Part IV. Items — Internal Revenue Bulletin 2004-15

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Loss Limitation Rules

REG–153172–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9118) under sections 337(d) and 1502 of the Internal Revenue Code relating to the deductibility of losses recognized on dispositions of subsidiary stock by members of a consolidated group, the consequences of treating subsidiary stock as worthless, and when stock of a member of a consolidated group may be treated as worthless. The temporary regulations apply to corporations filing consolidated returns. The text of the temporary regulations published in this issue of the Bulletin also serves as the text of these proposed regulations.

DATES: Written or electronic comments must be received by June 16, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–153172–03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 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–153172–03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044. Alternatively, taxpayers may submit electronic comments directly to the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Regarding the regulations under section 337(d), Mark Weiss (202–622–7790) of the Office of Associate Chief Counsel (Corporate), and regarding the regulations under section 1502, Lola

L. Johnson (202–622–7550) of the Office of Associate Chief Counsel (Corporate); regarding submission of comments and/or requests for a hearing, Sonya M. Cruse (202–622–4693) of the Office of Procedure and Administration (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 337(d) and section 1502. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

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 assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will primarily affect affiliated groups of corporations, which tend to be larger businesses. Therefore a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for

public inspection and copying. A public hearing may be scheduled if requested by any person who timely submits comments. If a public hearing is scheduled, notice of the date, time and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of the regulations under section 337(d) is Mark Weiss, Office of Associate Chief Counsel (Corporate). The principal author of the regulations under section 1502 is Lola L. Johnson, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.337(d)–2(c)(2) is added to read as follows:

§1.337(d)–2 Loss limitation window period.

[The text of this proposed section is the same as the text of §1.337(d)–2T published elsewhere in this issue of the Bulletin].

Par. 3. Section 1.1502–35(f)(1) is added to read as follows:

§1.1502–35 Transfers of subsidiary member stock and deconsolidations of subsidiary members.

[The text of this proposed section is the same as the text of §1.1502–35T published elsewhere in this issue of the Bulletin].

Par. 4. In §1.1502–80, paragraph (c) is revised to read as follows:

§1.1502–80 Applicability of other provisions of law.

April 12, 2004 729 2004-15 I.R.B.

on the disposition of member stock and regarding the computation of the portion of an excess loss account that must be taken into account when excluded COD income is not fully applied to reduce attributes. In particular, if the stock of the subsidiary that realizes excluded COD income is sold, the reduction of other members’ attributes will cause an increase in the basis of the stock of the subsidiary, thus reducing the gain (or increasing the loss) on the stock sale that might otherwise have been offset by attributes and possibly making more attributes available for reduction. If the stock of a subsidiary other than one that realizes excluded COD income is sold, the reduction of such subsidiary’s attributes in respect of the excluded COD income will cause a decrease in the basis of the sold subsidiary stock, thus increasing the gain (or reducing the loss) on the stock sale, possibly resulting in the absorption of more attributes and making fewer attributes available for reduction.

In addition, the amount of the excess loss account in the stock of a subsidiary that is required to be taken into account can only be determined after the computation of tax for the year of the discharge and the reduction of attributes. Pursuant to §1.1502–28T(b)(6)(ii), however, that excess loss account must be included on the group’s tax return for the taxable year that includes the date on which the subsidiary realizes the excluded COD income. If that excess loss account were offset by losses that could be reduced in respect of the excluded COD income, the inclusion of that amount could result in fewer attributes available for reduction. The availability of fewer attributes for reduction might increase the excluded COD income that was not applied to reduce attributes and, therefore, the amount of the excess loss account in the subsidiary’s stock required to be taken into account.

These regulations provide guidance regarding the timing of stock basis adjustments, the calculation of stock gain or loss (including the amount of an excess loss account required to be taken into account), and the reduction of attributes when a member (P) disposes of stock of a subsidiary (S) during a year in which a member realizes excluded COD income. In particular, these regulations propose the steps used to compute the group’s consolidated taxable income and to effect the

of §1.1502–80T(c) published elsewhere in this issue of the Bulletin].

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on March 17, 2004, 8:45 a.m., and published in the issue of the Federal Register for March 18, 2004, 69 F.R. 12811)

Notice of Proposed Rulemaking; Notice of Proposed Rulemaking by Cross Reference to Temporary Regulations

Guidance Under Section 1502; Application of Section 108 to Members of a Consolidated Group; Computation of Taxable Income When Section 108 Applies to a Member of a Consolidated Group

REG–167265–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of proposed rulemaking by cross reference to temporary regulations.

SUMMARY: This document contains proposed regulations under section 1502 that govern the timing of certain basis adjustments in respect of the realization of discharge of indebtedness income that is excluded from gross income and the reduction of attributes in respect of that excluded income. In addition, the text of the temporary regulations (T.D. 9117) published elsewhere in this issue of the Bulletin serves as the text of these proposed regulations with respect to the application of section 108 when a member of a consolidated group realizes discharge of indebtedness income. The proposed regulations affect corporations filing consolidated returns.

DATES: Written or electronic comments must be received by June 14, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–167265–03), room

5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, 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–167265–03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Candace B. Ewell or Marie C. Milnes-Vasquez at (202) 622–7530; concerning submission of comments, Treena Garrett at (202) 622–3401 (not toll-free numbers).

Background and Explanation of Provisions

On September 4, 2003, the IRS and Treasury Department published in the Federal Register a notice of proposed rulemaking (REG–132760–03, 2003–43 I.R.B. 933 [68 FR 52542]) and temporary regulations (T.D. 9089, 2003–43 I.R.B. 906 [68 FR 52487]) under section 1502 of the Internal Revenue Code. The temporary regulations added §1.1502–28T, which provides guidance regarding the determination of the attributes that are available for reduction when a member of a consolidated group realizes discharge of indebtedness income that is excluded from gross income (excluded COD income) and the method for reducing those attributes.

The text of the temporary regulations published in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 1502. The temporary regulations address certain issues related to the application of section 1245 and the matching rule of §1.1502–13, and the inclusion of excess loss accounts in cases in which excluded COD is not fully applied to reduce attributes. The text of those regulations also serves as the text of these proposed regulations with respect to those issues. The preamble to the temporary regulations explains those amendments.

These regulations also propose amendments to §§1.1502–28T and 1.1502–11 to address certain issues that have been raised regarding the computation of gain or loss

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nate an excess loss account and, therefore, reduce the amount of excess loss account required to be taken into account. The IRS and Treasury Department are aware that taking into account the basis effects of the excluded COD income of all members of the group may increase the excess loss account in the subsidiary stock. This result may occur in a case in which the excluded COD income of one subsidiary (the first subsidiary) is not fully applied to reduce attributes and the excluded COD income of another subsidiary (the second subsidiary) is applied to reduce attributes in the first subsidiary’s chain. The IRS and Treasury Department nevertheless believe that this result is not inappropriate as the reduction of an attribute in the first subsidiary’s chain in respect of excluded COD income of the second subsidiary may avoid taking into account an excess loss account in the second subsidiary’s stock.

