Cost of non-compete
agreement deductible not capitalizable.”
If space limitations on a form do not allow
for an adequate description, the descrip-
tion must be continued on an attachment.
(5) Although a taxpayer may literally
meet the disclosure requirements of this
revenue procedure, the disclosure will
have no effect for purposes of the sec-
tion 6662 accuracy-related penalty if the
item or position on the return: (1) Does
not have a reasonable basis as defined
in Treas. Reg. § 1.6662–3(b)(3); (2) Is
attributable to a tax shelter item as defined
in section 6662(d)(2) and Treas. Reg.
§ 1.6662–4(g); or (3) Is not properly sub-
stantiated or the taxpayer failed to keep
adequate books and records with respect
to the item or position. See Treas. Reg.
§ 1.6694–2(c) regarding limitations on the
effectiveness of a disclosure regarding the
section 6694 return preparer penalty.
.02 Items.
(1) Form 1040, Schedule A,Itemized
Deductions:
(a) Medical and Dental Expenses:
Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through 9,
supplying all required information. Line 8
must list each type of tax and the amount
paid.
(c) Interest Expenses: Complete lines
10 through 14, supplying all required in-
formation. This section 4.02(1)(c) does
not apply to (i) amounts disallowed under
section 163(d) unless Form 4952,Invest-
ment Interest Expense Deduction,iscom-
pleted, or (ii) amounts disallowed under
section 265.
(d) Contributions: Complete lines 15
through 18, supplying all required infor-
mation. Enter the amount of the contri-
bution reduced by the value of any sub-
stantial benefit (goods or services) pro-
vided by the donee organization in con-
sideration, in whole or in part. Entering
the value of the contribution unreduced by
the value of the benefit received will not
constitute adequate disclosure. If a con-
tribution of $250 or more is made, this
section will not apply unless a contem-
poraneous written acknowledgment, as re-
quired by section 170(f)(8), is obtained
from the donee organization. If a contri-
bution of property other than cash is made
and the amount claimed as a deduction ex-
ceeds $500, attach a properly completed
Form 8283,Noncash Charitable Contri-
butions, to the return. In addition to the
Form 8283, if a contribution of a quali-
fied motor vehicle, boat, or airplane has a
value of more than $500, this section will
not apply unless a contemporaneous writ-
ten acknowledgment, as required by sec-
tion 170(f)(12), is obtained from the donee
organization and attached to the return. An
acknowledgment under section 170(f)(8)
is not required if an acknowledgment un-
der section 170(f)(12) is required.
(e) Casualty and Theft Losses: Com-
plete Form 4684,Casualties and Thefts,
and attach to the return. Each item or ar-
ticle for which a casualty or theft loss is
claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses
(including, for purposes of this section, the
following six expenses as they relate to the
rental of property):
(a) Casualty and Theft Losses: The pro-
cedure outlined in section 4.02(1)(e) must
be followed.
(b) Legal Expenses: The amount
claimed must be stated. This section
does not apply, however, to amounts prop-
erly characterized as capital expenditures,
personal expenses, or non-deductible lob-
bying or political expenditures, including
amounts that are required to be (or that
are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The
amount written off must be stated.
(d) Reasonableness of Officers’ Com-
pensation: Form 1120, Schedule E,Com-
pensation of Officers, must be completed
when required by its instructions. The time
devoted to business must be expressed as
a percentage as opposed to “part” or “as
needed.” This section does not apply to
“golden parachute” payments, as defined
under section 280G. This section will not
apply to the extent that remuneration paid
or incurred exceeds the $1 million-em-
ployee-remuneration limitation, if applica-
ble.
(e) Repair Expenses: The amount
claimed must be stated. This section does
not apply, however, to any repair expenses
properly characterized as capital expendi-
tures or personal expenses.
(f) Taxes (other than foreign taxes): The
amount claimed must be stated.
(3) Differences in book and income tax
reporting.
(a) Form 1065. Schedule M–3 (Form
1065),Net Income (Loss) Reconciliation
for Certain Partnerships: Column (b),
Temporary Difference,andColumn(c),
Permanent Difference, of Part II, (recon-
ciliation of income (loss) items) and Part
III (reconciliation of expense/deduction
items).
(b) Form 1120. (i) Schedule M–1,Rec-
onciliation of Income (Loss) per Books
With Income per Return.
(ii) Schedule M–3 (Form 1120),Net
Income (Loss) Reconciliation for Corpo-
rations With Total Assets of $10 Million
or More: Column (b),Temporary Differ-
ence,andColumn(c),Permanent Differ-
ence, of Part II, (reconciliation of income
(loss) items) and Part III (reconciliation of
expense/deduction items).
(c) Form 1120–L. Schedule M–3 (Form
1120–L),Net Income (Loss) Reconcilia-
2006–47 I.R.B.935November 20, 2006

tion for U.S. Life Insurance Companies
With Total Assets of $10 Million or More:
Column (b),Temporary Difference,and
Column (c),Permanent Difference,ofPart
II, (reconciliation of income (loss) items)
and Part III (reconciliation of expense/de-
duction items).
(d) Form 1120–PC. Schedule M–3
(Form 1120–PC),Net Income (Loss) Rec-
onciliation for U.S. Property and Casualty
Insurance Companies With Total Assets
of $10 Million or More: Column (b),
Temporary Difference,andColumn(c),
Permanent Difference, of Part II, (recon-
ciliation of income (loss) items) and Part
III (reconciliation of expense/deduction
items).
(e) Form 1120–S. Schedule M–3 (Form
1120S),Net Income (Loss) Reconciliation
for S Corporations With Total Assets of
$10 Million or More: Column (b),Tempo-
rary Difference,andColumn(c),Perma-
nent Difference, of Part II, (reconciliation
of income (loss) items) and Part III (recon-
ciliation of expense/deduction items).
For Schedule M–1 and all Schedules
M–3, the information provided reasonably
must be expected to apprise the Service of
the nature of the potential controversy con-
cerning the tax treatment of the item. If
the information provided does not so ap-
prise the Service, a Form 8275 or Form
8275–R, must be used to adequately dis-
close the item (see Part II of the instruc-
tions for those forms).
Note: An item reported on a line with
a pre-printed description, shown on an
attached schedule, or “itemized” on
Schedule M–1 may represent the ag-
gregate amount of several transactions
producing that item (i.e.,agroupof
similar items, such as amounts paid or
incurred for supplies by a taxpayer en-
gagedinbusiness). Insomeinstances,
the potentially controversial item may
involve a portion of the amount dis-
closed on the schedule. The Service
will not be reasonably apprised of the
potential controversy by the amount
disclosed. In these instances, the tax-
payer must use Form 8275 or Form
8275–R regarding that portion of the
item.
The combining of unlike items, whether on
Schedule M–1 or Schedule M–3 (or on an
attachment when directed by the instruc-
tions), will not constitute an adequate dis-
closure.
(4) Foreign Tax Items:
(a) International Boycott Transactions:
Transactions disclosed on Form 5713,
International Boycott Report. Schedule
A,International Boycott Factor (Sec-
tion 999(c)(1)); Schedule B,Specifically
Attributable Taxes and Income (Section
999(c)(2)); and Schedule C,Tax Effect
of the International Boycott Provisions,
must be completed when required by their
instructions.
(b) Treaty-Based Return Position:
Transactions and amounts under section
6114 or section 7701(b) as disclosed on
Form 8833,Treaty-Based Return Posi-
tion Disclosure Under Section 6114 or
7701(b).
(5) Other:
(a) Moving Expenses: Complete Form
3903,Moving Expenses, and attach to the
return.
(b) Employee Business Expenses:
Complete Form 2106,Employee Business
Expenses, or Form 2106–EZ,Unreim-
bursed Employee Business Expenses,and
attach to the return. This section does not
apply to club dues, or to travel expenses
for any non-employee accompanying the
taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136,
Credit for Federal Tax Paid on Fuels,and
attach to the return.
(d) Investment Credit: Complete Form
3468,Investment Credit, and attach to the
return.
SECTION 5. EFFECTIVE DATE
This revenue procedure applies to any
return filed on a 2006 tax form for a taxable
year beginning in 2006, and to any return
filed on a 2006 tax form in 2007 for a short
taxable year beginning in 2007.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is John M. Moran of the Office
of Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue procedure, contact
John M. Moran at (202) 622–4940 (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, §§ 62, 162, 170, 213, 217, 274, 1016;
1.62–2, 1.162–17, 1.170A–1, 1.213–1, 1.217–2,
1.274–5, 1.1016–3.)
Rev. Proc. 2006–49
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2005–78, 2005–2 C.B. 1177, and
provides optional standard mileage rates
for employees, self-employed individuals,
or other taxpayers to use in computing
the deductible costs of operating an auto-
mobile for business, charitable, medical,
or moving expense purposes. This rev-
enue procedure also provides rules under
which the amount of ordinary and nec-
essary expenses of local travel or trans-
portation away from home that are paid
or incurred by an employee are deemed
substantiated under § 1.274–5 of the In-
come Tax Regulations if a payor (the em-
ployer, its agent, or a third party) pro-
vides a mileage allowance under a reim-
bursement or other expense allowance ar-
rangement to pay for the expenses. Use
of a method of substantiation described
in this revenue procedure is not manda-
tory and a taxpayer may use actual allow-
able expenses if the taxpayer maintains
adequate records or other sufficient evi-
dence for proper substantiation. The Inter-
nal Revenue Service prospectively adjusts
the business and medical and moving stan-
dard mileage rates annually (to the extent
warranted).
SECTION 2. SUMMARY OF
STANDARD MILEAGE RATES
.01Standard mileage rates
November 20, 20069362006–47 I.R.B.

(1) Business (section 5 below)48.5 cents per mile
(2) Charitable contribution (section 7 below)14 cents per mile
(3) Medical and moving (section 7 below)20 cents per mile
.02Determination of standard mileage
rates. The business and medical and mov-
ing standard mileage rates reflected in this
revenue procedure are based on an annual
study of the fixed and variable costs of op-
erating an automobile conducted on behalf
of the Service by an independent contrac-
tor. The charitable contribution standard
mileage rate is provided in § 170(i) of the
Internal Revenue Code.
SECT
ION 3. BACKGROUND AND
CHAN
GES
.01 Section 162(a) allows a deduction
for all the ordinary and necessary expenses
paid or incurred during the taxable year
in carrying on any trade or business. Un-
der that provision, an employee or self-em-
ployed individual may deduct the cost of
operating an automobile to the extent that
it is used in a trade or business. However,
under § 262, no portion of the cost of op-
erating an automobile that is attributable to
personal use is deductible.
.02 Section 274(d) provides, in part,
that no deduction is allowed under § 162
with respect to any listed property (as de-
finedin§280F(d)(4)toincludepassen-
ger automobiles and any other property
used as a means of transportation) unless
the taxpayer complies with certain sub-
stantiation requirements. Section 274(d)
further provides that regulations may pre-
scribe that some or all of the substantiation
requirements do not apply to an expense
that does not exceed an amount prescribed
by the regulations.
.03 Section 1.274–5(j), in part, grants
the Commissioner of Internal Revenue
the authority to establish a method under
which a taxpayer may use mileage rates
to substantiate, for purposes of § 274(d),
the amount of the ordinary and necessary
expenses of using a vehicle for local trans-
portation and transportation to, from, and
at the destination while traveling away
from home.
.04 Section 1.274–5(g), in part, grants
the Commissioner the authority to pre-
scribe rules relating to mileage allowances
for ordinary and necessary expenses of
using a vehicle for local transportation
and transportation to, from, and at the
destination while traveling away from
home. Pursuant to this grant of authority,
the Commissioner may prescribe rules
under which the allowances, if in accor-
dance with reasonable business practice,
will be regarded as (1) equivalent to sub-
stantiation, by adequate records or other
sufficient evidence, of the amount of the
travel and transportation expenses for pur-
poses of § 1.274–5(c), and (2) satisfying
the requirements of an adequate account-
ing to the employer of the amount of the
expenses for purposes of § 1.274–5(f).
.05 Section 62(a)(2)(A) allows an em-
ployee, in determining adjusted gross in-
come, a deduction for the expenses al-
lowedbyPartVI(§161andfollowing),
subchapter B, chapter 1 of the Code, paid
or incurred by the employee in connection
with the performance of services as an em-
ployee under a reimbursement or other ex-
pense allowance arrangement with a payor.
.06 Section 62(c) provides that an ar-
rangement will not be treated as a reim-
bursement or other expense allowance ar-
rangement for purposes of § 62(a)(2)(A) if
it—
(1) does not require the employee to
substantiate the expenses covered by the
arrangement to the payor, or
(2) provides the employee with the right
to retain any amount in excess of the sub-
stantiated expenses covered under the ar-
rangement.
Section 62(c) further provides that the sub-
stantiation requirements described therein
do not apply to any expense to the extent
that, under the grant of regulatory author-
ity in § 274(d), the Commissioner has pro-
vided that substantiation is not required for
the expense.
.07 Under § 1.62–2(c)(1), a reim-
bursement or other expense allowance
arrangement satisfies the requirements
of § 62(c) if it meets the requirements
of business connection, substantiation,
and returning amounts in excess of ex-
penses as specified in the regulations.
Section 1.62–2(e)(2) specifically provides
that substantiation of certain business ex-
penses in accordance with rules prescribed
under the authority of § 1.274–5(g) will
be treated as substantiation of the amount
of the expenses for purposes of § 1.62–2.
Under § 1.62–2(f)(2), the Commissioner
may prescribe rules under which an ar-
rangement providing mileage allowances
is treated as satisfying the requirement of
returning amounts in excess of expenses,
even though the arrangement does not
require the employee to return the por-
tion of the allowance that relates to miles
of travel substantiated and that exceeds
the amount of the employee’s expenses
deemed substantiated pursuant to rules
prescribed under § 274(d), provided the
allowance is reasonably calculated not
to exceed the amount of the employee’s
expenses or anticipated expenses and the
employee is required to return any portion
of the allowance that relates to miles of
travel not substantiated.
.08 Section 1.62–2(h)(2)(i)(B) provides
that if a payor pays a mileage allowance
under an arrangement that meets the re-
quirements of § 1.62–2(c)(1), the portion,
if any, of the allowance that relates to miles
of travel substantiated in accordance with
§ 1.62–2(e), that exceeds the amount of
the employee’s expenses deemed substan-
tiated for the travel pursuant to rules pre-
scribed under § 274(d) and § 1.274–5(g),
and that the employee is not required
to return, is subject to withholding and
payment of employment taxes.See
§§ 31.3121(a)–3, 31.3231(e)–1(a)(5),
31.3306(b)–2, and 31.3401(a)–4 of the
Employment Tax Regulations. Because
the employee is not required to return this
excess portion, the reasonable period of
time provisions of § 1.62–2(g) (relating to
the return of excess amounts) do not apply
to this excess portion.
.09 Under § 1.62–2(h)(2)(i)(B)(4), the
Commissioner may provide special rules
regarding the timing of withholding and
payment of employment taxes on mileage
allowances.
.10 Section 303 of the Katrina Emer-
gency Tax Relief Act of 2005, Pub. L.
No. 109–73, 119 Stat. 2016 (KETRA)
2006–47 I.R.B.937November 20, 2006

