Internal Revenue Bulletin 2006-6 (PDF rendition): IRS Announcements

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

Bulletin No. 200
6-6
February 6, 2006
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2006–7, page 399.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for February 2006.
T.D. 9238,
page 408.
REG–14324
4–05, page 419.
Temporary
and proposed regulations under section 7874 of
the Code pr
ovide for determination of whether a foreign cor-
poration i
s a surrogate foreign corporation when the foreign
corporati
on is part of an expanded affiliated group. A public
hearing o
n the proposed regulations is scheduled for April 27,
2006.
Notice 2006–9, page 413.
This notice provides procedures for a vehicle manufacturer to
certify that a passenger automobile or light truck meets cer-
tain requirements for the new advanced lean burn technology
motor vehicle credit or the new qualified hybrid motor vehicle
credit, and to certify the amount of the credit available with re-
spect to the vehicle. The notice also provides guidance to tax-
payers who purchase passenger automobiles and light trucks
regarding the conditions under which they may rely on the ve-
hicle manufacturer’s certification.
EMPLOYEE PLANS
T.D. 9237, page 394.
Final regulations under section 401 of the Code provide guid-
ance concerning the requirements for designated Roth contri-
butions under qualified cash or deferred arrangements.
EMPLOYMENT TAX
T.D. 9239, page 401.
REG–148568–04, page 417.
Final, temporary, and proposed regulations under section 6011
oftheCoderelatetothetimeforemployerstofilereturnsand
make deposits under the Federal Insurance Contributions Act
(FICA) and returns of income tax withheld. The regulations re-
quire employers who receive notification of qualification for the
Employers’ Annual Federal Tax Program (Form 944) to file Form
944,Employer’s Annual Federal Tax Return, annually instead of
Form 941,Employer’s Quarterly Federal Tax Return,quarterly
beginning in the 2006 taxable year. The regulations also permit
most employers who file Form 944 to remit accumulated em-
ployment taxes annually with their return and modify the look-
back period andde minimisdeposit rule for these employers.
The proposed regulations also provide an additional method for
quarterly return filers to determine whether the amount of accu-
mulated employment taxes is consideredde minimis. A public
hearing on the proposed regulations is scheduled for April 26,
2006.
ADMINISTRATIVE
Announcement 2006–11, page 420.
This announcement contains a correction to a notice of pro-
posed rulemaking (REG–158080–04, 2005–43 I.R.B. 786) re-
garding the application of section 409A to nonqualified de-
ferred compensation plans.
Announcement 2006–12, page 421.
This announcement contains a correction to T.D. 9203,
2005–25 I.R.B. 1285, which is adding back regulations sec-
tion 301.7701–3T after it was removed in error.
Fi
nding Lists begin on page ii.

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.
February 6, 20062006–6 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2006. See Rev.
Rul. 2006-7, page 399.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of February 2006. See Rev.
Rul. 2006-7, page 399.
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(k)–1: Certain cash or deferred ar-
rangements.
T.D. 9237
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Designated Roth Contributions
to Cash or Deferred
Arrangements Under Section
401(k)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
amendments to the regulations under
sections 401(k) and (m) of the Internal
Revenue Code. These regulations provide
guidance concerning the requirements
for designated Roth contributions under
qualified cash or deferred arrangements
described in section 401(k). These reg-
ulations affect section 401(k) plans that
provide for designated Roth contributions
and participants eligible to make elective
contributions under these plans.
DATES:Effective Date:These regulations
are effective January 1, 2006.
Applicability Date:These regulations
apply to plan years beginning on or after
January 1, 2006.
FOR FURTHER INFORMATION
CONTACT:CathyA.Vohs,
202–622–6090 or R. Lisa Mojiri-Azad,
202–622–6060 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1930.
The collection of information
in these regulations is in 26 CFR
§1.401(k)–1(f)(1)&(2). This information
is required to comply with the separate ac-
counting and recordkeeping requirements
of section 402A.
The estimated annual burden per
respondent under control number
1545–1930 is 1 hour.
Comments concerning the accuracy
of this burden estimate and sugges-
tions for reducing this burden should
be sent to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:CAR:MP:T:T:SP, Washington, DC
20224, and to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents might become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR Part
1) under section 401(k) and (m) of the
Internal Revenue Code of 1986 (Code).
The amendments provide guidance on des-
ignated Roth contributions under section
402A of the Code, added by section 617(a)
of the Economic Growth and Tax Relief
Reconciliation Act of 2001 (Public Law
107–16, 115 Stat. 38) (EGTRRA).
Section 401(k) provides that a profit-
sharing, stock bonus, pre-ERISA money
purchase or rural cooperative plan will not
fail to qualify under section 401(a) merely
because it contains a qualified cash or de-
ferred arrangement. Contributions made
at the election of an employee under a
qualified cash or deferred arrangement are
known as elective contributions. Gener-
ally, such elective contributions are not in-
cludible in gross income at the time con-
tributed and are sometimes referred to as
pre-tax elective contributions.
Under section 402A, effective for tax
years beginning on or after January 1,
2006, a plan may permit an employee
who makes elective contributions under
a qualified cash or deferred arrangement
to designate some or all of those contri-
butions as designated Roth contributions.
Designated Roth contributions are elec-
tive contributions under a qualified cash or
deferred arrangement that, unlike pre-tax
elective contributions, are currently in-
cludible in gross income. However, a
qualified distribution of designated Roth
contributions is excludable from gross
income.
Although designated Roth contribu-
tions under a qualified cash or deferred
arrangement bear somesimilarity to con-
tributions to a Roth IRA described in
section 408A (e.g., contributions to either
type of account are after-tax contributions
2006–6 I.R.B.394February 6, 2006

and qualified distributions from either
type of account are excludable from gross
income), there are many differences be-
tween these types of arrangements. For
example, under section 408A(c)(3), an
individual is ineligible to make Roth IRA
contributions if his or her modified ad-
justed gross income exceeds certain lim-
its, but section 402A does not impose any
comparable income limits on an individ-
ual’s eligibility to make designated Roth
contributions under a qualified cash or
deferred arrangement. In addition, under
section 408A(d)(3), a traditional IRA may
be converted to a Roth IRA, but section
402A does not provide for a conversion
of a pre-tax elective contribution account
under a qualified cash or deferred arrange-
ment to a designated Roth account. Also,
under section 408A(d)(4), specific order-
ing rules apply to distributions from Roth
IRAs. Section 402A, however, does not
provide a specific ordering rule for distri-
butions from designated Roth accounts, so
section 72 applies to determine the char-
acter of distributions from such accounts.
On December 29, 2004, final regu-
lations (T.D. 9169, 2005–5 I.R.B. 381)
under section 401(k) were issued (69 FR
78144). Those regulations generally apply
to plan years beginning on or after January
1, 2006, although they also may be ap-
plied to plan years ending after December
29, 2004. Under those final regulations,
§1.401(k)–1(f) was reserved for special
rules for designated Roth contributions.
On March 2, 2005, proposed regulations
(REG–152354–04, 2005–13 I.R.B. 805) to
fill in that reserved paragraph and provide
additional rules applicable to designated
Roth contributions were issued (70 FR
10062). Written public comments were
received on the proposed regulations and
public reaction to the proposed regulations
generally was favorable. After considera-
tion of the comments, these final regula-
tions adopt the provisions of the proposed
regulations with certain modifications, the
most significant of which are highlighted
below.
Explanation of Provisions
Rules Relating to Designated Roth
Contributions
These final regulations retain the spe-
cial rules which were included in the pro-
posed regulations relating to designated
Roth contributions under a section 401(k)
plan. Thus, these final regulations amend
§1.401(k)–1(f) to provide a definition of
designated Roth contributions and special
rules with respect to such contributions.
Under these final regulations, designated
Roth contributions are defined as elective
contributions under a qualified cash or de-
ferred arrangement that are: (1) designated
irrevocably by the employee at the time of
the cash or deferred election as designated
Roth contributions that are being made in
lieu of all or a portion of the pre-tax elec-
tive contributions the employee is other-
wise eligible to make under the plan; (2)
treated by the employer as includible in the
employee’s gross income at the time the
employee would have received the contri-
bution amounts in cash if the employee
had not made the cash or deferred elec-
tion (e.g., by treating the contributions as
wages subject to applicable withholding
requirements); and (3) maintained by the
plan in a separate account. The regula-
tions also provide that elective contribu-
tions may only be treated as designated
Roth contributions to the extent permitted
under the plan.
Some commentators requested that an
employer sponsoring a qualified cash or
deferred arrangement be permitted to offer
only designated Roth contributions. How-
ever, under section 402A(b)(1), designated
Roth contributions are made in lieu of all
or a portion of elective contributions that
the employee is otherwise eligible to make
under the cash or deferred arrangement.
If a cash or deferred arrangement offered
only designated Roth contributions, an
employee participating in the arrangement
would not be electing to make such con-
tributions in lieu of elective contributions
he or she was otherwise eligible to make
under the plan. Thus, these final regula-
tions clarify that, in order to provide for
designated Roth contributions, a qualified
cash or deferred arrangement must also
offer pre-tax elective contributions.
Separate Accounting Requirement
These final regulations also retain the
rule that, under the separate accounting re-
quirement, contributions and withdrawals
of designated Roth contributions must be
credited and debited to a designated Roth
account maintained for the employee and
the plan must maintain a record of the em-
ployee’s investment in the contract (i.e.,
designated Roth contributions that have
not been distributed) with respect to the
employee’s designated Roth account. In
addition, gains, losses, and other credits or
charges must be separately allocated on a
reasonable and consistent basis to the des-
ignated Roth accountand other accounts
under the plan. The proposed regulations
provided that forfeitures may not be allo-
cated to the designated Roth account. The
final regulations retain this rule and, in re-
sponse to comments, clarify that no con-
tributions other than designated Roth con-
tributions and rollover contributions de-
scribed in section 402A(c)(3)(B) are per-
mitted to be allocated to a designated Roth
account. For example, matching contribu-
tions are not permitted to be allocated to a
designated Roth account. The final regu-
lations also retain the rule that the separate
accounting requirement applies at the time
the designated Roth contribution is con-
tributed to the plan and must continue to
apply until the designated Roth account is
completely distributed.
Other Rules
These final regulations retain the re-
quirement that a designated Roth contri-
bution must satisfy the requirements ap-
plicable to any other elective contributions
made under a qualified cash or deferred
arrangement. Thus, designated Roth con-
tributions are subject to the nonforfeitabil-
ity and distribution restrictions applicable
to elective contributions and are taken into
account under the actual deferral percent-
age test (ADP test) of section 401(k)(3) in
the same manner as pre-tax elective contri-
butions. Similarly, designated Roth contri-
butions may be treatedas catch-up contri-
butions and serve as the basis for a partic-
ipant loan.
A number of commentators discussed
the application of section 401(a)(9) to
plans to which designated Roth contri-
butions are made. These commentators
pointed out that under section 408A, Roth
IRAs are not subject to the rules of section
401(a)(9)(A) (i.e., Roth IRAs are not sub-
ject to the rules of section 401(a)(9) while
the Roth IRA owner is alive). Although
Roth IRAs are not subject to section
401(a)(9) while the IRA owner is alive,
section 402A does not provide comparable
February 6, 20063952006–6 I.R.B.

rules regarding the application of section
401(a)(9) to designated Roth accounts un-
der a cash or deferred arrangement. Thus,
such designated Roth accounts are subject
to the rules of section 401(a)(9)(A) and
(B) in the same manner as pre-tax elective
contributions.
In response to comments asking for
clarification, the final regulations pro-
vide rules regarding elections to make
designated Roth contributions. These
rules specifically provide that the rules in
§1.401(k)–1(e)(2)(ii) regarding frequency
of elections to make pre-tax elective con-
tributions also apply to elections to make
designated Roth contributions. The rules
also specifically address automatic en-
rollment and permit a plan to utilize au-
tomatic enrollment in conjunction with
designated Roth contributions. Under the
final regulations, a plan that provides for
a cash or deferred election under which
contributions are made in the absence
of an affirmative election and that has
both pre-tax elective contributions and
designated Roth contributions must set
forth the extent to which those default
contributions are pre-tax elective contri-
butions or designated Roth contributions.
If the default contributions are designated
Roth contributions, then an employee who
has not made an affirmative election is
deemed to have irrevocably designated the
contributions (in accordance with section
402A(c)(1)(B)) as designated Roth contri-
butions.
A number of commentators addressed
direct rollovers of amounts from a desig-
nated Roth account. In response to these
comments, the regulations clarify that a di-
rect rollover from a designated Roth ac-
count under a qualified cash or deferred ar-
rangement may only be made to another
designated Roth account under an appli-
cable retirement plan described in section
402A(e)(1) or to a Roth IRA described
in section 408A, and only to the extent
the direct rollover is permitted under the
rules of section 402(c). In addition, a
plan is permitted to treat the balance of
the participant’s designated Roth account
and the participant’s other accounts un-
der the plan as accounts held under two
separate plans (within the meaning of sec-
tion 414(l)) for purposes of applying the
special rule in A–11 of §1.401(a)(31)–1
(under which a plan will satisfy section
401(a)(31) even though the plan adminis-
trator does not permit any distributee to
elect a direct rollover with respect to el-
igible rollover distributions during a year
that are reasonably expected to total less
than $200). Thus, if a participant’s balance
in the designated Roth account is less than
$200, then the plan is not required to offer a
direct rollover election with respect to that
account or to apply the automatic rollover
provisions of section 401(a)(31)(B) with
respect to that account.
Section 1.401(k)–2 contains correction
methods that may be used when a plan fails
to satisfy the ADP test for a year. These
final regulations retain the rule in the pro-
posed regulations relating to these correc-
tion methods that permits a highly com-
pensated employee (HCE), as defined in
section 414(q), with elective contributions
for a year that include both pre-tax elective
contributions and designated Roth contri-
butions to elect whether excess contribu-
tions are to be attributed to pre-tax elec-
tive contributions or designated Roth con-
tributions. There is no requirement that the
plan provide this option, and a plan may
provide for one of the correction methods
described in the final regulations without
permitting an HCE to make such an elec-
tion.
These final regulations also retain the
rule that a distribution of excess contri-
butions is not includible in gross income
to the extent it represents a distribution of
designated Roth contributions. However,
theincomeallocabletoacorrectivedis-
tribution of excess contributions that are
designated Roth contributions is includi-
bleingrossincomeinthesamemanner
as income allocable to a corrective distri-
bution of excess contributions that are pre-
tax elective contributions. The regulations
also provide a similar rule under the cor-
rectionmethodsthatmaybeusedwhena
plan fails to satisfy the actual contribution
percentage (ACP) test in §1.401(m)–2.
Additional Plan Terms
In addition to the rules relating to sec-
tions 401(k) and (m) discussed above,
there are other aspects of designated Roth
contributions that would be reflected in
plan terms and are not addressed in these
regulations. For example, while a plan is
permitted to allow an employee to elect the
character of a distribution (i.e.,whether
the distribution will be made from the des-
ignated Roth account or other accounts),
the extent to which a plan so permits must
be set forth in the terms of the plan.
Certain Issues Addressed in Proposed
Regulations
These final regulations do not provide
guidance with respect to the taxation of
distributions of designated Roth contribu-
tions. For example, the regulations do not
provide guidance with respect to the re-
covery of an employee’s investment in the
contract associated with his or her desig-
nated Roth contributions. Proposed regu-
lations under section 402A, to be issued in
the near future, address these taxation is-
sues.
Effective Date
Section 402A is effective for an em-
ployee’s taxable years beginning after De-
cember 31, 2005. These regulations have
thesameeffectivedateastheregulations
under section 401(k) that they are amend-
ing. Thus, these final regulations are gen-
erally applicable to plan years beginning
on or after January 1, 2006. If a plan is
applying the section 401(k) regulations as
of an earlier effective date (as provided un-
der those regulations), to the extent that
section 402A is effective, that same early
effective date applies to these regulations.
For a plan that has an effective date for
the section 401(k) regulations that is after
the effective date of section 402A (either
an employer that does not have a calen-
dar year plan or a plan established pursuant
to a collective bargaining agreement that
has a delayed effective date for the section
401(k) regulations), the employer may rely
on these regulations prior to the effective
date of the final section 401(k) regulations
for the plan, even if the plan does not oth-
erwise implement the section 401(k) regu-
lations earlier than required.
These regulations do not provide rules
for the application of the EGTRRA sun-
set provision (section 901 of EGTRRA),
under which the provisions of EGTRRA
do not apply to taxable, plan, or limitation
years beginning after December 31, 2010.
Unless the EGTRRA sunset provision is
repealed before it becomes effective, ad-
ditional guidance will be needed to clarify
its application.
2006–6 I.R.B.396February 6, 2006

Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has alsobeen determined that
5 U.S.C. 553(b) does not apply to these
regulations. It is hereby certified that the
collection of information in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that most small entities that maintain
a section 401(k) plan use a third party
provider to administerthe plan. Therefore,
an analysis under the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the proposed regulations preceding these
regulations were submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal authors of these reg-
ulations are R. Lisa Mojiri-Azad and
CathyA.VohsoftheOfficeoftheDi-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury participated in the develop-
ment of these regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(k)–0 is amended
as follows:
1. The entry for §1.401(k)–1(f) is re-
vised and entries for §1.401(k)–1(f)(1),
(2), (3), (4) and (5) are added.
2. An entry for §1.401(k)–2(b)(2)
(vi)(C) is added.
The additions read as follows:
§1.401(k)–0 Table of contents.
*****
§1.401(k)–1 Certain cash or deferred
arrangements.
*****
(f) Special rules for designated Roth
contributions.
(1) In general.
(2) Separate accounting required.
(3) Designated Roth contributions must
satisfy rules applicable to elective contri-
butions.
(i) In general.
(ii) Special rules for direct rollovers.
(4) Rules regarding designated Roth
contribution elections.
(i) Frequency of elections.
(ii) Default elections.
(5) Effective date.
(i) In general.
(ii) Sunset provisions.
*****
§1.401(k)–2 ADP test.
*****
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable
to designated Roth contributions.
*****
Par. 3. Section 1.401(k)–1(f) is revised
as follows:
§1.401(k)–1 Certain cash or deferred
arrangements.
*****
(f)Special rules for designated Roth
contributions—(1)In general.Theterm
designated Roth contributionmeans an
elective contribution under a qualified
cash or deferred arrangement that, to the
extent permitted under the plan, is—
(i) Designated irrevocably by the em-
ployee at the time of the cash or deferred
election as a designated Roth contribution
thatisbeingmadeinlieuofallorapor-
tion of the pre-tax elective contributions
the employee is otherwise eligible to make
under the plan;
(ii) Treated by the employer as includi-
ble in the employee’s gross income at the
time the employee would have received
the amount in cash if the employee had not
made the cash or deferred election (e.g.,by
treating the contributions as wages subject
to applicable withholding requirements);
and
(iii) Maintained by the plan in a sepa-
rate account (in accordance with paragraph
(f)(2) of this section).
(2)Separate accounting required.Un-
der the separate accounting requirement
of this paragraph (f)(2), contributions and
withdrawals of designated Roth contribu-
tions must be credited and debited to a
designated Roth account maintained for
the employee and the plan must maintain a
record of the employee’s investment in the
contract (i.e., designated Roth contribu-
tions that have not beendistributed) with
respect to the employee’s designated Roth
account. In addition,gains, losses, and
other credits or charges must be separately
allocated on a reasonable and consistent
basis to the designated Roth account and
other accounts under the plan. However,
forfeitures may not be allocated to the des-
ignated Roth account and no contributions
other than designated Roth contributions
and rollover contributions described in
section 402A(c)(3)(B) may be allocated
to such account. The separate accounting
requirement applies at the time the desig-
nated Roth contribution is contributed to
the plan and must continue to apply until
the designated Roth account is completely
distributed.
(3)Designated Roth contributions must
satisfy rules applicable to elective con-
tributions—(i)In general. A designated
Roth contribution must satisfy the require-
ments applicable to elective contributions
made under a qualified cash or deferred
arrangement. Thus, for example, a des-
ignated Roth contribution must satisfy
the requirements of paragraphs (c) and
(d) of this section and is treated as an
employer contribution for purposes of sec-
tions 401(a), 401(k), 402, 404, 409, 411,
412, 415, 416 and 417. In addition, the
designated Roth contributions are treated
as elective contributions for purposes of
the ADP test. Similarly, the designated
Roth account under the plan is subject to
the rules of section 401(a)(9)(A) and (B)
in the same manner as an account that
contains pre-tax elective contributions.
(ii)Special rules for direct rollovers
.A
direct rollover from a designated Roth ac-
count under a qualified cash or deferred ar-
rangement may only be made to another
designated Roth account under an appli-
cable retirement plan described in section
February 6, 20063972006–6 I.R.B.

402A(e)(1) or to a Roth IRA described in
section 408A, and only to the extent the
rollover is permitted under the rules of sec-
tion 402(c). Moreover, a plan is permitted
to treat the balance of the participant’s des-
ignated Roth account and the participant’s
other accounts under the plan as accounts
held under two separate plans (within the
meaning of section 414(l)) for purposes
of applying the special rule in A–11 of
§1.401(a)(31)–1 (under which a plan will
satisfy section 401(a)(31) even though the
plan administrator does not permit any dis-
tributee to elect a direct rollover with re-
spect to eligible rollover distributions dur-
ing a year that are reasonably expected to
total less than $200).
(4)Rules regarding designated Roth
contribution elections—(i)Frequency of
elections. The rules under paragraph
(e)(2)(ii) of this section regarding fre-
quency of elections apply in the same
manner to both pre-tax elective contribu-
tions and designated Roth contributions.
Thus, an employee must have an effec-
tive opportunity to make (or change) an
election to make designated Roth contri-
butions at least once during each plan year.
(ii)Default elections—(A) In the case
of a plan that provides for both pre-tax
elective contributions and designated Roth
contributions and in which, under para-
graph (a)(3)(ii) of this section, the default
in the absence of an affirmative election is
to make a contribution under the cash or
deferred arrangement, the plan terms must
provide the extent to which the default
contributions are pre-tax elective contribu-
tions and the extent to which the default
contributions are designated Roth contri-
butions.
(B) If the default contributions under
the plan are designated Roth contributions,
then an employee who has not made an
affirmative election is deemed to have ir-
revocably designated the contributions (in
accordance with section 402A(c)(1)(B)) as
designated Roth contributions.
(5)Effective date—(i)In general. Sec-
tion 402A is effective for taxable years be-
ginning after December 31, 2005.
(ii)Sunset provisions.Therulesset
forth in this paragraph (f) do not address
the application of section 901 of the Eco-
nomic Growth and Tax Relief Reconcilia-
tion Act of 2001 (Public Law 107–16; 115
Stat. 38) (under which the amendments
made by that Act do not apply to taxable,
plan, or limitation years beginning after
December 31, 2010).
*****
Par. 4. Section 1.401(k)–2 is amended
as follows:
1. A new sentence is added after the
second sentence in paragraph (b)(1)(ii).
2. The last sentence in paragraph
(b)(2)(vi)(B) is amended by adding the
phrase “, except to the extent provided in
paragraph (b)(2)(vi)(C) of this section.”
3. Paragraph (b)(2)(vi)(C) is added.
The additions read as follows:
§1.401(k)–2 ADP
test.
*****
(b) * * *
(1) * * *
(ii) * * * Similarly, a plan may per-
mit an HCE with elective contributions for
a year that includes both pre-tax elective
contributions and designated Roth contri-
butions to elect whether the excess contri-
butions are to be attributed to pre-tax elec-
tive contributions or designated Roth con-
tributions. * * *
*****
(2) * * *
(vi) * * *
(C)Corrective distributions attribut-
able to designated Roth contributions.
Notwithstanding paragraphs (b)(2)(vi)(A)
and (B) of this section, a distribution of ex-
cess contributions is not includible in gross
income to the extent it represents a distri-
bution of designated Roth contributions.
However,theincomeallocabletoacor-
rective distribution of excess contributions
that are designated Roth contributions is
included in gross income in accordance
with paragraph (b)(2)(vi)(A) or (B) of this
section (i.e., in the same manner as income
allocable to a corrective distribution of ex-
cess contributions that are pre-tax elective
contributions).
*****
Par. 5. Section 1.401(k)–6 is amended
as follows:
1. The definitions of “Designated Roth
account” and “Designated Roth contribu-
tions” are added after the definition ofCur-
rent year testing method.
2. A new definition of “Pre-tax elec-
tive contributions” is added after the defi-
nition ofPre-ERISA money purchase pen-
sion plan.
The additions read as follows:
§1.401(k)–6 Definitions.
*****
Designated Roth account.Designated
Roth accountmeans a separate account
maintained by a plan to which only des-
ignated Roth contributions (including in-
come, expenses, gains and losses attribut-
able thereto) are made.
Designated Roth contributions.Des-
ignated Roth contributionsmeans des-
ignated Roth contributions as defined in
§1.401(k)–1(f)(1).
*****
Pre-tax elective contributions.Pre-tax
elective contributionsmeans elective con-
tributions under a qualified cash or de-
ferred arrangement that are not designated
Roth contributions.
*****
Par. 6. Section 1.401(m)–0 is
amendedbyaddinganentryfor
§1.401(m)–2(b)(2)(vi)(C) to read as fol-
lows:
§1.401(m)–0 Table of contents.
*****
§1.401(m)–2 ACP test.
*****
(b) * * *
(2) * * *
(vi)***
(C) Corrective distributions attributable
to designated Roth contributions.
*****
Par. 7. Section 1.401(m)–2 is amended
as follows:
1. The last sentence in paragraph
(b)(2)(vi)(B) is amended by adding the
phrase “, or as provided in paragraph
(b)(2)(vi)(C) of this section.”
2. Paragraph (b)(2)(vi)(C) is added.
The additions read as follows:
§1.401(m)–2 ACP test.
*****
(b) * * *
(2) * * *
(vi)***
(C)Corrective distributions attribut-
able to designated Roth contributions.
Notwithstanding paragraphs (b)(2)(vi)(A)
and (B) of this section, a distribution of
2006–6 I.R.B.398February 6, 2006

excess aggregate contributions is not in-
cludible in gross income to the extent it
represents a distribution of designated
Roth contributions. However, the income
allocable to a corrective distribution of
excess aggregate contributions that are
designated Roth contributions is taxed in
accordance with paragraph (b)(2)(vi)(A)
or(B)ofthissection(i.e.,inthesame
manner as income allocable to a cor-
rective distribution of excess aggregate
contributions that are not designated Roth
contributions).
*****
Par. 8. Section 1.401(m)–5 is amended
by adding a new definition of “Designated
Roth contributions” after the definition of
Current year testing methodto read as fol-
lows:
§1.401(m)–5 Definitions.
*****
Designated Roth contributions.Des-
ignated Roth contributionsmeans des-
ignated Roth contributions as defined in
§1.401(k)–1(f)(1).
*****
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In §602.101, paragraph
(b) is amended by adding an entry for
“1.401(k)–1” in numerical order to the
table to read, in part, as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.401(k)–1........................................................... 1545–1930
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 13, 2005.
Eric Solomon,
Acting Deputy Assistant
Secretary for Tax Policy.
(Filed by the Office of the Federal Register on December 30,
2005, 8:45 a.m., and published in the issue of the Federal
Register for January 3, 2006, 71 F.R. 6)
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2006. See Rev.
Rul. 2006-7, page 399.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2006. See Rev.
Rul. 2006-7, page 399.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for February 2006.
Rev. Rul. 2006–7
This revenue ruling provides various
prescribed rates for federal income tax
February 6, 20063992006–6 I.R.B.

purposes for February 2006 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 200
6–7 TABLE 1
Applicable Federal Rates (AFR) for February 2006
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.39%4.34%4.32%4.30%
110% AFR4.83%4.77%4.74%4.72%
120% AFR5.28%5.21%5.18%5.15%
130% AFR5.72%5.64%5.60%5.57%
Mid-term
AFR4.40%4.35%4.33%4.31%
110% AFR4.85%4.79%4.76%4.74%
120% AFR5.29%5.22%5.19%5.16%
130% AFR5.74%5.66%5.62%5.59%
150% AF
R
6.64%6.53%6.48%6.44%
175% AFR7.75%7.61%7.54%7.49%
Long-
term
AFR4.61%4.56%4.53%4.52%
110% A
FR
5.08%5.02%4.99%4.97%
120% AFR5.54%5.47%5.43%5.41%
130% AFR6.02%5.93%5.89%5.86%
REV. RUL. 2006–7 TABLE 2
Adjusted AFR for February 2006
Per
iod for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
3.20%3.17%3.16%3.15%
Mid-term adjusted AFR3.53%3.50%3.48%3.47%
Long-term adjusted
AFR
4.26%4.22%4.20%4.18%
R
EV. RUL. 2006–7 TABLE 3
Rates Under Section 382 for February 2006
Adjusted federal long-term rate for the current month4.26%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.40%
2006–6 I.R.B.400February 6, 2006

REV. RUL. 2006–
7TABLE4
Appropriate Percentages Under Section 42(b)(2) for February 2006
Appropriate percentage for the 70% present value low-income housing credit8.05%
Appropriate percentage for the 30% present value low-income housing credit3.45%
REV. RUL. 2006–7 TABLE 5
Rate Under Se
ction 7520 for February 2006
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest5.2%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 6
011.—General
Requirem
ent of Return,
Statement, or List
26 CFR 31.6011(a)–1: Returns under Federal Insur-
ance Contributions Act.
T.D. 9239
DEPARTM
ENT OF
THE TRE
ASURY
Intern
al Revenue Service
26 CFR P
arts 1 and 31
Time for Filing Employment
Tax Returns and Modifications
to the Deposit Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
temporary regulations establishing the
Employers’ Annual Federal Tax Program
(Form 944) (hereinafter referred to as the
Form 944 Program). The temporary reg-
ulations relate to sections 6011 and 6302
of the Internal Revenue Code (Code) con-
cerning reporting and paying income taxes
withheld from wages and reporting and
paying taxes under the Federal Insurance
Contributions Act (FICA) (collectively,
employment taxes). These temporary reg-
ulations provide requirements for filing
returns under FICA and returns of in-
come tax withheld under section 6011 and
§§31.6011(a)–1 and 31.6011(a)–4 of the
Employment Tax Regulations.
These temporary regulations generally
require employers who receive written no-
tification from the Commissioner of their
qualification for the Form 944 Program to
fileaForm944,“Employer’s Annual Fed-
eral Tax Return,” rather than Form 941,
“Employer’s Quarterly Federal Tax Re-
turn.” In addition, these temporary regula-
tions provide requirements for employers
to make deposits of employment taxes un-
der section 6302 and §31.6302–1. These
temporary regulations permit employers in
the Form 944 Program to deposit or re-
mit their accumulated employment taxes
annually with their Form 944 if they sat-
isfy the provisions of thede minimisde-
posit rule, as modified. Also, these tempo-
rary regulations modify the lookback pe-
riod used to determine an employer’s sta-
tus as a monthly or semi-weekly depositor.
The portions of this document that
are final regulations provide necessary
cross-references to the temporary regula-
tions as well as technical revisions. The
technical revisions correct the table of
contents in §31.6302–0 and a cross-refer-
ence in §31.6302–1(e)(2) and remove all
references to an IRS district director, as
that position no longer exists within the
IRS. In addition, a cross-reference to the
temporary regulations under section 6011
was added to the final regulations under
section 6071, regarding the time for filing
returns. The text of the temporary regula-
tions also serves, in part, as the text of the
proposed regulations (REG–148568–04)
set forth in this issue of the Bulletin. In ad-
dition to the provisions contained in these
temporary regulations related to the Form
944 Program, the proposed regulations
provide a modification to thede minimis
deposit rule applicable to quarterly return
filers.
DATES:Effective Date:These regulations
are effective as of January 1, 2006.
Applicability Date:These regulations
apply with respect to taxable years begin-
ning on or after January 1, 2006. The ap-
plicability of §§31.6011–1T, 31.6011–4T,
and 31.6302–1T will expire on or before
December 30, 2009.
FOR FURTHER INFORMATION
CONTACT: Raymond Bailey, (202)
622–4910 (filing requirements under
section 6011), or Audra Dineen, (202)
622–4940 (deposit requirements under
section 6302) (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
These temporary regulations amend the
Regulations on Employment Taxes and
Collection of Income Tax at Source (26
CFR part 31) under section 6011 relating
to the Federal employment tax return filing
requirements and section 6302 relating to
the employment tax deposit requirements.
Section 31.6011(a)–1 of the Employ-
ment Tax Regulations provides rules re-
quiring employers to file returns quar-
terly to report FICA taxes. Section
31.6011(a)–4 of the Employment Tax
Regulations requires that every person
required to make a return of income tax
February 6, 20064012006–6 I.R.B.