Eighth, the taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) is computed. These amounts are calculated by applying the limitation on the use of S’s deductions and losses to offset income computed pursuant to the first step, and by including the gain or loss recognized on the disposition of S stock computed pursuant to the preceding step. However, attributes that were tentatively used to offset income in the tentative computation of taxable income (or loss) in the fourth step and attributes that were tentatively reduced in the fifth step cannot offset any excess loss account taken into account as a result of excluded COD income not being fully applied to reduce attributes. This limitation gives effect to the requirement that the excess loss account be taken into account and avoids circular calculations. If an excess loss account that is taken into account as a result of excluded income could be offset by attributes that could be reduced in respect of the excluded COD income, the use of attributes to offset the excess loss account could result in fewer attributes available for reduction and a greater amount of excluded COD income that was not applied to reduce attributes, which, in turn, would increase the amount of the excess loss account required to be taken into account. Ultimately, the inclusion of the excess loss account and the realization of excluded COD income could have no effect on the

reduction of attributes. In order to avoid circular calculations, these proposed regulations adopt an approach that limits the reduction of attributes in certain cases in which a disposition of subsidiary stock occurs during a year in which one or more members realize excluded COD income.

This methodology applies not only when there is an actual disposition of subsidiary stock, but also when there is a deemed disposition, including a disposition that results by reason of the application of §1.1502–19(c)(1)(iii)(B) when excluded COD income is not fully applied to reduce attributes. However, in order to know whether there has been a disposition of stock by reason of the application of §1.1502–19(c)(1)(iii)(B), the group must have computed its consolidated taxable income (or loss) and applied the rules of sections 108 and 1017 and §1.1502–28T. Therefore, as discussed below, a number of the steps proposed will have a slightly different application when there is such a deemed disposition of subsidiary stock rather than an actual disposition of subsidiary stock. The following paragraphs outline the proposed steps.

First, the extent to which S’s deductions and losses for the tax year of the disposition (and its deductions and losses carried over from prior years) may offset income and gain is computed pursuant to the current rules of §1.1502–11(b)(2) and (3). Those rules require a tentative computation of the group’s taxable income, without regard to the stock gain or loss. In the case of a disposition of subsidiary stock that results from the application of §1.1502–19(c)(1)(iii)(B) (which will only be apparent after the application of the sixth step described below), the application of §1.1502–11(b)(2) and (3) will not result in the imposition of a limitation on the use of S’s deductions and losses.

Second, §§1.1502–32 and 1.1502–32T are tentatively applied to adjust the basis of the S stock to reflect the amount of S’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) that is made pursuant to §1.1502–11(b)(2). The basis of the S stock is not adjusted to reflect the realization of excluded COD income and the reduction of attributes in respect thereof.

Third, in the case of a disposition of S stock that does not result from excluded COD income not being fully applied to reduce attributes, P’s income, gain, or loss from the disposition of S stock is computed using the basis of such stock computed in the preceding step.

Fourth, taxable income (or loss) for the year of disposition (and any prior years to which the deductions or losses may be carried) is tentatively computed. For this purpose, in the case of a disposition of S stock that does not result from excluded COD income not being fully applied to reduce attributes, the tentative computations of taxable income (or loss) take into account P’s income, gain, or loss from the disposition of S stock computed in the preceding step. Any excess loss account that is taken into account as a result of excluded COD income not being fully applied to reduce attributes is not included in this tentative computation of taxable income (or loss).

Fifth, the excluded COD income is tentatively applied to reduce attributes pursuant to the rules of sections 108 and 1017 and §1.1502–28T. Only those attributes that remain after the tentative computations of taxable income (or loss) in the fourth step are subject to reduction.

Sixth, §§1.1502–32 and 1.1502–32T are applied to adjust the basis of the S stock to reflect the amount of S’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) made pursuant to the fourth step, and the excluded COD income that is applied to reduce attributes and the attributes reduced in respect of the excluded COD income pursuant to the fifth step.

Seventh, the group’s actual gain or loss on the disposition of S stock is computed using the basis of such stock computed in the preceding step. At this point, whether and to what extent an excess loss account in the stock of a subsidiary that realizes excluded COD income must be taken into account is computed. In many cases, taking into account the basis consequences of the excluded COD income prior to computing the amount of an excess loss account required to be taken into account may be favorable to taxpayers because those consequences might decrease or even elimi

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Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Marie C. Milnes-Vasquez of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read, in part as follows:

Authority: 26 U.S.C. 7805. - * * Section 1.1502–28 also issued under 26 U.S.C. 1502. - * *

Par. 2. Section 1.1502–11 is amended by:

Revising paragraph (b)(1).
Redesignating paragraph (c) as paragraph (d).
Adding new paragraph (c). The revision and addition read as follows:

§1.1502–11 Consolidated taxable income.

- - - (b) Elimination of circular stock ba- sis adjustments when there is no excluded

overall tax liability of the group, thereby rendering meaningless the requirement to take into account the excess loss account.

Ninth, the excluded COD income is actually applied to reduce attributes pursuant to the rules of sections 108 and 1017 and §1.1502–28T. Only those attributes remaining after the actual computations of taxable income (or loss) pursuant to the eighth step are subject to reduction in the ninth step. In certain cases, however, the reduction of attributes will be limited to prevent circular calculations. The proposed regulations include two rules in this regard.

The first rule provides that when S or a subsidiary of S realizes excluded COD income, the aggregate amount of excluded COD income that is applied to reduce attributes attributable to members other than S and any lower-tier corporation of S cannot exceed the aggregate amount of excluded COD income that is applied to reduce attributes attributable to members other than S and any lower-tier corporation of S pursuant to the fifth step (tentative reduction of attributes). Without this limitation, the amount of excluded COD income applied to reduce attributes could exceed the amount of excluded COD income applied to reduce attributes in the fifth step, which would result in a greater positive adjustment (or a lesser negative adjustment) to the basis of the S stock compared to that made in the sixth step, and reduce the gain (or increase the loss) recognized on the disposition of the S stock, which might increase the attributes available for reduction and the amount of excluded COD income applied to reduce attributes.

The second rule provides that when a member other than S or a subsidiary of S realizes excluded COD income, the aggregate amount of excluded COD income that is applied to reduce attributes (other than credits) attributable to S and any lower-tier corporation of S cannot exceed the aggregate amount of excluded COD income that is applied to reduce attributes (other than credits) attributable to S and any lower-tier corporation of S in the fifth step. Without this limitation, the amount of excluded COD income applied to reduce the attributes (other than credits) attributable to S or a subsidiary of S could exceed the amount of excluded COD income applied to reduce the attributes (other than credits)

attributable to S or a subsidiary of S in the fifth step, which would result in a lesser positive adjustment (or a greater negative adjustment) to the basis of the S stock compared to that made in the sixth step, and increase the gain (or decrease the loss) recognized on the disposition of the S stock, which might decrease the attributes of S’s shareholder available for reduction, increase the reduction of S’s attributes, and result in a lesser positive adjustment (or a greater negative adjustment) to the basis of the S stock.

The IRS and Treasury Department are aware that the foregoing methodology does not prevent circular calculations in all cases, specifically certain cases in which there is a disposition of the stock of more than one subsidiary. The IRS and Treasury Department request comments regarding whether rules preventing circular calculations in these other cases are necessary. If such rules are necessary, the IRS and Treasury Department request comments regarding the approach that those rules should adopt.

Given the difficulty of the problem addressed by these regulations, the IRS and Treasury Department request comments regarding these rules prior to making them effective. Therefore, the rules described above are proposed. Before these rules are adopted as temporary or final regulations, taxpayers may rely on the rules proposed in these regulations.

Special Analysis

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Further, it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the

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takes into account P’s income, gain, or loss from the disposition of S stock computed pursuant to paragraph (c)(2)(iii) of this section. The tentative computation of taxable income (loss) is made without regard to whether all or a portion of an excess loss account in a share of S is required to be taken into account pursuant to §§1.1502–19(c)(1)(iii)(B) and 1.1502–19T(b)(1). (v) Tentative reduction of attributes . Fifth, the rules of sections 108 and 1017 and §1.1502–28T are tentatively applied to reduce the attributes remaining after the tentative computation of taxable income (or loss) pursuant to paragraph (c)(2)(iv) of this section.