provides a special standard mileage rate
for purposes of computing the amount al-
lowable as a charitable contribution deduc-
tion for the cost of operating an automo-
bile for the provision of relief related to
Hurricane Katrina during the period be-
ginning on August 25, 2005, and ending
on December 31, 2006. Section 304 of
KETRA provides that taxpayers may ex-
clude from income amounts received from
a charity as reimbursement for the cost of
operating an automobile for the provision
of relief related to Hurricane Katrina dur-
ing the period beginning on August 25,
2005, and ending on December 31, 2006.
Because these provisions expire after De-
cember 31, 2006, sections 2.01 and 7.01
of this revenue procedure are revised to re-
move these special charitable contribution
standard mileage rates for 2007.
SECTION 4. DEFINITIONS
.01Standard mileage rate.Theterm
“standard mileage rate” means the applica-
ble amount provided by the Service for op-
tional use by employees or self-employed
individuals in computing the deductible
costs of operating automobiles (including
vans, pickups, or panel trucks) they own or
lease for business purposes, or by taxpay-
ers in computing the deductible costs of
operating automobiles for charitable, med-
ical, or moving expense purposes.
.02Transportation expenses.Theterm
“transportation expenses” means the ex-
penses of operating an automobile for local
travel or transportation away from home.
.03Mileage allowance.Theterm
“mileage allowance” means a payment
under a reimbursement or other expense
allowance arrangement that is:
(1) paid with respect to the ordinary and
necessary business expenses incurred, or
that the payor reasonably anticipates will
be incurred, by an employee for transporta-
tion expenses in connection with the per-
formance of services as an employee of the
employer,
(2) reasonably calculated not to exceed
the amount of the expenses or the antici-
pated expenses, and
(3) paid at the applicable standard
mileage rate, a flat rate or stated schedule,
or in accordance with any other Ser-
vice-specified rate or schedule.
.04Flat rate or stated schedule.A
mileage allowance is paid at a flat rate or
stated schedule if it is provided on a uni-
form and objective basis with respect to the
expenses described in section 4.03 of this
revenue procedure. The allowance may
be paid periodically at a fixed rate, at a
cents-per-mile rate, at a variable rate based
on a stated schedule, at a rate that com-
bines any of these rates, or on any other
basis that is consistently applied and in ac-
cordance with reasonable business prac-
tice. Thus, for example, a periodic pay-
ment at a fixed rate to cover the fixed
costs (including depreciation (or lease pay-
ments), insurance, registration and license
fees, and personal property taxes) of driv-
ing an automobile in connection with the
performance of services as an employee of
the employer, coupled with a periodic pay-
ment at a cents-per-mile rate to cover the
variable costs (including gasoline and all
taxes thereon, oil, tires, and routine main-
tenance and repairs) of using an automo-
bile for those purposes, is an allowance
paid at a flat rate or stated schedule. Like-
wise, a periodic payment at a variable rate
based on a stated schedule for different lo-
cales to cover the costs of driving an auto-
mobile in connection with the performance
of services as an employee is an allowance
paid at a flat rate or stated schedule.
SECTION 5. BUSINESS STANDARD
MILEAGE RATE
.01In general. The standard mileage
rate for transportation expenses is 48.5
cents per mile for all miles of use for busi-
ness purposes.
.02Use of the business standard
mileage rate. A taxpayer may use the
business standard mileage rate with re-
spect to an automobile that is either owned
or leased by the taxpayer. A taxpayer
generally may deduct an amount equal
to either the business standard mileage
rate times the number of business miles
traveled or the actual costs (both fixed and
variable) paid or incurred by the taxpayer
that are allocable to traveling those busi-
ness miles.
.03Business standard mileage rate in
lieu of fixed and variable costs. A deduc-
tion using the business standard mileage
rate is computed on a yearly basis and is
in lieu of all fixed and variable costs of the
automobile allocable to business purposes
(except as provided in section 9.06 of this
revenue procedure). Items such as depre-
ciation (or lease payments), maintenance
and repairs, tires, gasoline (including all
taxes thereon), oil, insurance, and license
and registration feesare included in fixed
and variable costs for this purpose.
.04Parking fees, tolls, interest, and
taxes. Parking fees and tolls attributable
to use of the automobile for business pur-
poses may be deducted as separate items.
Likewise, interest relating to the purchase
of the automobile as well as state and local
personal property taxes may be deducted
as separate items, but only to the extent al-
lowable under § 163 or § 164, respectively.
Section 163(h)(2)(A) expressly provides
that interest is nondeductible personal
interest if it is paid or accrued on indebt-
edness properly allocable to the trade or
business of performing services as an em-
ployee. Section 164 expressly provides
that state and local taxes that are paid or
accrued by a taxpayer in connection with
an acquisition or disposition of property
are treated as part of the cost of the ac-
quired property or as a reduction in the
amount realized on the disposition of the
property. If the automobile is operated less
than 100 percent for business purposes,
an allocation is required to determine the
business and nonbusiness portion of the
taxes and interest deduction allowable.
.05Depreciation. For owned automo-
biles placed in service for business pur-
poses, and for which the business standard
mileage rate has been used for any year,
depreciation is considered to have been al-
lowed at the rate of 16 cents per mile for
2003 and 2004, 17 cents per mile for 2005
and 2006, and 19 cents per mile for 2007,
for those years in which the business stan-
dard mileage rate was used. If actual costs
were used for one or more of those years,
these rates do not apply to any year in
which actual costs were used. The depre-
ciation described above reduces the basis
of the automobile (but not below zero) in
determining adjusted basis as required by
§ 1016.
.06Limitations.
(1) The business standard mileage rate
may not be used to compute the deductible
expenses of (a) automobiles used for hire,
such as taxicabs, or (b) five or more auto-
mobiles owned or leased by a taxpayer and
used simultaneously (such as in fleet oper-
ations).
(2) The business standard mileage rate
may not be used to compute the deductible
November 20, 20069382006–47 I.R.B.

business expenses of an automobile leased
by a taxpayer unless the taxpayer uses ei-
ther the business standard mileage rate or
a fixed and variable rate allowance (FAVR
allowance) (as provided in section 8 of
this revenue procedure) to compute the de-
ductible business expenses of the automo-
bile for the entire lease period (including
renewals). For a lease commencing on
or before December 31, 1997, the “en-
tire lease period” means the portion of the
lease period (including renewals) remain-
ing after that date.
(3) The business standard mileage rate
may not be used to compute the deductible
expenses of an automobile for which the
taxpayer has (a) claimed depreciation us-
ing a method other than straight-line for its
estimated useful life, (b) claimed a § 179
deduction, (c) claimed the special depre-
ciation allowance under § 168(k), or (d)
used the Accelerated Cost Recovery Sys-
tem (ACRS) under former § 168 or the
Modified Accelerated Cost Recovery Sys-
tem (MACRS) under current § 168. By us-
ing the business standard mileage rate, the
taxpayer has elected to exclude the auto-
mobile (if owned) from MACRS pursuant
to § 168(f)(1). If, after using the busi-
ness standard mileage rate, the taxpayer
uses actual costs, the taxpayer must use
straight-line depreciation for the automo-
bile’s remaining estimated useful life (sub-
ject to the applicable depreciation deduc-
tion limitations under § 280F).
(4) The business standard mileage rate
and this revenue procedure may not be
used to compute the amount of the de-
ductible automobile expenses of an em-
ployee of the United States Postal Service
incurred in performing services involving
the collection and delivery of mail on a ru-
ral route if the employee receives qualified
reimbursements (as defined in § 162(o))
for the expenses.See§162(o)forthe
rules that apply to these qualified reim-
bursements.
SECTION 6. RESERVED
SECTION 7. CHARITABLE AND
MEDICAL AND MOVING STANDARD
MILEAGE RATES
.01Charitable. Section 170(i) provides
a standard mileage rate of 14 cents per mile
for purposes of computing the charitable
contribution deduction for use of an auto-
mobile in connection with rendering gratu-
itous services to a charitable organization
under § 170.
.02Medical and moving. The standard
mileage rate is 20 cents per mile for use of
an automobile (1) to obtain medical care
described in § 213, or (2) as part of a move
for which the expenses are deductible un-
der § 217.
.03Charitable or medical and moving
standard mileage rates in lieu of variable
expenses. A deduction computed using the
applicable standard mileage rate for chari-
table, medical, or moving expense miles is
in lieu of all variable expenses (including
gasoline and oil) of the automobile alloca-
ble to those purposes. Costs for items such
as depreciation (or lease payments), insur-
ance, and license and registration fees are
not deductible, and are not included in the
charitable or medical and moving standard
mileage rates.
.04Parking fees, tolls, interest, and
taxes. Parking fees and tolls attributable
to the use of the automobile for charitable,
medical, or moving expense purposes may
be deducted as separate items. Interest
relating to the purchase of the automobile
and state and local personal property taxes
are not deductible as charitable, medical,
or moving expenses, but they may be
deducted as separate items to the extent
allowable under § 163 or § 164, respec-
tively.
SECTION8.FIXEDANDVARIABLE
RATE ALLOWANCE
.01In general.
(1) The ordinary and necessary ex-
penses paid or incurred by an employee
in driving an automobile owned or leased
by the employee in connection with the
performance of services as an employee
of the employer are deemed substantiated
(in an amount determined under section 9
of this revenue procedure) when a payor
reimburses those expenses with a mileage
allowance using a flat rate or stated sched-
ule that combines periodic fixed and
variable rate payments that meet all the
requirements of section 8 of this revenue
procedure (a FAVR allowance).
(2) The amount of a FAVR allowance
must be based on data that (a) is derived
from the base locality,(b) reflects retail
prices paid by consumers, and (c) is rea-
sonable and statistically defensible in ap-
proximating the actual expenses employ-
ees receiving the allowance would incur as
owners of the standard automobile.
.02Computation of FAVR allowance.
(1)FAVR allowance.AFAVRal-
lowance includes periodic fixed payments
and periodic variable payments. A payor
may maintain more than one FAVR al-
lowance. A FAVR allowance that uses the
same payor, standard automobile (or an au-
tomobileofthesamemakeandmodelthat
is comparably equipped), retention period,
and business use percentage is considered
one FAVR allowance,even though other
features of the allowance may vary. A
FAVR allowance also includes any op-
tional high mileage payments; however,
optional high mileage payments are in-
cluded in the employee’s gross income,
are reported as wages or other compen-
sation on the employee’s Form W–2, and
are subject to withholding and payment
of employment taxes when paid.Seesec-
tion 9.05 of this revenue procedure. An
optional high mileage payment covers
the additional depreciation for a standard
automobile attributable to business miles
driven and substantiated by the employee
for a calendar year in excess of the annual
business mileage for that year. If an em-
ployee is covered by the FAVR allowance
for less than the entire calendar year, the
annual business mileage may be prorated
on a monthly basis for purposes of the
preceding sentence.
(2)Periodic fixed payment. A periodic
fixed payment covers the projected fixed
costs (including depreciation (or lease pay-
ments), insurance, registration and license
fees, and personal property taxes) of driv-
ing the standard automobile in connection
with the performance of services as an em-
ployee of the employer in a base locality,
and must be paid at least quarterly. A pe-
riodic fixed payment may be computed by
(a) dividing the total projected fixed costs
of the standard automobile for all years
of the retention period, determined at the
beginning of the retention period, by the
number of periodic fixed payments in the
retention period, and (b) multiplying the
resulting amount by the business use per-
centage.
(3)Periodic variable payment.Aperi-
odic variable payment covers the projected
variable costs (including gasoline and all
taxes thereon, oil, tires, and routine main-
tenance and repairs) of driving a standard
2006–47 I.R.B.939November 20, 2006

automobile in connection with the perfor-
mance of services as an employee of the
employer in a base locality, and must be
paid at least quarterly. The rate of a pe-
riodic variable payment for a computation
period may be computed by dividing the
total projected variable costs for the stan-
dard automobile for the computation pe-
riod, determined at the beginning of the
computation period, by the computation
period mileage. A computation period can
be any period of a year or less. Compu-
tation period mileage is the total mileage
(business and personal) a payor reason-
ably projects a standard automobile will
be driven during a computation period and
equals the retention mileage divided by the
number of computation periods in the re-
tention period. For each business mile sub-
stantiated by the employee for the com-
putation period, the periodic variable pay-
ment must be paid at a rate that does not ex-
ceed the rate for that computation period.
(4)Base locality. A base locality is
the particular geographic locality or re-
gion of the United States in which the
costs of driving an automobile in connec-
tion with the performance of services as
an employee of the employer are generally
paid or incurred by the employee. Thus,
for purposes of determining the amount
of fixed costs, the base locality is gen-
erally the geographic locality or region
in which the employee resides. For pur-
poses of determining the amount of vari-
able costs, the base locality is generally the
geographic locality or region in which the
employee drives the automobile in connec-
tion with the performance of services as an
employee of the employer.
(5)Standard automobile. A standard
automobile is the automobile selected by
the payor on which a specific FAVR al-
lowance is based.
(6)Standard automobile cost.Thestan-
dard automobile cost for a calendar year
may not exceed 95 percent of the sum of
(a) the retail dealer invoice cost of the stan-
dard automobile in the base locality, and
(b) state and local sales or use taxes appli-
cable on the purchase of the automobile.
Further, the standard automobile cost may
not exceed $27,600.
(7)Annual mileage. Annual mileage is
the total mileage (business and personal)
a payor reasonably projects a standard au-
tomobile will be driven during a calendar
year. Annual mileage equals the annual
business mileage divided by the business
use percentage.
(8)Annual business mileage. Annual
business mileage is the mileage a payor
reasonably projects a standard automobile
will be driven by an employee in connec-
tion with the performance of services as an
employee of the employer during the cal-
endar year, but may not be less than 6,250
miles for a calendar year. Annual business
mileage equals the annual mileage multi-
plied by the business use percentage.
(9)Business use percentage. A busi-
ness use percentage is determined by
dividing the annual business mileage by
the annual mileage. The business use
percentage may not exceed 75 percent.
In lieu of demonstrating the reasonable-
ness of the business use percentage based
on records of total mileage and business
mileage driven by theemployees annually,
a payor may use a business use percentage
that is less than or equal to the following
percentages for a FAVR allowance that
is paid for the following annual business
mileage:
Annual business mileageBusiness use percentage
6,250 or more but less than 10,00045 percent
10,000 or more but less than 15,00055 percent
15,000 or more but less than 20,00065 percent
20,000 or more75 percent
(10)Retention period. A retention pe-
riod is the period in calendar years selected
by the payor during which the payor ex-
pectsanemployeetodriveastandardauto-
mobile in connection with the performance
of services as an employee of the employer
before the automobile is replaced. The
period may not be less than two calendar
years.
(11)Retention mileage. Retention
mileage is the annual mileage multiplied
by the number of calendar years in the
retention period.
(12)Residual value. The residual value
of a standard automobile is the projected
amount for which it could be sold at the
end of the retention period after being
driven the retention mileage. The Ser-
vice will accept the following safe harbor
residual values for a standard automobile
computed as a percentage of the standard
automobile cost:
Retention periodResidual value
2-year70 percent
3-year60 percent
4-year50 percent
.03FAVR allowance in lieu of fixed and
variable costs.
(1) A reimbursement computed using
a FAVR allowance is in lieu of the em-
ployee’s deduction of all the fixed and
variable costs paid or incurred by an em-
ployee in driving the automobile in con-
nection with the performance of services
as an employee of the employer, except
as provided in section 9.06 of this rev-
enue procedure. Items such as deprecia-
tion (or lease payments), maintenance and
November 20, 20069402006–47 I.R.B.

