Internal Revenue Bulletin 2005-35 (PDF rendition): IRS Notices

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
5-35
August 29, 2005
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. 2005–53, page 425.
Assets produced on a routine and repetitive basis.For
purposes of the simplified service cost method and simplified
production method provided in the regulations under section
263A of the Code, a taxpayer’s self-constructed assets are pro-
duced on a routine and repetitive basis in the ordinary course of
its trade or business if the assets are either mass-produced (nu-
merous identical goods are manufactured using standardized
designs and assembly line techniques) or have a high degree
of turnover.
Rev. Rul.
2005–56, page 427.
LIFO; pri
ce indexes; department stores.The June 2005
Bureau of
Labor Statistics price indexes are accepted for use
by depart
ment stores employing the retail inventory and last-in,
first-o
ut inventory methods for valuing inventories for tax years
ended on
, or with reference to, June 30, 2005.
T.D. 9212, page 429.
Final regulations under section 861 of the Code describe the
proper basis for determining the source of compensation for
labor or personal services performed partly within and partly
without the United States.
REG–149436–04, page 454.
Proposed regulations under section 6012 of the Code pre-
scribe the form that cooperatives must use to file their income
tax returns. The regulations affect all cooperatives that are cur-
rently required to file an income tax return on either Form 1120,
U.S. Corporation Income Tax Return, or Form 990–C,Farmers’
Cooperative Association Income Tax Return. Announcement
84–26 obsoleted.
Rev. Proc. 2005–60, page 449.
The purpose of this procedure is to inform authorized IRS e-file
providers of their obligations to the Service and to consolidate
existing guidance. The procedure combines the rules govern-
ing IRS e-file, including the rules regulating Electronic Return
Originators (EROs) that electronically file (1) Form 1040 and
1040A,U.S. Individual Income Tax Return, and Form 1040EZ,
Income Tax Return for Single and Joint Filers With No Depen-
dents, contained in Publication 1345,Handbook for Authorized
IRS e-file Providers of Individual Income Tax Returns;(2)Form
940,Employer’s Annual Federal Unemployment (FUTA) Tax Re-
turn, contained in Rev. Proc. 2001–9; and (3) Form 941,Em-
ployer’s Quarterly Federal Tax Return, contained in Rev. Proc.
99–39. Rev. Procs. 99–39, 2000–31, and 2001–9 super-
seded.
EMPLOYEE PLANS
Notice 2005–63, page 448.
Weighted average interest rate update; corporate bond
indices; 30-year Treasury securities.The weighted aver-
age interest rate for August 2005 and the resulting permissible
range of interest rates used to calculate current liability and to
determine the required contribution are set forth.
EXEMPT ORGANIZATIONS
Announcement 2005–60, page 455.
A list is provided of organizations now classified as private foun-
dations.
(Continued on the next page)
A
ctions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
Index for July through August begins on page iv.

ESTATE TAX
T.D. 9214, page 435.
Final regulations under section 2651 of the Code provide an
exception to the general rules for determining the generation
assignment of a transferee of property for generation-skipping
transfer (GST) purposes. The regulations also provide rules
regarding a transferee assigned to more than one generation.
EMPLOYMENT TAX
Rev. Rul. 2005–52, page 423.
Tool allowance payments.This ruling holds that tool al-
lowances paid to employees are not paid under an accountable
plan because the substantiation and return of excess require-
ments are not met. All tool allowance payments under the ar-
rangement must be included in the employees’ gross income,
reported on the employees’ Forms W-2, and are subject to with-
holding and payment of federal employment taxes.
Notice 2005–59, page 443.
This notice provides information about additional criteria that
will be applied in selecting proposals for the Internal Revenue
Service’s Industry Issue Resolution (IIR) program regarding ap-
plication of accountable plan rules to specific industries.
EXCISE TAX
Notice 2005–62, page 443.
This notice modifies Notice 2005-4, 2005-2 I.R.B 289, by revis-
ing the guidance relating to the Certificate for Biodiesel, which
is required as a condition for claiming a credit or payment under
sections 6426(c), 6427(e), and 40A of the Code. This notice
also provides guidance on issues related to the boidiesel credit
or payment that are not addressed in Notice 2005-4. This no-
tice further modifies Notice 2005-4 relating to the Certificate
of Person Buying Aviation-Grade Kerosene for Commercial Avi-
ation or Nontaxable Use, which is required to notify a position
holder of certain transactions under sections 4081 and 4082.
Notice 2005-4 modified.
ADMINIS
TRATIVE
T.D. 92
13, page 440.
Section
6343(d) of the Code was added by the Taxpayer Bill of
Rights
2 and authorizes the Service to return levied property in
certai
n cases. Final regulations under section 6343 set forth
the cas
es in which the Service may return levied property and
the pro
cedures for a taxpayer to request a return of property.
REG–149436–04, page 454.
Proposed regulations under section 6012 of the Code pre-
scribe the form that cooperatives must use to file their income
tax returns. The regulations affect all cooperatives that are cur-
rently required to file an income tax return on either Form 1120,
U.S. Corporation Income Tax Return, or Form 990–C,Farmers’
Cooperative Association Income Tax Return. Announcement
84–26 obsoleted.
Rev. Proc. 2005–60, page 449.
The purpose of this procedure is to inform authorized IRS e-file
providers of their obligations to the Service and to consolidate
existing guidance. The procedure combines the rules govern-
ing IRS e-file, including the rules regulating Electronic Return
Originators (EROs) that electronically file (1) Form 1040 and
1040A,U.S. Individual Income Tax Return, and Form 1040EZ,
Income Tax Return for Single and Joint Filers With No Depen-
dents, contained in Publication 1345,Handbook for Authorized
IRS e-file Providers of Individual Income Tax Returns;(2)Form
940,Employer’s Annual Federal Unemployment (FUTA) Tax Re-
turn, contained in Rev. Proc. 2001–9; and (3) Form 941,Em-
ployer’s Quarterly Federal Tax Return, contained in Rev. Proc.
99–39. Rev. Procs. 99–39, 2000–31, and 2001–9 super-
seded.
August 29, 20052005–35 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2005–35 I.R.B.August 29, 2005

Actions Relating to Decisions of the Tax Court
It is the policy of the Internal Rev-
enue Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on unap-
pealed issues decided adverse to the gov-
ernment. Generally, an Action on Decision
is issued where its guidance would be help-
ful to Service personnel working with the
same or similar issues. Unlike a Treasury
Regulation or a Revenue Ruling, an Action
on Decision is not an affirmative statement
of Service position. It is not intended to
serve as public guidance and may not be
cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action on
Decision may be superseded by new legis-
lation, regulations, rulings, cases, or Ac-
tions on Decisions.
Prior to 1991, the Service published
acquiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may
acquiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquiescence”
and “acquiescence in result only” mean
that the Service accepts the holding of
the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
nifies that, although no further review was
sought, the Service does not agree with
the holding of the court and, generally,
will not follow the decision in disposing
of cases involving other taxpayers. In
reference to an opinion of a circuit court
of appeals, a “nonacquiescence” indicates
that the Service willnot follow the hold-
ing on a nationwide basis. However, the
Service will recognize the precedential
impact of the opinion on cases arising
within the venue of the deciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumula-
tive Bulletin for the first half of the year. A
semiannual consolidation also appears in
the first Bulletin for the following January
and in the Cumulative Bulletin for the last
half of the year.
The Commissioner does NOT ACQUI-
ESCE in the following Decision:
Sherman-Williams Co. Employee
Health Plan Trust v. Commissioner,
1
330 F.3rd 449 (6th Cir. 2003),
rev’g 115 T.C. 440 (2000).
1
Nonacquiescence relating to whether the Court of Appeals erred in concluding that investment income of a VEBA trust can be set aside and used separately before the end of a taxable year
to pay the reasonable costs of administering health care benefits and thereby avoid the limits imposed by section 512(a)(3)(E) on exempt function income.
August 29, 20052005–35 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 62.—Adjusted
Gross Income Defined
26 CFR 1.62–2: Reimbursement and other expense
allowance arrangements.
Tool allowance payments.This rul-
ing holds that tool allowances paid to em-
ployees are not paid under an account-
able plan because the substantiation and
return of excess requirements are not met.
All tool allowance payments under the ar-
rangement must be included in the em-
ployees’ gross income, reported on the em-
ployees’ Forms W-2, and are subject to
withholding and payment of federal em-
ployment taxes.
Rev. Rul. 2005–52
ISSUE
In the following situation, is the tool al-
lowance paid by the employer to the em-
ployees paid under an accountable plan
such that the payments are excluded from
the employees’ gross income and exempt
from the withholding and payment of em-
ployment taxes?
FACTS
Employer operates an automobile re-
pair and maintenance business. Employer
hires service technicians to work in the
business as employees. Employer requires
these employees, as a condition of em-
ployment, to provide and maintain various
tools needed for use in performing repair
and maintenance services. Employer pays
each employee an hourly wage. In addi-
tion, Employer pays each employee a set
amount for each hour worked as a “tool
allowance” to cover costs the employee
incurs for acquiringand maintaining his
tools.
Employer sets each employee’s tool al-
lowance annually by using a combination
of data from a national survey of average
tool expenses for automobile service tech-
nicians and specific information concern-
ing tool-related expenses provided by the
employee in response to an annual ques-
tionnaire completed by all service techni-
cians who work for Employer. Employer
does not reimburse expenses paid or in-
curred for listed property, as defined by
§ 280F(d) of the Internal Revenue Code
(the Code), or depreciation expenses; thus,
these expenses are not taken into account
in calculating the amount of the annual
tool allowance. Employer uses the data
to project the employee’s total annual tool
expenses. Employer then uses a projec-
tion of the total number of hours the em-
ployee is expected to work during the year
that will require the use of tools to convert
the employee’s estimated annual tool ex-
penses into an hourly rate for the tool al-
lowance. Thus, the hourly tool allowance
is an estimate of the tool expense projected
to be incurred per hour by the employee
over the course of the coming year.
At the end of each pay period, each
employee reports to Employer his hours
worked requiring the use of tools. Em-
ployer multiplies the number of hours re-
ported as worked requiring the use of tools
by the employee’s hourly rate for the tool
allowance and pays the resulting amount
to the employee in addition to compensa-
tion for services performed during the pay
period. On a quarterly statement furnished
to each employee, Employer reports: (1)
the amount paid to the employee as a tool
allowance during the quarter, and (2) the
tool expenses estimated to be incurred in
the quarter (i.e., the hours reported worked
requiring the use of tools times the tool al-
lowance). Employees are not required to
provide any substantiation of expenses ac-
tually incurred for tools either before or af-
ter the quarterly reports are issued. Em-
ployer does not require employees to re-
turn any portion of the tool allowances that
exceeds the expenses they actually incur
either before or after the quarterly reports
are issued.
LAW
Section 61 of the Code provides that
gross income means all income from what-
ever source derived, including compensa-
tion for services, fees, commissions, fringe
benefits, and similar items.
Section 62(a)(2)(A) of the Code and
§ 1.62–2(b) of the Income Tax Regulations
provide that, for purposes of determining
adjusted gross income, an employee may
deduct certain business expenses paid by
the employee in connection with the per-
formance of services as an employee un-
der a reimbursement or other expense al-
lowance arrangement with his employer.
Section 62(c) provides that, for pur-
poses of § 62(a)(2)(A), an arrangement
will not be treated as a reimbursement or
other expense allowance arrangement if
(1) the arrangement does not require the
employee to substantiate the expenses cov-
ered by the arrangement to the payor, or (2)
the arrangement provides the employee the
right to retain any amount in excess of the
substantiated expenses covered under the
arrangement.
Section 1.62–2(c)(1) of the regulations
provides that a reimbursement or other ex-
pense allowance arrangement satisfies the
requirements of § 62(c) if it meets the re-
quirements of business connection, sub-
stantiation, and returning amounts in ex-
cess of substantiated expenses. If an ar-
rangement meets these requirements, all
amounts paid under the arrangement are
treated as paid under an accountable plan.
§ 1.62–2(c)(2)(i). Amounts treated as paid
under an accountable plan are excluded
from the employee’s gross income, are not
required to be reported on the employee’s
Form W–2, and are exempt from the with-
holding and payment of income and em-
ployment taxes. § 1.62–2(c)(4).
If an arrangement does not satisfy one
or more of these requirements, all amounts
paid under the arrangement are treated
as paid under a “nonaccountable plan.”
§ 1.62–2(c)(3). Amounts treated as paid
under a nonaccountable plan are included
in the employee’s gross income, must
be reported as wages or other compen-
sation of the employee’s on Form W–2,
and are subject to withholding and pay-
ment of income and employment taxes.
§ 1.62–2(c)(5).
Section 1.62–2(d)(1) provides that an
arrangement meets the business connec-
tion requirements if it provides advances,
allowances, or reimbursements only for
business expenses thatare allowable as de-
ductions and are paid or incurred by the
employee in connection with the perfor-
mance of services as an employee of the
2005–35 I.R.B.423August 29, 2005

employer. If, however, a payor arranges to
payanamounttoanemployeeregardless
of whether the employee incurs (or is rea-
sonably expected to incur)bona fideem-
ployee business expenses, the arrangement
does not satisfy the business connection
requirements and allamounts paid under
the arrangement are treated as paid under
a nonaccountable plan. §1.62–2(d)(3)(i).
Section 1.62–2(e)(1) provides that an
arrangement meets the substantiation re-
quirements if the arrangement requires
each business expense to be substantiated
to the payor in accordance with para-
graph (e)(3), within a reasonable period of
time. An arrangement for those expenses
meets the substantiation requirements of
§ 1.62–2(e)(3) if information submitted to
the payor is sufficient to enable the payor
to identify the specific nature of each ex-
pense and to conclude that the expense is
attributable to the payor’s business activ-
ity. Generally the employee must submit
an expense account or other written state-
ment to the employer showing the business
nature and amount of the employee’s ex-
penses.See§ 1.162–17(b)(4).
Revenue Procedure 2002–41, 2002–1
C.B. 1098, provides an optional expense
substantiation rule applicable only to
certain employers in thepipeline construc-
tion industry. If an eligible employer’s
arrangement to pay employee business
expenses otherwise satisfies the busi-
ness connection and return of excess
requirements, and amounts paid under
the arrangement do not exceed $13.00
per hour, adjusted for inflation, an em-
ployee is deemed to have substantiated
the expenses, and amounts paid under the
arrangement are treated as paid under an
accountable plan.
Section 1.62–2(f)(1) provides that an
arrangement meets the return of excess re-
quirements if the arrangement requires the
employee to return to the payor within a
reasonable period of time any amount paid
under the arrangement in excess of sub-
stantiated expenses. Section 1.62–2(f)(2)
provides authority for the Commissioner
to issue rules, forper diemor mileage
allowances only, under which an arrange-
ment will be treated as satisfying the return
of excess requirement even though the ar-
rangement does not require the employee
to return the portion of the allowance
related to days or miles of travel substan-
tiated but that exceeds the amount of the
employee’s expenses deemed substanti-
ated pursuant to rules prescribed under
§ 274(d).
Section 1.62–2(g)(2)(ii) provides that
if a payor provides employees with a pe-
riodic statement, no less frequently than
quarterly, stating the amount, if any, paid
under the arrangement that exceeds the ex-
penses the employee has substantiated as
required by the arrangement, and request-
ing the employee to substantiate any ad-
ditional business expenses that have not
yet been substantiated (whether or not such
expenses relate to the expenses to which
the original advance was paid) and/or to
return any amounts remaining unsubstan-
tiated within 120 days of the statement,
an expense substantiated or an amount re-
turned within that period will be treated
as being substantiated or returned within a
reasonable period of time.
Additionally, § 1.62–2(k) provides that
if a payor’s reimbursement or other ex-
pense allowance arrangement evidences a
pattern of abuse of the rules of § 62(c)
and the regulations thereunder, all pay-
ments made under the arrangement will be
treated as made under a nonaccountable
plan.
ANALYSIS
An amount paid by an employer to an
employee to cover expenses incurred by
the employee in the course of employment
can be excluded fromthe employee’s in-
come and wages only if a particular Code
section provides an exclusion for such
amount or if the amount is paid under
an accountable plan. No specific sec-
tion of the Code excludes from wages
amounts paid to employees for acquiring
and maintaining tools used in the perfor-
mance of services as employees. Thus,
to be excluded from wages, amounts paid
to employees to cover expenses incurred
to acquire or maintain such tools must be
paid under a reimbursement or other ex-
pense allowance arrangement that meets
the requirements of § 62(c).
An arrangement qualifies as an ac-
countable plan only if it satisfies all three
requirements set forth in the statute and
regulations. An arrangement that fails to
meet one or more of the three requirements
will be treated as a nonaccountable plan.
The arrangement described in this rev-
enue ruling fails to meet both the substanti-
ation and the return of excess requirements
and thus does not qualify as an accountable
plan.
Although reasonableexpectations for
expenses can be used to establish that
a plan meets the business connection
requirement, satisfaction of the substan-
tiation and return of excess requirements
must be based on expenses actually in-
curred. The arrangement in the facts of
this ruling does not require employees
to substantiate the actual expenses they
are incurring; rather the employees report
their time worked requiring the use of
tools, and Employer converts the hours
into an amount treated as expenses in-
curred based on statistical data. Reporting
hours worked requiring the use of tools is
not the equivalent of substantiating actual
expenses incurred. Employers may not
substitute a reasonable estimate of ex-
penses to be incurred based on statistical
data and hours worked for the substanti-
ation of actual expenses that is required
by § 1.62–2(e)(3) absent explicit guidance
permitting the use of such deemed sub-
stantiation.See,e.g., Rev. Proc. 2002–41.
Employer does not cure the absence of
substantiation or return of excess by pro-
viding employees with the quarterly state-
ment described in this revenue ruling. Em-
ployer does not require employees to pro-
vide substantiation of expenses actually in-
curred nor does Employer require employ-
ees to return any excess received within a
reasonable period of time after receiving
the quarterly statement. Thus, Employer is
not providing a periodic statement within
the meaning of § 1.62–2(g)(2)(ii).
Each of the accountable plan require-
ments must be independently satisfied.
Thus, even if Employer required the em-
ployees to substantiate the actual amount
of the expenses, and Employer treated any
portion of the tool allowances they receive
that exceeded substantiated expenses as
additional wages, the arrangement would
still not be an accountable plan. With the
exception of circumstances where em-
ployee expenses are covered through a
mileage orper diemallowance pursuant
to § 1.62–2(f)(2), an arrangement is not
an accountable plan if it includes amounts
paid in excess of substantiated expenses
in wages rather than requiring that they be
returned.See§ 1.62–2(f)(1); Rev. Proc.
2004–64, 2004–49 I.R.B. 898, (mileage
allowances), or Rev. Proc. 2005–10,
August 29, 20054242005–35 I.R.B.

2005–3 I.R.B. 341, (per diemallowances),
or any successors.
HOLDING
The arrangement described in this rev-
enue ruling is not an accountable plan.
Therefore, the arrangement is a nonac-
countable plan and all tool allowances paid
under the arrangement must be included in
the employees’ gross income, reported as
wages on the employees’ Forms W–2, and
are subject to withholding and payment of
federal employment taxes.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Joe Spires of the Office of Asso-
ciate Chief Counsel (Tax Exempt & Gov-
ernment Entities). For further informa-
tion regarding this revenue ruling, contact
Jeanne Royal Singley at (202) 622–0047
(not a toll-free call).
Section 263A.—Capital-
ization and Inclusion in
Inventory Costs of Cer-
tain Expenses
26 CFR 1.263A–2: Rules relating to property pro-
duced by the taxpayer.
When are self-constructed assets produced on a
routine and repetitive basis in the ordinary course
of a taxpayer’s trade or business for purposes of the
simplified production method provided by section
1.263A–2(b)(2)(i)(D)? See Rev. Rul. 2005-53, page
425.
26 CFR 1.263A–1: Uniform capitalization of costs.
(Also: § 1.263A–2.)
Assets produced on a routine and
repetitive basis.For purposes of the sim-
plified service cost method and simplified
production method provided in the regu-
lations under section 263A of the Code, a
taxpayer’s self-constructed assets are pro-
duced on a routine and repetitive basis in
the ordinary course of its trade or business
if the assets are either mass-produced (nu-
merous identical goods are manufactured
using standardized designs and assembly
line techniques) or have a high degree of
turnover.
Rev. Rul. 2005–53
BACKGROUND
In Notice 2003–36, 2003–1 C.B. 992,
modified by Notice 2003–59, 2003–2 C.B.
429, the Treasury Department and the In-
ternal Revenue Service indicate that they
are aware that uncertainty exists as to what
types of property constitute “eligible prop-
erty” under §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D) of the Income Tax
Regulations for which qualifying taxpay-
ers may use the simplified service cost and
simplified production methods. In partic-
ular, there is uncertainty about the proper
interpretation and application of the term
“routine and repetitive.” The notice indi-
cates that the Treasury Department and the
Service plan to publish guidance that will
clarify the types of property that qualify as
eligible property under those sections and
address the interpretation and application
of the term “routine and repetitive.” This
revenue ruling clarifies the types of prop-
erty that qualify as eligible property for
purposes of §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D) and how the term
“routine and repetitive” is interpreted for
this purpose.
ISSUE
Under what circumstances are a tax-
payer’s self-constructed assets produced
on a routine and repetitive basis in the
ordinary course of its trade or business
for purposes of the simplified service
cost method and the simplified pro-
ductionmethod(the“simplifiedmeth-
ods”) under §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D) of the Income Tax
Regulations?
FACTS
Situation 1.U, a manufacturer of office
equipment, producesnumerous identical
copiers during the year using assembly line
techniques.Uleases the copiers and does
not hold them for sale.
Situation 2.V, a manufacturer of auto-
mobiles, regularly produces molds that are
specifically designed for the production of
particular automobile parts. The molds
cannot be adapted for a further or differ-
ent use after changes or improvements are
made to the particular part that is produced
by the mold. The molds generally are used
for one to three years. Accordingly, the
molds have a high degree of turnover.
Situation 3.W, a telephone company,
manufactures numerous identical poles us-
ing standardized designs and assembly line
techniques for use in its business.
Situation 4.X, an electric utility, reg-
ularly purchases identical meters and in-
stalls them on its customers’ properties.
The meters measure the amount of elec-
tric current used byX’s customers.X
does not manufacture meters. Meters are
included in asset class 49.14 under Rev.
Proc. 87–56, 1987–2 C.B. 674, as clari-
fied and modified by Rev. Proc. 88–22,
1988–1 C.B. 785, and have a class life of
30 years.
Situation 5.Y, an electric utility, con-
structs from various components substa-
tions that it uses in transmitting and dis-
tributing electricity. Substations and their
components are facilities built on land that
house an assembly of equipment designed
for switching, changing, or regulating the
voltage of electricity. Each substation is
intended to operate for an extended length
of time, is specifically custom designed for
a specific geographic site, and serves a par-
ticular function withinY’s electrical grid.
Situation 6.Z, a company that owns and
operates a national chain of restaurants,
continually constructs new restaurants
each year.Zgenerally uses a standardized
design when constructing new restau-
rants. However, local zoning laws and
the physical characteristics of the specific
construction site requireZto modify the
design for each new restaurant.
LAW AND ANALYSIS
Section 263A of the Internal Revenue
Code provides that producers of real or
tangible personal property must capitalize
the direct costs and a proper share of the
indirect costs of such property.
Section 1.263A–1(e)(3) provides that
indirect costs include service costs. For
this purpose, § 1.263A–1(e)(4) states that
servicecostsareatypeofindirectcosts
that can be identified specifically with an
administrative or support department or
function. Service costs include capital-
izable service costs, deductible service
costs, and mixed service costs. Under
§ 1.263A–1(e)(4)(ii)(C), mixed service
costs include service costs that are par-
tially allocable to production activities
2005–35 I.R.B.425August 29, 2005

and partially allocable to non-production
activities.
Section 1.263A–1(g)(3) provides that
indirect costs are generally allocated to in-
termediate cost objectives such as depart-
ments or activities prior to the allocation
of such costs to property produced. This
section further provides that taxpayers are
required to allocate indirect costs using
either a specific identification method,
a standard cost method, a burden rate
method, or any other reasonable allocation
method (as defined under the principles of
§ 1.263A–1(f)(4)).
Section 1.263A–2(b) allows producers
to use the simplified production method
to determine the additional § 263A costs
properly allocable to ending inventories
of property produced and other “eligible”
property on hand at the end of the taxable
year. Section 1.263A–2(b)(3)(i)(A) gener-
ally provides that the amount of additional
§ 263A costs that is allocable to eligible
propertyremainingonhandatthecloseof
the taxable year under the simplified pro-
duction method is computed by multiply-
ingthe§471costsonhandattheend
of the year by an absorption ratio. Sec-
tion 1.263A–2(b)(3)(ii)(A) provides that
the absorption ratio generally is equal to
the additional § 263A costs incurred dur-
ing the year divided by the § 471 costs in-
curred during the year.
Additional § 263A costs are the costs,
other than interest, that were not capi-
talized under the taxpayer’s method of
accounting immediately prior to the ef-
fective date of § 263A, but that are re-
quired to be capitalized under § 263A.
See § 1.263A–1(d)(3). Section 471 costs
generally are the costs, other than inter-
est, that the taxpayer capitalized under
its method of accounting immediately
prior to the effective date of § 263A. See
§ 1.263A–1(d)(2).
Section 1.263A–2(b)(2)(i) provides
that a taxpayer electing to use the sim-
plified production method generally must
use the method for all production activities
associated with the following categories
of eligible property:
1.Inventory property. Stock in trade or
other property properly includible in
the inventory of the taxpayer. See
§ 1.263A–2(b)(2)(i)(A).
2.Non-inventory property held for sale.
Non-inventorypropertyheldbya
taxpayer primarily for sale to cus-
tomers in the ordinary course of the
taxpayer’s trade or business. See
§ 1.263A–2(b)(2)(i)(B).
3.Certain self-constructed assets.
Self-constructed assets substantially
identical in nature to, and produced
in the same manner as, inventory
property produced by the taxpayer or
other property produced by the tax-
payer and held primarily for sale to
customers in the ordinary course of
the taxpayer’s trade or business. See
§ 1.263A–2(b)(2)(i)(C).
4.Self-constructed assets produced
on a repetitive basis. Self-con-
structed assets produced by the tax-
payer on a routine and repetitive
basis in the ordinary course of the
taxpayer’s trade or business. See
§ 1.263A–2(b)(2)(i)(D).
Section 1.263A–1(g)(4) generally re-
quires taxpayers to allocate mixed ser-
vice costs to property produced using
reasonable factors or relationships un-
der a direct reallocation method (as
defined in § 1.263A–1(g)(4)(iii)(A)), a
step-allocation method (as defined in
§ 1.263A–1(g)(4)(iii)(B)), or any other
reasonable allocation method (as defined
under the principles of § 1.263A–1(f)(4)).
Section 1.263A–1(h) permits taxpayers
to use the simplified service cost method
to determine the aggregate portion of
mixed service costs incurred during the
taxable year that are properly allocable
to “eligible property.” The categories of
eligible property provided by the simpli-
fied service cost method are identical to
the four categories of eligible property
provided by the simplified production
method. Compare § 1.263A–1(h)(2)(i)
with § 1.263A–2(b)(2)(i).
Section 1.263A–1(h)(3)(i) provides
that under the simplified service cost
method, a taxpayer computes its capitaliz-
able mixed service costs by multiplying its
total mixed service costs by an allocation
ratio. The allocation ratio can be either
the labor-based or production-based ratio.
See §§ 1.263A–1(h)(4) and (5).
The four categories of eligible
property in §§ 1.263A–1(h)(2)(i) and
1.263A–2(b)(2)(i) all share common char-
acteristics that make application of the
simplified methods appropriate. Prior to
the issuance of the final § 263A regula-
tions, the temporary § 263A regulations,
issued under T.D. 8131, 1987–1 C.B. 98,
and published in the Federal Register on
March 30, 1987, limited the availability of
the simplified methods to two categories
of property: inventory and non-inventory
property held by a taxpayer primarily for
sale to customers in the ordinary course
of the taxpayer’s trade or business. The
preamble to the temporary § 263A regu-
lations indicates that this limitation was
prescribed because the simplified meth-
ods are not appropriate to account for
the casual or occasional production of
property. Instead, the simplified meth-
ods were “designed to alleviate the ad-
ministrative burdens of complying with
the new capitalization rules in situations
where mass production of assets occurs
on a repetitive and routine basis, with
a typically high ‘turnover’ rate for the
produced assets.” See T.D. 8131, 1987–1
C.B. 98, 102. The final regulations retain
these two categories of eligible property
in §§ 1.263A–1(h)(2)(i)(A) and (B) and
1.263A–2(b)(2)(i)(A) and (B). See T.D.
8482, 1993–2 C.B. 77, published in the
Federal Register on August 9, 1993.
Commentators to the temporary regula-
tions suggested that the categories of prop-
erty eligible for the simplified methods be
expanded to other types of property that
share the characteristics that are appropri-
ate for application of the methods. In re-
sponse, Notice 88–86, 1988–2 C.B. 401,
published on August 5, 1988, expanded the
availability of the simplified methods to:
1. property constructed by a taxpayer for
use in its trade or business if the tax-
payer is also producing, in the ordi-
nary course of its business, inventory
property (or any other property with
respect to which the use of the simpli-
fied production method is permitted
under the present regulations), and the
property constructed by the taxpayer
for use in its trade or business is sub-
stantially identical in nature to, and
is produced in the same manner as,
the inventory property (or such other
property) produced by the taxpayer,
and
August 29, 20054262005–35 I.R.B.