(vi) Actual adjustment of stock basis . Sixth, §§1.1502–32 and 1.1502–32T are applied to reflect the amount of S’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) made pursuant to paragraph (c)(2)(iv) of this section, and the excluded COD income applied to reduce attributes and the attributes tentatively reduced in respect of the excluded COD income pursuant to paragraph (c)(2)(v) of this section.

(vii) Actual computation of stock gain or loss . Seventh, the group’s actual gain or loss on the disposition of S stock (including a disposition that results from the application of §1.1502–19(c)(1)(iii)(B)) is computed. The result of the computation pursuant to paragraph (c)(2)(vi) of this section is treated as the basis of such stock.

(viii) Actual computation of taxable income (or loss) . Eighth, taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) is computed. The group’s actual consolidated taxable income (or loss) for the year of the disposition is computed by applying the limitation computed pursuant to paragraph (c)(2)(i) of this section, and by including the gain or loss recognized on the disposition of S stock computed pursuant to paragraph (c)(2)(vii) of this section. However, attributes that were tentatively used to offset income pursuant to paragraph (c)(2)(iv) of this section and attributes that were tentatively reduced pursuant to paragraph (c)(2)(v) of this section cannot offset any excess loss account

COD income —(1) In general . If one member (P) disposes of the stock of another member (S), this paragraph (b) limits the use of S’s deductions and losses in the year of disposition and the carryback of items to prior years. The purpose of the limitation is to prevent P’s income or gain from the disposition of S’s stock from increasing the absorption of S’s deductions and losses, because the increased absorption would reduce P’s basis (or increase its excess loss account) in S’s stock under §1.1502–32 and, in turn, increase P’s income or gain. See paragraph (b)(3) of this section for the application of these principles to P’s deduction or loss from the disposition of S’s stock, and paragraph (b)(4) of this section for the application of these principles to multiple stock dispositions. This paragraph (b) applies only when no member realizes discharge of indebtedness income that is excluded from gross income under section 108(a) (excluded COD income) during the taxable year of the disposition. See paragraph (c) of this section for rules that apply when a member realizes excluded COD income during the taxable year of the disposition. See §1.1502–19(c) for the definition of disposition.

- - - (c) Elimination of circular stock basis adjustments when there is excluded COD income —(1) In general . If one member (P) disposes of the stock of another member (S) in a year during which any member realizes excluded COD income, this paragraph (c) limits the use of S’s deductions and losses in the year of disposition and the carryback of items to prior years, the amount of the attributes of certain members that can be reduced in respect of excluded COD income of certain other members, and the attributes that can be used to offset an excess loss account taken into account by reason of the application of §1.1502–19(c)(1)(iii)(B). In addition to the purpose set forth in paragraph (b)(1) of this section, the purpose of these limitations is to prevent the reduction of tax attributes in respect of excluded COD income from affecting P’s income, gain, or loss on the disposition of S stock (including a disposition of S stock that results from the application of §1.1502–19(c)(1)(iii)(B)) and, in turn, affecting the attributes available for reduc

tion pursuant to sections 108 and 1017 and §1.1502–28T.

(2) Computation of taxable income, reduction of attributes, and computation of limits on absorption and reduction of attributes . If a member realizes excluded COD income in the taxable year during which P disposes of S stock, the steps used to compute taxable income (or loss), to effect the reduction of attributes, and to compute the limitations on the absorption and reduction of attributes are as follows. These steps also apply to determine whether and to what extent an excess loss account must be taken into account as a result of the application of §§1.1502–19(c)(1)(iii)(B) and 1.1502–19T(b)(1). (i) Limitation on deductions and losses to offset income or gain . First, the determination of the extent to which S’s deductions and losses for the tax year of the disposition (and its deductions and losses carried over from prior years) may offset income and gain is made pursuant to §1.1502–11(b)(2) and (3).

(ii) Tentative adjustment of stock basis . Second, §§1.1502–32 and 1.1502–32T are tentatively applied to adjust the basis of the S stock to reflect the amount of S’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) that is made pursuant to §1.1502–11(b)(2), but not to reflect the realization of excluded COD income and the reduction of attributes in respect thereof.

(iii) Tentative computation of stock gain or loss . Third, in the case of a disposition of S stock that does not result from the application of §1.1502–19(c)(1)(iii)(B), P’s income, gain, or loss from the disposition of S stock is computed. For this purpose, the result of the computation pursuant to paragraph (c)(2)(ii) of this section is treated as the basis of such stock.

(iv) Tentative computation of taxable income (or loss) . Fourth, taxable income (or loss) for the year of disposition (and any prior years to which the deductions or losses may be carried) is tentatively computed. For this purpose, in the case of a disposition of S stock that does not result from the application of §1.1502–19(c)(1)(iii)(B), the tentative computation of taxable income (loss)

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(A) Computation of limitation on deductions and losses to offset income or gain . To determine the amount of the limitation under paragraph (c)(2)(i) of this section on S’s loss and the effect of the absorption of S’s loss on P’s basis in S’s stock under §1.1502–32(b), P’s gain or loss from the disposition of S’s stock is not taken into account. The group is tentatively treated as having a consolidated net operating loss of $50 (P’s $30 of income minus S’s $80 loss). Under the principles of §1.1502–21T(b)(2)(iv), all of such loss is attributable to S.

(B) Tentative adjustment of stock basis . Then, pursuant to paragraph (c)(2)(ii) of this section, §§1.1502–32 and 1.1502–32T are tentatively applied to adjust the basis of S stock. For this purpose, however, adjustments attributable to the excluded COD income and the reduction of attributes in respect thereof are not taken into account. Under §1.1502–32(b), the absorption of $30 of S’s loss decreases P’s basis in S’s stock by $30 to $60.

(C) Tentative computation of stock gain or loss . Then, P’s income, gain, or loss from the sale of S stock is computed pursuant to paragraph (c)(2)(iii) of this section using the basis computed in the previous step. Thus, P is treated as recognizing a $40 loss from the sale of S stock.

(D) Tentative computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(iv) of this section, taxable income (or loss) for the year of disposition (and any prior years to which the deductions or losses may be carried) is then tentatively computed, taking into account P’s $40 loss on the sale of the S stock computed pursuant to paragraph (c)(2)(iii) of this section. The group has a $50 consolidated net operating loss for Year 1 that, under the principles of §1.1502–21T(b)(2)(iv), is wholly attributable to S and a consolidated capital loss of $40 that, under the principles of §1.1502–21T(b)(2)(iv), is wholly attributable to P.

(E) Tentative reduction of attributes . Next, pursuant to paragraph (c)(2)(v) of this section, the rules of sections 108 and 1017 and §1.1502–28T are tentatively applied to reduce attributes remaining after the tentative computation of taxable income (or loss). Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S would first be reduced to take into account its $100 of excluded COD income. Accordingly, the consolidated net operating loss for Year 1 would be reduced by $50 to $0. Then, pursuant to §1.1502–28T(a)(4), S’s remaining $50 of excluded COD income would reduce the consolidated capital loss attributable to P of $40 by $40 to $0. The remaining $10 of excluded COD income would have no effect.

