Internal Revenue Bulletin 2004-21 (PDF rendition): IRS Revenue Procedures

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

Bulletin No. 200
4-21
May 24, 2004
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
Announcement 2004–46, page 964.
This announcement is a settlement initiative for taxpayers to
resolve transactions described in Notice 2000–44, 2000–2
C.B. 255, and substantially similar transactions (Son of Boss
transactions).
INCOME TAX
Rev. Rul. 2004–47, page 941.
Section 265(a)(2); expenses and interest relating to tax-
exempt income.This ruling deals with the application of
section 265 of the Code to affiliated corporate groups when
one member of the group borrows from outside the group and
makes funds available to another member of the group that is
a dealer in tax-exempt securities.
Rev. Rul. 2004–48, page 945.
LIFO; price indexes; department stores.The March 2004
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, March 31, 2004.
T.D. 912
8, page 943.
Final re
gulations under sections 446, 860G, and 863 of the
Code set
out rules relating to the proper timing and source
of inco
me from fees received to induce taxpayers to become
the hol
ders of noneconomic residual interests in Real Estate
Mortga
ge Investment Conduits (REMICs).
REG–128590–03, page 952.
Proposed regulations under section 265 of the Code provide
guidance regarding the consolidated return treatment of inter-
company obligations that are treated as financing tax-exempt
obligations. These regulations provide that, if a member of
a consolidated group incurs or continues debt to a nonmem-
ber that is directly traceable to an intercompany obligation ex-
tended to a member of the group (the borrowing member) by
another member of the group (the lending member), and sec-
tion 265(a)(2) applies to disallow a deduction for the borrowing
member’s interest expense incurred with respect to the inter-
company obligation, then the lending member’s corresponding
interest income will not be excluded under the intercompany
transaction regulations.
Notice 2004–38, page 949.
This notice announces that the Service and the Treasury De-
partment will issue temporary and proposed regulations that
will modify the definition of “qualified amended return” in regu-
lations section 1.6664–2(c)(3).
Rev. Proc. 2004–30, page 950.
This procedure provides automatic consent procedures for tax-
payers to change their method of accounting for income from
REMIC inducement fees to a safe harbor method set forth in
T.D. 9128. Rev. Proc. 2002–9 modified and amplified.
Announcement 2004–44, page 957.
This announcement solicits comments and suggestions regard-
ing the scope and details of regulations that may be proposed
under section 7701(f) of the Code that will address the appli-
cation of sections 265(a)(2) and 246A in transactions involving
related parties, pass-through entities, or other intermediaries.
(Continued on the next page)
A
nnouncements of Disbarments and Suspensions begin on page 966.
Finding Lists begin on page ii.
Index for January through May begins on page vi.

Announcement 2004–46, page 964.
This announcement is a settlement initiative for taxpayers to
resolve transactions described in Notice 2000–44, 2000–2
C.B. 255, and substantially similar transactions (Son of Boss
transactions).
EMPLOYEE PLANS
Announcement 2004–43, page 955.
Alternative deficit reduction election; notice to Pension
Benefit Guaranty Corporation (PBGC) and plan partici-
pants and beneficiaries.This announcement describes how
notice must be given to the Pension Benefit Guaranty Corpo-
ration and to plan participants and their beneficiaries under
section 302(d)(12) of the Employee Retirement Income Secu-
rity Act of 1974 when an employer elects to make an alterna-
tive deficit reduction contribution under section 412(1) of the
Code. This announcement also provides special timing and
transitional rules. Announcement 2004–38 modified.
EXEMPT ORGANIZATIONS
Announcement 2004–45, page 958.
A list is provided of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Rev. Rul. 2004–49, page 939.
Partnerships; amortization of intangibles.This ruling pro-
vides that if a section 197(f)(9) intangible is amortizable in the
hands of a partnership, the anti-churning rules under section
1.197–2(h)(12)(vii)(A) of the regulations do not apply to cura-
tive or remedial reverse section 704(c) allocations of amortiza-
tion. It also provides that if a section 197(f)(9) intangible was
not amortizable in the hands of the partnership, then remedial,
not curative, reverse section 704(c) allocations of amortization
are permitted.
Notice 2004–37, page 947.
Section 1504.This notice announces circumstances in
which the failure to satisfy the value requirement of section
1504(a)(2)(B) of the Code will be disregarded under section
1504(a)(5)(C) and (D) in determining whether a corporation
is treated as a member of an affiliated group. The notice
also announces that regulations will be proposed and invites
comments.
Notice 2004–38, page 949.
This notice announces that the Service and the Treasury De-
partment will issue temporary and proposed regulations that
will modify the definition of “qualified amended return” in regu-
lations section 1.6664–2(c)(3).
Announcement 2004–46, page 964.
This announcement is a settlement initiative for taxpayers to
resolve transactions described in Notice 2000–44, 2000–2
C.B. 255, and substantially similar transactions (Son of Boss
transactions).
Announcement 2004–47, page 966.
This document contains corrections to temporary regulations
(T.D. 9118, 2004–15 I.R.B. 718) under section 337 of the
Code that clarify that in computing the amount of stock loss
attributable to the recognition of built-in gain, gain recognized
on the disposition of an asset may be reduced by expenses
directly attributable to the recognition of that gain.
May 24, 20042004-21 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004-21 I.R.B.May 24, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 197.—Amortization
of Goodwill and Certain
Other Intangibles
26 CFR 197–2: Amortization of goodwill and certain
other intangibles.
If, pursuant to section 1.704–1(b)(2)(iv)(f)ofthe
Income Tax Regulations, a partnership revalues a
section 197 intangible, may the partnership allocate
amortization with respect to the section 197 intangi-
blesoastotakeintoaccountthebuilt-ingainorloss
from the revaluation? See Rev. Rul. 2004-49, page
939.
26 CFR 1.197–2: Amortization of goodwill and cer-
tain other intangibles.
(Also §§ 704; 1.704–1; 1.704–3.)
Partnerships; amortization of in-
tangibles.This ruling provides that if
a section 197(f)(9) intangible is amor-
tizable in the hands of a partnership,
the anti-churning rules under section
1.197–2(h)(12)(vii)(A) of the regula-
tions do not apply to curative or remedial
reverse section 704(c) allocations of amor-
tization. It also provides that if a section
197(f)(9) intangible was not amortizable
in the hands of the partnership, then reme-
dial, not curative, reverse section 704(c)
allocations of amortization are permitted.
Rev. Rul. 2004–49
ISSUE
If, pursuant to § 1.704–1(b)(2)(iv)(f)of
the Income Tax Regulations, a partnership
revalues a section 197 intangible, may the
partnership allocate amortization with re-
spect to the section 197 intangible so as to
take into account the built-in gain or loss
from the revaluation?
FACTS
Situation 1.AandBare partners in
theABpartnership.Ccontributes money
(more than ade minimisamount) to the
partnership in exchange for a partner-
ship interest. The partnership reval-
ues the assets of the partnership under
§ 1.704–1(b)(2)(iv)(f). TheABpartner-
ship owns several assets, including Asset
1, a section 197 intangible. Asset 1 is
amortizable in the hands of the partner-
ship.A,B,andCare not related.
Situation 2. Situation 2 is the same as
Situation 1 except that Asset 1 is not amor-
tizable in the hands of the partnership.
LAW
Section 197(a) provides that a taxpayer
is entitled to an amortization deduction
with respect to any amortizable section
197 intangible. The amount of the de-
ductionisdeterminedbyamortizingthe
adjusted basis (for purposes of determin-
ing gain) of the intangible ratably over the
15-year period beginning with the month
in which the intangible was acquired.
Section 197(c)(1) provides that, with
certain exceptions, the term “amortizable
section 197 intangible” means any section
197 intangible, (A) that is acquired by the
taxpayer after the date of the enactment of
§ 197, and (B) that is held in connection
with the conduct of a trade or business or
an activity described in § 212.
Section 197(d)(1) provides that the term
“section 197 intangible” means (A) good-
will; (B) going concern value; (C) any of
the following intangible items: (i) work-
force in place including its composition
and terms and conditions (contractual or
otherwise) of its employment, (ii) business
books and records, operating systems, or
any other information base (including lists
or other information with respect to current
or prospective customers), (iii) any patent,
copyright, formula, process, design, pat-
tern, knowhow, format, or other similar
items, (iv) any customer-based intangible,
(v) any supplier-based intangible, and (vi)
any other similar item; (D) any license,
permit, or other right granted by a govern-
mental unit or an agency or instrumental-
ity thereof; (E) ) any covenant not to com-
pete (or other arrangement to the extent the
arrangement has substantially the same ef-
fect as a covenant not to compete) entered
into in connection with an acquisition (di-
rectly or indirectly) of an interest in a trade
or business or substantial portion thereof;
and (F) any franchise, trademark, or trade
name.
Under § 197(f)(9)(A), the term “amor-
tizable section 197 intangible” does not in-
clude any section 197 intangible that is
goodwill or going concern value (or for
which depreciation or amortization would
not have been allowable but for § 197) and
that is acquired by the taxpayer after the
date of the enactment of § 197, if (i) the
intangible was held or used at any time on
or after July 25, 1991, and on or before
such date of enactment by the taxpayer or
a related person, (ii) the intangible was ac-
quired from a person who held such intan-
gible at any time on or after July 25, 1991,
and on or before such date of enactment,
and, as part of the transaction, the user of
such intangible does not change, or (iii) the
taxpayer grants the right to use such intan-
gible to a person (or a person related to
such person) who held or used such intan-
gible at any time on or after July 25, 1991,
and on or before such date of enactment.
An intangible described in § 197(f)(9)
(a section 197(f)(9) intangible) is treated as
an amortizable section 197 intangible only
to the extent permitted under § 1.197–2(h).
The purpose of the anti-churning rules of
§ 197(f)(9) and § 1.197–2(h) is to prevent
the amortization of section 197(f)(9) intan-
gibles unless they are transferred after the
applicable effective date in a transaction
giving rise to a significant change in own-
ership or use. Section 1.197–2(h)(1)(ii).
Section 1.197–2(h)(12) provides special
rules that apply for purposes of determin-
ing whether transactions involving part-
nerships give rise to a significant change
in ownership or use.
Under § 1.197–2(h)(5), a section
197(f)(9) intangible may be amortized
by the acquirer of the intangible if the
intangible was an amortizable section 197
intangible in the hands of the seller (or
transferor), but only if the acquisition
transaction and the transaction in which
the seller (or transferor) acquired the in-
tangible or interest therein are not part of
a series of related transactions.
Under § 704(b), a partner’s distribu-
tive share of income, gain, loss, deduction,
or credit (or item thereof) is determined
in accordance with the partnership agree-
ment provided that those allocations have
substantial economic effect. If the alloca-
tions under the partnership agreement do
not have substantial economic effect or the
2004-21 I.R.B.939May 24, 2004

partnership agreement does not provide as
to a partner’s distributive shares of partner-
ship items, then the partner’s distributive
share of such items is determined in ac-
cordance with the partner’s interest in the
partnership (determined by taking into ac-
count all facts and circumstances).
Section 1.704–1(b) describes various
requirements that must be met for part-
nership allocations to have substantial
economic effect. Among these require-
ments is that (except as otherwise pro-
vided in § 1.704–1(b)) the partnership
agreement must provide for the deter-
mination and maintenance of capital ac-
counts in accordance with the rules of
§ 1.704–1(b)(2)(iv).
Section 1.704–1(b)(2)(iv)(f)pro-
vides that, if certain criteria are met,
the capital account maintenance rules of
§ 1.704–1(b)(2)(iv) will not be violated
if a partnership agreement, upon the oc-
currence of certain events, increases or
decreases the capital accounts of the part-
ners to reflect a revaluation of partnership
property (including intangibles such as
goodwill) on the partnership’s books.
Section 704(c)(1)(A) provides that, un-
der regulations prescribed by the Secre-
tary, income, gain, loss, and deduction
with respect to property contributed to the
partnership by a partner shall be shared
among the partners so as to take account of
the variation between the basis of the prop-
erty to the partnership and its fair market
value at the time of contribution.
Section 1.704–3 provides rules ap-
plicable to partnership allocations under
§ 704(c)(1)(A). Section 1.704–3(a)(1) pro-
vides that allocations under § 704(c)(1)(A)
must be made using a reasonable method
that is consistent with the purpose of
§ 704(c). Section 1.704–3 describes three
allocation methods that are generally rea-
sonable: the traditional method, the tra-
ditional method with curative allocations,
and the remedial allocation method.
Section 1.704–3(a)(6)(i) provides that
the principles of § 1.704–3 apply to al-
locations with respect to property for
which differences between book value
and adjusted tax basis are created when a
partnership revalues partnership property
pursuant to § 1.704–1(b)(2)(iv)(f)(reverse
§ 704(c) allocations). Partnerships are
not required to use the same allocation
method for reverse § 704(c) allocations
as for contributed property, even if at the
time of revaluation the property is already
subject to §§ 704(c)(1)(A) and 1.704–3.
Section 1.197–2(g)(4)(i) provides that,
to the extent that an intangible was an
amortizable section 197 intangible in the
hands of the contributing partner, a part-
nership may make allocations of amortiza-
tion deductions with respect to the intan-
gible to all of its partners under any of the
permissible methods described in the reg-
ulations under § 704(c).
Section 1.197–2(g)(4)(ii) provides that,
to the extent that an intangible was not an
amortizable section 197 intangible in the
hands of the contributing partner, the in-
tangible is not amortizable by the partner-
ship. However, if a partner contributes a
section 197 intangible to a partnership and
the partnership adopts the remedial alloca-
tion method for making § 704(c) alloca-
tions of amortization deductions, the part-
nership generally may make remedial al-
locations of amortization deductions with
respect to the contributed section 197 in-
tangible in accordancewith § 1.704–3(d).
Section 1.197–2(h)(12)(vii)(A) pro-
vides that the anti-churning rules do not
apply to curative or remedial allocations
of amortization with respect to a section
197(f)(9) intangible if the intangible was
an amortizable section 197 intangible in
the hands of the contributing partner (un-
less § 1.197–2(h)(10) causes the intangible
to cease to be an amortizable section 197
intangible in the hands of the partnership).
Section 1.197–2(h)(12)(vii)(B) pro-
vides that, if a section 197(f)(9) intangible
was not amortizable in the hands of the
contributing partner, a non-contributing
partner generally may receive remedial
allocations of amortization under § 704(c)
that are deductible for federal income
tax purposes. However, such a partner
may not receive remedial allocations of
amortization under § 704(c) if that partner
is related to the partner that contributed
the intangible or if, as part of a series
of related transactions that includes the
contribution of the section 197(f)(9) intan-
gible to the partnership, the contributing
partner or related person (other than the
partnership) becomes (or remains) a direct
user of the contributed intangible. Un-
der § 1.197–2(h)(12)(vii)(B), taxpayers
may use any reasonable method to deter-
mine amortization of the asset for book
purposes, provided that the method used
does not contravene the purposes of the
anti-churning rules.
ANALYSIS
If, under § 1.704–1(b)(2)(iv)(f), a part-
nership revalues a section 197 intangible
that is amortizable in the hands of the part-
nership, then the partnership may make
allocations of amortization deductions
with respect to the built-in gain or loss
from the revaluation (i.e., the increase or
decrease, respectively, in the book value
of the intangible as a result of the reval-
uation) to all of its partners under any
of the permissible methods described in
§ 1.704–3. If the revalued section 197 in-
tangible is not amortizable in the hands of
the partnership, then §§ 1.197–2(g)(4)(ii)
and 1.197–2(h)(12)(vii) generally prevent
the partnership fromallocating amortiza-
tion with respect to the intangible under
§ 1.704–3(a)(6)(i), but do not prevent the
partnership from making remedial alloca-
tions of amortization with respect to the
intangible. However, remedial allocations
of amortization with respect to built-in
gain or loss from the revaluation of a sec-
tion 197(f)(9) intangible are not allowed
to the extent that such allocations are, in
substance, the equivalent of a remedial al-
location of amortization to a partner that is
related to the “contributing partner” (with
respect to the revaluation). Also, under
§ 1.197–2(h)(12)(vii)(B), remedial alloca-
tions of amortization with respect to the
built-in gain or loss from the revaluation
of a section 197(f)(9) intangible are not
allowed if, as part of a series of related
transactions that includes the revaluation,
the “contributing partners” (with respect to
the revaluation) or related persons (other
than the partnership) become (or remain)
direct users of the intangible.
InSituation 1, the partnership may
make traditional, curative, or remedial al-
locations of amortization under § 1.704–3
to take into account the built-in gain or
loss from the revaluation of Asset 1. Sec-
tion 1.197–2(g)(4)(i). Because Asset 1 is
amortizable in the hands of theABpart-
nership, the anti-churning rules do not
apply to reverse § 704(c) allocations of
amortization from Asset 1.
InSituation 2, because Asset 1 is
not amortizable in the hands ofAB,
the anti-churning rules apply. Under
§197–2(g)(4)(ii) and (h)(12)(vii)(B), the
May 24, 20049402004-21 I.R.B.

partnership may make deductible reme-
dial, but not traditional or curative, al-
locations of amortization to take into
account the built-in gain or loss from
the revaluation of Asset 1, provided
that such allocations are not limited by
§ 1.197–2(h)(12)(vii)(B).
HOLDING
If, pursuant to § 1.704–1(b)(2)(iv)(f), a
partnership revalues a section 197 intan-
gible that was amortizable in the hands of
the partnership, then the § 197 anti-churn-
ing rules do not apply and the partnership
may make reverse § 704(c) allocations (in-
cluding curative and remedial allocations)
of amortization to take into account the
built-in gain or loss from the revaluation
of the intangible. If the revalued section
197 intangible was not amortizable in the
hands of the partnership, then the partner-
ship may make remedial, but not tradi-
tional or curative, allocations of amortiza-
tion to take into account the built-in gain
or loss from the revaluation of the intangi-
ble, provided that such allocations are not
limited by § 1.197–2(h)(12)(vii)(B).
DRAFTING INFORMATION
The principal author of this revenue rul-
ingisLauraC.NashoftheOfficeofAs-
sociate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this revenue ruling, con-
tact Ms. Nash at (202) 622–3050 (not a
toll-free call).
Section 246A.—Dividends
Received Deduction
Reduced Where Portfolio
Stock is Debt Financed
Generally, section 246A reduces the dividend re-
ceived deduction otherwise allowable under sections
243, 244, or 245(a) in proportion to the extent that
the portfolio stock, with respect to which the divi-
dends are received, is debt-financed. Stock is treated
as debt-financed if there is indebtedness directly at-
tributable to the stock investment. See Announce-
ment 2004-44, page 957, and Rev. Rul. 2004-47,
page 941.
Section 265.—Expenses
and Interest Relating to
Tax-Exempt Income
Section 265(a) disallows expenses that would oth-
erwise be allowable as a deduction when these ex-
penses are allocable to income that is wholly exempt
from Federal Income taxes. Section 265(a)(2) dis-
allows interest on indebtedness incurred or contin-
ued to purchase or carry obligations the interest on
which is wholly exempt from Federal income taxes.
See Announcement 2004-44, page 957, and Rev. Rul.
2004-47, page 941.
26 CFR 1.265–2: Interest relating to tax-exempt in-
come.
Section 265(a)(2); expenses and inter-
est relating to tax-exempt income.This
ruling deals with the application of sec-
tion 265 of the Code to affiliated corpo-
rate groups when one member of the group
borrows from outside the group and makes
funds available to another member of the
group that is a dealer in tax-exempt secu-
rities.
Rev. Rul. 2004–47
ISSUE
If a member of an affiliated group
borrows money and transfers the money
to another member of the group that is
a dealer in tax-exempt obligations, does
§ 265(a)(2) of the Internal Revenue Code
apply to disallow the interest expense of
the borrowing corporation?
FACTS
Situation 1. —PandSarecorpora-
tions that are members of the same affil-
iated group, but file separate tax returns.
P and S use the calendar year as their tax-
able year. S is a dealer in tax-exempt obli-
gations, whose general business includes
purchasing and carrying tax-exempt secu-
rities.
On January 1, 2004, L, a bank unrelated
to the affiliated group that includes P and
S, lends $40x to P for 5 years. L’s loan to
P provides for payments of interest on De-
cember 31 of each year at a rate higher than
the appropriate applicable Federal rate. P
contributes the $40x borrowed from L to
the capital of S, and S uses the contributed
funds in its business. Although the bor-
rowed funds are directly traceable from
P to S, they are not directly traceable to
the purchase or carry of specific tax-ex-
empt obligations by S. During its taxable
year 2004, S holds an average of $500x of
tax-exempt obligations (valued at their ad-
justed bases), and an average of $1,000x of
total assets (valued at their adjusted bases).
During its taxable year 2004, P holds an
average of $10,000x of total assets (val-
ued at their adjusted bases) and no tax-ex-
empt obligations in the active conduct of
its trade or business, and incurs $2x of in-
terest expense on its $40x loan from L.
Situation 2. — The facts are the same
as inSituation 1, except that P and S file a
consolidated return.
Situation 3.—Thefactsarethesameas
inSituation 1, except that the funds that P
borrowed from L are not directly traceable
to any funds transferred from P to S and
there is no other directevidence linking the
borrowed funds to any funds transferred
from P to S.
Situation 4. — The facts are the same
as inSituation 1, except that P loans to
S the $40x borrowed from L on the same
terms and conditions as the loan from L to
P. During its taxable year 2004, S incurs
$2x of interest expense on its $40x loan
from P.
LAW AND ANALYSIS
In general, a deduction is allowed under
§ 163 of the Code for all interest paid or ac-
crued on indebtedness. Under § 265(a)(2),
however, no deduction is allowed for inter-
est on indebtedness incurred or continued
to purchase or carry obligations the inter-
est on which is wholly exempt from Fed-
eral income taxes.
Rev. Proc. 72–18, 1972–1 C.B. 740,
sets forth guidelines for the application of
§ 265(a)(2). Section 3.01, which applies to
all taxpayers, states that the application of
§ 265(a)(2) requires a determination of the
taxpayer’s purpose in incurring or contin-
uing each item of indebtedness, based on
all the facts and circumstances. That sec-
tion further states that the taxpayer’s pur-
pose may be established by either direct or
circumstantial evidence.
Section 3.02 of Rev. Proc. 72–18 pro-
vides that direct evidence of a purpose
to purchase tax-exempt obligations exists
when the proceeds of indebtedness are
used for, and are directly traceable to,
the purchase of tax-exempt obligations.
Wynn v. United States, 411 F.2d 614 (3d
2004-21 I.R.B.941May 24, 2004