repairs, tires, gasoline (including all taxes
thereon), oil, insurance, license and reg-
istration fees, and personal property taxes
are included in fixed and variable costs for
this purpose.
(2) Parking fees and tolls attributable to
an employee driving the standard automo-
bile in connection with the performance of
services as an employee of the employer
are not included in fixed and variable costs
and may be deducted as separate items.
Similarly, interest relating to the purchase
of the standard automobile may be de-
ducted as a separate item, but only to the
extent that the interest is an allowable de-
duction under § 163.
.04Depreciation.
(1) A FAVR allowance may not be paid
with respect to an automobile for which the
employee has (a) claimed depreciation us-
ing a method other than straight-line for its
estimated useful life, (b) claimed a § 179
deduction, (c) claimed the special depreci-
ation allowance under§ 168(k), or (d) used
ACRS under former § 168 or MACRS un-
der current § 168. If an employee uses
actual costs for an owned automobile that
has been covered by a FAVR allowance,
theemployeemustusestraight-linedepre-
ciation for the automobile’s remaining es-
timated useful life (subject to the applica-
ble depreciation deduction limitations un-
der § 280F).
(2) Except as provided in section
8.04(3) of this revenueprocedure, the total
amount of the depreciation component for
the retention period taken into account in
computing the periodic fixed payments
for that retention period may not exceed
the excess of the standard automobile cost
over the residual value of the standard
automobile. In addition, the total amount
of the depreciation component may not
exceed the sum of the annual § 280F lim-
itations on depreciation (in effect at the
beginning of the retention period) that ap-
ply to the standard automobile during the
retention period.
(3) If the depreciation component of pe-
riodic fixed payments exceeds the limi-
tations in section 8.04(2) of this revenue
procedure, that section will be treated as
satisfied in any year during which the to-
tal annual amount of the periodic fixed
payments and the periodic variable pay-
ments made to an employee driving 80 per-
cent of the annual business mileage of the
standard automobile does not exceed the
amount obtained by multiplying 80 per-
cent of the annual business mileage of the
standard automobile by the business stan-
dard mileage rate for that year (under sec-
tion 5.01 of the applicable revenue proce-
dure).
(4) The depreciation included in each
periodic fixed payment portion of a FAVR
allowance paid with respect to an automo-
bile reduces the basis of the automobile
(but not below zero) in determining ad-
justedbasisasrequiredby§1016. See
section 8.07(2) of this revenue procedure
for the requirement that the employer re-
port the depreciation component of a peri-
odic fixed payment to the employee.
.05FAVR allowance limitations.
(1) A FAVR allowance may be paid
only to an employee who substantiates to
the payor for a calendar year at least 5,000
miles driven in connection with the perfor-
mance of services as an employee of the
employer or, if greater, 80 percent of the
annual business mileage of that FAVR al-
lowance. If the employee is covered by
the FAVR allowance for less than the en-
tire calendar year, these limits may be pro-
ratedonamonthlybasis.
(2) A FAVR allowance may not be
paid to a control employee (as defined
in § 1.61–21(f)(5) and (6), excluding
the $100,000 limitation in paragraph
(f)(5)(iii)).
(3)AnemployermaynotpayaFAVR
allowance if at any time during a calendar
year a majority of the employees covered
by the FAVR allowance are management
employees.
(4)AnemployermaynotpayaFAVR
allowance to any employee unless at all
times during a calendar year at least five
employees in total are covered by FAVR
allowances provided by the employer.
(5) A FAVR allowance may be paid
only with respect to an automobile (a)
owned or leased by the employee receiv-
ing the payment, (b) the cost of which, as
a new vehicle (whether or not purchased
new by the employee), was at least 90 per-
cent of the standard automobile cost taken
into account for purposes of determining
the FAVR allowance for the first calendar
year the employee receives the allowance
with respect to that automobile, and (c) the
model year of which does not differ from
the current calendar year by more than the
number of years in the retention period.
(6) A FAVR allowance may not be paid
with respect to an automobile leased by
an employee for which the employee has
used actual expenses to compute the de-
ductible business expenses of the automo-
bile for any year duringtheentireleasepe-
riod. For a lease commencing on or before
December 31, 1997, the “entire lease pe-
riod” means the portion of the lease period
(including renewals) remaining after that
date.
(7) The insurance cost component of
a FAVR allowance must be based on the
rates charged in the base locality for in-
surance coverage on the standard automo-
bile during the current calendar year with-
out taking into account rate-increasing fac-
tors such as poor driving records or young
drivers.
(8) A FAVR allowance may be paid
only to an employee whose insurance cov-
erage limits on the automobile with respect
to which the FAVR allowance is paid are at
least equal to the insurance coverage lim-
its used to compute the periodic fixed pay-
ment under that FAVR allowance.
.06Employee reporting. Within 30
days after an employee’s automobile is
initially covered by a FAVR allowance,
or is again covered by a FAVR allowance
if coverage has lapsed, the employee by
written declaration must provide the payor
with the following information: (1) the
make, model, and year of the employee’s
automobile, (2) written proof of the insur-
ance coverage limits on the automobile,
(3) the odometer reading of the automo-
bile, (4) if owned, the purchase price of
the automobile or, if leased, the price at
which the automobile is ordinarily sold by
retailers (the gross capitalized cost of the
automobile), and (5) if owned, whether
the employee has claimed depreciation
with respect to the automobile using any
of the depreciation methods prohibited by
section 8.04(1) of this revenue procedure
or, if leased, whether the employee has
computed deductible business expenses
with respect to the automobile using actual
expenses. The information described in
(1), (2), and (3) of the preceding sentence
also must be supplied by the employee
to the payor within 30 days after the be-
ginning of each calendar year that the
employee’s automobile is covered by a
FAVR allowance.
.07Payor recordkeeping and reporting.
2006–47 I.R.B.941November 20, 2006

(1)Thepayororitsagentmustmain-
tain written records setting forth (a) the sta-
tistical data and projections on which the
FAVR allowance payments are based, and
(b) the information provided by the em-
ployees pursuant to section 8.06 of this
revenue procedure.
(2) Within 30 days of the end of each
calendar year, the employer must pro-
vide each employee covered by a FAVR
allowance during that year with a state-
ment that, for automobile owners, lists
the amount of depreciation included in
each periodic fixed payment portion of the
FAVR allowance paid during that calen-
dar year and explains that by receiving a
FAVR allowance the employee has elected
to exclude the automobile from the Mod-
ified Accelerated Cost Recovery System
pursuant to § 168(f)(1). For automobile
lessees, the statement must explain that
by receiving the FAVR allowance the em-
ployee may not compute the deductible
business expenses of the automobile using
actual expenses for the entire lease period
(including renewals). For a lease com-
mencing on or before December 31, 1997,
the “entire lease period” means the portion
of the lease period (including renewals)
remaining after that date.
.08Failure to meet section 8 require-
ments. If an employee receives a mileage
allowance that fails to meet one or more
of the requirements of section 8 of this
revenue procedure, the employee may not
be treated as covered by any FAVR al-
lowance of the payor during the period of
the failure. Nevertheless, the expenses to
which that mileage allowance relates may
be deemed substantiated using the method
described in sections 5, 9.01(1), and 9.02
of this revenue procedure to the extent the
requirements of those sections are met.
SECTION 9. APPLICATION
.01 If a payor pays a mileage allowance
in lieu of reimbursing actual transportation
expenses incurred or to be incurred by an
employee, the amount of the expenses that
is deemed substantiated to the payor is ei-
ther:
(1) for any mileage allowance other
than a FAVR allowance, the lesser of the
amount paid under the mileage allowance
or the applicable standard mileage rate
in section 5.01 of this revenue procedure
multiplied by the number of business miles
substantiated by the employee; or
(2) for a FAVR allowance, the amount
paid under the FAVR allowance less the
sum of (a) any periodic variable rate pay-
ment that relates to miles in excess of the
business miles substantiated by the em-
ployee and that the employee fails to re-
turn to the payor although required to do
so, (b) any portion of a periodic fixed pay-
ment that relates to a period during which
the employee is treated as not covered by
the FAVR allowance and that the employee
fails to return to the payor although re-
quired to do so, and (c) any optional high
mileage payments.
.02 If the amount of transportation ex-
penses is deemed substantiated under the
rulesprovidedinsection9.01ofthisrev-
enue procedure, and the employee actually
substantiates to the payor the elements of
time, place (or use), and business purpose
of the transportation expenses in accor-
dance with paragraphs (b)(2) (travel away
from home) and (b)(6) (listed property,
which includes passenger automobiles
and any other property used as a means of
transportation) of § 1.274–5T, and para-
graph (c) of § 1.274–5, the employee is
deemed to satisfy the adequate account-
ing requirements of § 1.274–5(f) as well
as the requirement to substantiate by
adequate records or other sufficient evi-
dence for purposes of § 1.274–5(c).See
§ 1.62–2(e)(1) for the rule that an arrange-
ment must require business expenses to be
substantiated to the payor within a reason-
able period of time.
.03 An arrangement providing mileage
allowances will be treated as satisfying the
requirement of § 1.62–2(f)(2) with respect
to returning amounts in excess of expenses
as follows:
(1) For a mileage allowance other than
a FAVR allowance, the requirement to
return excess amounts is treated as satis-
fied if the employee is required to return
within a reasonable period of time (as de-
fined in § 1.62–2(g)) any portion of the
allowance that relates to miles of travel
not substantiated by the employee, even
though the arrangement does not require
theemployeetoreturntheportionofthe
allowance that relates to the miles of travel
substantiated and that exceeds the amount
of the employee’s expenses deemed sub-
stantiated. For example, assume a payor
provides an employee an advance mileage
allowance of $105.00 based on an antici-
pated 200 business miles at 52.5 cents per
mile (at a time when the business standard
mileage rate is 48.5 cents per mile), and
the employee substantiates 120 business
miles. The requirement to return excess
amounts is treated as satisfied if the em-
ployee is required to return the portion
of the allowance that relates to the 80
unsubstantiated business miles ($42.00)
even though the employee is not required
to return the portion of the allowance
($4.80) that exceeds the amount of the em-
ployee’s expenses deemed substantiated
under section 9.01 of this revenue pro-
cedure ($58.20) for the 120 substantiated
business miles. However, the $4.80 excess
portion of the allowance is treated as paid
under a nonaccountable plan as discussed
in section 9.05.
(2) For a FAVR allowance, the require-
ment to return excess amounts is treated
as satisfied if the employee is required to
return within a reasonable period of time
(as defined in § 1.62–2(g)), (a) the portion
(if any) of the periodic variable payment
received that relates to miles in excess of
the business miles substantiated by the em-
ployee, and (b) the portion (if any) of a pe-
riodic fixed payment that relates to a pe-
riod during which the employee was not
covered by the FAVR allowance.
.04 An employee is not required to in-
clude in gross income the portion of a
mileage allowance received from a payor
that is less than or equal to the amount
deemed substantiated under section 9.01
of this revenue procedure, provided the
employee substantiates in accordance with
section 9.02.See§ 1.274–5T(f)(2)(i). In
addition, that portion of the allowance is
treated as paid under an accountable plan,
is not reported as wages or other compen-
sation on the employee’s Form W–2, and
is exempt from withholding and payment
of employment taxes.See§ 1.62–2(c)(2)
and (c)(4).
.05Anemployeeisrequiredtoinclude
in gross income the portion of a mileage
allowance received from a payor that ex-
ceeds the amount deemed substantiated
under section 9.01 of this revenue proce-
dure, provided the employee substantiates
in accordance with section 9.02 of this rev-
enue procedure.See§ 1.274–5T(f)(2)(ii).
In addition, the excess portion of the al-
lowance is treated as paid under a nonac-
countable plan, is reported as wages or
November 20, 20069422006–47 I.R.B.