2. property constructed by a taxpayer for
use in its trade or business if, in the or-
dinary course of its production activi-
ties, the taxpayer produces such prop-
erty on a routine and repetitive basis
(i.e., the taxpayer produces numerous
items of such property within a tax-
able year.)
The final regulations follow No-
tice 88–86 and expand the cate-
gories of producedproperty eligible
for the simplified methods by adding
§§ 1.263A–1(h)(2)(i)(C) and (D) and
1.263A–2(b)(2)(i)(C) and (D).
The simplified methods are predicated
on the assumption that it is appropriate to
allocate production costs on a ratable ba-
sis when assets are either mass-produced
(i.e., numerous identical goods are man-
ufactured using standardized designs and
assembly line techniques) or have a high
degree of turnover. In contrast, it is not
appropriate to allocate production costs
on a ratable basis when assets are neither
mass-produced nor have a high degree of
turnover.
The first three categories of
eligiblepropertyprovidedin
§§ 1.263A–1(h)(2)(i)(A)–(C) and 1.263A–
2(b)(2)(i)(A)–(C) are either mass-pro-
duced and/or have a high degree of
turnover or are identical to assets that
are mass-produced and/or have a high
degree of turnover. The fourth category
of eligible property, self-constructed
assets produced on a routine and
repetitive basis, is similar to these first
three categories.It was intended
that the fourth category of eligible
property provided by the simplified
methods, §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D), possess the same
characteristics shared by all of the
preceding categories of eligible property.
Therefore, to be eligible under the fourth
category, the property also must be either
mass-produced (numerous identical goods
are manufactured using standardized
designs and assembly line techniques)
or have a high degree of turnover (in
this case have a relatively short useful
life). Mass production does not include
all the terms provided by § 263A(g)
and § 1.263A–2(a)(1) (for example,
install, develop, and improve). Instead
property is mass-produced only if it is
manufacturednumerous times during the
year using standardized designs and
assembly line techniques.
For example, the fourth category of el-
igible property provided by the simplified
methods, §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D), includes property
mass-produced by a vertically integrated
business for use in its own business that
would have been properly included in
inventory of a third party if mass-pro-
duced for sale by the third party. Thus,
if a telephone company mass-produces
its own poles for use in its business, the
poles would be eligible property for pur-
poses of §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D).
InSituation 1,Uis producing copiers
on a routine and repetitive basis for pur-
poses of the simplified methods because
the copiers are mass-produced.
InSituation 2,Vis producing molds
on a routine and repetitive basis for pur-
poses of the simplified methods because
the molds have a high degree of turnover.
InSituation 3,Wis producing poles on a
routine and repetitive basis for purposes of
the simplified methods because the poles
are mass-produced.
InSituation 4,Xis not producing meters
on a routine and repetitive basis for pur-
poses of the simplified methods because
the meters are neither mass-produced byX
nor have a high degree of turnover. Mass
production does not include installation of
meters and meters do not have a short use-
ful life.
InSituation 5,Yis not producing sub-
stations on a routine and repetitive basis
for purposes of the simplified methods be-
cause the substationsare neither mass-pro-
duced nor have a high degree of turnover.
InSituation 6,Zis not producing restau-
rants on a routine and repetitive basis for
purposes of the simplified methods be-
cause the restaurants are neither mass-pro-
duced nor have a high degree of turnover.
HOLDING
For purposes of the simplified meth-
ods under §§ 1.263A–1(h)(2)(i)(D)
and 1.263A–2(b)(2)(i)(D), a taxpayer’s
self-constructed assets are produced on
a routine and repetitive basis in the or-
dinary course of its trade or business if
the assets are either mass-produced (nu-
merous identical goods are manufactured
using standardized designs and assembly
line techniques) or have a high degree of
turnover.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Scott H. Rabinowitz of the Of-
fice of Associate Chief Counsel (Income
Tax & Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Rabinowitz at (202) 622–4970 (not a
toll-free call).
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The June 2005 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out in-
ventory methods for valuing inventories
for tax years ended on, or with reference
to, June 30, 2005.
Rev. Rul. 2005–56
The following Department Store In-
ventory Price Indexes for June 2005 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, June 30, 2005.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of de-
partments, (b) three special combinations
of the major groups – soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
2005–35 I.R.B.427August 29, 2005

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJune 2004June 2005
Percent Change
from June 2004
to June 2005
1
1. PieceGoods .............................................490.9504.82.8
2. DomesticsandDraperies..................................538.7519.1-3.6
3. Women’sandChildren’sShoes ............................631.8650.42.9
4. Men’sShoes.............................................854.5878.22.8
5. Infants’Wear ............................................567.3559.9-1.3
6. Women’sUnderwear......................................508.4541.46.5
7. Women’sHosiery ........................................329.9340.03.1
8. Women’sandGirls’Accessories ...........................581.5588.91.3
9. Women’sOuterwearandGirls’Wear .......................361.9347.5-4.0
10. Men’sClothing ..........................................540.3536.9-0.6
11. Men’sFurnishings........................................578.3562.8-2.7
12. Boys’ClothingandFurnishings............................431.3413.6-4.1
13. Jewelry..................................................897.4872.3-2.8
14. Notions .................................................791.9810.42.3
15. ToiletArticlesandDrugs..................................998.9997.0-0.2
16. FurnitureandBedding ....................................624.2598.7-4.1
17. FloorCoverings..........................................592.9604.62.0
18. Housewares..............................................712.6711.9-0.1
19. MajorAppliances.........................................200.4204.31.9
20. RadioandTelevision......................................41.939.0-6.9
21. Recreation and Education
2
.................................80.778.5-2.7
22. Home Improvements
2
.....................................129.3137.86.6
23. Automotive Accessories
2
..................................112.4114.62.0
Groups1–15:SoftGoods .......................................559.3552.0-1.3
Groups16–20:DurableGoods...................................384.1379.8-1.1
Group
s 21–23: Misc. Goods
2
....................................
93.493.40.0
Store Total
3
..............................................496.5490.8-1.1
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Ind
exes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
August 29, 20054282005–35 I.R.B.

Section 861.—Income
From Sources Within the
United States
26 CFR 1.861–4: Compensation for labor or per-
sonal services.
T.D. 9212
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Source of Compensation for
Labor or Personal Services
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that describe the proper ba-
sis for determining the source of compen-
sation for labor or personal services per-
formed partly within and partly without the
United States. These final regulations will
affect individuals who earn compensation
for labor or personal services performed
partly within and partly without the United
States and are needed to provide appropri-
ate guidance regarding the determination
of the proper source of that compensation.
DATES:Effective Date: These regulations
are effective on July 14, 2005.
Applicability Date: For dates of appli-
cability, see §1.861–4(d).
FOR FURTHER INFORMATION
CONTACT: David Bergkuist, (202)
622–3850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by theOffice of
Management and Budgetin accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1900.
The collections of information
in these final regulations are in
§1.861–4(b)(2)(ii)(C)(1)(i), (b)(2)(ii)(D),
and (b)(2)(ii)(D)(6). The information re-
quired in §1.861–4(b)(2)(ii)(C)(1)(i)will
enable an individual, where appropri-
ate, to use an alternative basis other than
that described in §1.861–4(b)(2)(ii)(A)
or (B) to determine the source of his or
her compensation as an employee for la-
bor or personal services performed partly
within and partly without the United
States. The information required in
§1.861–4(b)(2)(ii)(D) and (D)(6)willen-
able an employee to source certain fringe
benefits on a geographical basis. The
collections of information will, likewise,
allow the IRS to verify these determina-
tions.
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 26 CFR part 1. On August 6, 2004,
proposed revisions to the regulations
(REG–208254–90;REG–136481–04,
2004–37 I.R.B. 480) under section 861 of
the Internal Revenue Code (Code) relating
to the source of compensation for labor
or personal services were published in the
Federal Register(69 FR 47816). In the
same document, a prior notice of proposed
rulemaking (REG–208254–90, 2000–1
C.B. 577), published in theFederal Reg-
isteron January 21, 2000 (65 FR 3401),
was withdrawn. A public hearing was
held on January 13, 2005. Two written
comments were received. After consid-
eration of these comments, the August 6,
2004, proposed regulations are adopted as
amended by this Treasury decision.
Summary of Comments and
Explanation of Revisions
These final regulations, as proposed in
the notice of proposed rulemaking, retain
the facts and circumstances basis as the
general rule for determining the source of
compensation for labor or personal ser-
vices performed partly within and partly
without the United States received by per-
sons other than individuals and by indi-
viduals who are not employees. As pro-
posed, the final regulations provide two
general bases for determining the proper
source of compensation that an individ-
ual receives as an employee for such la-
bor or personal services. Under the first
general basis of §1.861–4(b)(2)(ii)(A), an
individual will source compensation, other
than compensation in the form of certain
fringe benefits, on a time basis, as defined
in §1.861–4(b)(2)(ii)(E).
Under the second general basis of
§1.861–4(b)(2)(ii)(B) and (D), an indi-
vidual will source compensation in the
form of fringe benefits, as described in
§1.861–4(b)(2)(ii)(D)(1) through (6), on a
geographical basis (e.g., at the employee’s
principal place of work, as defined in sec-
tion 217 and §1.217–2(c)(3)). The fringe
benefits to which this general basis applies
are housing, education, local transporta-
tion, tax reimbursement, hazardous or
hardship duty pay, and moving expense
reimbursement fringe benefits. This gen-
eral basis will apply only if the amount of
the fringe benefit is reasonable and is sub-
stantiated by adequate contemporaneous
records or sufficient evidence under rules
similar to those set forth in §1.274–5T(c)
or (h) or §1.132–5.
Comments were received that pro-
posed several changes with regard
to the fringe benefits described in
§1.861–4(b)(2)(ii)(D)(1) through (6). Un-
der one suggestion, the specific definitions
of the identified fringe benefits would be
replaced with broad categories. The com-
ment further suggested that the housing
fringe benefit, education fringe benefit,
and local transportation fringe benefit in-
clude employer-provided allowances that
are based on estimated, rather than actual,
expenses. The comment also requested
that the definition of education fringe ben-
efit be expanded to include payments for
the education of the employee’s spouse for
studies that relate to the foreign location of
the employment, such as language courses
and job training at the foreign location,
and to include pre-school and post-sec-
ondary education, home schooling costs,
and language courses of the employee’s
dependents. With respect to the transporta-
tion fringe benefit, the comment requested
2005–35 I.R.B.429August 29, 2005

that automobile purchase assistance in the
host country be included. The comment
also requested that the amount of com-
pensation qualifying for the hazardous or
hardship duty pay fringe benefit not be
limited to government-provided amounts.
The comment suggested that the defini-
tion of moving expense reimbursement
fringe benefit be expanded to include a list
of specific expenses, such as moving al-
lowances, home sale/purchase assistance,
temporary living, car loss reimbursement,
utility setup, appliance installation, auto
registration, driver’s license fees, power
converters, and other related expenses.
The comment also suggested three ad-
ditional fringe benefits: home leave al-
lowances, cost-of-living allowances, and
exchange rate differential allowances.
The Treasury Department and the IRS
considered the various comments regard-
ing the approach, scope, and detail of
the identified fringe benefits under the
proposed regulations. In response to the
comments, the final regulations modify
the definition of education fringe bene-
fit to include education expenses of the
type described in section 530(b)(4)(A)(i)
regardless of whether the education ex-
penses are incurred in connection with
enrollment or attendance at a school. The
final regulations do not incorporate the
suggestion for allowances based on esti-
mated expenses because the Treasury De-
partment and the IRS continue to believe
that substantiation of relevant items is the
more appropriate approach. Regarding the
other proposed changes to the identified
fringe benefits, the Treasury Department
and the IRS believe that the regulations
provide an appropriate scope of benefits,
a reasonable manner of determining the
appropriate amount of fringe benefit to
be sourced geographically, and a reason-
able limit to the amount of an individual’s
compensation that may be sourced under
the exception to the general time basis rule
of §1.861–4(b)(2)(ii)(E). As noted in the
preamble to the proposed regulations, the
Treasury Department and the IRS intend
to keep the list and descriptions of identi-
fied fringe benefits current and continue to
invite comments on whether the identified
fringe benefits are appropriately defined
and whether other fringe benefits should
be identified and sourced on a specific
geographic basis.
Furthermore, the final regulations re-
tain the proposed provision that permits
an employee to use an alternative basis,
based upon the facts and circumstances,
to source such compensation if he or she
establishes to the satisfaction of the Com-
missioner that such an alternative basis
more properly determines the source of
the compensation. An individual seeking
to use an alternative basis need not obtain
the satisfaction of the Commissioner prior
to filing his or her return. To obtain the
satisfaction of the Commissioner, an indi-
vidual who uses an alternative basis must
retain in his or her records documenta-
tion setting forth why the alternative basis
more properly determines the source of
the compensation than the basis for deter-
mining source of compensation described
in §1.861–4(b)(2)(ii)(A) or (B). One com-
ment requested that substantiation by the
individual’s employer be accepted as sub-
stantiation by the employee, particularly
where the alternative method is used by
a group of employees. Whether an alter-
native basis more properly determines the
source of an individual’s compensation is
based on the facts and circumstances of the
individual’s specific case. As a result, it
is the individual employee, rather than the
employer, who must demonstrate that the
alternative basis more properly determines
the source of the compensation than the
basis for determining source of compensa-
tion described in §1.861–4(b)(2)(ii)(A) or
(B). It is expected, however, that the indi-
vidual employee would use, among other
documentation, documentation provided
by the employer for such substantiation.
Another comment requested relief from
any penalties that might arise from inaccu-
rate reporting or withholding if an alterna-
tive method is determined not to be accept-
able or if the Commissioner determines
that a method other than the two general
methods determines the source of compen-
sationinamorereasonablemanner. The
Treasury Department and the IRS believe
that the existing standards of penalty ad-
ministration, including applicable justifi-
cations, adequately address this matter.
Section 1.861–4(b)(2)(ii)(C)(1)(i)of
the proposed regulations provided that
to assert an alternative basis the individ-
ual must comply with the requirements set
forth in any administrative pronouncement
issued by the Commissioner. The final
regulations require that to assert an alter-
native basis, the individual must provide
the information related to the alternative
basis required by applicable Federal tax
forms and accompanying instructions. It
is expected that the applicable Federal tax
forms and accompanying instructions will
require individuals with $250,000 or more
in compensation for the tax year that use
an alternative basis to respond to ques-
tions on the tax form and to attach to their
income tax returns a written statement that
sets forth: (1) the specific compensation
income, or the specific fringe benefit, for
which an alternative method is used; (2)
for each such item, the alternative method
of allocation of source used; (3) for each
such item, a computation showing how
the alternative allocation was computed;
and (4) a comparison of the dollar amount
of the compensation sourced within and
without the United States under both the
individual’s alternative basis and the basis
for determining source of compensation
described in §1.861–4(b)(2)(ii)(A) or (B).
The proposed regulations at
§1.861–4(b)(2)(ii)(C)(3) were reserved
with respect to artists and athletes who
are employees. Although requested, no
comments were received on the definition
of artists and athletes. The reservation
is retained in these final regulations. As
noted in the preamble to the proposed
regulation, it is intended that the specific
rules for artists and athletes who are
employees, when issued, will require such
individuals to determine the proper source
of compensation for labor or personal
services on the basis that most correctly
reflects the proper source of that income
under the facts and circumstances of the
particular case, consistent with current
law.
Proposed §1.861–4(b)(2)(ii)(F) pro-
vided that the source of multi-year com-
pensation of an employee is generally
determined on a time basis over the appli-
cable period to which the compensation is
attributable. Determination of the appli-
cable period to which the compensation is
attributable (including whether the com-
pensation relates tomore than one taxable
year) is based upon the facts and circum-
stances of the particular case. Comments
requested additional guidance in the area
of equity based compensation, particu-
larly with respect to stock options, that
relate to services performed over a period
of more than one year. These comments
August 29, 20054302005–35 I.R.B.

requested guidance related to pre-grant
sourcing, sourcing based upon exercise
date, and non-conventional equity com-
pensation awards. Because under the regu-
lations the applicable period is determined
based on the facts and circumstances of
the particular case, and a taxpayer may
assert an alternative method to source
such compensation income pursuant to
§1.861–4(b)(2)(ii)(C)(1)(i), the Treasury
Department and the IRS concluded that
§1.861–4(b)(2)(ii)(F), as proposed, was
reasonableinitsscopeandtheruleswere
not modified in the final regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It is hereby certified that
the collections of information contained
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. Accordingly,
a regulatory flexibility analysis is not re-
quired. This certification is based upon
that fact that the Treasury Department and
the IRS believe that a time basis gener-
ally is the most appropriate method for de-
termining the source of an individual em-
ployee’s compensation for labor or per-
sonal services performed partly within and
partly without the United States. The in-
formation necessary to apply the time basis
should be readily available to employers
and employees. For example, Form 2555,
“Foreign Earned Income”, requires an in-
dividual who claims the foreign earned in-
come exclusion to provide the IRS with in-
formation relating to the number of busi-
ness days spent within the United States
and any fringe benefits received. In addi-
tion, if an employee wishes to use an alter-
native method to source compensation, it
is the employee that must document such
alternative method. Pursuant to section
7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these final regu-
lations is David Bergkuist of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
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 1.861–4 is amended as
follows:
1. The heading for paragraph (a) is re-
vised.
2. A sentence is added at the beginning
of paragraph (a)(1) introductory text.
3. Paragraph (b) is revised.
4. A sentence is added at the end of
paragraph (d).
The revisions and addition read as fol-
lows:
§1.861–4 Compensation for labor or
personal services.
(a)Compensation for labor or personal
services performed wholly within the
United States. (1) Generally, compensa-
tion for labor or personal services, includ-
ing fees, commissions, fringe benefits, and
similar items, performed wholly within the
United States is gross income from sources
within the United States. * * *
*****
(b)Compensation for labor or per-
sonal services performed partly within
and partly without the United States—(1)
Compensation for labor or personal ser-
vices performed by persons other than
individuals—(i)In general. In the case of
compensation for labor or personal ser-
vices performed partly within and partly
without the United States by a person
other than an individual, the part of that
compensation that is attributable to the la-
bor or personal services performed within
the United States, and that is therefore
included in gross income as income from
sources within the United States, is de-
termined on the basis that most correctly
reflects the proper source of the income
under the facts and circumstances of the
particular case. In many cases, the facts
and circumstances will be such that an ap-
portionment on the time basis, as defined
in paragraph (b)(2)(ii)(E) of this section,
will be acceptable.
(ii)Example. The application of para-
graph (b)(1)(i) is illustrated by the follow-
ing example.
Example. Corp X, a domestic corporation, re-
ceives compensation of $150,000 under a contract
for services to be performed concurrently in the
United States and in several foreign countries by nu-
merous Corp X employees. Each Corp X employee
performing services under this contract performs
his or her services exclusively in one jurisdiction.
Although the number of employees (and hours spent
by employees) performing services under the con-
tract within the United States equals the number of
employees (and hours spent by employees) perform-
ing services under the contract without the United
States, the compensation paid to employees perform-
ing services under the contract within the United
States is higher because of the more sophisticated
nature of the services performed by the employees
within the United States. Accordingly, the payroll
cost for employees performing services under the
contract within the United States is $20,000 out of a
total contract payroll cost of $30,000. Under these
facts and circumstances, a determination based upon
relative payroll costs would be the basis that most
correctly reflects the proper source of the income
received under the contract. Thus, of the $150,000
of compensation included in Corp X’s gross income,
$100,000 ($150,000 x $20,000/$30,000) is attrib-
utable to the labor or personal services performed
within the United States and $50,000 ($150,000 x
$10,000/$30,000) is attributable to the labor or per-
sonal services performed without the United States.
(2)Compensation for labor or personal
services performed by an individual—(i)
In general. Except as provided in para-
graph (b)(2)(ii) of this section, in the case
of compensation for labor or personal ser-
vices performed partly within and partly
without the United States by an individual,
the part of such compensation that is at-
tributable to the labor or personal services
performed within the United States, and
that is therefore included in gross income
as income from sources within the United
States, is determined on the basis that most
correctly reflects the proper source of that
income under the facts and circumstances
of the particular case. In many cases, the
facts and circumstances will be such that
an apportionment on a time basis, as de-
fined in paragraph (b)(2)(ii)(E) of this sec-
tion, will be acceptable.
(ii)Employee compensation—(A)In
general. Except as provided in paragraph
(b)(2)(ii)(B) or (C) of this section, in the
2005–35 I.R.B.431August 29, 2005

case of compensation for labor or per-
sonal services performed partly within
and partly without the United States by
an individual as an employee, the part of
such compensation that is attributable to
the labor or personal services performed
within the United States, and that is there-
fore included in gross income as income
from sources within the United States, is
determined on a time basis, as defined in
paragraph (b)(2)(ii)(E) of this section.
(B)Certain fringe benefits sourced on
a geographical basis. Except as provided
in paragraph (b)(2)(ii)(C) of this section,
items of compensation of an individual as
an employee for labor or personal services
performed partly within and partly with-
out the United States that are described in
paragraphs (b)(2)(ii)(D)(1) through (6)of
this section are sourced on a geographical
basis in accordance with those paragraphs.
(C)Exceptions and special rules—(1)
Alternative basis—(i)Individual as an em-
ployee generally. An individual may de-
termine the source of his or her compen-
sation as an employee for labor or per-
sonal services performed partly within and
partly without the United States under an
alternative basis if the individual estab-
lishes to the satisfaction of the Commis-
sioner that, under the facts and circum-
stances of the particular case, the alter-
native basis more properly determines the
source of the compensation than a basis de-
scribed in paragraph (b)(2)(ii)(A) or (B),
whichever is applicable, of this section.
An individual that uses an alternative basis
must retain in his or her records documen-
tation setting forth why the alternative ba-
sis more properly determines the source of
the compensation. In addition, the individ-
ual must provide the information related to
the alternative basis required by applica-
ble Federal tax forms and accompanying
instructions.
(ii)Determination by Commissioner.
The Commissioner may, under the facts
and circumstances of the particular case,
determine the source of compensation
that is received by an individual as an
employee for labor or personal services
performed partly within and partly without
the United States under an alternative basis
other than a basis described in paragraph
(b)(2)(ii)(A) or (B) of this section if such
compensation either is not for a specific
time period or constitutes in substance
a fringe benefit described in paragraph
(b)(2)(ii)(D) of this section notwithstand-
ing a failure to meet any requirement of
paragraph (b)(2)(ii)(D) of this section.
The Commissioner may make this de-
termination only if such alternative basis
determines the source of compensation in
a more reasonable manner than the basis
used by the individual pursuant to para-
graph (b)(2)(ii)(A) or (B) of this section.
(2)Ruling or other administrative pro-
nouncement with respect to groups of tax-
payers. The Commissioner may, by ruling
or other administrative pronouncement
applying to similarly situated taxpayers
generally, permit individuals to determine
the source of their compensation as an
employee for labor or personal services
performed partly within and partly with-
out the United States under an alternative
basis. Any such individual shall be treated
as having met the requirement to establish
such alternative basis to the satisfaction of
the Commissioner under the facts and cir-
cumstances of the particular case, provided
that the individual meets the other require-
ments of paragraph (b)(2)(ii)(C)(1)(i)of
this section. The Commissioner also may,
by ruling or other administrative pro-
nouncement, indicate the circumstances in
which he will require individuals to deter-
mine the source of certain compensation
as an employee for labor or personal ser-
vices performed partly within and partly
without the United States under an al-
ternative basis pursuant to the authority
under paragraph (b)(2)(ii)(C)(1)(ii)ofthis
section.
(3)Artists and athletes. [Reserved.]
(D)Fringe benefits sourced on a geo-
graphical basis. Except as provided in
paragraph (b)(2)(ii)(C) of this section,
compensation of an individual as an em-
ployee for labor or personal services
performed partly within and partly with-
out the United States in the form of the
following fringe benefits is sourced on
a geographical basis as indicated in this
paragraph (b)(2)(ii)(D). The amount of
the compensation in the form of the fringe
benefit must be reasonable, and the indi-
vidual must substantiate such amounts by
adequate records or by sufficient evidence
under rules similar to those set forth in
§1.274–5T(c) or (h) or §1.132–5. For pur-
poses of this paragraph (b)(2)(ii)(D), the
termprincipal place of workhas the same
meaning that it has for purposes of section
217 and §1.217–2(c)(3).
(1)Housing fringe benefit. The source
of compensation in the form of a housing
fringe benefit is determined based on the
location of the individual’s principal place
of work. For purposes of this paragraph
(b)(2)(ii)(D)(1), a housing fringe benefit
includes payments to or on behalf of an
individual (and the individual’s family
if the family resides with the individual)
only for rent, utilities (other than tele-
phone charges), real and personal property
insurance, occupancy taxes not deductible
under section 164 or 216(a), nonrefund-
able fees paid for securing a leasehold,
rental of furniture and accessories, house-
hold repairs, residential parking, and the
fair rental value of housing provided in
kind by the individual’s employer. A
housing fringe benefit does not include
payments for expenses or items set forth
in §1.911–4(b)(2).
(2)Education fringe benefit.The
source of compensation in the form of an
education fringe benefit for the education
expenses of the individual’s dependents
is determined based on the location of the
individual’s principal place of work. For
purposes of this paragraph (b)(2)(ii)(D)(2),
an education fringe benefit includes pay-
ments only for qualified tuition and ex-
penses of the type described in section
530(b)(4)(A)(i) (regardless of whether in-
curred in connection with enrollment or
attendance at a school) and expenditures
for room and board and uniforms as de-
scribed in section 530(b)(4)(A)(ii) with
respect to education at an elementary or
secondary educational institution.
(3)Local transportation fringe benefit.
The source of compensation in the form of
a local transportation fringe benefit is de-
termined based on the location of the in-
dividual’s principal place of work. For
purposes of this paragraph (b)(2)(ii)(D)(3),
an individual’s local transportation fringe
benefit is the amount that the individual
receives as compensation for local trans-
portation of the individual or the individ-
ual’s spouse or dependents at the location
of the individual’s principal place of work.
The amount treated as a local transporta-
tion fringe benefit is limited to the actual
expenses incurred for local transportation
and the fair rental value of any vehicle pro-
vided by the employer and used predomi-
nantly by the individual or the individual’s
spouse or dependents for local transporta-
tion. For this purpose, actual expenses in-
August 29, 20054322005–35 I.R.B.