Cir. 1969),cert. denied, 396 U.S. 1008
(1970). Section 265(a)(2) does not ap-
ply, however, when proceeds of abona
fidebusiness indebtedness are temporarily
invested in tax-exempt obligations under
circumstances similar to those set forth in
Rev. Rul. 55–389, 1955–1 C.B. 276.
Section 3.03 of Rev. Proc. 72–18 pro-
vides that direct evidence of a purpose to
carry tax-exempt obligations exists when
tax-exempt obligations are used as collat-
eral for indebtedness. “[One] who bor-
rows to buy tax-exempts and one who bor-
rows against tax-exempts already owned
are in virtually the same economic posi-
tion. Section 265(2) [the predecessor of
§ 265(a)(2)] makes no distinction between
them.”Wisconsin Cheeseman v. United
States, 388 F.2d 420 (7
th
Cir. 1968), at
422. Section 3.04 of Rev. Proc. 72–18
states that in the absence of direct evidence
linking indebtedness with the purchase or
carrying of tax-exempt obligations as il-
lustrated in paragraphs 3.02 and 3.03 of
Rev. Proc. 72–18, section 265(a)(2) of the
Code will apply only if the totality of facts
and circumstances supports a reasonable
inference that the purpose to purchase or
carry tax-exempt obligations exists. Stated
alternatively, section 265(a)(2) will apply
only when the totality of facts and circum-
stances establishes a “sufficiently direct re-
lationship” between the borrowing and the
investment in tax-exempt obligations. See
Wisconsin Cheeseman, 388 F.2d at 422.
The guidelines set forth in sections 4, 5,
and 6 of Rev. Proc. 72–18 are used to de-
termine whether such a relationship exists.
Section 3.05 of Rev. Proc. 72–18 pro-
vides that generally, when a taxpayer’s
investment in tax-exempt obligations is
insubstantial, the purpose to purchase or
carry tax-exempt obligations will ordinar-
ily not be inferred in the absence of direct
evidence as set forth in sections 3.02 and
3.03 of that revenue procedure. Section
3.05 provides further that in the case of a
corporation, an investment in tax-exempt
obligations shall be presumed insubstan-
tial only when duringthe taxable year the
average amount of the tax-exempt obliga-
tions (valued at their adjusted bases) does
not exceed 2 percent of the average total
assets (valued at their adjusted bases) held
in the active conduct of the trade or busi-
ness. Thede minimisrule of paragraph
3.05 does not apply to dealers in tax-ex-
empt obligations.
Section 5 of Rev. Proc. 72–18 provides
special rules for dealers in tax-exempt
obligations. Specifically, section 5.03
states that if debt is incurred or continued
for the general purpose of carrying on a
brokerage business that includes the pur-
chase of both taxable and tax-exempt obli-
gations, and the use of the borrowed funds
cannot be directly traced, it is reasonable to
infer that the borrowed funds were used for
all the activities of the business, including
the purchase of tax-exempt obligations.
Section 5 of Rev. Proc. 72–18 refers to
a specific allocation formula in section 7
of Rev. Proc. 72–18, derived from the
formula inCommissioner v. Leslie,413
F.2d 636 (2d. Cir. 1969),cert. denied,396
U.S. 1007 (1970). The formula is applied
to interest on borrowed funds that are not
directly traceable to tax-exempt obliga-
tions. The formula consists of a fraction,
whose numerator is the average amount
during the taxable year of the taxpayer’s
tax-exempt obligations (valued at their
adjusted bases), and whose denominator
is the average amount during the taxable
year of the taxpayer’s total assets (valued
at their adjusted bases) minus the amount
of any indebtedness the interest on which
is not subject to disallowance to any extent
under Rev. Proc. 72–18.
InH Enterprises International v. Com-
missioner, 75 T.C.M. 1948 (1998),aff’d,
183F.3d907(8
th
Cir. 1999), a parent and
a subsidiary were members of the same
consolidated group of corporations. The
subsidiary declared a dividend and, a few
days later, borrowed funds and immedi-
ately used part of those funds to make the
dividend distribution to the parent. A por-
tion of the distributed funds was disbursed
to two investment divisions of the parent,
which used the funds to acquire invest-
ments including tax-exempt obligations.
The court held that a portion of the
subsidiary’s indebtedness was incurred
for the purpose of purchasing or carry-
ing tax-exempt obligations (held in the
parent’s investment divisions) and, there-
fore, no deduction was allowed for the
interest on this portion of the indebt-
edness under § 265(a)(2). To establish
the required purposive connection under
§ 265(a)(2), the court reasoned that the
activities of the parent corporation were
relevant in determining the subsidiary’s
purpose for borrowing the funds. If the
analysis only focused on the borrower and
not the transferee, then the purpose of the
borrower corporation would always be ac-
ceptable, frustrating the legislative intent
of § 265(a)(2).
In bothSituations 1and2, following
the rationale ofH Enterprises, the activi-
ties of S must be taken into account to de-
termine P’s purpose under § 265(a)(2) for
borrowing the $40x of funds that are di-
rectly traceable to P’s contribution to the
capital of S. In order to determine the ac-
tivities of S, however, Rev. Proc. 72–18
must be applied. Because S’s brokerage
business includes the purchase of both tax-
able and tax-exempt obligations, it is rea-
sonable to infer under section 5.03 of Rev.
Proc. 72–18 that part of P’s debt was in-
curred for the purpose of purchasing or car-
rying tax-exempt obligations. Applying
the allocation formula in section 7 of Rev.
Proc. 72–18, the interest expense incurred
by P on the $40x borrowed is subject to
partial disallowance. The ratio of S’s aver-
age tax-exempt obligations to S’s total as-
sets is $500x/$1,000x. Therefore, one-half
of the $2x interest expense incurred by P
(i.e., $1x) is disallowed as a deduction to P
under § 265(a)(2). P is not entitled to the
2 percentde minimisrule provided by sec-
tion 3.05 of Rev. Proc. 72–18 because S is
a dealer in tax-exempt obligations.
InSituation 3, there is no direct evi-
dence that P transferred to S any portion
of the $40X P borrowed from L. Without
such direct evidence, the activities of S will
not be taken into account to determine P’s
purpose under § 265(a)(2) for borrowing
the $40x and it is not reasonable to infer
that part of P’s debt was incurred for the
purpose of purchasing or carrying tax-ex-
empt obligations. Therefore, none of the
$2x interest expense incurred by P is dis-
allowed as a deduction under § 265(a)(2).
InSituation 4, the $40x that P bor-
rowed from L is directly traceable to P’s
loan to S. Accordingly, the two separate
back-to-back loans (i.e., the loan from L
to P, followed by the loan from P to S)
must each be examined for the potential
application of § 265(a)(2). With regard to
the loan from L to P, P uses the borrowed
funds to make a loan to S, and separately
accounts for the taxable interest income
from this loan. P does not have a purpose
of using the borrowed funds to purchase
or carry tax-exempt obligations within the
meaning of § 265(a)(2). With regard to the
loan from P to S, although the borrowed
May 24, 20049422004-21 I.R.B.

funds are not directly traceable to S’s pur-
chase or carry of tax-exempt obligations,
§ 265(a)(2) applies to S, a dealer in tax-ex-
empt obligations, to disallow a portion of
its interest expense. The portion of S’s in-
terest deduction that is disallowed is com-
puted by applying the allocation formula in
section 7 of Rev. Proc. 72–18. The ratio
of S’s average tax-exempt obligations to
S’s total assets is $500x/$1,000x. Accord-
ingly, one-half of the $2x interest expense
incurred by S (i.e.,$1x)isdisallowedto
S as a deduction under § 265(a)(2). S is
not entitled to the 2 percentde minimis
rule provided by section 3.05 of Rev. Proc.
72–18 because S is a dealer in tax-exempt
obligations.
HOLDINGS
If a member of an affiliated group bor-
rows money and contributes the borrowed
funds to another member that is a dealer in
tax-exempt obligations such that the funds
contributed to the dealer are directly trace-
able to the contributor’s borrowing, but are
not directly traceable to the dealer’s pur-
chase or carry of tax-exempt obligations,
§ 265(a)(2) applies to disallow a portion of
the interest expense of the contributor. The
portion of the contributor’s interest deduc-
tion to be disallowed is determined by ap-
plying the allocation formula in section 7
of Rev. Proc. 72–18 to the dealer that uses
the borrowed funds in its business.
If a member of an affiliated group
borrows money and there is no direct
evidence linking the borrowed funds to
any funds transferred to another member
who is a dealer in tax-exempt obligations,
§ 265(a)(2) does not apply to disallow
any portion of the interest expense of the
borrowing member based on the dealer
member’s investment in tax-exempt obli-
gations.
If the funds borrowed by a member of
an affiliated group are directly traceable to
a loan to another member that is a dealer in
tax-exempt obligations, § 265(a)(2) does
not apply to disallow the interest expense
of the lending member, but does apply to
disallow a portion of the interest expense
of the dealer. The portion of the dealer’s
interest deduction to be disallowed is de-
termined by applying the allocation for-
mula in section 7 of Rev. Proc. 72–18.
DRAFTING INFORMATION
The principal authors of this rev-
enue ruling are David B. Silber and
Avital Grunhaus of the Office of the Asso-
ciate Chief Counsel (Financial Institutions
and Products). For further information
regarding this revenue ruling, contact
Mr. Silber or Ms. Grunhaus at (202)
622–3930 (not a toll-free call).
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446–1: General rule for methods of ac-
counting.
Rev. Proc. 2004–30 provides automatic consent
procedures for taxpayersto change their method of
accounting for income from REMIC inducement fees
to a safe harbor method set forth in T.D. 9128, pub-
lished May 11, 2004, in the Federal Register. See
Rev. Proc. 2004-30, page 950.
26 CFR 1.446–6: REMIC inducement fees.
T.D. 9128
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Real Estate Mortgage
Investment Conduits;
Application of Section 446
With Respect to Inducement
Fees
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains fi-
nal regulations relating to the proper tim-
ing and source of income from fees re-
ceived to induce taxpayers to become the
holders of noneconomic residual interests
in Real Estate Mortgage Investment Con-
duits (REMICs).
DATES:Effective Date: These regulations
are effective May 11, 2004.
Applicability Dates: For dates of ap-
plicability of the final regulations, see
§§1.446–6(g) and 1.863–1(f).
FOR FURTHER INFORMATION
CONTACT: For information concern-
ing accounting for inducement fees re-
lating to noneconomic REMIC residual
interests, contact John W. Rogers III at
(202) 622–3950 (not a toll-free number).
For information concerning the source of
REMIC inducement fee income, contact
Bethany Ingwalson at (202) 622–3850
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 446(b) (relating to
general rules for methods of accounting),
860C (relating to other definitions and
special rules applicable to REMICs), and
863(a) (relating to special rules for deter-
mining source) of the Internal Revenue
Code of 1986 (Code). On July 21, 2003,
the IRS and Treasury Department pub-
lished a notice of proposed rulemaking
(REG–162625–02, 2003–35 I.R.B. 500
[68 FR 43055]) in the Federal Register.
Inthenoticeofproposedrulemak-
ing, the IRS and Treasury Department
requested comments on the proper method
of accounting to be used by taxpayers for
inducement fee income. No written or
electronic comments were received from
the public in response to the notice of pro-
posed rulemaking. No requests to speak
at the public hearing were received, and,
accordingly, the hearing was canceled.
Therefore, these final regulations adopt
without substantive changes the proposed
regulations set out in the notice of pro-
posed rulemaking.
Explanation of Provisions
Final regulations governing REMICs,
issued in 1992, contain rules governing
the transfer of noneconomic residual in-
terests. Those regulations do not, how-
ever, contain rules that address the trans-
feree’s treatment of the fee received to in-
duce the transferee to become the holder of
a noneconomic residual interest. Follow-
ing release of the final REMIC regulations,
the IRS and the Treasury Department re-
ceived requests for guidance on the proper
method of accounting to be used by tax-
payers for inducement fee income. These
2004-21 I.R.B.943May 24, 2004

regulations provide rules relating to the
proper timing and source of income from
an inducement fee received in connection
with becoming the holder of a noneco-
nomic residual interest in a REMIC.
The notice of proposed rulemaking
published on July 21, 2003, stated that, to
clearly reflect income, an inducement fee
must be included in income over a period
that is reasonably related to the period
during which the applicable REMIC is
expected to generate taxable income or net
loss allocable to the holder of the noneco-
nomic residual interest. The notice of
proposed rulemaking further stated that an
inducement fee generally may not be taken
into account in a single tax year. The no-
tice of proposed rulemaking also set forth
two safe harbor methods of accounting for
inducement fees and contained a rule clar-
ifying that an inducement fee is income
from sources within the United States.
The final regulations adopt these provi-
sions without substantive change. For
further information on the rationale for the
rules set out in these final regulations, see
the preamble for the proposed regulations
in the notice of proposed rulemaking.
The effective date provision of
§1.446–6(g) contained in the notice of
proposed rulemaking stated that these
regulations would become effective upon
publication of the final regulations in
the Federal Register. The notice of pro-
posed rulemaking specifically requested
comments on whether the applicability
of these regulations should be limited to
transactions arising on or after their ef-
fective date and whether some delay in
theeffectivedateoftheseregulationsis
warranted. No comments were received
from the public in response to this request.
In finalizing these regulations, the IRS and
Treasury Department have determined not
to limit the applicability of these regula-
tions to transactions arising on or after the
effective date of the final regulations or to
delay the effective date. The effective date
provision in §1.446–6(g), therefore, is also
adopted without substantive change.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions 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 author of these regula-
tions is John W. Rogers III, Office of As-
sociate Chief Counsel (Financial Institu-
tions & Products). However, other person-
nel from the IRS and the Treasury Depart-
ment participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.446–6 also issued under 26
U.S.C. 446 and 26 U.S.C. 860G; * * *
Par. 2. Section 1.446–6 is added to read
as follows:
§1.446–6 REMIC inducement fees.
(a)Purpose. This section provides spe-
cific timing rules for the clear reflection of
income from an inducement fee received
in connection with becoming the holder
of a noneconomic REMIC residual inter-
est. An inducement fee must be included
in income over a period reasonably related
to the period during which the applicable
REMIC is expected to generate taxable in-
come or net loss allocable to the holder of
the noneconomic residual interest.
(b)Definitions. For purposes of this
section:
(1)Applicable REMIC. The applica-
ble REMIC is the REMIC that issued the
noneconomic residual interest with respect
to which the inducement fee is paid.
(2)Inducement fee. An inducement fee
istheamountpaidtoinduceapersontobe-
come the holder of a noneconomic residual
interest in an applicable REMIC.
(3)Noneconomic residual interest.A
REMIC residual interest is a noneconomic
residual interest if it is a noneconomic
residual interest within the meaning of
§1.860E–1(c)(2).
(4)Remaining anticipated weighted
average life. The remaining antici-
pated weighted average life is the an-
ticipated weighted average life deter-
mined using the methodology set forth in
§1.860E–1(a)(3)(iv) applied as of the date
of acquisition of the noneconomic residual
interest.
(5)REMIC.ThetermREMIChasthe
same meaning in this section as given in
§1.860D–1.
(c)General rule. All taxpayers, regard-
less of their overall method of accounting,
must recognize an inducement fee over the
remaining expected life of the applicable
REMIC in a manner that reasonably re-
flects, without regard to this paragraph, the
after-tax costs and benefits of holding that
noneconomic residual interest.
(d)Special rule on disposition of a
residual interest. If any portion of an
inducement fee received with respect to
becoming the holder of a noneconomic
residual interest in an applicable REMIC
has not been recognized in full by the
holder as of the time the holder trans-
fers, or otherwise ceases to be the holder
for Federal tax purposes of, that residual
interest in the applicable REMIC, then
the holder must include the unrecognized
portion of the inducement fee in income
at that time. This rule does not apply to
a transaction to which section 381(c)(4)
applies.
(e)Safe harbors. If inducement fees
are recognized in accordance with a
method described in this paragraph (e),
that method complies with the require-
ments of paragraph (c) of this section.
(1)The book method. Under the book
method, an inducement fee is recognized
in accordance with the method of ac-
counting, and over the same period, used
by the taxpayer for financial reporting
purposes (including consolidated finan-
cial statements to shareholders, partners,
beneficiaries, and other proprietors and
May 24, 20049442004-21 I.R.B.

for credit purposes), provided that the in-
ducement fee is included in income for
financial reporting purposes over a period
that is not shorter than the period during
which the applicable REMIC is expected
to generate taxable income.
(2)The modified REMIC regulatory
method. Under the modified REMIC
regulatory method, the inducement fee
is recognized ratably over the remaining
anticipated weighted average life of the
applicable REMIC as if the inducement fee
were unrecognized gain being included in
gross income under §1.860F–2(b)(4)(iii).
(3)Additional safe harbor methods.
The Commissioner, by revenue ruling or
revenue procedure (see §601.601(d)(2)
of this chapter), may provide additional
safe harbor methods for recognizing in-
ducement fees relating to noneconomic
REMIC residual interests.
(f)Method of accounting. The treat-
ment of inducement fees is a method of
accounting to which the provisions of
sections 446 and 481 and the regulations
thereunder apply. A taxpayer is generally
permitted to adopt a method of account-
ing for inducement fees that satisfies the
requirements of paragraph (c) of this sec-
tion. Once a taxpayer adopts a method
of accounting for inducement fees, that
method must be applied consistently to all
inducement fees received in connection
with noneconomic REMIC residual inter-
ests and may be changed only with the
consent of the Commissioner, as provided
by section 446(e) and the regulations and
procedures thereunder.
(g)Effective date.Thissectionisappli-
cable for taxable years ending on or after
May 11, 2004.
Par. 3. Section 1.860A–0 is amended
by adding an entry in the outline for
§1.860C–1(d) to read as follows:
§1.860A–0 Outline of REMIC provisions.
*****
§1.860C–1 Taxation of holders of residual
interests.
*****
(d) Treatment of REMIC inducement
fees.
*****
Par. 4. Section 1.860C–1 is amended
by adding paragraph (d) to read as follows:
§1.860C–1 Taxation of holders of residual
interests.
*****
(d) For rules on the proper account-
ing for income from inducement fees, see
§1.446–6.
*****
Par. 5. Section 1.863–0 is amended by:
1. Revising the entry for the section
heading for §1.863–1.
2. Adding an entry for §1.863–1(d).
3.Redesignating the entry for
§1.863–1(e) as §1.863–1(f).
4. Adding a new entry for §1.863–1(e).
The additions and revisions read as fol-
lows:
§1.863–0 Table of contents.
*****
§1.863–1 Allocation of gross income
under section 863(a).
*****
(d) Scholarships, fellowship grants,
grants, prizes and awards.
(e) REMIC inducement fees.
*****
Par. 6. Section 1.863–1 is amended as
follows:
1. Paragraph (e) is revised.
2. Paragraph (f) is added.
The revision and addition read as fol-
lows:
§1.863–1 Allocation of gross income
under section 863(a).
*****
(e)REMIC inducement fees.
An inducement fee (as defined in
§1.446–6(b)(2)) shall be treated as income
from sources within the United States.
(f)Effective dates. The rules of para-
graphs (a), (b), and (c) of this section apply
to taxable years beginning after December
30, 1996. However, taxpayers may apply
the rules of paragraphs (a), (b), and (c) of
this section for taxable years beginning af-
ter July 11, 1995, and on or before De-
cember 30, 1996. For years beginning be-
fore December 30, 1996, see §1.863–1 (as
contained in 26 CFR part 1 revised as of
April 1, 1996). See paragraph (d)(4) of this
section for rules regarding the applicability
date of paragraph (d) of this section. Para-
graph (e) of this section is applicable for
taxable years ending on or after May 11,
2004.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved May 4, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on May 7, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 11, 2004, 69 F.R. 26040)
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The March 2004 Bureau of La-
bor Statistics price indexes are accepted
for use by department stores employing
the retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, March 31, 2004.
Rev. Rul. 2004–48
The following Department Store Inven-
tory Price Indexesfor March 2004 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, March 31, 2004.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of de-
partments, (b) three special combinations
of the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
2004-21 I.R.B.945May 24, 2004

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsMarch 2003March 2004
Percent Change
from March 2003
to March 2004
1
1. PieceGoods .............................................458.9491.87.2
2. DomesticsandDraperies..................................552.6537.6-2.7
3. Women’sandChildren’sShoes ............................642.6643.40.1
4. Men’sShoes.............................................842.0840.1-0.2
5. Infants’Wear ............................................600.3593.2-1.2
6. Women’sUnderwear......................................524.9493.6-6.0
7. Women’sHosiery ........................................341.2334.6-1.9
8. Women’sandGirls’Accessories ...........................556.0561.71.0
9. Women’sOuterwearandGirls’Wear .......................380.1379.7-0.1
10. Men’sClothing ..........................................570.0539.2-5.4
11. Men’sFurnishings........................................591.1580.7-1.8
12. Boys’ClothingandFurnishings............................470.9451.9-4.0
13. Jewelry..................................................871.7890.02.1
14. Notions .................................................797.1798.50.2
15. ToiletArticlesandDrugs..................................976.3982.70.7
16. FurnitureandBedding ....................................625.2620.3-0.8
17. FloorCoverings..........................................589.1596.81.3
18. Housewares..............................................734.0714.4-2.7
19. MajorAppliances.........................................217.5205.2-5.7
20. RadioandTelevision......................................46.643.1-7.5
21. Recreation and Education
2
.................................83.881.6-2.6
22. Home Improvements
2
.....................................125.7127.81.7
23. Automotive Accessories
2
..................................111.7112.30.5
Groups1–15:SoftGoods .......................................570.4564.9-1.0
Groups16–20:DurableGoods...................................400.8387.2-3.4
Group
s 21–23: Misc. Goods
2
....................................
95.093.8-1.3
Store Total
3
..............................................508.5501.0-1.5
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
In
dexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
Section 481.—Adjustments
Required by Changes in
Method of Accounting
Rev. Proc. 2004–30 provides automatic consent
procedures for taxpayersto change their method of
accounting for income from REMIC inducement fees
to a safe harbor method set forth in T.D. 9128, pub-
lished May 11, 2004, in the Federal Register. See
Rev. Proc. 2004-30, page 950.
Section 860C.—Taxation
of Residual Interests
26 CFR 1.860C–1: Taxation of holders of residual
interests.
Rev. Proc. 2004–30 provides automatic consent
procedures for taxpayers to change their method of
accounting for income from REMIC inducement fees
to a safe harbor method set forth in T.D. 9128, pub-
lished May 11, 2004, in the Federal Register. See
Rev. Proc. 2004-30, page 950.
May 24, 20049462004-21 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Guidance Regarding Affiliation
Notice 2004–37
SECTION 1. PURPOSE
This notice announces those circum-
stances under which a consolidated group
that owns stock of an includible corpora-
tion will be treated as satisfying the value
requirement of § 1504(a)(2)(B) of the In-
ternal Revenue Code for certain purposes.
It also announces the intention of the Inter-
nal Revenue Service and the Treasury De-
partment to propose regulations pursuant
to § 1504(a)(5)(C) providing that the value
requirement will be treated as satisfied if
the affiliated group, in reliance on a good
faith determination of value, treated such
requirement as satisfied. In addition, pur-
suant to § 1504(a)(5)(D), the proposed reg-
ulations will disregard an inadvertent ceas-
ing to satisfy the value requirement by rea-
son of changes in relative values of differ-
ent classes of stock. This notice describes
the issues that the Service and the Treasury
Department are studying and invites com-
ments on those issues.
SECTION 2. BACKGROUND
Section 1504(a)(1) provides that an af-
filiated group means one or more chains of
includible corporations connected through
stock ownership with a common parent
which is an includible corporation, but
only if (A) the common parent owns di-
rectly stock meeting the requirements of
§ 1504(a)(2) in at least one of the includi-
ble corporations and (B) stock meeting
the requirements of § 1504(a)(2) in each
of the includible corporations (other than
the common parent) is owned directly
by one or more of the other includible
corporations. Section 1504(a)(2) im-
poses two requirements. First, pursuant to
§ 1504(a)(2)(A), the stock must possess at
least 80 percent of the total voting power
of the stock of the corporation. Second,
pursuant to § 1504(a)(2)(B), the stock
must have a value equal to at least 80 per-
cent of the total value of the stock of the
corporation (the value requirement).
Section 1504(a)(5)(C) directs the Sec-
retary to prescribe regulations that provide
that the value requirement will be treated
as met if the affiliated group, in reliance
on a good faith determination of value,
treated it as met (the good faith exception).
Section 1504(a)(5)(D) directs the Secre-
tary to prescribe regulations that disregard
an inadvertent ceasing to meet the value
requirement by reason of changes in rel-
ative values of different classes of stock
(the inadvertence exception). The legisla-
tive history of § 1504 reflects that the in-
advertence exception should be available
only if the changes in relative value are
“not large” and are not “intentionally gen-
erated.” H.R. Rep. No. 98–861 at 834,
1984–3 C.B. (vol. 2) 87 (1984). Sec-
tion 1504(a)(5)(C) and (D), therefore, con-
template that affiliation could be treated as
continuing, notwithstanding that the value
requirement is not satisfied.
The Service and Treasury Department
intend to promulgate regulations imple-
menting the provisions of § 1504(a)(5)(C)
and (D). This document outlines those cir-
cumstances under which the Service will
provide relief from the failure to satisfy
the value requirement until temporary or
final regulations are promulgated or until
this notice is revised. It is possible that the
standards adopted in such regulations will
vary from and, in certain circumstances, be
narrower than the interim relief provided
in this document.
SECTION 3. INTERIM RELIEF
.01Scope. Until temporary or final
regulations implementing § 1504(a)(5)(C)
and (D) are promulgated, or until this no-
tice is revised, the Service will not chal-
lenge a consolidated group’s position on
a consolidated returnthat the stock own-
ership of a “qualifying corporation” satis-
fies the value requirement for purposes of
applying any “value provision” if the con-
solidated group (including a consolidated
group that arises or continues to exist by
reason of the relief provided in this notice)
satisfies the requirements of either section
3.02 or section 3.03. For purposes of the
preceding sentence, a “qualifying corpora-
tion” is an includible corporation (within
the meaning of § 1504(b) or (c)). In ad-
dition, a “value provision” is any provi-
sion of the Code and the regulations pro-
mulgated thereunder for which ownership
of stock, as defined in § 1504, represent-
ing 80 percent (or any lesser threshold per-
centage) of the total value of the stock of
the qualifying corporation is relevant. A
“value provision” is also any provision of
the Code and the regulations promulgated
that refers to “affiliated group” as such
termisdefinedin§1504.
This notice does not require a taxpayer
to treat the value requirement as satisfied
with respect to a corporation for purposes
of any value provision if the requirements
of the value provision are not in fact sat-
isfied. This notice does not permit a tax-
payer to treat the value requirement as sat-
isfied with respect to a corporation for pur-
poses of some but not all value provisions
(see section 3.04(7)).
Finally, the relief provided in this notice
extends only to the taxpayer that satisfies
the requirements of section 3.02 or section
3.03. For example, assume a consolidated
group’s ownership of the stock of a quali-
fying corporation does not satisfy the value
requirement and, consistent with the terms
of this notice (because it is entitled to either
the good faith or inadvertence exception),
the consolidated group takes the position
on its consolidated return that its owner-
ship of the stock of the qualifying corpora-
tion satisfies the value requirement. If the
group sells all of its stock of the qualify-
ing corporation, unless the purchaser of the
stock independently satisfies the require-
ments of section 3.02, an election under
§ 338(h)(10) may not be made in respect
of the stock of the qualifying corporation.
.02Good Faith Exception. The require-
ment of this section 3.02 will be satis-
fied if the consolidated group made a good
faith determination that the value require-
ment was satisfied. The requirement of
this section 3.02 will cease to be treated
as satisfied immediately before the occur-
rence of a designated event described in
section 3.04, unless the consolidated group
makes a good faith determination that, im-
mediately after such designated event, the
value requirement is satisfied. If, at any
time prior to the occurrence of a desig-
nated event, the consolidated group knows
or should know that the good faith deter-
mination that the value requirement was
satisfied was incorrect, the requirement of
this section 3.02 nonetheless will continue
to be treated as satisfied until immedi-
2004-21 I.R.B.947May 24, 2004