other compensation on the employee’s
Form W–2, and is subject to withholding
and payment of employment taxes.See
§ 1.62–2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).
.06 If an employee’s substantiated ex-
penses are less than the employee’s actual
expenses, the following rules apply:
(1) Except as otherwise provided in
section 9.06(2) of this revenue procedure
with respect to leased automobiles, if the
amount of the expenses deemed substan-
tiated under the rules provided in section
9.01 of this revenue procedure is less than
the amount of the employee’s business
transportation expenses, the employee
may claim an itemized deduction for
the amount by which the business trans-
portation expenses exceed the amount
that is deemed substantiated, provided
the employee substantiates all the busi-
ness transportation expenses, includes
on Form 2106,Employee Business Ex-
penses, the deemed substantiated portion
of the mileage allowance received from
the payor, and includes in gross income
the portion (if any) of the mileage al-
lowance received from the payor that
exceeds the amount deemed substantiated.
See§ 1.274–5T(f)(2)(iii). However, for
purposes of claiming this itemized deduc-
tion, substantiation of the amount of the
expenses is not required if the employee
is claiming a deduction that is equal to or
less than the applicable standard mileage
rate multiplied by the number of business
miles substantiated by the employee minus
the amount deemed substantiated under
section 9.01 of this revenue procedure.
The itemized deduction is subject to the
2-percent floor on miscellaneous itemized
deductions provided in § 67.
(2) An employee whose business trans-
portation expenses with respect to a leased
automobile are deemed substantiated un-
der section 9.01(1) of this revenue proce-
dure (relating to an allowance other than a
FAVR allowance) may not claim a deduc-
tion based on actual expenses under sec-
tion 9.06(1) unless the employee does so
consistently beginning with the first busi-
ness use of the automobile after December
31, 1997. An employee whose business
transportation expenses with respect to a
leased automobile are deemed substanti-
ated under section 9.01(2) of this revenue
procedure (relating to a FAVR allowance)
may not claim a deduction based on actual
expenses.
.07 An employee may deduct an
amount computed pursuant to section
5.01 of this revenue procedure only as an
itemized deduction. This itemized deduc-
tion is subject to the 2-percent floor on
miscellaneous itemized deductions pro-
videdin§67.
.08 A self-employed individual may
deduct an amount computed pursuant to
section 5.01 of this revenue procedure in
determining adjusted gross income under
§ 62(a)(1).
.09 If a payor’s reimbursement or
other expense allowance arrangement ev-
idences a pattern of abuse of the rules of
§ 62(c) and the regulations thereunder, all
payments under the arrangement will be
treated as made under a nonaccountable
plan. Thus, the payments are included in
the employee’s gross income, are reported
as wages or other compensation on the
employee’s Form W–2, and are subject
to withholding and payment of employ-
ment taxes.See§ 1.62–2(c)(3), (c)(5), and
(h)(2).
SECTION 10. WITHHOLDING AND
PAYMENT OF EMPLOYMENT TAXES
.01 The portion of a mileage allowance
(other than a FAVR allowance), if any,
that relates to the miles of business
travel substantiated and that exceeds the
amount deemed substantiated for those
miles under section 9.01(1) of this rev-
enue procedure is subject to withholding
and payment of employment taxes.See
§ 1.62–2(h)(2)(i)(B).
(1) In the case of a mileage allowance
paid as a reimbursement, the excess de-
scribed in section 10.01 of this revenue
procedure is subject to withholding and
payment of employment taxes in the pay-
roll period in which the payor reimburses
the expenses for the business miles sub-
stantiated.See§ 1.62–2(h)(2)(i)(B)(2).
(2) In the case of a mileage allowance
paid as an advance, the excess described in
section 10.01 of this revenue procedure is
subject to withholding and payment of em-
ployment taxes no later than the first pay-
roll period following the payroll period in
which the business miles with respect to
which the advance was paid are substanti-
ated.See§ 1.62–2(h)(2)(i)(B)(3). If some
or all of the business miles with respect
to which the advance was paid are not
substantiated within a reasonable period
of time and the employee does not return
the portion of the allowance that relates to
those miles within a reasonable period of
time, the portion of the allowance that re-
lates to those miles is subject to withhold-
ing and payment of employment taxes no
later than the first payroll period follow-
ing the end of the reasonable period.See
§ 1.62–2(h)(2)(i)(A).
(3) In the case of a mileage allowance
that is not computed on the basis of a
fixed amount per mile of travel (for ex-
ample, a mileage allowance that combines
periodic fixed and variable rate payments,
but that does not satisfy the requirements
of section 8 of this revenue procedure),
the payor must compute periodically (no
less frequently than quarterly) the amount,
if any, that exceeds the amount deemed
substantiated under section 9.01(1) of this
revenue procedure by comparing the total
mileage allowance paid for the period to
the standard mileage rate in section 5.01
of this revenue procedure multiplied by the
number of business miles substantiated by
the employee for the period. Any excess
is subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll pe-
riod in which the excess is computed.See
§ 1.62–2(h)(2)(i)(B)(4).
(4) For example, assume an employer
pays its employees a mileage allowance
at a rate of 52.5 cents per mile (when
the business standard mileage rate is 48.5
cents per mile). The employer does not
require the return of the portion of the al-
lowance that exceeds the business standard
mileage rate for the business miles sub-
stantiated (4.0 cents). In June, the em-
ployer advances an employee $262.50 for
500milestobetraveledduringthemonth.
In July, the employee substantiates to the
employer 400 business miles traveled in
June and returns $52.50 to the employer
for the 100 business miles not traveled.
The amount deemed substantiated for the
400 miles traveled is $194.00 and the em-
ployee is not required to return $16.00. No
later than the first payroll period following
the payroll period in which the 400 busi-
ness miles traveled are substantiated, the
employer must withhold and pay employ-
ment taxes on $16.00.
.02 The portion of a FAVR allowance,
if any, that exceeds the amount deemed
substantiated for those miles under section
9.01(2) of this revenue procedure is sub-
2006–47 I.R.B.943November 20, 2006

ject to withholding and payment of em-
ployment taxes.See§ 1.62–2(h)(2)(i)(B).
(1) Any periodic variable rate payment
that relates to miles in excess of the busi-
ness miles substantiated by the employee
and that the employee fails to return within
a reasonable period, or any portion of a pe-
riodic fixed payment that relates to a pe-
riod during which the employee is treated
as not covered by the FAVR allowance and
that the employee fails to return within a
reasonable period, is subject to withhold-
ing and payment of employment taxes no
later than the first payroll period follow-
ing the end of the reasonable period.See
§ 1.62–2(h)(2)(i)(A).
(2) Any optional high mileage payment
is subject to withholding and payment of
employment taxes when paid.
SECTION 11. EFFECTIVE DATE
This revenue procedure is effective
for (1) deductible transportation expenses
paid or incurred on or after January 1,
2007, and (2) mileage allowances or re-
imbursements paid to an employee or
to a charitable volunteer (a) on or after
January 1, 2007, and (b) with respect to
transportation expenses paid or incurred
by the employee or charitable volunteer
on or after January 1, 2007.
SECTION 12. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2005–78 is superseded.
DRAFTING INFORMATION
The principal author of this revenue
procedure is John Roman Faron of the Of-
fice of Associate Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Faron at (202) 622–4930 (not
a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(AlsoPartI,§170.)
Rev. Proc. 2006–50
SECTION 1. PURPOSE
This revenue procedure provides the
procedures under which the whaling ex-
penses of an individual recognized by
the Alaska Eskimo Whaling Commission
(AEWC) as a whaling captain charged
with the responsibility of maintaining and
carrying out sanctioned whaling activities
are substantiated for purposes of Internal
Revenue Code § 170(n), as enacted by the
American Jobs Creation Act of 2004 and
effective for whaling expenses incurred
after December 31, 2004. Pub. L. No.
109–357, § 335.
SECTION 2. BACKGROUND
.01 The AEWC was formed in 1977
to represent the Alaskan whaling commu-
nities in efforts to preserve the Eskimo
subsistence hunting of bowhead whales
(Baleana mysticetus). The AEWC’s pur-
pose is to protect the bowhead whale and
its habitat; preserve Eskimo subsistence
bowhead whaling and associated Eskimo
culture, traditions,and activities; and
conduct research and education activities
related to bowhead whales.
.02 The AEWC recognizes certain indi-
viduals as whaling captains and provides
rules for the conduct of sanctioned whal-
ing activities. It requires these captains to
file reports detailing their whaling activi-
ties.
.03 Section 170(n) provides that an
individual recognized by the AEWC as a
whaling captain, who is responsible for
maintaining and carrying out sanctioned
whaling activities and engages in these
activities during the taxable year, may
claim a charitable contribution deduction
not exceeding $10,000 per taxable year
for the reasonable and necessary whaling
expenses paid in carrying out sanctioned
whaling activities. Section 170(n) is
effective for contributions made after De-
cember 31, 2004.
.04 Under § 170(n)(2)(B), “whaling ex-
penses” include amounts paid for (1) the
acquisition and maintenance of whaling
boats, weapons, and gear used in sanc-
tioned whaling activities, (2) the supplying
of food for the crew and other provisions
for carrying out sanctioned whaling activi-
ties, and (3) the storage and distribution of
the catch from sanctioned whaling activi-
ties.
.05 Section 170(n)(3) defines “sanc-
tioned whaling activities” as subsistence
bowhead whale hunting activities con-
ducted pursuant to the management plan
of the AEWC.
.06 Section 170(n)(4) directs the Sec-
retary to issue guidance requiring taxpay-
ers claiming a deduction under § 170(n)
to substantiate their whaling expenses by
maintaining appropriate written records of
the time, place, date, amount, and nature
of the expenses and of the taxpayer’s eli-
gibility for the deduction.
.07 A whaling captain may deduct an
amount for whaling expenses only as an
itemized deduction. See § 63(d).
SECTION 3. SCOPE
This revenue procedure applies to tax-
payers who are recognized by the AEWC
as whaling captains and who pay whaling
expenses during the taxable year in car-
rying out sanctioned whaling activities as
captain of a whaling crew.
SECTION 4. SUBSTANTIATION OF
EXPENSES
.01In general. A taxpayer within the
scope of this revenue procedure is required
to substantiate a deduction for whaling ex-
penses by maintaining adequate records of
the elements of time, place, date, amount,
and nature of the expenses as required un-
der section 4.02, and of the taxpayer’s eli-
gibility for the deduction as required under
section 4.03, of this revenue procedure.
.02Requirements for adequate records
of whaling expenses. A taxpayer within the
scope of this revenue procedure must meet
each of the following adequate records re-
quirements:
(1) A taxpayer satisfies the adequate
records requirement of this revenue pro-
cedure by maintaining written records that
include—
(A) An expense report (such as an ac-
count book, diary, log, statement of ex-
pense, trip sheets, or similar record that
lists each expense); and
November 20, 20069442006–47 I.R.B.

(B) Documentary evidence (such as a
receipt, bill, invoice, or credit card record
of charge) for each expense of $75 or more.
(2) Adequate records must document
each applicable element of a whaling ex-
pense, including the following informa-
tion:
(A) Time and date of departure and re-
turn for each trip for sanctioned whaling
activities;
(B) Place or area of sanctioned whaling
activities;
(C) Amount of each separate expense,
such as the cost of weapons; and
(D) The nature of each expense includ-
ing a description of the purpose of the ex-
pense and the relationship of the expense
to sanctioned whaling activities.
(3) The expense report, in combination
with the documentary evidence, must be
sufficient to establish each element of a
whaling expense. It is not necessary to
record information in an expense report
that duplicates information reflected on
documentary evidence (such as a receipt)
as long as the expense report and the
documentary evidence substantiate each
expense in an orderly manner.
(4) Adequate records must be made at
or near the time of the expenditure or ac-
tivity. Records are made at or near the time
of the expenditure or activity if informa-
tion relating to each element (time, place,
date, amount, and nature of the expense) is
recorded at a time when the taxpayer has
full present knowledge of the information.
.03Substantiation of eligibility for the
deduction. A taxpayer must substantiate
eligibility to deduct whaling expenses un-
der § 170(n) by maintaining documenta-
tion that the taxpayer is recognized as a
whaling captain by the AEWC and copies
of all reports the taxpayer submits to the
AEWC.
.04Substantiation under revenue pro-
cedure required. An expense that is not
substantiated in accordance with this rev-
enue procedure may not be deducted as
a whaling expense under § 170(n). Ex-
ceptasprovidedinsection5.02ofthisrev-
enue procedure, a taxpayer’s uncorrobo-
rated statement or estimates of expenses
unsupported by adequate records do not
constitute substantiation for purposes of
§ 170(n).
SECTION 5. MAINTENANCE OF
RECORDS
.01 A taxpayer must maintain with the
taxpayer’s books and records, and be able
to produce upon request of the Internal
Revenue Service, the documentation de-
scribed in section 4 of this revenue proce-
dure. A taxpayer is not required to attach
the documentation to the taxpayer’s tax re-
turn.
.02 Notwithstanding section 4.04 of
this revenue procedure, a taxpayer who
establishes that a failure to produce ad-
equate records is due to the loss of the
records through circumstances beyond the
taxpayer’s control, such as destruction
by fire, flood, earthquake, or other casu-
alty, may substantiate a deduction under
§ 170(n) by a reasonable reconstruction of
the previously-maintained documentation.
SECTION 6. SPECIAL RULES
.01 A taxpayer may not deduct ex-
penses under both § 170(n) and another
provision of the Code.
.02 Expenses relating to a whaling boat
that is used for sanctioned whaling activ-
ities and other activities in a taxable year
must be allocated between the sanctioned
whaling activities and other activities by
comparing the total number of days the
whaling boat is used for sanctioned whal-
ing activities to the total number of days in
the taxable year.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
whaling expenses paid after November 20,
2006.
SECTION 8. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–2041.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in sections 4 and 5.
This information is required to substanti-
ate the amount of expenses paid in sup-
port of native Alaskan subsistence whal-
ing and eligibility to deduct the expenses.
Thisinformationwillbeusedtosubstan-
tiate expenses paid during the taxable year
in carrying out sanctioned whaling activ-
ities upon audit. The collection of infor-
mationisrequiredtoobtainabenefit.The
likely respondents are individuals recog-
nized as whaling captains by the AEWC.
The estimated total annual recordkeep-
ing burden is 48 hours.
The estimated annual burden per record
keeper varies from one to three hours, de-
pending on individual circumstances, with
an estimated average of two hours. The es-
timated number of record keepers is 12 to
24.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and return in-
formation are confidential, as required by
§ 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Christian Wood of the Office
of the Associate Chief Counsel (Income
Tax & Accounting). For further infor-
mation regarding this revenue procedure,
contact Jeffrey Rodrick at (202) 622–4930
(not a toll-free call).
26 CFR 601.602: Tax forms and instructions.
(Also Part I, § 911.)
Rev. Proc. 2006–51
SECTION 1. PURPOSE
This revenue procedure amplifies Rev.
Proc. 2005–70, 2005–47 I.R.B. 979,
which sets forth inflation adjusted items
for 2006.
SECTION 2. BACKGROUND
Subject to limitations, section 911
of the Internal Revenue Code allows a
qualified individual to elect to exclude
from gross income the foreign earned
2006–47 I.R.B.945November 20, 2006