curred for local transportation do not in-
clude the cost (including interest) of the
purchase by the individual, or on behalf of
the individual, of an automobile or other
vehicle.
(4)Tax reimbursement fringe benefit.
The source of compensation in the form of
a foreign tax reimbursement fringe benefit
is determined based on the location of the
jurisdiction that imposed the tax for which
the individual is reimbursed.
(5)Hazardous or hardship duty pay
fringe benefit. The source of compensa-
tion in the form of a hazardous or hardship
duty pay fringe benefit is determined
based on the location of the hazardous
or hardship duty zone for which the haz-
ardous or hardship duty pay fringe benefit
is paid. For purposes of this paragraph
(b)(2)(ii)(D)(5), a hazardous or hardship
duty zone is any place in a foreign country
which is either designated by the Sec-
retary of State as a place where living
conditions are extraordinarily difficult,
notably unhealthy, or where excessive
physical hardships exist, and for which
apostdifferentialof15percentormore
would be provided under section 5925(b)
ofTitle5oftheU.S.Codetoanyofficeror
employee of the U.S. Government present
at that place, or where a civil insurrection,
civil war, terrorism, or wartime condi-
tions threatens physical harm or imminent
danger to the health and well-being of
the individual. Compensation provided
an employee during the period that the
employee performs labor or personal ser-
vices in a hazardous or hardship duty zone
may be treated as a hazardous or hardship
duty pay fringe benefit only if the em-
ployer provides the hazardous or hardship
duty pay fringe benefit only to employees
performing labor or personal services in
a hazardous or hardship duty zone. The
amount of compensation treated as a haz-
ardous or hardship duty pay fringe benefit
may not exceed the maximum amount that
the U.S. government would allow its offi-
cers or employees present at that location.
(6)Moving expense reimbursement
fringe benefit. Except as otherwise pro-
vided in this paragraph (b)(2)(ii)(D)(6),
the source of compensation in the form
of a moving expense reimbursement is
determined based on the location of the
employee’s new principal place of work.
The source of such compensation is de-
termined based on the location of the em-
ployee’s former principal place of work,
however, if the individual provides suf-
ficient evidence that such determination
of source is more appropriate under the
facts and circumstances of the particu-
lar case. For purposes of this paragraph
(b)(2)(ii)(D)(6), sufficient evidence gen-
erally requires an agreement, between the
employer and the employee, or a written
statement of company policy, which is
reduced to writing before the move and
which is entered into or established to in-
duce the employee or employees to move
to another country. Such written statement
or agreement must state that the employer
will reimburse the employee for moving
expenses that the employee incurs to re-
turn to the employee’s former principal
place of work regardless of whether he or
she continues to work for the employer
after returning to that location. The writ-
ing may contain certain conditions upon
which the right to reimbursement is de-
termined as long as those conditions set
forth standards that are definitely ascer-
tainable and can only be fulfilled prior to,
or through completion of, the employee’s
return move to the employee’s former
principal place of work.
(E)Time basis. The amount of com-
pensation for labor or personal services
performed within the United States deter-
mined on a time basis is the amount that
bears the same relation to the individual’s
total compensation as the number of days
of performance of the labor or personal ser-
vices by the individual within the United
States bears to his or her total number of
days of performance of labor or personal
services. A unit of time less than a day may
be appropriate for purposes of this calcula-
tion. The time period for which the com-
pensation for labor or personal services is
made is presumed to be the calendar year
in which the labor or personal services are
performed, unless the taxpayer establishes
to the satisfaction of the Commissioner, or
the Commissioner determines, that another
distinct, separate, and continuous period of
time is more appropriate. For example, a
transfer during a year from a position in
the United States to a foreign posting that
lasted through the end of that year would
generally establish two separate time pe-
riods within that taxable year. The first
of these time periods would be the portion
of the year preceding the start of the for-
eign posting, and the second of these time
periods would be the portion of the year
following the start of the foreign posting.
However, in the case of a foreign post-
ing that requires short-term returns to the
United States to perform services for the
employer, such short-term returns would
not be sufficient to establish distinct, sep-
arate, and continuous time periods within
the foreign posting time period but would
be relevant to the allocation of compensa-
tion relating to the overall time period. In
each case, the source of the compensation
on a time basis is based upon the number
of days (or unit of time less than a day, if
appropriate) in that separate time period.
(F)Multi-year compensation arrange-
ments. The source of multi-year compen-
sation is determined generally on a time
basis, as defined in paragraph (b)(2)(ii)(E)
of this section, over the period to which
such compensation is attributable. For
purposes of this paragraph (b)(2)(ii)(F),
multi-year compensationmeans compen-
sation that is included in the income of an
individual in one taxable year but that is
attributable to a period that includes two
or more taxable years. The determination
of the period to which such compensation
is attributable, for purposes of determin-
ing its source, is based upon the facts and
circumstances of the particular case. For
example, an amount of compensation that
specifically relates to a period of time that
includes several calendaryearsisattribut-
able to the entirety of that multi-year pe-
riod. The amount of such compensation
that is treated as from sources within the
United States is the amount that bears the
same relationship to the total multi-year
compensation as the number of days (or
unit of time less than a day, if appropriate)
that labor or personal services were per-
formed within the United States in connec-
tion with the project bears to the total num-
ber of days (or unit of time less than a day,
if appropriate) that labor or personal ser-
vices were performed in connection with
the project. In the case of stock options,
the facts and circumstances generally will
be such that the applicable period to which
the compensation is attributable is the pe-
riod between the grant of an option and the
date on which all employment-related con-
ditions for its exercise have been satisfied
(the vesting of the option).
(G)Examples. The following examples
illustrate the application of this paragraph
(b)(2)(ii):
2005–35 I.R.B.433August 29, 2005

Example 1. B, a nonresident alien individual, was
employed by Corp M, a domestic corporation, from
March 1 to December 25 of the taxable year, a total
of 300 days, for which B received compensation in
the amount of $80,000. Under B’s employment con-
tract with Corp M, B was subject to call at all times by
Corp M and was in a payment status on a 7-day week
basis. Pursuant to that contract, B performed ser-
vices (or was available to perform services) within the
United States for 180 days and performed services (or
was available to perform services) without the United
States for 120 days. None of B’s $80,000 compen-
sation was for fringe benefits as identified in para-
graph (b)(2)(ii)(D) of this section. B determined the
amount of compensation that is attributable to his la-
bor or personal services performed within the United
States on a time basis underparagraph (b)(2)(ii)(A)
and (E) of this section. B did not assert, pursuant to
paragraph (b)(2)(ii)(C)(1)(i) of this section, that, un-
der the particular facts and circumstances, an alterna-
tive basis more properly determines the source of that
compensation than the time basis. Therefore, B must
include in income from sources within the United
States $48,000 ($80,000 x 180/300) of his compen-
sation from Corporation M.
Example 2. (i) Same facts as inExample 1except
that Corp M had a company-wide arrangement with
its employees, including B, that they would receive
an education fringe benefit,as described in paragraph
(b)(2)(ii)(D)(2) of this section, while working in the
United States. During the taxable year, B incurred
education expenses for his dependent daughter that
qualified for the education fringe benefit in the
amount of $10,000, for which B received a reim-
bursement from Corp M. B did not maintain adequate
records or sufficient evidence of this fringe benefit
as required by paragraph (b)(2)(ii)(D) of this section.
When B filed his Federal income tax return for the
taxable year, B did not apply paragraphs (b)(2)(ii)(B)
and (D)(2) of this section to treat the compensation
in the form of the education fringe benefit as income
from sources within the United States, the location of
his principal place of work during the 300-day period.
Rather, B combined the $10,000 reimbursement with
his base compensation of $80,000 and applied the
time basis of paragraph (b)(2)(ii)(A) of this section
to determine the source of his gross income.
(ii) On audit, B argues that because he failed to
substantiate the education fringe benefit in accor-
dance with paragraph (b)(2)(ii)(D) of this section,
his entire employment compensation from Corp M
is sourced on a time basis pursuant to paragraph
(b)(2)(ii)(A) of this section. The Commissioner, af-
ter reviewing Corp M’s fringe benefit arrangement,
determines, pursuant to paragraph (b)(2)(ii)(C)(1)(ii)
of this section, that the $10,000 educational expense
reimbursement constitutes in substance a fringe ben-
efit described in paragraph (b)(2)(ii)(D)(2)ofthis
section, notwithstanding a failure to meet all of the
requirements of paragraph (b)(2)(ii)(D) of this sec-
tion, and that an alternative geographic source basis,
under the facts and circumstances of this particular
case, is a more reasonable manner to determine the
source of the compensation than the time basis used
by B.
Example 3. (i) A, a United States citizen, is em-
ployed by Corp N, a domestic corporation. A’s prin-
cipal place of work is in the United States. A earns an
annual salary of $100,000. During the first quarter of
the calendar year (which is also A’s taxable year), A
performed services entirely within the United States.
At the beginning of the second quarter of the calendar
year, A was transferred to Country X for the remain-
der of the year and received, in addition to her annual
salary, $30,000 in fringe benefits that are attributable
to her new principal place of work in Country X. Corp
N paid these fringe benefits separately from A’s an-
nual salary. Corp N supplied A with a statement de-
tailing that $25,000 of the fringe benefit was paid
for housing, as defined in paragraph (b)(2)(ii)(D)(1)
of this section, and $5,000 of the fringe benefit was
paid for local transportation, as defined in paragraph
(b)(2)(ii)(D)(3) of this section. None of the local
transportation fringe benefit is excluded from the em-
ployee’s gross income as a qualified transportation
fringe benefit under section 132(a)(5). Under A’s em-
ployment contract, A was required to work on a 5-day
week basis, Monday through Friday. During the last
three quarters of the year, A performed services 30
days in the United States and 150 days in Country X
and other foreign countries.
(ii) A determined the source of all of her com-
pensation from Corp N pursuant to paragraphs
(b)(2)(ii)(A), (B), and (D)(1)and(3)ofthissec-
tion. A did not assert, pursuant to paragraph
(b)(2)(ii)(C)(1)(i) of this section, that, under the
particular facts and circumstances, an alternative
basis more properly determines the source of that
compensation than the bases set forth in paragraphs
(b)(2)(ii)(A), (B), and (D)(1) and (3) of this section.
However, in applying the time basis set forth in
paragraph (b)(2)(ii)(E) of this section, A establishes
to the satisfaction of the Commissioner that the first
quarter of the calendar year and the last three quarters
of the calendar year are two separate, distinct, and
continuous periods of time. Accordingly, $25,000 of
A’s annual salary is attributable to the first quarter of
the year (25 percent of $100,000). This amount is
entirely compensation that was attributable to the la-
bor or personal services performed within the United
States and is, therefore, included in gross income
as income from sources within the United States.
The balance of A’s compensation as an employee of
Corp N, $105,000 (which includes the $30,000 in
fringe benefits that are attributable to the location
of A’s principal place of work in Country X), is
compensation attributable to the final three quarters
of her taxable year. During those three quarters, A’s
periodic performance of services in the United States
does not result in distinct, separate, and continuous
periods of time. Of the $75,000 paid for annual
salary, $12,500 (30/180 x $75,000) is compensation
that was attributable to the labor or personal services
performed within the United States and $62,500
(150/180 x $75,000) is compensation that was attrib-
utable to the labor or personal services performed
outside the United States. Pursuant to paragraphs
(b)(2)(ii)(B) and (D)(1) and (3) of this section, A
sourced the $25,000 received for the housing fringe
benefit and the $5,000 received for the local trans-
portation fringe benefit based on the location of her
principal place of work, Country X. Accordingly, A
included the $30,000 in fringe benefits in her gross
income as income from sources without the United
States.
Example 4. Same facts as inExample 3.Of
the 150 days during which A performed services in
Country X and in other foreign countries (during
the final three quarters of A’s taxable year), she
performed 30 days of those services in Country Y.
Country Y is a country designated by the Secre-
tary of State as a place where living conditions are
extremely difficult, notably unhealthy, or where ex-
cessive physical hardships exist and for which a post
differential of 15 percent or more would be provided
under section 5925(b) of Title 5 of the U.S. Code
to any officer or employee of the U.S. government
present at that place. Corp N has a policy of paying
its employees a $65 premium per day for each day
worked in countries so designated. The $65 pre-
mium per day does not exceed the maximum amount
that the U.S. government would pay its officers or
employees stationed in Country Y. Because A per-
formed services in Country Y for 30 days, she earned
additional compensation of $1,950. The $1,950 is
considered a hazardous duty or hardship pay fringe
benefit and is sourced under paragraphs (b)(2)(ii)(B)
and (D)(5) of this section based on the location of
the hazardous or hardship duty zone, Country Y. Ac-
cordingly, A included the amount of the hazardous
duty or hardship pay fringe benefit ($1,950) in her
gross income as income from sources without the
United States.
Example 5. (i) During 2006 and 2007, Corp
P, a domestic corporation, employed four United
States citizens, E, F, G, and H to work in its man-
ufacturing plant in Country V. As part of his or her
compensation package, each employee arranged for
local transportation unrelated to Corp P’s business
needs. None of the local transportation fringe benefit
is excluded from the employee’s gross income as a
qualified transportation fringe benefit under section
132(a)(5) and (f).
(ii) Under the terms of the compensation package
that E negotiated with Corp P, Corp P permitted E to
use an automobile owned by Corp P. In addition, Corp
P agreed to reimburse E for all expenses incurred
by E in maintaining and operating the automobile,
including gas and parking.Provided that the local
transportation fringe benefit meets the requirements
of paragraph (b)(2)(ii)(D)(3)ofthissection,E’scom-
pensation with respect to the fair rental value of the
automobile and reimbursement for the expenses E in-
curred is sourced under paragraphs (b)(2)(ii)(B) and
(D)(3) of this section based on E’s principal place
of work in Country V. Thus, the local transportation
fringe benefit will be included in E’s gross income as
income from sources without the United States.
(iii) Under the terms of the compensation package
that F negotiated with Corp P, Corp P let F use an au-
tomobileownedbyCorpP.However,CorpPdidnot
agree to reimburse F for any expenses incurred by F in
maintaining and operating the automobile. Provided
that the local transportation fringe benefit meets the
requirements of paragraph (b)(2)(ii)(D)(3)ofthissec-
tion, F’s compensation with respect to the fair rental
value of the automobile is sourced under paragraphs
(b)(2)(ii)(B) and (D)(3) of this section based on F’s
principal place of work in Country V. Thus, the lo-
cal transportation fringe benefit will be included in
F’s gross income as income from sources without the
United States.
(iv) Under the terms of the compensation pack-
age that G negotiated with Corp P, Corp P agreed
to reimburse G for the purchase price of an automo-
bile that G purchased in Country V. Corp P did not
agree to reimburse G for any expenses incurred by
August 29, 20054342005–35 I.R.B.

G in maintaining and operating the automobile. Be-
cause the cost to purchase an automobile is not a local
transportation fringe benefit as defined in paragraph
(b)(2)(ii)(D)(3) of this section, the source of the com-
pensation to G will be determined pursuant to para-
graph (b)(2)(ii)(A) or (C) of this section.
(v) Under the terms of the compensation pack-
agethatHnegotiatedwithCorpP,CorpPagreed
to reimburse H for the expenses that H incurred in
maintaining and operating an automobile, including
gas and parking, which H purchased in Country V.
Provided that the local transportation fringe benefit
meets the requirements of paragraph (b)(2)(ii)(D)(3)
of this section, H’s compensation with respect to the
reimbursement for the expenses H incurred is sourced
under paragraphs (b)(2)(ii)(B) and (D)(3)ofthissec-
tion based on H’s principal place of work in Country
V. Thus, the local transportation fringe benefit will be
included in H’s gross income as income from sources
without the United States.
Example 6. (i) On January 1, 2006, Company Q
compensates employee J with a grant of options to
which section 421 does not apply that do not have a
readily ascertainable fair market value when granted.
The stock options permit J to purchase 100 shares of
Company Q stock for $5 per share. The stock options
do not become exercisable unless and until J performs
services for Company Q (or a related company) for 5
years. J works for Company Q for the 5 years re-
quired by the stock option grant. In years 2006–08,
J performs all of his services for Company Q within
the United States. In 2009, J performs
1
/2of his ser-
vices for Company Q within the United States and
1
/2of his services for Company Q without the United
States. In year 2010, J performs his services entirely
without the United States. On December 31, 2012,
J exercises the options when the stock is worth $10
per share. J recognizes $500 in taxable compensation
(($10-$5) x 100) in 2012.
(ii) Under the facts and circumstances, the appli-
cable period is the 5-year period between the date of
grant (January 1, 2006) and the date the stock op-
tions become exercisable (December 31, 2010). On
the date the stock options become exercisable, J per-
forms all services necessary to obtain the compensa-
tion from Company Q. Accordingly, the services per-
formed after the date the stock options become ex-
ercisable are not taken into account in sourcing the
compensation from the stock options. Therefore, pur-
suant to paragraph (b)(2)(ii)(A), since J performs 3
1
/2
years of services for Company Q within the United
States and 1
1
/2years of services for Company Q with-
out the United States during the 5-year period, 7/10
of the $500 of compensation (or $350) recognized in
2012 is income from sources within the United States
and the remaining 3/10 of the compensation (or $150)
is income from sources without the United States.
*****
(d)Effective date. ***Paragraph(b)
and the first sentence of paragraph (a)(1)
of this section apply to taxable years be-
ginning on or after July 14, 2005.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b) is
amended by adding an entry for §1.861–4
in numerical order to the table to read as
follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.861–4........................................................... 1545–1900
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 5, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
for Tax Policy.
(
Filed by the Office of the Federal Register on July 13, 2005,
8:45 a.m., and published in the issue of the Federal Register
for July 14, 2005, 70 F.R. 40663)
Section 2651.—Generation
Assignment
26 CFR 26.2651–1: Generation assignment.
T.D. 9214
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 26
Predeceased Parent Rule
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the predeceased
parent rule, which provides an exception to
the general rules of section 2651 of the In-
ternal Revenue Code (Code) for determin-
ing the generation assignment of a trans-
feree of property for generation-skipping
transfer (GST) tax purposes. These regu-
lations also provide rules regarding a trans-
feree assigned to more than one genera-
tion. The regulations reflect changes to
the law made by the Taxpayer Relief Act
of 1997 and generally apply to individuals,
trusts, and estates.
DATES:Effective Date: These regulations
are effective July 18, 2005.
FOR FURTHER INFORMATION
CONTACT: Lian A. Mito at (202)
622–7830 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 3, 2004, a notice of
proposed rulemaking (REG–145988–03,
2004–42 I.R.B. 693) relating to the pre-
deceased parent rule was published in the
Federal Register(69 FR 53862). The
public hearing scheduled for December
14, 2004, was cancelled because no re-
2005–35 I.R.B.435August 29, 2005

quests to speak were received. Written
comments responding to the notice of pro-
posed rulemaking were received. After
consideration of all the comments, the pro-
posed regulations are adopted as amended
by this Treasury decision. The revisions
are discussed below.
Summary of Comments
The proposed regulations provided that,
for purposes of determining whether the
predeceased parent rule applies, an indi-
vidual transferee’s interest in property is
established or derived at the time the trans-
feror who transferred the property is sub-
ject to either the gift or estate tax on the
property. If the transferor will be sub-
ject to a transfer tax imposed on the prop-
erty transferred on more than one occa-
sion, then the relevant time for determining
whether the predeceased parent rule ap-
plies is the earliest time at which the trans-
feror is subject to the gift or estate tax. In
the case of a trust for which an election
under section 2056(b)(7) (QTIP election)
has been made, the proposed regulations
provided that the interest of the remainder
beneficiary is considered as established or
derived when the QTIP trust was estab-
lished. However, the proposed regulations
also included an exception to this general
rule by providing that, to the extent of the
QTIP (but not a reverse QTIP) election, the
remainder beneficiary’s interest is deemed
to have been established or derived on the
death of the transferor’s spouse (the in-
come beneficiary), rather than on the trans-
feror’s earlier death.
One commentator indicated that this ex-
ception is unnecessary. The commentator
believes that the proposed regulations mis-
interpreted the statute because a remain-
der beneficiary’s interest in a trust that is
subject to a QTIP (but not a reverse QTIP)
election should always be deemed to have
been established, not at the time of the
trust’s creation, but rather at the time when
the income-beneficiary spouse is first sub-
ject to gift or estate tax on the trust prop-
erty. This position applies the definition
of “transferor” in section 2652 in the con-
text of the reference to “established and
derived” in section 2651(e), and is based
on the conclusion that the tax in this situa-
tion is not imposed on the same transferor
on more than one occasion. Thus, because
the donee or surviving spouse becomes the
transferor of a trust that is subject to a
QTIP (but not reverse QTIP) election, the
remainder beneficiary’s interest in such a
trust is established upon that spouse’s gift
of an interest in the trust or that spouse’s
death, in each case the time at which gift
or estate tax on the trust is first imposed on
that spouse. Viewed from this perspective,
this provision of the proposed regulations
is not an exception. The Treasury Depart-
ment and the IRS agree, and the final reg-
ulations adopt the suggested change.
Under the proposed regulations, the
predeceased parent rule does not apply to
transfers to collateralheirsif,atthetimeof
the transfer, “the transferor (or the trans-
feror’s spouse or former spouse) has any
living lineal descendant.” Thus, under the
proposed regulations, if, at the time of the
transfer, the transferor has no living lineal
descendants but the transferor’s spouse
or former spouse does, the predeceased
parent rule will not apply to any transfer
by the transferor to a collateral heir. A
number of commentators pointed out that
the parenthetical language is inconsis-
tent with the purpose and language of the
statute, and will inappropriately narrow
the application of the predeceased parent
rule with respect to collateral heirs. The
Treasury Department and the IRS agree,
and the parenthetical language is removed
in the final regulations. Accordingly, the
final regulations require that, for the pre-
deceased parent rule to apply to transfers
to collateral heirs, only the transferor must
have no living lineal descendants at the
time of the transfer.
The proposed regulations provided an
exception to the general rule that assigns
an individual to the youngest of the gener-
ations to which that individual may be as-
signed. Under the exception, an adopted
individual will be treated as a member of
the generation that is one generation below
the adoptive parent for purposes of deter-
mining whether a transfer to the adopted
individual from the adoptive parent (or the
spouse or former spouse of the adoptive
parent, or a lineal descendant of a grand-
parent of the adoptive parent) is subject to
the GST tax. The proposed regulations de-
fined an “adopted individual” as an indi-
vidual who is: (1) a descendant of a parent
of the adoptive parent (or the spouse or for-
mer spouse of the adoptive parent); and (2)
under the age of 18 at the time of the adop-
tion.
Two commentators expressed concern
that this objective test (specifically, the age
at the time of the adoption) provides a
strong inducement to engage in a tax-mo-
tivated adoption, particularly in the case
of older minors, because of the amount of
GST tax that thereby may be avoided. One
commentator suggested lowering the limit
on the age of the individual at the time of
the adoption for purposes of the test. The
other commentator recommended adding a
third element to the definition of adopted
individual, namely, that the individual was
not adopted primarily for tax-avoidance
purposes.
The Treasury Department and the IRS
continue to believe that certain adopted
minors should be treated as a member of
the generation that is one generation be-
low the adoptive parent, but only if the
adoption is not primarily for the purpose
of avoiding GST tax. Therefore, under
the final regulations, the adopted individ-
ual will be treated as a member of the gen-
eration that is one generation below the
adoptive parent for purposes of determin-
ing whether transfers from certain indi-
viduals to the adopted individual are sub-
ject to GST tax if the following require-
ments are satisfied: (1) the individual is
legally adopted by the adoptive parent; (2)
the individual is a descendant of a par-
ent of the adoptive parent (or the adop-
tive parent’s spouse or former spouse); (3)
the individual is under the age of 18 at
the time of the adoption; and (4) the in-
dividual is not adopted primarily for GST
tax-avoidance purposes. The determina-
tion of whether an adoption is primarily for
GST tax-avoidance purposes is to be made
based upon all of the facts and circum-
stances. The Treasury Department and
IRS believe that the most significant factor
to be considered is whether there is abona
fideparent/child relationship between the
adoptive parent and the adopted individ-
ual. Other factors that may be considered
include (but are not limited to): the age
of the adopted individual at the time of
the adoption, and the relationship between
the adopted individual and the individual’s
parents immediately before the adoption.
Thus, the adoption of an infant will be
less likely to be considered primarily for
tax-avoidance purposes than the adoption
of an individual who is age 17. Objec-
tive evidence that the parent was unwilling
or unable to act as the individual’s parent
August 29, 20054362005–35 I.R.B.