(F) Actual adjustment of stock basis . Pursuant to paragraph (c)(2)(vi) of this section, §§1.1502–32 and 1.1502–32T are applied to reflect the amount of S’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) and the excluded COD income tentatively applied to reduce attributes and the attributes reduced in respect of the excluded COD income pursuant to the previous step. Under §1.1502–32(b), the absorption of $30 of S’s loss, the application of $90 of S’s excluded COD income to reduce attributes of P and S, and the reduction of the $50 loss attributable to S in respect of the excluded COD income results in a positive adjust

taken into account as a result of the application of §§1.1502–19(c)(1)(iii)(B) and 1.1502–19T(b)(1). (ix) Actual reduction of attributes . Ninth, the rules of sections 108 and 1017 and §1.1502–28T are actually applied to reduce the attributes remaining after the actual computation of taxable income (or loss) pursuant to paragraph (c)(2)(viii) of this section.

(A) S or a lower-tier corporation re- alizes excluded COD income . If S or a lower-tier corporation of S realizes excluded COD income, the aggregate amount of excluded COD income that is applied to reduce attributes attributable to members other than S and any lower-tier corporation of S pursuant to this paragraph (c)(2)(ix) shall not exceed the aggregate amount of excluded COD income that was tentatively applied to reduce attributes attributable to members other than S and any lower-tier corporation of S pursuant to paragraph (c)(2)(v) of this section. The amount of the actual reduction of attributes attributable to S and any lower-tier corporation of S that may be reduced in respect of the excluded COD income of S or a lower-tier corporation of S shall not be so limited.

(B) A member other than S or a lower-tier corporation realizes excluded COD income . If a member other than S or a lower-tier corporation of S realizes excluded COD income, the aggregate amount of excluded COD income that is applied to reduce attributes (other than credits) attributable to S and any lower-tier corporation of S pursuant to this paragraph (c)(2)(ix) shall not exceed the aggregate amount of excluded COD income that was tentatively applied to reduce attributes (other than credits) attributable to S and any lower-tier corporation of S pursuant to paragraph (c)(2)(v) of this section. The amount of the actual reduction of attributes attributable to any member other than S and any lower-tier corporation of S that may be reduced in respect of the excluded COD income of S or a lower-tier corporation of S shall not be so limited.

(3) Special rules . (i) If the reduction of attributes attributable to a member is prevented as a result of a limitation described in paragraph (c)(2)(ix)(B) of this section, the excluded COD income that would have otherwise been applied to reduce such attributes is applied to re

duce the remaining attributes of the same type that are available for reduction under §1.1502–28T(a)(4), on a pro rata basis, prior to reducing attributes of a different type. The reduction of such remaining attributes, however, is subject to any applicable limitation described in paragraph (c)(2)(ix)(B) of this section.

(ii) To the extent S’s deductions and losses in the year of disposition (or those of a lower-tier corporation of S) cannot offset income or gain because of the limitation under paragraph (b) of this section or this paragraph (c) and are not reduced pursuant to sections 108 and 1017 and §1.1502–28T, such items are carried to other years under the applicable provisions of the Internal Revenue Code and regulations as if they were the only items incurred by S (or a lower-tier corporation of S) in the year of disposition. For example, to the extent S incurs an operating loss in the year of disposition that is limited and is not reduced pursuant to section 108 and §1.1502–28T, the loss is treated as a separate net operating loss attributable to S arising in that year.

(4) Definition of lower-tier corporation . A corporation is a lower-tier corporation of S if all of its items of income, gain, deduction, and loss (including the absorption of deduction or loss and the reduction of attributes other than credits) would be fully reflected in P’s basis in S’s stock under §1.1502–32.

(5) Examples . For purposes of the examples in this paragraph (c), unless otherwise stated, the tax year of all persons is the calendar year, all persons use the accrual method of accounting, the facts set forth the only corporate activity, all transactions are between unrelated persons, tax liabilities are disregarded, and no election under section 108(b)(5) is made. The principles of this paragraph (c) are illustrated by the following examples:

Example 1. Departing member realizes excluded COD income . (i) Facts . P owns all of S’s stock with a $90 basis. For Year 1, P has ordinary income of $30, and S has an $80 ordinary loss and $100 of excluded COD income from the discharge of non-intercompany indebtedness. P sells the S stock for $20 at the close of Year 1. As of the beginning of Year 2, S has Asset A with a basis of $0 and a fair market value of $20.

(ii) Analysis . The steps used to compute the group’s consolidated taxable income, to effect the reduction of attributes, and to compute the limitations on the use and reduction of attributes are as follows:

2004-15 I.R.B. 734 April 12, 2004

ment of $10 to P’s basis in the S stock. P’s basis in the S stock, therefore, is $100.

(G) Actual computation of stock gain or loss . Pursuant to paragraph (c)(2)(vii) of this section, P’s actual gain or loss on the sale of the S stock is computed using the basis computed in the previous step. Accordingly, P recognizes an $80 loss on the disposition of the S stock.

(H) Actual computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(viii) of this section, taxable income (or loss) is computed by taking into account P’s $80 loss from the sale of S stock. Before the application of §1.1502–28T, the group, therefore, has a consolidated net operating loss of $50 that is wholly attributable to S under the principles of §1.1502–21T(b)(2)(iv), and a consolidated capital loss of $80 that is wholly attributable to P under the principles of §1.1502–21T(b)(2)(iv).

(I) Actual reduction of attributes . Pursuant to paragraph (c)(2)(ix) of this section, sections 108 and 1017 and §1.1502–28T are then actually applied to reduce attributes remaining after the actual computation of taxable income (or loss). Pursuant to section 108(b)(4)(B) and §1.1502–28T(a), the consolidated net operating loss attributable to S under the principles of §1.1502–21T(b)(2)(iv) is reduced first. Accordingly, the operating loss for Year 1 that S would otherwise carry forward is reduced by $50 to $0. Then, pursuant to §1.1502–28T(a)(4), S’s remaining $50 of excluded COD income reduces consolidated tax attributes. In particular, without regard to the limitation imposed by paragraph (c)(2)(ix)(A) of this section, the $80 consolidated capital loss, which under the principles of §1.1502–21T(b)(2)(iv) is attributable to P, would be reduced by $50 from $80 to $30. However, the limitation imposed by paragraph (c)(2)(ix)(A) of this section prevents the reduction of the consolidated capital loss attributable to P by more than $40. Therefore, the consolidated capital loss attributable to P is reduced by only $40 in respect of S’s excluded COD income. The remaining $10 of excluded COD income has no effect.

Example 2 . Member other than departing mem- ber realizes excluded COD income . (i) Facts . P owns all of S1’s and S2’s stock. P’s basis in S2’s stock is $600. For Year 1, P has ordinary income of $30, S1 has a $100 ordinary loss and $100 of excluded COD income from the discharge of non-intercompany indebtedness, and S2 has $200 of ordinary loss. P sells the S2 stock for $600 at the close of Year 1. As of the beginning of Year 2, S1 has Asset A with a basis of $0 and a fair market value of $10.

(A) Computation of limitation on deductions and losses to offset income or gain . To determine the amount of the limitation under paragraph (c)(2)(i) of this section on S2’s loss and the effect of the absorption of S2’s loss on P’s basis in S2’s stock under §1.1502–32(b), P’s gain or loss from the sale of S2 stock is not taken into account. The group is tentatively treated as having a consolidated net operating loss of $270 (P’s $30 of income minus S1’s $100 loss and S2’s $200 loss). Consequently, $20 of S2’s loss from Year 1 is unlimited and $180 of S2’s loss from Year 1 is limited under paragraph (c)(2)(i) of this section.

(B) Tentative adjustment of stock basis . Then, pursuant to paragraph (c)(2)(ii) of this section, §§1.1502–32 and 1.1502–32T are tentatively applied to adjust the basis of S2 stock. For this purpose, however, adjustments to the basis of S2 stock attributable to the reduction of attributes in respect of S1’s excluded COD income are not taken into account. Under §1.1502–32(b), the absorption of $20 of S2’s loss decreases P’s basis in S2’s stock by $20 to $580.