ately before the occurrence of a designated
event described in section 3.04.
.03Inadvertence exception.There-
quirement of this section 3.03 will be sat-
isfied if (a) the consolidated group’s own-
ership of stock of the corporation does not
satisfy the value requirement as a result of
a change in the relative values of different
classes of stock and such change is not at-
tributable to the occurrence of a designated
event described in section 3.04, and (b)
immediately before such change in rela-
tive values, the consolidated group’s own-
ership of stock of the corporation satisfied
the value requirement. The requirement of
this section 3.03 will cease to be treated
as satisfied immediately before the occur-
rence of a designated event described in
section 3.04.
.04Designated Events.Thefollowing
events are designated events:
(1)Thecorporationissuesstocktoa
person that is not a member of the consol-
idated group.
(2) The corporation redeems stock
owned by a member of the consolidated
group, other than in complete liquidation
of the corporation.
(3) A member of the consolidated group
(directly or indirectly) transfers stock of
the corporation to a person that is not a
member of the consolidated group.
(4) The corporation after May 6, 2004,
distributes with respect to its stock money
or other property to a member of the con-
solidated group or a person related (within
the meaning of § 267(b) or § 707(b)) to a
member of the consolidated group. How-
ever, a transaction that is not in form a
distribution with respect to a corporation’s
stock (for example, a distribution deemed
to occur by reason of the application of
§ 482) is a designated event only if (a) the
corporation accountsfor it on its books and
records as a transaction with respect to its
stock, (b) it involves the transfer of money
or other property (including stock of the
corporation) by the corporation to a per-
son in satisfaction of the indebtedness of
another member of the consolidated group
or a person related thereto, or (c) it in-
volves the forgiveness by the corporation
of indebtedness of a member of the con-
solidated group or a person related (within
the meaning of § 267(b) or § 707(b)) to a
member of the consolidated group.
(5) The consolidated group claims a
worthless stock deduction with respect to
any of the stock of the corporation. In this
case, the designated event shall be treated
as occurring on the later of the last date
on which members of the group own stock
that actually satisfies the value require-
ment or the first day of the taxable year for
which the deduction is claimed.
(6) The corporation engages in a recap-
italization described in § 368(a)(1)(E).
(7) The consolidated group takes a po-
sition on its consolidated Federal income
tax return that the value requirement is
not satisfied for purposes of applying any
value provision. In this case, unless the
position taken reflects the occurrence of
another designated event, the designated
event shall be treated as occurring on the
later of the last date on which members of
the group own stock that actually satisfies
the value requirement or the first day of
the taxable year for which the position is
taken. However, if a consolidated group
took such a position before May 6, 2004,
and the group would otherwise be eligible
for relief under this notice, a designated
event will not result from taking such in-
consistent position if the group amends the
relevant return or returns to take a position
consistent with satisfaction of the value re-
quirement for purposes of applying every
applicable value provision.
SECTION 4. REQUEST FOR
COMMENTS
The following paragraphs describe the
issues the Service and Treasury Depart-
ment are considering in connection with
promulgating regulations implementing
the good faith and inadvertence excep-
tions. The Service and Treasury Depart-
ment request comments on these issues as
well as any other issues that are relevant
to regulations implementing these excep-
tions.
.01Scope. The interim relief set forth
in this notice applies only to corporations
that are members of a consolidated group
(including corporations that are members
of a consolidated group by virtue of being
entitled to the interim relief set forth in this
notice). The Service and Treasury Depart-
ment request comments regarding whether
the good faith and inadvertence exceptions
should, by regulation, permit a corpora-
tion that is not a member of a consolidated
group to treat its ownership of the stock of
another corporation as satisfying the value
requirement. The Service and Treasury
Department also request comments iden-
tifying any special issues that may arise if
the good faith and inadvertence exceptions
were to apply not only in the consolidated
group context, but more broadly in the af-
filiated group context, and the manner in
which those issues should be addressed.
.02The Good Faith Exception.The
Service and Treasury Department believe
that, in order to establish that the affiliated
group, in reliance on a good faith determi-
nation of value, treated the value require-
ment as satisfied, members of the affili-
ated group must have filed Federal income
tax returns in a manner that is consistent
with satisfaction of the value requirement.
Consideration is being given to whether
evidence, such as a third party appraisal,
should be required to establish reliance on
a good faith determination of value.
The Service and Treasury Department
are also considering whether the good faith
exception should be presumptively avail-
able if the value of the affiliated group’s
ownership of the stock of the corporation
does not fall below a requisite percent-
age that is relatively small. In addition,
the Service and Treasury are considering
whether to adopt a rule providing that, if
the value of the affiliated group’s owner-
ship of stock of the corporation falls be-
low a requisite percentage, the affiliated
group’s treatment of the value requirement
assatisfiedisnotbasedinrelianceona
good faith determination of value.
Finally, the Service and Treasury De-
partment are considering whether the good
faith exception should be available only if
the affiliated group cures the value defi-
ciency within a specified period of time af-
ter the deficiency arose, or, alternatively,
after becoming aware of the deficiency.
.03The Inadvertence Exception.The
Service and Treasury Department are con-
sidering what evidence an affiliated group
must produce to establish that the failure
to satisfy the value requirement was inad-
vertent by reason of a change in the rel-
ative values of different classes of stock.
The Service and Treasury Department are
also considering whether the inadvertence
exception should be available only if the
value deficiency does not exceed a certain
percentage.
The Service and Treasury Department
are considering whether the inadvertence
exception should be available only if the
May 24, 20049482004-21 I.R.B.

affiliated group cures the value deficiency
within a certain period of time after the de-
ficiency arose or the affiliated group be-
came aware of it. In that regard, the Ser-
vice and Treasury Department are consid-
ering whether the inadvertence exception
should be available only if the value de-
ficiency is cured by the end of the tax-
able year in which the affiliated group be-
came aware of the value deficiency, by
the date the original return (without exten-
sions) for the taxable year in which the af-
filiated group became aware of the value
deficiency, or by the end of the taxable
year following the taxable year in which
the group became aware of the value defi-
ciency.
Finally, the Service and Treasury De-
partment are considering what events, such
as the designated events, should terminate
the availability of the inadvertence excep-
tion.
The Service and Treasury Department
are considering whether, in cases in which
the inadvertence exception applies, the
failure to satisfy the value requirement
should not be disregarded for certain pur-
poses. In particular, in the consolidated
group context, the failure to satisfy the
value requirement should not be disre-
garded to the extent treating that require-
ment as satisfied permits the group to
obtain excess tax benefits. One possible
approach to prevent a consolidated group
from obtaining excess tax benefits would
be to limit the use of losses (for exam-
ple, to prevent creating or increasing an
excess loss account in the stock of the
corporation) and credits of the corporation
to offset income of other members of the
consolidated group or to reduce the tax
liability of the consolidated group for a
taxable year during which the value re-
quirement is not satisfied. Comments are
requested regarding whether such an ap-
proach is appropriate and what the terms
of such an approach should be.
.04Application To Different Provisions.
The Service and Treasury Department re-
quest comments regarding whether the
parameters of the good faith and inadver-
tence exceptions should vary for purposes
of determining whether corporations are
affiliated for different provisions of the
Internal Revenue Code. That is, the Ser-
vice and Treasury Department request
comments regarding whether the policies
underlying the various provisions of the
Code for which affiliated status is relevant
suggests that the good faith and inadver-
tence exceptions should be interpreted
differently for these various provisions.
.05Comments. Comments should refer
to Notice 2004–37, and should be submit-
ted by July 31, 2004, to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Attn: CC:PA:LPD:PR
Room 5203
or electronically via the Service inter-
net site at:Notice.Comments@irscoun-
sel.treas.gov. All comments will be avail-
able for public inspection and copying.
SECTION 5. DRAFTING
INFORMATION
For further information regarding this
notice, contact Mr. David Kessler of the
Office of Associate Chief Counsel (Cor-
porate) at (202) 622–7770 (not a toll-free
call).
Qualified Amended Returns
Notice 2004–38
PURPOSE
The purpose of this notice is to an-
nounce that the Internal Revenue Service
and the Treasury Department will issue
temporary and proposed regulations that
will modify the definition of “qualified
amended return” in Treasury Regulations
§ 1.6664–2(c)(3). The temporary regula-
tions will provide that the period for filing
a qualified amended return is terminated
when the Service serves a John Doe sum-
mons under section 7609(f) of the Inter-
nal Revenue Code with respect to the tax-
payer’s tax liability. The temporary reg-
ulations also will provide that the period
for filing a qualified amended return is ter-
minated when the Service contacts a pro-
moter, organizer or material advisor con-
cerning a listed transaction for which the
taxpayer has claimed a tax benefit.
The temporary regulations will be ef-
fective for amended returns or requests for
administrative adjustment filed on or after
April 30, 2004.
BACKGROUND
Section 1.6664–2(c)(3) of the Treasury
Regulations requires a taxpayer to file a
qualified amended return before the earli-
est of: (1) the date on which the taxpayer
is first contacted by the Service concern-
ing an examination of the return; (2) the
date on which a person described in sec-
tion 6700(a) is first contacted by the Ser-
vice concerning the examination of an ac-
tivity described in section 6700(a) with re-
spect to which the taxpayer claimed any
tax benefit on the return directly or indi-
rectly through the entity, plan or arrange-
ment described in section 6700(a)(1)(A);
or (3) for certain pass-through items, the
date on which the pass-through entity is
first contacted by the Service in connection
with an examination to which the pass-
through item relates.
The Service may serve a John Doe sum-
mons pursuant to section 7609(f) after a
court proceeding in which the Service es-
tablishes that: (1) the summons relates to
the investigation of a particular person or
ascertainable group or class of persons;
(2) there is a reasonable basis for believ-
ing that the person, group, or class may
fail or may have failed to comply with
any internal revenue provision; and (3) the
information sought from the examination
of records and testimony (and the identity
of the person or persons with respect to
whose liability the summons is issued) is
not readily available from other sources.
In February 2000, the Treasury Depart-
ment and the Service issued temporary
and proposed regulations requiring cer-
tain corporations to disclose “reportable
transactions” that were reflected on their
federal income tax returns. A reportable
transaction included a transaction that is
the same as or substantially similar to one
of the types of transactions that the Service
determined to be a tax avoidance transac-
tion and identified by published guidance
as a “listed transaction,” if the transac-
tion also gave rise to federal income tax
savings above a certain dollar threshold.
In June 2002, the Treasury Department
and the Service extended the disclosure
requirement for listed transactions to indi-
viduals, partnerships, S corporations, and
other noncorporate persons. This change
was effective for transactions entered into
on or after January 1, 2001, that had not
beenreportedonareturnfiledonorbefore
2004-21 I.R.B.949May 24, 2004

June 14, 2002. (T.D. 9000, 2002–2 C.B.
87, 6/14/2002). The June 2002 modifica-
tions also removed the dollar thresholds
related to tax savings for all taxpayers
engaging in listed transactions. The reg-
ulations under section 6011 requiring
disclosure of reportable transactions were
modified substantially in October 2002
(T.D. 9017, 2002–2 C.B. 815, 10/17/2002)
and finalized in February 2003 (T.D. 9046,
2003–1 C.B. 614, 2/27/2003). The Febru-
ary 2003 final regulations also amended
the regulations under sections 6111 and
6112 relating to the registration of and list
maintenance for certain transactions.
In early 2002, the Treasury Department
and the Service gave taxpayers the oppor-
tunity to avoid the imposition of certain
penalties by disclosing their participation
in any transaction for which the imposi-
tion of the accuracy-related penalty under
section 6662 may be appropriate. In An-
nouncement 2002–2, 2002–1 C.B. 304, the
Service agreed to waive certain compo-
nents of the accuracy-related penalty under
section 6662 for taxpayers who disclosed
any item in accordance with the terms of
Announcement 2002–2 by April 23, 2002.
DISCUSSION
I. Revised Definition of Qualified
Amended Returns
The Treasury Department and the Ser-
vice have identified additional periods of
time after which a taxpayer is no longer
permitted to file a qualified amended
return. In addition to the current require-
ments, the temporary regulations will
require that a taxpayer file a qualified
amended return before the earliest of:
(1) The date on which a third party is
served a John Doe summons described in
section 7609(f) relating to the tax liability
of a person, group, or class that includes
the taxpayer, with respect to the return re-
flecting the transactions or tax items that
are the subject of the summons, or
(2) The “date of contact” or “date of
request,” described below, in the case of
a transaction with respect to which the
taxpayer claimed any direct or indirect
tax benefits on its return and that is the
same or substantially similar to a transac-
tion that has been designated as a “listed
transaction” (regardless of whether the
taxpayer’stransactionisrequiredtobe
disclosed as a listed transaction under
Treasury Regulation § 1.6011–4), unless
the taxpayer disclosed the transaction un-
der Treasury Regulation § 1.6011–4 or
pursuant to Announcement 2002–2 before
the date of contact or date of request.
(a)Date of contact. The date of contact
is the date on which any person required to
register a tax shelter under section 6111(a)
is first contacted by the Service concerning
an examination of an activity described in
section 6707(a) (relating to the failure to
register a tax shelter as defined in section
6111 or the filing of false or incomplete
information with respect to that registra-
tion) relating to a type of listed transaction
with respect to which the taxpayer claimed
any direct or indirect tax benefits on its
return. The rules in the temporary regu-
lations will apply even if the taxpayer’s
transaction is not required to be disclosed
as a listed transaction under Treasury Reg-
ulation § 1.6011–4.
(b)Date of request. The date of request
is the date on which any person described
in section 6112(a) (organizer or seller, in-
cluding a material advisor as defined in the
Treasury Regulations under section 6112)
receives a request from the Service for in-
formationrequiredtobeincludedonalist
under section 6112 relating to a type of
listed transaction with respect to which the
taxpayer claimed any direct or indirect tax
benefits on its return. The rules in the tem-
porary regulations will apply even if the
taxpayer’s information is not required to
be included on the list requested by the Ser-
vice.
The regulations also will provide simi-
lar rules in the case of pass-through items.
In addition, where appropriate, the regula-
tions will reference the October 2002 tem-
porary regulations under sections 6011 and
6112 and other temporary regulations un-
der sections 6011, 6111, and 6112.
II. Effective Date of Regulations Issued
Pursuant to This Notice
The regulations to be issued will be ef-
fective for amended returns and requests
for administrative adjustment filed on or
after April 30, 2004, the date this notice is
issued.
DRAFTING INFORMATION
The principal author of this notice is
Nancy M. Galib of the Office of Associate
Chief Counsel (Procedure and Adminis-
tration), Administrative Provisions and Ju-
dicial Practice Division. For further in-
formation regarding this notice, contact
Ms. Galib at (202) 622–4940 (not a toll-
free call).
26 CFR 1.446–6: REMIC inducement fees.
(Also §§ 446, 481, 860C; 1.446–1, 1.860C–1.)
Rev. Proc. 2004–30
SECTION 1. PURPOSE
This revenue procedure provides the
procedures for taxpayers described in
section 3 to change their methods of ac-
counting for inducement fees received
in connection with becoming holders of
noneconomic residual interests in Real
Estate Mortgage Investment Conduits
(REMICs) to a safe harbor method pro-
vided under § 1.446–6(e)(1)–(2) of the
Income Tax Regulations.
SECTION 2. BACKGROUND
.01 Under § 1.446–6, if a taxpayer re-
ceives an inducement fee in connection
with becoming the holder of a noneco-
nomic residual interest in a REMIC, the
inducement fee must be taken into ac-
count over the remaining expected life
of the applicable REMIC in a manner
that reasonably reflects, without regard to
§ 1.446–6(c), the after-tax costs and bene-
fits of holding that noneconomic residual
interest. See § 1.446–6(c) and (d). Section
1.446–6 provides two safe harbor methods
of accounting for these inducement fees,
the book method in § 1.446–6(e)(1) and
the modified REMIC regulatory method
in § 1.446–6(e)(2). Section 1.446–6(e)(3)
authorizes the Commissioner to provide
one or more additional safe harbor meth-
ods by publishing a revenue ruling or
revenue procedure.
.02 If a method of accounting for in-
ducement fees received with respect to
becoming the holder of noneconomic
REMIC residual interests does not comply
with § 1.446–6, that method of account-
ing is impermissible. Any change in a
taxpayer’s treatment of these inducement
fees, including a change to conform to
§ 1.446–6, is a change in method of ac-
counting to which the provisions of §§ 446
May 24, 20049502004-21 I.R.B.

and 481 of the Internal Revenue Code and
the regulations thereunder apply.
.03 Under § 446(e) and
§ 1.446–1(e)(2)(i), a taxpayer gener-
ally must secure the consent of the
Commissioner before changing a method
of accounting for federal income tax
purposes.Section 1.446–1(e)(3)(ii)
authorizes the Commissioner to prescribe
administrative procedures setting forth the
terms and conditions necessary to obtain
consent to change a method of accounting.
Except as provided in sections 3 and 4
of this revenue procedure, a taxpayer
seeking to change the taxpayer’s method
of accounting for inducement fees must
follow the advance consent procedures of
Rev. Proc. 97–27, 1997–1 C.B. 680 (or
successor), as modified and amplified by
Rev. Proc. 2002–19, 2002–1 C.B. 696,
as amplified and clarified by Rev. Proc.
2002–54, 2002–2 C.B. 432.
.04 Rev. Proc. 2002–9, 2002–1 C.B.
327 (as modified and clarified by An-
nouncement 2002–17, 2002–1 C.B. 561,
modified and amplified by Rev. Proc.
2002–19, 2002–1 C.B. 696, and ampli-
fied, clarified, and modified by Rev. Proc.
2002–54, 2002–2 C.B. 432), provides
procedures by which taxpayers may ob-
tain automatic consent to change to the
methods of accounting described in the
Appendix of the revenue procedure. Sec-
tion 5.03 of Rev. Proc. 2002–9 provides
that, unless otherwise provided, a taxpayer
making a change in method of accounting
under the revenue procedure must take
into account a § 481(a) adjustment in the
manner provided in section 5.04 of the
revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to a
taxpayer that seeks to change from any
method of accounting for inducement fees
received with respect to becoming the
holder of noneconomic REMIC residual
interests (including one of the safe harbor
methods provided under § 1.446–6(e)) to
one of the safe harbor methods provided
under § 1.446–6(e)(1)–(2).
SECTION 4. CHANGE IN METHOD
OF ACCOUNTING
A taxpayer within the scope of this rev-
enue procedure must follow the automatic
change in method of accounting provisions
of Rev. Proc. 2002–9 (or successor), with
all of the following modifications:
(1) The scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply to a
taxpayer that wants to make the change for
the taxpayer’s first taxable year ending on
or after May 11, 2004.
(2) The taxpayer prepares and files the
newest version of the Form 3115 in ac-
cordance with section 6 of Rev. Proc.
2002–9, and the taxpayer enters the des-
ignated number for the automatic change
in method in Line 1a of the Form 3115.
The designated number for the automatic
accounting method change authorized by
this revenue procedure is “79”.
(3) The taxpayer identifies the specific
safe harbor method under § 1.446–6(e) to
which the taxpayer is changing.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective on
May 11, 2004.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic change
in section 4.01 of the APPENDIX.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are John W. Rogers III and
Tina Jannotta of the Office of Associate
Chief Counsel (Financial Institutions and
Products). For further information re-
garding this revenue procedure, contact
Mr. Rogers at (202) 622–3950 (not a
toll-free call).
2004-21 I.R.B.951May 24, 2004

Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Special Consolidated Return
Rules for the Disallowance of
Interest Expense Deductions
Under Section 265(a)(2)
REG–128590–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under section 265(a)(2)
that affect corporations filing consolidated
returns. These regulations provide special
rules for the treatment of certain intercom-
pany transactions involving interest on in-
tercompany obligations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 5, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–128590–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–128590–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the
IRS Internet site atwww.irs.gov/regsor
via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–128590–03).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Frances L. Kelly, (202)
622–7770; concerning submissions of
comments and/or requests for a public
hearing, Guy Traynor, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 265(a)(2)
Section 163(a) generally allows a de-
duction for all interest paid or accrued
within the taxable year on indebtedness.
Under section 265(a)(2), however, no de-
duction is allowed for interest on indebt-
edness incurred or continued to purchase
or carry obligations the interest on which
is wholly exempt from Federal income
taxes.
Rev. Proc. 72–18, 1972–1 C.B. 740,
provides guidelines for the application of
section 265(a)(2) to taxpayers holding tax-
exempt obligations. Section 3.01 of the
revenue procedure states that the appli-
cation of section 265(a)(2) requires a de-
termination, based upon all the facts and
circumstances, of the taxpayer’s purpose
in incurring or continuing each item of
indebtedness. Such purpose may be es-
tablished by either direct or circumstan-
tial evidence. Direct evidence includes di-
rect tracing of borrowed funds to invest-
ments in tax-exempt obligations and the
pledging of tax-exempt obligations as se-
curity for the indebtedness. To the ex-
tent that there is direct evidence establish-
ing a purpose to purchase or carry tax-ex-
empt obligations, the interest paid or in-
curred on such indebtedness may not be
deducted. In certain other cases when an
interest deduction is disallowed (for exam-
ple, when amounts borrowed by a dealer
in tax-exempt obligations are not directly
traceable to tax-exempt obligations), sec-
tion 7 of Rev. Proc. 72–18 sets forth a
formula to calculate the disallowed inter-
est deduction. That formula provides that
the amount of the disallowed interest de-
duction is determined by multiplying the
total interest on the indebtedness by a frac-
tion, the numerator of which is the aver-
age amount during the taxable year of the
taxpayer’s tax-exempt obligations (valued
at their adjusted bases), and the denomina-
tor of which is the average amount during
the taxable year of the taxpayer’s total as-
sets (valued at their adjusted bases) minus
the amount of any indebtedness the interest
deduction on which is not subject to dis-
allowance to any extent under Rev. Proc.
72–18.
InH Enterprises International, Inc.
v. Commissioner, 75 T.C.M. (CCH) 1948
(1998),aff’d, 183 F.3d 907 (8
th
Cir. 1999),
a parent and a subsidiary were members of
the same consolidated group of corpora-
tions. The subsidiary declared a dividend
and, a few days later, borrowed funds
and immediately used part of those funds
to make the dividend distribution to the
parent. A portion of the distributed funds
was disbursed to two investment divisions
of the parent, which used the funds to
acquire investments including tax-exempt
obligations.
The court held that a portion of the sub-
sidiary’s indebtedness was incurred for the
purpose of purchasing or carrying tax-ex-
empt obligations (held in the parent’s in-
vestment divisions) and, therefore, no de-
duction was allowed for the interest on this
portion of the indebtedness under section
265(a)(2). To establish the required pur-
posive connection under section 265(a)(2),
the court reasoned that the activities of the
parent corporation were relevant in deter-
mining the subsidiary’s purpose for bor-
rowing the funds. The court stated that if
the analysis only focused on the borrower
and not the transferee, then the purpose
of the borrower corporation would always
be acceptable, frustrating the legislative in-
tent of section 265(a)(2).
Rev. Rul. 2004–47, 2004–21 I.R.B.
941, provides guidance on the application
of section 265(a)(2) in a number of sit-
uations in which a member of an affili-
ated group borrows money from an unre-
lated party and transfers funds to another
member of the group that is a dealer in
tax-exempt obligations. InSituation 4,P
and S are members of the same affiliated
group but file separate tax returns. P bor-
rows funds from L, an unrelated bank, and
lends the borrowed funds to S, a dealer in
May 24, 20049522004-21 I.R.B.

tax-exempt obligations. S uses the bor-
rowed funds in its business. The ruling
examines the obligation from L to P and
the obligation from P to S for the appli-
cation of section 265(a)(2). With regard
to the loan from L to P, P uses the bor-
rowed funds to make a loan to S, and P
separately accounts for the taxable inter-
est income from the obligation. The ruling
concludes that P does not have a purpose
of using the borrowed funds to purchase
or carry tax-exempt obligations within the
meaning of section 265(a)(2). With regard
to the loan from P to S, although the bor-
rowed funds are not directly traceable to
S’s purchase or carry of tax-exempt obli-
gations, the ruling concludes that section
265(a)(2) applies to disallow a deduction
for a portion of S’s interest expense. The
portion of S’s interest deduction that is dis-
allowed is determined pursuant to the for-
mula of section 7 of Rev. Proc. 72–18.
The Intercompany Transaction
Regulations
Section 1.1502–13 prescribes rules re-
lating to the treatment of transactions be-
tween members of a consolidated group.
With respect to intercompany obligations,
the intercompany transaction rules gener-
ally operate to match the debtor member’s
items with the lending member’s items
from the intercompany obligation.
Under §1.1502–13(c)(6)(i), if section
265(a)(2) permanently and explicitly dis-
allows a debtor member’s interest deduc-
tion with respect to a debt to another mem-
ber, the lending member’s interest income
is treated as excluded from gross income.
See §1.1502–13(g)(5),Example 1(d). In
cases when a member of the group borrows
from another member to purchase or carry
tax-exempt obligations, and the lending
member has not borrowed from sources
outside of the group to fund the intercom-
pany obligation, the result reached under
the §1.1502–13(c)(6)(i) exclusion rule is
appropriate in that it reflects that intercom-
pany lending transactions do not alter the
net worth of the group and, thus, should
not affect consolidated taxable income.
However, when the lending member
borrows from a nonmember, the lending
member lends those funds to the debtor
member, and the debtor member uses
those funds to purchase or carry tax-ex-
empt obligations, the application of the
§1.1502–13(c)(6)(i) exclusion rule may
produce inappropriate results. For exam-
ple, assume P borrows $100 from L, a
nonmember, for the purpose of lending
the $100 to S under the same terms, and
S’s purpose for borrowing $60 of the in-
tercompany loan from P is to purchase
$60 of tax-exempt obligations. Under
section 265(a)(2), a deduction would be
disallowed for a portion of S’s interest
expense on the intercompany obligation
and a portion of P’s interest income would
be excluded from P’s gross income under
§1.1502–13(c)(6)(i). Accordingly, sec-
tion 265(a)(2) may have no effect on the
group’s taxable income, even though the
group has borrowed to purchase tax-ex-
empt obligations.
Explanation of Provisions
The IRS and Treasury Department be-
lieve that, when a member’s indebtedness
to a nonmember is directly traceable to
an intercompany obligation and another
member of the group uses the funds bor-
rowed from the nonmember to purchase or
carry tax-exempt obligations, the net tax
effect of these transactions for the group
should be a disallowance of a deduction for
interest under section 265(a)(2).
These proposed regulations reflect that
when a member (P) borrows funds from
a nonmember and lends all of those funds
to another member (S) that uses those
funds to purchase tax-exempt obligations,
section 265(a)(2) will apply to disallow a
deduction for the interest on S’s obligation
to P, not P’s obligation to the nonmember.
These proposed regulations provide that,
if a member of a consolidated group incurs
or continues indebtedness to a nonmem-
ber, that indebtedness to the nonmember
is directly traceable to all or a portion
of an intercompany obligation extended
to a member of the group (the borrow-
ing member) by another member of the
group (the lending member), and section
265(a)(2) applies to disallow a deduc-
tion for all or a portion of the borrowing
member’s interest expense incurred with
respect to the intercompany obligation,
then §1.1502–13(c)(6)(i) will not apply to
exclude an amount of the lending mem-
ber’s interest income with respect to the
intercompany obligation that equals the
amount of the borrowing member’s dis-
allowed interest deduction. This override
of the exclusion rule is subject, however,
to a limitation. In particular, the amount
of interest incomenot excluded cannot
exceed the interest expense on the por-
tion of the nonmember indebtedness that
is directly traceable to the intercompany
obligation. This limitation ensures that
applying section 265(a)(2) to disallow
an interest deduction with respect to an
intercompany obligation that can be di-
rectly traced to nonmember indebtedness
does not result in a worse overall tax po-
sition for the group than applying section
265(a)(2) to disallow a deduction for the
interest paid to the nonmember.
Therefore, subject to the limitation dis-
cussed above, if the proceeds of P’s bor-
rowing from a nonmember can be directly
traced to a P-S intercompany obligation
and all or a portion of S’s interest ex-
pense on the P-S intercompany obligation
is disallowed as a deduction under section
265(a)(2), these proposed regulations re-
quire that all or a portion of P’s interest in-
come on the intercompany obligation not
be excluded under §1.1502–13(c)(6)(i).
In an Advance Notice of Proposed
Rulemaking (REG–128572–03, published
as Announcement 2004–44) in this is-
sue of the Bulletin, the IRS and Treasury
Department are soliciting comments re-
garding whether regulations under section
7701(f) should address the application of
sections 265(a)(2) and 246A in transac-
tions involving related parties, pass-thru
entities, or other intermediaries, and sug-
gestions as to the approach that should be
taken by those regulations. It is possible
that those comments and any regulations
proposed under section 7701(f) will result
in amendments to the rules set forth in
these proposed regulations.
Proposed Effective Date
These regulations are proposed to apply
to taxable years beginning on or after the
date these regulations are published as fi-
nal regulations in theFederal Register.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It is hereby cer-
tified that these regulations will not have a
2004-21 I.R.B.953May 24, 2004

significant economic impact on a substan-
tial number of small entities. This certi-
fication is based upon the fact that these
regulations will primarily affect affiliated
groups of corporations that have elected to
file consolidated returns, which tend to be
larger businesses. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, these regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Comments and Requests for a 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 IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is Frances L. Kelly, Office of
the Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and 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 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.265–2 also issued under 26
U.S.C. 1502 and 7701(f). * * *
Par. 2. In §1.265–2, paragraph (c) is
added to read as follows:
§1.265–2 Interest relating to tax-exempt
income.
*****
(c)Special rule for consolidated
groups—(1)Treatment of intercompany
obligations—(i)Direct tracing to non-
member indebtedness. If a member of a
consolidated group incurs or continues
indebtedness to a nonmember, that in-
debtedness is directly traceable to all or a
portionofanintercompany obligation (as
defined in §1.1502–13(g)(2)(ii)) extended
to a member of the group (B) by another
member of the group (S), and section
265(a)(2) applies to disallow a deduction
for all or a portion of B’s interest expense
incurred with respect to the intercompany
obligation, then §1.1502–13(c)(6)(i) will
not apply to exclude an amount of S’s
interest income with respect to the inter-
company obligation that equals the amount
of B’s disallowed interest deduction.
(ii)Limitation. The amount of interest
income to which §1.1502–13(c)(6)(i) will
not apply as a result of the application of
paragraph (c)(1)(i) of this section cannot
exceed the interest expense on the portion
of the indebtedness to the nonmember that
is directly traceable to the intercompany
obligation.
(2)Examples. Therulesofthispara-
graph (c) are illustrated by the following
examples. For purposes of these examples,
unless otherwise stated, P and S are mem-
bers of a consolidated group of which P is
the common parent. P owns all of the out-
standing stock of S. The taxable year of the
P group is the calendar year and all mem-
bers of the P group use the accrual method
of accounting. L is a bank unrelated to
any member of the consolidated group. All
obligations are on the same terms and con-
ditions, remain outstanding at the end of
the applicable year, and provide for pay-
ments of interest on December 31 of each
year that are greater than the appropriate
applicable Federal rate (AFR). The exam-
ples are as follows:
Example 1.(i)Facts. On January 1, 2005, P bor-
rows $100x from L and lends the entire $100x of bor-
rowed proceeds to S. S uses the $100x of borrowed
proceeds to purchase tax-exempt securities. P’s in-
debtedness to L is directly traceable to the intercom-
pany obligation between P and S. In addition, there
is direct evidence that the proceeds of S’s intercom-
pany obligation to P were used to fund S’s purchase or
carrying of tax-exempt obligations. During the 2005
taxable year, P incurs $10x of interest expense on its
loan from L, and S incurs$10x of interest expense
on its loan from P. Under section 265(a)(2), the en-
tire $10x of S’s interest expense on the intercompany
obligation to P is disallowed as a deduction.
(ii)Analysis. Because section 265(a)(2) perma-
nently and explicitly disallows $10x of S’s interest
expense, ordinarily $10x of P’s interest income
on the intercompany obligation would be redeter-
mined to be excluded from P’s gross income under
§1.1502–13(c)(6)(i). However, under this paragraph
(c), §1.1502–13(c)(6)(i) will not apply to exclude
P’s interest income with respect to the intercompany
obligation in an amount that equals S’s disallowed
interest deduction with respect to the intercompany
obligation. Accordingly, §1.1502–13(c)(6)(i) will
not apply to exclude P’s $10x of interest income on
the intercompany obligation and P must include in
income $10x of interest income from the intercom-
pany obligation.
Example 2.(i)Facts. The facts are the same as in
Example 1, except that P incurs only $8x of interest
expense on its loan from L.
(ii)Analysis. Section 1.1502–13(c)(6)(i) will ap-
ply to exclude only a portion of P’s $10x of interest
income on the intercompany obligation. Under para-
graph (c)(1)(ii) of this section, the amount of P’s in-
terest income that §1.1502–13(c)(6)(i) will not apply
to exclude is $8x, the total interest expense incurred
by P on its indebtedness to L. Consequently, P must
include in income $8x of interest income from the in-
tercompany obligation and §1.1502–13(c)(6)(i) will
apply to exclude $2x of interest income from the in-
tercompany obligation.
(3)Effective date. The provisions of
this section shall apply to taxable years be-
ginning on or after the date these regula-
tions are published as final regulations in
theFederal Register.
Par. 3. Section 1.1502–13 is amended
by:
1. Adding a sentence immediately
after the second sentence of paragraph
(c)(6)(ii)(A).
2. Adding paragraph (c)(6)(iii).
3. Revising the first sentence ofExam-
ple 1(d) of paragraph (g)(5).
The revisions and additions read as fol-
lows:
§1.1502–13 Intercompany transactions.
*****
(c) * * *
(6) * * *
(ii) * * *
(A) * * * However, see §1.265–2(c) for
special rules related to the application of
May 24, 20049542004-21 I.R.B.

paragraph (c)(6)(i) of this section to in-
terest income with respect to certain in-
tercompany obligations the interest deduc-
tion on which is disallowed under section
265(a)(2). * * *
*****
(iii)Effective date. The third sentence
of paragraph (c)(6)(ii)(A) of this section
shall apply to taxable years beginning on
or after the date these regulations are pub-
lished as final regulations in theFederal
Register.
*****
(g) * * *
(5) * * *
Example 1***
*****
(d)Tax-exempt income. The facts are
the same as in paragraph (a) of thisExam-
ple 1,exceptthatB’sborrowingfromS
is allocable under section 265 to B’s pur-
chase of state and local bonds to which sec-
tion 103 applies and §1.265–2(c) does not
apply. * * *
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 6, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 7, 2004, 69 F.R. 25535)
Election of Alternative Deficit
Reduction Contribution
Announcement 2004–43
This announcement provides guidance
on the notices that must be given by an
employer to plan participants and their
beneficiaries and to the Pension Benefit
Guaranty Corporation (the “PBGC”) if
the employer elects the alternative deficit
reduction contribution under § 412(l)(12)
of the Internal Revenue Code (the “Code”)
and section 302(d)(12) of the Employee
Retirement Income Security Act of 1974
(“ERISA”), as added by section 102 of the
Pension Funding Equity Act of 2004, Pub.
L. 108–218 (“PFEA’04”). This announce-
ment also sets forth timing requirements
for the election.
I. Background
Section 102 of PFEA’04, which
was enacted on April 10, 2004, added
§ 412(l)(12) to the Code and section
302(d)(12) to ERISA. Section 412(l)(12)
of the Code permits certain employers
who are required to make additional con-
tributions under § 412(l) to elect a reduced
amount of those contributions (“alterna-
tive deficit reduction contributions”) for
certain plan years. An employer is eligible
to make such an election if it is (1) a com-
mercial passenger airline, (2) primarily
engaged in the production or manufacture
of a steel mill product or the processing
of iron ore pellets, or (3) an organization
described in § 501(c)(5) that established a
plan on June 30, 1955, to which § 412 now
applies. On April 12, 2004, the Internal
Revenue Service (the “Service”) issued
Announcement 2004–38, 2004–18 I.R.B.
878, which provides guidance for making
the election for an alternative deficit re-
duction contribution.
Section 302 of ERISA contains mini-
mum funding standard requirements that
are parallel to those under § 412 of the
Code, and section 302(d)(12) of ERISA
provides an election that is identical to
the election under § 412(l)(12) of the
Code. Moreover, section 302(d)(12)(E) of
ERISA requires an employer that elects an
alternative deficit reduction contribution
under section 302(d)(12) of ERISA and
§ 412(l)(12) of the Code for any year to
provide certain noticesto the participants
and beneficiariesunder the plan and to
the PBGC. The notices must be provided
within 30 days of the filing of the election
for such year, and the written notices of the
election must specify various information.
Section 302(d)(12)(F) of ERISA as
addedbysection102(a)ofPFEA’04au-
thorizes the Secretary of the Treasury to
prescribe the time and manner of making
an alternative deficitreduction contribu-
tion election. In addition, under section
101 of Reorganization Plan No. 4 of 1978,
1979–1 C.B. 480, the Secretary of the
Treasury has sole interpretive authority
(except for certain matters not relevant
here) over the subject matter addressed in
this announcement.
Section 102(d) of PFEA’04 amended
section 502(c)(3) of ERISA to provide that
if an employer fails to provide the required
notices on a timely basis to a participant or
beneficiary, or to the PBGC, that employer
may be liable to such participant or bene-
ficiary or to the PBGC, in the discretion of
the court, for a penalty of up to $100 a day
from the date of the failure, or such other
relief as the court deems proper.
II. Required Notice to Participants and
Beneficiaries
A.Explanation of Context—Pursuant
to section 302(d)(12)(E)(i) of ERISA, an
employer that elects an alternative deficit
reduction contribution must provide writ-
ten notice of the election to each partici-
pant and to each beneficiary under the plan
(“the participant notice”) and must explain
the context in which the information set
forthinsectionII.B.of this announcement
is being provided. This requirement to ex-
plain the context is satisfied if the notice
includes the following information:
“As permitted under a new law
calledthePensionFundingEquity
Act of 2004, Pub. L. 108–218
(“PFEA’04”), [enter name of corpo-
ration] has made a special election that
reduces the amount of contributions
that are required to be made for [enter
plan year] to [enter name of pension
plan]. The election was made on [en-
ter date of election]. The following
information is being provided to you
pursuant to the new law.”
B.Information Required in Notice to
Participants and Beneficiaries—Pursuant
to section 302(d)(12)(E)(i) of ERISA, the
participant notice must also include the in-
formation described in this Section II.B.
1.Due Date of the Alternative Deficit
Reduction Contribution and Amount by
Which Required Contribution is Reduced
The participant notice must specify the
following information with respect to the
due date and the reduction in required
contributions resulting from the alterna-
tive deficit reduction contribution election
for the plan year:
a. The amount of the required mini-
mum contribution under § 412 of the Code
for the plan year for which the alternative
deficit reduction contribution election was
made, calculated taking into account that
election;
b. The amount of the required mini-
mum contribution under § 412 for the plan
2004-21 I.R.B.955May 24, 2004

year for which the alternative deficit re-
duction contribution election was made,
calculated without taking into account the
election;
c. The due date of the required mini-
mum contribution under § 412 for the plan
year for which the alternative deficit re-
duction contribution election was made;
and
d. If the electing employer is required
to make quarterly contributions to the plan
for the plan year for which the election
is made, the aggregate amount of the re-
quired minimum contribution under § 412
for the plan year that is required to be paid
in quarterly installments (calculated taking
into account the election).
The employer may provide reasonable
estimates of the amounts described above,
and the participant notice may also specify
the amount and date of any contributions
that were made for the plan year prior to
the date of the participant notice.
2.Benefits Eligible for Guarantee and
Limitations on Guarantee
The participant notice must include
a description of the benefits under the
plan that are eligible for guarantee by
the PBGC, an explanation of the limita-
tions on the PBGC’s guarantee and the
circumstances in which the limitations
apply, including the maximum guaranteed
monthly benefits that the PBGC would
pay if the plan terminated while under-
funded. This requirement will be satisfied
if an employer includes in the participant
notice the text from the portion of the
model notice in Appendix A to 29 CFR
Part 4011 that is found under the heading
“PBGC Guarantees.”
C.Method of Delivery
The delivery requirement for the partic-
ipant notice is treated as satisfied if the par-
ticipant notice is mailed to the last known
address of each participant or beneficiary.
III. Required Notice to PBGC
Pursuant to section 302(d)(12)(E)(iii)
ofERISAanemployerelectinganalter-
native deficit reduction contribution must
provide the information described in this
section.
A.Due Date of the Alternative Deficit
Reduction Contribution and Amount
by Which Required Contribution Was
Reduced
This PBGC notice must include the
information regarding the contribution
amounts and due dates set forth in the
description of the participant notice in
section II.B.1. of this announcement.
B.Time to Restore Plan to Full Funding
The PBGC notice must include the
number of years it will take to restore
the plan to full funding if the employer
only makes the required minimum con-
tributions. For this purpose, a plan will
be considered to be in full funding for a
plan year if, for the plan year, the plan is
subject to the full-funding limitation of
§ 412(c)(7), taking into account the 90%
override of § 412(c)(7)(E).
The projection of when the plan
will be in full funding must be based
on reasonable actuarial assumptions
and, for plan years beginning in 2006
and later years, must reflect the inter-
est rate rules (§§ 412(b)(5)(ii)(III) and
412(l)(7)(C)(i)(II)) that are applicable for
plan years beginning after 2005. In addi-
tion, the PBGC notice must also include
the required minimum contributions that
form the basis of the projections for the
plan year of the election and each of the 4
subsequent plan years.
C.Comparison of Underfunded Amount
with Capitalization
The PBGC notice must include (1) the
amount by which the plan is underfunded
and (2) the capitalization of the employer
making the election.
For purposes of providing the amount
by which the plan is underfunded, the
PBGC notice must include the plan’s ter-
mination liability as of a date within the
most recently ended plan year and the
market value of plan assets as of that date.
In the case of an employer whose stock
is publicly traded, the capitalization of the
employer is the product of the number of
outstanding shares of stock and the mar-
ket price per share. In the case of any
other employer, the capitalization informa-
tion required to be shown is the follow-
ing: (1) the fair market value of total as-
sets, (2) total liabilities, (3) stockholder eq-
uity (deficit), (4) paid-in capital, and (5) re-
tained earnings (accumulated loss).
The capitalization information should
be shown as of the same date for which
the underfunded amount in the paragraph
above is specified. If, however, the cap-
italization information is not available as
of such date, capitalization information as
of the end of the most recently ended fiscal
year of the corporation may be substituted.
Method of Delivery
The delivery requirement for the PBGC
notice is set forth on the PBGC’s website
atwww.pbgc.gov.
IV.TimeForMakingElection
Pursuant to the authority contained in
section 302(d)(12)(F) of ERISA, and sub-
ject to the transition rule in Section V of
this announcement,an election to make
the alternative deficit reduction contribu-
tion for any plan year must be made by the
end of the first quarter of that plan year.
V. Transition
Notwithstanding the requirement to
make an election by the end of the first
quarter of the plan year, the following
transitional rules are applicable. If an
employer makes an alternative deficit re-
duction contribution election on or before
June 30, 2004, that election will be deemed
timely for the plan year that begins during
calendar 2004. In addition, if an employer
issues a PBGC notice for a plan on or
before June 5, 2004, the PBGC will treat
the PBGC notice as timely issued.
VI. Paperwork Reduction Act
The collection of information contained
in this announcement has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1884.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The collection of information in this
announcement is in sections II and III.
This information is required to meet the
May 24, 20049562004-21 I.R.B.