withheld from wages pursuant to section
3402 shall make a return quarterly. Under
these existing regulations, employers must
file Form 941, “Employer’s Quarterly
Federal Tax Return,” each quarter report-
ing FICA taxes and income tax withheld.
Certain employers, however, file returns
reporting FICA and income tax withheld
annually, such as agricultural employers
who file Form 943, “Employer’s Annual
Federal Tax Return for Agricultural Em-
ployees.” §31.6011(a)–4(a)(3). Existing
regulations also provide certain excep-
tions to the quarterly filing requirement
for wages paid for domestic service.
Section 31.6302–1 of the Employment
Tax Regulations provides rules for em-
ployers to make deposits of employment
taxes. Under these rules, deposits of em-
ployment taxes reported on Form 941 are
generally made either monthly or semi-
weekly. In order for an employer to de-
termine its status as a monthly or semi-
weekly depositor, an employer determines
the aggregate amount of employment taxes
reported in the 12-month period ending
the preceding June 30 (the lookback pe-
riod). New employers are treated as hav-
ing an employment tax liability of zero for
any part of the lookback period before the
date they started or acquired their business.
All employers are subject to a “One-Day
rule” requiring employment taxes to be de-
posited on the next banking day if the em-
ployer has accumulated $100,000 or more
of employment taxes. If an employer fails
to make timely deposits of employment
taxes, then, absent reasonable cause, the
employer will be subject to a penalty for
failure to deposit under section 6656.
Section 31.6302–1(f)(4) (thede min-
imisdeposit rule) provides that for quar-
terly and annual return periods, if the total
amount of employment taxes for the return
period is less than $2,500 and that amount
is deposited or remitted with a timely filed
return for that return period, the amount
will be deemed to have been timely de-
posited. Under existing regulations, em-
ployers who file annual employment tax
returns (such as Form 943 for agricultural
workers) are required to deposit employ-
ment taxes at least monthly if their an-
nual employment tax liability equals or ex-
ceeds thede minimisdeposit rule amount
of $2,500.
The purpose of these temporary regula-
tions is to generally require employers who
receive written notification of their quali-
fication for the Form 944 Program to file
an annual employment tax return, Form
944, rather than the quarterly Form 941 re-
turn. For these employers, Form 944 will
replace Form 941. Form 944 will not re-
place Form 943 for agricultural employers
or Schedule H, Form 1040, for employers
with only household employees. Notwith-
standing notification from the IRS of qual-
ification for the Form 944 Program, em-
ployers who prefer to file Form 941 may be
eligible to do so if they timely contact the
IRS and satisfy one of the following two
conditions: 1) the employer notifies the
IRS of its preferenceto electronically file
Forms941quarterlyinlieuoffilingForm
944 annually, or 2) the employer notifies
the IRS that it anticipates its annual em-
ployment tax liability will exceed $1,000.
Employers otherwisemeeting the criteria
of the Form 944 Program will be permitted
to file Form 941 only if they receive writ-
ten notification from the IRS that their fil-
ing requirement has been changed to Form
941.
Under these temporary regulations,
most employers who file Form 944 will
be able to remit employment taxes annu-
ally with their returns rather than making
monthly or semi-weekly deposits. Form
944 will generally be due January 31 of
the year following the year for which the
return is filed. If the employer timely de-
posits all accumulated employment taxes
on or before January 31 of the year fol-
lowing the year for which the return is
filed, then the employer will have 10 extra
calendar days to file Form 944 pursuant to
§31.6071(a)–1(a).
The Form 944 Program is limited to em-
ployers meeting certain eligibility require-
ments described in the temporary regula-
tions. Currently, the Form 944 Program
will be limited to employers whose esti-
mated annual employment tax liability is
$1,000 or less. The IRS will send writ-
ten notifications of qualification for the
Form 944 Program to the employers that
the IRS has estimated will have an annual
employment tax liability of $1,000 or less
(based on the employers’ prior Form 941
reporting history). As this estimate may
not reflect recent or imminent changes in
an employer’s payroll, employers receiv-
ing notices may contact the IRS to dis-
cuss their qualification if they anticipate
that their annual employment tax liability
will exceed $1,000. In addition, employ-
ers who do not receive a notice may con-
tact the IRS to request to be in the Form
944 Program if they anticipate that their
annual employment tax liability will be
$1,000 or less. New employers will re-
ceive notification of qualification for the
Form 944 Program if they notify the IRS
that they anticipate their annual employ-
ment tax liability will be $1,000 or less.
For example, new employers can indicate
their estimated employment tax liability
on their Form SS–4,Application for Em-
ployer Identification Number.TheIRS
and Treasury Department are considering
expanding the Form 944 Program in the fu-
ture and seek comments on the eligibility
requirements and how best to change them.
If an employer is required to file Form
944 to report its employment tax liability
for the current calendar year, the employer
must file Form 944 even if the employer’s
actual employment tax liability for the cur-
rent year exceeds the eligibility require-
ment threshold ($1,000 under these regula-
tions). If the Form 944 shows that the em-
ployer’s employment tax liability exceeds
the eligibility threshold, then the employer
will be required to file Form 941 to report
its employment tax liability in the future.
The IRS will send written notification to
the employer that the employer’s filing re-
quirement has changed.
For employers in the Form 944 Pro-
gram during the current or previous cal-
endar year, the temporary regulations also
modify the lookback period for determin-
ing whether an employer is a monthly or
semi-weekly depositor. This change is
necessary because once an employer be-
gins to file annual Form 944 returns, it
may not be possible to determine the em-
ployer’s aggregate amount of employment
tax liability during the lookback period
set forth in the existing regulations (12-
month period ending the preceding June
30). In the event that an employer ex-
ceeds thede minimisdeposit amount, that
employer will need to determine whether
it is a monthly or semi-weekly depositor.
Consequently, these temporary regulations
change the lookback period for employers
in the Form 944 Program during the cur-
rent, or preceding, calendar year. With re-
spect to those employers, the lookback pe-
riod is the second calendar year preceding
the current calendar year. For example, the
2006–6 I.R.B.402February 6, 2006

lookback period for calendar year 2007 is
calendar year 2005.
These temporary regulations also mod-
ify thede minimisdeposit rules in certain
situations to accommodate employers in
the Form 944 Program during the current,
or preceding, calendar year. These modi-
fications are designed to assist employers
who qualified for the Form 944 Program
because their annual employment tax
liability satisfied the eligibility require-
ments ($1,000 or less), but ultimately had
a total employment tax liability for the
year exceeding thede minimisdeposit
amount ($2,500 under existing regula-
tions). The deposit rules in §31.6302–1,
including thede minimisdeposit rule in
§31.6302–1(f)(4), apply to employers who
file Form 944. Therefore, these employers
will not have to make deposits and can pay
their employment tax liability when they
timely file their Forms 944 on or before
January 31 only if their total employment
tax liability for the year is less than $2,500.
Under the existingde minimisdeposit rule,
if an employer’s employment tax liability
equals or exceeds $2,500 for the year, the
employer would be required to deposit
employment taxes and, absent reasonable
cause, would be subjectto the penalty for
failure to deposit if the employer did not
make timely deposits. Any employer that
accumulates $100,000 or more of employ-
ment taxes is subject to the One-Day rule
of §31.6302–1(c)(3), and is required to
deposit those taxes on the next banking
day.
To assist employers whose tax liabil-
ity exceeds thede minimisamount while
in the Form 944 Program, these regu-
lations modify the deposit rules in two
ways. First, as employers who file Form
941 quarterly would be allowed a quar-
terly $2,500de minimisamount when
they timely filed their quarterly returns
instead of an annualde minimisamount,
these regulations modify thede minimis
deposit rule to mirror the treatment em-
ployers would have if they continued to
file Form 941 quarterly instead of Form
944 annually. Thus, these regulations al-
low employers in the Form 944 Program to
apply a quarterlyde minimisdeposit rule
if they deposit the employment taxes that
accumulated during a quarter by the last
day of the month following the close of the
quarter (the day their quarterly Forms 941
would have been due). If an employer’s
employment tax liability for a quarter
will not bede minimis, then the employer
should make deposits either monthly or
semi-weekly, depending on their deposit
schedule, to avoid being subject to the
failure-to-deposit penalty.
Second, because employers may not
realize their prior year’s employment tax
liability exceeded the eligibility require-
ment (currently, $1,000 or less) until they
file Form 944 on January 31 of the year
following the year for which the return is
filed, these employers might not realize
that they will be required to file Form 941
in the current year until after the date on
which to timely make their January deposit
obligation(s) for the current year. There-
fore, these regulations allow employers
whowereintheForm944Programin
the prior year to avoid a failure-to-deposit
penalty during the first month they fail
to deposit any required deposit(s), if they
fully pay their January employment taxes
by March 15 of the current year. For ex-
ample, an employer who was in the Form
944 Program during 2006 and had an em-
ployment tax liability for 2006 of $4,000
would not qualify for the Form 944 Pro-
gram for 2007. Under these regulations,
if the employer was a monthly depositor
for 2007, it would be required to deposit
the employment taxes it accumulated in
January 2007 by February 15, 2007. If the
employer does not deposit these accumu-
lated taxes by February 15, 2007, then it
will be deemed to have timely deposited if
it deposits them by March 15, 2007.
Lastly, these regulations contain fi-
nal regulations that provide cross-refer-
ences to the temporary regulations, cor-
rect and amend the table of contents in
§31.6302–0, correct a cross-reference in
§31.6302–1(e)(2), and revise the regula-
tions under section 6302 to remove all
references to an IRS district director, a
position that no longer exists in the IRS.
These temporary regulations are part of
the IRS’s effort to reduce taxpayer burden
by requiring certain employers to file em-
ployment tax returns annually rather than
quarterly and allowing them, in most cir-
cumstances, to remit employment taxes
annually with their return. By reducing the
number of returns employers are required
to file per year, the IRS will reduce each
eligible employer’s burden.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. For appli-
cability of the Regulatory Flexibility Act,
please refer to the Special Analyses section
of the preamble to the cross-referenced no-
tice of proposed rulemaking published in
this issue of the Bulletin. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
these regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these fi-
nal and temporary regulations are
Raymond Bailey, Audra M. Dineen, and
Emly B. Berndt of the Office of the As-
sociate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 31 are
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.6302–1 and
1.6302–2 are amended as follows:
February 6, 20064032006–6 I.R.B.

SectionRemoveAdd
1.6302–1(c)
third sentence
to the district director (or director of a service center)
1.6302–1(c)
fourth sentence
the district director or director of a service center with
1.6302–2(b)(6)
last sentence
to the district director or director of a service center
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Par. 3. The authority citation for part
31 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. In the list below, for each section
indicated in the left column, remove the
language in the middle column and add the
language in the right column:
SectionRemoveAdd
31.6302–1(e)(2)
first sentence
§31.6011(a)(4) or (5)§31.6011(a)–4 or
§31.6011(a)–5
31.6302–1(k)(1)
first sentence
District Director noticeNotice
31.6302–1(k)(1)
first sentence
from the district director
31.6302–1(k)(1)
first sentence, second
parenthetical
district directorCommissioner
31.6302(c)–1(a)(3)
last sentence
to the district director or director of a service center
31.6302(c)–1(b)(1)
first sentence
from the district director
31.6302(c)–1(b)(1)
first sentence, third
parenthetical
by the district director
31.6302(c)–2(c)
last sentence
to the district director or director of a service center
31.6302(c)–3(b)(4)
last sentence
to the district director or director of a service center
Par. 5. Section 31.6011(a)–1 is
amended by adding paragraph (a)(5) to
read as follows:
§31.6011(a)–1 Returns under Federal
Insurance Contributions Act.
(a) * * *
(5) [Reserved]. For further guidance,
see §31.6011(a)–1T(a)(5).
*****
Par. 6. Section 31.6011(a)–1T is added
to read as follows:
§31.6011(a)–1T Returns under Federal
Insurance Contributions Act (temporary).
(a)(1) through (a)(4) [Reserved]. For
further guidance, see §31.6011(a)–1(a)(1)
through (a)(4).
(5)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. For taxable years beginning on
or after January 1, 2006, employers noti-
fied of their qualification for the Employ-
ers’ Annual Federal Tax Program (Form
944) are required to file Form 944, “Em-
ployer’s Annual Federal Tax Return.” The
Internal Revenue Service (IRS) will no-
tify employers in writing of their qualifi-
cation for the Employers’ Annual Federal
Tax Program (Form 944). For provisions
relating to the time and place for filing re-
turns, see §§31.6071(a)–1 and 31.6091–1,
respectively.
(ii)Qualification for the Employers’
Annual Federal Tax Program (Form 944).
The IRS will send notifications of qualifi-
cation for the Employers’ Annual Federal
Tax Program (Form 944) to employers
with an estimated annual employment tax
liability of $1,000 or less. New employ-
2006–6 I.R.B.404February 6, 2006

ers who timely notify the IRS that they
anticipate their estimated annual employ-
ment tax liability to be $1,000 or less will
be notified of their qualification for the
Employers’ Annual Federal Tax Program
(Form 944). If an employer in the Employ-
ers’ Annual Federal Tax Program (Form
944) reports an annual employment tax
liability of more than $1,000, the IRS will
notify the employer that the employer’s
filing status has changed and the employer
will be required to file the quarterly Form
941 for succeeding tax years.
(iii)Exception to qualification for the
Employers’ Annual Federal Tax Program
(Form 944). Notwithstanding notification
by the IRS of qualification for the Employ-
ers’ Annual Federal Tax Program (Form
944), an employer may file Form 941 if—
(A) One of the following conditions ap-
plies—
(1) The employer anticipates that its an-
nual employment tax liability will exceed
$1,000, or
(2) The employer prefers to electroni-
cally file Forms 941 quarterly in lieu of fil-
ing Form 944 annually;
(B) The employer contacts the IRS, pur-
suant to the instructions in the IRS’ written
notification, to request to file Form 941;
and
(C) The IRS sends the employer a writ-
ten notification that the employer’s filing
requirement has been changed to Form
941.
(b) through (f) [Reserved]. For further
guidance, see §31.6011(a)–1(b) through
(f).
Par. 7. Section 31.6011(a)–4 is
amended by adding paragraph (a)(4) to
read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
(a) * * *
(4) [Reserved]. For further guidance,
see §31.6011(a)–4T(a)(4).
*****
Par. 8. Section 31.6011(a)–4T is added
to read as follows:
§31.6011(a)–4T Returns of income tax
withheld (temporary).
(a)(1) through (a)(3) [Reserved]. For
further guidance, see §31.6011(a)–4(a)(1)
through (a)(3).
(4)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. For taxable years beginning on
or after January 1, 2006, employers noti-
fied of their qualification for the Employ-
ers’ Annual Federal Tax Program (Form
944) are required to file a Form 944, “Em-
ployer’s Annual Federal Tax Return.” The
Internal Revenue Service (IRS) will no-
tify employers in writing of their qualifi-
cation for the Employers’ Annual Federal
Tax Program (Form 944). For provisions
relating to the time and place for filing re-
turns, see §§31.6071(a)–1 and 31.6091–1,
respectively.
(ii)Qualification for the Employers’
Annual Federal Tax Program (Form 944).
The IRS will send notifications of qualifi-
cation for the Employers’ Annual Federal
Tax Program (Form 944) to employers
with an estimated annual employment tax
liability of $1,000 or less. New employ-
ers who timely notify the IRS that they
anticipate their estimated annual employ-
ment tax liability to be $1,000 or less will
be notified of their qualification for the
Employers’ Annual Federal Tax Program
(Form 944). If an employer in the Employ-
ers’ Annual Federal Tax Program (Form
944) reports an annual employment tax
liability of more than $1,000, the IRS will
notify the employer that the employer’s
filing status has changed and that the em-
ployer will be required to file the quarterly
Form 941 for succeeding tax years.
(iii)Exception to qualification for the
Employers’ Annual Federal Tax Program
(Form 944). Notwithstanding notification
by the IRS of qualification for the Employ-
ers’ Annual Federal Tax Program (Form
944), an employer may file Form 941 if—
(A) One of the following conditions ap-
plies—
(1) The employer anticipates that its an-
nual employment tax liability will exceed
$1,000, or
(2) The employer prefers to electroni-
cally file Forms 941 quarterly in lieu of fil-
ing Form 944 annually;
(B) The employer contacts the IRS, pur-
suant to the instructions in the IRS’ written
notification, to request to file Form 941;
and
(C) The IRS sends the employer a writ-
ten notification that the employer’s filing
requirement has been changed to Form
941.
(b) through (c) [Reserved]. For further
guidance, see §31.6011(a)–4(b) through
(c).
Par. 9. In §31.6071(a)–1, the first sen-
tence in paragraph (a)(1) is revised to read
as follows:
§31.6071(a)–1 Time for filing returns and
other documents.
(a) * * *
(1)Quarterly or annual returns.Ex-
cept as provided in subparagraph (4)
of this paragraph, each return required
to be made under §§31.6011(a)–1 and
31.6011(a)–1T, in respect of the taxes
imposed by the Federal Insurance Contri-
butions Act (26 U.S.C. §§3101–3128), or
required to be made under §§31.6011(a)–4
and 31.6011(a)–4T, in respect of income
tax withheld, shall be filed on or before
the last day of the first calendar month
following the period for which it is made.
***
*****
Par. 10. Section 31.6302–0 is amended
by:
1.Adding new entries for
§31.6302–1(b)(4), (c)(5) and (6), (d),
(f)(4), and (f)(5).
2.Removing the entries for
§31.6302–1(b)(5) and (i).
3. Redesignating the entries for
§31.6302–1(h), (j), (k), and (m) as (i),
(k), (m), and (n), respectively.
4.Adding new entries for
§31.6302–1(h) and (j).
5. Revising the entry for newly desig-
nated §31.6302–1(k)(1).
6. Adding entries for §31.6302–1T.
The revision and additions read as fol-
lows:
§31.6302–0 Table of contents.
*****
Section 31.6302–1 Federal tax deposit
rules for withheld income taxes and
taxes under the Federal Insurance
Contributions Act (FICA) attributable to
payments made after December 31, 1992.
*****
(b) * * *
(4) Lookback period.
(i) [Reserved].
(ii) [Reserved].
(c) * * *
February 6, 20064052006–6 I.R.B.