income and housing cost amount of the
individual making the election. Under
§ 911(b)(2)(D)(i), the foreign earned in-
come exclusion amount is $80,000 for
calendar years after 2001. Prior to amend-
ment by § 515(a) of the Tax Increase Pre-
vention and Reconciliation Act of 2005,
Pub. L. No. 109–222, 120 Stat. 345,
367 (2006) (“TIPRA”), § 911(b)(2)(D)(ii)
provided for the annual exclusion amount
to be adjusted for inflation in any taxable
year beginning in a calendar year after
2007. Section 515(a) of TIPRA amended
§ 911(b)(2)(D)(ii) to provide for the an-
nual exclusion amount to be adjusted for
inflation in any taxable year beginning in
a calendar year after 2005.
This revenue procedure adds a new
subsection to Rev. Proc. 2005–70 to
set forth the inflation adjustment for
§ 911(b)(2)(D)(i) in accordance with the
amendment made by § 515(a) of TIPRA
to § 911(b)(2)(D)(ii).
SECTION 3. AMPLIFICATION OF
REV. PROC. 2005–70
Section 3.38 is added to Rev. Proc.
2005–70 to read as follows:
.38Foreign Earned Income Exclusion.
For taxable years beginning in 2006, the
foreign earned income exclusion amount
under § 911(b)(2)(D)(i) is $82,400.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
This revenue procedure amplifies Rev.
Proc. 2005–70 by adding new § 3.38.
SECTION 5. EFFECTIVE DATE
This revenue procedure applies to tax-
able years beginning in 2006. See § 4.01
of Rev. Proc. 2005–70.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Marnette M. Myers of the
Office of Associate Chief Counsel (In-
come Tax & Accounting). For further
information regarding this revenue proce-
dure, contact Marnette M. Myers at (202)
622–4920 (not a toll-free call).
November 20, 20069462006–47 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Exchanges of Property for an
Annuity
REG–141901–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that provide guidance on
the taxation of the exchange of property
for an annuity contract. These regulations
are necessary to outline the proper taxation
of these exchanges and will affect partic-
ipants in transactions involving these ex-
changes. This document also provides no-
tice of public hearing.
DATES: Written or electronic comments
must be received by January 16, 2007.
Outlines of topics to be discussed at the
public hearing scheduled for February 16,
2007, at 10 a.m. must be received by Jan-
uary 16, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–141901–05),
room 5203, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered to CC:PA:LPD:PR
(REG–141901–05), Courier’s Desk, Inter-
nal Revenue Service, Crystal Mall 4 Build-
ing, 1901 S. Bell St., Arlington, VA, or sent
electronically, via the IRS internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS and REG–141901–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, James Polfer, at (202) 622–3970;
concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the hear-
ing, Kelly Banks, at (202) 622–0392 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations.
Section 1001 of the Internal Revenue
Code (Code) provides rules for determin-
ing the amount of gain or loss recognized.
Gain from the sale or other disposition of
property equals the excess of the amount
realized therefrom over the adjusted basis
of the property; loss from the sale or other
disposition of property equals the excess
of the adjusted basis of the property over
the amount realized. Section 1.1001–1(a)
of the Income Tax Regulations provides
further that the exchange of property for
other property differing materially either
in kind or in extent is treated as income or
as loss sustained. Under section 1001(b),
the amount realized from the sale or other
disposition of property is the sum of any
money received plus the fair market value
of any property (other than money) re-
ceived. Except as otherwise provided in
the Code, the entire amount of gain or loss
on the sale or exchange of property is rec-
ognized.
Under section 72(a), gross income in-
cludes any amount received as an annuity
(whether for a period certain or for the life
or lives of one or more individuals) under
an annuity, endowment, or life insurance
contract. Section 72(b)provides that gross
income does not include that part of any
amount received as an annuity which bears
the same ratio to such amount as the in-
vestment in the contract bears to the ex-
pected return under the contract. Under
section 72(e), amounts received under an
annuity contract before the annuity start-
ing date are included in gross income to
the extent allocable to income on the con-
tract, and are excluded from gross income
to the extent allocable to the investment in
the contract. Investment in the contract is
defined in section 72(c) as the aggregate
amount of premiums or other considera-
tion paid, reduced by amounts received be-
fore the annuity starting date that were ex-
cluded from gross income.
InLloyd v. Commissioner, 33 B.T.A.
903 (1936),nonacq., XV–2 C.B. 39
(1936),nonacq. withdrawn and acq.,
1950–2 C.B. 3, the Board of Tax Appeals
considered the taxation of gain from a
father’s sale of property to his son for
an annuity contract. The Board con-
cluded that the annuity contract had no
fair market value within the meaning of
the predecessor of section 1001(b) be-
cause of the uncertainty of payment from
the son. Because the annuity contract had
no fair market value under that provision,
the Board held that the gain from the sale
of the property was not required to be rec-
ognized immediately but rather would be
included in income only when the annuity
payments exceeded the property’s basis.
In reaching its holding, the Board applied
the open transaction doctrine articulated
by the Supreme Court inBurnet v. Logan,
283 U.S. 404 (1931). Under this doctrine,
if an amount realized from a sale cannot
be determined with certainty, the seller
recovers the basis of the property sold
before any income is realized on the sale.
In Rev. Rul. 69–74, 1969–1 C.B. 43,
a father transferred a capital asset having
an adjusted basis of $20,000 and a fair
market value of $60,000 to his son in ex-
change for the son’s legally enforceable
promise to pay him a life annuity of $7,200
per year, in equal monthly installments of
$600. The present value of the life an-
nuity was $47,713.08. The ruling con-
cluded that: (1) the father realized capi-
tal gain based on the difference between
the father’s basis in the property and the
present value of the annuity; (2) the gain
was reported ratably over the father’s life
expectancy; (3) the investment in the con-
tract for purposes of computing the exclu-
sion ratio was the father’s basis in the prop-
erty transferred; (4) the excess of the fair
market value of the property transferred
over the present value of the annuity was
a gift from the father to the son; and (5)
the prorated capital gain reported annually
was derived from the portion of each an-
nuity payment that was not excludible.
InEstate of Bell v. Commissioner,60
T.C. 469 (1973),acq. in part and nonacq.
in part, 1974 WL 36039 (Jan. 8, 1974),
acq., AOD No. 1979–184 (August 15,
1979), a husband and wife transferred
stockintwocloselyheldcorporationsto
their son and daughter and their spouses
2006–47 I.R.B.947November 20, 2006

in exchange for an annuity contract. The
fair market value of the stock substantially
exceeded the value of the annuity contract.
The stock transferred was placed in escrow
to secure the promise of the transferees.
As further security, the annuity agreement
provided for a cognovit judgment against
the transferees in the event of default. Be-
cause of the secured nature of the annuity,
the tax court held that (i) the difference be-
tween the value of the stock and the value
of the annuity contract constituted a gift;
(ii) the difference between the adjusted ba-
sis of the stock and the value of the annuity
contract constituted gain that was taxable
in the year of the transfer (which was not
before the court); and (iii) the investment
in the annuity contract equaled the present
value of the annuity. Similarly, in212
Corp. v. Commissioner,70T.C.788
(1978), the tax court held that the entire
amount of gain realized from the exchange
of appreciated real property for an annuity
contract was fully taxable in the year of
the exchange because the annuity contract
was secured by (i) an agreement that the
annuity payments would be considered a
charge against the rents from the property,
(ii) an agreement not to mortgage or sell
the property without written consent of
the transferors, and (iii) the authorization
of a confession of judgment against the
transferee in the event of default.
The Treasury Department and the IRS
have learned that some taxpayers are inap-
propriately avoiding or deferring gain on
the exchange of highly appreciated prop-
erty for the issuance of annuity contracts.
Many of these transactions involve pri-
vate annuity contracts issued by family
members or by business entities that are
owned, directly or indirectly, by the annu-
itants themselves or by their family mem-
bers. Many of these transactions involve a
variety of mechanisms to secure the pay-
ment of amounts due under the annuity
contracts.
The Treasury Department and the IRS
believe that neither the open transaction
approach ofLloyd v. Commissionernor the
ratable recognition approach of Rev. Rul.
69–74 clearly reflects the income of the
transferor of property in exchange for an
annuity contract. Contrary to the premise
underlying these authorities, an annuity
contract — whether secured or unsecured
— may be valued at the time it is received
in exchange for property. See generally
section7520(requiringtheuseoftables
to value any annuity contract for federal
income tax purposes, except for purposes
of any provision specified in regulations);
§1.1001–1(a) (“The fair market value of
property is a question of fact, but only in
rare and unusual circumstances will prop-
erty be considered to have no fair market
value.”). The Treasury Department and
the IRS believe that the transferors should
be taxed in a consistent manner regardless
of whether they exchange property for an
annuity or sell that property and use the
proceeds to purchase an annuity.
Explanation of Provisions
These proposed amendments provide
that, if an annuity contract is received in
exchange for property (other than money),
(i) the amount realized attributable to the
annuity contract is the fair market value
(as determined under section 7520) of
the annuity contract at the time of the
exchange; (ii) the entire amount of the
gain or loss, if any, is recognized at the
time of the exchange, regardless of the
taxpayer’s method of accounting; and (iii)
for purposes of determining the initial
investment in the annuity contract under
section 72(c)(1), the aggregate amount of
premiums or other consideration paid for
the annuity contract equals the amount re-
alized attributable tothe annuity contract
(the fair market value of the annuity con-
tract). Thus, in situations where the fair
market value of the property exchanged
equals the fair market value of the annuity
contract received, the investment in the
annuity contract equals the fair market
value of the property exchanged for the
annuity contract.
In order to apply the proposed regula-
tions to an exchange of property for an an-
nuity contract, taxpayers will need to de-
termine the fair market value of the annuity
contract as determined under section 7520.
In the case of an exchange of property for
an annuity contract that is in part a sale and
in part a gift, the proposed regulations ap-
ply the same rules that apply to any other
such exchange under section 1001.
The proposed regulations provide that,
for purposes of determining the invest-
ment in the annuity contract under section
72(c)(1), the aggregate amount of premi-
ums or other consideration paid for the an-
nuity contract is the portion of the amount
realized on the exchange that is attribut-
able to the annuity contract (which is the
fair market value of the annuity contract
at the time of the exchange). This rule is
intended to ensure that no portion of the
gain or loss on the exchange is duplicated
or omitted by the application of section 72
in the years after the exchange. The annu-
itant’s investment in the contract would be
reduced in subsequent years under section
72(c)(1)(B) for amounts already received
under the contract subsequent to the ex-
change and excluded from gross income
when received as a return of the annui-
tant’s investment in the contract.
The proposed regulations do not distin-
guish between secured and unsecured an-
nuity contracts, or between annuity con-
tracts issued by an insurance company sub-
ject to tax under subchapter L and those is-
sued by a taxpayer that is not an insurance
company. Instead, the proposed regula-
tions provide a single set of rules that leave
the transferor and transferee in the same
position before tax as if the transferor had
sold the property for cash and used the pro-
ceeds to purchase an annuity contract. The
same rules would apply whether the ex-
change produces a gain or loss. The regu-
lations do not, however, prevent the appli-
cation of other provisions, such as section
267, to limit deductible losses in the case
of some exchanges. The proposed regula-
tions apply to exchanges of property for an
annuity contract, regardless of whether the
property is exchanged for a newly issued
annuity contract or whether the property is
exchanged for an already existing annuity
contract.
Existing regulations in §1.1011–2 gov-
ern the tax treatment of an exchange of
property that constitutes a bargain sale to
a charitable organization (including an ex-
change of property for acharitable gift an-
nuity). Example 8 in section 2(c) of those
regulations provides that any gain on such
an exchange is reported ratably, rather than
entirely in the year of the exchange. This
notice of proposed rulemaking does not
propose to change the existing regulations
in §1.1011–2. However, comments are re-
quested as to whether a change should be
made in the future to conform the tax treat-
ment of exchanges governed by §1.1011–2
to the tax treatment prescribed in these pro-
posed regulations.
The Treasury Department and the IRS
are aware that property is sometimes ex-
November 20, 20069482006–47 I.R.B.

changed for an annuity contract, includ-
ing a private annuity contract, for valid,
non-tax reasons related to estate planning
and succession planning for closely held
businesses. The proposed regulations are
not intended to frustrate these transactions,
but will ensure that income from the trans-
actions is accounted for in the appropri-
ate periods. In section 453, Congress set
forth rules permitting the deferral of in-
come from a transaction that qualifies as an
installment sale. Taxpayers retain the abil-
ity to structure transactions as installment
sales within the meaning of section 453(b),
provided the other requirements of section
453 are met. The Treasury Department
and IRS request comments as to the cir-
cumstances, if any, in which an exchange
of property for an annuity contract should
be treated as an installment sale, and as to
any changes to the regulations under sec-
tion 453 that might be advisable with re-
gard to those circumstances.
Proposed Effective Date
The Treasury Department and the IRS
propose §1.1001–1(j) to be effective gen-
erally for exchanges of property for an
annuity contract after October 18, 2006.
Thus, the regulations would not apply to
amounts received after October 18, 2006,
under annuity contracts that were received
in exchange for property before that date.
For a limited class of transactions, how-
ever, §1.1001–1(j) is proposed to be effec-
tive for exchanges of property for an annu-
ity contract after April 18, 2007.
The Treasury Department and the IRS
propose §1.72–6(e) to be effective gener-
ally for annuity contracts received in such
exchanges after October 18, 2006. For
a limited class of transactions, however,
§1.72–6(e) is proposed to be effective for
annuity contracts received in exchange
for property after April 18, 2007. The
Treasury Department and the IRS also
propose to declare Rev. Rul. 69–74 ob-
solete effective contemporaneously with
the effective date of these regulations.
Thus, the obsolescence would be effective
April 18, 2007, for exchanges described in
§1.1001–1(j)(2)(ii) and §1.72–6(e)(2)(ii),
and effective October 18, 2006, for all
other exchanges of property for an annuity
contract.
In both regulations, the effective date is
delayed for six months for transactions in
which (i) the issuer of the annuity contract
is an individual; (ii) the obligations under
the annuity contract are not secured, either
directly or indirectly; and (iii) the property
transferred in the exchange is not subse-
quently sold or otherwise disposed of by
the transferee during the two-year period
beginning on the date of the exchange. The
Treasury Department and the IRS believe
that the later proposed effective date for
these transactions provides ample notice of
the proposed rules for taxpayers currently
planning transactionsthat present the least
opportunity for abuse.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial numberof small entities. Ac-
cordingly, a regulation flexibility analy-
sis is not required. This certification is
based on the fact that typically only nat-
ural persons within the meaning of sec-
tion 72(u) exchange property for an annu-
ity contract. In addition, these regulations
do not impose new reporting, recordkeep-
ing, or other compliance requirements on
taxpayers. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemak-
ing will be submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are timely submitted to
the IRS. In addition to comments on the
proposed regulations more generally, the
Treasury Department and the IRS specif-
ically request comments on (i) the clarity
of the proposed regulations and how they
can be made easier to understand; (ii) what
guidance, if any, is needed in addition to
Rev. Rul. 55–119, 1955–1 C.B. 352, see
§601.601(d)(2), on the treatment of the
issuer of an annuity contract that is not
taxed under the provisions of subchapter
L of the Code; (iii) whether any changes
to §1.1011–2 (concerning a bargain sale
to a charitable organization in exchange
for an annuity contract), conforming those
regulations to the proposed regulations,
would be appropriate; (iv) circumstances
(and corresponding changes to the regula-
tions under section 453, if any) in which it
might be appropriate to treat an exchange
of property for an annuity contract as an
installment sale; (v) circumstances, if any,
in which the fair market value of an annu-
ity contract for purposes of §1.1001–1(j)
should be determined other than by tables
promulgated under the authority of sec-
tion 7520; and (vi) additional transactions,
if any, for which the six month delayed
effective date would be appropriate. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled
for February 16, 2007, at 10 a.m., in
the auditorium, Internal Revenue Ser-
vice, New Carrollton Building, 5000 Ellin
Road, Lanham, MD 20706. All visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area lobby more
than 30 minutes before the hearing starts.
For information about having your name
placed on the access list to attend the
hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” portion of
this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments by January 16, 2007, and sub-
mit an outline of the topics to be discussed
and the time to be devoted to each topic
(a signed original and eight (8) copies) by
that same date.
A period of 10 minutes will be allotted
to each person making comments. An
agenda showing the scheduling of the
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is James Polfer, Office of the
Associate Chief Counsel (Financial Insti-
tutions and Products), Internal Revenue
Service.
2006–47 I.R.B.949November 20, 2006