requirements of section 102 of the Pen-
sion Funding Equity Act of 2004 to moni-
tor and make valid determinations with re-
spect to employers that elect an alterna-
tive deficit reduction contribution for cer-
tain plans. As a result of such elections, an
employer’s deficit reduction contribution
for certain plans will be based on amounts
specified under § 412(l)(12) of the Code.
If an employer does not give timely no-
tice of an election to make a deficit reduc-
tion contribution (including all of the re-
quirements described above), a court may
in its discretion impose a penalty. The
likely respondents are businesses or other
for-profit institutions, and nonprofit insti-
tutions.
The estimated total annual reporting
and/or recordkeeping burden is 12,000
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from 20 to
100 hours, depending on individual cir-
cumstances, with an estimated average of
60 hours. The estimated number of re-
spondents and/or recordkeepers is 200.
The estimated frequency of responses 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 confidential, as required
by 26 U.S.C. § 6103.
VII. Effect on Other Documents
Announcement 2004–38, 2004–18
I.R.B. 878, is modified.
Drafting Information
The principal authors of this an-
nouncement are James E. Holland and
Michael Rubin of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. Mr. Holland may be reached at
1–202–283–9699 and Mr. Rubin may be
reached at 1–202–283–9888 (not toll-free
numbers).
Application of Sections
265(a)(2) and 246A in
Multi-Party Financing
Arrangements; Request
for Comments
Announcement 2004–44
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Advance notice of proposed
rulemaking.
SUMMARY: The IRS and Treasury De-
partment are soliciting comments and sug-
gestions regarding the scope and details
of regulations (REG–128572–03) that may
be proposed under section 7701(f) of the
Internal Revenue Code to address the ap-
plication of sections 265(a)(2) and 246A
in transactions involving related parties,
pass-through entities, or other intermedi-
aries.
DATES: Written or electronic comments
must be submitted by August 5, 2004.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–128572–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to: CC:PA:LPD:PR (REG–128572–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC or sent electronically, via
the IRS Internet site atwww.irs.gov/regs
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS and
REG–128572–03).
FOR FURTHER INFORMATION
CONTACT: Concerning submissions,
LaNita Van Dyke, (202) 622–7180; con-
cerning the notice, Avital Grunhaus, (202)
622–3930 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 163(a) generally allows a de-
duction for all interest paid or accrued
within the taxable year on indebtedness.
Section 265(a)(2), however, provides that
no deduction shall be allowed for interest
on indebtedness incurred or continued to
purchase or carry obligations the interest
on which is wholly exempt from Federal
income taxes.
Generally, section 246A reduces the
dividends received deduction under sec-
tion 243, 244, or 245(a) to the extent that
the portfolio stock, with respect to which
the dividends are received, is debt-fi-
nanced. Stock is treated as debt-financed
if there is indebtednessdirectly attribut-
able to the stock investment.
Section 7701(f) provides that the Sec-
retary shall prescribe such regulations as
may be necessary or appropriate to prevent
the avoidance of the provisions of the In-
ternal Revenue Code that deal with (1) the
linking of borrowing to investment, or (2)
diminishing risk, through the use of related
persons, pass-thru entities, or other inter-
mediaries.
Concurrent with the publication of this
advance notice of proposed rulemaking in
theFederal Register, the IRS and Trea-
sury are issuing Rev. Rul. 2004–47,
2004–21 I.R.B. 941, which provides
guidance on the application of section
265(a)(2) to disallow a portion of interest
incurred by one member of an affiliated
group when it transfers borrowed funds
to another member of the group that is a
dealer in tax-exempt bonds. In the cir-
cumstances described inSituations 1and
2of that ruling, the funds borrowed by one
member are directly traceable to the funds
the borrowing member transfers to the
dealer member. Under Rev. Proc. 72–18,
1972–1 C.B. 740, the application of sec-
tion 265(a)(2) to these facts requires a
determination of the borrowing member’s
purpose for incurring or continuing each
item of indebtedness. The revenue ruling
holds that the purpose of the borrowing
member is determined by reference to the
use of the borrowed funds in the business
of the dealer member to whom the funds
are made available. This conclusion is
based onH Enterprises International v.
Commissioner, 75 T.C.M. 1948 (1998),
aff’d per curiam, 183 F.3d 907 (8
th
Cir.
1999). The result is a disallowance of
the borrowing member’s interest expense
under section 265(a)(2).
InH Enterprises, a parent and a sub-
sidiary were members of the same con-
solidated group of corporations. The
subsidiary declared a dividend and, a few
2004-21 I.R.B.957May 24, 2004

days later, borrowed funds and immedi-
ately used part of those funds to make the
dividend distribution to the parent. A por-
tion of the distributed funds was disbursed
to two investment divisions of the parent,
which used the funds to acquire invest-
ments including tax-exempt obligations
and corporate stock. The court held that a
portion of the indebtedness was incurred
to purchase and carry tax-exempt obliga-
tions for the purpose of section 265(a)(2)
and that a portion of the indebtedness was
directly attributable to the purchase and
carry of portfolio stock for the purpose of
section 246A.
The transactions described inSituations
1and2of Rev. Rul. 2004–47 and the
transaction before the court inHEnter-
prisesall involve funds borrowed by one
member of an affiliated group that can be
directly traced to funds transferred to an-
other member of the group.
In contrast to the transactions described
inSituations 1and2, in the transaction
described inSituation 3of Rev. Rul.
2004–47, the borrowed funds are not di-
rectly traceable to the funds transferred to
the dealer member, and there is no other
direct evidence linking the borrowed funds
to the funds transferred to the dealer mem-
ber. The revenue ruling holds that in these
circumstances, section 265(a)(2) will not
be applied to disallow interest expense of
the borrowing member.
Other situations may not be so clear.
For example, funds may be transferred
among the members of an affiliated or
consolidated return group in a variety of
ways that make it difficult to match bor-
rowed funds with particular investments or
other uses. Furthermore, certain taxpayers
may affirmatively seek to avoid applica-
tion of the rules of sections 265(a)(2) and
246A by using related parties, pass-thru
entities, or other intermediaries in a man-
ner that obscures the linkage between
borrowing outside of the affiliated group
and the purchase or carry of investments
within the group.
During the course of developing Rev.
Rul. 2004–47, the IRS and Treasury be-
gan preliminary consideration of possible
regulations that might be adopted under
the authority granted by section 7701(f)
to provide clearer rules for matching bor-
rowings and investments and for admin-
istering more effectively the purposes of
section 265(a)(2). For example, Treasury
and IRS are considering a rule that would
permit taxpayers to trace proceeds of bor-
rowings to specific taxable investments or
other specific uses but would apply apro
rataapproach to determine the use of pro-
ceeds of borrowings that are not traceable
to a specific use. This would differ from
a general rule requiring apro rataallo-
cation of borrowings among all available
uses, such as the rule in section 265(b) ap-
plicable to financial institutions.
The IRS and Treasury also are consider-
ing whether to adopt regulations under sec-
tion 7701(f) for purposes of section 246A
(dealing with debt financing of portfolio
stock).
The IRS and Treasury are requesting
comments on whether regulations should
be adopted under section 7701(f) for pur-
poses of applying section 265(a)(2) or
section 246A and, if so, the approach
that should be taken in such regulations.
Specifically, the IRS and Treasury are
inviting comments on the approach of
supplementing a specific tracing rule with
apro rataallocation rule, as well as sug-
gestions for alternative approaches. Com-
ments addressing the possible adoption of
regulations for purposes of section 246A
should take into account any differences
in approach that may be required under
section 7701(f) because section 246A de-
fines portfolio indebtedness by reference
to indebtedness “directly attributable to”
portfolio stock, while section 265(a)(2)
refers to indebtedness “incurred or con-
tinued to purchase or carry” tax-exempt
obligations. Persons making comments
mayalsowishtoaddressthemandate
in section 246A(f) to adopt regulations
providing for interest disallowance, rather
than disallowance of the dividends re-
ceived deduction, when indebtedness is
incurred by a person other than the person
receiving dividends.
SPECIAL ANALYSIS
This advance notice of proposed rule-
making is not a significant regulatory
action for purposes of Executive Order
12866, “Regulatory Planning and Re-
view.”
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 6, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May, 7, 2004, 69 F.R. 25534)
Foundations Status of Certain
Organizations
Announcement 2004–45
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors maynot, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations that are not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
4 the Kids, Mountain View, CA
4K12 Com, Las Vegas, NV
Abundant Life of Perrysburg 3, Inc.,
Perrysburg, OH
Academy for Adult Learning,
St. Augustine, FL
ADA A Grant, Inc., Chicago, IL
Adaptive Recovery Options, Inc.,
Tigard, OR
Agape Productions, Inc., Passaic, NJ
Aixale Martial Arts Fitness, Inc.,
Bronx, NY
Alaqua Womens Charitable Fund, Inc.,
Lake Mary, FL
Alcaitorrian Senior Housing Corporation,
Bloomington, MN
Alicias Animal Haven, Los Angeles, CA
Alliance for Gifted Children,
Ann Arbor, MI
Alpha-Omega Sports Ministries,
Ridgefield, WA
Alta California Regional Foundation,
Sacramento, CA
Alumni Partners, Fairfax, VA
American Academy for Integrated
Practice of Medicine, Berkeley, CA
American Bulldoggers Helping to Educate
and Rescue Together, Islip Terrace, NY
May 24, 20049582004-21 I.R.B.

American Center for Cultural and
Education, Washington, DC
American Dream Associates, Inc.,
Los Angeles, CA
American Friends of the Calgary
Health Trust Foundation,
Calgary, Alberta, Canada
American High School of Fremont
Alumni Association, Inc., Fremont, CA
American Home Care Services, Inc.,
Los Angeles, CA
American Israel Education Fund, Troy, MI
American Russian Publishing, Inc.,
Longmeadow, MA
Amigos De La Raza, Inc.,
Chattanooga, TN
Andrew Paul Foundation,
Staten Island, NY
Annex Credit Management, Inc.,
Orlando, FL
Apelles Quest, Santa Clarita, CA
Appalachian Mountain Ministries, Inc.,
Brevard, NC
Arizona Grassroots Collaborations,
Phoenix, AZ
Arizona Public Schools Donation Service,
Phoenix, AZ
Arizona Scholarships and Grants
Organization A S G O, Phoenix, AZ
Ars Antiqua Biblica, Los Angeles, CA
Artists Gym, Toluca Lake, CA
Ashona Foundation, Valley Center, CA
Australian Legal Resources International,
Sydney South NJW 1235, Australia
Autum Springs Corporation,
Smithville, TX
Baptist Saint Thomas Home Care
Services, Inc., Nashville, TN
Barlow High School Boosters Club,
Gresham, OR
Basin Educational Excellence Foundation,
Durango, CO
Bay County D A R E Officers Association,
Inc., Panama City, FL
Beckendorf Intermediate School Parent
Teacher Organization, Tomball, TX
Ben Amarfio International Sports
Company, Staten Island, NY
Benicia Education and Astronomical
Research, Inc., Benicia, CA
Berks Radio Association,
Lenhartsville, PA
Bethel Sexual Assault Response Team,
Inc., Bethel, AK
Beyond Dreams Foundation,
San Francisco, CA
Bico Properties, Inc.,
Colorado Springs, CO
Big Sur Arts Initiative, Inc., Big Sur, CA
Birth Network of Santa Cruz County,
Santa Cruz, CA
Blackwater Research Initiatives, Inc.,
Kingsport, TN
Blake Elementary PTO, Spokane, WA
Blue Circles, Inc., Nashville, TN
Bobbindoctrin Puppet Theatre,
Houston, TX
Booker T. Washington High School
National Alumni Association, Inc.,
Tulsa, OK
Boston Center for Propagation &
Knowledge, Boston, MA
Bread of Life, Royal, NE
B S A Troop 206 Margate FL, Inc.,
Coral Springs, FL
Buena Vista Childrens Center, Inc.,
Walnut Creek, CA
Building Science Resource Group,
Berkeley, CA
Burning Bush, Inc., Los Angeles, CA
Businesses Against Drugs, Inc.,
Salt Lake City, UT
Caleb Missionary Relief Services, Inc.,
Decatur, GA
California Association of Local
Agency Formation Commissions,
Nevada City, CA
California Space Program, Berkeley, CA
California Wild Turkey Association,
Stockton, CA
Cameron Park Volunteer Firefighter
Association, Cameron Park, CA
Caring About Kids, Auburn, CA
Carmel Art Festival, Carmel, CA
Carteret County International Choralfest,
Inc., Morehead City, NC
Casa De Paz Housing, Inc.,
Thousand Oaks, CA
C A S A Guardian Ad Litems of McIntosh
Co., Inc., Eufaula, OK
Catholic Charities Connect IPA, Inc.,
Brooklyn, NY
Catoosa Foundation for the Performing
Art, Inc., Ringgold, GA
CCM Ministries, Inc., Evansville, IN
CCM Ministries, Inc., Minneapolis, MN
Center for Market-Based Education, Inc.,
Rumney, NH
Center for Performance Enhancement
Research and Education, Omaha, NE
Center for the Study of Adult
Development, Montecilto, CA
Center of Resource for Educational
Enhancement and Development, Inc.,
Laud Lakes, FL
Center Sown Seed Ministries Outreach,
Inc., Ft. Worth, TX
Central Maui Youth Center, Kahului, HI
Centre for Self Empowerment and Social
Services, Inc., San Diego, CA
C E S Care, Tempe, AZ
Chamberlyne Foundation, Inc.,
Winter Haven, FL
Chandler Sister Cities, Inc., Chandler, AZ
Change Agent Programs, Inc.,
Orlando, FL
Changes Behavioral Services, Inc.,
Oak Park, IL
Changing Helping and Networking
for Community Empowerment, Inc.,
Fort Valley, GA
Chaplains for Assisted Living, Inc.,
Buttgart, AR
Charlotte Amalie High School Class of
1991,Inc.,CharlotteAma,VI
Charlotte Amalie High School Class of
1991, Inc., St. Thomas, VI
Children Helped in Illness Loss or Death,
Inc., Rochester, NY
Children Need Both Parents,
Grand Rapids, MI
Children of Promise, Inc., Acworth, GA
Children Yes, Santa Barbara, CA
Childrens Helpers Educating Reassuring
& Uniting by Sharing, North Bend, WA
Christian Child Care Center, Inc.,
Memphis, TN
Christian Life Movement, Inc.,
Denver, CO
Christmas in April Albuquerque,
Albuquerque, NM
Christmas in April Truckee Meadows,
Reno, NV
Church Computer Project, Inc.,
Harriman, TN
Circle of Wellness, Inc.,
Salt Lake City, UT
Cirrus Arts, Houston, TX
City of Brevig Mission, Brevig, AK
Civitas Associates, Inc., St. Louis, MO
Clackamas County Duii Impact Panel,
Oregon City, OR
Coalition for Youth, Roswell, NM
Coalition on Media Concerns, Inc.,
Santa Monica, CA
Collaborative for Tribal Education,
Sacramento, CA
College of John Paul in the Desert,
Tucson, AZ
Columbus Housing Development
Corporation, Columbus, NE
Communities in School of Walton County,
Inc., Monroe, GA
2004-21 I.R.B.959May 24, 2004

Communities in Schools of Okeechobee,
Inc., Okeechobee, FL
Communities in Schools of Orange
County, Inc., Orlando, FL
Community Advancement Through
Service, Hawthorne, CA
Community Development Corporation
of Northeast Tennessee, Inc.,
Johnson City, TN
Community Growth, Inc.,
Long Beach, CA
Community Helps of Coosa County, Inc.,
Goodwater, AL
Community Housing Assistance of New
Mexico, Inc., Edgewood, NM
Community Resources Network of
Arkansas, Inc., Little Rock, AR
Compass Montessori Erd Kinder
Foundation, Lakewood, CO
Computer Sciences for the Blind, Inc.,
Brooklyn, NY
Concerned Area Residents Get Organized,
Smyrna, TN
Coppell Organization of Parents for
Education, Coppell, TX
Corans Dream, Los Angeles, CA
Corban, Inc., Alto, TX
Corn Palace Balloon Club, Tyndall, SD
Covenant Partners of Dekalb County, Inc.,
Smithville, TN
Crafty Chair-Ubs, Inc., Old Hickory, TN
Creative You, Glendale, AZ
Critical Ceramics, Freeport, ME
Cross to Freedom Ministries,
Mesquite, TX
Dallas Stars Foundation, Inc.,
Arlington, TX
Danville Area Housing Foundation, Inc.,
Danville, IL
Deaf Abused Women and Children
Advocacy Services, Austin, TX
Deerfield Beach Roller Hockey
Association, Inc., Deerfield Beach, FL
Denton Creek Elementary Parent Teacher
Organization, Coppell, TX
Devereux Kids, Inc., Orlando, FL
Dewitt Community Development
Foundation, Inc., Cuero, TX
Disabled Childrens Assistance Fund,
Glendale, AZ
Discipleship in Action, Booneville, MS
Dive Deeper, Honolulu, HI
Diversified Working Solutions,
Bolivar, MO
Donations for Christian Education
Foundation, Purvis, MS
Don’t Give Up, Inc., Las Vegas, NV
E-Access Foundation, Van Nuys, CA
E-Mainstreet, Honolulu, HI
Eagle Valley Merit Award Fund, Vail, CO
East Diablo Tournaments, Brentwood, CA
East Diablo Tournaments, Temple, TX
East Mesa Friends, Inc., Organ, NM
East Timor Scholarship Foundation,
Keaau, HI
Eastern Technology Council Foundation,
Wayne, PA
Eastside Community Substance Abuse
Center, Inc., Des Moines, IA
Edserve, Inc., Littleton, CO
Educare, Incorporated, Las Vegas, NV
El Rito Public Library, El Rito, NM
Elder Care Advocates of Marin,
Novato, CA
Elizabethtown Christian Academy,
Elizabethtown, KY
Eljeannette White Helping Hands Parent
Child Center, New Orleans, LA
Elmer G. Bondy PTO, Pasadena, TX
Employment Job Seekers, Inc.,
Los Angeles, CA
Employment of Adults With Disabilities,
Inc., Tamarac, FL
Endless Mountains Theatre Company,
New Milford, PA
Ernest J. Brucker Foundation, Inc.,
Antigo, WI
Escontrias Elementary PTO, El Paso, TX
Excellence Foundation, Canton, MS
Faith and Health International Ministries,
Lake Forest, IL
Faith United, Inc., Frankfort, KY
Families in Crisis Ministries, Orlando, FL
Family Support Services, Inc.,
Pasadena, CA
Family Support Services, Inc.,
White Hall, AR
Family Tree Services, Chico, CA
Fanus Non Profit Organization,
Woodland Hills, CA
Faunavision, Inc., New York, NY
F B Alliance, Los Angeles, CA
Fighting Spartan Scholarship, Inc.,
Houston, TX
Fine Arts Norwalk, Inc., Norwalk, CT
Five Acre School PSO, Carlsborg, WA
Five Star Gymnastics Boosters,
Erlanger, KY
Fleishmann Family Fund, Galveston, TX
Florida Association for Pupil
Transportation, Inc., Tallahassee, FL
Flury Place, Inc., Catonsville, MD
Flying Eagle Community Development
Corporation, Inc., North Stonington, CT
Focased, Philadelphia, PA
Foundation for American Renewal Corp.,
Indianapolis, IN
Foundations for Success II, Bellevue, WA
Franklin Childrens Foundation,
Las Vegas, NV
Fraternidad Misionera De La Providencia,
Perth Amboy, NJ
Freedom Educational Group,
Philadelphia, PA
Freedom West Computer Learning Center,
San Francisco, CA
Freemasons Hall, Inc., Indianapolis, IN
Friends of 32nd St. School Booster Club,
Los Angeles, CA
Friends of Alameda County Casa, Inc.,
Oakland, CA
Friends of Albuquerques Environmental
Story, Albuquerque, NM
Friends of Bellaire High School Choirs,
Bellaire, TX
Friends of Childrens United Succeed,
Inc., Ft. Lauderdale, FL
Friends of Evergreen and Fairview
Cemeteries, Colorado Springs, CO
Friends of the Monterey Public Library,
Monterey, CA
Fund for the National Commission
on Nonprofit Governance,
East Patchogue, NY
Garza Rodriguez & Tajon Childrens
Services, Santa Maria, CA
George Washington School Foundation,
Inc., South America
Giles County Youth Leadership
Development, Pulaski, TN
GLA Foundation, Grove, OK
Global Alliance for the Less Privileged,
Roswell, GA
Global House, Inc., Philadelphia, PA
Global Seas Foundation, Inc.,
Lake Worth, FL
Gods World Photography, Bothell, WA
Good Works Foundation, Inc.,
Hood River, OR
Granbury Educational Access Channel,
Inc., Granbury, TX
Great Falls Elks Lodge Charitable Corp.,
Great Falls, MT
Greater New Jericho Economic
Development, Los Angeles, CA
Greek American Medical Society of South
Florida, Inc., Boca Raton, FL
Green River Regional Education
Cooperative, Inc., Bowling Green, KY
Greenbriar P E A S, Fort Worth, TX
Groups Memorial, Inc., of the Army Air
Forces, Canon City, CO
May 24, 20049602004-21 I.R.B.

Guadalupe Educational Technology
Association, Guadalupe, CA
Gunnerman Global Environmental
Foundation, Reno, NV
Hallsville Rotary Club Foundation, Inc.,
Longview, TX
Handicapped Health Housing Education
Activity League, Inc., Cranston, RI
Harney County Watershed Council, Inc.,
Burns, OR
Haven of Hope, Inc., Oklahoma City, OK
Haven West, Inc., Edmond, OK
Healdsburg Hope Homes, Inc.,
Healdsburg, CA
Health Adventures Visioning Education
Network, Batside, CA
Heart and Soul Studios, Inc.,
Boca Raton, FL
Helms Manor, Culver City, CA
Henderson Aquatic Center Corporation,
Henderson, KY
Herd Community Development
Corporation, Los Angeles, CA
High Desert Employment Services
Network, Incorp., Victorville, CA
High Hopes Childrens Center,
Redway, CA
Highland Oaks Educational Foundation,
Grass Valley, CA
Hillcrest Elementary PTA,
Oak Harbor, WA
Hispanic Arts Center of New York State,
Peekskill, NY
HIVAIDS Resource Team, Inc., H A R T,
Thibodaux, LA
Hmong Organization for Parents
Educators and Students, Inc.,
Sacramento, CA
Hollywood Arts and Education Coalition,
Hollywood, CA
Holy Temple Human Services
Corporation, Opa Locka, FL
Home Church International, Aurora, CO
Hope Tree, Inc., Baton Rouge, LA
House of Umpja Bridgeport, Inc.,
New Haven, CT
Hui Maka Ainana O Makana, Hanalei, HI
Human Development & Resource Center
of Ft. Pierce Florida, Inc., Ft. Pierce, FL
Hurricane Baseball Booster Club of Palm
Harbor, Inc., Palm Harbor, FL
Ican Project, Inkom, ID
Immunology Allergy & Asthma
Foundation, Inc., Fort Wayne, IN
Impressions of Grace Abg, Inc.,
Baldwin, CA
Indian River Institute, Inc., Fort Pierce, FL
Industry Hills Rotary Foundation,
La Puente, CA
Informed Buyers Coalition, Sylmar, CA
Innovators in Milestones, Inc.,
New Orleans, LA
Inoka, Inc., Lake Oswego, OR
Institute for Renaissance and Reformation
Biblical Studies, Philadelphia, PA
Instituto Sanchez-Mendoza Para La
Capacitacion De La Comunidad,
Santa Rosa, CA
Intercollegiate Equestrian Foundation,
Inc., Stony Brook, NY
International Center for Art Intelligence,
Inc., Culver City, CA
International Institute for Womens Health,
Vancouver, WA
International Pediatric Respiratory and
Allergy Forum, San Francisco, CA
International Service and Aid, Inc.,
Oklahoma City, OK
Ishi Valley Family Resources, Inc.,
Chico, CA
It’s a Wonderful Life, Inc., Allendale, NJ
J & T Enterprises, Inc., Pine Bluff, AR
Jacob K. Javits Foundation, Inc.,
New York, NY
Jason Berger Memorial Scholarship Fund,
Boston, MA
Jeff Davis County Family Connection
Council, Inc., Hazlehurst, GA
Jefferson County Tea Coalition,
Pine Bluff, AR
Jesse James Carter Memorial Foundation,
New Orleans, LA
Journal of Legal Advocacy & Practice,
Inc., Woodland Hills, CA
Journal Press, Salt Lake City, UT
Junior Stars Hockey Association,
Arlington, TX
Justice for all Alliance, Houston, TX
Kefalas-Pinto Foundation,
Mountainside, NJ
Kennedy Krieger Marcus National
Foundation, Inc., Baltimore, MD
Kerry Restoration, Inc.,
Huntington Beach, CA
Kid Gloves Boxing Foundation,
Simi Valley, CA
Kids for Literary and the Arts, Inc.,
Evergreen, CO
K I D S of Sonoma County,
Santa Rosa, CA
Kidsville Preschool & Daycare Center,
Jackson, MS
Krista Ford Foundation,
Stone Mountain, GA
Kristen Watt Foundation for Eating
Disorders Awareness, Stockton, CA
La Causa Alcohol & Drug Services,
San Bernardino, CA
Laborers in the Harvest Unlimited,
Omaha, NE
Laborers Local 300 Scholarship Fund,
Los Angeles, CA
Lafreniere Soccer Association, Inc.,
Metairie, LA
Lakeview High School Alumni
Association, Lakeview, OR
Lakewood School PTO, Sunnyvale, CA
Lambda Chi Alpha Educational
Foundation, Inc., Indianapolis, IN
Landowner Resource Management
Corporation, Central Point, OR
Lapetite Preparatory School,
Pine Bluff, AR
Las Casas De Vida Corporation,
Clovis, NM
Latinos in America Moving for Peace,
Highland, CA
League of Idaho Cities, Incorporated,
Boise, ID
Liberty Lake Elementary PTSA,
Tacoma, WA
Life Building Ministries, Inc.,
Florence, KY
Linda Cesarski & Mary Ann Evans
Foundation for Cancer Research,
Batesville, AR
Lions Club of North Bend, Incorporated,
Coos Bay, OR
London Parent Teacher Organization,
Corpus Christi, TX
Long Island Chapter of the Association
of Certified Fraud Examiners, Inc.,
Hicksville, NY
Longboat Key Lions Foundation, Inc.,
Longboat Key, FL
Longview Childrens Clinic, Inc.,
Longview, TX
Loudoun Bar Foundation, Leesburg, VA
Louisiana Pharmacists Recovery
Network, Inc., Monroe, LA
Lovefest Charities, Inc., Hollywood, FL
Loving Care Center, San Diego, CA
Low Income Living, Inc.,
Los Angeles, CA
Maap Foundation, Pacific Beach, WA
Mac Foundation, Pahoa, HI
Male Advocacy in Pregnancy and
Parenting, Richmond, CA
Maricopa Community Chamber of
Commerce, Inc., Maricopa, AZ
Maryland Regional Practitioners Network
for Fathers and Families, Baltimore, MD
2004-21 I.R.B.961May 24, 2004