(5) [Reserved].
(6) [Reserved].
(d) * * *
Example 6[Reserved].
*****
(f) * * *
(4)De minimisrule.
(i)De minimisdeposit rule for quarterly
and annual return periods beginning on or
after January 1, 2001.
(ii) [Reserved].
(iii) [Reserved].
(5) * * *
Example 3.[Reserved].
*****
(h) Time and manner of deposit — de-
posits required to be made by electronic
funds transfer.
(1) In general.
(2) Applicability of requirement.
(i) Deposits for return periods begin-
ning before January 1, 2000.
(ii) Deposits for return periods begin-
ning after December 31, 1999.
(iii) Voluntary deposits.
(3) Taxes required to be deposited by
electronic funds transfer.
(4) Definitions.
(i) Electronic funds transfer.
(ii) Taxpayer.
(5) Exemptions.
(6) Separation of deposits.
(7) Payment of balance due.
(8) Time deemed deposited.
(9) Time deemed paid.
*****
(j) Voluntary payments by electronic
funds transfer.
(k) * * *
(1) Notice exception.
*****
Section 31.6302–1T Federal tax deposit
rules for withheld income taxes and
taxes under the Federal Insurance
Contributions Act (FICA) attributable to
payments made after December 31, 1992
(temporary).
(a) through (b)(4)(ii) [Reserved].
(b)(4)(i) In general.
(ii) Adjustments.
(c)(1) through (c)(4) [Reserved].
(c)(5) Exception to the monthly and
semi-weekly deposit rules for employers
in the Employers’ Annual Federal Tax
Program (Form 944).
(c)(6) Extension of time to deposit rule
for employers in the Employers’ Annual
Federal Tax Program (Form 944) during
the preceding year.
(d)Examples 1through5[Reserved].
Example 6. Extension of time to deposit
rule for employers in the Employers’ An-
nual Federal Tax Program (Form 944) dur-
ing the preceding year satisfied.
(e) through (f)(4)(ii) [Reserved].
(f)(4)(iii)De minimisdeposit rule for
employers currently in the Employers’ An-
nual Federal Tax Program (Form 944).
(f)(5)Examples 1and2[Reserved].
Example 3.De minimisdeposit rule
for employers currently in the Employers’
Annual Federal Tax Program (Form 944)
satisfied.
(g) through (n) [Reserved].
Par. 11. Section 31.6302–1 is amended
by:
1. Revising paragraph (b)(4).
2. Adding paragraphs (c)(5) and (6), (d)
Example 6, and (f)(5)Example 3.
3. Removing paragraph (b)(5).
4. Revising paragraph (f)(4).
The revisions and additions read as fol-
lows:
§31.6302–1 Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(b) * * *
*****
(4)Lookback period—(i) [Re-
served]. For further guidance, see
§31.6302–1T(b)(4)(i).
(ii) [Reserved]. For further guidance,
see §31.6302–1T(b)(4)(ii).
(c) * * *
*****
(5) [Reserved]. For further guidance,
see §31.6302–1T(c)(5).
(6) [Reserved]. For further guidance,
see §31.6302–1T(c)(6).
(d) * * *
*****
Example 6. For further guidance, see
§31.6302–1T(d)Example 6.
*****
(f) * * *
*****
(4)De minimis rule—(i)De minimis de-
posit rule for quarterly and annual return
periods beginning on or after January 1,
2001. If the total amount of accumulated
employment taxes for the return period is
less than $2,500 and the amount is fully de-
posited or remitted with a timely filed re-
turn for the return period, the amount de-
posited or remitted will be deemed to have
been timely deposited.
(ii) [Reserved].
(iii) [Reserved]. For further guidance,
see §31.6302–1T(f)(4)(iii).
(5) * * *
*****
Example 3. For further guidance, see
§31.6302–1T(f)(5)Example 3.
Par. 12. Section 31.6302–1T is added
to read as follows:
§31.6302–1T Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992 (temporary).
(a) through (b)(3) [Reserved]. For fur-
ther guidance, see §31.6302–1(a) through
(b)(3).
(4)Lookback period—(i)In general.
For employers who file Form 941, the
lookback period for each calendar year is
the twelve month period ended the preced-
ing June 30. For example, the lookback
period for calendar year 2006 is the pe-
riod July 1, 2004 to June 30, 2005. The
lookback period for employers who are in
the Employers’ Annual Federal Tax Pro-
gram (Form 944), or were in it during
the previous calendar year, is the second
calendar year preceding the current cal-
endar year. For example, the lookback
period for calendar year 2006 is calendar
year 2004. In determining status as either
a monthly or semi-weekly depositor, an
employer should determine the aggregate
amount of employment tax liabilities re-
ported on its return(s) (Form 941 or Form
944) for the lookback period. New em-
ployers shall be treated as having employ-
ment tax liabilities of zero for any part of
the lookback period before the date the em-
ployer started or acquired its business.
(ii)Adjustments. The tax liability
shown on an original return for the return
period shall be the amount taken into ac-
count in determining whether more than
2006–6 I.R.B.406February 6, 2006

$50,000 has been reported during the look-
back period. In determining the aggregate
employment taxes for each return period
in a lookback period, an employer does
not take into account any adjustments for
the return period made on a supplemental
return filed after the due date of the return.
However, adjustments made on a Form
941c,Supporting Statement To Correct
Information, attached to a Form 941 or
Form 944 filed for a subsequent return
period are taken intoaccount in determin-
ing the employment tax liability for the
subsequent return period.
(c)(1) through (c)(4) [Reserved]. For
further guidance, see §31.6302–1(c)(1)
through (c)(4).
(5)Exception to the monthly and semi-
weekly deposit rules for employers in the
Employers’ Annual Federal Tax Program
(Form 944). Generally, an employer in the
Employers’ Annual Federal Tax Program
(Form 944) may remit its accumulated em-
ployment taxes with its timely filed re-
turn and is not required to deposit under
either the monthly or semi-weekly rules
set forth in paragraphs (c)(1) and (2) of
this section. An employer in the Employ-
ers’ Annual Federal Tax Program (Form
944) whose actual employment tax lia-
bility exceeds the eligibility threshold, as
set forth in §31.6011(a)–1T(a)(5)(ii) and
§31.6011(a)–4T(a)(4)(ii), will not qualify
for this exception and should follow the
deposit rules set forth in this section.
(6)Extension of time to deposit for
employers in the Employers’ Annual Fed-
eral Tax Program (Form 944) during
the preceding year.Anemployerwho
was in the Employers’ Annual Federal
Tax Program (Form 944) in the preced-
ing year, but who is no longer qualified
because its annual employment tax li-
ability exceeded the eligibility thresh-
old set forth in §31.6011(a)–1T(a)(5)(ii)
and §31.6011(a)–4T(a)(4)(ii) in that pre-
ceding year, is required to deposit pur-
suant to §31.6302–1. The employer
will be deemed to have timely deposited
its January deposit obligation(s) under
§31.6302–1(c)(1) through (4) for the first
quarter of the year in which it must file
quarterly using Form 941 if the employer
deposits the amount of such deposit obli-
gation(s) by March 15 of that year.
(d)Examples 1through5[Reserved].
For further guidance, see §31.6302–1(d)
Examples 1through5.
Example 6.Extension of time to deposit for em-
ployers in the Employers’ Annual Federal Tax Pro-
gram (Form 944) during the preceding year satisfied.
F (a monthly depositor) was notified to file Form
944 to report its employment tax liabilities for the
2006 calendar year. F filed Form 944 on January
31, 2007, reporting a total employment tax liabil-
ity for 2006 of $3,000. Because F’s annual employ-
ment tax liability for the 2006 taxable year exceeded
$1,000 (the eligibility requirement threshold), F may
not file Form 944 for calendar year 2007. Based
on F’s liability during the lookback period (calendar
year 2005, pursuant to §31.6302–1T(b)(4)(i)), F is a
monthly depositor for 2007. F accumulates $1,000
in employment taxes during January 2007. Because
F is a monthly depositor, F’s January deposit obli-
gation is due February 15, 2007. F does not deposit
these accumulated employment taxes on February 15,
2007. F accumulates $1,500 in employment taxes
during February 2007. F’s February deposit is due
March 15, 2007. F deposits the $2,500 of employ-
ment taxes accumulated during January and February
on March 15, 2007. Pursuant to §31.6302–1T(c)(6),
F will be deemed to have timely deposited the em-
ployment taxes due for January 2007, and, thus, the
IRS will not impose a failure-to-deposit penalty un-
der section 6656 for that month.
(e) through (f)(4)(ii) [Reserved]. For
further guidance, see §31.6302–1(e)
through (f)(4)(ii).
(iii)De minimis deposit rule for em-
ployers currently in the Employers’ An-
nual Federal Tax Program (Form 944).An
employer in the Employers’ Annual Fed-
eral Tax Program (Form 944) whose em-
ployment tax liability for the year equals or
exceeds $2,500 but whose employment tax
liability for a quarter of the year isde min-
imispursuant to §31.6302–1(f)(4)(i) will
be deemed to have timely deposited the
employment taxes due for that quarter if
the employer fully deposits the employ-
ment taxes accumulated during the quarter
by the last day of the month following the
close of that quarter. Employment taxes
accumulated during the fourth quarter can
be either deposited by January 31 or remit-
ted with a timely filed return for the return
period.
(5)Examples 1and2[Reserved]. For
further guidance, see §31.6302–1(f)(5)Ex-
amples 1and2.
Example 3.De minimis deposit rule for employ-
ers currently in the Employers’ Annual Federal Tax
Program (Form 944) satisfied. K (a monthly depos-
itor) was notified to file Form 944 to report its em-
ployment tax liabilities for the 2006 calendar year.
In the first quarter of 2006, K accumulates employ-
ment taxes in the amount of $1,000. On April 28,
2006, K deposits the $1,000 of employment taxes ac-
cumulated in the 1st quarter. K accumulates another
$1,000 of employment taxes during the second quar-
ter of 2006. On July 31, 2006, K deposits the $1,000
of employment taxes accumulated in the 2nd quar-
ter. K’s business grows and accumulates $1,500 in
employment taxes during the third quarter of 2006.
On October 31, 2006, K deposits the $1,500 of em-
ployment taxes accumulated in the 3rd quarter. K ac-
cumulates another $2,000 in employment taxes dur-
ing the fourth quarter. K files Form 944 on Jan-
uary 31, 2007, reporting a total employment tax li-
ability for 2006 of $5,500 and submits a check for
the remaining $2,000 of employment taxes with the
return. K will be deemed to have timely deposited
the employment taxes due for all of 2006, because K
complied with thede minimisdeposit rule provided
in §31.6302–1T(f)(4)(iii). Therefore, the IRS will
not impose a failure-to-deposit penalty under section
6656 for any month of the year. Under thisde minimis
deposit rule, as K was required to file Form 944 for
calendar year 2006, if K’s employment tax liability
for a quarter isde minimis, then K may deposit that
quarter’s liability by the last day of the month fol-
lowing the close of the quarter. This newde minimis
rule allows K to have the benefit of the same quarterly
de minimisamount K would have received if K filed
Form 941 each quarter instead of Form 944 annually.
Thus, as K’s employment tax liability for each quar-
ter wasde minimis, K could deposit quarterly.
(g) through (n) [Reserved]. For further
guidance, see §31.6302–1(g) through (n).
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 8, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
for Tax Policy.
(Filed by the Office of the Federal Register on December 30,
2005, 8:45 a.m., and published in the issue of the Federal
Register for January 3, 2006, 71 F.R. 11)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2006. See Rev. Rul. 2006-7, page 399.
February 6, 20064072006–6 I.R.B.

Section 7874.—Rules
Relating to Expatriated
Entities and Their Foreign
Parents
26 CFR 1.7874–1T: Disregard of affiliate-owned
stock (temporary).
T.D. 9238
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 7874
for Determining Ownership
by Former Shareholders or
Partners of Domestic Entities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains tem-
porary regulations under section 7874 of
the Internal Revenue Code (Code) relat-
ing to the disregard of certain affiliate-
owned stock in determining whether a cor-
poration is a surrogate foreign corporation
under section 7874(a)(2)(B) of the Code.
The text of the temporary regulations also
serves as the text of the proposed regu-
lations (REG–143244–05) set forth in the
notice of proposed rulemaking on this sub-
ject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective December 28, 2005.
Applicability Date:For the date of ap-
plicability, see §1.7874–1T(e).
FOR FURTHER INFORMATION
CONTACT: Jefferson Vanderwolk,
202–622–3800 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary
amendments to 26 CFR part 1 under
section 7874 of the Code relating to the
determination of the percentage of stock
in a foreign corporation held by former
shareholders or partners of a domestic cor-
poration or partnership (domestic entity)
by reason of holding stock or a partnership
interest in the domestic entity, for purposes
of determining whether the foreign corpo-
ration is a surrogate foreign corporation
under section 7874(a)(2)(B).
Section 7874 provides rules for expa-
triated entities and their surrogate foreign
corporations. An expatriated entity is de-
fined in section 7874(a)(2)(A) as a domes-
tic corporation or partnership with respect
to which a foreign corporation is a surro-
gate foreign corporation and any U.S. per-
son related (within the meaning of section
267(b) or 707(b)(1)) to such domestic cor-
poration or partnership. Generally, a for-
eign corporation is a surrogate foreign cor-
poration under section 7874(a)(2)(B), if,
pursuant to a plan or a series of related
transactions:
(i) The foreign corporation directly or
indirectly acquires substantially all the
properties held directly or indirectly by
a domestic corporation, or substantially
all the properties constituting a trade or
business of a domestic partnership;
(ii) After the acquisition at least 60 per-
cent of the stock (by vote or value) of the
foreign corporation is held by (in the case
of an acquisition with respect to a domes-
tic corporation) former shareholders of the
domestic corporation by reason of holding
stock in the domestic corporation, or (in
the case of an acquisition with respect to
a domestic partnership) by former partners
of the domestic partnership by reason of
holding a capital or profits interest in the
domestic partnership (ownership percent-
age test); and
(iii) The expanded affiliated group that
includes the foreigncorporation does not
have business activities in the foreign
country in which the foreign corporation
was created or organized that are substan-
tial when compared to the total business
activities of such group.
The tax treatment of expatriated entities
and surrogate foreign corporations varies
depending on the level of owner continu-
ity. If the percentage of stock (by vote
or value) in the surrogate foreign corpo-
rationheldbyformerownersofthedo-
mestic entity by reason of holding an in-
terest in the domestic entity is 80 percent
or more, the surrogate foreign corporation
is treated as a domestic corporation for all
purposes of the Code. If such ownership
percentage is 60 percent or more (but less
than 80 percent) by vote or value, the sur-
rogate foreign corporation is treated as a
foreign corporation but any applicable cor-
porate-level income or gain required to be
recognized by the expatriated entity under
section 304, 311(b), 367, 1001, 1248 or
any other applicableprovision with respect
to the transfer or license of property (other
than inventory or similar property) cannot
be offset by net operating losses or cred-
its (other than credits allowed under sec-
tion 901). This treatment of an expatriated
entity generally applies from the first date
properties are acquired pursuant to the plan
through the end of the 10-year period fol-
lowing the completion of the acquisition.
Section 7874(c)(2) provides that stock
held by members of the expanded affil-
iated group which includes the foreign
corporation is not taken into account for
purposes of the ownership percentage
test (affiliate-owned stock rule). Section
7874(c)(1) defines the termexpanded affil-
iated groupas an affiliated group defined
in section 1504(a) but without regard to
the exclusion of foreign corporations in
section 1504(b)(3) and with a reduction
of the 80 percent ownership threshold of
section 1504(a) to a more-than-50 percent
threshold.
The statute provides the Secretary of the
Treasury significant regulatory authority.
Section 7874(c)(6) authorizes the Secre-
tary of the Treasury to prescribe such regu-
lations as may be appropriate to determine
whether a corporation is a surrogate for-
eign corporation, including regulations to
treat warrants, options, contracts to acquire
stock, convertible debt interests, and other
similar interests as stock, and to treat stock
as not stock. Section 7874(g) authorizes
the Secretary of the Treasury to provide
such regulations as are necessary to carry
out the section.
The legislative history of section 7874
indicates that it was intended to apply to
so-called inversion transactions in which
a U.S. parent corporation of a multina-
tional corporate group is replaced by a for-
eign parent corporation without significant
change in the ultimate ownership of the
group. See H.R. Conf. Rep. No. 108–755,
108
th
Cong., 2d Sess., at 568 (Oct. 7,
2004). The statute was also intended to ap-
ply to similar transactions in which a trade
or business of a domestic partnership is
transferred to a foreign corporation at least
60 percent of which is owned by former
partners.
2006–6 I.R.B.408February 6, 2006