(e.g., the parent abandons the individual,
or is adjudicated incompetent or incapaci-
tated) may indicate that an adoption is not
primarily for tax-avoidance purposes.
One commentator suggested clari-
fying the interaction between section
2651(b)(3), regarding the treatment of
legal adoptions, and section 2651(f)(1),
regarding individuals assigned to more
than one generation. In order to provide
that clarification, the Treasury Department
and the IRS confirm that, for purposes of
chapter 13, a legal adoption may create an
additional generation assignment, but the
adoption does not constitute a substitute
for the blood relationship. Specifically, an
individual who has been adopted will be
treated as a blood relative of the adoptive
parent under section 2651(b)(3) and gen-
erally is treated as a child of the adoptive
parent under state law. In spite of the
adoption, however, the adopted individual
also continues to be a blood relative of
the individual’s birth parents. Thus, the
generation assignment of the adopted in-
dividual with regard to a transfer from an
ancestor of the birth parent, for example,
will continue to be measured under section
2651(b), but, subject to the exception in
§26.2651–2(b), the relationship between
them may be subject to the special rule
in section 2651(f)(1), which provides that
an individual who would be assigned to
more than one generation is assigned to
the youngest of those generations.
The proposed regulations provided that
any individual who dies no later than 90
days after a transfer is treated as having
predeceased the transferor. One commen-
tator recommended that the final regula-
tions apply this 90-day rule to inter vivos,
as well as testamentary, transfers. The
90-day rule is intended to replace a simi-
lar 90-day rule in §26.2612–1(a)(2), which
is limited to testamentary transfers. More-
over, many state statutes contain similar
rules that apply only to testamentary trans-
fers. Accordingly, the final regulations do
not adopt this recommendation, and revise
the language of this provision to confirm
that it addresses only transfers occurring
by reason of the death of the transferor.
Two commentators requested confir-
mation that the reference to adoption in
§26.2651–2(b) applies solely for purposes
of the rule in section 2651(f)(1) and has no
application to the rule in section 2651(b).
Accordingly, the introductory language of
§26.2651–2(b) has been revised.
Special Analyses
It has been determined that these pro-
posed regulations arenot a significant reg-
ulatory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and,
because these regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small entities.
Drafting Information
The principal author of these regula-
tions is Lian A. Mito of the Office of As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 26 is
amended as follows:
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Paragraph 1. The authority citation for
part 26 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §26.2600–1, the table is
amended by:
1.Removing the entries for
§26.2612–1, paragraphs (a)(1) and (a)(2).
2. Adding entries for §§26.2651–1,
26.2651–2, and 26.2651–3.
The additions read as follows:
§26.2600–1 Table of contents.
*****
§26.2651–1 Generation assignment.
(a) Special rule for persons with a deceased
parent.
(1) In general.
(2) Special rules.
(3) Established or derived.
(4) Special rule in the case of additional
contributions to a trust.
(b) Limited application to collateral heirs.
(c) Examples.
§26.2651–2 Individual assigned to more
than one generation.
(a) In general.
(b) Exception.
(c) Special rules.
(1) Corresponding generation adjustment.
(2) Continued application of generation as-
signment.
(d) Example.
§26.2651–3 Effective dates.
(a) In general.
(b) Transition rule.
Par. 3. Section 26.2612–1 is amended
by:
1. Removing the paragraph designation
and heading for (a)(1).
2. Removing paragraph (a)(2).
3. Removing the second sentence of
paragraph (f) introductory text.
4. RemovingExamples 6and7in para-
graph (f).
5. RedesignatingExamples 8through
15asExamples 6through13in paragraph
(f).
6. Revising the first sentence of newly
designated Example 7 in paragraph (f).
7. Revising the first sentence of newly
designatedExample 11in paragraph (f).
The revisions read as follows:
§26.2612–1 Definitions.
*****
(f) * * *
Example 7.Taxable termination resulting from
distribution. The facts are the same as inExample 6,
except twenty years after C’s death the trustee exer-
cises its discretionary power and distributes the entire
principal to GGC. * * *
*****
Example 11.Exercise of withdrawal right as tax-
able distribution. The facts are the same as inExam-
ple 10, except GC holds a continuing right to with-
draw trust principal and after one year GC withdraws
$10,000. * * *
2005–35 I.R.B.437August 29, 2005

*****
Par. 4. Sections 26.2651–1, 26.2651–2
and 26.2651–3 are added to read as fol-
lows:
§26.2651–1 Generation assignment.
(a)Special rule for persons with a de-
ceased parent—(1)In general. This para-
graph (a) applies for purposes of determin-
ingwhetheratransfertoorfortheben-
efit of an individual who is a descendant
of a parent of the transferor (or the trans-
feror’s spouse or former spouse) is a gener-
ation-skipping transfer. If that individual’s
parent, who is a lineal descendant of the
parent of the transferor (or the transferor’s
spouse or former spouse), is deceased at
the time the transfer (from which an inter-
est of such individual is established or de-
rived) is subject to the tax imposed on the
transferor by chapter 11 or 12 of the Inter-
nal Revenue Code, the individual is treated
as if that individual were a member of the
generation that is one generation below the
lower of—
(i) The transferor’s generation; or
(ii) The generation assignment of the in-
dividual’s youngest living lineal ancestor
who is also a descendant of the parent of
the transferor (or the transferor’s spouse or
former spouse).
(2)Special rules—(i)Corresponding
generation adjustment. If an individual’s
generation assignment is adjusted with
respect to a transfer in accordance with
paragraph (a)(1) of this section, a corre-
sponding adjustment with respect to that
transfer is made to the generation assign-
ment of each—
(A) Spouse or former spouse of that in-
dividual;
(B) Descendant of that individual; and
(C) Spouse or former spouse of each
descendant of that individual.
(ii)Continued application of genera-
tion assignment. If a transfer to a trust
would be a generation-skipping transfer
but for paragraph (a)(1) of this section, any
generation assignment determined under
this paragraph (a) continues to apply in de-
termining whether any subsequent distri-
bution from (or termination of an interest
in) the portion of the trust attributable to
that transfer is a generation-skipping trans-
fer.
(iii)Ninety-day rule. For purposes of
paragraph (a)(1) of this section, any indi-
vidual who dies no later than 90 days after
a transfer occurring by reason of the death
of the transferor is treated as having prede-
ceased the transferor.
(iv)Local law. A living person is not
treated as having predeceased the trans-
feror solely by reason of a provision of ap-
plicable local law;e.g., an individual who
disclaims is not treated as a predeceased
parent solely because state law treats a dis-
claimant as having predeceased the trans-
feror for purposes of determining the dis-
position of the disclaimed property.
(3)Established or derived. For pur-
poses of section 2651(e) and paragraph
(a)(1) of this section, an individual’s inter-
est is established or derived at the time the
transferor is subject to transfer tax on the
property. See §26.2652–1(a) for the def-
inition of a transferor. If the same trans-
feror, on more than one occasion, is sub-
ject to transfer tax imposed by either chap-
ter 11 or 12 of the Internal Revenue Code
on the property so transferred (whether the
same property, reinvestments thereof, in-
come thereon, or any or all of these), then
the relevant time for determining whether
paragraph (a)(1) of this section applies is
the earliest time at which the transferor is
subject to the tax imposed by either chap-
ter 11 or 12 of the Internal Revenue Code.
For purposes of section 2651(e) and para-
graph (a)(1) of this section, the interest of a
remainder beneficiary of a trust for which
an election under section 2523(f) or sec-
tion 2056(b)(7) (QTIP election) has been
made will be deemed to have been estab-
lished or derived, to the extent of the QTIP
election, on the date as of which the value
of the trust corpus is first subject to tax un-
der section 2519 or section 2044. The pre-
ceding sentence does not apply to a trust,
however, to the extent that an election un-
der section 2652(a)(3) (reverse QTIP elec-
tion) has been made for the trust because,
to the extent of a reverse QTIP election,
the spouse who established the trust will
remain the transferor of the trust for gen-
eration-skipping transfer tax purposes.
(4)Special rule in the case of additional
contributions to a trust. If a transferor re-
ferred to in paragraph (a)(1) of this sec-
tion contributes additional property to a
trust that existed before the application of
paragraph (a)(1), then the additional prop-
erty is treated as being held in a separate
trust for purposes of chapter 13 of the In-
ternal Revenue Code. The provisions of
§26.2654–1(a)(2), regarding treatment as
separate trusts, apply as if different trans-
ferors had contributed to the separate por-
tions of the single trust. Additional sub-
sequent contributions from that transferor
will be added to the new share that is
treated as a separate trust.
(b)Limited application to collateral
heirs. Paragraph (a) of this section does
not apply in the case of a transfer to any
individual who is not a lineal descendant
of the transferor (or the transferor’s spouse
or former spouse) if the transferor has any
living lineal descendant at the time of the
transfer.
(c)Examples. The following examples
illustrate the provisions of this section:
Example 1. T establishes an irrevocable trust,
Trust, providing that trust income is to be paid to T’s
grandchild, GC, for 5 years. At the end of the 5-year
period or on GC’s prior death, Trust is to terminate
and the principal is to be distributed to GC if GC is
living or to GC’s children if GC has died. The trans-
fer that occurred on the creation of the trust is subject
to the tax imposed by chapter 12 of the Internal Rev-
enue Code and, at the time of the transfer, T’s child,
C, who is a parent of GC, is deceased. GC is treated
as a member of the generation that is one generation
below T’s generation. As a result, GC is not a skip
person and Trust is not a skip person. Therefore, the
transfer to Trust is not a direct skip. Similarly, dis-
tributions to GC during the term of Trust and at the
termination of Trust will not be GSTs.
Example 2. On January 1, 2004, T transfers
$100,000 to an irrevocable inter vivos trust that
provides T with an annuity payable for four years or
until T’s prior death. The annuity satisfies the defi-
nition of a qualified interest under section 2702(b).
When the trust terminates, the corpus is to be paid to
T’s grandchild, GC. The transfer is subject to the tax
imposed by chapter 12 of the Internal Revenue Code
and, at the time of the transfer, T’s child, C, who
is a parent of GC, is living. C dies in 2006. In this
case, C was alive at the time the transfer by T was
subject to the tax imposed by chapter 12 of the Inter-
nal Revenue Code. Therefore, section 2651(e) and
paragraph (a)(1) of this section do not apply. When
the trust subsequently terminates, the distribution
to GC is a taxable termination that is subject to the
GST tax to the extent the trust has an inclusion ratio
greater than zero. See section 2642(a).
Example 3. T dies testate in 2002, survived by T’s
spouse,S,theirchildren,C1andC2,andC1’schild,
GC. Under the terms of T’s will, a trust is established
for the benefit of S and of T and S’s descendants.
Under the terms of the trust, all income is payable
to S during S’s lifetime and the trustee may distribute
trust corpus for S’s health, support and maintenance.
At S’s death, the corpus is to be distributed, outright,
to C1 and C2. If either C1 or C2 has predeceased
S, the deceased child’s share of the corpus is to be
distributed to that child’s then-living descendants, per
stirpes. The executor of T’s estate makes the election
under section 2056(b)(7) to treat the trust property
as qualified terminable interest property (QTIP) but
does not make the election under section 2652(a)(3)
August 29, 20054382005–35 I.R.B.

(reverse QTIP election). In 2003, C1 dies survived by
S and GC. In 2004, S dies, and the trust terminates.
The full fair market value of the trust is includible in
S’s gross estate under section 2044 and S becomes the
transferor of the trust under section 2652(a)(1)(A).
GC’s interest is considered established or derived at
S’s death, and because C1 is deceased at that time,
GC is treated as a member of the generation that is
one generation below the generation of the transferor,
S. As a result, GC is not a skip person and the transfer
to GC is not a direct skip.
Example 4. ThefactsarethesameasinExam-
ple 3. However, the executor of T’s estate makes
the election under section 2652(a)(3) (reverse QTIP
election) for the entire trust. Therefore, T remains
the transferor because, for purposes of chapter 13 of
the Internal Revenue Code, the election to be treated
as qualified terminable interest property is treated as
if it had not been made. In this case, GC’s interest
is established or derived on T’s death in 2002. Be-
cause C1 was living at the time of T’s death, the pre-
deceased parent rule under section 2651(e) does not
apply, even though C1 was deceased at the time the
transfer from S to GC was subject to the tax under
chapter 11 of the Internal Revenue Code. When the
trust terminates, the distribution to GC is a taxable
termination that is subject to the GST tax to the ex-
tent the trust has an inclusion ratio greater than zero.
See section 2642(a).
Example 5. T establishes an irrevocable trust pro-
viding that trust income is to be paid to T’s grand-
niece, GN, for 5 years or until GN’s prior death. At
the end of the 5-year period or on GN’s prior death,
the trust is to terminate and the principal is to be dis-
tributed to GN if living, or if GN has died, to GN’s
then-living descendants, per stirpes. S is a sibling of
T and the parent of N. N is the parent of GN. At the
time of the transfer, T has no living lineal descendant,
S is living, N is deceased, and the transfer is subject
to the gift tax imposed by chapter 12 of the Internal
Revenue Code. GN is treated as a member of the gen-
eration that is one generation below T’s generation
because S, GN’s youngest living lineal ancestor who
is also a descendant of T’s parent, is in T’s generation.
As a result, GN is not a skip person and the transfer to
the trust is not a direct skip. In addition, distributions
to GN during the term of the trust and at the termina-
tion of the trust will not be GSTs.
Example 6. On January 1, 2004, T transfers
$50,000 to a great-grandniece, GGN, who is the
great-grandchild of B, a brother of T. At the time of
the transfer, T has no living lineal descendants and
B’s grandchild, GN, who is a parent of GGN and a
child of B’s living child, N, is deceased. GGN will
be treated as a member of the generation that is one
generation below the lower of T’s generation or the
generation assignment of GGN’s youngest living
lineal ancestor who is also a descendant of the parent
of the transferor. In this case, N is GGN’s youngest
living lineal ancestor who is also a descendant of the
parent of T. Because N’s generation assignment is
lower than T’s generation, GGN will be treated as
a member of the generation that is one generation
below N’s generation assignment (i.e., GGN will be
treated as a member of her parent’s generation). As
a result, GGN remains a skip person and the transfer
to GGN is a direct skip.
Example 7. Thasachild,C.CandC’sspouse,
S, have a 20-year-old child, GC. C dies and S subse-
quently marries S2. S2 legally adopts GC. T transfers
$100,000 to GC. Under section 2651(b)(1), GC is as-
signed to the generation that is two generations below
T. However, since GC’s parent, C, is deceased at the
time of the transfer, GC will be treated as a member
of the generation that is one generation below T. As a
result,GCisnotaskippersonandthetransfertoGC
is not a direct skip.
§26.2651–2 Individual assigned to more
than 1 generation.
(a)In general. Except as provided in
paragraph (b) or (c) of this section, an indi-
vidual who would be assigned to more than
1 generation is assigned to the youngest
of the generations to which that individual
would be assigned.
(b)Exception. Notwithstanding para-
graph (a) of this section, an adopted indi-
vidual (as defined in this paragraph) will
be treated as a member of the generation
that is one generation below the adop-
tive parent for purposes of determining
whether a transfer to the adopted individ-
ual from the adoptive parent (or the spouse
or former spouse of the adoptive parent,
or a lineal descendant of a grandparent of
the adoptive parent) is subject to chapter
13 of the Internal Revenue Code. For
purposes of this paragraph (b), an adopted
individual is an individual who is—
(1) Legally adopted bythe adoptive par-
ent;
(2) A descendant of a parent of the
adoptive parent (or the spouse or former
spouse of the adoptive parent);
(3) Under the age of 18 at the time of
the adoption; and
(4) Not adopted primarily for the pur-
pose of avoiding GST tax. The determi-
nation of whether an adoption is primarily
for GST tax-avoidance purposes is made
based upon all of the facts and circum-
stances. The most significant factor is
whether there is abona fideparent/child re-
lationship between the adoptive parent and
the adopted individual, in which the adop-
tive parent has fully assumed all signifi-
cant responsibilitiesfor the care and rais-
ing of the adopted child. Other factors may
include (but are not limited to), at the time
of the adoption—
(i) The age of the adopted individ-
ual (for example, the younger the age of
the adopted individual, or the age of the
youngest of siblings who are all adopted
together, the more likely the adoption
will not be considered primarily for GST
tax-avoidance purposes); and
(ii) The relationship between the
adopted individual and the individual’s
parents (for example, objective evidence
of the absence or incapacity of the parents
may indicate that the adoption is not pri-
marily for GST tax-avoidance purposes).
(c)Special rules—(1)Corresponding
generation adjustment. If an individual’s
generation assignment is adjusted with re-
spect to a transfer in accordance with para-
graph (b) of this section, a correspond-
ing adjustment with respect to that trans-
fer is made to the generation assignment
of each—
(i) Spouse or former spouse of that in-
dividual;
(ii) Descendant of that individual; and
(iii) Spouse or former spouse of each
descendant of that individual.
(2)Continued application of generation
assignment. If a transfer to a trust would be
a generation-skippingtransfer but for para-
graph (b) of this section, any generation as-
signment determined under paragraph (b)
or (c) of this section continues to apply in
determining whether any subsequent dis-
tribution from (or termination of an inter-
est in) the portion of the trust attributable to
that transfer is a generation-skipping trans-
fer.
(d)Example. The following example
illustrates the provisions of this section:
Example. T has a child, C. C has a 20-year-old
child, GC. T legally adopts GC and transfers
$100,000 to GC. GC’s generation assignment is
determined by section 2651(b)(1) and GC is assigned
to the generation that is two generations below T.
In addition, because T has legally adopted GC, GC
is generally treated as a child of T under state law.
Under these circumstances, GC is an individual who
is assigned to more than one generation and the ex-
ception in §26.2651–2(b) does not apply. Thus, the
special rule under section 2651(f)(1) applies and GC
is assigned to the generation that is two generations
below T. GC remains a skip person with respect to T
and the transfer to GC is a direct skip.
§26.2651–3 Effective dates.
(a)In general.Therulesof
§§ 26.2651–1 and 26.2651–2 are ap-
plicable for terminations, distributions,
and transfers occurring on or after July 18,
2005.
(b)Transition rule. In the case of trans-
fers occurring after December 31, 1997,
and before July 18, 2005, taxpayers may
2005–35 I.R.B.439August 29, 2005

rely on any reasonable interpretation of
section 2651(e).
For this purpose, these final regula-
tions, as well as the proposed regulations
issued on September 3, 2004, (69 FR
53862) are treated as a reasonable inter-
pretation of the statute.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved June 30, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on July 15, 2005,
8:45 a.m., and published in the issue of the Federal Register
for July 18, 2005, 70 F.R. 41140)
Section 6343.—Authority
to Release Levy and
Return Property
26 CFR 301.6343–3: Return of property in certain
cases.
T.D. 9213
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Return of Property in Certain
Cases
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that amend regulations under
section 6343 of the Internal Revenue Code
(Code) relating to the return of property
in certain cases. The regulations reflect
changes made to section 6343 of the Code
by the Taxpayer Bill of Rights 2. The regu-
lations also reflect changes affecting levies
enacted by the Internal Revenue Service
Restructuring and Reform Act of 1998.
The regulations affect taxpayers seeking
the return of levied property from the In-
ternal Revenue Service (IRS).
DATES:Effective Date: These regulations
are effective on July 14, 2005.
Applicability Date: For dates of appli-
cability, see §301.6343–3(k).
FOR FURTHER INFORMATION
CONTACT: Kevin B. Connelly, (202)
622–3630 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Procedure and Administration Regu-
lations (26 CFR part 301) relating to the
return of property under section 6343 of
the Code. Section 501(b) of the Taxpayer
Bill of Rights 2 (TBOR2), Public Law
104–168 (110 Stat. 1452), amended sec-
tion 6343 to authorize the IRS to return
levied property in certain cases. The pur-
pose of this provision is, to the extent pos-
sible, to return the taxpayer to the position
the taxpayer would have been in had the
levy not been issued. No interest shall be
paid with respect to property returned to
the taxpayer under this provision. These
final regulations reflect the amendments
made by section 501(b) of TBOR2.
These regulations also reflect amend-
ments made by the Internal Revenue Ser-
vice Restructuring and Reform Act (RRA
1998), Public Law 105–206 (112 Stat.
685), which added newsections 6331(i)
and (j) to the Code to provide that no
levy may be made during the pendency of
proceedings for refund of divisible taxes
or prior to completion of an investigation
of the status of property that is to be sold
under section 6335. RRA 1998 also added
section 6331(k) to the Code, which pro-
vides that no levy may be made during
the period an offer-in-compromise or an
installment agreement is pending or in ef-
fect. In addition, RRA 1998 added section
6330, which provides in certain circum-
stances for notice and an opportunity for a
hearing before a levy can be made.
Explanation of Provisions
On February 14, 2001, a notice of pro-
posed rulemaking (REG–101520–97,
2001–1 C.B. 1057) reflecting these
changes was published in theFederal
Register(66 FR 10249). No written com-
ments were received in response to the
notice of proposed rulemaking and no
public hearing was requested, scheduled
or held. These final regulations adopt the
provisions of the notice of proposed rule-
making without change.
Comments on the Proposed Regulation
None
Modifications of Proposed Regulation
None
Special Analyses
It has been determined that this final
regulation is not a significant 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) and the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) do not apply to these regulations,
and, therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of theCode, the preceding
notice of proposed rulemaking was sub-
mitted 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 these regu-
lations is Kevin B. Connelly, Office of
Associate Chief Counsel (Procedure and
Administration), Collection Bankruptcy
& Summons Division, CC:PA:CBS, IRS.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6343–3 is added to
read as follows:
§301.6343–3 Return of property in certain
cases.
(a)In general. If money has been levied
upon and applied toward the taxpayer’s li-
ability, or property has been levied upon
August 29, 20054402005–35 I.R.B.

and sold, and the receipts have been ap-
plied toward the taxpayer’s liability, or
property has been levied upon and pur-
chased by the United States and the United
States still possessesthe property, and the
Commissioner determines that any of the
conditions in paragraph (c) of this section
exist, the Commissioner may return—
(1) An amount of money equal to the
amount of money levied upon;
(2) An amount of money equal to the
amount of money received by the United
States from a sale of the property; or
(3) The specific property levied upon
and purchased by the United States.
(b)Return of levied upon property in
possession of the Internal Revenue Service
(IRS) pending sale under section 6335.
Other than as provided in §301.6343–1(b)
or in paragraph (d) of this section, the
Commissioner, in his or her discretion,
mayreturnlevieduponpropertythatisin
the possession of the United States pend-
ing sale under section 6335.
(c)Conditions authorizing the return of
property. The Commissioner may return
property upon determining that one of the
following conditions exist:
(1)Premature or not in accordance with
administrative procedures. The levy was
premature or otherwise not in accordance
with the administrative procedures of the
Secretary.
(2)Installment agreement.Subsequent
to the levy, the taxpayer enters into an
agreement under section 6159 to satisfy
the liability for which the levy was made
by means of installment payments. If,
however, the agreement specifically pro-
vides that already levied upon property
will not be returned under section 6343(d),
the Commissioner may not grant a request
for return of property under this paragraph
(c)(2).
(3)Facilitate collection.Thereturnof
property will facilitate the collection of the
tax liability for which the levy was made.
(4)Best interests of the United States
and the taxpayer—(i)In general.Thetax-
payer or the National Taxpayer Advocate
(or his or her delegate) has consented to the
return of property, and the return of prop-
erty would be in the best interest of the tax-
payer, as determined by the National Tax-
payer Advocate (or his or her delegate),
and in the best interest of the United States,
as determined by the Commissioner.
(ii)Best interest of the taxpayer.The
National Taxpayer Advocate (or his or her
delegate) generally will determine whether
thereturnofpropertyisinthebestinter-
est of the taxpayer. If, however, a taxpayer
requests the Commissioner to return prop-
erty and has not specifically requested the
National Taxpayer Advocate (or his or her
delegate) to determine the taxpayer’s best
interest, a finding by the Commissioner
thatthereturnofpropertyisinthebestin-
terest of the taxpayer will be sufficient to
support the return of property. Only the
National Taxpayer Advocate (or his or her
delegate) may determine that a return of
property is not in the best interest of the
taxpayer.
(5)Examples. The following examples
illustrate the provisions of this paragraph
(c):
Example 1. A owes $1,000 in Federal income
taxes. The IRS levies on a broker with respect to a
money market account belonging to the taxpayer and
receives payment from the broker which it applies
to the taxpayer’s outstanding liability. However, the
IRS failed to follow procedure provided by the Inter-
nal Revenue Manual (but not required by statute) with
regard to managerial approval prior to the making of
the levy. The Commissioner may return an amount of
money equal to the amount of money the IRS levied
upon and applied toward the taxpayer’s tax liability.
Example 2. B owes $1,000 in Federal income
taxes. The IRS levies on a bank with respect to a
savings account belonging to the taxpayer and re-
ceives funds from the bank, which it applies to the
taxpayer’s liability. Subsequent to the levy, B en-
ters into an installment agreement, under which B
will pay timely installments to satisfy the entire li-
ability. The installment agreement does not by its
terms preclude the return of levied upon property.
The revenue officer verifies that B is financially ca-
pable of paying the entire liability, including accruals,
in the agreed-upon installment payments. The Com-
missioner may return an amount of money equal to
the amount of money levied upon and applied toward
the taxpayer’s liability.
Example 3. C owns a house that is deteriorating
and in unsalable condition. C is in the process of ren-
ovating the house for sale when the IRS levies upon
C’s bank account for the payment of a $20,000 out-
standing Federal tax liability and receives funds in the
amount of $3,000, which it applies toward C’s liabil-
ity. A notice of federal tax lien is the only lien en-
cumbrancing the house. C requests that an amount
of money equal to the amount seized from the bank
account be returned so that C can complete the ren-
ovations on the house. Without the funds, C will
be unable to complete the renovations and sell the
house. Upon examination, the Commissioner deter-
mines that the IRS will be able to collect the entire tax
liability if C’s house is restored to salable condition.
If the National Taxpayer Advocate, or the Commis-
sioner in lieu of the National Taxpayer Advocate, de-
termines that the return of the seized money is in the
taxpayer’s best interest, the Commissioner may re-
turn an amount of money equal to the amount seized
from the bank account, in the best interest of the tax-
payer and the United States.
(d)Best Interests of the United States
and the taxpayer to release levy and re-
turn of property where levy made in vio-
lation of law—(1)In general.IftheIRS
makes a levy in violation of the law, it is in
the best interests of the United States and
the taxpayer to release the levy and the IRS
will return to the taxpayer any property ob-
tained pursuant to the levy. For example,
the IRS will release the levy and return the
taxpayer’s property if the levy was made—
(i) Without giving the requisite thirty-
day notice of the right to a hearing under
section 6330;
(ii) During the pendency of a proceed-
ing for refund of divisible tax in violation
of section 6331(i);
(iii) Before investigation of the status of
levied upon property in violation of section
6331(j);
(iv) During the pendency of an of-
fer-in-compromise in violation of section
6331(k)(1); or
(v) During the period an offer to enter
into an installment agreement is pending
(or for 30 days following the rejection of
an offer, or, if the rejection is timely ap-
pealed, during the period that the appeal
is pending) or during the period an install-
ment agreement is in effect (or during the
30 days following a termination or, if a
timely appeal of termination is filed, dur-
ing the period the appeal is pending) in vi-
olation of section 6331(k)(2).
(2)Property may not be credited to out-
standing liability without the taxpayer’s
permission. When the release of a levy
and the return of property are required un-
der this paragraph (d), the property or the
proceeds from the sale of the property re-
ceived by the IRS pursuant to the levy must
be returned to the taxpayer unless the tax-
payer requests otherwise. The property or
proceeds of sale may not be credited to any
outstanding tax liability of the taxpayer, in-
cluding the one with respect to which the
IRS made the levy, without the written per-
mission of the taxpayer.
(e)Time of return. Levied upon prop-
erty in possession of the IRS (other than
money) may be returned under paragraphs
(c) and (d) of this section at any time. An
amount of money equal to the amount of
money levied upon or received from a sale
of property may be returned at any time be-
2005–35 I.R.B.441August 29, 2005