*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.72–6, paragraph (e) is
added to read as follows:
§1.72–6 Investment in the contract.
*****
(e)Certain annuitycontracts received
in exchange for property—(1)In gen-
eral. If an annuity contract is received in
an exchange subject to §1.1001–1(j), the
aggregate amount of premiums or other
consideration paid for the contract equals
the amount realized attributable to the
annuity contract, determined according to
§1.1001–1(j).
(2)Effective date—(i)In general.Ex-
cept as provided in paragraph (e)(2)(ii),
this paragraph (e) is applicable for annuity
contracts received after October 18, 2006,
in an exchange subject to §1.1001–1(j).
(ii) This paragraph (e) is applica-
ble for annuity contracts received after
April 18, 2007, in an exchange subject to
§1.1001–1(j) if the following conditions
are met —
(A) The issuer of the annuity contract is
an individual;
(B) The obligations under the annuity
contract are not secured, either directly or
indirectly; and
(C) The property transferred in ex-
change for the annuity contract is not
subsequently sold or otherwise disposed
of by the transferee during the two-year
period beginning on the date of the ex-
change. For purposes of this provision, a
disposition includes without limitation a
transfer to a trust (whether a grantor trust,
a revocable trust, or any other trust) or to
any other entity even if solely owned by
the transferor.
Par. 3. In §1.1001–1, paragraphs (h),
(i) and (j) are added to read as follows:
§1.1001–1 Computation of gain or loss.
*****
(h) [Reserved.]
(i) [Reserved.]
(j)Certain annuity contracts received in
exchange for property—(1)In general.
If an annuity contract (other than an annu-
ity contract that either is a debt instrument
subject to sections 1271 through 1275, or
is received from a charitable organization
in a bargain sale governed by §1.1011–2) is
received in exchange for property, receipt
of the contract shall be treated as a receipt
of property in an amount equal to the fair
market value of the contract, whether or
not the contract is the equivalent of cash.
The amount realized attributable to the an-
nuity contract is the fair market value of
the annuity contract at the time of the ex-
change, determinedunder section 7520.
For the timing of the recognition of gain or
loss, if any, see §1.451–1(a). In the case of
a transfer in part a sale and in part a gift,
see paragraph (e) of this section. In the
case of an annuity contract that is a debt in-
strument subject to sections 1271 through
1275, see paragraph (g) of this section. In
the case of a bargain sale to a charitable or-
ganization, see §1.1011–2.
(2)Effective date—(i)In general.Ex-
cept as provided in paragraph (j)(2)(ii), this
paragraph (j) is effective for exchanges of
property for an annuitycontract (other than
an annuity contract that either is a debt in-
strument subject to sections 1271 through
1275, or is received from a charitable or-
ganization in a bargain sale governed by
§1.1011–2) after October 18, 2006.
(ii) This paragraph (j) is effective for
exchanges of property for an annuity con-
tract (other than an annuity contract that
either is a debt instrument subject to sec-
tions 1271 through 1275, or is received
from a charitable organization in a bargain
sale governed by §1.1011–2) after April
18, 2007, if the following conditions are
met —
(A) The issuer of the annuity contract is
an individual;
(B) The obligations under the annuity
contract are not secured, either directly or
indirectly; and
(C) The property transferred in ex-
change for the annuity contract is not
subsequently sold or otherwise disposed
of by the transferee during the two-year
period beginning on the date of the ex-
change. For purposes of this provision, a
disposition includes without limitation a
transfer to a trust (whether a grantor trust,
a revocable trust, or any other trust) or to
any other entity even if solely owned by
the transferor.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on October 17,
2006, 8:45 a.m., and published in the issue of the Federal
Register for October 18, 2006, 71 F.R. 61441)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Treatment of Payments in Lieu
of Taxes Under Section 141
REG–136806–06
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations modifying the stan-
dards for treating payments in lieu of
taxes (PILOTs) as generally applicable
taxes for purposes of the private security
or payment test under section 141 of the
Internal Revenue Code (Code). The pro-
posed regulations provide State and local
governmental issuers of tax-exempt bonds
with guidance for applying the private
security or payment test. The proposed
regulations affect State and local govern-
mental issuers of tax-exempt bonds. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by January 16, 2007.
Outlines of topics to be discussed at the
public hearing scheduled for February 13,
2007, at 10 a.m., must be received by Jan-
uary 16, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–136806–06), In-
ternal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered
to CC:PA:LPD:PR (REG–136806–06),
Courier’s Desk, Internal Revenue Ser-
vice, Crystal Mall 4 Building, 1901 S.
Bell Street, Arlington, Virginia, or sent
November 20, 20069502006–47 I.R.B.

electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–136806–06). The public hear-
ing will be held in the auditorium, Internal
Revenue Service, New Carrollton Fed-
eral Building, 5000 Ellin Road, Lanham,
Maryland 20706.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Vicky Tsilas or Carla Young,
at (202) 622–3980; concerning submis-
sions of comments, the hearing and/or to
be placed on the building access list to
attend the hearing, Kelly Banks, at (202)
622–0392 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations (26 CFR part 1). Final regulations
(T.D. 8712, 1997–12 I.R.B. 4) under sec-
tion 141 of the Code were published in
theFederal Registeron January 16, 1997
(62 FR 2275) to provide comprehensive
guidance on most aspects of the private
activity bond restrictions. This document
amends the Income Tax Regulations un-
der section 141 of the Code by proposing
modifications to the standards for treating
payments in lieu of taxes as generally ap-
plicable taxes for purposes of the private
security or payment test under section
141. These regulations are published as
proposed regulations to provide an oppor-
tunity for public review and comment.
Explanation of Provisions
I.Introduction.
In general, interest on State and local
governmental bonds is excludable from
gross income under section 103 of the
Code. Interest on a private activity bond,
other than a qualified bond under section
141(e), is not excludable from gross in-
come. Section 141(a) classifies a bond as a
private activity bond if it is part of an issue
that meets both the private business use
test under section 141(b)(1) (the private
business use test) and the private security
or payment test under section 141(b)(2)
(the private payment test). In addition,
section 141(a) independently treats a bond
as a private activity bond if it is part of an
issue that meets the private loan test under
section 141(c).
Section 141(b)(2) provides generally
that an issue meets the private payment
test if the payment of the debt service on
more than 10 percent of the proceeds of
such issue is (under the terms of such issue
or any underlying arrangement) directly
or indirectly (1) secured by any interest in
property used or to be used for a private
business use, or payments in respect of
such property, or (2) to be derived from
payments (whether or not to the issuer) in
respect of property, or borrowed money,
used or to be used for a private business
use.
II.Private Payment Test in General.
Sections 1.141–4(c) and 1.141–4(d) of
the Income Tax Regulations provide broad
general rules for purposes of application of
the private payment test. Private payments
generally include any payments made, di-
rectly or indirectly, by any nongovernmen-
tal person that is a private business user of
proceeds during a period of private busi-
ness use and any payments made with re-
spect to property financed with proceeds of
an issue during a period of private business
use, whether or not made by a private busi-
ness user. In addition, private payments in-
clude property and payments in respect of
property that are used or to be used for pri-
vate business use to the extent that any in-
terest in that property or payments serves
as security for the payment of debt service
on an issue.
III.Generally Applicable Taxes Exception.
Section 1.141–4(e) provides an excep-
tion to the otherwise-broad scope of pay-
ments taken into account under the pri-
vate payment test in the case of “gener-
ally applicable taxes.” In general, the pur-
pose of the generally applicable taxes ex-
ception is to allow eligible tax payments
made with respect to property or services
to be used to pay debt service on an is-
sue without causing private payments. For
this purpose, §1.141–4(e)(2) defines a gen-
erally applicable tax to mean an enforced
contribution exacted pursuant to legisla-
tive authority in the exercise of the tax-
ing power that is imposed and collected
for the purpose of raising revenue to be
used for governmental purposes. To qual-
ify as a generally applicable tax, a tax must
have a uniform rate that is applied to all
persons of the same classification in the
appropriate jurisdiction and the tax must
have a generally applicable manner of de-
termination and collection. By contrast,
under §1.141–4(e)(3), a payment does not
qualify as a generally applicable tax if it
is a special charge for a special privilege
granted or service rendered (for example,
apaymentlimitedtopropertyorpersons
benefited by an improvement). Sections
1.141–4(e)(4)(ii) and (iii) set forth certain
permissible and impermissible agreements
that bear upon whether or not a tax has a
generally applicable manner of determina-
tion and collection. For example, an agree-
ment to reduce or limit the amount of taxes
collected to further abona fidegovernmen-
tal purpose is a permissible agreement.
IV.Certain Payments in Lieu of Taxes
Treated as Generally Applicable Taxes.
In addition, existing §1.141–4(e)(5)
treats certain tax equivalency payments or
PILOTs as generally applicable taxes if (1)
the payments are commensurate with and
not greater than the amounts imposed by
the statute for a tax of general application,
and (2) the payments are designated for a
public purpose and are not special charges
(as described in §1.141–4(e)(3)). Exist-
ing §1.141–4(e)(5) further provides an
example which states that a PILOT made
in consideration for the use of property
financed with tax-exempt bonds is treated
as a special charge.
The Treasury Department and the IRS
are concerned that additional guidance
may be needed regarding the existing
standards for treating PILOTs as generally
applicable taxes and that those existing
standards potentially could be interpreted
in an unduly broad manner to provide
favorable treatment for certain PILOTs
which may have an insufficient link to
generally applicable taxes. Conversely,
the Treasury Department and the IRS are
concerned that the last sentence of existing
§1.141–4(e)(5)(ii), which provides as an
example of a special charge a PILOT paid
in consideration for the use of property
financed with tax-exempt bonds, could be
interpreted in an unduly restrictive manner
to prevent any PILOTs with respect to
2006–47 I.R.B.951November 20, 2006

property financed with tax-exempt bonds
from being treated as generally applicable
taxes.
To address these concerns, the Treasury
Department and the IRS propose to modify
the standards to better assure a reasonably
close relationship between eligible PILOT
payments and generally applicable taxes.
The proposed clarification provides that an
eligible PILOT payment must represent a
fixed percentage of, or reflect a fixed ad-
justment to, the amount of generally ap-
plicable taxes in each year, based on com-
parable current valuation assessments. In
addition, the Treasury Department and the
IRS propose to eliminate the example in
the last sentence of §1.141–4(e)(5)(ii). Re-
garding this latter proposal, the Treasury
Department and the IRS believe that the
existing definitionof special charge under
§1.141–4(e)(3) adequately addresses this
principle.
The proposed standards for treating
PILOTs as generally applicable taxes
generally contemplate PILOTs based on
property taxes. The Treasury Department
and the IRS also seek public comment
regarding whether any special rules are
needed to address PILOTs based on other
taxes, including sales taxes.
Proposed Effective Date
The proposed regulations are proposed
to apply to bonds that are sold on or after
February 16, 2007.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined thatsection 553(b) of the
Administrative Procedures Act (5 U.S.C.
chapter 5) does not apply to these reg-
ulations, and because the regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this proposed regulation has been submit-
ted to the Chief Counsel for Advocacy
of the Small BusinessAdministration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to
the IRS. The Treasury Department and
the IRS specifically request comments on
the clarity of the proposed rules and how
they may be made easier to understand.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled
for February 13, 2007, at 10 a.m. in the au-
ditorium of the Internal Revenue Service,
New Carrollton Federal Building, 5000
Ellin Road, Lanham, Maryland 20706.
Due to building security procedures, vis-
itors must enter at the New Carrollton
Federal Building main entrance. In ad-
dition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments and
an outline of the topics to be discussed
and the amount of time to be devoted to
each topic (signed original and eight (8)
copies) by January 16, 2007. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the hear-
ing.
Drafting Information
The principal authors of these reg-
ulations are Rebecca L. Harrigal,
Vicky Tsilas, and Carla Young, Office
of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities), IRS. However, other personnel
from the IRS and the Treasury Department
participated 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. Section 1.141–4(e)(5) is revised
to read as follows:
§1.141–4 Private Security or Payment
Test.
*****
(e) * * *
(5)Payments in lieu of taxes—(i)In
general. A tax equivalency payment or
other payment in lieu of a tax (PILOT) is
treated as a generally applicable tax if—
(A) The payment is commensurate with
and not greater than the amounts imposed
by a statute for a generally applicable tax
in each year; and
(B) The payment is designated for a
public purpose and is not a special charge
(as described in paragraph (e)(3) of this
section).
(ii)Commensurate standard. For pur-
poses of this paragraph (e)(5), a payment
is “commensurate” with generally applica-
ble taxes only if the amount of such pay-
ment represents a fixed percentage of, or
reflects a fixed adjustment to, the amount
of generally applicable taxes that other-
wise would apply to the property in each
year if the property were subject to tax. For
example, a payment is commensurate with
generally applicable taxes if it is equal to
the amount of generally applicable taxes
in each year, less a fixed dollar amount
or a fixed adjustment determined by refer-
ence to characteristicsof the property, such
as size or employment. A payment does
not fail to be a fixed percentage or adjust-
ment as a result of a single change in the
level of the percentage or adjustment fol-
lowing completion of development of the
subject property. The payment must be
based on the current assessed value of the
property for property tax purposes for each
year in which the PILOTs are paid and that
assessed value must be determined in the
same manner and with the same frequency
as property subject to generally applicable
taxes. A payment is not commensurate if
November 20, 20069522006–47 I.R.B.