A key feature of section 7874 is the
affiliate-owned stock rule. Congress in-
tended to accomplish two main objectives
with this rule. See Joint Committee on
Taxation,General Explanation of Tax Leg-
islation Enacted in the 108
th
Congress,
at 344. First, Congress intended that the
ownership percentage test should be ap-
plied to prevent avoidance of the provi-
sions when they otherwise should apply,
including situations involving the use of
so-calledhook stock. In this context, hook
stock is stock of the acquiring foreign cor-
poration held by an entity that is at least 50
percent owned (by vote or value) directly
or indirectly by the acquiring foreign cor-
poration. If hook stock were respected as
stock of the foreign corporation for pur-
poses of section 7874(a)(2)(B)(ii), a tax-
payer might implement an inversion and
take the position that section 7874 was not
applicable by ensuring that hook stock ac-
counted for over 40 percent of the value
and voting power of the foreign corpora-
tion’s stock.
Second, Congress intended that the
affiliate-owned stock rule could operate
in specified situations to prevent the sec-
tion from applying to certain transactions
occurring within a group of corporations
ownedbythesamecommonparentcor-
poration before and after the transaction,
such as the conversion of a wholly owned
domestic subsidiary into a new wholly
owned controlled foreign corporation.Id.
In the absence of this rule, section 7874
could apply to internal group restructuring
transactions involving the transfer of a
wholly owned domestic corporation (or
its assets) to a wholly owned foreign cor-
poration, without a change in the parent
corporation of the group.
The IRS and Treasury Department have
concluded that the affiliate-owned stock
rule should not operate in a manner that al-
lows the avoidance of section 7874 in sit-
uations where it should apply. For exam-
ple, the affiliate-owned stock rule should
prevent the use of hook stock to avoid sec-
tion 7874. On the other hand, the IRS and
Treasury Department have also concluded
that the rule should not operate in a man-
ner that would result in section 7874 ap-
plying to certain types of transactions that
are outside the intended scope of the sec-
tion. For example, the type of concerns
that Congress meant to address in enacting
section 7874 do not result from certain in-
ternal group restructuring transactions in-
volving the transferto a foreign corpora-
tion of the stock or assets of a domestic
corporation where minority shareholders
have a relatively small percentage interest
in such stock or assets before and after the
transaction.
In addition, the IRS and Treasury De-
partment believe that the affiliate-owned
stock rule was not intended to cause sec-
tion 7874 to apply to certain acquisitive
business transactions, such as the acquisi-
tion of stock or assets of a domestic cor-
poration by an unrelated foreign corpora-
tion where after the acquisition the former
owners of the domestic entity do not own
more than 50 percent (by vote or value) of
the stock of any member of the expanded
affiliate group. For example, the contri-
bution of a domestic entity or its assets to
a foreign joint venturecorporationinex-
change for a minority interest in the joint
venture corporation should not result in the
joint venture corporation’s being treated,
for purposes of the ownership percentage
test, as wholly owned by the former own-
ers of the domestic entity by operation of
the affiliate-owned stock rule. In contrast,
section 7874 may properly apply to the ac-
quisition of an existing domestic joint ven-
ture entity by a foreign corporation which
is at least 60 percent owned, after the ac-
quisition, by the former owners of the ac-
quired domestic entity. Congress intended
the section to apply to transactions (other
than internal group restructurings, as dis-
cussed previously) that effectively replace
adomesticcorporation or partnership with
a foreign corporation at least 60 percent of
whichisheldbyformerownersofthedo-
mestic entity.
Explanation of Provisions
The IRS and Treasury Department be-
lieve that guidance is necessary to ensure
that the affiliate-owned stock rule cannot
be used to avoid the application of section
7874, through the use of hook stock or oth-
erwise, where that provision should apply.
However, the IRS and Treasury Depart-
ment also believe that guidance is needed
to make sure that this test does not ap-
ply to certain transactions that are prop-
erly viewed as outside the scope of sec-
tion 7874. Consequently, clarification is
needed with respect to the application of
the affiliate-owned stock rule.
The temporary regulation provides, as
a general rule, that affiliate-owned stock
is excluded from boththe numerator and
the denominator of the fraction that de-
termines the stock ownership percentage
for purposes of section 7874(a)(2)(B)(ii).
This rule prevents the use of hook stock
(and similar techniques) as means to re-
move an otherwise covered transaction
from the scope of section 7874.
The temporary regulation also provides
limited exceptions to the general rule pur-
suant to which affiliate-owned stock (other
than hook stock) is included in the de-
nominator of the fraction that determines
the stock ownership percentage for pur-
poses of section 7874(a)(2)(B)(ii) but is
excluded from the numerator of that frac-
tion. These exceptions are necessary to
prevent section 7874 from applying to (1)
certain transactions occurring as part of
an internal group restructuring involving
a domestic entity; and (2) certain acquis-
itive business transactions between unre-
lated parties where the former sharehold-
ers or partners of the domestic entity have
a minority interest in the acquired proper-
ties after the acquisition.
With respect to internal group restruc-
turings, the special rule applies where the
common parent corporation owns directly
or indirectly at least 80 percent of the do-
mestic entity before the transaction, and
continuing owners that are not members of
the expanded affiliated group hold no more
than 20 percent of the stock of the acquir-
ing foreign corporation after the transac-
tion.
With respect to transactions between
unrelated parties, thespecial rule applies
to the acquisition of a domestic entity or
its assets by a foreign corporation where,
after the acquisition, the former owners of
the domestic entity do not own, in the ag-
gregate, directly or indirectly, more than
50 percent of the stock (by vote or value)
of any member of the expanded affiliated
group that includes the acquiring foreign
corporation.
The temporary regulation also provides
a rule that prevents hook stock from be-
ing taken into account for purposes of (1)
determining the percentage of ownership
of an entity for purposes of determining
whether the special rule is applicable; and
(2) the application of the special rule itself.
The IRS and Treasury Department de-
cided it was important to issue these regu-
February 6, 20064092006–6 I.R.B.

lations to deal with affiliate-owned stock
as soon as possible. As a result, these
temporary regulationsare being published
without further delay and with the same
effective date as section 7874, which ap-
plies for taxable years ending after March
4, 2003.
Request for Comments
The IRS and Treasury Department
identified internal restructurings and ac-
quisitions by unrelated parties as cate-
gories of transactions requiring a special
rule regarding affiliate-owned stock in
order to prevent unintended consequences
under section 7874. Comments are re-
quested as to any other categories of
transactions that may give rise to unin-
tended consequences under section 7874
and these regulations.
The IRS and Treasury Department are
considering issuing subsequent public
guidance that addresses additional issues
under section 7874. This guidance may
address issues related to (1) the determi-
nation of whether there has been a direct
or indirect acquisition of substantially all
the properties held directly or indirectly
by a domestic corporation or substantially
all the properties constituting a trade or
business of a domestic partnership; (2)
the requirement that such acquisition be
pursuant to a plan or a series of related
transactions; (3) the requirement, in the
ownership percentage test, that ownership
ofstockbebyreasonofholdinganinterest
in the domestic corporation or partnership;
(4) the treatment of stock sold in a public
offering that is related to the acquisition;
(5) the requirement that the group’s activ-
ities in the relevant foreign country are in-
substantial when compared to the group’s
total business activities; (6) whether and
to what extent options on stock and other
similar interests are treated as stock for the
purpose of determining whether a corpo-
ration is a surrogate foreign corporation;
(7) the disregard of transfers of properties
or liabilities if the transfers are part of a
plan a principal purpose of which is to
avoid the purposes of section 7874; and
(8) any adjustments to the application of
the section that are necessary to carry out
its purposes, including adjustments neces-
sary to prevent avoidance. The IRS and
Treasury Department specifically request
comments regarding appropriate rules in
relation to these and other issues arising
under section 7874.
The IRS and Treasury Department
also are considering possible changes to
§1.367(a)–3(c), which governs the tax
consequences at the shareholder level of
certain transactions similar to those ad-
dressed by section 7874, in light of the
enactment of section 7874. Comments are
requested in this regard.
Regulations Addressing Avoidance of
the Purposes of Section 7874
The IRS and Treasury Department un-
derstand that taxpayers are implementing
structures that result in the same overall
tax consequences as structures that Con-
gress intended to be subject to section
7874, but taxpayers are taking the position
these structures are not within the scope
of section 7874. For example, the IRS
and Treasury Department understand that
the shareholders (or partners) of a domes-
tic corporation (or domestic partnership)
may arrange to transfer their shares (or
partnership interests) to a newly-formed
foreign entity for which an entity classifi-
cation election under Treasury regulation
§301.7701–3 is made to treat such entity
as a foreign partnership for Federal tax
purposes. Taxpayers may take the posi-
tion that these transactions are not subject
to section 7874 because the foreign entity
is not a foreign corporation for Federal tax
purposes and thus is not a surrogate foreign
corporation under section 7874(a)(2)(B).
In some cases, taxpayers further take the
position that the foreign entity, the inter-
ests in which are publicly traded, is treated
as a partnership for Federal tax purposes.
The IRS and Treasury Department be-
lieve that such structures have the effect
of inversion transactions. Section 7874(g)
grants broad regulatory authority to make
adjustments to the application of section
7874 to prevent the avoidance of the pur-
pose of section 7874 through the use of
non-corporate entities or other intermedi-
aries. In addition, sections 7805(b)(2) and
(3) provide exceptions in certain situations
to the general prohibition against the is-
suance of retroactive regulations found in
section 7805(b)(1). Accordingly, the IRS
and Treasury Department are considering
issuing regulations, which may be retroac-
tive, addressing these structures. The
IRS and Treasury Department specifically
request comments regarding appropriate
rules in relation to these and other uses
of intermediary entities (and other tech-
niques, including the use of exchangeable
shares) to avoid the purpose of section
7874.
Effective Date
Section 1.7874–1Tapplies to taxable
years ending after March 4, 2003.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) refer to the
Special Analyses section of the preamble
to the cross-reference notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f), this
Treasury decision will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of this regulation is
Jefferson VanderWolk, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Trea-
sury Department participated in its devel-
opment.
*****
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 1.7874–1T also issued under 26
U.S.C. 7874(c)(6) and (g).
Par. 2. Section 1.7874–1T is added to
read as follows:
2006–6 I.R.B.410February 6, 2006

§1.7874–1T Disregard of affiliate-owned
stock (temporary).
(a)Scope. Section 7874(c)(2)(A) pro-
vides that stock of the foreign corporation
referred to in section 7874(a)(2)(B) held
by members of the expanded affiliated
group that includes such foreign corpo-
ration (the EAG) shall not be taken into
account in determining, for purposes of
section 7874(a)(2)(B)(ii), the percent-
age of stock in such foreign corporation
held, after the acquisition, by former
shareholders or partners of the domestic
corporation or partnership referred to in
section 7874(a)(2)(B)(i) (the domestic en-
tity) by reason of having held stock or a
partnership interest in the domestic entity.
This section provides rules under section
7874(c)(2)(A).
(b)General rule. Except as provided in
paragraph (c) of this section, for purposes
of the ownership percentage determina-
tion required by section 7874(a)(2)(B)(ii),
stock held by one or more members of the
EAG is not included in either the numera-
tor or the denominator of the fraction that
determines such percentage. For purposes
of this §1.7874–1T, stock held by a part-
nership shall be considered as held propor-
tionately by its partners.
(c)Special rules. For purposes of the
ownership percentage determination re-
quired by section 7874(a)(2)(B)(ii), stock
held by one or more members of the EAG
shall be included in the denominator, but
not in the numerator, of the fraction that
determines the percentage if—
(1) (i) Before the acquisition, 80 percent
or more of the stock (by vote or value) or
the capital or profits interest in the domes-
tic entity was owned directly or indirectly
by the corporation that is the common par-
ent of the EAG after the acquisition; and
(ii) After the acquisition, stock held by
non-members of the EAG by reason of
holding stock or a capital or profits inter-
est in the domestic entity, if any, does not
exceed 20 percent of the stock (by vote or
value) of the foreign corporation; or
(2) After the acquisition, the former
shareholders or partners of the domestic
entity do not own, in the aggregate, di-
rectly or indirectly, more than 50 percent
of the stock (by vote or value) of any mem-
beroftheEAG.
(d)Disregard of subsidiary-owned in-
terests. Stock or partnership interests
owned by an entity in which at least 50
percent of the stock (by vote or value), or
at least 50 percent of the capital or profits
interest, is owned directly or indirectly by
the issuer of such stock or by the partner-
ship in question shall not be taken into
account for purposes of—
(1) Determining the percentage of own-
ership of an entity under paragraphs (c)(1)
and (c)(2) of this section; or
(2) Treating stock held by one or more
members of the EAG as included in the de-
nominator but not in the numerator under
paragraph (c) of this section.
(e)Examples. The application of this
section is illustratedby the following ex-
amples. It is assumed that all transactions
in the examples occur after March 4, 2003.
In all the examples,the EAGmeans the
expanded affiliated group which includes
the foreign corporation that has completed
the direct or indirect acquisition referred to
in section 7874(a)(2)(B)(i). In all the ex-
amples, if an entity or other person is not
described as either domestic or foreign, it
may be either domestic or foreign. The
analysis of the following examples is lim-
ited to a discussion of issues under sec-
tion 7874, even though the examples may
raise other issues (for example, under sec-
tion 367).
Example 1.Disregard of hook stock—(i)Facts.
A is a domestic corporation with 100 shares of a sin-
gle class of common stock outstanding. A’s stock is
held by a group of individuals. Pursuant to a plan, A
forms F, a foreign corporation, and transfers to F the
stock of several wholly owned foreign subsidiaries,
in exchange for 90 shares of F stock. F then forms
Merger Sub, a domestic corporation. Under a merger
agreement and state law, Merger Sub merges into A,
with A surviving the merger as a subsidiary of F. In
exchange for their A stock, the former shareholders
of A receive, in the aggregate, 100 shares of F stock.
A continues to hold 90 shares of F stock.
(ii)Analysis. F has indirectly acquired substan-
tially all the properties of A pursuant to a plan. Af-
ter the acquisition, the former shareholders of A own
100 shares of F stock by reason of holding stock in
A, and A owns 90 shares of F stock. Under para-
graph (b) of this section, the 90 shares of F stock held
by A, a member of the EAG, are not included in ei-
ther the numerator or the denominator of the fraction
that determines the percentage of F stock owned by
former shareholders of A by reason of holding stock
in A. Accordingly, the fraction is 100/100 and the
percentage is 100%. If the condition stated in sec-
tion 7874(a)(2)(B)(iii) regarding relatively insubstan-
tial business activities in F’s country of incorpora-
tion is satisfied, F is a surrogate foreign corporation
which is treated as a domestic corporation under sec-
tion 7874(b).
Example 2.Intra-group restructuring; wholly
owned corporation—(i)Facts. USS, a domestic
corporation, has 100 shares of common stock out-
standing, all of which are owned by P, a corporation.
As part of an internal restructuring within the P group,
USS transfers all its assets to FS, a newly formed
foreign corporation, in exchange for stock of FS, in
a reorganization describedin section 368(a)(1)(F). P
exchanges its USS stock for FS stock under section
354.
(ii)Analysis. FS has acquired substantially all the
properties held directly or indirectly by USS pursuant
to a plan. P, the common parent of the EAG, held
more than 80% of the stock of USS before the acqui-
sition. After the acquisition, less than 20% of FS’s
stock is owned by non-members of the EAG. Under
paragraph (c)(1) of this section, the FS stock owned
by P by reason of holding stock in USS is included in
the denominator but not in the numerator of the frac-
tion that determines the percentage of FS stock owned
by former shareholders of USS by reason of holding
stockinUSS.Accordingly,thefractionis0/100and
the percentage is 0%. FS is not a surrogate foreign
corporation.
Example 3.Intra-group restructuring; wholly
owned corporation—(i)Facts. The facts are the
same as inExample 2except that USS does not
transfer any of its assets. Ptransfers all 100 shares of
USS stock to FS in exchange for FS stock.
(ii)Analysis. FS has indirectly acquired substan-
tially all the properties held directly or indirectly by
USS pursuant to a plan. P, the common parent of the
EAG, held more than 80% of the stock of USS be-
fore the acquisition. After the acquisition, less than
20% of FS’s stock is owned by non-members of the
EAG. Under paragraph (c)(1) of this section, the FS
stock owned by P by reason of holding stock in USS
is included in the denominator but not in the numer-
ator of the fraction that determines the percentage of
stock owned by former shareholders of USS by rea-
sonofholdingstockinUSS.Accordingly,thefrac-
tion is 0/100 and the percentage is 0%. FS is not a
surrogate foreign corporation.
Example 4.Intra-group restructuring; less than
wholly owned corporation—(i)Facts. The facts are
thesameasinExample 2except that P owns 85 shares
of USS stock. The remaining 15 shares of USS stock
are owned by A, a person unrelated to P. As part of
an internal restructuring within the P group, P and A
transfer all their USS stock to FS, in exchange for an
equal number of shares of FS stock.
(ii)Analysis. FS has indirectly acquired substan-
tially all the properties held directly or indirectly by
USS pursuant to a plan. After the acquisition, P owns
85 shares of FS stock by reason of holding stock in
USS, and A owns 15 shares of FS stock by reason
of holding stock in USS. Before the acquisition, USS
was more than 80% owned by P, which is the com-
mon parent of the EAG, and after the acquisition, less
than 20% of FS’s stock is owned by non-members of
the EAG (i.e., by A) by reason of holding stock in
USS. Under paragraph (c)(1) of this section, the FS
stock owned by P is included in the denominator, but
is not included in the numerator, of the fraction that
determines the percentage of FS stock owned by for-
mer shareholders of USS by reason of holding stock
in USS. Accordingly, the fraction is 15/100 and the
percentage is 15%. FS is not a surrogate foreign cor-
poration. FS is a controlled foreign corporation.
Example 5.Formation of joint venture corpora-
tion—(i)Facts. M, a corporation, owns all the out-
February 6, 20064112006–6 I.R.B.