fore the expiration of 9 months from the
date of the levy. When a request for the
return of money filed in accordance with
paragraph (h) of this section is filed be-
fore the expiration of the 9-month period,
or a determination to return an amount of
money is made before the expiration of
the 9-month period, the money may be re-
turned within a reasonable period of time
after the expiration of the 9-month period
if additional time is necessary for investi-
gation or processing.
(f)Purchase by the United States.For
purposes of paragraph (a)(2) of this sec-
tion, if property is declared purchased by
the United States at a sale pursuant to sec-
tion 6335(e)(1)(C), the United States will
be treated as having received an amount
of money equal to the minimum price de-
termined by the Commissioner before the
sale.
(g)Determinations by the Commis-
sioner. The Commissioner must deter-
mine whether any of the conditions au-
thorizing the return of property exists if a
taxpayer submits a request for the return of
property in accordance with paragraph (h)
of this section. The Commissioner also
may make this determination indepen-
dently. If the Commissioner determines
that conditions authorizing the return of
property are not present, the Commis-
sioner may not authorize the return of
property. If the Commissioner determines
that conditions authorizing the return of
property are present, the Commissioner
may (but is not required to, unless the
reason for the return of property is that the
levy was made in violation of law and is
governed by paragraph (d) of this section)
authorize the return of property. If the
Commissioner decides independently to
return property under paragraph (c)(4) of
this section based on the best interests of
the taxpayer and the United States, the
taxpayer or the National Taxpayer Advo-
cate (or his or her delegate) must consent
to the return of property.
(h)Procedures for request for the re-
turn of property—(1)Manner.Arequest
for the return of property must be made in
writing to the address on the levy form.
(2)Form. The written request must in-
clude the following information—
(i) The name, current address, and tax-
payer identification number of the person
requesting the return of money (or prop-
erty purchased by the United States);
(ii) A description of the property levied
upon;
(iii) The date of the levy; and
(iv) A statement of the grounds upon
which the return of money is being re-
quested (or property purchased by the
United States).
(i)No interest. No interest will be paid
on any money returned under this section.
(j)Administrative collection upon de-
fault. If the Commissioner returns prop-
erty under this section, and the taxpayer
fails to pay the previously assessed liabil-
ity for which the levy was made on the
returned property, the Commissioner may
administratively collect the liability. Col-
lection may include levying again on the
returned property as long as statutory and
administrative requirements are followed.
(k)Effective date.Thissectionisappli-
cable on July 14, 2005.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved June 30, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 13, 2005,
8:45 a.m., and published in the issue of the Federal Register
for July 14, 2005, 70 F.R. 40669)
August 29, 20054422005–35 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Information About Additional
Criteria That Will be Applied
in Selecting Proposals for the
Internal Revenue Service’s
Industry Issue Resolution (IIR)
Program
Notice 2005–59
This notice provides information about
additional criteria that will be applied in
considering proposals regarding account-
able plans for the Internal Revenue Ser-
vice’s Industry Issue Resolution (IIR) pro-
gram. The objective of the IIR Program
is to identify frequently disputed or bur-
densome tax issues that are common to a
significant number of business taxpayers
that may be resolved through published or
other administrative guidance.SeeRev.
Proc. 2003–36, 2003–1 C.B. 859.
During the IIR Pilot Program, the Ser-
vice initiated a project involving the tax
treatment of employer reimbursements of
various equipment-related expenses to em-
ployees in a segment of the pipeline con-
struction industry. Whether or not such ex-
penses are included in the employee’s in-
come and wages is governed generally by
whether or not the employer makes pay-
ments to the employee under an account-
able plan in accordancewith the require-
ments of § 62(c) of the Internal Revenue
Code.
1
The industry representatives main-
tained that their industry practice made
compliance with the accountable plan re-
quirements unworkable. As a result of the
project, the Service published two pieces
of guidance: Rev. Rul. 2002–35, 2002–1
C.B. 1067, making clear that expense re-
imbursement in the industry is excluded
from income and wages only if made in
accordance with the accountable plan re-
quirements, and Rev. Proc. 2002–41,
2002–1 C.B. 1098, providing for deemed
substantiation of expenses at a specified
rate to make it possible for employers in
the industry to comply with the account-
able plan requirements.
Since the completion of the IIR pilot
program, several submissions to the IIR
program have asserted that compliance
with various aspects of the accountable
plan rules set forth under § 62(c) are un-
duly burdensome for businesses in certain
other industries and have asked for pub-
lished guidance providing administrative
relief similar to that provided in Rev. Proc.
2002–41.
The Service provided guidance as part
of the IIR pilot project for a segment of the
pipeline construction industry because the
industry had successfully demonstrated
that employers could not comply with
the existing accountable plan rules given
certain fundamental aspects of their in-
dustry practice that could not readily be
changed, if changed at all. For purposes of
evaluating future IIR submissions raising
similar concerns aboutapplication of the
accountable plan rules in specific indus-
tries, the Service will make a comparable
assessment as to whether the accountable
plan rules are unworkable given aspects of
industry practice that cannot be changed at
all or cannot be changed without great dif-
ficulty. In addition to the requirements of
Rev. Proc. 2003–36, factors to be consid-
ered in determining whether there is need
for relief as to this issue would include,
but not be limited to the following:
(a) an established industry history
showing that high turnover in the labor
force or short-term employment with mul-
tiple employers is typical;
(b) large expenses for maintenance, al-
though infrequent, are predictable relative
to the compensation paid to the employees
for their services;
(c) individual employers are unwilling
to reimburse in full for sporadic expenses
for equipment maintenance because a
significant portion of the reimbursement
will accrue to the benefit of a later em-
ployer/competitor;
(d) there is a uniformity of expenses
across the workforce or the existence of
a uniform objective predictive proxy for
measuring the expense, and
(e) existing methods of substantiating
expenses, such as Rev. Proc. 2004–64,
2004–49 I.R.B. 898 (mileage allowances),
do not accurately reflect the expenses in-
curred by the employees on behalf of the
employer.
The mere cost of collecting records,
substantiating expenses and reconciling
the amount of expenses with the amount
of reimbursements paid does not support
a claim of burden meriting relief from
the requirements of the accountable plan
rules.
DRAFTING INFORMATION
The principal author of this notice
is Joe Spires of the Office of Asso-
ciate Chief Counsel (Tax Exempt &
Government Entities). For further in-
formation regarding this notice, con-
tact Jeanne Royal Singley at (202)
622–0047 (not a toll-free call).
Modification of Notice
2005–4; Biodiesel and
Aviation-Grade Kerosene
Notice 2005–62
Section 1. PURPOSE
This notice modifies Notice 2005–4,
2005–2 I.R.B. 289, as modified by No-
tice 2005–24, 2005–12 I.R.B. 757, by re-
vising the guidance relating to the Certifi-
cate for Biodiesel, which is required as
a condition for claiming a credit or pay-
ment under §§ 6426(c), 6427(e), and 40A
of the Internal Revenue Code. This no-
tice also provides guidance on issues re-
lated to the biodiesel credit or payment that
are not addressed in Notice 2005–4. This
notice further modifies Notice 2005–4 re-
lating to the Certificate of Person Buying
Aviation-Grade Kerosene for Commercial
Aviation or Nontaxable Use, which is re-
quired to notify a position holder of certain
transactions under §§ 4081 and 4082.
Notice 2005–4 provides guidance on
certain excise tax provisions in the Code
that were added or affected by the Amer-
ican Jobs Creation Act of 2004 (Pub. L.
108–357) (the Act).
1
Whether a payment of this type is a rental payment rather than the reimbursement of an employee expense may involve the question whether the worker is serving as an independent
contractor or employee. Although these payments in almost every case would not qualify as actual rental payments, it is a highly factual question.See,e.g.,Eliseo v. Commissioner, T.C.
Memo. 2000–176. Further, in this context, the Service is restricted from addressing classification of workers by section 530(b) of the Revenue Act of1978.
2005–35 I.R.B.443August 29, 2005

Section 2. BIODIESEL CERTIFICATE
(a) Section 2 of Notice 2005–4 provides
guidance on credits and payments allowed
for biodiesel fuel. Section 2(h) of that no-
tice describes the Certificate for Biodiesel
that, under the Code, the claimant must ob-
tain “from” the producer of the biodiesel.
This notice revises the certificate to clar-
ify that the claimant may obtain the cer-
tificate either directly from the producer of
the biodiesel or indirectly from a biodiesel
reseller.
(b)Section2(h)ofNotice2005–4also
requires that each claim contain a state-
ment that the claimant has in its possession
an unexpired biodiesel certificate. This
notice revises that rule so that the claimant
generally must submit a copy of the certifi-
cate with its claim.
(c) This notice also provides guidance
on accounting for commingled biodiesel.
(d) Finally, this notice provides a tran-
sitional rule for claims that were made be-
fore August 29, 2005.
(e) Accordingly, section 2(h) of Notice
2005–4 is revised to read as follows:
Section 2. ALCOHOL AND BIODIESEL
CLAIMS
*****
(h)Content of claim; commingled
biodiesel—(1)In general.Section
6426(c)(4) of the Code provides that
the biodiesel mixture credit of § 6426
is not allowed unless the producer of
the mixture obtains a certificate, in such
form and manner as may be prescribed
by the Secretary, from the producer of
the biodiesel that identifies the product
produced and the percentage of biodiesel
and agri-biodiesel in the product. Sec-
tion 40A(b)(4) provides a similar rule for
the biodiesel mixture credit and biodiesel
credit allowed by § 40A. Under this notice,
these rules will also apply to the credit or
payment allowed for biodiesel mixtures
by § 6427(e). Accordingly, each claim for
a credit or payment under § 6426, 6427(e),
or 40A must contain the following in-
formation with respect to biodiesel or a
biodiesel mixture covered by the claim:
(i) The amount of agri-biodiesel and
the amount of biodiesel other than agri-
biodiesel in the biodiesel or biodiesel mix-
ture.
(ii) A copy of the Certificate for
Biodiesel described in paragraph (h)(2)
of this section and, if applicable, the State-
ment(s) of Biodiesel Reseller described in
paragraph (h)(3) of this section. However,
in the case of a certificate and statement
that supports a claim made on more than
one claim form, the certificate and state-
ment are to be included with the first claim
and the claimant is to provide information
related to the certificate on any subsequent
claim in accordance with the instructions
applicable to the claim form.
(iii) A statement by the claimant that the
claimant has no reason to believe that any
information in the certificate (described in
paragraph (h)(2) of this section) or state-
ment (described in paragraph(h)(3)ofthis
section) is false.
(2)Certificate for Biodiesel—(i)In
general. The certificate to be obtained by
the claimant claiming a credit or payment
under § 6426, 6427(e), or 40A consists of a
statement that is signed under penalties of
perjury by a person with authority to bind
the biodiesel producer, is substantially in
the same form as the model certificate in
paragraph (h)(2)(ii) of this section, and
contains all the information necessary to
complete such model certificate. In the
case of a claimant that is the producer of
the biodiesel, the information required on
lines 2–7 of the model certificate is not
applicable and those lines do not need to
be completed. The certificate identifica-
tion number is determined by the producer
and must be unique to each certificate. A
biodiesel producer may, with respect to a
particular sale of biodiesel, provide multi-
ple separate certificates, each applicable to
a portion of the total volume of biodiesel
sold. Thus, for example, a biodiesel pro-
ducer that sells 5,000 gallons of biodiesel
may provide its buyer with five certifi-
cates for 1,000 gallons each. The multiple
certificates may be provided either to the
buyeratorafterthetimeofsaleortoa
reseller in the circumstances described in
paragraph (h)(3)(i) of this section.
(ii)Model certificate.
C
ERTIFICATEFORBIODIESEL
Certificate Identification Number:
(To support a claim related to biodiesel or a biodiesel mixture under the Internal Revenue Code)
The undersigned biodiesel producer (“Producer”) hereby certifies the following under penalties of perjury:
1.
Producer’s name, address, and employer identification number
2.
Name, address, and employer identification number of person buying the biodiesel from Producer
3.
Date and location of sale to buyer
August 29, 20054442005–35 I.R.B.

4. This certificate applies togallons of biodiesel.
5. Producer certifies that the biodieselto which this certificate relates is:
% Agri-biodiesel (derivedsolelyfromvirginoils)
% Biodiesel other than agri-biodiesel
This certificate applies to the following sale:
Invoice or delivery ticket number
Total number of gallons of biodiesel sold under that invoice or delivery ticket number (including biodiesel not
covered by this certificate)
Total number of certificates issued for that invoice or delivery ticket number
6.
Name, address, and employer identification number of reseller to whom certificate is issued (only in the case of certificates
reissued to a reseller after the return of the original certificate)
7.
Original Certificate Identification Number (only in the case of certificates reissued to a reseller after return of the
original certificate)
Producer is registered as a biodieselproducer with registration number
. Producer’s registration has not been sus-
pended or revoked by the Internal Revenue Service.
Producer certifies that the biodiesel to which this certificate relates is monoalkylesters of long chain fatty acids derived
from plant or animal matter that meets the requirements ofthe American Society of Testing and Materials D6751 and the
registration requirements for fuels and fuel additives established by EPA under section 211 of the Clean Air Act (42 U.S.C.
7545).
Producer understands that the fraudulent use of this certificate may subject Producer and all parties making any fraudulent
use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.
Printed or typed name of person signing this certificate
Title of person signing
Signature and date signed
(3)Statement of Biodiesel Reseller—(i)
In general. A person that receives a Cer-
tificate for Biodiesel, and subsequently
sells the biodiesel without producing a
biodiesel mixture or claiming the biodiesel
credit, is to give the certificate and a state-
ment that satisfies the requirements of
this paragraph (h)(3) to its buyer. The
statement must contain all of the infor-
mation necessary to complete the model
certificate in paragraph (h)(3)(iii) of this
section and be attached to the Certificate
for Biodiesel. A reseller cannot make mul-
tiple copies of a Certificate for Biodiesel
to divide the certificate between multiple
buyers. If a single Certificate for Biodiesel
applies to biodiesel that a reseller expects
to sell to multiple buyers, the reseller
should return the certificate (together with
any statements provided by intervening
resellers) to the producer who may reis-
sue to the reseller multiple Certificates
for Biodiesel in the appropriate volumes.
The reissued certificates must include the
Certificate Identification Number from the
certificate that has been returned.
(ii)Withdrawal of the right to provide
a certificate. The Internal Revenue Ser-
vice may withdraw the right of a buyer
of biodiesel to provide the certificate and
a statement under this section if the In-
ternal Revenue Service cannot verify the
accuracy of the buyer’s statements. The
Internal Revenue Service may notify any
person to whom the buyer has provided a
statement that the buyer’s right to provide
the certificate and a statement has been
withdrawn.
(iii)Model statement of biodiesel re-
seller.
2005–35 I.R.B.445August 29, 2005

STATEMENTOFBIODIESELRESELLER
(To support a claim related to biodiesel or a biodiesel mixture under the Internal Revenue Code)
The undersigned biodiesel producer(“Reseller”) hereby certifies the following under penalties of perjury:
1.
Resellers’s name, address, and employer identification number
2.
Name, addr
ess, and employer identification number of Reseller’s buyer
3.
Date and location of sale to buyer
4.
Volume of b
iodiesel sold
5.
Certificate Identification Number on the Certificate for Biodiesel
Reseller has bought the biodiesel described in the accompanying Certificate for Biodiesel and Reseller has no reason to
believe that any information in the certificate is false.
Reseller
has not been notified by the Internal Revenue Service thatits right to provide a certificate and a statement has been
withdraw
n.
Reseller understands that the fraudulent use of this statement may subject Reseller and all parties making any fraudulent use
of this statement to a fine or imprisonment, orboth, together with the costs of prosecution.
Printed or typed name of person signing this certificate
Title of
person signing
Signature and date signed
(4)Commingled biodiesel—(i)In gen-
eral. For purposes of this paragraph (h)(4),
commingled biodieselmeans—
(A) Biodiesel held by its producer in a
storagetankthatisusedtostorebothagri-
biodiesel and biodiesel other than agri-
biodiesel; and
(B) Biodiesel held by a person other
than its producer in a storage tank unless
a single Certificate for Biodiesel applies to
the tank.
(ii)Reasonable methods may be used
to identify commingled biodiesel.Aper-
son that holds commingled biodiesel may
identify the biodiesel it sells or uses by
any reasonable method, including a first-
in, first-out method applied either on a
tank-by-tank basis or on an aggregate ba-
sis to all commingled biodiesel the per-
son holds. Thus, for example, a reseller
may treat the biodiesel it first purchases as
the first biodiesel it resells, and a biodiesel
mixture producer may treat the biodiesel it
first purchases as the first biodiesel it uses
to produce a biodiesel mixture.
(5)Effective date. This paragraph (h)
of this section applies with respect to
biodiesel sold or used by its producer after
August 29, 2005, but taxpayers may rely
on it as if it were applicable with respect
to biodiesel sold or used by its producer
on or before that date. In addition, the In-
ternal Revenue Service may accept claims
relating to biodiesel sold or used by its
producer on or before August 29, 2005
if the claim evidences a good faith effort
to comply with the applicable Code pro-
vision or the rules of Notice 2005–4 as
in effect before August 29, 2005 and the
Service can reasonably verify the amount
of biodiesel and agri-biodiesel covered by
the claim.
*****
Section 3. DEFINITION OF A
BIODIESEL MIXTURE
(a)Definition in the Code. Section
6426(c)(3) provides thatbiodiesel mix-
turemeans a mixture of biodiesel and
diesel fuel (as defined in § 4083(a)(3)),
determined without regard to any use of
kerosene, that (1) is sold by the taxpayer
producing the mixture to any person for
August 29, 20054462005–35 I.R.B.

use as a fuel, or (2) is used as a fuel by the
taxpayer producing the mixture.
(b)Explanation of terms—(1) The
diesel fuel in a biodiesel mixture may be
either dyed or undyed. However, taxpay-
ers are reminded of the penalty in § 6715
for the willful alteration of the strength or
composition of any dye in dyed fuel. Also
see § 48.6715–1 of the Manufacturers and
Retailers Excise Tax Regulations.
(2) A biodiesel mixture generally is
used as a fuel when it is consumed to
produce energy. Thus, for example, a
biodiesel mixture that is consumed in a
furnace to produce heat is used as a fuel.
However, the destruction of a biodiesel
mixture in a fire or other casualty loss is
not treated as use as a fuel.
(3) A biodiesel mixture is a mixture
of biodiesel and diesel fuel containing at
least 0.1 percent (by volume) of diesel fuel.
Thus, for example, a mixture of 999 gal-
lons of biodiesel and 1 gallon of diesel fuel
is a biodiesel mixture.
(4) Kerosene in a mixture of biodiesel
and diesel fuel is not included in the vol-
ume for purposes of determining whether
the biodiesel mixture satisfies the volume
requirements set forth in paragraph (b)(3)
of this section. Further, the gallons of
kerosene in the mixture of biodiesel and
diesel fuel are not included in the gallons
of biodiesel for which a credit or payment
is allowed.
(c)Effective date—(1)In general.
Paragraphs (b)(1), (2), and (4) of this sec-
tion are applicable January 1, 2005, the
effective date of Notice 2005–4. Para-
graph (b)(3) of this section applies with
respect to mixtures produced after Au-
gust 29, 2005 and, except as provided
in paragraph (c)(2) of this section, is not
taken into account in determining the tax
treatment of any mixture produced on or
before that date.
(2)Reliance permitted in certain cases.
A taxpayer may rely on paragraph (b)(3)
of this section to claim a biodiesel mix-
ture credit for a mixture produced on or
before August 29, 2005 if the taxpayer has
not taken any action inconsistent with the
claim requirements under this notice such
as providing a Certificate for Biodiesel or
a Statement of Biodiesel Reseller with re-
spect to the biodiesel in the mixture.
Section 4. DEFINITION OF
AGRI-BIODIESEL
(a)In general. Section 40A(d)(2) de-
finesagri-biodieselas meaning biodiesel
derived solely from virgin oils, “includ-
ing” esters derived from virgin vegetable
oils from corn, soybeans, sunflower seeds,
cottonseeds, canola, crambe, rapeseeds,
safflowers, flaxseeds, rice bran, and mus-
tard seeds, and from animal fats. The
language “including” indicates that this
list is not exclusive. Thus, for example,
biodiesel derived solely from virgin oils
includes esters derived from palm oil and
fish oil.
(b)Commingled feedstock.Ifvirgin
oils and recycled oils are commingled
for use as a feedstock in the production
of biodiesel, the biodiesel is not derived
solely from virgin oils as required by
§ 40A(d)(2).
(c)Effective date. Paragraph (a) of this
section is applicable January 1, 2005, the
effective date of Notice 2005–4. Para-
graph (b) of this section applies with re-
spect to biodiesel produced after August
29, 2005.
Section 5. CLAIMS FOR PAYMENTS
THAT EXCEED THE ALLOWABLE
CREDIT
(a)Background. Section 6426 gen-
erally allows a biodiesel mixture credit
against any tax imposed by § 4081, in-
cluding those taxes unrelated to biodiesel
mixtures or alcohol mixtures. The § 6426
credit is claimed on a Form 720,Quar-
terly Federal Excise Tax Return,whichis
filed at the end of each quarter. Section
6427(e)(1) generally allows a payment
relating to a person’s production of a
biodiesel mixture. The § 6427(e)(1) pay-
ment may be claimed before Form 720 is
due and as often as once a week if certain
conditions are met. However, § 6427(e)(2)
provides that no amount is payable under
§ 6427(e)(1) for any mixture with respect
to which an amount is allowed as a credit
under § 6426. If a claim is made under
§ 6427(e) for an amount that is allowable
as a credit under § 6426, section 2(d)(2)
of Notice 2005–4 provides that payment
under § 6427(e) is treated as an excessive
amount under § 6206. Unless this exces-
sive amount is repaid with interest before
the due date of the Form 720 on which the
credit under § 6426 is allowable, it may
be assessed as if it were a tax imposed by
§ 4081 and a penalty under § 6675 may be
imposed.
(b)Computation of payment limitation.
A person producing biodiesel mixtures
outside the bulk transfer/terminal system
and liable for tax imposed by § 4081 solely
because of the removal or sale of the mix-
tures can avoid making excessive claims
for payment under § 6427(e) by limiting
claimsfiledonaformotherthanForm
720 to—
(1) 75.6 percent of the total credits
and payments allowable with respect to
agri-biodiesel used to produce the mix-
tures (24.4 percent of the allowable credits
and payments must be claimed on Form
720); and
(2) 51.2 percent of the total credits
and payments allowable with respect to
biodiesel other than agri-biodiesel used to
produce the mixtures (48.8 percent of the
allowable credits and payment must be
claimed on Form 720).
(c)Example. The following example
illustrates the application of this section:
(1)Pis a biodiesel mixture producer.Pproduces
blended taxable fuel outside of the bulk transfer/ter-
minal system by adding biodiesel to taxed diesel fuel.
See §§ 48.4081–1(c)(1) and 48.4081–3(g).Phas no
§ 4081 liability other than its liability as a blender on
its sale of the biodiesel mixture. During the period
August 1 through August 10, 2005,Puses 5,000 gal-
lons of agri-biodiesel to produce a biodiesel mixture.
The total of the credits and payments allowable with
respect to the biodiesel used to produce the mixture
is $5,000 (5,000 x $1.00).
(2) On August 11,Pfiles Form 8849,Claim for
Refund of Excise Taxes, for the period August 1 –
August 10. To avoid an excessive claim,Plimits
the claim on Form 8849 to $3,780 (75.6 percent of
$5,000) reporting 3,780 gallons of agri-biodiesel.
(3) On Form 720,Quarterly Federal Excise Tax
Return,Preports liability for IRS No. 60(c) of $1,220
(5,000 gallons x $.244) and claims a credit on Sched-
ule C for $1,220 (24.4 percent of $5,000) for the pe-
riod August 1 – August 10, reporting on Schedule C
1,220 gallons of agri-biodiesel.
(d)Effective date.Thissectionisappli-
cable January 1, 2005, the effective date of
Notice 2005–4.
Section 6. AVIATION-GRADE
KEROSENE
(a)In general—(1) Section 4 of Notice
2005–4 provides guidance on the taxation
of aviation-grade kerosene under the Act.
Under sections 4(d) and 4(e), a position
holder is not liable for tax if, among other
conditions, it obtains a certificate from the
2005–35 I.R.B.447August 29, 2005