(C) Tentative computation of stock gain or loss . Then, P’s income, gain, or loss from the disposition of S2 stock is computed pursuant to paragraph (c)(2)(iii) of this section using the basis computed in the previous step. Thus, P is treated as recognizing a $20 gain from the sale of the S2 stock.

(D) Tentative computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(iv) of this section, taxable income (or loss) for the year of disposition (and any prior years to which the deductions or losses may be carried) is then tentatively computed, taking into account P’s $20 gain from the sale of S2 stock. P’s $20 gain from the sale of S2’s stock is offset by $20 of S1’s loss. Therefore, the group is tentatively treated as having a consolidated net operating loss of $250, $70 of which is attributable to S1 and $180 of which is attributable to S2 under the principles of §1.1502–21T(b)(2)(iv).

(E) Tentative reduction of attributes . Next, pursuant to paragraph (c)(2)(v) of this section, the rules of sections 108 and 1017 and §1.1502–28T are tentatively applied to reduce attributes remaining after the tentative computation of taxable income (or loss). Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S1 would first be reduced to take into account its $100 of excluded COD income. Accordingly, the consolidated net operating loss for Year 1 would be reduced by $70, the portion of the consolidated net operating loss attributable to S1 under the principles of §1.1502–21T(b)(2)(iv), to $0. Then, pursuant to §1.1502–28T(a)(4), S1’s remaining $30 of excluded COD income would reduce the consolidated net operating loss attributable to S2 of $180 by $30 to $150.

(F) Actual adjustment of stock basis . Pursuant to paragraph (c)(2)(vi) of this section, §§1.1502–32 and 1.1502–32T are applied to reflect the amount of S2’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) and the excluded COD income tentatively applied to reduce attributes and the attributes reduced in respect of the excluded COD income pursuant to the previous step. Under §1.1502–32(b), the absorption of $20 of S2’s loss and the application of $30 of S1’s excluded COD income to reduce attributes attributable to S2 results in a negative adjustment of $50 to P’s basis in the S2 stock. P’s basis in the S2 stock, therefore, is $550.

(G) Actual computation of stock gain or loss . Pursuant to paragraph (c)(2)(vii) of this section, P’s actual gain or loss on the sale of the S2 stock is computed using the basis computed in the previous step. Therefore, P recognizes a $50 gain on the disposition of the S2 stock.

S2 stock. Before the application of §1.1502–28T, therefore, the group has a consolidated net operating loss of $220, $40 of which is attributable to S1 and $180 of which is attributable to S2 under the principles of §1.1502–21T(b)(2)(iv).

(I) Actual reduction of attributes . Pursuant to paragraph (c)(2)(ix) of this section, sections 108 and 1017 and §1.1502–28T are then actually applied to reduce attributes remaining after the actual computation of taxable income (or loss). Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S1 must first be reduced to take into account its $100 of excluded COD income. Accordingly, pursuant to section 108(b)(4)(B) and §1.1502–28T(a), the net operating loss attributable to S1 under the principles of §1.1502–21T(b)(2)(iv) is reduced first. The consolidated net operating loss for Year 1 is reduced by $40, the portion of the consolidated net operating loss attributable to S1 under the principles of §1.1502–21T(b)(2)(iv), to $0. Then, pursuant to §1.1502–28T(a)(4), without regard to the limitation imposed by paragraph (c)(2)(ix)(B) of this section, S1’s remaining $60 of excluded COD income would reduce S2’s net operating loss of $180 to $120. However, the limitation imposed by paragraph (c)(2)(ix)(B) of this section prevents the reduction of S2’s loss by more than $30. Therefore, S2’s loss of $180 is reduced by $30 to $150 in respect of S1’s excluded COD income. The remaining $30 of excluded COD income has no effect.

Example 3 . Lower-tier corporation of departing member realizes excluded COD income . (i) Facts . P owns all of S1’s stock, S2’s stock, and S3’s stock. S1 owns all of S4’s stock. P’s basis in S1’s stock is $50 and S1’s basis in S4 stock is $50. For Year 1, P has $50 of ordinary loss, S1 has $100 of ordinary loss, S2 has $150 of ordinary loss, S3 has $50 of ordinary loss, and S4 has $50 of ordinary loss and $80 of excluded COD income from the discharge of non-intercompany indebtedness. P sells the S1 stock for $100 at the close of Year 1. As of the beginning of Year 2, S4 has Asset A with a basis of $0 and a fair market value of $10.

(A) Computation of limitation on deductions and losses to offset income or gain . To determine the amount of the limitation under paragraph (c)(2)(i) of this section on S1’s and S4’s losses and the effect of the absorption of S1’s and S4’s losses on P’s basis in S1’s stock under §1.1502–32(b), P’s gain or loss from the disposition of S1’s stock is not taken into account. The group is tentatively treated as having a consolidated net operating loss of $400. Consequently, $100 of S1’s loss and $50 of S4’s loss is limited under paragraph (c)(2)(i) of this section.

(B) Tentative adjustment of stock basis . Then, pursuant to paragraph (c)(2)(ii) of this section, §§1.1502–32 and 1.1502–32T are tentatively applied to adjust the basis of S stock. For this purpose, adjustments to the basis of S1 stock attributable to S4’s realization of excluded COD income and the reduction of attributes in respect of such excluded COD income are not taken into account. There is no adjustment under §1.1502–32 to the basis of the S1 stock. Therefore, P’s basis in the S1 stock for this purpose is $50.

April 12, 2004 735 2004-15 I.R.B.

(C) Tentative computation of stock gain or loss . Then, P’s income, gain, or loss from the sale of S1 stock is computed pursuant to paragraph (c)(2)(iii) of this section using the basis computed in the previous step. Thus, P is treated as recognizing a $50 gain from the sale of the S1 stock.

(D) Tentative computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(iv) of this section, taxable income (or loss) for the year of disposition (and any prior years to which the deductions or losses may be carried) is tentatively computed, taking into account P’s $50 gain from the sale of the S1 stock computed pursuant to the previous step. P’s $50 gain from the sale of the S1 stock is offset by $10 of P’s loss, $30 of S2’s loss, and $10 of S3’s loss. Therefore, the group is tentatively treated as having a consolidated net operating loss of $350, $40 of which is attributable to P, $100 of which is attributable to S1, $120 of which is attributable to S2, $40 of which is attributable to S3, and $50 of which is attributable to S4 under the principles of §1.1502–21T(b)(2)(iv).

(E) Tentative reduction of attributes . Next, pursuant to paragraph (c)(2)(v) of this section, the rules of sections 108 and 1017 and §1.1502–28T are tentatively applied to reduce attributes remaining after the tentative computation of taxable income (or loss). Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S4 would first be reduced to take into account its excluded COD income in the amount of $80. Accordingly, the consolidated net operating loss attributable to S4 would be reduced by $50 to $0. Then, pursuant to §1.1502–28T(a)(4), S4’s remaining $30 of excluded COD income would reduce the consolidated net operating loss for Year 1 that is attributable to other members. Therefore, the consolidated net operating loss for Year 1 would be reduced by $30. Of that amount, $4 is attributable to P, $10 is attributable to S1, $12 is attributable to S2, and $4 is attributable to S3.