standing stock of S, a domestic corporation engaged
in business Y in the United States. B, a corporation
unrelated to M, owns several foreign subsidiaries that
are engaged in business Y outside the United States.
M and B enter into an agreement under which each
will transfer certain assets to FJV, a newly formed for-
eign corporation, in exchange for stock of FJV. FJV
will conduct business Y on a worldwide basis. Pur-
suant to the plan, M transfers to FJV all the outstand-
ing stock of S in exchange for 40 shares of FJV stock,
and B transfers to FJV the stock of several foreign
corporations in exchange for 60 shares of FJV stock.
FJV has no other stock outstanding.
(ii)Analysis. FJV has indirectly acquired sub-
stantially all the properties held directly or indirectly
by S pursuant to a plan. After the acquisition, M owns
40 shares of FJV stock by reason of holding stock in
S, and B owns the remaining 60 shares of FJV stock.
M does not own, directly or indirectly, more than 50%
of the stock of any member of the EAG. Under para-
graph (c)(2) of this section, the FJV stock owned by
B is included in the denominator but not the numer-
ator of the fraction that determines the percentage of
FJV stock owned by former shareholders of S by rea-
sonofholdingstockinS.Accordingly,thefractionis
40/100 and the percentage is 40%. FJV is not a sur-
rogate foreign corporation.
Example 6.Acquisition of existing joint venture
entity—(i)Facts. K and L are unrelated corpora-
tions. T is a domestic corporation with 100 shares
of stock outstanding, 55 of which are held by K and
45 of which are held by L. K and L contribute their
T stock to U, a newly formed foreign corporation, in
exchange for an equal number of shares of U stock.
(ii)Analysis. U has indirectly acquired substan-
tially all the properties held directly or indirectly by
T pursuant to a plan. After the acquisition, K owns
55 shares of U stock by reason of holding stock in T,
and L owns 45 shares of U stock by reason of hold-
ing stock in T. Under paragraph (b) of this section,
the U stock held by K is not included in either the
numerator or the denominator of the fraction that de-
termines the percentage of U stock owned by former
shareholders of T by reason of holding stock in T. Ac-
cordingly, the fraction is 45/45 and the percentage is
100%. If the EAG does not have substantial business
activities in U’s country of incorporation when com-
pared to the total business activities of the EAG, U is
a surrogate foreign corporation which is treated as a
domestic corporation under section 7874(b).
Example 7.Intra-group restructuring; less
than wholly owned partnership—(i)Facts.LLC,a
Delaware limited liability company engaged in the
conduct of a trade or business, is 90% owned by
C, a corporation, and 10% owned by D, a person
unrelated to C. LLC has not elected to be treated as
an association taxable as a corporation. As part of
an internal restructuring within the C group, C and D
transfer their interests in LLC to E, a newly formed
foreign corporation, in exchange for 90 shares and
10 shares, respectively, of E’s common stock, which
are all of the issued and outstanding shares of E.
(ii)Analysis. LLC is a domestic partnership for
Federal income tax purposes. E has indirectly ac-
quired substantially all the properties constituting a
trade or business of LLC pursuant to a plan. After
the acquisition, C holds 90% of E’s stock by reason
of holding a capital or profits interest in LLC, and D
holds 10% of E’s stock by reason of holding a capi-
tal or profits interest in LLC. Before the acquisition,
LLC is more than 80% owned by C, the common par-
ent of the EAG, and after the acquisition, less than
20% of E’s stock is owned by non-members of the
EAG (that is by D) by reason of holding a capital or
profits interest in LLC. Under paragraph (c)(1) of this
section, the E stock held by C is included in the de-
nominator but not the numerator of the fraction that
determines the percentage of E stock owned by for-
mer partners of LLC by reason of holding an interest
in LLC. Accordingly, the fraction is 10/100 and the
percentage is 10%. E is not a surrogate foreign cor-
poration.
Example 8.Acquisition of 50–50 joint venture
partnership—(i)Facts. The facts are the same as in
Example 7except that C and D each own 50% of the
capital and profits interests in LLC. C and D transfer
their interests in LLC to G, a newly formed foreign
corporation, in exchange for 50 shares each of G’s
common stock, which are all of the issued and out-
standing shares of G.
(ii)Analysis. G has indirectly acquired substan-
tially all the properties constituting a trade or busi-
ness of LLC, a domestic partnership, pursuant to a
plan. After the acquisition, C and D each hold 50%
of G’s stock by reason of holding an interest in LLC.
G is not included in an expanded affiliated group af-
ter the acquisition. Accordingly, none of the stock
of G is disregarded under this section in determining
the percentage of G stock held by former partners of
LLC by reason of holding an interest in LLC. Thus,
the fraction is 100/100 and the percentage is 100%.
If the EAG does not have substantial business activ-
ities in G’s country of incorporation when compared
to the total business activities of the EAG, G is a sur-
rogate foreign corporation which is treated as a do-
mestic corporation under section 7874(b).
(e)Effective date. This section applies
to taxable years ending after March 4,
2003.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 13, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 27,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 28, 2005, 70 F.R. 76685)
2006–6 I.R.B.412February 6, 2006

Part III. Administrative, Procedural, and Miscellaneous
Credit for New Qualified
Alternative Motor Vehicles
(Advanced Lean Burn
Technology Motor Vehicles
andQualifiedHybridMotor
Vehicles)
Notice 2006–9
SECTION 1. PURPOSE
This notice sets forth interim guidance,
pending the issuance of regulations, relat-
ing to the new advanced lean burn technol-
ogy motor vehicle credit under § 30B(a)(2)
and (c) of the Internal Revenue Code and
the new qualified hybrid motor vehicle
credit under § 30B(a)(3) and (d). Specif-
ically, this notice provides procedures for
a vehicle manufacturer (or, in the case of a
foreign vehicle manufacturer, its domestic
distributor) to certify to the Internal Rev-
enue Service (Service) both:
(1) that a passenger automobile or light
truck of a particular make, model, and
model year meets certain requirements that
must be satisfied to claim the new ad-
vanced lean burn technology motor vehi-
cle credit under § 30B(a)(2) and (c) or the
new qualified hybrid motor vehicle credit
under § 30B(a)(3) and (d); and
(2) the amount of the credit allowable
with respect to that vehicle.
This notice also provides guidance to
taxpayers who purchase passenger auto-
mobiles and light trucks regarding the con-
ditions under which they may rely on the
vehicle manufacturer’s (or, in the case of a
foreign vehicle manufacturer, its domestic
distributor’s) certification in determining
whether a credit is allowable with respect
to the vehicle and the amount of the credit.
The Service and the Treasury Department
expect that the regulations will incorporate
the rules set forth in this notice.
SECTION 2. BACKGROUND
Section 30B(a)(2) provides for a credit
determined under § 30B(c) for certain new
advanced lean burn technology motor ve-
hicles. Section 30B(a)(3) provides for a
credit determined under § 30B(d) for cer-
tain new qualified hybrid motor vehicles.
The new advanced lean burn technology
motor vehicle credit is the sum of: (1) a
fuel economy amount that varies with the
rated fuel economy of a qualifying vehicle
compared to the 2002model year city fuel
economy for a vehicle in its weight class;
and (2) a conservation credit based on the
estimated lifetime fuel savings of the vehi-
clecomparedtofuelusedbyavehicleinits
weight class and with fuel economy equal
to the 2002 model year city fuel economy.
The new qualified hybrid motor vehicle
credit for passenger automobiles and light
trucks is computed under the same formula
as the new advanced lean burn technology
motor vehicle credit. Both the new ad-
vanced lean burn technology motor vehi-
cle credit and the new qualified hybrid mo-
tor vehicle credit begin to phase out for a
manufacturer’s passenger automobiles and
light trucks in the second calendar quar-
ter after the calendar quarter in which at
least 60,000 of the manufacturer’s passen-
ger automobiles and light trucks that qual-
ify for either credit have been sold for use
in the United States (determined on a cu-
mulative basis for sales after December 31,
2005).
SECTION 3. SCOPE OF NOTICE
.01Vehicles Covered. Both the new ad-
vanced lean burn technology motor vehi-
cle credit and the new qualified hybrid mo-
tor vehicle credit apply to passenger auto-
mobiles and light trucks. The new qual-
ified hybrid motor vehicle credit also ap-
plies to other vehicles, but the credit for ve-
hicles that are not passenger automobiles
and light trucks is computed under a differ-
ent formula than that applicable to passen-
ger automobiles and light trucks. This no-
tice applies only to passenger automobiles
and light trucks. Guidance regarding the
credit for new qualified hybrid motor vehi-
cles that are not passenger automobiles or
light trucks will be provided in a separate
notice. Guidance regarding the credits for
other vehicles that are eligible for credits
under § 30B (new qualified fuel cell motor
vehicles and new qualified alternative fuel
motor vehicles) will be provided in sepa-
rate notices.
.02Rules Common to All Qualifying Ve-
hicles. This notice does not address a num-
ber of rules that are common to all mo-
tor vehicles that qualify for credits under
§ 30B. These rules include: (1) rules under
which lessors may claim the credits allow-
able under § 30B; (2) the rule preventing
thecreditsfrombeingusedtoreducealter-
native minimum tax liability; and (3) rules
relating to recapture of the credit. The Ser-
vice and Treasury Department expect to
issue separate guidance relating to these
rules.
SECTION 4. MEANING OF TERMS
The following definitions apply for pur-
poses of this notice:
(1)In General. Terms used in this no-
tice and not defined in this section have the
samemeaningaswhenusedin§30B.
(2)Passenger Automobile and Light
Truck. Section 30B provides that the
terms “passenger automobile” and “light
truck” have the meaning given in regu-
lations prescribed by the Administrator
of the Environmental Protection Agency
for purposes of the administration of Title
II of the Clean Air Act (42 U.S.C. 7521
et seq.). Those regulations currently do
not include a definition of these terms, but
§ 30B(b)(2)(B) provides the 2002 model
year city fuel economy tables that must
be used to determine the amount of the
credit for passenger automobiles and light
trucks. Those tables do not prescribe the
fuel economy for vehicles having a gross
vehicle weight of more than 8,500 pounds.
Accordingly, until either the Environmen-
tal Protection Agency issues regulations or
future guidance issued by the Service pro-
vides otherwise (whichever occurs first),
any vehicle having a gross vehicle weight
of more than 8,500 pounds will not be
treated as a passenger automobile or light
truck for purposes of this notice.
(3)City Fuel Economy. The term “city
fuel economy” has the meaning prescribed
in 40 CFR § 600.002–85(11).
(4)Gasoline-Gallon-Equivalent.Inthe
case of a motor vehicle that does not use
gasoline, the 2002 model year city fuel
economy is determined on a gasoline-gal-
lon-equivalent basis. The gasoline-gal-
lon-equivalents for the 2002 model year
city fuel economy may be obtained from
the Environmental Protection Agency, Of-
fice of Transportation and Air Quality at
the following address:
February 6, 20064132006–6 I.R.B.