operator of the aircraft into which the avia-
tion-grade kerosene is delivered. This cer-
tificate, described in section 4(g), is signed
by the aircraft operator and includes the
name of the position holder.
(2) In a so-called “flash title trans-
action,” the position holder sells (as de-
fined in § 48.0–2(a)(5)) the aviation-grade
kerosene to a wholesale distributor (re-
seller) that in turn sells the kerosene to the
aircraft operator as the kerosene is being
removed from a terminal into the fuel tank
of an aircraft.
(3) For purposes of determining
whether the conditions of sections
4(d)(1)(ii) and 4(e)(2) of Notice 2005–4
are met in a case described in paragraph
(a)(2) of this section, the position holder
will be treated as having a certificate (in
the form described in section 4(g)) from
the operator of the aircraft if: (i) the air-
craft operator puts the reseller’s name, ad-
dress, and employer identification number
on the certificate in place of the position
holder’s name, address, and employer
identification number; and (ii) the reseller
provides the position holder with a state-
ment of aviation-grade kerosene reseller.
The reseller statement is a statement that
is signed under penalties of perjury by a
person with authority to bind the reseller;
is provided at the bottom or on the back
of the certificate (or in an attached docu-
ment); and contains the reseller’s name,
address, and employer identification num-
ber, the position holder’s name, address,
and employer identification number, and
a statement that the reseller has no reason
to believe that any information in the ac-
companying aircraft operator’s certificate
is false.
(b)Effective date.Thissectionisappli-
cable August 29, 2005.
Section 7. CORRECTION TO NOTICE
2005–4
The last sentence of section 2(a) of No-
tice 2005–4 is revisedto read as follows:
Under the Code’s coordination rules, the
sum of all credits and payments per gallon
of alcohol or biodiesel may not exceed the
creditratepergallonprescribedin§40or
40A, whichever is applicable.
Section 8. PAPERWORK REDUCTION
ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the office of Management and
Budget (OMB) in accordance with the Pa-
perwork Reduction Act (44 U.S.C. § 3507)
under control number 1545–1915.
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 the following sections.
Section 2 of the notice describes the
statement that the biodiesel reseller must
give to its buyer with respect to the
biodiesel mixture credit or biodiesel credit.
Section 6 of the notice describes the
statement that an aviation-grade kerosene
reseller must give to the position holder of
aviation grade kerosene.
The collections of information are re-
quired to obtain a tax benefit. This infor-
mation will be used to substantiate claims
for the tax benefits. The likely respondents
are businesses, not-for-profit institutions,
and state, local, or tribal governments.
The estimated total annual reporting
and or recordkeeping burden is 5,100
hours.
The estimated average annual burden
per respondent and/or recordkeeper is ap-
proximately is .25 hours.
The estimated number of respondents
and recordkeepers is 240.
Books or records relating to a collection
of information must be retained as long
as their contents may become material to
the administration of the internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.
Section 9. EFFECT ON OTHER
DOCUMENTS
Notice 2005–4 is modified as described
in sections 2, 6, and 7 of this notice.
Section 10. DRAFTING INFORMATION
The principal authors of this notice
are Susan Athy and Deborah Karet of
theOfficeoftheAssociateChiefCoun-
sel (Passthroughs and Special Industries).
For further information regarding this no-
tice, please contact Ms. Athy (regarding
biodiesel) or Ms. Karet (regarding avia-
tion-grade kerosene) at (202) 622–3130
(not a toll-free call).
Weighted Average Interest
Rates Update
Notice 2005–63
This notice provides guidance as to the
corporate bond weighted average interest
rate and the permissible range of interest
rates specified under §412(b)(5)(B)(ii)(II)
of the Internal Revenue Code. In ad-
dition, it provides guidance as to the
interest rate on 30-year Treasury securi-
ties under § 417(e)(3)(A)(ii)(II), and the
weighted average interest rate and permis-
sible ranges of interest rates based on the
30-year Treasury securities rate.
CORPORATE BOND WEIGHTED
AVERAGE INTEREST RATE
Sections412(b)(5)(B)(ii)and
412(l)(7)(C)(i), as amended by the Pen-
sion Funding Equity Act of 2004, provide
that the interest rates used to calculate cur-
rent liability and to determine the required
contribution under § 412(l) for plan years
beginning in 2004 or 2005 must be within
a permissible range based on the weighted
average of the rates of interest on amounts
invested conservativelyinlongtermin-
vestment grade corporate bonds during the
4-year period ending on the last day before
the beginning of the plan year.
Notice 2004–34, 2004–1 C.B. 848, pro-
vides guidelines for determining the cor-
porate bond weighted average interest rate
and the resulting permissible range of in-
terest rates used to calculate current liabil-
ity. That notice establishes that the corpo-
rate bond weighted average is based on the
monthly composite corporate bond rate de-
rived from designated corporate bond in-
dices.
The composite corporate bond rate for
July 2005 is 5.37 percent. Pursuant to No-
tice 2004–34, the Service has determined
this rate as the average of the monthly
yields for the included corporate bond in-
dices for that month.
The following corporate bond weighted
average interest rate was determined for
August 29, 20054482005–35 I.R.B.

plan years beginning in the month shown
below.
For Plan Years
Corporate
Bond90% to 100%
Beginning in:WeightedPermissible
MonthYearAverageRange
August20055.875.28 to 5.87
30-YEAR TREASURY SECURITIES
WEIGHTED AVERAGE INTEREST
RATE
Section 417(e)(3)(A)(ii)(II) defines
the applicable interest rate, which must
be used for purposes of determining the
minimum present value of a participant’s
benefit under § 417(e)(1) and (2), as the
annual rate of interest on 30-year Treasury
securities for the month before the date
of distribution or such other time as the
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income
Tax Regulations provides that the applica-
bleinterestrateforamonthistheannual
interest rate on 30-year Treasury securi-
ties as specified by the Commissioner for
that month in revenue rulings, notices or
other guidance published in the Internal
Revenue Bulletin.
Section 404(a)(1) of the Code, as
amended by the Pension Funding Eq-
uity Act of 2004, permits an employer
to elect to disregard subclause (II) of
§ 412(b)(5)(B)(ii) to determine the max-
imum amount of the deduction allowed
under § 404(a)(1).
The rate of interest on 30-year Treasury
securities for July 2005 is 4.41 percent.
Pursuant to Notice 2002–26, 2002–1 C.B.
743, the Service has determined this rate
as the monthly average of the daily deter-
mination of yield on the 30-year Treasury
bond maturing in February 2031.
The following 30-year Treasury rates
were determined for the plan years begin-
ning in the month shown below.
For Plan Years
30-Year
Treasury90% to 105%90% to 110%
Beginning in:WeightedPermissiblePermissible
MonthYearAverageRangeRange
August20054.944.44 to 5.184.44 to 5.43
Drafting Information
The principal authors of this not
ice
are Paul Stern and Tony Montanar
oof
the Employee Plans, Tax Exempt a
nd
Government Entities Division.
For fur-
ther information regarding thi
s notice,
please contact the Employee Plan
s’ tax-
payer assistance telephone serv
ice at
1–877–829–5500 (a toll-free nu
mber),
between the hours of 8:00 a.m. an
d
6:30 p.m. Eastern time, Monday t
hrough
Friday. Mr. Stern may be reached
at
1–202–283–9703. Mr. Montanaro m
ay
be reached at 1–202–283–9714. Th
e tele-
phone numbers in the preceding s
entences
are not toll-free.
26 CFR 601.602: Tax forms and instructions.
(Also Part 1, §§ 6012, 6061, 6033, 1.6011–1(a), 1.6012–5, 301.6061–1(b).)
Rev. Proc. 2005–60
TABLE OF CONTENTS
SECTION 1. PURPOSE
............................................................................................ 450
SECTION 2. BACKGROUND AND CHANGES........................................................................ 450
SECTION 3. DEFINITIONS......................................................................................... 451
SECTION 4. ACCEPTANCE TO PARTICIPATE IN THE IRSe-filePROGRAM............................................ 451
SECTION 5. RESPONSIBILITIES OF AN AUTHORIZED IRSe-filePROVIDER........................................... 451
SECTION 6. PENALTIES........................................................................................... 452
SECTION 7. MONITORING AND SANCTIONING AN AUTHORIZED IRSe-filePROVIDER............................... 453
2005–35 I.R.B.449August 29, 2005

SECTION 8. ADMINISTRATIVE REVIEW PROCESS.................................................................. 453
SECTION 9. PILOT PROGRAMS.................................................................................... 453
SECTION 10. EFFECT ON OTHER DOCUMENTS.................................................................... 453
SECTION 11. EFFECTIVE DATE.................................................................................... 453
SECTION 12. INTERNAL REVENUE SERVICE OFFICE CONTACT.................................................... 453
SECTION 1. PURPOSE
.01 This revenue procedure informs
Authorized IRSe-fileProviders of their
obligations to the Internal Revenue Ser-
vice (the Service), taxpayers, and other
participants in the IRSe-fileProgram.
This revenue procedure combines the rules
governing IRSe-file, including the rules
regulating Authorized IRSe-fileProviders
that facilitate the electronic filing of:
(1) Form 1040 and 1040A,U.S. Individ-
ual Income Tax Return, and Form 1040EZ,
Income Tax Return for Single and Joint Fil-
ers With No Dependents, previously con-
tained in Publication 1345,Handbook for
Authorized IRS e-file Providers of Individ-
ual Income Tax Returns,andRev. Proc.
2000–31, 2000–2 C.B. 146;
(2) Form 940,Employer’s Annual
Federal Unemployment (FUTA) Tax Re-
turn, previously contained in Rev. Proc.
2001–9, 2001–1 C.B. 328; and
(3) the rules governing electronic filing
for the Form 941,Employer’s Quarterly
Federal Tax Return, previously contained
in Rev. Proc. 99–39, 1999–2 C.B. 532.
.02 This revenue procedure also regu-
lates Authorized IRSe-fileProviders that
facilitate the electronic filing of:
(1) Form 1120,U.S. Corporation In-
come Tax Return;
(2) Forms 1120S,U.S. Income Tax Re-
turn for an S Corporation;
(3) Form 990,Return of Organization
Exempt From Income Tax;and
(4) Form 990–PF,Return of Private
Foundation or Section 4947(a)(1) Trust
Treated as a Private Foundation.
.03 IRSe-fileallows return filers to file
their returns through an ERO, or by using a
personal computer, modem or the Internet,
and commercial tax preparation software.
The returns that can be filed under IRS
e-fileinclude:
(1) Form 56,Notice Concerning Fidu-
ciary Relationship;
(2) Form 940,Employer’s Annual Fed-
eral Unemployment (FUTA) Tax Return;
(3) Form 941,Employer’s Quarterly
Federal Tax Return;
(4) Form 990,Return of Organization
Exempt From Income Tax;
(5) Form 990–EZ,Short Form Return of
Organization Exempt From Income Tax;
(6) Form 990–PF,Return of Private
Foundation or Section 4947(a)(1) Trust
Treated as a Private Foundation;
(7) Forms 1040 and 1040A,U.S. Indi-
vidual Income Tax Return;
(8) Form 1040EZ,Income Tax Return
for Single and Joint Filers With No Depen-
dents;
(9) Form 1065,U.S. Return of Partner-
ship Income;
(10) Form 1120,U.S. Corporation In-
come Tax Return;
(11) Form 1120–POL,U.S. Income Tax
Return for Certain Political Organiza-
tions;
(12) Form 1120S,U.S. Income Tax Re-
turn for an S Corporation;
(13) Form 1041,U.S. Income Tax Re-
turn for Estates and Trusts;
(14) Form 1065,U.S. Return of Partner-
ship Income;
(15) Form 2350,Application for Exten-
sion of Time to File U.S. Income Tax Return
(or any successor form);
(16) Form 2688,Application for Addi-
tional Extension of Time To File U.S. Indi-
vidual Income Tax Return(or any succes-
sor form);
(17) Form 4868,Application for Auto-
matic Extension of Time to File U.S. Indi-
vidual Income Tax Return(or any succes-
sor form);
(18) Form 7004,Application for Auto-
matic Extension of Time to File Corpora-
tion Income Tax Return(or any successor
form);
(19) Form 8868,Application for Exten-
sion of Time To File an Exempt Organiza-
tion Return(or any successor form); and
(20) Form 9465,Installment Agreement
Request.
.04 This revenue procedure does not
cover procedures governing electronic fil-
ing of Form 1040NR,U.S. Nonresident
Alien Income Tax Return. For procedures
governing the electronic filing of Form
1040NR, see Rev. Proc. 2000–24, 2000–1
C.B. 1133.
.05 This revenue procedure also does
not cover providers of information returns
that are filed under the FIRE (Filing Infor-
mation Returns Electronically) Program.
The information returns not covered by
this revenue procedure include:
(1) Form 1042–S,Foreign Person’s
U.S. Source Income Subject to Withhold-
ing;
(2) Form 1098,Mortgage Interest
Statement;
(3) Form 5498,Individual Retirement
Arrangement Contribution Information;
(4) Form 8027,Employer’s Annual In-
formation Return of Tip Income and Allo-
cated Tips;
(5) Form W–2G,Certain Gambling
Winnings;and
(6) Questionable Forms W–4,Em-
ployee’s Withholding Allowance Certifi-
cate. See Publication 1220,Specifications
for Filing Forms 1098, 1099, 5498 and
W2–G Magnetically or Electronically.
SECTION 2. BACKGROUND AND
CHANGES
.01 Section 1.6011–1(a) of the Income
Tax Regulations provides that every per-
son subject to income tax must make a re-
turn or statement as required by the regula-
tions. The return or statement must include
the information required by the applicable
regulations or forms.
.02 Section 301.6061–1(b) of the Reg-
ulations on Procedure and Administration
authorizes the Secretary to prescribe in
forms, instructions, or other appropriate
guidance the method of signing any return,
statement, or other document required to
be made under any provision of the inter-
nal revenue laws or regulations.
.03 Section 1.6012–5 provides that the
Commissioner may authorize the use, at
August 29, 20054502005–35 I.R.B.

the option of a person required to make
a return, of a composite return in lieu
of any form specified in 26 CFR Part 1
(Income Tax), subject to such conditions,
limitations, and special rules governing
the preparation, execution, filing, and cor-
rection thereof as the Commissioner may
deem appropriate.
.04 Section 6011(e)(1) of the Internal
Revenue Code (the Code) gives specific
authority for the Service and the Treasury
Department to “prescribe regulations pro-
viding standards for determining which
returns must be filed on magnetic media
or in other machine-readable form.” On
January 12, 2005, the Service and the Trea-
sury Department published in the Federal
Register (T.D. 9175, 2005–10 I.R.B. 665
[70 FR 2012–01]) temporary regulations
mandating the electronic filing of certain
Forms 1120, 1120S, 990 and 990–PF un-
der sections 301.6011–5T, 301.6037–2T,
and 301.6033–4T. On November 12, 1999,
the Service and the Treasury Department
also published in the Federal Register
(T.D. 8843, 1999–2 C.B. 590 [64 FR
61502]) final regulations mandating the
electronic filing of certain Forms 1065
under section 301.6011–3.
.05 This revenue procedure combines
the rules governing IRSe-fileincluding the
rules governing electronic filing of:
(1) Form 1040 and 1040A,U.S. Individ-
ual Income Tax Return, and Form 1040EZ,
Income Tax Return for Single and Joint Fil-
ers With No Dependents, contained in Pub-
lication 1345,Handbook for Authorized
IRS e-file Providers of Individual Income
Tax Returns, and Rev. Proc. 2000–31,
2000–2 C.B. 146;
(2) Form 940,Employer’s Annual Fed-
eral Unemployment (FUTA) Tax Return,
contained in Rev. Proc. 2001–9; and
(3) Form 941,Employer’s Quarterly
Federal Tax Return, contained in Rev.
Proc. 99–39.
.06 This revenue procedure also in-
cludes the rules governing electronic filing
of:
(1) Form 990,Return of Organization
Exempt From Income Tax;
(2) Form 990–EZ,Short Form Return of
Organization Exempt From Income Tax;
(3) Form 990–PF,Return of Private
Foundation or Section 4947(a)(1) Trust
Treated as a Private Foundation;
(4) Form 1041,U.S. Income Tax Return
for Estates and Trusts;
(5) Form 1065,U.S. Return of Partner-
ship Income;
(6) Form 1120,U.S. Corporation In-
come Tax Return;
(7) Form 1120–POL,U.S. Income Tax
Return for Certain Political Organiza-
tions;and
(8) Form 1120S,U.S. Income Tax Re-
turn for an S Corporation.
.07 Many of the rules governing partici-
pation in IRSe-fileare now set forth in IRS
Publications. See section 5.01 of this rev-
enue procedure.
SECTION 3. DEFINITIONS
.01 Authorized IRSe-fileProvider. A
participant in IRSe-fileis referred to as
an “Authorized IRSe-fileProvider.” The
five categories of Authorized IRSe-file
Providers are:
(1) ELECTRONIC RETURN ORIGI-
NATOR. An Electronic Return Originator
(ERO) originates the electronic submis-
sion of returns.
(2) INTERMEDIATE SERVICE
PROVIDER. An Intermediate Service
Provider receives taxreturn information
from an ERO (or from a taxpayer or tax ex-
empt organization that files electronically
using a personal computer, modem or the
Internet, and commercial tax preparation
software), processes the return informa-
tion, and either forwards the information
to a Transmitter, or sends the information
back to the ERO (or taxpayer or exempt
organization).
(3) SOFTWARE DEVELOPER. A
Software Developer develops software for
the purposes of (a) formatting electronic
return informationaccording to publica-
tions issued by the Service that set forth
electronic return file specifications and
record layouts for tax returns; and/or (b)
transmitting electronic tax return informa-
tion directly to the Service.
(4) TRANSMITTER. A Transmitter
transmits electronic return information
directly to the Service.
(5) REPORTING AGENT. A Report-
ing Agent is an accounting service, fran-
chiser, bank, service bureau, or other entity
that complies with Rev. Proc. 2003–69,
2003–2 C.B. 403, and is authorized to per-
form one or more of the acts listed in Rev.
Proc. 2003–69 on behalf of a taxpayer.
The five categories of Authorized IRS
e-fileProviders are not mutually exclusive.
For example, an ERO can, at the same
time, be a Transmitter, Software Devel-
oper, or Intermediate Service Provider de-
pending on the function(s) performed.
.02 Responsible Official. A Respon-
sible Official is an individual with au-
thority over the IRSe-fileoperation of
the office(s) of the Authorized IRSe-file
Provider, is the first point of contact with
the Service, and has authority to sign
revised IRSe-fileapplications. A Respon-
sible Official is responsible for ensuring
that the Authorized IRSe-fileProvider
adheres to the provisions of this revenue
procedure and the publications and notices
governing the IRSe-fileProgram.
SECTION 4. ACCEPTANCE TO
PARTICIPATE IN THE IRSe-file
PROGRAM
.01 Sole proprietors, businesses, and or-
ganizations that wish to become an Autho-
rized IRSe-fileProvider must apply for
participation and must be accepted by the
Service.
.02 The procedures governing applica-
tion to the IRSe-fileProgram are included
in Publication 3112,IRS e-file Application
and Participation.
.03 The circumstances under which the
Service may deny participation in the IRS
e-fileProgram are also included in Publi-
cation 3112. An applicant who is denied
participation may seek administrative re-
view of the denial. See section 8 of this
revenue procedure.
.04TocontinueparticipationintheIRS
e-fileProgram, an Authorized IRSe-file
Provider must adhere to all requirements
of this revenue procedure and the publica-
tions and notices governing IRSe-file.
SECTION 5. RESPONSIBILITIES
OF AN AUTHORIZED IRSe-file
PROVIDER
.01 To ensure that returns are accu-
rately and efficiently filed, an Authorized
IRSe-fileProvider must comply with the
provisions of this revenue procedure and
all publications and notices governing IRS
e-file. The Service will from time to time
update such publications and notices to
reflect changes to the program. It is the
responsibility of the Authorized IRSe-file
Provider to ensure that it complies with
the latest version ofall publications and
2005–35 I.R.B.451August 29, 2005

notices. The publications and notices gov-
erning the IRSe-fileProgram include:
(1) Publication 1345,Handbook for Au-
thorized IRS e-file Providers of Individual
Income Tax Returns;
(2) Publication 1345A,Filing Sea-
son Supplement for Authorized IRS e-file
Providers of Individual Income Tax Re-
turns;
(3) Publication 1346,Electronic Return
File Specifications and Record Layouts for
Individual Income Tax Returns;
(4) Publication 1436,Test Package for
Electronic Filers of Individual Income Tax
Returns;
(5) Publication 1437,Procedures for
the1041e-fileProgram,U.S.IncomeTax
Return for Estates and Trusts;
(6) Publication 1438,File Specifica-
tions, Validation Criteria and Record
Layouts for the 1041 e-file Program, U.S.
Income Tax Return for Estates and Trusts;
(7) Publication 1438–A,(Supplement)
1041 e-file Program, U.S. Income Tax Re-
turn for Estates and Trusts;
(8) Publication 1474,Technical Specifi-
cations Guide For Reporting Agent Autho-
rization For Magnetic Tape/Electronic Fil-
ers and Federal Tax Depositors;
(9) Publication 1524,Procedures for
1065 e-file Program, U.S. Return of Part-
nership Income;
(10) Publication 1525,File Specifica-
tions, Validation Criteria and Record Lay-
outs for the 1065 e-file Program, U.S. Re-
turn of Partnership Income;
(11) Publication 1855,Technical Speci-
fications Guide for the Electronic Filing of
Form 941, Employer’s Quarterly Federal
Tax Return;
(12) Publication 3112,IRS e-file Appli-
cation and Participation;
(13) Publication 3416,1065 e-file Pro-
gram, U.S. Return of Partnership Income
(Publication 1525 Supplement);
(14) Publication 3715,Technical Speci-
fications Guide for the Electronic Filing of
Form 940, Employer’s Federal Unemploy-
ment (FUTA) Tax Return;
(15) Publication 3823,Employment
Tax e-file System Implementation and
User Guide;
(16) Publication 4162,Modernized
e-File Test Package for Forms 1120/1120S;
(17) Publication 4163,Modernized
e-File Information for Authorized IRS
e-file Providers of Forms 1120/1120S;
(18) Publication 4164,Modernized
e-File Guide for Software Developers and
Transmitters;
(19) Publication 4205,Modernized
e-File Test Package for Exempt Organiza-
tion Filings;
(20) Publication 4206,Modernized
e-File Information for Authorized IRS
e-file Providers of Exempt Organization
Filings;and
(21) Postings to the IRS web site at:
http://www.irs.govon the Internet, and
published guidance in the Internal Rev-
enue Bulletin and the Federal Register.
.02 The publications and notices listed
in section 5.01 supplement this revenue
procedure. A violation of any provision
of these publications and notices is consid-
ered a violation of this revenue procedure
and may subject an Authorized IRSe-file
Provider to the sanctions provided in sec-
tion 7 of this revenue procedure.
.03 The security of taxpayer accounts
and personal information is a top prior-
ity for the IRS. It is the responsibility of
each Authorized IRSe-fileProvider to
have security systems in place to prevent
unauthorized access to taxpayer accounts
and personal information by third parties.
The Gramm-Leach-Bliley Act, codified
at 15 U.S.C. §§ 6801–6827, includes
rules applicable to Authorized IRSe-file
Providers that are designed to ensure the
security and privacy of taxpayer informa-
tion. Violation of the provisions of the
Gramm-Leach-Bliley Act and the imple-
menting rules and regulations promul-
gated by the Federal Trade Commission,
or violations of the non-disclosure rules
contained in sections 6713 or 7216 or the
regulations promulgated thereunder, are
considered violations of this revenue pro-
cedure and may subject an Authorized IRS
e-fileProvider to the sanctions provided in
section 7 of this revenue procedure. See
section 6.01 of this revenue procedure.
.04 In addition to the responsibilities
defined in 5.01, 5.02, and 5.03 above, ad-
ditional Authorized IRSe-fileProviders
responsibilities may be defined in statutes
and regulations.
SECTION 6. PENALTIES
.01 Penalties for Disclosure or Use of
Information.
(1) An Authorized IRSe-fileProvider,
except a Software Developer that does not
have access to taxpayer information, is
a tax return preparerunder the definition
of section 301.7216–1(b)(2). Tax return
preparers are subject to criminal penal-
ties for unauthorized disclosure or use of
tax return information. See section 7216
of the Internal Revenue Code and section
301.7216–1(a). In addition, section 6713
establishes civil penalties for unauthorized
disclosure or use of income tax return in-
formation by tax return preparers.
(2) Under section 301.7216–2(h), dis-
closure of tax return information among
Authorized IRSe-fileProviders for the
purpose of electronically filing a return
is permissible. For example, an ERO
may pass on tax return information to an
Intermediate Service Provider and/or a
Transmitter for the purpose of having an
electronic return formatted and transmit-
tedtotheService.
.02 Other Preparer Penalties.
(1) Preparer penalties may be asserted
against an individual or firm meeting
the definition of an income tax return
preparer under section 7701(a)(36) and
section 301.7701–15. Preparer penalties
that may be asserted under appropriate
circumstances include, but are not limited
to, those set forth in sections 6694, 6695,
and 6713.
(2) Under section 301.7701–15(d)(1),
Authorized IRSe-fileProviders are not
income tax return preparers for the pur-
pose of assessing most preparer penalties
as long as their services are limited to “typ-
ing, reproduction, or other mechanical as-
sistance in the preparation of a return or
claim for refund.”
(3) If an ERO, Intermediate Service
Provider, Transmitter, or the product of
a Software Developer alters the income
tax return information in a nonsubstantive
way, this alteration will be considered
to come under the “mechanical assis-
tance” exception described in section
301.7701–15(d)(1), and will not cause an
Authorized IRSe-fileProvider to become
an income tax preparer. A nonsubstantive
change is a correction or change limited
to a transposition error, misplaced entry,
spelling error, or arithmetic correction.
(4) If an ERO, Intermediate Service
Provider, Transmitter, or the product of
a Software Developer alters income tax
return information in a way that does not
come under the “mechanical assistance”
exception, such Authorized IRSe-file
August 29, 20054522005–35 I.R.B.