(F) Actual adjustment of stock basis . Pursuant to paragraph (c)(2)(vi) of this section, §§1.1502–32 and 1.1502–32T are applied to reflect the amount of S1’s and S4’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) and the excluded COD income tentatively applied to reduce attributes and the attributes reduced in respect of the excluded COD income pursuant to the previous step. Under §1.1502–32(b), the application of $80 of S4’s excluded COD income to reduce attributes, and the reduction of S4’s loss in the amount of $50 and S1’s loss in the amount of $10 in respect of the excluded COD income results in a positive adjustment of $20 to P’s basis in the S1 stock. Accordingly, P’s basis in S1 stock is $70.

(G) Actual computation of stock gain or loss . Pursuant to paragraph (c)(2)(vii) of this section, P’s actual gain or loss on the sale of the S1 stock is computed using the basis computed in the previous step. Accordingly, P recognizes a $30 gain on the disposition of the S1 stock.

(H) Actual computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(viii) of this section, the group’s taxable income or loss is then computed by taking into account P’s $30 gain from the sale of S1 stock. Before the application of §1.1502–28T, therefore, the group has a consolidated net operating loss of $370, $44 of which is

attributable to P, $100 of which is attributable to S1, $132 of which is attributable to S2, $44 of which is attributable to S3, and $50 of which is attributable to S4.

(I) Actual reduction of attributes . Pursuant to paragraph (c)(2)(ix) of this section, sections 108 and 1017 and §1.1502–28T are then actually applied to reduce attributes remaining after the actual computation of taxable income (or loss). Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S4 must first be reduced to take into account its $80 of excluded COD income. Accordingly, the consolidated net operating loss attributable to S4 is reduced by $50 to $0. Then, pursuant to §1.1502–28T(a)(4), S4’s remaining $30 of excluded COD income reduces the consolidated net operating loss for Year 1. Therefore, without regard to the limitation imposed by paragraph (c)(2)(ix)(B) of this section, the consolidated net operating loss for Year 1 would be reduced by $30 ($4.12 of the consolidated net operating loss attributable to P, $9.38 of the consolidated net operating loss attributable to S1, $12.38 of the consolidated net operating loss attributable to S2, and $4.12 of the consolidated net operating loss attributable to S3) to $290. However, the limitation imposed by paragraph (c)(2)(ix)(B) of this section prevents the reduction of the consolidated net operating loss attributable to P, S2, and S3 by more than $4, $12, and $4 respectively. The $.62 of excluded COD income that would have otherwise reduced the consolidated net operating loss attributable to P, S2, and S3 is applied to reduce the consolidated net operating loss attributable to S1. Therefore, S1 carries forward $90 of loss.

Example 4 . Excess loss account taken into ac- count . (i) Facts . P is the common parent of a consolidated group. On Day 1 of Year 2, P acquired all of the stock of S1. As of the beginning of Year 2, S1 had a $30 net operating loss carryover from Year 1, a separate return limitation year. A limitation under §1.1502–21(c) applies to the use of that loss by the P group. For Years 1 and 2, the P group had no consolidated taxable income or loss. On Day 1 of Year 3, S1 acquired all of the stock of S2 for $10. In Year 3, P had ordinary income of $10, S1 had ordinary income of $25, and S2 had an ordinary loss of $50. In addition, in Year 3, S2 realized $20 of excluded COD income from the discharge of non-intercompany indebtedness. After the discharge of this indebtedness, S2 had no liabilities. As of the beginning of Year 4, S2 had Asset A with a basis of $0 and a fair market value of $10. S2 had no taxable income (or loss) for Year 1 and Year 2.

(A) Computation of limitation on deduction and losses to offset income or gain, tentative basis ad- justments, tentative computation of stock gain or loss . Because it is not initially apparent that there has been a disposition of stock, paragraph (c)(2)(i) of this section does not limit the use of deductions to offset income or gain, no adjustments to the basis are required pursuant to paragraph (c)(2)(ii) of this section, and no stock gain or loss is computed pursuant to paragraph (c)(2)(iii) of this section or taken into account in the tentative computation of taxable income pursuant to paragraph (c)(2)(iv) of this section.

(B) Tentative computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(iv) of this section, the group’s taxable income (or loss) for Year 3 (and any prior years to which the deductions or losses may be carried) is tentatively computed. For Year 3, the P group has a consolidated taxable loss of $15, all of which is attributable to S2 under the principles of §1.1502–21T(b)(2)(iv).

(C) Tentative reduction of attributes . Next, pursuant to paragraph (c)(2)(v) of this section, the rules of sections 108 and 1017 and §1.1502–28T are tentatively applied to reduce attributes remaining after the tentative computation of consolidated taxable loss. Pursuant to §1.1502–28T(a)(2), the tax attributes attributable to S2 would first be reduced to take into account its excluded COD income of $20. Accordingly, the net operating loss attributable to S2 under the principles of §1.1502–21T(b)(2)(iv) is reduced first. Therefore, the consolidated net operating loss for Year 3 is reduced by $15, the portion of the consolidated net operating loss attributable to S2, to $0. The remaining $5 of excluded COD income is not applied to reduce attributes as there are no remaining attributes that are subject to reduction.

(D) Actual adjustment of stock basis . Pursuant to paragraph (c)(2)(vi) of this section, §§1.1502–32 and 1.1502–32T are applied to reflect the amount of S2’s unlimited deductions and losses that are absorbed in the tentative computation of taxable income (or loss) for the year of the disposition (and any prior years to which the deductions or losses may be carried) and the excluded COD income tentatively applied to reduce attributes and the attributes reduced in respect of the excluded COD income pursuant to the previous step. Pursuant to §§1.1502–32 and 1.1502–32T, the absorption of $35 of S2’s loss, the application of $15 in respect of S2’s excluded COD income to reduce attributes, and the reduction of $15 in respect of the loss attributable to S2 reduced in respect of the excluded COD income results in a negative adjustment of $35 to the basis of the S2 stock. Therefore, S1 has an excess loss account of $25 in the S2 stock.

(E) Actual computation of stock gain or loss . Pursuant to paragraph (c)(2)(vii) of this section, S1’s actual gain or loss, if any, on the S2 stock is computed. Because S2 realized $5 of excluded COD income that was not applied to reduce attributes, pursuant to §§1.1502–19(c)(1)(iii)(B) and 1.1502–19T(b)(1), S1 is required to take into account $5 of its excess loss account in the S2 stock.

(F) Actual computation of taxable income (or loss) . Pursuant to paragraph (c)(2)(viii) of this section, the group’s taxable income or loss is computed taking into account the $5 of the excess loss account in the S2 stock required to be taken into account. See §1.1502–28T(b)(6) (requiring an excess loss account that is required to be taken into account as a result of the application of §1.1502–19(c)(1)(iii)(B) to be included in the group’s consolidated taxable income for the year that includes the date of the debt discharge). However, pursuant to paragraph (c)(2)(viii) of this section, such amount may not be offset by any of the consolidated net operating loss attributable to S2. It may, however, subject to applicable limitations, be offset by the separate net operating loss of S1 from Year 1.

(G) Actual reduction of attributes . Pursuant to paragraph (c)(2)(ix) of this section, sections 108 and 1017 and §1.1502–28T are then actually applied to

2004-15 I.R.B. 736 April 12, 2004

August 29, 2003, but only if the discharge occurs during a taxable year the original return for which is due (without regard to extensions) after March 12, 2004. However, groups may apply paragraphs (b)(4), (b)(5), and (b)(6)(ii) of this section to discharges of indebtedness that occur after August 29, 2003, and during a taxable year the original return for which is due (without regard to extensions) on or before March 12, 2004.