itisbasedinanywayondebtserviceon
an issue or is otherwise set at a fixed dol-
lar amount that cannot vary with the as-
sessed value of the property determined
in the manner described in this paragraph
(e)(5)(ii).
*****
Par. 3. Section 1.141–15 is amended by
adding paragraph (m) to read as follows:
§1.141–15 Effective Dates.
*****
(m)Effective date for certain regu-
lationsrelatingtopaymentsinlieuof
tax. The rules of §1.141–4(e)(5) apply
to bonds sold on or after [DATE THAT
IS 120 DAYS AFTER PUBLICATION
OF THIS DOCUMENT IN THEFederal
Register] that are subject to section 141.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on October 18,
2006, 8:45 a.m., and published in the issue of the Feder
al
Register for October 19, 2006, 71 F.R. 61693)
Definition of Taxpayer for
Purposes of Section 901 and
Related Matters; Correction
Announcement 2006–90
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing; Correction.
SUMMARY: This document contains
corrections to notice of proposed rule-
making and notice of public hearing
(REG–124152–06, 2006–36 I.R.B. 368)
that was published in theFederal Reg-
isteron Friday, August 4, 2006 (71 FR
44240) relating to the determination of
who is considered to pay a foreign tax for
purposes of sections 901 and 903.
FOR FURTHER INFORMATION
CONTACT: Bethany A. Ingwalson, (202)
622–3850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemak-
ing and notice of public hearing
(REG–124152–06) that is the subject
of these corrections are under sections 901
and 903 of the Internal Revenue Code.
Need for Correction
As published, the notice of proposed
rulemaking and notice of public hearing
(REG–124152–06) contains errors that
may prove to be misleading and are in
need of clarification.
Correction of Publication
Accordingly, the notice of proposed
rulemaking and notice of public hearing
(REG–124152–06) that was the subject
of FR Doc. E6–12358 is corrected as fol-
lows:
§1.901–2 [Corrected]
1.On page 44246, column 1,
§1.901–2(f)(6), paragraph (i) ofExample
4., line 4, the language “county Y. A ac-
crues interest income on the” is corrected
to read “country Y. A accrues interest in-
come on the”.
2.On page 44246, column 2,
§1.901–2(f)(6), paragraph (i) ofExam-
ple 4., first paragraph of the column, line
1, the language “pay over to country X 10
percent of the” is corrected to read “pay
over to country Y 10 percent of the”.
3.On page 44247, column 1,
§1.901–2(f)(6), paragraph (i) ofExam-
ple 8.,thelanguage“taxpurposes.NewD
also has a short U.S.” is corrected to read
“tax purposes. “New” D also has a short
U.S.”.
4.On page 44247, column 1,
§1.901–2(f)(6), paragraph (ii) ofExample
8., line 11, the language “years of termi-
nating D and new D. See” is corrected to
read “years of old D and new D. See”.
5.On page 44247, column 1,
§1.901–2(f)(6), paragraph (ii) ofExam-
ple 8., line 13, the language “allocation
of terminating D’s country M taxes” is
corrected to read “allocation of old D’s
country M taxes”.
6.On page 44247, column 1,
§1.901–2(h), the language “(h)Effec-
tive Date. Paragraphs (a)” is corrected to
read “(h)Effective date. Paragraphs (a)”.
LaNita Van Dyke,
Federal Register Liaison,
Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on October 30,
2006, 8:45 a.m., and published in the issue of the Federal
Register for October 31, 2006, 71 F.R. 63732)
Determination of Basis
of Stock or Securities
Received in Exchange for,
or With Respect to, Stock
or Securities in Certain
Transactions; Treatment
of Excess Loss Accounts;
Correction
Announcement 2006–91
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document contains a
correction to final and temporary regula-
tions (T.D. 9244, 2006–8 I.R.B. 463), that
were published in theFederal Register
on Thursday, January 26, 2006 (71 FR
4264). This regulation provides guidance
regarding the determination of the basis of
stock or securities received in exchange
for, or with respect to, stock or securities
in certain transactions.
DATES: This correction is effective Jan-
uary 23, 2006.
FOR FURTHER INFORMATION
CONTACT: Theresa M. Kolish, (202)
622–7530 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations
(T.D. 9244) that are the subject of these
2006–47 I.R.B.953November 20, 2006

corrections are under sections 358 and
1502 of the Internal Revenue Code.
Need for Correction
As published, T.D. 9244 contains errors
that may prove to be misleading and are in
need of clarification.
*****
Correction of Publication
Accordingly, 26 CFR Part 1 is cor-
rected by making the following correcting
amendments:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority:26USC7805***
§1.358–1 [Corrected]
Par. 2. Section 1.358–1 is amended by
revising paragraph (b),Exampleto read as
follows:
§1.358–1 Basis to distributees.
(a) * * *
(b) * * *
Example. A purchased a share of stock in Cor-
poration X in 1935 for $150. Since that date A has
received distributions out of other than earnings and
profits (as defined in section 316) totaling $60, so that
A’s adjusted basis for the stock is $90. In a transaction
qualifying under section 356, A exchanged this share
foroneshareinCorporationY,worth$100,cashin
the amount of $10, and other property with a fair mar-
ket value of $30. The exchange had the effect of the
distribution of a dividend. A’s ratable share of the
earnings and profits of Corporation X accumulated
after February 28, 1913, was $5. A realized a gain
of $50 on the exchange, but the amount recognized is
limited to $40, the sum of the cash received and the
fair market value of the other property. Of the gain
recognized, $5 is taxable as a dividend, and $35 is
taxable as a gain from the exchange of property. The
basis to A of the one share of stock of Corporation Y
is $90, that is, the adjusted basis of the one share of
stock of Corporation X ($90), decreased by the sum
of the cash received ($10) and the fair market value of
the other property received ($30) and increased by the
sum of the amount treated as a dividend ($5) and the
amount treated as a gain from the exchange of prop-
erty ($35). The basis of the other property received is
$30.
*****
§1.358–2 [Corrected]
Par. 3. Section 1.358–2(c) is amended
by revising paragraphs (ii) inExamples 4,
5,6and11to read as follows:
§1.358–2 Allocation of basis among
nonrecognition property.
(a) * * *
(2) * * *
(viii) * * *
(c) * * *
Example 4.(i)***
(ii)Analysis. Under paragraph (a)(2)(ii) of this
section and under §1.356–1(b), because the terms of
the exchange do not specify that shares of Corpora-
tionYstockorcasharereceived in exchange for par-
ticular shares of Class A stock or Class B stock of
CorporationX,apro rataportion of the shares of Cor-
poration Y stock and cash received will be treated
as received in exchange for each share of Class A
stock and Class B stock of Corporation X surrendered
based on the fair market value of such stock. There-
fore, J is treated as receiving one share of Corporation
Y stock and $5 of cash in exchange for each share
of Class A stock of Corporation X and one share of
Corporation Y stock and $5 of cash in exchange for
each share of Class B stock of Corporation X. J re-
alizes a gain of $140 on the exchange of shares of
Class A stock of Corporation X, $100 of which is rec-
ognized under §1.356–1(a). J realizes a gain of $80
on the exchange of Class B stock of Corporation X,
all of which is recognized under §1.356–1(a). Under
paragraph (a)(2)(i) of thissection, J has 10 shares of
Corporation Y stock, each of which has a basis of $2
and is treated as having been acquired on Date 1, 10
shares of Corporation Y stock, each of which has a
basis of $4 and is treated as having been acquired on
Date 2, and 20 shares of Corporation Y stock, each of
which has a basis of $5 and is treated as having been
acquired on Date 3. Under paragraph (a)(2)(vii) of
this section, on or before the date on which the basis
of a share of Corporation Y stock received becomes
relevant, J may designate which of the shares of Cor-
poration Y stock received have a basis of $2, which
have a basis of $4, and which have a basis of $5.
Example 5.(i)***
(ii)Analysis. Under paragraph (a)(2)(ii) of this
section and under §1.356–1(b), because the terms of
the exchange specify that J receives 40 shares of stock
of Corporation Y in exchange for J’s shares of Class
A stock of Corporation X and $200 of cash in ex-
change for J’s shares of Class B stock of Corporation
X and such terms are economically reasonable, such
terms control. J realizes a gain of $140 on the ex-
change of shares of Class A stock of Corporation X,
none of which is recognized under §1.356–1(a). J re-
alizes a gain of $80 on the exchange of shares of Class
B stock of Corporation X, all of which is recognized
under §1.356–1(a). Under paragraph (a)(2)(i) of this
section, J has 20 shares of Corporation Y stock, each
of which has a basis of $1 and is treated as having
been acquired on Date 1, and 20 shares of Corpo-
ration Y stock, each of which has a basis of $2 and
is treated as having been acquired on Date 2. Un-
der paragraph (a)(2)(vii) of this section, on or before
the date on which the basis of a share of Corporation
Y stock received becomes relevant, J may designate
which of the shares of Corporation Y stock received
have a basis of $1 and which have a basis of $2.
Example 6.(i)***
(ii)Analysis. Under paragraph (a)(2)(ii) of this
section and under §1.354–1(a), because the terms of
the exchange specify thatJ receives 10 shares of stock
of Corporation Y in exchange for J’s shares of Class
A stock of Corporation X and a Corporation Y secu-
rity in exchange for its Corporation X security and
such terms are economically reasonable, such terms
control. Pursuant to section 354, J recognizes no gain
on either exchange. Under paragraph (a)(2)(i) of this
section, J has 10 shares of Corporation Y stock, each
of which has a basis of $2 and is treated as having
been acquired on Date 1, and a security that has a ba-
sis of $100 and is treated as having been acquired on
Date 2.
*****
Example 11.(i)***
(ii)Analysis. Under paragraph (a)(2)(iii) of this
section, J is deemed to have received shares of Cor-
poration Y stock with an aggregate fair market value
of $1,000 in exchange for J’s Corporation X shares.
Consistent with the economics of the transaction and
the rights associated with each class of stock of Cor-
poration Y owned by J, J is deemed to receive addi-
tional shares of Corporation Y common stock. Be-
cause the value of the common stock indicates that
the liquidation preference associated with the Corpo-
ration Y preferred stock could be satisfied even if the
reorganization did not occur, it is not appropriate to
deem the issuance of additional Corporation Y pre-
ferred stock. Given the number of outstanding shares
of common stock of Corporation Y and their value
immediately before the effective time of the reorga-
nization, J is deemed to have received 100 shares of
common stock of Corporation Y in the reorganiza-
tion. Under paragraph (a)(2)(i) of this section, each of
those shares has a basis of $1 and is treated as having
been acquired on Date 1. Then, the common stock
of Corporation Y is deemed to be recapitalized in a
reorganization under section 368(a)(1)(E) in which J
receives 100 shares of Corporation Y common stock
in exchange for those shares of Corporation Y com-
mon stock that J held immediately prior to the reorga-
nization and those shares of Corporation Y common
stock that J is deemed to have received in the reor-
ganization. Under paragraph (a)(2)(i), immediately
after the reorganization, J holds 50 shares of Corpo-
ration Y common stock, each of which has a basis of
$2 and is treated as having been acquired on Date 1,
and 50 shares of Corporation Y common stock, each
of which has a basis of $4 and is treated as having
been acquired on Date 2. Under paragraph (a)(2)(vii)
of this section, on or before the date on which the ba-
sis of any share of J’s Corporation Y common stock
becomes relevant, J may designate which of those
shares have a basis of $2 and which have a basis of
$4.
*****
§1.1502–19T [Corrected]
Par. 4 Section 1.1502–19T is amended
by removing the cross-reference for para-
November 20, 20069542006–47 I.R.B.

graphs (b) through (c) and adding a cross-
reference for paragraphs (a) through (c)
and revising the text of (h)(2)(iv) to read
as follows:
§1.1502–19T Excess loss accounts
(temporary).
(a) through (c) [Reserved]. For further
guidance, see §1.1502–19 (a) through (c).
*****
(h)(2)(iv)***Forguidanceregarding
determinations of the basis of the stock of a
subsidiary acquired in an intercompany re-
organization on or after January 23, 2006,
see paragraphs (d) and (g)Example 2of
this section.
*****
§1.1502–32 [Corrected]
Par. 5. Section 1.1502–32 is amended
by revising the text of paragraph (h)(8) to
readsasfollows:
§1.1502–32 Investment adjustments.
*****
(h) * * *
(h)(8) * * * Paragraph (b)(5)(ii)Exam-
ple 6of this section applies only with re-
spect to determinations of the basis of the
stock of a subsidiary on or after January
23, 2006. For determinations of the basis
of the stock of a subsidiary before January
23, 2006, see §1.1502–32(b)(5)(ii)Exam-
ple 6as contained in the 26 CFR part 1 edi-
tion revised as of April 1, 2005.
Guy R. Traynor,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on October 25,
2006, 8:45 a.m., and published in the issue of the Federal
Register for October 26, 2006, 71 F.R. 62556)
2006–47 I.R.B.955November 20, 2006

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
November 20, 2006i2006–47 I.R.B.