Provider may be held liable for income
tax return preparer penalties. See section
301.7701–15; Rev. Rul. 85–189, 1985–2
C.B. 341 (describing a situation where a
Software Developer was determined to be
an income tax return preparer and subject
to certain preparer penalties).
.03 Other Penalties. In addition to the
above specified provisions, the Service
may assert all appropriate preparer, non-
preparer, and disclosure penalties against
an Authorized IRSe-fileProvider as war-
ranted under the circumstances.
SECTION 7. MONITORING AND
SANCTIONING AN AUTHORIZED
IRSe-filePROVIDER
.01 The Service will monitor Autho-
rized IRSe-fileProviders for compliance
with the rules governing IRSe-file.The
Service may sanction an Authorized IRS
e-fileProvider for violating any provision
of this revenue procedure or the publica-
tions and notices governing IRSe-file.
.02 Sanctions that the Service may
impose upon an Authorized IRSe-file
Provider for violations described in sec-
tion 7.01 of this revenue procedure in-
clude a written reprimand, suspension or
expulsion from the program, and other
sanctions, depending on the severity of the
infraction. Publication 3112 describes the
infraction categories and the rules govern-
ing the imposition of sanctions.
SECTION 8. ADMINISTRATIVE
REVIEW PROCESS
.01 An applicant that has been denied
participation in IRSe-file(see section 4.03
of this revenue procedure) has the right
to an administrative review. During the
administrative reviewprocess, the denial
of participation remains in effect.
.02 An Authorized IRSe-fileProvider
may seek administrative review for any
sanction the Service may impose under
section 7 of this revenue procedure.
.03 Publication 3112 describes the pro-
cedures regarding administrative review of
a denial of participation in IRSe-fileand
any sanction imposed by the Service.
SECTION 9. PILOT PROGRAMS
.01 The Service regularly conducts pi-
lot programs to introduce new technology
into the IRSe-fileProgram. These pilot
programs are usually conducted within a
limited geographic area or within a limited
taxpayer or practitioner community. The
Service establishes rules for participating
in these pilot programs and embodies these
rules in an implementing document typi-
cally referred to as a “Memorandum of Un-
derstanding” or “Memorandum of Agree-
ment.” Pilot participants must agree to the
provisions of the implementing document
in order to participate in the pilot program.
.02 An implementing document supple-
ments this revenue procedure, but does not
supersede it.
.03 A violation of a provision of an im-
plementing document is considered a vio-
lation of this revenue procedure and may
subject the participant to sanctions (see
section 7 of this revenue procedure).
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 99–39, 1999–2 C.B. 532;
Rev. Proc. 2000–31, 2000–2 C.B. 146;
and Rev. Proc. 2001–9, 2001–1 C.B. 328
are superseded.
SECTION 11. EFFECTIVE DATE
This revenue procedure is effective
August 29, 2005.
SECTION 12. INTERNAL REVENUE
SERVICE OFFICE CONTACT
All questions regarding this revenue
procedure should be directed to the In-
ternal Revenue Service. The telephone
number for this purpose is (202) 283–0261
(not a toll-free number).
2005–35 I.R.B.453August 29, 2005

Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Return Required by
Subchapter T Cooperatives
Under Section 6012
REG–149436–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations that prescribe the form
that cooperatives must use to file their in-
come tax returns. The regulations affect
all cooperatives that are currently required
to file an income tax return on either Form
1120, “U.S. Corporation Income Tax Re-
turn,” or Form 990–C, “Farmers’ Cooper-
ative Association Income Tax Return.”
DATES: Written or electronic comments
and requests for a public hearing must be
received by October 27, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–149436–04), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–149436–04),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via the
IRS Internet site atwww.irs.gov/regs,
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS-
REG–149436–04). A public hearing may
be scheduled if requested by any person
who timely submits comments.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Donnell M. Rini-Swyers, (202)
622–4910; concerning submissions of
comments, or to request a hearing, Richard
Hurst, (202) 622–7180 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
Background
Under existing regulations, all coop-
eratives to which subchapter T applies
(Subchapter T cooperatives) are required
to make income tax returns. Except in
the case of farmers’ cooperatives, the reg-
ulations require that the return be made
on Form 1120. In the case of farmers’
cooperatives, the regulations require that
thereturnbemadeonForm990-C.
Most taxpayers required to make an
income tax return on Form 1120 must
file their return on or before the 15
th
day
of the third month following the close of
the taxpayer’s taxable year (2
1
/2month
deadline). Some Subchapter T cooper-
atives that make their returns on Form
1120 are required to file by the 2
1
/2month
deadline, but others are not required to
file their returns until the 15
th
day of the
ninth month following the close of the tax-
payer’s taxable year (8
1
/2month deadline).
Because the Form 1120 does not distin-
guish between Subchapter T cooperatives
that must file by the 2
1
/2month deadline
and those that must file by the 8
1
/2month
deadline, the IRS has difficulty deter-
mining which filing deadline applies and
deciding whether to assert delinquency
and failure to pay penalties in the case of
returns filed after the 2
1
/2month deadline.
Explanation of Provisions
The proposed regulations provide that
all Subchapter T cooperatives must make
their income tax returns on Form 1120-C,
“U.S. Income Tax Return for Cooperative
Associations,” or such other form as may
be designated by the Commissioner. The
information that Subchapter T coopera-
tives will be required to provide on new
Form 1120–C will assist taxpayers and the
IRS in determining the appropriate filing
deadline. Having that information will
reduce the burden on taxpayers and will
help the IRS avoid asserting penalties in
inappropriate cases. Having all Subchap-
ter T cooperatives make their income tax
returns on Form 1120–C will also elim-
inate confusion over which form to file
and will promote efficiency in addressing
income tax issues common to Subchapter
T cooperatives.
Effect on Other Documents
The following publication is obsolete as
of the date this regulation is published as a
final rule in theFederal Register.
Announcement 84–26, 1984–11 I.R.B.
42.
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 Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business 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, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to
the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
August 29, 20054542005–35 I.R.B.

Drafting Information
The principal author of these regula-
tions is Donnell M. Rini-Swyers, Office of
Assistant Chief Counsel (Procedure & Ad-
ministration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES,
REPORTING AND RECORDKEEPING
REQUIREMENTS
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6012–2 is amended by
revising paragraph (f) to read as follows:
§1.6012–2 Corporations required to make
returns of income.
*****
(f)Subchapter T cooperatives—(1)In
general. For taxable years ending on or
after December 31, 2006, a cooperative
organization described in section 1381
(including a farmers’ cooperative exempt
from tax under section 521) is required to
make a return, whether or not it has tax-
able income and regardless of the amount
of its gross income, on Form 1120–C,
“U.S. Income Tax Return for Cooperative
Associations,” or such other form as may
be designated by the Commissioner.
(2)Farmers’ cooperatives.Fortax-
able years ending before December 31,
2006, a farmers’ cooperative organization
described in section 521(b)(1) (including
a farmers’ cooperative that is not exempt
from tax under section 521) is required to
make a return on Form 990–C, “Farmers’
Cooperative Association Income Tax Re-
turn.”
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 28, 2005,
8:45 a.m., and published in the issue of the Federal Register
for July 29, 2005, 70 F.R. 43811)
Foundations Status of Certain
Organizations
Announcement 2005–60
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
360 Sports Organization, Inc.,
Homewood, IL
8300 Sheridan Dr., Inc., Clarence, NY
Abram Kessel Goldberg Fish Foundation,
Cedarhurst, NY
Abundant Life Encyclopedia, Inc.,
Horsham, PA
ACFE Foundation, Inc., Springfield, MO
Accord Foundation, Bellevue, WA
Acova, Inc., Avoca, IA
Advocacy Resource System,
Wyoming, MI
Africa-Expo, Las Vegas, NV
Africa Health Strategies, Washington, DC
African American Family Liaison
Organization, Inc., Wimauma, FL
Air Intelligence, Inc., Fly Creek, NY
Alabama Sports Hall of Fame Foundation,
Birmingham, AL
Allen Kiwanis Club Foundation,
Allen, TX
Alliance for Strong Communities, Inc.,
New Haven, CT
Alpha Foundation, Washington, DC
Alvarado Project, San Francisco, CA
Amana Christian Training Center, Inc.,
Santa Clara, CA
American Abstinence Institute,
Chicago, IL
American Friends for Jewish Institutions
& Orphanage in Odessa, Flushing, NY
American Friends of Leshivat Ahrchot
Torah, Inc., New York, NY
American Friends of Mosdos Eli Bezri,
Inc., New York, NY
American Friends of Yeshiva Etz Joseph,
Inc., North Miami Beach, FL
Amigos of University De Fresnillo,
Mission, TX
Amir Community Development, Inc.,
Atlanta, GA
An Artists Life, Inc., Boston, MA
Angel Wings Cat Rescue & Sanctuary,
Kingston, TN
Animalsave, Fort Lee, NJ
Apaga, Inc., Great Neck, NY
Apostolic Joy and Miracles Child
Development Center, Inc.,
Riviera Beach, FL
Appalachian Institute for the
Advancement of Women, Girls &
Children, Inc., Morgantown, WV
Applied Ballet Arts Foundation,
Oakland, CA
Arachnoiditis Foundation, Inc.,
Santa Rosa Beach, FL
Aries Foundation, Inc., Midlothian, VA
Arizona Athletic Association,
Glendale, AZ
Arizona High School Allstar Games, Inc.,
Casa Grande, AZ
Arkansas American Indian Cultural and
Heritage Society, Inc., Seneca, MO
Armenian Orthodox Theological Research
Institute, Inc., Greenville, RI
Asociacian De Maestros Apoyando
Ninos, Las Cruces, NM
Association for the Promotion of
the Individuals Laws of Life, Inc.,
New York, NY
Atchafalaya Basin Foundation,
Morgan City, LA
Atlanta Youth Arts Foundation, Inc.,
Cumming, GA
Avante-Garde, Inc., Silver Spring, MD
Baltimores Ark, Inc., Baltimore, MD
Bartow Community, Inc., Cartersville, GA
Bay Area Pedestrian Education Group,
Oakland, CA
Bear Foods, Inc., Boston, MA
Beloved Community Public Charter
School, Washington, DC
Benefits Aids Babies & Youths,
Havertown, PA
Berkeley Striders Track Club,
Moncks Corner, SC
Bioss USA Leadership Association,
Seattle, WA
2005–35 I.R.B.455August 29, 2005

Birmingham Youth Service Corps,
N. Birmingham, AL
Blackwater Little League, Waverly, VA
BLC Foundation, Castle Rock, CO
Book Station Library, Grand Junction, MI
Bosnian & Herzegovinian Association
Northern California, Campbell, CA
Boston Counseling & Legal Services,
Inc., Boston, MA
Boston Historical Society, Inc.,
Boston, NY
Bourn Dance Competition Team,
Uniontown, OH
Boys and Girls Club of Bay City and
Matagorda County, Bay City, TX
Brentwood Youth Soccer Club, Inc.,
Brentwood, NY
Bridge Ministries, Lincoln, NE
Bristol Tree Society, Bristol, RI
Broncos Swimming and Diving Booster
Club, International Falls, MN
Burton Sharpe Ministries, Seattle, WA
Butler County-Georgiana Family Life
Services Center, Georgiana, AL
Cactus Cowboy Corral, Inc., Vail, AZ
Cajacet Project, Inc., Newport, RI
Cal Ripkin Baseball League of Great
Kills, Inc., Staten Island, NY
Calling the Shots, St. Paul, MN
Cambridge-Salem 481 Charities, Inc.,
Cambridge, NY
Camp Tamarack Summer Program,
Menominee, MI
Capable Allies Relying on Each Other
akas CARE, Selma, OR
Career Forum for the Under-Employed,
Stanford, CA
Carnaval Independencia Centro America
Y Mexico, Inc., Miami, FL
Castleberry Community Drugfree
Committee, River Oaks, TX
Catherine Cole Taylor Center for the Arts,
Inc., Santa Rose Beach, FL
Central Connecticut Arts Science and
Technology Initiative, Meriden, CT
Central Soccer League, Inc.,
Oceanside, CA
Chance House, Inc., Roxbury, MA
Chagrin River Valley Association,
Solon, OH
Changehaven, Inc., Reno, NV
Cherab Foundation, Inc., Union, NJ
Chicago Block Club Association,
Chicago, IL
Children of Sosnovaya Street, Seattle, WA
Childrens World of Fun Family Learning
Center, Inkster, MI
Christian Mission to Gaza, Corona, CA
Christian Team Resources, Scottsdale, AZ
Chukchansi Indian Housing Authority,
Coarsegold, CA
Circle of Growth Foundation, Inc.,
Flushing, NY
Citizens for Hayden-Tomahawk Island,
Inc., Portland, OR
Citizens for Homeless Relief, Inc.,
Tullahoma, TN
Citizens Redevelopment Corp.,
Asbury Park, NJ
Classy Cats Chariot,Inc., Jacksonville, FL
Clinton Friends of the Parks, Clinton, MO
Clovis Heat Softball Association, Inc.,
Clovis, NM
Club of Budapest, San Francisco, CA
Coalition for African-American Health
and Wellness, Tucson, AZ
Coalition of Concerned Communities,
Inc., Culver City, CA
Coastal Brain Injury Support Group,
New Bern, NC
Collegiate Strength & Conditioning
Coaches Association, Inc., Provo, UT
Come to Christ, Richardson, TX
Commemorative Historical Society World
War Two Living, San Jose, CA
Committee for the Human Rights of
Children, Inc., Miami, FL
Community Care and Counseling of
Hartsville, Inc., Hartsville, SC
Community Connection of Northwest
Indiana, Merrillville, IN
Compassionate Hearts-Serving Hands,
Inc., Sunrise, FL
Computer Literacy Association,
Valdez, AK
Constituency for the Caribbean, Inc.,
New York, NY
Consumer Advancement, Flint, MI
Cornwells Home & School, Bensalem, PA
Corona Lions Universal Foundation, Inc.,
Corona, NY
Country Place of Pierz, Pierz, MN
Coyote Productions, Inc., Park Hill, OK
Crandon Water Ski Club, Inc.,
Crandon, WI
Creatures for Culture, Inc., New York, NY
Crossroads Christian Ministry,
Medford, OR
Crusade for Life International,
Denver, CO
Cultured Community Service Center,
Queens Village, NY
Dallas Area All-Stars Track Club
Incorporation, Hutchins, TX
D A N C — Dance Alive in Northern
Colorado, Loveland, CO
Darren C. Stevens Foundation,
New York, NY
Daskalos Foundation, Inc.,
Cambridge, MA
Delaware Small Business Foundation,
Georgetown, DE
Delta Chi Educational Foundation, Inc.,
Indianapolis, IN
Derech Emet, Brooklyn, NY
Desert Labrador Retriever Rescue, Inc.,
Phoenix, AZ
Desire Area Resident Community
Development, Lansing, MI
Detroit Deacons Baptist Council, Inc.,
Detroit, MI
Diabetes World Advocacy Foundation,
Seattle, WA
Diamond Force Girls Fast Pitch
Association, Chambersburg, PA
Disability Resource Center, Everett, WA
Discover Foundation, Pleasant Grove, UT
DMZ Forum, Inc., East Meadow, NY
Donate Life, Inc., Brookline, MA
Doobys Clown Brotherhood for the Uplift
of Gods People, Inc., Atlanta, GA
Doors and Passageways of Return
Foundation, Washington, DC
Dora Moore Children Center, Inc.,
Houston, TX
Dorchester County Communities in
Schools, Ridgeville, SC
Dreamshapers, Mooresville, NC
Drive-In Theatre Museum, Inc.,
Mason City, IA
Dunamei Christian Leadership Network,
Inc., Irvine, CA
Eagle Court Apartments, Randall, MN
East Chapel Hill High School Foundation,
Chapel Hill, NC
East Idaho Juniors, Inc., Blackfoot, ID
East Timor Disaster Response
Organization, Inc., Washington, DC
Eastern Legal Immigration Advocate
Networks, Atlantic City, NJ
Eden Foundation, San Antonio, TX
Educational Global Associates,
Washington, DC
Educore Foundation, Inc., Encinitas, CA
Elizabeths Park, Bradford, VT
Ellison Watson Ellison and Associates,
Inc., Texas City, TX
Emerald Coast Comets, Inc.,
Ft. Walton Beach, FL
Environmental Quality Initiative, Inc.,
Bethel, PA
Esteemed Woman Foundation, Inc.,
Norwalk, CT
August 29, 20054562005–35 I.R.B.

Etowah County Law Enforcement
Memorial, Gadsen, AL
Eyesight International USA, Seattle, WA
Fairfield Industrial High School Alumni
Association, Gardena, CA
Fairfield Main St., Inc., Fairfield, TX
Faith Not Sight, Inc., Fair Lawn, NJ
Families First, Inc., Ferndale, MI
Family Medicine Educational Foundation,
Inc., Glendale, CA
Fanya Corporation, Los Angeles, CA
Far Southeast Family Strengthening
Collaborative, Washington, DC
Farkas Foundation, Inc., Scottsdale, AZ
Farmington Motor City Madness,
Farmington, MI
Federal Hill South Neighborhood
Association, Baltimore, MD
Ferrell Family Services,
Capitol Heights, MD
Finance Institute for Global Sustainability,
Chapel Hill, NC
First Family Pledge Foundation, Inc.,
Vero Beach, FL
Firststep Networking Solutions,
San Diego, CA
Fit 5 Fitness Council, Portage, MI
Flatiron Foundation, Inc., Brooklyn, NY
FloridaFireandPoliceHonorGuard
Competition, Orlando, FL
Florida Tissue Services, Inc.,
Pensacola, FL
Floyd Bennett Cricket Club, Inc.,
Far Rockaway, NY
Food Mission of Christ of Kentucky, Inc.,
Stanford, KY
For Your Life Foundation, Inc.,
Houston, TX
Fort Myers Historical Museum
Foundation, Inc., Fort Myers, FL
Foundation for Community-Based
Initiatives, Dallas, TX
Foundation for Independence and Growth,
Inc., N. Lauderdale, FL
Freedom Round-Up, Philadelphia, PA
Freightliner Toys for Tots, Gastonia, NC
Fresh Start, Inc., Columbus, GA
Friends in Family Unity, Inc.,
Sacramento, CA
Friends of Charlotte Harbor Estuary, Inc.,
Port Charlotte, FL
Friends of Londonderry Hockey,
Londonderry, NH
Friends of New Mexico Tribal Libraries,
Santa Fe, NM
Friends of Redbird Airport, Dallas, TX
Friends of the Family, Inc., Taos, NM
Friends of the Pontiac Public Library,
Pontiac, MI
Friends of Weaver, Los Alamitos, CA
Friendship Community Development
Corporation, Mobile, AL
From Bondage to Freedom,
Los Angeles, CA
Fund for Our Children, Old Tappan, NJ
Galaxy 2000 Entertainment, Mesa, AZ
Gemach Mordechai Aron Chaiam, Inc.,
Brooklyn, NY
Genesee Coalition on Adolescent
Pregnancy Parenting & Prevention,
Flint, MI
Genesis Troupe, Livonia, MI
Geneva Avenue Elderly Housing, Inc.,
Boston, MA
Georgia Community Resources Exchange,
Inc., Atlanta, GA
Giveback Foundation, Chicago, IL
G M B C Community Development
Corporation, Houston, TX
Go CAIA, Tucson, AZ
God is Good, Incorporated, El Reno, OK
Golden Gate Chapter Lupus Foundation
of America, Inc., San Francisco, CA
Good Samaritan Ministry, Inc.,
New York, NY
Good Shepherd Outreach Center,
Newport News, VA
Grace Project, Inc., Shreveport, LA
Grand Central Parkway, Forest Hills, NY
Great Dane Rescue Alliance, Inc.,
Plymouth, MI
Great Lakes Opera, Southfield, MI
Greater Ann Arbor Omega Foundation,
Ann Arbor, MI
Greater New York Chinatown Social
Services Agency, Inc., New York, NY
Greenville Dream Center, Pelzer, SC
Harambee African Female Rites of
Passage Collective Program Process,
Baltimore, MD
Harbor Foundation, Wilmington, NC
Harby Hawks Booster Club, Alvin, TX
Harlem Music Lab, Inc., New York, NY
Haus of Marcellus, Dallas, TX
Haven International Ministries,
Los Angeles, CA
Healing Hearts Ministries, Inc., Miami, FL
Health Information of America, Inc.,
Cedar Grove, NJ
Health Research Group,
Rocksburg Bath, VA
Hearts of Gold Foundation,
Rochester, MN
Heat Halsell Education and Training
Center, Philadelphia, PA
HelpMe,Augusta,ME
Helping People Grow Academy,
Charlotte, NC
Helping Young Haitians Succeed,
Riverdale, MD
Herb Millro Classic, Seattle, WA
Heroes of the Flame, Inc., Houston, TX
Higher Dimensions, Inc., Byron, GA
Hilltop Speed Track Club, Vallejo, CA
His Servants of Fire Christian
International Ministries, La Habra, CA
Hollyberry Foundation, Abingdon, VA
Hollyview RHF Housing, Inc.,
Long Beach, CA
Holocaust Awareness Ark, Yonkers, NY
Home Ownership Preparation &
Experience, Big Lake, MN
Hope for Honduras, Inc.,
Overland Park, KS
Hope House, Inc., New Haven, CT
Hope of Glory Mission, Inc., Mobile, AL
Hopkins County Community
Resource Coordination Group,
Sulphur Springs, TX
Horizon Circle of Friends, Allegan, MI
Humanity United Globally, Honolulu, HI
I Support Charity, New York, NY
IBIC Institute, Inc., Greenwich, CT
Illinois Committee of Blind Vendors,
Chenoa, IL
Indiana Angels, Greenwood, IN
Indiana Hooved Animal Humane Society,
Salem, IN
Insight Ministries International,
Las Vegas, NV
Institute for Species Specific Milk,
Temecula, CA
International Shrine for Boxing &
Wrestling, Los Angeles, CA
International Soap Box Derby, Inc.,
Akron, OH
Internet Ministries Fish Net, Tucson, AZ
Into the Harvest, Milpitas, CA
Invisible Theatre Company, Inc.,
Baltimore, MD
Irish Center of Washington, DC,
Vienna, VA
Israel Metropolitan Social Action &
Education Foundation, Greenville, SC
Jack Barnett Scholarship Fund,
Uncasville, CT
JCM Spirit Club, Jackson, TN
Jefferson City Early Childhood
Parent Teacher Organization,
Jefferson City, MO
Jesus Run, Incorporated,
Highland Ranch, CO
2005–35 I.R.B.457August 29, 2005

Jewish Continuity Foundation,
Monsey, NY
Joe Cali Ministries, Phoenix, AZ
John Braun Foundation, Elkhart Lake, WI
Johnson City Rotary Foundation,
Johnson City, NY
Joshua Rescue Foundation,
Walnut Creek, CA
JS-Lyn Child Care, Inc., Lithonia, GA
Kaamilah Foundation, Inglewood, CA
Kafuku Farm Institute, Inc., Davis, CA
Kassiwi Sanctuary & Coalition for
Preservation of Indigenous Culture,
Beecher Falls, VT
K C Force, Blue Springs, MO
KCFC — Kansas City Fencing Center,
Shawnee Mission, KS
Kentucky Family Development Institute,
Inc., Frankfort, KY
Kick, Inc., Charlestown, MA
Kids Helping Kids in Crisis, Inc.,
Wayne, NJ
Kids in a Drug-Free Society,
New York, NY
Kids World Daycare, Inc.,
Holly Springs, MS
Kiwanis Club of Capital City Foundation,
Inc., Boise, ID
Kiwanis Club of Midtown
St. Petersburg Youth Foundation,
Inc., St. Petersburg, FL
Kiwanis Club of Saugerties Foundation,
Saugerties, NY
Korean American Society of Hawaii,
Honolulu, HI
Korean Senior Center of Central Florida,
Inc., Orlando, FL
Lafayette Crossing Foundation, Inc.,
Keswick, VA
Lafayette High School Athletic
Educational Foundation,
Williamsburg, VA
Land Assembly for Neighborhood
Development, Detroit, MI
Lang Ranch Elementary School Booster
Club, Thousand Oaks, CA
Lavender and Green Alliance, Inc.,
Mineola, NY
Leap of Faith Community Outreach,
Evansville, IN
Leap of Faith Ministries, Inc.,
Canon City, CO
Liberation Independence Freedom
Empowerment Foundation, Inc.,
Redding, CA
Liberian American Community
Organization, Los Angeles, CA
Liberty International Family and
Educational Services, Inc., Hartford, CT
Life Improvement, Inc.,
West Palm Beach, FL
Life With Lupus Guild, Chicago, IL
LIRR Commuters Campaign, Inc.,
Bayport, NY
Little Traverse Bay Band of Odawa
Indians Elders Association,
Harbor Springs, MI
Living Room Opera, St. Paul, MN
LJC Ministries, Lemon Grove, CA
Logan Community Foundation, Logan, IA
M-Powerhouse, Washington, DC
Macon Better Housing Foundation,
Macon, GA
Malakoff Area Garden Club,
Malakoff, TX
Mammoth Lakes Celtic Festival, Inc.,
Mammoth Lakes, CA
Manitowish Waters Skiing Skeeters, Inc.,
Manitowish Waters, WI
Marion Jones Ministry, Nashville, TN
Markey Road Neighborhood Association,
Dayton, OH
Marshfield Sister Cities, Inc.,
Marshfield, WI
Mart Emergency Medical Services, Inc.,
Mart, TX
Martinsburg Blue Sox, Martinsburg, WV
Mary Vincent Foundation,
West Covina, CA
Marysville Independent Traveling Teams,
Marysville, OH
Massachusetts Low-Income Taxpayers
Clinic, Inc., Norwell, MA
Matthews Christian Youth Group,
Oswego, IL
Meadowlark Foundation, Inc.,
Great Falls, MT
Mega Complex Outreach, Inc.,
Missouri City, TX
Melanoma Assistance Program, Inc.,
Pensacola, FL
Mentor Link, Inc., Bronx, NY
Mercy Mountain Transportation, Inc.,
Williamsburg, KY
Michigan State University Investment
Club, East Lansing, MI
Milledgeville Resident Council, Inc.,
Milledgeville, GA
Mills Remediation & Tutoring Center,
Inc., Southside, AL
Minnesota Shakespeare Project,
Minneapolis, MN
Miracle Farm, Inc., Gladwyne, PA
Miss Ohio Scholarship Pageant,
Mansfield, OH
Mission Teens, Detroit, MI
MMBC Ministries, Temple, TX
Mothers Care Support Services, Inc.,
Madison, AL
Mount Moriah Baptist Church of
Spartanburg Foundation, Inc.,
Spartanburg, SC
Moving Forward Towards Independence,
Napa, CA
Mueenabad Fund, Inc., New Park, PA
Music Ministries, Inc., Union, NJ
Nashville Chamber Singers, Nashville, TN
National African-American Archives and
Museum, Mobile, AL
National Assistance Dog Advocate
Coalition, Brooklyn, NY
National Association of Yemeni
Americans, Inc., Dearborn, MI
National School Fitness Foundation,
Salt Lake City, UT
National Youth Athletic Association,
Lynnwood, WA
Nationwide Masonic Brotherhood, Inc.,
Linden, NJ
New Covenant Promise Foundation,
Caledonia, NY
New England Seacoast Institute,
Nahant, MA
New Mercies, Inc., Newport News, VA
New Mexico Association of Community
Action Agencies, Albuquerque, NM
New River Valley Feline Rescue & Care
Center, Christianburg, VA
New York Raptors Special Hockey Club,
Inc., Larchmont, NY
Newtown Colonial Girls Softball League,
Inc., Newtown, PA
Nipmuc Indian Development Corp.,
Webster, MA
No Limit Youth Ministries-Programs of
Louisville, Inc., Louisville, KY
Noon Optimist Foundation of Elkhart
Indiana, Elkhart, IN
North Carolina County Youth Foundation,
Inc., Asheville, NC
North Carolina State Indian Housing
Authority, Fayetteville, NC
North Dakota Native American Foster
Parent Association, Bismarck, ND
Northeast Community Counsel of Austin
Texas, Austin, TX
Northeast Kiwanis Club of Lincoln
Nebraska Foundation, Lincoln, NE
Northside Affordable Housing
Opportunities, Inc., Jacksonville, FL
Ohio Rural Partners, Reynoldsburg, OH
August 29, 20054582005–35 I.R.B.