(4) Paragraphs (b)(6)(i) and (b)(7) of this section apply to discharges of indebtedness that occur after August 29, 2003, but only if the discharge occurs during a taxable year the original return for which is due (without regard to extensions) after the date these regulations are published as temporary or final regulations in the Fed- eral Register . However, groups may apply paragraphs (b)(6)(i) and (b)(7) of this section to discharges of indebtedness that occur after August 29, 2003, and during a taxable year the original return for which is due (without regard to extensions) on or before the date these regulations are published as temporary or final regulations in the Federal Register .

- - - Par. 5. The last sentence of paragraph (c) of §1.1502–80 is revised to read as follows:

§1.1502–80 Applicability of other provisions of law.

- - - (c) - - - See §§1.1502–11(d) and 1.1502–35T for additional rules relating to stock loss.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on March 12, 2004, 8:45 a.m., and published in the issue of the Federal Register for March 15, 2004, 69 F.R. 12091)

Foundations Status of Certain Organizations

Announcement 2004–25

The following organizations have failed to establish or have been unable to maintain their status as public charities or as op

reduce attributes remaining after the actual computation of taxable income (or loss). Attributes will be actually reduced in the same way that they were tentatively reduced.

(6) Additional rules for multiple dispo- sitions . [Reserved].

(7) Effective date . This paragraph (c) applies to dispositions of subsidiary stock that occur after the date these regulations are published as temporary or final regulations in the Federal Register . Taxpayers may apply this paragraph (c), as contained in these proposed regulations, in whole, but not in part, to any disposition of subsidiary stock that occurs before the date these regulations are published as temporary or final regulations in the Federal Register .

Par. 3. Section 1.1502–13 is revised to read as follows:

§1.1502–13 Intercompany transactions.

[The text of this proposed section is the same as the text of §1.1502–13T(g)(3)(ii)(B) published elsewhere in this issue of the Bulletin].

Par. 4. Section 1.1502–28 is amended to read as follows:

Adding paragraphs (b)(4), (b)(5), (b)(6) and (b)(7).
Revising paragraph (d).
The additions and revision read as follows:

§1.1502–28 Consolidated section 108.

- - - (b)(4) and (5) [The text of paragraphs (b)(4) and(5) is the same as the text of §1.1502–28T(b)(4) and (5) published elsewhere in this issue of the Bulletin].

(6) Taking into account of excess loss account —(i) Determination of inclusion . The determination of whether any portion of an excess loss account in a share of stock of a subsidiary that realizes excluded COD income is required to be taken into account as a result of the application of §1.1502–19(c)(1)(iii)(B) is made after the determination of taxable income (or loss) for the year during which the member realizes excluded COD income (without regard to whether any portion of an excess loss account in a share of the subsidiary is required to be taken into account) and any prior years to which the deductions or losses of the subsidiary may be carried, after the reduction of tax attributes pursuant

to sections 108 and 1017, and this section, and after the adjustment of the basis of the share of stock of the subsidiary pursuant to §1.1502–32 to reflect the amount of the subsidiary’s deductions and losses that are absorbed in the computation of taxable income (or loss) for the year of the disposition and any prior years to which the deductions or losses may be carried, and the excluded COD income applied to reduce attributes and the attributes reduced in respect thereof. See §1.1502–11(c) for special rules related to the computation of taxable income (or loss) that apply when an excess loss account is required to be taken into account.

(ii) [The text of paragraph (b)(6)(ii) is the same as the text of §1.1502–28T(b)(6)(ii) published elsewhere in this issue of the Bulletin].

- - - (7) Dispositions of stock . See §1.1502–11(c) for limitations on the reduction of tax attributes when a member disposes of stock of another member (including dispositions that result from the application of §1.1502–19(c)(1)(iii)(B)) during a taxable year in which any member realizes excluded COD income.
- - - (d) Effective dates . (1) This section, other than paragraphs (a)(4), (b)(4), (b)(5), (b)(6), and (b)(7) of this section, applies to discharges of indebtedness that occur after August 29, 2003.

(2) Paragraph (a)(4) of this section applies to discharges of indebtedness that occur after August 29, 2003, but only if the discharge occurs during a taxable year the original return for which is due (without regard to extensions) after December 11, 2003. However, groups may apply paragraph (a)(4) of this section to discharges of indebtedness that occur after August 29, 2003, and during a taxable year the original return for which is due (without regard to extensions) on or before December 11, 2003. For discharges of indebtedness that occur after August 29, 2003, and during a taxable year the original return for which is due (without regard to extensions) on or before December 11, 2003, paragraph (a)(4) of this section shall apply as in effect on August 29, 2003.

(3) Paragraphs (b)(4), (b)(5), and (b)(6)(ii) of this section apply to discharges of indebtedness that occur after

April 12, 2004 737 2004-15 I.R.B.

Bishop Bush Home Care, Clinton, MD Black College Information Network, Inc.,

Washington, DC Black West Presentations, Inc.,

Harrisonville, MO Bobby Zipper Foundation, Inc.,

Baltimore, MD Bolling View Corporation, Inc.,

Washington, DC Boys and Girls Club of Dane County, Inc.,

Madison, WI Branson Gospel Music Association,

Branson, MO Bread of Life Ministries International,

Inc., Burnsville, MN Brice Transitional Care Home, Inc.,

Baltimore, MD Brighton Lions Community Den,

Brighton, MI Buchanan County Humane Society,

Vansant, VA Buffalo KS Historical Society, Inc.,

Buffalo, KS Building Eminence Schools for

Tomorrow, Eminence, MO Busy Bee Early Learning Center, Inc.,

Linden, NJ Butler County Veterans Memorial Fund,

Poplar Bluff, MO Butler Youth Wrestling Club, Butler, MO C D E O, Laytonsville, MD Cadott Hunter-Education Association,

Inc., Cadott, WI Calumet County Tourism Association,

Inc., Chilton, WI Cameras for Students, Silver Spring, MD Camp Crystal Foundation, St. Louis, MO Camp Grayling Historical Society,

Camp Grayling, MI Cannon Vermillion Watersheds Protection

League, Welch, MN Capital Area Astronomy Association,

Potterville, MI Capital Press Club, Washington, DC Carlton Corporation I, Milwaukee, WI Carpenter Medical Publishing, Inc.,

Washington, DC Carroll County Genealogical Association,

Carrollton, MO Carrollsburg Residence Council, Inc.,

Washington, DC Caryl Proud Horty Scholarship Fund Tr.,

Wilmington, DE Cat Wrestling Club, Inc., Cedar Falls, IA Cedar Vale Teen Center, Inc.,

Cedar Vale, KS Celebration of Life Art Program,

Minneapolis, MN

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 section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

1–2–3 Health Access, Inc., Milwaukee, WI 31st December Womens Movement, Washington, DC 1898 Foundation, Inc., Rockville, MD ABC XXI-Child Awareness Program for

Poland, Inc., Alexandria, VA Academy of Missouri Educational

Network of Graduate Dogs, Inc., Warrenton, MO Accept the Challenge, Inc.,

Minneapolis, MN Achievements Worldwide, Inc.,

Waldorf, MD Adopt a Grandparent Foundation,

Fairfield, IA AFD Foundation, Inc., Southfield, MI African American Institute for

Empowerment, Inc., Waterbury, CT African Heritage Foundation, Inc.,

Washington, DC African Wholistic Health Association,

Washington, DC Afrikan Rites of Passage Delaware

Kollective, Inc., Wilmington, DE Alva Consortium, Inc., Washington, DC Amani Clergy Coalition, Milwaukee, WI America-China International Exchange