Master Classes International, Inc.,
Los Angeles, CA
McKinney High School Basketball
Booster Club, McKinney, TX
Media Literacy Alliance Central Coast,
Salinas, CA
Medicine and Science Discovery Center
of Central Texas, Temple, TX
Memphis Performing Arts Conservatory,
Inc., Memphis, TN
Men’s Self Advocacy Council of
Durango, Inc., Durango, CO
Mexican American Historical Society in
Ventura County, Oxnard, CA
Mexico Academy Educational
Foundation, Mexico, NY
Miami Contender Yamaha Kingfish
Championship, Inc., Miami, FL
Miami County Arts Foundation, Troy, OH
Michael Charles Albert Scholarship Fund,
Walkerton, IN
Mickey Cox Elementary School Parent
Club, Clovis, CA
Mid-San Gabriel Valley Televillage, Inc.,
El Monte, CA
Middle Country Central School
District Education Foundation, Inc.,
Centerreach, NY
Millbrae Community Foundation a
California Non Profit Benefit Corp.,
Millbrae, CA
Minnesota American Legion and
Auxiliary Brain Science Foundation,
St. Paul, MN
Moments 2 Success, Sacramento, CA
Monticello High School Music Boosters,
Inc., Charlottesville, VA
Montly Sponsor, Tooele, UT
Mud, Inc., Philadelphia, PA
Museum of the American West,
Lander, WY
Music at La Gesse Foundation, Inc.,
Cabin John, MD
My Contribution, Hercules, CA
My Fathers House of Erie, Erie, PA
Na Mele Hawaii Apau, Honolulu, HI
National Council of Negro Women, Inc.,
Seattle, WA
National Down Payment Assistance
Corp., Northglenn, CO
Neuronoetics, Edmonds, WA
New Era Armenian Charitable Mission
USA, Inc., Burbank, CA
New Joshua Center for Hope,
Cleveland, OH
New Sardis Daycare, Memphis, TN
Newman Center Foundation,
Columbia, MO
Noel’s Barn, Tucson, AZ
Nolan Elementary School Parent Teacher
Association, Signal Mountain, TN
North American Housing Foundation,
Inc., Englewood, CO
North American Transportation Institute,
Oklahoma City, OK
North Carolina Public Interest
Research Group Education Fund,
Inc., Chapel Hill, NC
North Star Alliance Bingo Boosters,
Bakersfield, CA
Northern Kentucky Workforce Investment
Board, Inc., Florence, KY
Nowata Area Senior Service Organization,
Inc., Nowata, OK
Nu Chapter Alpha Chi Sigma Professional
Society, Schaefferstown, PA
NVCSS Whispering Oaks, Inc.,
Redding, CA
Oak Park Education Foundation,
Oak Park, CA
Oak View Parent Club, Acampo, CA
On the Way Home, Inc., Logandale, NV
Open Door Program, Greensboro, NC
Opera in the Hills, Fremont, CA
Oregon Foundation for Free Expression,
Inc., Portland, OR
Orinda Intermediate School Parents Club,
Inc., Orinda, CA
Oxnard Public Access Assistance
Corporation, Oxnard, CA
Palms Manor, Culver City, CA
Pannonia Christian Educational Exchange,
Inc., Grand Rapids, MI
Panthers Operation Graduation, Inc.,
Grangerland, TX
Pathways to Achievement,
Sacramento, CA
Paws Animal Rescue, Inc., Alvin, TX
Peace Foundation, Inc., Chester, NY
Pendulum, Inc., Houston, TX
Personal Retirement Alliance, Ltd.,
New York, NY
Pet Pals, Inc., Fort Lauderdale, FL
Petlink, Inc., Nicholasville, KY
Philanthropy Foundation, Inc.,
Ft. Lauderdale, FL
Philippine American National Museum,
Los Angeles, CA
PlaceinTime,Coosada,AL
Placer County Crime Stoppers, Inc.,
Rocklin, CA
Plano West Senior High School Band
Boosters, Plano, TX
Plantados Until Freedom and Democracy
in Cuba, Inc., Miami, FL
Plasma @ Cincinnati, Utica, IN
Polaris Chapter of Texas Mental Health
Consumers, Inc., El Paso, TX
Portland Pounders, Portland, OR
Positive Attitude Outlook of Southern
California, Rancho Cucamonga, CA
Preston Hot Springs Library Memorial
Foundation, Hot Springs, MT
Prince Boxing Gym, Inc., Houston, TX
Prodigals House, Bakersfield, CA
Progressive Housing Concepts, Inc.,
Los Angeles, CA
Progressive Rehabilitation Center, Inc.,
New Orleans, LA
Project America Development Company,
Phoenix, AZ
PTA Texas Congress, El Paso, TX
Public Education Enrichment Fund,
Nevada City, CA
Quality Community Services,
Whittier, CA
Rancho Cordova Rotary Charitable
Foundation, Rancho Cordova, CA
Rapides Community Housing
Development Corporation, Inc.,
Alexandria, LA
Razzy Baileys I Hate Hate, Inc.,
Gooclettsville, TN
Real People Ministries, Inc., Dallas, TX
Red Bluff Parent Teacher Organization,
Pasadena, TX
Reflections of Love, Inc., Chicago, IL
Renewed Family Joy Service,
Los Angeles, CA
Rescue Animal Fund, Inc., Divide, CO
Retired Scientists Cooperative, Inc.,
Douglaston, NY
Richard Burdell Memorial Foundation,
Portland, OR
Ridgerunner Wrestling Club, Grove, OK
Riverrun, Salem, OR
Riverton School Preservation Society,
Riverton, UT
Rocklin Elementary Parent Teacher Club,
Rocklin, CA
Romeo Corporation, Tempe, AZ
Ropp for Girls, Inc., Dallas, TX
Rowan County Domestic Violence
Council, Morehead, KY
Royal High Dance Guard Booster,
Simi Valley, CA
Royal Palm Symphoney Chorus and
Orchestra, Inc., Boca Raton, FL
Sackets Safe Harbor, Sackets Harbor, NY
S A F E Coalition, Inc., Bakersfield, CA
Sage Theatre Group, Dallas, TX
Salinas Barrios Unidos, Inc., Salinas, TX
Sami Disharoon Brain Tumor Research
Foundation, Cotati, CA
May 24, 20049622004-21 I.R.B.

Samoa for all of Sacramento,
Sacramento, CA
San Francisco Bay Area Polio Survivors,
Concord, CA
Santa Fe High School Parent Teacher
Coalition, Santa Fe, NM
Santa Monica Citizen Police Academy
Alumni Association, Santa Monica, CA
Santee Focus Foundation, Santee, CA
Sassfa, Inc., Whittier, CA
Sausalito Jazz and American Music
Foundation, Sausalito, CA
Say Yes to Life, Los Angeles, CA
Scholarship Association of Fort Plain,
Inc.,FortPlain,NY
Scholarship Foundation of the Colorado
Technical Recruiters Network,
Denver, CO
Seattle Debate Foundation, Seattle, WA
Self Advocacy Council VI, Stockton, CA
Services & Immigrant Rights & Education
Network, San Jose, CA
Shawnee Surge, Inc., Shawnee, OK
Shelby County Alcohol and Drug
Rehabilitation School, Memphis, TN
Shepherds Ranch, Snowflake, AZ
Sickle Cell Forum, Phoenix, AZ
Sierra Food Bank, Inc., Placerville, CA
Sierra High School Band Boosters,
Manteca, CA
Sims Middle School PTO, Pace, FL
Sipa Community Development Corp.,
Los Angeles, CA
Snake River Chamber Orchestra,
Idaho Falls, ID
Society of Academy Women, Hudson, OH
Soroptimist International Boca Raton
Deerfield Beach, Inc., Boca Raton, FL
Soroptimist International of St. Petersburg
Florida, Inc., St. Petersburg, FL
SOS Children’s Village of Arizona, Inc.,
Scottsdale, AZ
South Aurora Family Resource Center,
Aurora, CO
South Everett Mukilteo Rotary
Foundation, Everett, WA
South Hills High School Scorpions
Athletics Booster Club, Ft. Worth, TX
South Stockton Diabetes Society,
Stockton, CA
Southern California Rays Women Hockey
Club, Diamond Bar, CA
Southern High School Athletic Booster
Club, Inc., Louisville, KY
Southside School Alumni Association,
Rowland, NC
Southwest Care, Inc., McComb, MS
Southwest College of Naturopathic
Medicine Student Government,
Tempe, AZ
Southwest Georgia Perpetual Arts Fund,
Inc., Cordele, GA
Southwest Section PGA Foundation,
Scottsdale, AZ
Special Kids Network, Inc., Jackson, MS
Springs of Life Community Outreach,
Inc., Atlanta, GA
St. Luke Surgical Foundation, Inc.,
Cleveland, OH
Starz Gymnastics Competitive Team,
Reno, NV
Stone City Art Institute, Cedar Rapids, IA
Student Junxion, Santa Cruz, CA
Sunshine Vision, Fort Pierce, FL
Supai PTO, Scottsdale, AZ
Supporters of Summit, Inc., Boulder, CO
Tacoma Chapter of the Washington
State Music Teachers Association,
Tacoma, WA
Tara De Christo, Inc., Austin, TX
Taytumns House, Inc., Loveland, CO
Team Hardin County, Inc., Savannah, TN
Ted Warthen Center, St. George, UT
Texarkana Wilbur Smith Rotary Club
Foundation, Texarkana, TX
Texas Christian Counseling Services, Inc.,
Palestine, TX
Theta Upsilon Education Company, Inc.,
Newark, OH
Threshold of Hope Center, Inc.,
Eunice, LA
Tri County Childrens Advocacy Center,
Lafayette, AL
Trussville-East Jefferson Rotary
Foundation, Birmingham, AL
Tuba City Boarding School, Inc.,
Tuba City, AZ
Ujima, San Bernardino, CA
United Coalition of Families, Inc.,
Cedar Hill, TX
United Counties Minority Aids Care and
Education, Inc., Defuniak Springs, FL
Upper Room Ministry, Inc., Cushing, OK
Van R. Butler Elementary School
Parent Teacher Organization, Inc.,
Santa Rosa Beach, FL
Velvet Victories, Inc., Bartlett, TN
Villa Apartments Housing Foundation,
Pasadena, CA
VNA Foundation, Inc., Orlando, FL
Volunteer Coordinators of Pueblo,
Pueblo, CO
Volunteers of Africa, Inglewood, CA
Voters United in God We Trust, Inc.,
New Port Richey, FL
Waimea Project Graduation, Waimea, HI
Walksacramento, Sacramento, CA
Washington County Community
Partnership, Springdale, AR
Washington County Fire Chiefs
Association, Vera, OK
W E C Group Home, Portland, OR
Weed Wildlife Refuge & Botanical
Gardens, Weed, CA
Wesley Neighborhood, Inc., Redding, CA
West Coast Armor and Artillery Museum,
Petaluma, CA
West Hollywood Community Foundation,
W. Hollywood, CA
West Kauai Early Childhood Development
Center, Eleele, HI
Western Regional EMS Council, Inc.,
Montrose, CO
Western States Health Alliance,
Tesuque, NM
Westside Community Park, Lakeport, CA
Westside Cultural Center, Ventura, CA
Wholly Living for Him Educational
Resources, Inc., Decatur, GA
Why We Were Chosen Foundation
Corporation, Fort Lauderdale, FL
Wicker Basket Alzheimer Homes,
Las Vegas, NV
Willie Landry Mount Foundation,
Lake Charles, LA
Windsong Intermediate School Parent
Teacher Organization, Friendswood, TX
Winters Conservancy, Winters, CA
Wisconsin North Youth Ballet State
Regional Arts Center, Altoona, WI
WomenandChildrenCenterfor
Development, San Francisco, CA
Women and Children First, Inc.,
Helena, MT
Women in Motion Incorporation,
Denver, CO
Women of Vision, Los Angeles, CA
Womens Armed Forces Memorial,
Cincinnati, OH
Women’s Outreach, Inc., Syracuse, NY
Womens Resource Center, Inc.,
Nashville, TN
Womens Resource Center, Inc.,
New Orleans, LA
Woodbridge Rotary Foundation,
Woodbridge, VA
Woodlands High School Boys Track and
Field Booster Club, The Woodlands, TX
Word of Salvation, El Paso, TX
Wyoming Alternatives for Youth, Inc.,
Buffalo, NY
Yeuani, San Diego, CA
2004-21 I.R.B.963May 24, 2004

Youth Education and Safety for Kids, Inc.,
Osnard, CA
Youth Educational Sports, Inc.,
Chatsworth, CA
Young Entrepreneurs Association,
Colorado Springs, CO
Youth On Ice, Green Bay, WI
Youth Under-Served Disabilities
Empowerment Service Agency,
Philadelphia, PA
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors maythereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
Son of Boss Settlement
Initiative
Announcement 2004–46
Section 1. Purpose and Scope of Initiative
The Internal Revenue Service an-
nounces a settlement initiative for tax-
payers to resolve transactions described
in Notice 2000–44, 2000–2 C.B. 255, and
substantially similar transactions (Son of
Boss transactions).
The Service has determined that Son of
Boss transactions are abusive and were de-
signed, marketed, and undertaken solely to
create tax benefits unintended by any rea-
sonable interpretation of the tax laws. The
Service believes that it will prevail in liti-
gation on the merits of these transactions
and that the imposition of penalties will
be upheld. For efficient tax administra-
tion reasons, however, the Service offers
taxpayers an opportunity to resolve their
civil tax liabilities under this initiative and
avoid litigation.
Section 2. Terms of Initiative
(a) Tax Adjustments—
(1) Taxpayers will concede all claimed
tax benefits and attributes, including basis
adjustments, from the Son of Boss transac-
tion.
(2) Taxpayers will be allowed to treat
(i) their net out-of-pocket costs and fees as
a long-term capital loss, or (ii) one-half of
their net out-of-pocket costs and fees as an
ordinary loss, in the year those costs and
fees were paid or accrued. If tax bene-
fits, including benefitsattributable to those
costs and fees, were claimed in a year
barred by the period of limitations on as-
sessment, the costs and fees will be al-
lowed only to the extent they exceed the
tax benefits claimed in the barred years.
(b) Application of Penalties—
(1) Taxpayers who properly disclosed
their Son of Boss transaction under An-
nouncement 2002–2, 2002–1 C.B. 304,
will not pay a penalty on the underpay-
ment attributable to that Son of Boss
transaction.
(2) Taxpayers who did not properly dis-
close their Son of Boss transaction under
Announcement 2002–2 and who:
(i) Did not directly or indirectly claim
tax benefits from any other listed trans-
action, including any other Son of Boss
transaction, will pay a penalty of 10 per-
cent of the underpayment attributable to
the Son of Boss transaction; or
(ii) Directly or indirectly claimed tax
benefits from another listed transaction, in-
cluding any other Son of Boss transaction,
willpayapenaltyof20percentontheun-
derpayment attributable to the Son of Boss
transaction.
For purposes of this announcement, a
“listed transaction” is a transaction that is
the same as, or substantially similar to,
one identified by the Service under sec-
tion 6011 and the Treasury regulations as
of the date the taxpayer submits the No-
tice of Election, regardless of whether (a)
the Service had identified the transaction
as a listed transaction at the time the tax-
payer entered into the transaction, or (b)
the transaction is (or was) required to be
disclosed by the taxpayer as a listed trans-
action pursuant to the regulations (includ-
ing the temporary regulations) under sec-
tion 6011.
Section 3. Eligibility Requirements
All taxpayers that claimed tax benefits
in a manner described in Notice 2000–44
are eligible to participate in this initiative
except:
(1) Persons who (i) organized or partic-
ipated directly or indirectly in the sale or
promotion of any Son of Boss transaction,
(ii) received fees for organizing, selling or
promoting one, (iii) were partners in a part-
nership, or employeesof a person, that en-
gaged in activities described in (i) or (ii)
of this paragraph at the time they partic-
ipated in the Son of Boss transaction, or
(iv) were related to a person described in
this paragraph within the meaning of sec-
tion 267(b), other than section 267(b)(1),
at the time they participated in the Son of
Boss transaction.
(2) All partners in entities subject to
the unified partnership audit and litigation
provisions of sections 6221 through 6234,
as enacted by the Tax Equity and Fiscal Re-
sponsibility Act of 1982 (TEFRA partner-
ships), that include a partner described in
paragraph (1) of this section who directly
or indirectly claimed tax benefits in a man-
ner described in Notice 2000–44 with re-
spect to those TEFRA partnerships.
(3) Taxpayers who, individually or as a
partner in a TEFRA partnership, are a party
in a court proceeding to determine the tax
treatment of the Son of Boss transaction.
(4) Taxpayers where the Service has in-
formed the taxpayer, or the tax matters
partner of a TEFRA partnership in which
the taxpayer was a partner, that the Service
has designated, or is considering designat-
ing, the Son of Boss transaction for litiga-
tion.
Section 4. Required Procedures for
Electing Participants
(a) Notice of Election
Taxpayers participating in this initiative
must notify the Service of their election by
sending the Notice of Election, as set out
below, on or before June 21, 2004. The
Notice of Election must be sent by certified
mail or designated delivery service (within
the meaning of section 7502(f)) to:
INTERNAL REVENUE SERVICE
Attn: Announcement 2004–46
1901 Butterfield Road, Ste. 310
Downers Grove, IL 60515
May 24, 20049642004-21 I.R.B.

If the taxpayer, or a TEFRA partner-
ship in which the taxpayer was a partner, is
under examination, the taxpayer also must
provide a copy of the Notice of Election to
the examining agent.
TheNoticeofElectionmustbepre-
pared under penalties of perjury and:
(1) State that the taxpayer elects to par-
ticipate in the settlement initiative in An-
nouncement 2004–46;
(2) Include the taxpayer’s name, tax-
payer identification number (TIN), current
address, and daytime telephone number,
and, if under examination, the name, ad-
dress, and daytime telephone number of
the examining agent. If a tax practitioner
will represent the taxpayer, the practitioner
must provide a completed Form 2848 or
other valid power of attorney;
(3) Include the name and TIN of all
other entities known to the taxpayer that
directly or indirectly were parties in the
Son of Boss transaction, and for each
TEFRA entity, the name, address, and
daytime telephone number of the tax mat-
ters partner;
(4) State whether the taxpayer claims
qualification for a penalty of 0 percent, 10
percent or 20 percent; and
(5) Either (i) identify all listed transac-
tions in which the taxpayer directly or indi-
rectly claimed tax benefits (for example, a
spouse filing jointly with a participant in a
listed transaction, oras a trust beneficiary
that entered into a listed transaction), or (ii)
state that the taxpayer did not directly or
indirectly claim taxbenefits in any other
listed transaction.
(b) Additional Information and
Documentation — 60 days
Upon receipt and review of an elec-
tion to participate, the Service will notify
the taxpayer by mail whether the taxpayer
is eligible to participate in this initiative.
The notification will include a request for
additional information and documentation.
The taxpayer must submit all requested
information under penalties of perjury to
the Service within 60 days of the date of
mailing by the Service. The Service may
grant an extension for good cause to tax-
payers who request additional time within
the 60-day period.
(c) Closing Agreement and Payment —
30 days
After receiving the requested informa-
tion, the Service will prepare a closing
agreement under section 7121 reflecting
the terms of the settlement. The closing
agreement will provide that (1) without
limitation as to the otherwise applicable ef-
fect of section 7121(b), providing inaccu-
rate information about tax benefits claimed
from other listed transactions, including
other Son of Boss transactions, as required
in the Notice of Election, is a misrepresen-
tation of a material fact within the mean-
ing of section 7121(b), and (2) the taxpayer
waives all defenses to the assessment and
collection of the tax liabilities determined
under this initiative, including the applica-
ble penalty and interest.
The Service will mail the closing agree-
ment to the taxpayer who must sign and re-
turn it to the Service within 30 days of the
date of mailing by the Service. The Ser-
vice may grant an extension for good cause
to taxpayers who request additional time
within the 30-day period. Full payment of
the liabilities under this initiative must be
made by the date the closing agreement is
executed. Any taxpayer not making full
payment must submit complete financial
statements and agree to other financial ar-
rangements acceptable to the Service be-
fore the Service will execute the closing
agreement. A taxpayer will be ineligible to
participate in this initiative if an agreement
regarding an acceptable financial arrange-
ment cannot be reached.
(d) Other Matters
(1) Denial of a taxpayer’s request to
participate in this initiative is not subject
to judicial review.
(2) Execution of a closing agreement
under this initiative does not preclude the
Service from investigating any associated
criminal conduct or recommending prose-
cution for violation of any criminal statute.
Section 5. Dispute Resolution Procedures
for Nonparticipants
Appeals Office consideration will not
be available for Son of Boss transactions.
For all taxpayers ineligible or not partici-
pating in this initiative, the Service will (a)
develop the cases, (b) disallow all tax ben-
efits and attributes claimed from the Son of
Boss transaction, including out-of-pocket
costs and fees, (c) determine appropriate
penalties, including those under section
6662 or section 6663, and (d) issue a No-
tice of Deficiency or Notice of Final Part-
nership Administrative Adjustment, as ap-
propriate.
The Office of Chief Counsel will
closely coordinate Son of Boss cases by
treating them as if they were designated for
litigation under Chief Counsel procedures
for designating cases for litigation. Like-
wise, in refund and TEFRA partnership
suits handled by the Department of Jus-
tice, Chief Counsel expects to recommend
against any settlement more favorable to
the taxpayer than is provided in this ini-
tiative. Department of Justice regulations
require Assistant Attorney General ap-
proval of any settlement contrary to the
Chief Counsel’s recommendation. Con-
sequently, taxpayers should not expect to
settle their cases on better terms if they
proceed to litigation, whether in the Tax
Court or in other forums.
Section 6. Paperwork Reduction Act
The collection of information contained
in this announcement has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1885.
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 number. The collection of infor-
mation in this announcement is in section
4 entitled REQUIRED PROCEDURES
FOR ELECTING PARTICIPANTS. This
information is required to apply the terms
of the settlement set forth in this an-
nouncement. The information will be
used to determine whether the taxpayer
has reported the disclosed item properly
for income tax purposes. The collection of
informationisrequiredtoobtaintheben-
efit described in this announcement. The
likely respondents are businesses or other
for-profit institutions, small businesses or
organizations, and individuals.
The estimated total annual reporting
burden is 5000 hours.
The estimated annual burden per re-
spondent varies from 3 hours to 7 hours,
depending on individual circumstances,
2004-21 I.R.B.965May 24, 2004

with an estimated average of 5 hours. The
estimated number of respondents is 1000.
The estimated frequency of responses is
onetimeperrespondent.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
CONTACT INFORMATION
For additional information regard-
ing this announcement, including an-
swers to frequently asked questions, see
www.irs.gov, or contact Paul Zamolo of
the Office of Division Counsel (SB/SE) at
(415) 744–9217 (not a toll-free number)
or James Fee of the Office of Division
Counsel (LMSB) at (215) 597–3442 (not
a toll-free number).
Loss Limitation Rules;
Correction
Announcement 2004–47
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document contains cor-
rections to T.D. 9118, 2004–15 I.R.B. 718
[69 FR 12799], which was published in
theFederal Registeron Thursday, March
18, 2004, relating to certain aspects of
the temporary regulations addressing the
deductibility of losses recognized on dis-
positions of subsidiary stock by members
of a consolidated group and to the con-
sequences of treating subsidiary stock as
worthless.
DATES: This correction is effective on
March 18, 2004.
FOR FURTHER INFORMATION
CONTACT: Mark Weiss (202) 622–7790
or Lola Johnson (202) 622–7550 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The temporary regulations (T.D. 9118)
that are the subject of this correction is
under 1502 of the Internal Revenue Code.
Need for Correction
As published, T.D. 9118 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:26 U.S.C. 7805 * * *
§1.1502–35T [Corrected]
Par. 2.Section 1.1502–35T(f)(1), the
language “expired as of the day following
the last” is removed and the language “ex-
pired as of the beginning of the day follow-
ing the last”.
Par. 3.Section 1.1502–35T(f)(1), the
language “shall be treated as expired as
of the day” is removed and the language
“shall be treated as expired as of the be-
ginning of the day”.
LaNita Van Dyke,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on May 5, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 6, 2004, 69 F.R. 25315)
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2004-49
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
May 24, 20049662004-21 I.R.B.