Numerical Finding List
1
Bulletins 2006–27 through 2006–47
Announcements:
2006-42, 2006-27 I.R.B.48
2006-43, 2006-27 I.R.B.48
2006-44, 2006-27 I.R.B.49
2006-45, 2006-31 I.R.B.121
2006-46, 2006-28 I.R.B.76
2006-47, 2006-28 I.R.B.78
2006-48, 2006-31 I.R.B.135
2006-49, 2006-29 I.R.B.89
2006-50, 2006-34 I.R.B.321
2006-51, 2006-32 I.R.B.222
2006-52, 2006-33 I.R.B.254
2006-53, 2006-33 I.R.B.254
2006-54, 2006-33 I.R.B.254
2006-55, 2006-35 I.R.B.342
2006-56, 2006-35 I.R.B.342
2006-57, 2006-35 I.R.B.343
2006-58, 2006-36 I.R.B.388
2006-59, 2006-36 I.R.B.388
2006-60, 2006-36 I.R.B.389
2006-61, 2006-36 I.R.B.390
2006-62, 2006-37 I.R.B.444
2006-63, 2006-37 I.R.B.445
2006-64, 2006-37 I.R.B.447
2006-65, 2006-37 I.R.B.447
2006-66, 2006-37 I.R.B.448
2006-67, 2006-38 I.R.B.509
2006-68, 2006-38 I.R.B.510
2006-69, 2006-37 I.R.B.449
2006-70, 2006-40 I.R.B.629
2006-71, 2006-40 I.R.B.630
2006-72, 2006-40 I.R.B.630
2006-73, 2006-42 I.R.B.745
2006-74, 2006-42 I.R.B.746
2006-75, 2006-42 I.R.B.746
2006-76, 2006-42 I.R.B.746
2006-77, 2006-42 I.R.B.748
2006-78, 2006-42 I.R.B.748
2006-79, 2006-43 I.R.B.792
2006-80, 2006-45 I.R.B.840
2006-81, 2006-44 I.R.B.821
2006-82, 2006-44 I.R.B.821
2006-83, 2006-44 I.R.B.822
2006-84, 2006-45 I.R.B.873
2006-85, 2006-45 I.R.B.873
2006-86, 2006-45 I.R.B.842
2006-87, 2006-44 I.R.B.822
2006-88, 2006-46 I.R.B.910
2006-89, 2006-44 I.R.B.826
2006-90, 2006-47 I.R.B.953
2006-91, 2006-47 I.R.B.953
Notices:
2006-56, 2006-28 I.R.B.58
2006-57, 2006-27 I.R.B.13
2006-58, 2006-28 I.R.B.59
2006-59, 2006-28 I.R.B.60
2006-60, 2006-29 I.R.B.82
2006-61, 2006-29 I.R.B.85
2006-62, 2006-29 I.R.B.86
2006-63, 2006-29 I.R.B.87
2006-64, 2006-29 I.R.B.88
2006-65, 2006-31 I.R.B.102
2006-66, 2006-30 I.R.B.99
2006-67, 2006-33 I.R.B.248
2006-68, 2006-31 I.R.B.105
2006-69, 2006-31 I.R.B.107
2006-70, 2006-33 I.R.B.252
2006-71, 2006-34 I.R.B.316
2006-72, 2006-36 I.R.B.363
2006-73, 2006-35 I.R.B.339
2006-74, 2006-35 I.R.B.339
2006-75, 2006-36 I.R.B.366
2006-76, 2006-38 I.R.B.459
2006-77, 2006-40 I.R.B.590
2006-78, 2006-41 I.R.B.675
2006-79, 2006-43 I.R.B.763
2006-80, 2006-40 I.R.B.594
2006-81, 2006-40 I.R.B.595
2006-82, 2006-39 I.R.B.529
2006-83, 2006-40 I.R.B.596
2006-84, 2006-41 I.R.B.677
2006-85, 2006-41 I.R.B.677
2006-86, 2006-41 I.R.B.680
2006-87, 2006-43 I.R.B.766
2006-88, 2006-42 I.R.B.686
2006-89, 2006-43 I.R.B.772
2006-90, 2006-42 I.R.B.688
2006-91, 2006-42 I.R.B.688
2006-92, 2006-43 I.R.B.774
2006-93, 2006-44 I.R.B.798
2006-94, 2006-43 I.R.B.777
2006-95, 2006-45 I.R.B.848
2006-96, 2006-46 I.R.B.902
2006-97, 2006-46 I.R.B.904
2006-98, 2006-46 I.R.B.906
2006-99, 2006-46 I.R.B.907
2006-101, 2006-47 I.R.B.930
2006-102, 2006-46 I.R.B.909
2006-103, 2006-47 I.R.B.931
Proposed Regulations:
REG-208270-86, 2006-42 I.R.B.698
REG-121509-00, 2006-40 I.R.B.602
REG-135866-02, 2006-27 I.R.B.34
REG-140379-02, 2006-44 I.R.B.808
REG-142599-02, 2006-44 I.R.B.808
Proposed Regulations— Continued:
REG-146893-02, 2006-34 I.R.B.317
REG-159929-02, 2006-35 I.R.B.341
REG-148864-03, 2006-34 I.R.B.320
REG-168745-03, 2006-39 I.R.B.532
REG-105248-04, 2006-43 I.R.B.787
REG-109512-05, 2006-30 I.R.B.100
REG-141901-05, 2006-47 I.R.B.947
REG-142270-05, 2006-43 I.R.B.791
REG-145154-05, 2006-39 I.R.B.567
REG-148576-05, 2006-40 I.R.B.627
REG-109367-06, 2006-41 I.R.B.683
REG-112994-06, 2006-27 I.R.B.47
REG-118775-06, 2006-28 I.R.B.73
REG-118897-06, 2006-31 I.R.B.120
REG-120509-06, 2006-39 I.R.B.570
REG-124152-06, 2006-36 I.R.B.368
REG-125071-06, 2006-36 I.R.B.375
REG-136806-06, 2006-47 I.R.B.950
Revenue Procedures:
2006-29, 2006-27 I.R.B.13
2006-30, 2006-31 I.R.B.110
2006-31, 2006-27 I.R.B.32
2006-32, 2006-28 I.R.B.61
2006-33, 2006-32 I.R.B.140
2006-34, 2006-38 I.R.B.460
2006-35, 2006-37 I.R.B.434
2006-36, 2006-38 I.R.B.498
2006-37, 2006-38 I.R.B.499
2006-38, 2006-39 I.R.B.530
2006-39, 2006-40 I.R.B.600
2006-40, 2006-42 I.R.B.694
2006-41, 2006-43 I.R.B.777
2006-42, 2006-47 I.R.B.931
2006-43, 2006-45 I.R.B.849
2006-44, 2006-44 I.R.B.800
2006-45, 2006-45 I.R.B.851
2006-46, 2006-45 I.R.B.859
2006-47, 2006-45 I.R.B.869
2006-48, 2006-47 I.R.B.934
2006-49, 2006-47 I.R.B.936
2006-50, 2006-47 I.R.B.944
2006-51, 2006-47 I.R.B.945
Revenue Rulings:
2006-35, 2006-28 I.R.B.50
2006-36, 2006-36 I.R.B.353
2006-37, 2006-30 I.R.B.91
2006-38, 2006-29 I.R.B.80
2006-39, 2006-32 I.R.B.137
2006-40, 2006-32 I.R.B.136
2006-41, 2006-35 I.R.B.331
2006-42, 2006-35 I.R.B.337
2006-43, 2006-35 I.R.B.329
2006-44, 2006-36 I.R.B.361
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2006–1 through 2006–26 is in Internal Revenue Bulletin
2006–26, dated June 26, 2006.
2006–47 I.R.B.iiNovember 20, 2006

Revenue Rulings— Continued:
2006-45, 2006-37 I.R.B.423
2006-46, 2006-39 I.R.B.511
2006-47, 2006-39 I.R.B.511
2006-48, 2006-39 I.R.B.516
2006-49, 2006-40 I.R.B.584
2006-50, 2006-41 I.R.B.672
2006-51, 2006-41 I.R.B.632
2006-52, 2006-43 I.R.B.761
2006-53, 2006-44 I.R.B.796
2006-54, 2006-45 I.R.B.834
2006-55, 2006-45 I.R.B.837
2006-56, 2006-46 I.R.B.874
2006-57, 2006-47 I.R.B.911
2006-58, 2006-46 I.R.B.876
Social Security Contribution and Benefit
Base; Domestic Employee Coverage
Threshold:
2006-102, 2006-46 I.R.B.909
Tax Conventions:
2006-80, 2006-45 I.R.B.840
2006-86, 2006-45 I.R.B.842
Treasury Decisions:
9265, 2006-27 I.R.B.1
9266, 2006-28 I.R.B.52
9267, 2006-34 I.R.B.313
9268, 2006-30 I.R.B.94
9269, 2006-30 I.R.B.92
9270, 2006-33 I.R.B.237
9271, 2006-33 I.R.B.224
9272, 2006-35 I.R.B.332
9273, 2006-37 I.R.B.394
9274, 2006-33 I.R.B.244
9275, 2006-35 I.R.B.327
9276, 2006-37 I.R.B.424
9277, 2006-33 I.R.B.226
9278, 2006-34 I.R.B.256
9279, 2006-36 I.R.B.355
9280, 2006-38 I.R.B.450
9281, 2006-39 I.R.B.517
9282, 2006-39 I.R.B.512
9283, 2006-41 I.R.B.633
9284, 2006-40 I.R.B.582
9285, 2006-41 I.R.B.656
9286, 2006-43 I.R.B.750
9287, 2006-46 I.R.B.896
9288, 2006-44 I.R.B.794
9289, 2006-45 I.R.B.827
9290, 2006-46 I.R.B.879
9291, 2006-46 I.R.B.887
9292, 2006-47 I.R.B.914
November 20, 2006iii2006–47 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2006–27 through 2006–47
Announcements:
2005-59
Updated and superseded by
Ann. 2006-45, 2006-31 I.R.B.121
Notices:
88-128
Supplemented by
Notice 2006-95, 2006-45 I.R.B.848
2002-45
Amplified by
Rev. Rul. 2006-36, 2006-36 I.R.B.353
2003-69
Amplified and superseded by
Notice 2006-101, 2006-47 I.R.B.930
2004-61
Modified and superseded by
Notice 2006-95, 2006-45 I.R.B.848
2006-20
Supplemented and modified by
Notice 2006-56, 2006-28 I.R.B.58
2006-27
Modified by
Ann. 2006-88, 2006-46 I.R.B.910
2006-28
Modified by
Ann. 2006-88, 2006-46 I.R.B.910
2006-53
Modified by
Notice 2006-71, 2006-34 I.R.B.316
2006-67
Modified and superseded by
Notice 2006-77, 2006-40 I.R.B.590
Proposed Regulations:
REG-135866-02
Corrected by
Ann. 2006-64, 2006-37 I.R.B.447
Ann. 2006-65, 2006-37 I.R.B.447
REG-124152-06
Corrected by
Ann. 2006-90, 2006-47 I.R.B.953
REG-134317-05
Corrected by
Ann. 2006-47, 2006-28 I.R.B.78
REG-112994-06
Corrected by
Ann. 2006-79, 2006-43 I.R.B.792
Proposed Regulations— Continued:
REG-118775-06
Corrected by
Ann. 2006-71, 2006-40 I.R.B.630
Revenue Procedures:
99-35
Modified and superseded by
Rev. Proc. 2006-40, 2006-42 I.R.B.694
2002-9
Modified and amplified by
Notice 2006-67, 2006-33 I.R.B.248
Notice 2006-77, 2006-40 I.R.B.590
Rev. Proc. 2006-43, 2006-45 I.R.B.849
2002-37
Clarified, modified, amplified, and superseded by
Rev. Proc. 2006-45, 2006-45 I.R.B.851
2002-38
Clarified, modified, amplified, and superseded by
Rev. Proc. 2006-46, 2006-45 I.R.B.859
2004-63
Superseded by
Rev. Proc. 2006-34, 2006-38 I.R.B.460
2005-41
Superseded by
Rev. Proc. 2006-29, 2006-27 I.R.B.13
2005-49
Superseded by
Rev. Proc. 2006-33, 2006-32 I.R.B.140
2005-67
Superseded by
Rev. Proc. 2006-41, 2006-43 I.R.B.777
2005-70
Amplified by
Rev. Proc. 2006-51, 2006-47 I.R.B.945
2005-78
Superseded by
Rev. Proc. 2006-49, 2006-47 I.R.B.936
2006-12
Modified by
Rev. Proc. 2006-37, 2006-38 I.R.B.499
2006-33
Updated and clarified by
Ann. 2006-73, 2006-42 I.R.B.745
2006-35
Modified by
Notice 2006-90, 2006-42 I.R.B.688
Revenue Rulings:
72-238
Obsoleted by
REG-109367-06, 2006-41 I.R.B.683
Revenue Rulings— Continued:
73-558
Obsoleted by
REG-109367-06, 2006-41 I.R.B.683
75-296
Distinguished by
Rev. Rul. 2006-52, 2006-43 I.R.B.761
80-31
Distinguished by
Rev. Rul. 2006-52, 2006-43 I.R.B.761
81-35
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
81-36
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
87-10
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
2002-41
Amplified by
Rev. Rul. 2006-36, 2006-36 I.R.B.353
2003-43
Amplified by
Notice 2006-69, 2006-31 I.R.B.107
2005-24
Amplified by
Rev. Rul. 2006-36, 2006-36 I.R.B.353
Treasury Decisions:
9244
Corrected by
Ann. 2006-91, 2006-47 I.R.B.953
9254
Corrected by
Ann. 2006-44, 2006-27 I.R.B.49
Ann. 2006-66, 2006-37 I.R.B.448
9258
Corrected by
Ann. 2006-46, 2006-28 I.R.B.76
9260
Corrected by
Ann. 2006-67, 2006-38 I.R.B.509
9262
Corrected by
Ann. 2006-56, 2006-35 I.R.B.342
9264
Corrected by
Ann. 2006-46, 2006-28 I.R.B.76
9272
Corrected by
Ann. 2006-68, 2006-38 I.R.B.510
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–1 through 2006–26 is in Internal Revenue Bulletin 2006–26, dated June 26, 2006.
2006–47 I.R.B.ivNovember 20, 2006

Treasury Decisions— Continued:
9274
Corrected by
Ann. 2006-89, 2006-44 I.R.B.826
9276
Corrected by
Ann. 2006-83, 2006-44 I.R.B.822
Ann. 2006-85, 2006-45 I.R.B.873
9277
Corrected by
Ann. 2006-72, 2006-40 I.R.B.630
9280
Corrected by
Ann. 2006-78, 2006-42 I.R.B.748
9281
Corrected by
Ann. 2006-82, 2006-44 I.R.B.821
Ann. 2006-84, 2006-45 I.R.B.873
November 20, 2006v2006–47 I.R.B.

INTERNAL REVENUE BULLETIN
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Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
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related topics, select More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
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REVENUE BUL
LETIN
If you have c
omments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be p
leased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.g
ov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224
Internal Revenue Service
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ashington,DC20224
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