Oklahoma Association & Leadership
of Student Assistance Program,
Yukon, OK
One Faith Ministries, Fairdealing, MO
One Song Many Voices Foundation,
Bethesda, MD
Operation Rebound, Flint, MI
Optimal Community Support Services,
Inc., Houston, TX
Or Yechiel, Brooklyn, NY
Orange Business Incubator, Inc.,
Orange, VA
Organization of Black Airline Pilots,
Silver Spring, MD
Oromo Community of Denver,
Denver, CO
Owensboro Ice Foundation, Inc.,
Owensboro, KY
Panther Childrens Foundation,
Camarillo, CA
Parents and Friends of Boy Scout Troop
212 of Santa Clara County, San Jose, CA
Partners in Torah, Inc., New York, NY
Path of Hope Foundation,
Fountain Valley, CA
Patriots Praise Corps, Phelan, CA
Patterson Scrip Program, Fremont, CA
Perry Fund for Others, Charlottesville, VA
Perry-Yokley Family Development
Center, Merced, CA
Pfc Dan Bullock Foundation,
Mount Laurel, NJ
Phoebes Work, Minneapolis, MN
Pilgrim House, Inc., Sheffield, AL
Pine Creek Headwaters Protection Group,
Wellsboro, PA
Pinellas County African American
History Museum, Inc., Clearwater, FL
Plainfield Minority Golf Association,
Plainfield, NJ
Port Arthur Municipal Non-Profit
Corporation, Port Arthur, TX
Pound Band Boosters, Pound, VA
Powerhouse Foundation, Inc.,
League City, TX
PPRC Nursing Home, Inc.,
High Point, NC
PRN Care Nonprofit Corporation,
Upland, CA
Project Open Arms, San Francisco, CA
Project Still I Rise, Inc., Dallas, TX
Promise Academy Charter School,
Long Beach, CA
Promised Assurance, Madera, CA
Providing Every American Child
Education and Well Being Organization,
Austin, TX
Radicand Foundation, Birmingham, AL
Rainbow House for Women and Children,
Inc., San Antonio, TX
Rainbow Unity Foundation,
Des Moines, IA
Rapendeh, Bedford, TX
Raym-Co Scholarship Foundation, Inc.,
Bristol, CT
R E A C H the Youth, Inc., Madison, AL
Reed City Firefighters Auxiliary,
Reed City, MI
Refreshing Florida Community
Development Corporation,
Haines City, FL
Refugee Women United for Progress,
Phoenix, AZ
Renaissance Townhomes, Inc.,
Denton, TX
Resource Center for Westside
Communities, Chicago, IL
Rites of Passage for Girls, Denver, CO
Roanoke Stars Basketball, Inc.,
Penhook, VA
Rockland Street Baseball, Inc.,
Portsmouth, NH
Rocky Boy Health Board, Box Elder, MT
Ron-Sher, Inc., Downey, CA
Sandlewood Senior Apartments,
San Bernardino, CA
Sanibel-Captiva Kiwanis Charitable
Foundation, Inc., Sanibel, FL
Sanibel-Captiva Review, Inc.,
Sanibel Island, FL
Santa Barbara Christian Homesteaders,
Inc., Buellton, CA
Santa Clara Palomino World Series, Inc.,
Saratoga, CA
Saving the Impotent Christian, Inc.,
Citrus Heights, CA
Second Amendment Legal Studies
Association, Montclair, VA
Second Humanitarian Fund,
Waterford, MI
Self-Esteem Tennis Foundation,
Scottsdale, AZ
Senior Volunteer Service Organization,
Oakdale, CA
Shaarei Halacha, Inc., Brooklyn, NY
Shock Wave Athletic Association,
Colonial Heights, VA
Show Us the Way, Papillion, NE
Shull Technology Booster Club,
San Dimas, CA
Siddique Foundation of America,
Auburn, AL
Signature Band & Choir Camp, Inc.,
Syracuse, NY
Silver City Development Corporation,
Meriden, CT
Sirkulo Pilipino, Canoga Park, CA
Skills for Living Foundation, Inc.,
Monticello, MN
SLV PNY-Colt Baseball, Inc.,
Ben Lomond, CA
Social High — Scope Educators,
Torrance, CA
Society for Outdoor Sculpture, Inc.,
South Windsor, CT
Solo Academic Boosters Club, Solon, OH
South Haven Drop in Center,
South Haven, MI
South Lake High School Theatre Arts
Boosters, Oakton, VA
Southlake Aquatics,Inc., Southlake, TX
Southside Hornets Athletic Association,
Fort Worth, TX
Southwest Alabama EMS Educational
Conference, Inc., Mobile, AL
Sparta Resident Council, Inc.,
Milledgeville, GA
Spice Dogs, Sacramento, CA
Spiritual Gifts, Louisville, KY
Sponsor a Voice, Atlanta, GA
Sprott Christian Youth Center, Inc.,
Moncure, NC
Spruce Housing Non-Profit Corporation,
Teaneck, NJ
St. Andrews Community Services for All
Ages SACS, Sacramento, CA
Standing Together Assisting Youth,
Jacksonville, FL
Stars on Call, Inc., Owings Mills, MD
Starshine & Company Productions,
Cave Creek, AZ
Step by Step Ministries, Saint Charles, IL
Stratford Community Theatre,
Stratford, SD
Summit Missions, Incorporated,
Pensacola, FL
Sunnyvale Kiwanis Club Foundation,
Sunnyvale, CA
Sweet Life Program, Las Vegas, NV
Swim Tucson Foundation, Tucson, AZ
Sylvestors Freedom House, Inc.,
Bridgman, MI
Synetic Foundation, Inc., Macon, GA
T-Bird Foundation & Alumni Association,
Inc., Cheyenne, WY
T L P Development Corporation,
Philadelphia, PA
Talent Motivation Center, Inc.,
Hollywood, FL
Tarrant County Family and Childrens
Fund, Bedford, TX
Team One Productions, Inc., Cordova, TN
Teens With a Vision, Inc.,
Winston Salem, NC
2005–35 I.R.B.459August 29, 2005

Texas Organic Research Center, Inc.,
Dallas, TX
Texas USA Wrestling, Fort Worth, TX
TheZone,Howard,SD
Theatre Medina, Denver, CO
Thoreau School Parent Teacher Group,
Concord, MA
Three Trees Charitable Trust,
Lafayette, OR
Touch of Kindness, Inc., Pocasset, MA
Treasure Valley Interpreter Association,
Inc., Boise, ID
Tri-County Independent Living Center of
Utah, Ogden, UT
Trust for Jewish Philanthropy, Inc.,
New York, NY
Tucson Synchro, Inc., Tucson, AZ
Tutor Company Foundation, Danville, CA
University Retirement Community at
Davis Foundation, Inc., Davis, CA
V T & D Community Development
Corporation, Inc., Laud Lakes, FL
Valencia High School Choir Booster Club,
Placentia, CA
Valliant Band Booster Club, Valliant, OK
Vidor Junior Football League Pirates,
Vidor, TX
Village Resource, Chicago, IL
Vision Quest Sports and Fitness,
Auburn, WA
Visionary Foundation, Columbus, OH
Vocational Outreach of Maryland, Ltd.,
Red Lion, PA
Wakanyeja Pawicayapi, Inc.,
Porcupine, SD
Wall Street Lions Cultural Foundation,
Inc., Flushing, NY
Wayne Bull Adams Foundation, Inc.,
Waco, TX
Wentzville Football Booster Club,
Wentzville, MO
West Corporation, Washington, DC
White House Commission on the
National Moment of Remembrance,
Washington, DC
Willow Manor, Inc., Lake Charles, LA
Windsong Swim Team, Inc., Houston, TX
WMMQ Coat for Kids Program, Inc.,
Lansing, MI
Women in Transition Counseling and
Education Center, Tacoma, WA
Women of Avaya Valuing Excellence,
Inc., Westminster, CO
Womens Serenity Retreat, Dalton, GA
WordSoundAction, Inc., Bethesda, MD
Worlds Recovery, Tonasket, WA
Wrights Community Center,
Sacramento, CA
Y.com, Mahtomedi, MN
Yes There is Hope of Midway GA,
Midway, GA
Youth Activities Foundation, Inc.,
Louisville, KY
Youth Investment Coalition Corp. of
Northampton County, Woodland, NC
Youth Media Productions, Inc.,
Debary, FL
Yulee Career Institute, Inc.,
Jacksonville, FL
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nalRevenueServicewillissuearulingor
determinationletterwiththerevisedclas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
August 29, 20054602005–35 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.
2005–35 I.R.B.iAugust 29, 2005

Numerical Finding List
1
Bulletins 2005–27 through 2005–35
Announcements:
2005-46, 2005-27 I.R.B.63
2005-47, 2005-28 I.R.B.71
2005-48, 2005-29 I.R.B.111
2005-49, 2005-29 I.R.B.119
2005-50, 2005-30 I.R.B.152
2005-51, 2005-32 I.R.B.283
2005-52, 2005-31 I.R.B.257
2005-53, 2005-31 I.R.B.258
2005-54, 2005-32 I.R.B.283
2005-55, 2005-33 I.R.B.317
2005-56, 2005-33 I.R.B.318
2005-57, 2005-33 I.R.B.318
2005-58, 2005-33 I.R.B.319
2005-60, 2005-35 I.R.B.455
Notices:
2005-48, 2005-27 I.R.B.9
2005-49, 2005-27 I.R.B.14
2005-50, 2005-27 I.R.B.14
2005-51, 2005-28 I.R.B.74
2005-52, 2005-28 I.R.B.75
2005-53, 2005-32 I.R.B.263
2005-54, 2005-30 I.R.B.127
2005-55, 2005-32 I.R.B.265
2005-56, 2005-32 I.R.B.266
2005-57, 2005-32 I.R.B.267
2005-58, 2005-33 I.R.B.295
2005-59, 2005-35 I.R.B.443
2005-62, 2005-35 I.R.B.443
2005-63, 2005-35 I.R.B.448
Proposed Regulations:
REG-130241-04, 2005-27 I.R.B.18
REG-138362-04, 2005-33 I.R.B.299
REG-149436-04, 2005-35 I.R.B.454
Revenue Procedures:
2005-35, 2005-28 I.R.B.76
2005-36, 2005-28 I.R.B.78
2005-37, 2005-28 I.R.B.79
2005-38, 2005-28 I.R.B.81
2005-39, 2005-28 I.R.B.82
2005-40, 2005-28 I.R.B.83
2005-41, 2005-29 I.R.B.90
2005-42, 2005-30 I.R.B.128
2005-43, 2005-29 I.R.B.107
2005-44, 2005-29 I.R.B.110
2005-45, 2005-30 I.R.B.141
2005-46, 2005-30 I.R.B.142
2005-47, 2005-32 I.R.B.269
2005-48, 2005-32 I.R.B.271
Revenue Procedures— Continued:
2005-49, 2005-31 I.R.B.165
2005-50, 2005-32 I.R.B.272
2005-51, 2005-33 I.R.B.296
2005-52, 2005-34 I.R.B.326
2005-53, 2005-34 I.R.B.339
2005-54, 2005-34 I.R.B.353
2005-55, 2005-34 I.R.B.367
2005-56, 2005-34 I.R.B.383
2005-57, 2005-34 I.R.B.392
2005-58, 2005-34 I.R.B.402
2005-59, 2005-34 I.R.B.412
2005-60, 2005-35 I.R.B.449
Revenue Rulings:
2005-38, 2005-27 I.R.B.6
2005-39, 2005-27 I.R.B.1
2005-40, 2005-27 I.R.B.4
2005-41, 2005-28 I.R.B.69
2005-42, 2005-28 I.R.B.67
2005-43, 2005-29 I.R.B.88
2005-44, 2005-29 I.R.B.87
2005-45, 2005-30 I.R.B.123
2005-46, 2005-30 I.R.B.120
2005-47, 2005-32 I.R.B.261
2005-48, 2005-32 I.R.B.259
2005-49, 2005-30 I.R.B.125
2005-50, 2005-30 I.R.B.124
2005-51, 2005-31 I.R.B.163
2005-52, 2005-35 I.R.B.423
2005-53, 2005-35 I.R.B.425
2005-54, 2005-33 I.R.B.289
2005-55, 2005-33 I.R.B.284
2005-56, 2005-35 I.R.B.427
Tax Conventions:
2005-47, 2005-28 I.R.B.71
Treasury Decisions:
9208, 2005-31 I.R.B.157
9209, 2005-31 I.R.B.153
9210, 2005-33 I.R.B.290
9211, 2005-33 I.R.B.287
9212, 2005-35 I.R.B.429
9213, 2005-35 I.R.B.440
9214, 2005-35 I.R.B.435
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin
2005–26, dated June 27, 2005.
August 29, 2005ii2005–35 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–27 through 2005–35
Announcements:
84-26
Obsoleted by
REG-149436-04, 2005-35 I.R.B.454
Notices:
2005-4
Modified by
Notice 2005-62, 2005-35 I.R.B.443
2005-51
Modified and superseded by
Notice 2005-57, 2005-32 I.R.B.267
Proposed Regulations:
REG-142686-01
Withdrawn by
Ann. 2005-55, 2005-33 I.R.B.317
REG-100420-03
Corrected by
Ann. 2005-57, 2005-33 I.R.B.318
REG-102144-04
Corrected by
Ann. 2005-56, 2005-33 I.R.B.318
Revenue Procedures:
64-54
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
66-33
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
69-13
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
70-8
Modified by
Rev. Proc. 2005-46, 2005-30 I.R.B.142
71-1
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
72-22
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
87-8
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
87-9
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
Revenue Procedures— Continued:
89-20
Superseded by
Rev. Proc. 2005-52, 2005-34 I.R.B.326
90–11
Modified by
Rev. Proc. 2005-40, 2005-28 I.R.B.83
90-30
Section4supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section5supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Section6supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section7supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section8supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
90-31
Section4supersededby
Rev. Proc. 2005-52, 2005-34 I.R.B.326
Section5supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section6supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Section7supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section8supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section9supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
93-22
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
98-18
Obsoleted by
Rev. Proc. 2005-45, 2005-30 I.R.B.141
99-39
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-31
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-49
Superseded by
Rev. Proc. 2005-41, 2005-29 I.R.B.90
2001-9
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2001-16
Superseded by
Rev. Proc. 2005-42, 2005-30 I.R.B.128
Revenue Procedures— Continued:
2002-9
Modified and amplified by
Rev. Rul. 2005-42, 2005-28 I.R.B.67
Rev. Proc. 2005-35, 2005-28 I.R.B.76
Rev. Proc. 2005-43, 2005-29 I.R.B.107
Rev. Proc. 2005-47, 2005-32 I.R.B.269
2004-50
Superseded by
Rev. Proc. 2005-49, 2005-31 I.R.B.165
Revenue Rulings:
65-109
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
68-549
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
82-29
Modified and clarified by
Rev. Proc. 2005-39, 2005-28 I.R.B.82
2005-41
Corrected by
Ann. 2005-50, 2005-30 I.R.B.152
Treasury Decisions:
9186
Corrected by
Ann. 2005-53, 2005-31 I.R.B.258
9206
Corrected by
Ann. 2005-49, 2005-29 I.R.B.119
9207
Corrected by
Ann. 2005-52, 2005-31 I.R.B.257
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin 2005–26, dated June 27, 2005.
2005–35 I.R.B.iiiAugust 29, 2005

INDEX
Internal Revenue Bulletins 2005–27 through
2005–35
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Federal credit unions, section 457, nonqualified deferred com-
pensation plans (Notice 58) 33,295
Full funding limitations, weighted average interest rate for:
July 2005 (Notice 54) 30,127
August 2005 (Notice 63) 35,448
Proposed Regulations:
26 CFR 1.72(p)–1, amended; 1.401(a)–21, added; 1.402(f)–1,
amended; 1.411(a)–11, amended; 1.417(a)(3)–1, amended;
1.7476–2, amended; use of electronic technologies for pro-
viding employee benefit noticesand transmitting employee
benefit elections and consents (REG–138362–04) 33,299
26 CFR 1.401(a)(9)–6, revised; 1.401(k)–1, amended;
1.403(b)–3(b)(4)(ii), revised; 1.415–1 thru –10, removed;
1.415(a)–1, (b)–1, (b)–2, (c)–1, (c)–2, (d)–1, (f)–1,
(g)–1, (j)–1, added; 1.457–4, –5, –6, –10, amended;
11.415(c)(4)–1, removed; limitations on benefits and con-
tributions under qualified plans (REG–130241–04) 27,18
Qualified retirement plans:
Limitations on benefits and contributions (REG–130241–04)
27,18
Profit-sharing plan, retiree health accounts (RR 55) 33,284
EMPLOYMENT TAX
Alternative signature methods, facsimile signatures (RP 39) 28,
82
EMPLOYMENT TAX—Cont.
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Industry Issue Resolution (IIR) program, additional criteria for
considering specific industries’ proposals regarding account-
able plan rules (Notice 59) 35,443
Penalties, disclosure on reports filed with Securities and Ex-
change Commission (SEC) (RP 51) 33,296
Proposed Regulations:
26 CFR 35.3405–1, amended; use of electronic tech-
nologies for providing employee benefit notices and
transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Stocks, statutory stock options, wages, application of
FICA, FUTA, and income tax withholding, withdrawal
of REG–142686–01 (Ann 55) 33,317
Tool allowances to employees, arrangement not considered an
accountable plan (RR 52) 35,423
ESTATE TAX
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
Testamentary:
For a term of years (RP 57) 34,392
For one measuring life (RP 56) 34,383
With concurrent and consecutive interests for two measur-
ing lives (RP 59) 34,412
With consecutive interests for two measuring lives (RP 58)
34,402
Generation-skipping transfer (GST) tax:
Deemed allocations, election out (TD 9208) 31,157
Predeceased parent rule (TD 9214) 35,435
Regulations:
26 CFR 26.2600–1, amended; 26.2612–1, amended;
26.2651–1, –2, –3, added; predeceased parent rule (TD
9214) 35,435
26 CFR 26.2600–1, amended; 26.2632–1, amended; 602.101,
amended; election out of GST deemed allocations (TD
9208) 31,157
EXCISE TAX
Biodiesel and aviation-grade kerosene (Notice 62) 35,443
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
August 29, 2005iv2005–35 I.R.B.

EXCISE TAX—Cont.
Penalties:
Disclosure on reports filed with Securities and Exchange
Commission(SEC)(RP51)33,296
Relief under section 6715, dyed diesel fuel (Ann 51) 32,283
Proposed Regulations:
26 CFR 54.4980F–1, amended; use of electronic tech-
nologies for providing employee benefit notices and
transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Rural airport, exception to tax on the amount paid for a domestic
segment of taxable transportation by air (RP 45) 30,141
EXEMPT ORGANIZATIONS
Accounting methods, change in reporting method for eligible ed-
ucational institution (RP 50) 32,272
Federal credit unions, section 457, nonqualified deferred com-
pensation plans (Notice 58) 33,295
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
List of organizations classifiedas private foundations (Ann 46)
27,63; (Ann 58) 33,319;(Ann60)35,455
Revocations (Ann 54) 32,283
GIFT TAX
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
INCOME TAX
Accounting methods:
Automatic consent to change to a method under which a utility
may treat an up-front payment for network upgrades as not
being taxable income when received (RP 35) 28,76
Change in reporting method for eligible educational institu-
tion (RP 50) 32,272
Credit card cash advance fees (RP 47) 32,269
Uniform capitalization of costs, environmental remediation
(RR 42) 28,67
Amended returns, qualified, John Doe summons (TD 9186); cor-
rection (Ann 53) 31,258
Arbitrage rebate payments:
Address change (Notice 52) 28,75
Late payment (RP 40) 28,83
ATM surcharge, treatment of cardholder surcharge fees by credit
card issuers (RR 47) 32,261
Charitable contributions, allocation and apportionment of deduc-
tions (TD 9211) 33,287
INCOME TAX—Cont.
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
Testamentary:
For a term of years (RP 57) 34,392
For one measuring life (RP 56) 34,383
With concurrent and consecutive interests for two measur-
ing lives (RP 59) 34,412
With consecutive interests for two measuring lives (RP 58)
34,402
Compensation for labor or personal services, basis for determin-
ing source (TD 9212) 35,429
Credits:
Enhanced oil recovery credit, 2005 inflation adjustment (No-
tice 56) 32,266
Health coverage tax credit (HCTC), miscellaneous issues
(Notice 50) 27,14
Low-income housing credit:
Carryovers to qualified states, 2005 National Pool (RP 36)
28,78
Safe harbor for extending low-income housing commit-
ments (RP 37) 28,79
Satisfactory bond, “bond factor” amounts for the period
January through September 2005 (RR 44) 29,87
Deficiency procedures, use of mathematical or clerical error as-
sessments (RR 51) 31,163
Depreciable business property, election to expense (TD 9209) 31,
153
Disaster relief grants, treatment with respect to gross income (RR
46) 30,120
Disciplinary actions involving attorneys, CPAs, enrolled agents,
and enrolled actuaries (Ann 48) 29,111
Dual consolidated loss (REG–102144–04); correction (Ann 56)
33,318
E-file provider responsibilities (RP 60) 35,449
Employer-provided vehicles, cents-per-mile valuation rule, reg-
ulations sections 1.61–21(d) and (e) (RP 48) 32,271
Forms:
W-4, specifications for filing electronically (RP 42) 30,128
1098, 1099, 5498 and W-2G, requirements for filing electron-
ically or magnetically (revised 8-2005) (RP 49) 31,165
8027, Employer’s Annual Information Return of Tip Income
and Allocated Tips, specifications for filing electronically
or magnetically (RP 41) 29,90
Information reporting, returns by donees relating to qualified in-
tellectual property contributions (TD 9206); correction (Ann
49) 29,119
Insurance companies, tax on insurance companies other than life
insurance companies (RR 40) 27,4
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
2005–35 I.R.B.vAugust 29, 2005

INCOME TAX—Cont.
Interest:
Foreign bank interest expense allocation to effectively con-
nected income (Notice 53) 32,263
Investment:
Federal short-term, mid-term, and long-term rates for:
July 2005 (RR 38) 27,6
August 2005 (RR 54) 33,289
Rates, farm real property, special use value (RR 41) 28,69;
correction (Ann 50) 30,152
Taxpayer remedies when the Service fails to suspend interest
as required by section 6404(g) (RP 38) 28,81
Inventory:
LIFO, price indexes used by department stores for:
May 2005 (RR 45) 30,123
June 2005 (RR 56) 35,427
LIFO recapture by corporationsholding LIFO inventory indi-
rectly (TD 9210) 33,290
Judicial remedy for third person asserting wrongful levy (RR 49)
30,125
Levied property, return incertain cases (TD 9213) 35,440
Marginal production rates, 2005 (Notice 55) 32,265
New York Liberty Zone, election out of section 1400L(c), 5-year
property (RP 43) 29,107
Obsoleting Rev. Proc. 64-54 and subsequent rulings (RR 43) 29,
88
Partnerships, assumption of partner liabilities (TD 9207); correc-
tion (Ann 52) 31,257
Penalties, disclosure on reports filed with Securities and Ex-
change Commission (SEC) (RP 51) 33,296
Private foundations, organizations now classified as (Ann 46) 27,
63; (Ann 58) 33,319; (Ann 60) 35,455
Procedures for claiming section 482 setoffs (RP 46) 30,142
Proposed Regulations:
26 CFR 1.475(a)–4; safe harborfor valuation under section
475 (REG–100420–03); correction (Ann 57) 33,318
26 CFR 1.1503(d)–4, –5; dual consolidated loss
(REG–102144–04); correction (Ann 56) 33,318
26 CFR 1.6012–2, amended; return required by subchapter
T cooperatives under section 6012 (REG–149436–04) 35,
454
Publications:
1220, Specifications for Filing Forms 1098, 1099, 5498 and
W-2G Electronically or Magnetically, 2005 revision (RP
49) 31,165
1239, changes affecting tax year 2005 electronic or magnetic
filing of Form 8027, Employer’s Annual Information Re-
turn of Tip Income and Allocated Tips (RP 41) 29,90
1245, changes affecting the filing of Form W-4, Employee’s
Withholding Allowance Certificate, electronically or mag-
netically (RP 42) 30,128
Qualified green building and sustainable design projects, Brown-
fields Demonstration Program (Notice 48) 27,9
INCOME TAX—Cont.
Regulations:
26 CFR 1.179–0, –2, –4, –5, amended; 1.179–2T, –4T,
–5T, –6, removed; 1.179–6T, redesignated as 1.179–6 and
amended; 602.101, amended; section 179 elections (TD
9209) 31,153
26 CFR 1.861–4, amended; 602.101, amended; source of
compensation for labor or personal services (TD 9212) 35,
429
26 CFR 1.861–8, –8T, –14, –14T, amended; allocation and ap-
portionment of deductions for charitable contributions (TD
9211) 33,287
26 CFR 1.1363–2, amended; 602.101, amended; LIFO recap-
ture under section 1363(d) (TD 9210) 33,290
26 CFR 1.6664–2T, amended; qualified amended returns (TD
9186); correction (Ann 53) 31,258
26 CFR 301.6343–3, added; return of property in certain cases
(TD 9213) 35,440
Restricted property, whether transfer restrictions prevent treat-
ment as substantially vested (RR 48) 32,259
Revocations, exempt organizations (Ann 54) 32,283
Safe harbor, for valuation under section 475 for marking to mar-
ket (REG–100420–03); correction (Ann 57) 33,318
Stocks, golden parachute payments, effect of election under sec-
tion 83(b) for purposes of section 280G (RR 39) 27,1
Subchapter T cooperatives, return required (REG–149436–04)
35,454
Tax conventions:
Canadian memorandum of understanding (MOU) on MAP
(Ann 47) 28,71
Representations required to claim exemption from withhold-
ing tax on personal services income under U.S. income tax
treaties, students/teachers (RP 44) 29,110
Third party not liable for tax, relief under sections 6325(b)(4) and
7426(a)(4) (RR 50) 30,124
Tobacco marketing quotas, tax treatment of termination pay-
ments (Notice 51) 28,74; (Notice 57) 32,267
Uniform capitalization, simplified methods, assets produced on
a routine and repetitive basis (RR 53) 35,425
August 29, 2005vi2005–35 I.R.B.
*U.S. Government Printing Office: 2005—310–365/20020