Consent Disbarments From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to disbarment from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may disbar an attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary in accordance with the consent offered.
The following individuals have been
placed under consent disbarment from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Disbarment
Ranes III, Wesse C.Annapolis, MDCPAIndefinite
from
May 1, 2004
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent, or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Montgomery, Goldie L.Lancaster, CAEnrolled AgentIndefinite
from
February 1, 2004
Frost, Charles L.San Antonio, TXEnrolled AgentIndefinite
from
February 1, 2004
Briggs, John W.Sayville, NYEnrolled AgentFebruary 10, 2004
from
August 8, 2004
Lahman, Gary M.Ft. Collins,COEnrolled AgentIndefinite
from
February 12, 2004
Stanny, Gertrude M.South Lyon, MIEnrolled AgentIndefinite
from
March 1, 2004
2004-21 I.R.B.967May 24, 2004

NameAddressDesignationDate of Suspension
Millar, MarkTall Timbers, MDEnrolled AgentIndefinite
from
March 1, 2004
Murray, Maureen E.Naugatuck, CTEnrolled AgentIndefinite
from
March 1, 2004
Keith, James S.Imperial Beach, CAEnrolled AgentMarch 2, 2004
from
June 30, 2004
Zelek, Linda S.Moultonboro, NHCPAIndefinite
from
March 4, 2004
Gilpin, Charles H.San Leandro,CAEnrolled AgentIndefinite
from
March 5, 2004
Smith, Sean M.Silver Spring, MDEnrolled AgentIndefinite
from
March 15, 2004
Morelini, Wayne C.Modesto, CAEnrolled AgentIndefinite
from
March 15, 2004
Bower, JayRedmond, OREnrolled AgentIndefinite
from
March 16, 2004
Lynn, Celia M.Locust Grove, VAEnrolled AgentIndefinite
from
April 1, 2004
Swantz Jr., H. E.San Diego, CAEnrolled AgentIndefinite
from
April 6, 2004
Hart, David A.Lake Zurich, ILEnrolled AgentIndefinite
from
April 8, 2004
Lau, Dennis K.M.Honolulu, HIEnrolled AgentIndefinite
from
April 20, 2004
Lentz, CaroleMastic, NYEnrolled AgentIndefinite
from
April 23, 2004
Goble, Dennis R.Valparaiso, INCPAIndefinite
from
April 26, 2004
Rivera, Eduardo M.Torrence, CAAttorneyMay 1, 2004
to
October 29, 2006
May 24, 20049682004-21 I.R.B.

NameAddressDesignationDate of Suspension
Grant, Elaine C.Woodway, WAEnrolled AgentMay 1, 2004
to
October 31, 2004
Bell, DonGrand Junction, COEnrolled AgentIndefinite
from
May 1, 2004
Cohick, Jeffrey S.Newville, PAEnrolled AgentMay 1, 2004
from
October 30, 2004
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Candelario, AlexanderCabins, WVCPAIndefinite
from
February 1, 2004
Riener, RichardSt. Paul, MNAttorneyIndefinite
from
March 1, 2004
Dunkle, ClarkCarlisle, PACPAIndefinite
from
March 15, 2004
Bailey, Donald D.Tucson, AZCPAIndefinite
from
March 18, 2004
Hill, Donald R.Clinchco, VACPAIndefinite
from
April 1, 2004
Bergeson, NancyInver Grove Hghts, MNCPAIndefinite
from
April 14, 2004
Reese, Kenneth J.Nebraska City, NECPAIndefinite
from
April 15, 2004
Coates, Marsden S.Baltimore, MDAttorneyIndefinite
from
April 15, 2004
2004-21 I.R.B.969May 24, 2004

NameAddressDesignationDate of Suspension
Schaefer, Robert J.Moorhead, MNAttorneyIndefinite
from
April 20, 2004
Mills, Stuart B.Pender, NEAttorneyIndefinite
from
May 1, 2004
Harris-Smith, BridgetteSilver Spring, MDAttorneyIndefinite
from
May 3, 2004
Janousek, Donald R.Omaha, NEAttorneyIndefinite
from
May 3, 2004
Williams, Gary W.Diamond Bar, CACPAIndefinite
from
May 3, 2004
Demaio, Louis J.Bel Air, MDAttorneyIndefinite
from
May 3, 2004
Miller, Frederick C.Cedar Hill, TXCPAIndefinite
from
May 15, 2004
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Friedman, Milton G.Ft. Lauderdale, FLCPADecember 30, 2003
Stevens, William E.Omaha, NECPAFebruary 13, 2004
Turner, Mark A.Cincinnati, OHCPAFebruary 25, 2004
Rath, Dorris A.Bradenton, FLEnrolled AgentMarch 9, 2004
Damiano, LisaSouth Windsor, CTEnrolled AgentMarch 9, 2004
Silbiger, Arnold R.Baltimore, MDAttorneyMarch 11, 2004
Farwell, Nancy K.Citrus Heights, CAEnrolled AgentApril 5, 2004
Dembrowski, Karen E.Encino, CACPAApril 13, 2004
May 24, 20049702004-21 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2004-21 I.R.B.iMay 24, 2004

Numerical Finding List
1
Bulletins 2004–1 through 2004–21
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
2004-8, 2004-6 I.R.B.441
2004-9, 2004-6 I.R.B.441
2004-10, 2004-7 I.R.B.501
2004-11, 2004-10 I.R.B.581
2004-12, 2004-9 I.R.B.541
2004-13, 2004-9 I.R.B.543
2004-14, 2004-10 I.R.B.582
2004-15, 2004-11 I.R.B.612
2004-16, 2004-13 I.R.B.668
2004-17, 2004-12 I.R.B.635
2004-18, 2004-12 I.R.B.639
2004-19, 2004-13 I.R.B.668
2004-20, 2004-13 I.R.B.673
2004-21, 2004-13 I.R.B.673
2004-22, 2004-14 I.R.B.709
2004-23, 2004-13 I.R.B.673
2004-24, 2004-14 I.R.B.714
2004-25, 2004-15 I.R.B.737
2004-26, 2004-15 I.R.B.743
2004-27, 2004-14 I.R.B.714
2004-28, 2004-16 I.R.B.818
2004-29, 2004-15 I.R.B.772
2004-30, 2004-17 I.R.B.833
2004-31, 2004-18 I.R.B.854
2004-32, 2004-18 I.R.B.860
2004-33, 2004-18 I.R.B.862
2004-34, 2004-19 I.R.B.895
2004-35, 2004-17 I.R.B.839
2004-36, 2004-20 I.R.B.932
2004-37, 2004-17 I.R.B.839
2004-38, 2004-18 I.R.B.878
2004-39, 2004-17 I.R.B.840
2004-40, 2004-17 I.R.B.840
2004-41, 2004-18 I.R.B.879
2004-42, 2004-17 I.R.B.840
2004-43, 2004-21 I.R.B.955
2004-44, 2004-21 I.R.B.957
2004-45, 2004-21 I.R.B.958
2004-46, 2004-21 I.R.B.964
2004-47, 2004-21 I.R.B.966
2004-49, 2004-21 I.R.B.966
Court Decisions:
2078, 2004-16 I.R.B.773
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
2004-12, 2004-10 I.R.B.556
2004-13, 2004-12 I.R.B.631
2004-14, 2004-9 I.R.B.526
2004-15, 2004-9 I.R.B.526
2004-16, 2004-9 I.R.B.527
2004-17, 2004-11 I.R.B.605
2004-18, 2004-11 I.R.B.605
2004-19, 2004-11 I.R.B.606
2004-20, 2004-11 I.R.B.608
2004-21, 2004-11 I.R.B.609
2004-22, 2004-12 I.R.B.632
2004-23, 2004-15 I.R.B.725
2004-24, 2004-13 I.R.B.642
2004-25, 2004-15 I.R.B.727
2004-26, 2004-16 I.R.B.782
2004-27, 2004-16 I.R.B.782
2004-28, 2004-16 I.R.B.783
2004-29, 2004-17 I.R.B.828
2004-30, 2004-17 I.R.B.828
2004-31, 2004-17 I.R.B.830
2004-32, 2004-18 I.R.B.847
2004-33, 2004-18 I.R.B.847
2004-34, 2004-18 I.R.B.848
2004-35, 2004-19 I.R.B.889
2004-36, 2004-19 I.R.B.889
2004-37, 2004-21 I.R.B.947
2004-38, 2004-21 I.R.B.949
Proposed Regulations:
REG-106590-00, 2004-14 I.R.B.704
REG-116664-01, 2004-3 I.R.B.319
REG-129447-01, 2004-19 I.R.B.894
REG-106681-02, 2004-18 I.R.B.852
REG-122379-02, 2004-5 I.R.B.392
REG-139792-02, 2004-20 I.R.B.926
REG-139845-02, 2004-5 I.R.B.397
REG-165579-02, 2004-13 I.R.B.651
REG-166012-02, 2004-13 I.R.B.655
REG-115471-03, 2004-14 I.R.B.706
REG-116564-03, 2004-20 I.R.B.927
REG-121475-03, 2004-16 I.R.B.793
REG-126459-03, 2004-6 I.R.B.437
REG-126967-03, 2004-10 I.R.B.566
Proposed Regulations— Continued:
REG-128309-03, 2004-16 I.R.B.800
REG-128590-03, 2004-21 I.R.B.952
REG-149752-03, 2004-14 I.R.B.707
REG-153172-03, 2004-15 I.R.B.729
REG-156232-03, 2004-5 I.R.B.399
REG-156421-03, 2004-10 I.R.B.571
REG-167217-03, 2004-9 I.R.B.540
REG-167265-03, 2004-15 I.R.B.730
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-12, 2004-9 I.R.B.528
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
2004-16, 2004-10 I.R.B.559
2004-17, 2004-10 I.R.B.562
2004-18, 2004-9 I.R.B.529
2004-19, 2004-10 I.R.B.563
2004-20, 2004-13 I.R.B.642
2004-21, 2004-14 I.R.B.702
2004-22, 2004-15 I.R.B.727
2004-23, 2004-16 I.R.B.785
2004-24, 2004-16 I.R.B.790
2004-25, 2004-16 I.R.B.791
2004-26, 2004-19 I.R.B.890
2004-27, 2004-17 I.R.B.831
2004-29, 2004-20 I.R.B.918
2004-30, 2004-21 I.R.B.950
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-3, 2004-7 I.R.B.486
2004-4, 2004-6 I.R.B.414
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
2004-8, 2004-10 I.R.B.544
2004-9, 2004-6 I.R.B.428
2004-10, 2004-7 I.R.B.484
2004-11, 2004-7 I.R.B.480
2004-12, 2004-7 I.R.B.478
2004-13, 2004-7 I.R.B.485
2004-14, 2004-8 I.R.B.511
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
May 24, 2004ii2004-21 I.R.B.

Revenue Rulings— Continued:
2004-15, 2004-8 I.R.B.515
2004-16, 2004-8 I.R.B.503
2004-17, 2004-8 I.R.B.516
2004-18, 2004-8 I.R.B.509
2004-19, 2004-8 I.R.B.510
2004-20, 2004-10 I.R.B.546
2004-21, 2004-10 I.R.B.544
2004-22, 2004-10 I.R.B.553
2004-23, 2004-11 I.R.B.585
2004-24, 2004-10 I.R.B.550
2004-25, 2004-11 I.R.B.587
2004-26, 2004-11 I.R.B.598
2004-27, 2004-12 I.R.B.625
2004-28, 2004-12 I.R.B.624
2004-29, 2004-12 I.R.B.627
2004-30, 2004-12 I.R.B.622
2004-31, 2004-12 I.R.B.617
2004-32, 2004-12 I.R.B.621
2004-33, 2004-12 I.R.B.628
2004-34, 2004-12 I.R.B.619
2004-35, 2004-13 I.R.B.640
2004-36, 2004-12 I.R.B.620
2004-37, 2004-11 I.R.B.583
2004-38, 2004-15 I.R.B.717
2004-39, 2004-14 I.R.B.700
2004-40, 2004-15 I.R.B.716
2004-41, 2004-18 I.R.B.845
2004-42, 2004-17 I.R.B.824
2004-43, 2004-18 I.R.B.842
2004-44, 2004-19 I.R.B.885
2004-46, 2004-20 I.R.B.915
2004-47, 2004-21 I.R.B.941
2004-48, 2004-21 I.R.B.945
2004-49, 2004-21 I.R.B.939
Tax Conventions:
2004-3, 2004-7 I.R.B.486
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
9104, 2004-6 I.R.B.406
9105, 2004-6 I.R.B.419
9106, 2004-5 I.R.B.384
9107, 2004-7 I.R.B.447
9108, 2004-6 I.R.B.429
9109, 2004-8 I.R.B.519
9110, 2004-8 I.R.B.504
9111, 2004-8 I.R.B.518
9112, 2004-9 I.R.B.523
9113, 2004-9 I.R.B.524
9114, 2004-11 I.R.B.589
9115, 2004-14 I.R.B.680
9116, 2004-14 I.R.B.674
Treasury Decisions— Continued:
9117, 2004-15 I.R.B.721
9118, 2004-15 I.R.B.718
9119, 2004-17 I.R.B.825
9120, 2004-19 I.R.B.881
9121, 2004-20 I.R.B.903
9122, 2004-19 I.R.B.886
9123, 2004-20 I.R.B.907
9124, 2004-20 I.R.B.901
9128, 2004-21 I.R.B.943
2004-21 I.R.B.iiiMay 24, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–21
Announcements:
93-60
Obsoleted by
Rev. Proc. 2004-23, 2004-16 I.R.B.785
2003-56
Modified by
Ann. 2004-11, 2004-10 I.R.B.581
2004-38
Modified by
Ann. 2004-43, 2004-21 I.R.B.955
Notices:
98-5
Withdrawn by
Notice 2004-19, 2004-11 I.R.B.606
2000-4
Obsoleted by
T.D. 9115, 2004-14 I.R.B.680
2003-76
Modified by
Notice 2004-19, 2004-11 I.R.B.606
2004–2
Modified by
Notice 2004–25, 2004–15 I.R.B.727
Proposed Regulations:
REG-110896-98
Corrected by
Ann. 2004-14, 2004-10 I.R.B.582
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-138499-02
Partially withdrawn by
REG-106590-00, 2004-14 I.R.B.704
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-163974-02
Corrected by
Ann. 2004-13, 2004-9 I.R.B.543
REG-166012-02
Corrected by
Ann. 2004-40, 2004-17 I.R.B.840
Revenue Procedures:
85-35
Obsoleted by
Rev. Proc. 2004-26, 2004-19 I.R.B.890
87-19
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
93-15
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
94-55
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
98-16
Suspended by
Notice 2004-12, 2004-10 I.R.B.556
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2001-10
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2001-23
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Rev. Proc. 2004-23, 2004-16 I.R.B.785
Rev. Proc. 2004-30, 2004-21 I.R.B.950
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
Ann. 2004-16, 2004-13 I.R.B.668
2002-28
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
Revenue Procedures— Continued:
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
2003-23
Modified and superseded by
Rev. Proc. 2004-14, 2004-7 I.R.B.489
2003-26
Supplemented by
Rev. Proc. 2004-17, 2004-10 I.R.B.562
2003-29
Obsoleted, except as provided in section 5.02, by
Rev. Proc. 2004-24, 2004-16 I.R.B.790
2003-64
Modified by
Rev. Proc. 2004-21, 2004-14 I.R.B.702
2004-1
Corrected by
Ann. 2004-8, 2004-6 I.R.B.441
2004-4
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-5
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-6
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
Revenue Rulings:
55-748
Modified and superseded by
Rev. Rul. 2004-20, 2004-10 I.R.B.546
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
May 24, 2004iv2004-21 I.R.B.

Revenue Rulings— Continued:
92-19
Supplemented in part by
Rev. Rul. 2004-14, 2004-8 I.R.B.511
94-38
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
98-25
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
2004-38
Modified by
Rev. Proc. 2004-22, 2004-15 I.R.B.727
Treasury Decisions:
9088
Corrected by
Ann. 2004-39, 2004-17 I.R.B.840
2004-21 I.R.B.vMay 24, 2004

INDEX
Internal Revenue Bulletins
2004–1 through 2004–21
The abbreviation and number in parenthesis
following the index entry refer to the specific
item; numbers in roman and italic type follow-
ing the parentheses refer to the Internal Rev-
enue Bulletin in which the item may be found
and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
COBRA health care continuation cover-
age requirements (RR 22) 10,553
Coverage requirements, exclusions
(REG–149752–03) 14,707
Determination letters, issuing procedures
(RP 6) 1,197
Electronic delivery of payee statements
(Notice 10) 6,433
Employee Retirement Income Security
Act of 1974 (ERISA), participant,
working owner (CD 2078) 16,773
Forms 1099 and 5498 payee statements,
electronic delivery (Notice 10) 6,433
Full funding limitations, weighted aver-
age interest rate for:
January 2004 (Notice 3) 5,391
February 2004 (Notice 14) 9,526
March2004(Notice24)13,642
April 2004 (Notice 32) 18,847
Letter rulings:
And determination letters, areas which
will not be issued from:
Associates Chief Counsel and Divi-
sion Counsel (TE/GE) (RP 3) 1,
114
Associate Chief Counsel (Interna-
tional) (RP 7) 1,237
EMPLOYEE
PLANS—Cont.
And information letters, etc. (RP 4) 1,
125
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
1) 1,1; correction of user fee (Ann
8) 6,441
User fees, request for letter rulings (RP
8) 1,240
Minimum funding standards:
Current liability:
Alternative deficit reduction (Ann
38) 18,878
Election of alternative deficit reduc-
tion (Ann 43) 21,955
Interest rate (Notice 34) 18,848
Waivers (RP 15) 7,490
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Proposed Regulations:
26 CFR 1.79–1, amended; 1.83–3,
amended; 1.402(a)–1, amended;
value of life insurance contracts
when distributed from a qualified
retirement plan (REG–126967–03)
10,566
26 CFR 1.410(b)–0, amended;
1.410(b)–6, revised; exclusion of
employees of 501(c)(3) organiza-
tions in 401(k) and 401(m) plans
(REG–149752–03) 14,707
26 CFR 1.411(d)–3, amended;
54.4980F–1(b), amended; sec-
tion 411(d)(6) protected benefits
(REG–128309–03) 16,800
Qualified retirement plans:
Determination letter program, future of
(Ann 32) 18,860
Employee stock ownership plans, syn-
thetic equity, listed transactions (RR
4) 6,414
Master and prototype (M&P) plans,
volume submitter (VS) plans (Ann
33) 18,862
Minimum participation standards, spe-
cial rule (RR 11) 7,480
Remedial amendment period (RP 25)
16,791
Rollovers (RR 12) 7,478
Section 411(d)(6) protected benefits
(REG–128309–03) 16,800
EMPLOYEE
PLANS—Cont.
Section 412(i) plans:
Deductibility, listed transactions
(RR 20) 10,546
Discrimination (RR 21) 10,544
Valuation (RP 16) 10,559
Top-heavy status, special rules (RR 13)
7,485
Vesting, consent (RR 10) 7,484
Roth IRAs, tax shelters (Notice 8) 4,333
S corporations, employee stock owner-
ship plans (ESOPs), termination of
election (RP 14) 7,489
Technical advice:
To directors and appeals area direc-
tors from Associates Chief Coun-
sel and Division Counsel/Associate
Chief Counsel (TE/GE) (RP 2) 1,83
To IRS employees (RP 5) 1,167
Valuation of distributed life insurance
contracts (REG–126967–03) 10,566
EMPLOYMENT TAX
Collection of Limited Liability Com-
pany’s (LLC’s) employment tax liabil-
ities (RR 41) 18,845
Delinquent tax, levy on wages, salary,
and other income, exempt amount ta-
bles (Notice 4) 2,273
Form W-2, new reporting code for Box
12, 2004 (Ann 2) 3,322
Income and employment tax treatment of
benefits received under the Smallpox
Emergency Personnel Protection Act of
2003 (SEPPA) (Notice 17) 11,605
Mileage allowance, local transporta-
tion expenses computed similarly to a
courier’s compensation, accountable
plan (RR 1) 4,325
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Proposed Regulations:
26 CFR 31.3121(b)(2)–1, amended;
31.3121(b)(10)–2,amended;
31.3306(c)(10)–2, revised; student
FICA exception (REG–156421–03)
10,571
Reduction of the stated principal amount
of a recourse note issued by the em-
ployee to the employer to acquire em-
ployer stock, treatment (RR 37) 11,583
May 24, 2004vi2004-21 I.R.B.