Mailing Address
USEPA Headquarters
Ariel Rios Building
1200 Pennsylvania Avenue, N.W.
Mail Code: 6401A
Washington, DC 20460
Courier Address
USEPA Headquarters
Ariel Rios Building
1200 Pennsylvania Avenue, N.W.
Room 6502A
Washington, DC 20004
(5)Vehicle Inertia Weight Class.The
term “vehicle inertia weight class” means,
with respect to a motor vehicle, its iner-
tia weight class determined under 40 CFR
§ 86.129–94. Under 40 CFR § 86.082–2,
the inertia weight class is the class (a group
of test weights) into which a vehicle is
grouped based on its loaded vehicle weight
in accordance with the provisions of 40
CFR part 86.
SECTION 5. MANUFACTURER’S
CERTIFICATION AND QUARTERLY
REPORTS
.01When Certification Permitted.A
vehicle manufacturer (or, in the case of a
foreign vehicle manufacturer, its domestic
distributor) may certify to purchasers that
a passenger automobile or light truck of
a particular make, model, and model year
meets all requirements (other than those
listed in section 5.02 of this notice) that
must be satisfied to claim the new ad-
vanced lean burn technology motor vehi-
cle credit or the new qualified hybrid mo-
tor vehicle credit, and the amount of the
credit allowable under § 30B(a)(2) and (c)
or § 30B(a)(3) and (d) with respect to the
vehicle, if the following requirements are
met:
(1) The manufacturer (or, in the case of
a foreign vehicle manufacturer, its domes-
tic distributor) has submitted to the Ser-
vice, in accordance with section 6 of this
notice, a certification with respect to the
vehicle and the certification satisfies the
requirements of section 5.03 of this notice;
(2) The manufacturer (or, in the case of
a foreign vehicle manufacturer, its domes-
tic distributor) hasreceived an acknowl-
edgment of the certification from the Ser-
vice.
.02Purchaser’s Reliance. Except as
provided in section 5.07 of this notice, a
purchaser of a passenger automobile or
light truck may rely on the manufacturer’s
(or, in the case of a foreign vehicle man-
ufacturer, its domestic distributor’s) cer-
tification concerningthe vehicle and the
amount of the credit allowable with respect
to the vehicle (including cases in which the
certification is received after the purchase
of the vehicle). The purchaser may claim a
credit in the certified amount with respect
to the vehicle if the following requirements
are satisfied:
(1) The vehicle is placed in service by
the taxpayer after December 31, 2005, and
is purchased on or before December 31,
2010.
(2) The original use of the vehicle com-
mences with the taxpayer.
(3) The vehicle is acquired for use or
lease by the taxpayer, and not for resale.
(4) The vehicle is used predominantly
in the United States.
.03Content of Certification. The cer-
tification must contain the information re-
quired in section 5.03(1) of this notice and
the additional information required in sec-
tion 5.03(2) or section 5.03(3), whichever
applies.
(1)All Vehicles. For all vehicles, the
certification must contain—
(a) The name, address, and taxpayer
identification number of the certifying en-
tity;
(b) The make, model, model year, and
any other appropriate identifiers of the mo-
tor vehicle;
(c) A statement that the vehicle is made
by a manufacturer;
(d) The type of credit for which the ve-
hicle qualifies (that is, either the new ad-
vanced lean burn technology motor vehi-
cle credit, or the new qualified hybrid mo-
tor vehicle credit for passenger automo-
biles and light trucks);
(e) The amount of the credit for the ve-
hicle (showing computations);
(f) The gross vehicle weight rating of
the vehicle;
(g) The vehicle inertia weight class of
the vehicle;
(h) The city fuel economy of the vehi-
cle;
(i) A statement that the vehicle com-
plies with the applicable provisions of the
Clean Air Act;
(j) A copy of the certificate that the ve-
hicle meets or exceeds the applicable Bin
5 Tier II emission standard (if the vehi-
cle has a gross vehicle weight rating of
6,000 pounds or less), or the applicable
Bin 8 Tier II emission standard (if the
vehicle has a gross vehicle weight rating
of more than 6,000 pounds, but not more
than 8,500 pounds) established in regula-
tions prescribed by the Administrator of
the Environmental Protection Agency un-
der § 202(i) of the Clean Air Act for that
make and model year vehicle;
(k) A statement that the vehicle com-
plies with the applicable air quality pro-
visions of state law of each state that has
adopted the provisions under a waiver un-
der § 209(b) of the Clean Air Act or a list
identifying each state that has adopted ap-
plicable air quality provisions with which
the vehicle does not comply;
(l) A statement that the vehicle com-
plies with the motor vehicle safety pro-
visions of 49 U.S.C. §§ 30101 through
30169;
(m) A declaration, applicable to the
certification and any accompanying doc-
uments, signed by a person currently
authorized to bind the manufacturer (or, in
the case of a foreign vehicle manufacturer,
it domestic distributor) in these matters, in
the following form:
“Under penalties of perjury, I declare
that I have examined this certification, in-
cluding accompanying documents, and to
the best of my knowledge and belief, the
facts presented in support of this certifica-
tion are true, correct, and complete.”
(2)New Advanced Lean Burn Technol-
ogy Motor Vehicles. A certification re-
lating to a new advanced lean burn tech-
nology motor vehicle must also contain a
statement that the vehicle has an internal
combustion engine that—
(a) Is designed to operate primarily us-
ing more air than is necessary for complete
combustion of the fuel;
(b) Incorporates direct injection; and
(c) Achieves at least 125 percent of the
2002 model year city fuel economy.
2006–6 I.R.B.414February 6, 2006

(3)New Qualified Hybrid Motor Vehi-
cles. A certification relating to a new qual-
ified hybrid motor vehicle must also con-
tain—
(a) A statement that the motor vehi-
cle draws propulsion energy from onboard
sources of stored energy that are both an
internal combustion or heat engine using
consumable fuel, and a rechargeable en-
ergy storage system;
(b) A copy of the certificate that the mo-
tor vehicle meets or exceeds the equivalent
qualifying California low emission vehicle
standard under § 243(e)(2) of the Clean Air
Act for that make and model year; and
(c) Evidence that the maximum power
available from the rechargeable energy
storage system during a standard 10 sec-
ond pulse power or equivalent test is at
least 4 percent of the sum of the power
and the SAE net power of the internal
combustion or heat engine;
.04Acknowledgment of Certification.
The Service will review the original signed
certification and issue an acknowledgment
letter to the vehicle manufacturer (or, in the
case of a foreign vehicle manufacturer, its
domestic distributor) within 30 days of re-
ceipt of the request for certification. This
acknowledgment letter will state whether
purchasers may rely on the certification.
.05Quarterly Reporting of Sales of
Qualified Vehicles. A manufacturer (or,
in the case of a foreign vehicle manu-
facturer, its domestic distributor) that has
received an acknowledgment of its certi-
fication from the Service must submit to
the Service, in accordance with section 6
of this notice, a report of the number of
qualified vehicles sold by the manufac-
turer (or, in the case of a foreign vehicle
manufacturer, its domestic distributor) to
a retail dealer during the calendar quarter.
For this purpose, a qualified vehicle is any
passenger automobile or light truck that
is a new advanced lean burn technology
motor vehicle or a new qualified hybrid
motor vehicle. The quarterly report must
contain the following information:
(1) The name, address, and taxpayer
identification number of the reporting en-
tity;
(2) The number of qualified vehicles
sold by the reporting entity to a retail
dealer during thecalendar quarter;
(3) The make, model, model year, and
any other appropriateidentifiers of the
qualified vehicles sold during the calendar
quarter; and
(4) A declaration, applicable to the
quarterly report and any accompanying
documents, signed by a person currently
authorized to bind the manufacturer (or, in
the case of a foreign vehicle manufacturer,
its domestic distributor) in these matters,
in the following form:
“Under penalties of perjury, I declare
that I have examined this report, includ-
ing accompanying documents, and to the
best of my knowledge and belief, the facts
presented in support of this report are true,
correct, and complete.”
.06Acknowledgment of Quarterly Re-
port. The Service will review the origi-
nal signed quarterly report and issue an ac-
knowledgment letter to the vehicle man-
ufacturer (or, in the case of a foreign ve-
hicle manufacturer, itsdomestic distribu-
tor) within 30 days of receipt of the re-
quest for certification. This acknowledg-
ment letter will state whether purchasers
may continue to rely on the certification.
.07Effect of Erroneous Certification,
Erroneous Quarterly Reports, or Failure
to Make Timely Quarterly Reports.
(1)Erroneous Certification or Quar-
terly Report. The acknowledgment that
the Service provides for a certification is
not a determination that a vehicle quali-
fies for the credit, or that the amount of
the credit is correct. The Service may,
upon examination (and after any appro-
priate consultation with the Department of
Transportation or the Environmental Pro-
tection Agency), determine that the vehi-
cle is not a new advanced lean burn tech-
nology motor vehicle or new qualified hy-
brid motor vehicle or that the amount of
the credit determined by the manufacturer
(or, in the case of a foreign vehicle manu-
facturer, its domestic distributor) to be al-
lowable with respect to the vehicle is incor-
rect. In either event, or in the event that the
manufacturer (or, inthe case of a foreign
vehicle manufacturer, its domestic distrib-
utor) makes an erroneous quarterly report,
the manufacturer’s (or, in the case of a
foreign vehicle manufacturer, its domestic
distributor’s) right to provide a certifica-
tion to future purchasers of the advanced
lean burn technology or hybrid motor ve-
hicles will be withdrawn, and purchasers
who acquire a vehicle after the date on
which the Service publishes an announce-
ment of the withdrawal may not rely on the
certification. Purchasers may continue to
rely on the certification for vehicles they
acquired on or before the date on which the
announcement of thewithdrawal is pub-
lished (including in cases in which the ve-
hicle is not placed in service and the credit
is not claimed until after that date), and
the Service will not attempt to collect any
understatement of tax liability attributable
to such reliance. Manufacturers (or, in
the case of foreign vehicle manufacturers,
their domestic distributors) are reminded
that an erroneous certification or an erro-
neous quarterly report may result in the im-
position of penalties:
(a) under § 7206 for fraud and making
false statements; and
(b) under § 6701 for aiding and abetting
an understatement of tax liability in the
amount of $1,000 ($10,000 in the case of
understatements by corporations) per re-
turn on which a credit is claimed in re-
liance on the certification).
(2)Failure to Make Timely Quarterly
Report. If a manufacturer (or, in the case
of a foreign vehicle manufacturer, its do-
mestic distributor) fails to make a quar-
terly report in accordance with section 5.05
of this notice and at the time specified in
section 6.02 of this notice, the acknowl-
edgment letter issued under section 5.04
of this notice may be withdrawn, and pur-
chasers will not be entitled to rely on the
related certification for quarters beginning
after the date on which the Service pub-
lishes an announcement of the withdrawal
(generally, quarters beginning after the due
date of the report). If the quarterly report
is filed subsequently, the Service may reis-
sue the acknowledgment letter and retract
the withdrawal announcement.
SECTION 6. TIME AND ADDRESS
FOR FILING CERTIFICATION AND
QUARTERLY REPORTS
.01Time for Filing Certification.In
order for a certification under section 5
of this notice to be effective for new ad-
vanced lean burn technology motor vehi-
cles and new qualified hybrid motor ve-
hicles placed in service during a calendar
year, the certification must be received by
the Service not later than December 31
st
of
that calendar year.
.02Time for Filing Quarterly Reports.
A report of sales of qualified vehicles dur-
ing a quarter must be filed with the Service
February 6, 20064152006–6 I.R.B.

at the address specified in section 6.03 of
this notice not later than the last day of the
first calendar month following the quarter
to which the report relates.
.03Address for Filing. Certifications
and quarterly reports under section 5 of
this notice must be sent to:
Internal Revenue Service
Industry Director, Large and Mid-Size
Business, Heavy Manufacturing and
Transportation
MetroParkOfficeComplex—LMSB
111 Wood Avenue, South
Iselin, New Jersey 08830
SECTION 7. PAPERWORK
REDUCTION ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1988.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in this
notice are in section 5. This information
is required to be collected and retained
in order to ensure that vehicles meet the
requirements for the new advanced lean
burn technology motor vehicle credit
under § 30B(a)(2) and (c) or the new qual-
ified hybrid motor vehicle credit under
§ 30B(a)(3) and (d). This information will
be used to determine whether the vehi-
cle for which the credit is claimed by a
taxpayer is property that qualifies for the
credit. The collection of information is
required to obtain a benefit. The likely
respondents are corporations and partner-
ships.
The estimated total annual reporting
burden is 280 hours.
The estimated annual burden per re-
spondent varies from 35 hours to 45 hours,
depending on individual circumstances,
with an estimated average burden of 40
hours to complete the certification re-
quired under this notice. The estimated
number of respondents is 7.
The estimated annual frequency of re-
sponses is on occasion.
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.
SECTION 8. DRAFTING
INFORMATION
The principal author of this notice
is Nicole R. Cimino of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this notice, contact
Ms. Cimino at (202) 622–3120 (not a
toll-free call).
2006–6 I.R.B.416February 6, 2006

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations,
Notice of Proposed
Rulemaking, and Notice
of Public Hearing
Time for Filing Employment
Tax Returns and Modifications
to the Deposit Rules
REG–148568–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions, notice of proposed rulemaking, and
notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9239) relating to the annual fil-
ing of Federal employment tax returns
and requirements for employment tax de-
posits for employers in the Employers’
Annual Federal Tax Program (Form 944)
(hereinafter referred to as the “Form 944
Program”). Those temporary regulations
provide requirements for filing returns to
report the Federal Insurance Contributions
Act (FICA) taxes and income tax withheld
under section 6011 of the Internal Rev-
enue Code (Code) and §§31.6011(a)–1
and 31.6011(a)–4. Those regulations also
require employers qualified for the Form
944 Program to file Federal employment
tax returns annually. In addition, those
regulations provide requirements for em-
ployers to make deposits of tax under
FICA and the income tax withholding
provisions of the Code (collectively, em-
ployment taxes) under section 6302 of the
Code and §31.6302–1. The text of those
regulations serves, in part, as the text of
these proposed regulations. In addition
to rules related to the Form 944 Program,
these proposed regulations provide an ad-
ditional method for quarterly return filers
to determine whether the amount of accu-
mulated employment taxes is considered
de minimis. This document also provides
notice of a public hearing.
DATES: Written or electronic comments
must be received by April 3, 2006. Out-
lines of topics to be discussed at the public
hearing scheduled for April 26, 2006, at 10
a.m. must be received by April 5, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–148568–04), room
5203, Internal Revenue Service, PO Box
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–148568–04),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC, or sent electronically, via the IRS
Internet site athttp://www.irs.gov/regs
or via the Federal eRulemaking Por-
tal athttp://www.regulations.gov(IRS
REG–148568–04). The public hearing
will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations relating to section 6011,
Raymond Bailey, (202) 622–4910; con-
cerning the proposed regulations relating
to section 6302, Audra M. Dineen, (202)
622–4940; concerning submissions of
comments and the hearing, Treena Garrett,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Regulations on Em-
ployment Taxes and Collection of Income
Tax at Source (26 CFR Part 31) under sec-
tions 6011 and 6302. These amendments
are designed to require employers quali-
fied for the Form 944 Program to file Fed-
eral employment tax returns annually and
to permit most employers in the Form 944
Program to remit their accumulated em-
ployment taxes annually with their return.
The text of those temporary regulations
also serves, in part, as the text of these
proposed regulations. The preamble to the
temporary regulations explains the tempo-
rary regulations and these proposed reg-
ulations. These proposed regulations are
one part of the IRS’s effort to reduce tax-
payer burden by requiring certain employ-
ers to file Federal employment tax returns
annually rather than quarterly and by per-
mitting certain employers to remit employ-
ment taxes annually with their return.
De Minimis Deposit Rule
In addition to establishing the Form 944
Program, these proposed regulations will
provide a safe harbor for small employ-
ers that have an unexpected increase in
their deposit liability for a quarterly re-
turn period. The proposed regulations pro-
vide an alternate method for determining
whether the employer’s employment tax
obligations arede minimis, which is based
on its employment taxes due for the prior
return period. This special rule applies
only to employers filing quarterly tax re-
turns and therefore has no application to
the Form 944 Program.
Under the existing regulations, deposits
of taxes reported on Form 941, “Em-
ployer’s Quarterly Federal Tax Return,”
generally are due monthly or semi-weekly.
If an employer fails to make timely de-
posits of employment taxes, then, absent
reasonable cause, the employer will be
subject to the penalty for failure to de-
posit under section 6656. Currently,
§31.6302–1(f)(4) (thede minimisde-
posit rule) provides that, for quarterly and
annual return periods, if the aggregate
amount of employment taxes for the re-
turn period is less than $2,500 and that
amount is deposited or remitted with a
timely filed return for that return period,
the amount will be deemed to have been
timely deposited and the employer will
not be subject to the penalty for failure
to deposit. Thus, currently under thede
minimisdeposit rule, employers remitting
their employment taxes with their timely
filed quarterly returns will only be deemed
to have timely deposited their taxes if the
amount of taxes due is less than $2,500
for that quarter. Similarly, under the cur-
rentde minimisdeposit rule, employers
remitting their employment taxes with
their timely filed annual returns will only
be deemed to have timely deposited if the
February 6, 20064172006–6 I.R.B.

amount of taxes due is less than $2,500 for
the entire year.
Under the proposed amendments, em-
ployers may remit their employment taxes
with their timely filed quarterly returns and
be deemed to have timely deposited if the
amount of the taxes due for the current
quarteror for the prior quarteris less than
$2,500. This special rule can be illus-
trated by the following example: an em-
ployer has less than $50,000 in employ-
ment taxes reported during the lookback
period and is therefore a monthly depositor
under §31.6302–1(b)(2). The employer’s
employment tax liabilities for the first and
second quarters of 2004 were $2,450 and
$2,400, respectively. In the third quar-
ter of 2004, however, the employer’s em-
ployment tax liability was $2,550. Under
the existingde minimisdeposit rule, if the
employer remits the $2,550 with its third
quarter return, the amount is not consid-
ered timely deposited for that quarter and,
therefore, the employer would be assessed
the section 6656 penalty for failure to de-
posit. Modifying thede minimisdeposit
rule to allow employers to base the de-
termination on the employment taxes due
for the immediately preceding quarter pro-
vides a safe harbor for employers regard-
ing their deposit obligations. Thus, in
this example, when the employer had an
increase in its employment tax liability
for the third quarter of 2004, its remit-
tance would still be deemed to have been
timely deposited because the taxes for the
immediately preceding return period were
de minimis. The proposed amendment
has no application to the One-Day rule in
§31.6302–1(c)(2), which requires employ-
ers to make a deposit on the next banking
day if they accumulate $100,000 or more
of employment taxes.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and because these regulations do not im-
pose a collection of information on small
entities, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. In addition, the IRS and Trea-
sury Department are considering expand-
ing the Form 944 program in the future and
seek comments on the eligibility require-
ments and how best to change them. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled for
April 26, 2006, beginning at 10 a.m. in the
Auditorium of the Internal Revenue Build-
ing, 1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the Consti-
tution Avenue entrance. In addition, all
visitors must presentphoto identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
thehearing,seetheFORFURTHERIN-
FORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments and
an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
April 5, 2006. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of these pro-
posed regulations are Raymond Bailey,
Audra M. Dineen, and Emly B. Berndt of
the Office of the Associate Chief Counsel
(Procedure and Administration), Admin-
istrative Provisions and Judicial Practice
Division.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.6011(a)–1 is
amended by revising paragraph (a)(5)
to read as follows:
§31.6011(a)–1 Returns under Federal
Insurance Contributions Act.
(a) * * *
(5) [The text of proposed
§31.6011(a)–1(a)(5) is the same as
the text of §31.6011(a)–1T(a)(5) pub-
lished elsewhere in this issue of the
Bulletin].
*****
Par. 3. Section 31.6011(a)–4 is
amended by revising paragraph (a)(4)
to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
(a) * * *
(4) [The text of proposed
§31.6011(a)–4(a)(4) is the same as
the text of §31.6011(a)–4T(a)(4) pub-
lished elsewhere in this issue of the
Bulletin].
*****
Par. 4. Section 31.6302–1 is amended
by revising paragraphs (b)(4), (c)(5) and 6,
(d)Example 6, (f)(4), and (f)(5)Example 3
to read as follows:
2006–6 I.R.B.418February 6, 2006

§31.6302–1 Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(b) * * *
(4) * * *
(i) [The text of the proposed
§31.6302–1(b)(4)(i) is the same as the
text of §31.6302–1T(b)(4)(i) published
elsewhere in this issue of the Bulletin].
(ii) [The text of the proposed
§31.6302–1(b)(4)(ii) is the same as the
text of §31.6302–1T(b)(4)(ii) published
elsewhere in this issue of the Bulletin].
(c) * * *
(5) [The text of proposed
§31.6302–1(c)(5) is the same as the
text of §31.6302–1T(c)(5) published
elsewhere in this issue of the Bulletin].
(6) [The text of proposed
§31.6302–1(c)(6) is the same as the
text of §31.6302–1T(c)(6) published
elsewhere in this issue of the Bulletin].
(d) * * *
Example 6.[Thetextofproposed
§31.6302–1(d)Example 6is the same as
the text of §31.6302–1T(d)Example 6
published elsewhere in this issue of the
Bulletin].
*****
(f) * * *
(4)De minimis rule—(i)De minimis
deposit rule for quarterly and annual re-
turn periods beginning on or after January
1, 2001. If the total amount of accumu-
lated employment taxes for the return pe-
riod isde minimisand the amount is fully
deposited or remitted with a timely filed
return for the return period, the amount de-
posited or remitted will be deemed to have
been timely deposited. The total amount of
accumulated employment taxes isde min-
imisif it is less than $2,500 for the return
period or if it isde minimispursuant to
paragraph (f)(4)(ii) of this section.
(ii)De minimis deposit rule for quar-
terly return periods. For purposes of para-
graph (f)(4)(i) of this section, if the to-
tal amount of accumulated employment
taxes for the immediately preceding quar-
ter was less than $2,500, unless paragraph
(c)(3) of this section applies to require a
deposit at the close of the next banking
day, then the employer will be deemed
to have timely deposited the employer’s
employment taxes for the current quarter
if the employer complies with the time
and method of payment requirements con-
tained in paragraph (f)(4)(i) of this section.
(iii)[Thetextofproposed
§31.6302–1(f)(4)(iii) is the same as
the text of §31.6302–1T(f)(4)(iii) pub-
lished elsewhere in this issue of the
Bulletin].
(5) * * *
Example 3.[Thetextofproposed
§31.6302–1(f)(5)Example 3is the same
as the text of §31.6302–1T(f)(5)Example
3published elsewhere in this issue of the
Bulletin]
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 30,
2005, 8:45 a.m., and published in the issue of the Federal
Register for January 3, 2006, 71 F.R. 46)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Public Hearing
Guidance Under Section 7874
for Determining Ownership
by Former Shareholders or
Partners of Domestic Entities
REG–143244–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9238) relating to the disregard of af-
filiate-owned stock in determining the per-
centage of stock of a foreign corporation
held by former shareholders or partners of
a domestic entity, in order to determine
whether the foreign corporation is a sur-
rogate foreign corporation under section
7874 of the Internal Revenue Code (Code).
The text of those regulations also serves
as the text of these proposed regulations.
This document also provides notice of a
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments
must be received by April 6, 2006. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for April 27, 2006 at
10 a.m., must be received by April 6, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–143244–05),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of
8a.m.and4p.m. to: CC:PA:LPD:PR
(REG–143244–05), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at:
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–143244–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Jefferson VanderWolk at (202)
622–3810; concerning submission and
delivery of comments and the public hear-
ing, Robin R. Jones, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Income Tax Regu-
lations (26 CFR part 1) relating to section
7874. The temporary regulations set forth
rules on disregarding affiliate-owned stock
in determining the percentage of stock of a
foreign corporation held by former share-
holders or partners of a domestic entity by
reason of holding stock or a partnership in-
terest in the domestic entity, for purposes
of determining whether the foreign corpo-
ration is a surrogate foreign corporation
under section 7874(a)(2)(B). The text of
those regulations also serves as the text of
these proposed regulations. The preamble
to the temporary regulations explains the
amendments.
February 6, 20064192006–6 I.R.B.

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and because these regulations do not im-
pose a collection of information on small
entities, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not
apply. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request comments
on the clarity of the proposed regulations
and how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for
April 27, 2006, at 10 a.m., in the audi-
torium of the Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the Consti-
tution Avenue entrance. In addition, all
visitors must presentphoto identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments and
an outline of the topics to be discussed
and the time to be devoted to each topic
(a signed original and eight (8) copies) by
April 6, 2006. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Jefferson VanderWolk of the Of-
fice of the Associate Chief Counsel (Inter-
national). However, other personnel from
the IRS and Treasury Department partici-
pated 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 1.7874–1 also issued under 26
U.S.C. 7874(c)(6) and (g). * * *
Par. 2. Section 1.7874–1 is added to
read as follows:
§1.7874–1 Disregard of affiliate-owned
stock.
[The text of proposed §1.7874–1 is the
same as the text of §1.7874–1T published
elsewhere in this issue of the Bulletin].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 27,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 28, 2005, 70 F.R. 76732)
Application of Section 409A
to Nonqualified Deferred
Compensation Plans;
Correction
Announcement 2006–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking.
SUMMARY: This document cor-
rects a notice of proposed rulemaking
(REG–158080–04, 2005–43 I.R.B. 786)
that was published in theFederal Reg-
isteron Tuesday, October 4, 2005 (70
FR 57930), regarding the application of
section 409A to nonqualified deferred
compensation plans. The regulations af-
fect service providers receiving amounts
of deferred compensation, and the service
recipients for whom the service providers
provide services.
FOR FURTHER INFORMATION
CONTACT: Stephen Tackney, (202)
927–9639 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking
(REG–158080–04) that is the subject of
this correction is under section 409A of
the Internal Revenue Code.
Need for Correction
As published, REG–158080–04 con-
tains an error that may prove to be mis-
leading and is in needof clarification.
Correction of Publication
Accordingly, the publication of
the notice of proposed rulemaking
(REG–158080–04) that was the subject
of FR. Doc. 05–19379, is corrected as
follows:
On page 57930, column 1, in the
preamble, under the paragraph heading
“FOR FURTHER INFORMATION CON-
TACT:”, lines 4 thru 8, the language
“concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the hearing,
Richard A. Hurst at (202) 622–7116 (not
toll-free numbers).”. is corrected to read
“concerning submission of comments,
the hearing, and/or to be placed on the
building access list to attend the hearing,
Richard A. Hurst at (202) 622–7180 (not
toll-free numbers).”.
2006–6 I.R.B.420February 6, 2006

Guy R. Traynor,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on January 12,
2006, 8:45 a.m., and published in the issue of the Federal
Register for January 17, 2006, 71 F.R. 2496)
Deemed Election to Be an
Association Taxable as a
Corporation for a Qualified
Electing S Corporation;
Correction
Announcement 2006–12
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document adds the
text that was inadvertently removed from
the Code of Federal Regulations in T.D.
9203, 2005–25 I.R.B. 1285, which was
published in theFederal Registeron
Monday, May 23, 2005 (70 FR 29452).
DATES: This correction is effective on
May 23, 2005.
FOR FURTHER INFORMATION
CONTACT: Jian H. Grant, (202)
622–3050 (not a toll-free number).
SUPPLEMENTAL INFORMATION:
Background
This document adds §301.7701–3T to
the Code of Federal Regulations. The final
regulations (T.D. 9203) that are the subject
of this correction are under section 7701 of
the Internal Revenue Code.
Need for Correction
As published, §301.7701–3T was inad-
vertently removed in its entirety from the
Code of Federal Regulations in T.D. 9203.
*****
Correction of Publication
Accordingly, 26 CFR part 301 is cor-
rected as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701–3T is added
to read as follows:
§301.7701–3T Classification of certain
business entities (temporary).
(a) through (c)(1)(i) [Reserved]. For
further guidance, see §301.7701–3(a)
through (c)(1)(i).
(ii) Further notification of elections. An
eligible entity required to file a Federal
tax or information return for the taxable
year for which an election is made under
§301.7701–3(c)(1)(i) must attach a copy of
its Form 8832 to its Federal tax or infor-
mation return for that year. If the entity is
not required to file a return for that year,
a copy of its Form 8832, “Entity Clas-
sification Election,” must be attached to
the Federal income tax or information re-
turn of any direct or indirect owner of the
entity for the taxable year of the owner
that includes the date on which the elec-
tion was effective. An indirect owner of
the entity does not have to attach a copy
of the Form 8832 to its return if an en-
tity in which it has an interest is already
filing a copy of the Form 8832 with its
return. If an entity, or one of its direct
or indirect owners, fails to attach a copy
of a Form 8832 to its return as directed
in this section, an otherwise valid election
under §301.7701–3(c)(1)(i) will not be in-
validated, but the non-filing party may be
subject to penalties, including any appli-
cable penalties if the Federal tax or infor-
mation returns are inconsistent with the en-
tity’s election under §301.7701–3(c)(1)(i).
In the case of returns for taxable years be-
ginning after December 31, 2002, the copy
of Form 8832 attached to a return pursuant
to this paragraph (c)(1)(ii) is not required
to be a signed copy.
(c)(1)(iii) through (h)(3) [Re-
served]. For further guidance, see
§301.7701–3(c)(1)(iii) through (h)(3).
Guy R. Traynor,
Federal Register Liaison,
Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on January 19,
2006, 8:45 a.m., and published in the issue of the Federal
Register for January 20, 2006, 71 F.R. 3219)
February 6, 20064212006–6 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2006–6 I.R.B.iFebruary 6, 2006

Numerical Finding List
1
Bulletin 2006–1 through 2006–6
Announcements:
2006-1, 2006-1 I.R.B.260
2006-2, 2006-2 I.R.B.300
2006-3, 2006-3 I.R.B.327
2006-4, 2006-3 I.R.B.328
2006-5, 2006-4 I.R.B.378
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
2006-9, 2006-5 I.R.B.392
2006-10, 2006-5 I.R.B.393
2006-11, 2006-6 I.R.B.420
2006-12, 2006-6 I.R.B.421
Notices:
2006-1, 2006-4 I.R.B.347
2006-2, 2006-2 I.R.B.278
2006-3, 2006-3 I.R.B.306
2006-4, 2006-3 I.R.B.307
2006-5, 2006-4 I.R.B.348
2006-6, 2006-5 I.R.B.385
2006-8, 2006-5 I.R.B.386
2006-9, 2006-6 I.R.B.413
2006-10, 2006-5 I.R.B.386
Proposed Regulations:
REG-107722-00, 2006-4 I.R.B.354
REG-104385-01, 2006-5 I.R.B.389
REG-137243-02, 2006-3 I.R.B.317
REG-133446-03, 2006-2 I.R.B.299
REG-148568-04, 2006-6 I.R.B.417
REG-143244-05, 2006-6 I.R.B.419
Revenue Procedures:
2006-1, 2006-1 I.R.B.1
2006-2, 2006-1 I.R.B.89
2006-3, 2006-1 I.R.B.122
2006-4, 2006-1 I.R.B.132
2006-5, 2006-1 I.R.B.174
2006-6, 2006-1 I.R.B.204
2006-7, 2006-1 I.R.B.242
2006-8, 2006-1 I.R.B.245
2006-9, 2006-2 I.R.B.278
2006-10, 2006-2 I.R.B.293
2006-11, 2006-3 I.R.B.309
2006-12, 2006-3 I.R.B.310
2006-13, 2006-3 I.R.B.315
2006-14, 2006-4 I.R.B.350
2006-15, 2006-5 I.R.B.387
Revenue Rulings:
2006-1, 2006-2 I.R.B.261
Revenue Rulings— Continued:
2006-2, 2006-2 I.R.B.261
2006-3, 2006-2 I.R.B.276
2006-4, 2006-2 I.R.B.264
2006-5, 2006-3 I.R.B.302
2006-6, 2006-5 I.R.B.381
2006-7, 2006-6 I.R.B.399
Tax Conventions:
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
Treasury Decisions:
9231, 2006-2 I.R.B.272
9232, 2006-2 I.R.B.266
9233, 2006-3 I.R.B.303
9234, 2006-4 I.R.B.329
9235, 2006-4 I.R.B.338
9236, 2006-5 I.R.B.382
9237, 2006-6 I.R.B.394
9238, 2006-6 I.R.B.408
9239, 2006-6 I.R.B.401
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin
2005–52, dated December 27, 2005.
February 6, 2006ii2006–6 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2006–1 through 2006–6
Notices:
2005-44
Supplemented by
Notice 2006-1, 2006-4 I.R.B.347
Proposed Regulations:
REG-131739-03
Corrected by
Ann. 2006-10, 2006-5 I.R.B.393
REG-138647-04
Corrected by
Ann. 2006-4, 2006-3 I.R.B.328
REG-158080-04
Corrected by
Ann. 2006-11, 2006-6 I.R.B.420
Revenue Procedures:
96-52
Superseded by
Rev. Proc. 2006-10, 2006-2 I.R.B.293
97-27
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2002-9
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
Rev. Proc. 2006-14, 2006-4 I.R.B.350
2002-17
Modified by
Rev. Proc. 2006-14, 2006-4 I.R.B.350
2004-23
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2004-40
Superseded by
Rev. Proc. 2006-9, 2006-2 I.R.B.278
2005-1
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-2
Superseded by
Rev. Proc. 2006-2, 2006-1 I.R.B.89
Revenue Procedures— Continued:
2005-3
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-4
Superseded by
Rev. Proc. 2006-4, 2006-1 I.R.B.132
2005-5
Superseded by
Rev. Proc. 2006-5, 2006-1 I.R.B.174
2005-6
Superseded by
Rev. Proc. 2006-6, 2006-1 I.R.B.204
2005-7
Superseded by
Rev. Proc. 2006-7, 2006-1 I.R.B.242
2005-8
Superseded by
Rev. Proc. 2006-8, 2006-1 I.R.B.245
2005-9
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2005-12
Section10modifiedandsupersededby
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-61
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-68
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
Rev. Proc. 2006-3, 2006-1 I.R.B.122
Revenue Rulings:
74-503
Revoked by
Rev. Rul. 2006-2, 2006-2 I.R.B.261
Treasury Decisions:
9203
Corrected by
Ann. 2006-12, 2006-6 I.R.B.421
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,
2005.
2006–6 I.R.B.iiiFebruary 6, 2006
U.S. GPO: 2006—320–797/20043