EMPLOYMENT
TAX—Cont.
Student FICA exception under Code sec-
tion 3121(b)(10):
And section 3306(c)(10)(B), applica-
tion (REG–156421–03) 10,571
Proposed safe harbor available for cer-
tain institutions (Notice 12) 10,556
ESTATE TAX
Gross estate, election to value on alter-
nate valuation date (REG–139845–02)
5,397
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Proposed Regulations:
26 CFR 20.2032–1(b), revised;
301.9100–6T, amended; gross es-
tate, election to value on alternate
valuation date (REG–139845–02) 5,
397
Regulations:
26 CFR 20.2056(b), amended;
20.2056A–5, amended; 20.2056A–
13, revised; definition of income for
trust purposes (TD 9102) 5,366
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
EXCISE TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Private foundations:
Determination of net investment in-
come from distributions from trusts
and estates (Notice 35) 19,889
Split-interest trust distributions, dis-
tributable amount (Notice 36) 19,
889
EXEMPT
ORGANIZATIONS
Declaratory judgment suits, annual notice
to doners regarding pending and settled
suits (Ann 1) 1,254
Electronic delivery of payee statements
(Notice 10) 6,433
EXEMPT
ORGANIZATIONS—Cont.
Forms 1099 and 5498 payee statements,
electronic delivery (Notice 10) 6,433
Letter rulings:
And determination letters, areas which
will not be issued from Associates
Chief Counsel and Division Counsel
(TE/GE) (RP 3) 1,114
And information letters, etc. (RP 4) 1,
125
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
1) 1,1; correction of user fee (Ann
8) 6,441
User fees, request for letter rulings (RP
8) 1,240
List of organizations classified as private
foundations (Ann 12) 9,541;(Ann15)
11,612; (Ann 17) 12,635;(Ann19)
13,668; (Ann 22) 14,709;(Ann25)
15,737; (Ann 28) 16,818;(Ann30)
17,833; (Ann 31) 18,854;(Ann34)
19,895;(Ann36)20,932;(Ann45)21,
958
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Private foundations:
Determination of net investment in-
come from distributions from trusts
and estates (Notice 35) 19,889
Split-interest trust distributions, dis-
tributable amount (Notice 36) 19,
889
Public advocacy activities conducted by
certain tax-exempt organizations (RR
6) 4,328
Revocations (Ann 18) 12,639;(Ann23)
13,673;(Ann27)14,714;(Ann37)17,
839;(Ann41)18,879
Technical advice:
To directors and appeals area direc-
tors from Associates Chief Coun-
sel and Division Counsel/Associate
Chief Counsel (TE/GE) (RP 2) 1,83
To IRS employees (RP 5) 1,167
GIFT TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
GIFT TAX—Cont.
Regulations:
26 CFR 25.2523(e)–1, amended;
25.2523(h)–2, amended; 26.2601–1,
amended; definition of income for
trust purposes (TD 9102) 5,366
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
INCOME TAX
Abusive foreign tax credit transactions:
Taxpayer alert (Notice 20) 11,608
Withdrawal of Notice 98–5 (Notice 19)
11,606
Advance Pricing Agreement (APA) pro-
gram for 2003 (Ann 26) 15,743
Agent for certain purposes, definition (TD
9111) 8,518
Allocation and apportionment of in-
terest expense (TD 9120) 19,881;
(REG–129447–01) 19,894
Allocation of basis under section 358
(REG–116564–03) 20,927
At-risk limitations, interest other than that
of creditor (TD 9124) 20,901
Automobile owners and lessees, inflation
adjustment for 2004 (RP 20) 13,642
Capitalization:
Of amounts paid to acquire or create
intangibles (TD 9107) 7,447
Tangible property (Notice 6) 3,308
Capitalized costs, treatment of capitalized
business acquisition costs (Notice 18)
11,605
Charitable contributions, intellectual
property (Notice 7) 3,310
Charitable remainder trust, application
of ordering rule, cancellation of public
hearing on REG–110896–98 (Ann 14)
10,582
Check the box, disregarded entities
(REG–106681–02) 18,852
Circular 230, application to municipal
bond options (Ann 29) 15,772
Confidential transactions (TD 9108) 6,
429
Consolidated groups:
Circular basis adjustments (TD 9117)
15,721; (REG–167265–03) 15,730
Loss limitation rules (TD 9118) 15,
718; correction (Ann 47) 21,966;
(REG–153172–03) 15,729
2004-21 I.R.B.viiMay 24, 2004

INCOME TAX—Cont.
Consolidated returns:
Affiliation, value requirement (Notice
37) 21,947
Rules for the disallowance of interest
expense deductions under section
265(a)(2) (REG–128590–03) 21,
952
Contingent nonperiodic payments made
pursuant to notional principal contracts
(REG–166012–02) 13,655; correction
(Ann 40) 17,840
Corporations:
Determination of stock basis after a
group structure change (TD 9122)
19,886
S corporation, tax shelter, listed trans-
action (Notice 30) 17,828
Spin-offs, corporate distributions (RR
23) 11,585
Structures to avoid limitations on in-
terest deductions using partnerships
and guaranteed payments, listed
transactions (Notice 31) 17,830
Transfers of assets or stock following
a reorganization (REG–165579–02)
13,651
Cost depletion for an oil and gas property,
determining total recoverable units to
compute (RP 19) 10,563
Costs attributable to stock options in qual-
ified cost sharing arrangements, correc-
tion to TD 9088 (Ann 39) 17,840
Credits:
Health coverage tax credit, qualified
health insurance (RP 12) 9,528
Increasing research activities credit:
Internal-use software, advance no-
tice of proposed rulemaking –
REG–153656–03 (Ann 9) 6,441
Qualified research definition (TD
9104) 6,406
Research credit recordkeeping
agreements, pilot program (No-
tice 11) 6,434
Low-income housing credit:
2004 population figures used for
calculation (Notice 21) 11,609
Satisfactory bond, “bond factor”
amounts for the period:
January through March 2004
(RR 16) 8,508
April through June 2004 (RR 40)
15,716
State or local housing tax credit (TD
9110) 8,503
INCOME TAX—Cont.
New markets tax credit (TD 9116) 14,
674; (REG–115471–03) 14,706
Nonconventional source fuel credit:
Accounting (RP 27) 17,831;(Ann
42) 17,840
Inflation adjustment factor, refer-
ence price for CY 2003 (Notice
33) 18,847
Renewable electricity production
credit, 2004 inflation adjustment
(Notice 29) 17,828
Credits or refunds of tax under section
692(c), procedures for claiming (RP 26)
19,890
Declaratory judgmentsuits, annual notice
to doners regarding pending and settled
suits (Ann 1) 1,254
Deduction of business expenses, use of
statistical sampling to determine excep-
tions from disallowance (RP 29) 20,
918
Depreciation of MACRS property that is
acquired in a like-kind exchange or as a
result of an involuntary conversion (TD
9115) 14,680; (REG–106590–00) 14,
704
Disciplinary actions involving attorneys,
certified public accountants, enrolled
agents, and enrolled actuaries (Ann 6)
3,499; (Ann 49) 21,966
Disclosure of relative values of optional
forms of benefit (TD 9099) 2,255
Electronic filing of:
Certain income tax returns and
other forms (TD 9100) 3,297;
(REG–116664–01) 3,319
Duplicate Forms 5472 (TD 9113) 9,
524; (REG–167217–03) 9,540
Form 8609 (TD 9112) 9,523
Electronic payee statements (TD 9114)
11,589
Enrolled agents, renewal of enrollment
(Ann 35) 17,839
Environmental remediation expenses:
Restoration of amount held under
claim of right (RR 17) 8,516
Uniform capitalization of costs (RR
18) 8,509
Forest Land Enhancement Program
(FLEP), cost-share payments (RR 8)
10,544
Forms:
3115, Application for Change in Ac-
counting Method, revised (Ann 16)
13,668
INCOME TAX—Cont.
5472, electronic filing of du-
plicates (TD 9113) 9,524;
(REG–167217–03) 9,540
8609, Low-Income Housing Credit Al-
location Certification, electronic fil-
ing (TD 9112) 9,523
8806, Information Return for Ac-
quisition of Control or Substantial
Change in Capital Structure, new
(Ann 5) 4,361
8858, Information Return of U.S.
Persons With Respect to Foreign
Disregarded Entities, comments re-
quested(Ann4)4,357
Frivolous tax returns:
Attempting to avoid taxes under sec-
tion 861 (RR 30) 12,622
Common tax avoidance schemes, civil
and criminal penalties (Notice 22)
12,632
Excluding gross income under section
911 (RR 28) 12,624
Filing a “zero return” (RR 34) 12,619
Meritless “claim of right” arguments
(RR 29) 12,627
Meritless “corporation sole” argument
(RR 27) 12,625
Meritless home-based business deduc-
tions (RR 32) 12,621
Meritless “removal arguments” (RR
31) 12,617
Reparations tax credit (RR 33) 12,628
Guidance Priority List, recommendations
for 2004–2005 (Notice 26) 16,782
Health Savings Accounts (HSAs):
Eligible individual (RR 38) 15,717
Questions and answers (Notice 2) 2,
269
Safe harbor for preventive care ben-
efits provided by a high deductible
health plan (HDHP) (Notice 23) 15,
725
Transition relief for calendar year
2004, HSA established before April
15, 2005 (Notice 25) 15,727
Transition relief for determining an el-
igible individual (RP 22) 15,727
Income and employment tax treatment of
benefits received under the Smallpox
Emergency Personnel Protection Act of
2003 (SEPPA) (Notice 17) 11,605
Individual income tax returns, common
taxpayer mistakes (Notice 13) 12,631
Individual Taxpayer Identification Num-
bers (ITINs), new application process
(Notice 1) 2,268
May 24, 2004viii2004-21 I.R.B.

INCOME TAX—Cont.
Information reporting:
Extension of certain 2004 deadlines
(Notice 9) 4,334
For payments in lieu of dividends (TD
9103) 3,306
Health plans (Notice 16) 9,527
Royalties, payments made by a pub-
lisher to a literary agent on behalf of
an author (RR 46) 20,915
Innocent spouse relief, Publication 971,
revised (Ann 24) 14,714
Insurance companies:
Distributions from non-qualified annu-
ity, section 72(q)(2) (Notice 15) 9,
526
Diversification requirements for
variable annuity, endowment,
and life insurance contracts
(REG–163974–02), hearing (Ann
13) 9,543
Loss payment patterns and discount
factors for the 2003 accident year
(RP 9) 2,275
Salvage discount factors for the 2003
accident year (RP 10) 2,288
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2004 (RR 2) 2,265
February 2004 (RR 9) 6,428
March 2004 (RR 25) 11,587
April 2004 (RR 39) 14,700
May 2004 (RR 44) 19,885
Rate tables (RR 14) 8,512
Rates:
Underpayments and overpayments,
quarter beginning:
April 1, 2004 (RR 26) 11,598
Inventory:
LIFO, price indexes used by depart-
ment stores for:
November 2003 (RR 7) 4,327
December 2003 (RR 19) 8,511
January 2004 (RR 35) 13,640
February 2004 (RR 42) 17,824
March2004(RR48)21,945
Letter rulings:
And determination letters, areas which
will not be issued from:
Associates Chief Counsel and Divi-
sion Counsel (TE/GE) (RP 3) 1,
114
Associate Chief Counsel (Interna-
tional) (RP 7) 1,237
INCOME TAX—Cont.
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
1) 1,1; correction of user fee (Ann
8) 6,441
Meal and entertainment expenses, use
of statistical sampling to determine
amount excepted from deduction disal-
lowance (RP 29) 20,918
Methods of accounting:
Automatic consent for change in
method (RP 23) 16,785
Changes in determining depreciation
or amortization (RP 11) 3,311;(TD
9105) 6,419; (REG–126459–03) 6,
437
REMIC residual interests, inducement
fees (TD 9128) 21,943; (RP 30) 21,
950
Mortgage bonds and credit certificates,
median income figures—2004 (RP 24)
16,790
Multi-party financing arrangements, use
of related persons or pass-through enti-
ties to avoid the application of sections
265(a)(2) and 246A (Ann 44) 21,957
Partnerships:
Allocation of foreign tax expen-
ditures (TD 9121) 20,903;
(REG–139792–02) 20,926
Amortization of goodwill and certain
other intangibles (RR 49) 21,939
Assets-over partnership mergers, sec-
tions 704(c)(1)(B) and 737 conse-
quences (RR 43) 18,842
Charitable contributions, trust govern-
ing instrument requirement (RR 5) 3,
295
Electing large partnerships, separately
stated items, qualified dividend in-
come (Notice 5) 7,489
Penalties, defenses available to the im-
position of the accuracy-related penalty
(TD 9109) 8,519
Per diem rates, Publication 1542, revision
changes (Ann 20) 13,673
Practice before the Internal Revenue Ser-
vice (REG–122379–02) 5,392
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Private foundations, organizations now
classified as (Ann 12) 9,541;(Ann15)
11,612; (Ann 17) 12,635;(Ann19)
13,668; (Ann 22) 14,709;(Ann25)
15,737; (Ann 28) 16,818;(Ann30)
INCOME TAX—Cont.
17,833; (Ann 31) 18,854; (Ann 34)
19,895; (Ann 36) 20,932; (Ann 45)
21,958
Proposed Regulations:
26 CFR 1.45D–1, amended; new mar-
kets tax credit (REG–115471–03)
14,706
26 CFR 1.162–30, added; 1.212–1(q),
added;1.446–3,amended;
1.1234A–1, added; notional prin-
cipal contracts, contingent nonperi-
odic payments (REG–166012–02)
13,655; correction (Ann 40) 17,840
26 CFR 1.167(e)–1, amended;
1.446–1, amended; 1.1016–3,
amended; changes in computing
depreciation (REG–126459–03) 6,
437
26 CFR 1.168(a)–1, added;
1.168(b)–1, added; 1.168(d)–1,
amended; 1.168(i)–0, –1, amended;
1.168(i)–5, –6, added; 1.168(k)–1,
added; depreciation of MACRS
property that is acquired in a
like-kind exchange or as a re-
sult of an involuntary conversion
(REG–106590–00) 14,704
26 CFR 1.170A–11, amended;
1.556–2, amended; 1.565–1,
amended; 1.936–7, amended;
1.1017–1, amended; 1.1368–1,
amended; 1.1377–1, amended;
1.1502–21,–75,amended;
1.1503–2, amended; 1.6038B–1,
amended; 301.7701–3, amended;
guidance necessary to facili-
tate business electronic filing
(REG–116664–01) 3,319
26 CFR 1.265–2, amended;
1.1502–13, amended; special con-
solidated return rules for the dis-
allowance of interest expense de-
ductions under section 265(a)(2)
(REG–128590–03) 21,952
26 CFR 1.337(d)–2(c)(2), added;
1.1502–35(f)(1), added; 1.1502–
80(c), revised; loss limitation rules
(REG–153172–03) 15,729
26 CFR 1.358–1, –2, amended; alloca-
tion of basis (REG–116564–03) 20,
927
26 CFR 1.368–1, –2, amended; corpo-
rate reorganizations, transfers of as-
sets or stock following a reorganiza-
tion (REG–165579–02) 13,651
2004-21 I.R.B.ixMay 24, 2004

INCOME TAX—Cont.
26 CFR 1.482–6, –9, amended; treat-
ment of services under section 482,
allocation of income and deductions
from intangibles (REG–115037–00,
REG–146893–02); correction (Ann
7) 4,365
26 CFR 1.704–1, amended; partner’s
distributive share: foreign tax ex-
penditures (REG–139792–02) 20,
926
26 CFR 1.856–9, added; 1.1361–4,
amended; 301.7701–2, amended;
modification of check the box
(REG–106681–02) 18,852
26 CFR 1.861–9, amended; alloca-
tion and apportionment of interest
expense; alternative method for de-
termining tax book value of assets
(REG–129447–01) 19,894
26 CFR 1.1397E–1, amended; qual-
ified zone academy bonds, obliga-
tions of states and political subdivi-
sions (REG–121475–03) 16,793
26 CFR 1.1502–11, –13, revised;
1.1502–28, amended; 1.1502–80,
revised; computation of taxable in-
come when section 108 applies to
a member of a consolidated group
(REG–167265–03) 15,730
26 CFR 1.6038A–1, –2, amended;
electronic filing of duplicate Forms
5472 (REG–167217–03) 9,540
26 CFR 1.6043–4, added; 1.6045–3,
added; information reporting re-
lating to taxable stock transactions
(REG–156232–03) 5,399
31 CFR 10.33, revised; 10.35, added;
10.36, added; 10.37, added; reg-
ulations governing practice be-
fore the Internal Revenue Service
(REG–122379–02) 5,392
Publications:
538, Accounting Periods and Methods,
revised (Ann 21) 13,673
971, Innocent Spouse Relief (And Sep-
aration of Liability and Equitable
Relief), revised (Ann 24) 14,714
1220, Specifications for Filing Forms
1098, 1099, 5498 and W-2G Elec-
tronically or Magnetically, changes
affecting tax year2003 filing of in-
formation returns (Ann 3) 2,294
1542, Per Diem Rates (For Travel
Within the Continental United
States), revision changes (Ann 20)
13,673
INCOME TAX—Cont.
Qualified amended return, modification
of the definition (Notice 38) 21,949
Qualified dividends, changes to rules
(Ann 11) 10,581
Qualified mortgage bonds and mortgage
credit certificates, average area and na-
tionwide housing purchase prices (RP
18) 9,529
Qualified offer regulations, award of at-
torney’s fees and other costs (TD 9106)
5,384
Qualified zone academy bonds, obliga-
tions of states and political subdivisions
(REG–121475–03) 16,793
Real estate investment trust (REIT) park-
ing income (RR 24) 10,550
Reduction of the stated principal amount
of a recourse note issued by the em-
ployee to the employer to acquire em-
ployer stock, treatment (RR 37) 11,583
Regulations:
26 CFR 1.41–0, –4, amended;
602.101, amended; credit for in-
creasing research activities (TD
9104) 6,406
26 CFR 1.42–1, added; 1.42–1T,
amended; low-income housing
credit allocationcertification, elec-
tronic filing (TD 9112) 9,523
26 CFR 1.42–6, –8, –12, –14,
amended; section 42 carryover
and stacking rule amendments (TD
9110) 8,503
26 CFR 1.45D–1T, amended; new
markets tax credit (TD 9116) 14,
674
26 CFR 1.167(a)–3, amended;
1.263(a)–0, –4, –5, added; 1.446–5,
added; 602.101, amended; guidance
regarding deduction and capitaliza-
tion of expenditures (TD 9107) 7,
447
26 CFR 1.167(e)–1, amended;
1.167(e)–1T, added; 1.446–1,
amended;1.446–1T, added;
1.1016–3, amended; 1.1016–3T,
added; changes in computing depre-
ciation (TD 9105) 6,419
26 CFR 1.168(a)–1T, added;
1.168(b)–1T, added; 1.168(d)–1,
–1T, amended; 1.168(i)–0, –1,
amended; 1.168(i)–0T, –1T, –5T,
–6T, added; 1.168(k)–1T, amended;
depreciation of MACRS property
that is acquired in a like-kind ex-
INCOME TAX—Cont.
change or as a result of an involun-
tary conversion (TD 9115) 14,680
26 CFR 1.170A–11, amended;
1.170A–11T, added; 1.556–2,
amended;1.556–2T, added;
1.565–1, amended; 1.565–1T,
added;1.936–7,amended;
1.936–7T, added;1.1017–1,
–1T, amended;1.1368–1,
amended; 1.1368–1T, added;
1.1377–1, amended; 1.1377–1T,
added;1.1502–21,–21T,
–75, amended;1.1502–75T,
added;1.1503–2, amended;
1.1503–2T, added; 1.6038B–1, –1T,
amended; 301.7701–3, amended;
301.7701–3T, added; 602.101,
amended; guidance necessary to
facilitate business electronic filing
(TD 9100) 3,297
26 CFR 1.337(d)–2T, amended;
1.1502–35T, –80,amended;
1.1502–80T, added; loss limitation
rules (TD 9118) 15,718; correction
(Ann 47) 21,966
26 CFR 1.401(a)–11, –(20), revised;
1.417(a)(3)–1, added; 1.417(e)–1,
amended; 602.101, amended; dis-
closure of relative values of optional
forms of benefit (TD 9099) 2,255
26 CFR 1.446–6, added; 1.860A–0,
amended; 1.860C–1, amended;
1.863–0, –1, amended; REMICs;
application of section 446 with re-
spect to inducement fees (TD 9128)
21,943
26 CFR 1.465–8, –20, added; at-risk
limitations; interest other than that of
a creditor (TD 9124) 20,901
26 CFR 1.482–7, amended; compen-
satory stock options under section
482, TD 9088; correction (Ann 39)
17,840
26 CFR 1.642(c)–2, amended;
1.642(c)–5, revised; 1.643, revised;
1.651(a)–2(d), added; 1.661(a)–2(f),
revised; 1.664–3, amended; defini-
tion of income for trust purposes
(TD 9102) 5,366
26 CFR 1.704–1, amended; 1.704–1T,
added; partner’s distributive share:
foreign tax expenditures (TD 9121)
20,903
26 CFR 1.861–9, –9T, amended; allo-
cation and apportionment of interest
expense; alternative method for de-
May 24, 2004x2004-21 I.R.B.

INCOME TAX—Cont.
termining tax book value of assets
(TD 9120) 19,881
26 CFR 1.1291–0, –1, amended;
1.1295–0, –1, amended; 1.1296–1,
added; 1.1296(e)–1 redesignated as
1.1296–2 and revised; 1.6031(a)–1,
amended; electing mark to market
for marketable stock (TD 9123) 20,
907
26 CFR 1.1502–13, revised;
1.1502–13T, added; 1.1502–28T,
amended; application of section 108
to members of a consolidated group
(TD 9117) 15,721
26 CFR 1.1502–31, amended; stock
basis after a group structure change
(TD 9122) 19,886
26 CFR 1.1502–35T, amended; sus-
pension of losses on certain stock
dispositions (TD 9048); correction
(Ann 10) 7,501
26 CFR 1.6011–4, amended;
301.6112–1, amended; confiden-
tial transactions (TD 9108) 6,429
26 CFR 1.6038A–2, amended;
1.6038–2T, added; electronic fil-
ing of duplicate Forms 5472 (TD
9113) 9,524
26 CFR 1.6041–2(a)(5), added;
1.6041–2T, removed; 1.6050S–2,
–4,added;1.6050S–2T,
–4T, removed;31.6051–1(j),
added; 31.6051–1T, removed;
301.6724–1T, removed; 602.101(b),
amended; electronic payee state-
ments (TD 9114) 11,589
26 CFR 1.6043–4T, revised;
1.6045–3T, revised; information
reporting relating to taxable stock
transactions (TD 9101) 5,376
26 CFR 1.6045–2, amended; informa-
tion statements forcertain substitute
payments (TD 9103) 3,306
26 CFR 1.6107–2, added; 1.6107–2T,
removed; 1.6695–1, amended;
1.6695–1T, removed; tax return pre-
parers, electronic filing (TD 9119)
17,825
26 CFR 1.6662–0, –2, –3, –4,
amended; 1.6664–0, –1, –4,
amended; establishing defenses to
the imposition of the accuracy-re-
lated penalty (TD 9109) 8,519
26 CFR 301.6103(1)–1, added;
301.6103(m)–1, added; definition
INCOME TAX—Cont.
of agent for certain purposes (TD
9111) 8,518
26 CFR 301.7430–7, added;
301.7430–7T, removed; awards of
attorney’s fees and other costs based
upon qualified offers (TD 9106) 5,
384
Reporting an acquisition of control or sub-
stantial change in capital structure, new
Form 8806 (Ann 5) 4,362
Revocations, exempt organizations (Ann
18) 12,639; (Ann 23) 13,673;(Ann27)
14,714;(Ann37)17,839;(Ann41)18,
879
Section 911(d)(4) waiver, 2003 update
(RP 17) 10,562
Son of Boss transactions, settlement ini-
tiative (Ann 46) 21,964
Standard Industry Fare Level (SIFL) for-
mula (RR 36) 12,620
Stocks:
Constructive sale, short sale, and trans-
fers by broker (RR 15) 8,515
Electing mark to market for mar-
ketable stock (TD 9123) 20,907
Guidance under section 1502, suspen-
sion of losses on certain stock dispo-
sitions (TD 9048); correction (Ann
10) 7,501
Information reporting relating to tax-
able stock transactions (TD 9101) 5,
376; (REG–156232–03) 5,399
Losses, decrease in stock value (Notice
27) 16,782
Treatment of income on spread on
statutory and nonstatutory stock op-
tions upon exercise (Notice 28) 16,
783
Tax conventions, taxation of nonresident
partners in a service partnership that
conducts activities in the United States
(RR 3) 7,486
Tax-exempt income, expenses and inter-
est, application of section 265(a)(2) to
related-party transactions in affiliated
groups (RR 47) 21,941
Tax return preparers, electronic filing (TD
9119) 17,825
Technical advice to directors and appeals
area directors from Associates Chief
Counsel and Division Counsel/Asso-
ciate Chief Counsel (TE/GE) (RP 2) 1,
83
Treatment of services under section 482
(REG–115037–00, REG–146893–02);
correction (Ann 7) 4,365
INCOME TAX—Cont.
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
Withholding foreign partnership (WP)
and withholding foreign trust (WT)
agreements (RP 21) 14,702
SELF-EMPLOYMENT
TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
2004-21 I.R.B.xiMay 24, 2004
*U.S. Government Printing Office: 2004—304–778/60136