Foundation, Inc., Washington, DC American Charities Research Institute,

Lincoln, NE American Heritage Rivers Alliance, Inc.,

Washington, DC American Recreational Services

Association, Inc., Twin Falls, ID American Service Dog Association,

Manchester, MO American Submarine Memorial

Restoration Foundation, Inc., Fairfax, VA

Americans for Self Determination, Inc.,

Arlington, VA Angels for Children Foundation,

Incorporated, Northfield, MN Apex Booster Club, Roseland, KS Apocalypse Outreach Center, Inc.,

White Pigeon, MI Apostolic Ministerial Alliance, Inc.,

Randallstown, MD Ariadne Press of Maryland, Inc.,

Rockville, MD Ark of Safety Center, Inc., St. Louis, MO Arka Ballet, Takoma Park, MD Arrowhead Regional Entrepreneurship

Project, Inc., Duluth, MN Artist on the Edge Ice Theater Company,

Minneapolis, MN Asnew Disability Support Services,

Ames, IA Association for Children and Infants With

Digestive Disorders, Newark, DE B. Tate Hibschman Memorial Scholarship

Fund, Inc., Abingdon, MD Backroads for Books, Olathe, KS Baldwin City Clear Foundation,

Baldwin City, KS Baltimore Committee for International

Wrestling, Inc., Cockeysville, MD Baltimore Select, Inc., Baltimore, MD Baltimore Teacher Network,

Baltimore, MD Bandoneon Association, Incorporated,

Bethesda, MD Bangladeshi-American Foundation, Inc.,

Potomac, MD Baraboo Firefighters Fundraising

Association, Inc., Baraboo, WI Bea Gaddy Human Resources Center,

Inc., Baltimore, MD Beer Museum, Ltd., Oconomowoc, WI Beginning Environment for Addiction

Recovery, Fargo, ND Bel Sogno, Inc., Waleska, GA Benevolence Alliance International, Inc.,

West Union, IA Benjamin Welch Owens Monument Fund,

Inc., Upper Marlboro, MD Berkley Community League, Inc.,

Norfolk, VA Bertha Hughes Concert Series, Inc.,

Topeka, KS Bethel A M E Church Foundation, Inc.,

Ann Arbor, MI Better Community Foundation,

Clayton, MO Bible Search Publications, Inc.,

Winona, MN Bigga Enterprises, Inc., St. Louis, MO

2004-15 I.R.B. 738 April 12, 2004

Educational Discovery Programming,

Washington, DC Elishas Rock Educational, Inc.,

Columbia, MO Emmanuel Ministries International, Inc.,

Baltimore, MD Enter the Walls Ministry, Ltd.,

Suitland, MD Environment Development and

Educational Fund, Washington, DC Ethiopian Gospel Mission Association

NC, Arlington, VA Excellence in Catholic & Christian

Education, Inc., Alexandria, VA Exodus, Isanti, MN Experiential Endeavors, Inc.,

Columbia, MO Faith Builders S D A International Corp.,

Metairie, LA Family Harbor, Omaha, NE Family Recreational Park of Georgetown,

Georgetown, DE Family Violence Council of the City of

St. Louis, St. Louis, MO Family Watch, Alexandria, VA First Presbyterian Church of Ferguson

Transitional Housing Corp., Ferguson, MO First Promise Foundation, Inc.,

Pawleys, SC First State YHEC Program, Inc.,

Hockessin, DE Fish Rod, Inc., Washington, DC Fishes & Loaves from Jesus Christ, Inc.,

Fargo, ND Fleming Huner Foundation, Inc.,

Randallstown, MD Florida Avenue Renaissance Project, Inc.,

Washington, DC Fort Dodge Senior High Choir Boosters,

Inc., Fort Dodge, IA Foundation for Global Catholic

Communications, Washington, DC Foundation for Sustainable Development

With Human Values, Inc., Washington, DC Four Chaplains Foundation,

Minneapolis, MN Franciscan Servants of Jesus, Prescott, WI Franklin County Youth Athletic

Association, Inc., Washington, MO Freedom Fest Celebration, Inc.,

Earlham, IA Friends Foundation, Annapolis, MD Friends of Carter Rockwell Museum,

New Hope, MN Friends of Governor Nelson State Park,

Inc., Madison, WI

Center for Humanity,

Montgomery Village, MD Center for Patient Advocacy Foundation,

McLean, VA Center for Timett, Inc., Howell, NJ Center for Workers Compensation

Studies, Inc., Lacey, WA Champbuilder Amateur Wrestling, Inc.,

Middleton, WI Changing Faces, Inc., Baltimore, MD Charles County Community Youth Center,

Inc., Bryantown, MD Chesapeake Deep Creek Hornets AAU

Baseball Club, Chesapeake, VA Chesapeake Dispute Resolution Center,

Inc., Annapolis, MD Chesapeake Habit Restoration Trust,

Silver Spring, MD Child Access Center, Inc., Baltimore, MD Child Care Development, Inc.,

Wichita, KS Child Intervention Center, Superior, WI Childrens Book Bank, Kalamazoo, MI Childrens Community Foundation,

Shawnee Mission, KS Childrens Rainbow Foundation,

Parkville, MO Childs Eyes Ministries, Hart, MI Chilton Youth Football Association, Inc.,

Hilbert, WI Choice Leaders of Tomorrow, Inc.,

St. Louis, MO Christ the King Institute Women

Auxiliary and Legionary Group, Silver Spring, MD Christian Foundation, Inc., Madison, WI Christian Law Enforcement Fellowship,

Ann Arbor, MI Citizens for Learning Everything-Amoco

Negligence & Underground Clean Up, Sugar Creek, MO Coldwater Scholarship Bowling, Inc.,

Coldwater, MI Colesville Sports Association,

Silver Spring, MD Combat Disabled American Veterans,

Stacy, MN Community Care Programs, Inc.,

Middleton, WI Community Caring for People, Inc.,

Sterling, VA Community Credit Counseling Services,

Inc., Beltsville, MD Community Development Corporation of

Benton Harbor, Benton Harbor, MI Community Institute for Family

Resources, Inc., Milwaukee, WI

Community Stabilization,

Los Angeles, CA Comparative Government Forum,

Washington, DC Conrath Housing, Inc., Almena, WI Contemplative Outreach of Metropolitan

Washington, Inc., Washington, DC Core City Planning Group,

Des Moines, IA Council for Global Education,

Kingstowne, VA Crayon, Inc., Milwaukee, WI Creative Writing Education Foundation,

Inc., Green Bay, WI Crime Victims for a Just Society,

Mason, MI Cross Border Network for Justice and

Solidarity, Kansas City, MO Cross Foundation, Inc., Baltimore, MD Crossing Ministries, St. Paul, MN Crow River BMX, Inc.,

Saint Michael, MN CSE Foundation Corporation,

New Berlin, WI Cuyuna Range Fire Chiefs Association,

Brainerd, MN CWE Housing Corporation,

St. Louis, MO D C Parents for School Choice,

Washington, DC D L Youth Wrestling Organization, Inc.,

Detroit Lakes, MN Damali, Inc., Capitol Heights, MD Daniel Boone Baseball Association,

St. Peters, MO Danville Soccer Club, Inc., Danville, VA David Goliath Foundation, Inc.,

Saint Louis, MO Daystar Commission, Des Moines, IA Deaf Choices, Inc., Minneapolis, MN Deaf Services Foundation, Inc.,

Grand Island, NE Derrick Hale Foundation, Detroit, MI Dining on the Word Ministries,

Houston, MS Direct Impact 10–40, South St. Paul, MN Directors of Continuation Services, Inc.,

Milwaukee, WI Dwayne Friend Crusades, Inc.,

Rogersville, MO East Buchanan Parent Teacher

Organization PTO, Winthrop, IA East Troy Area Lakes Land Trust, Inc.,

East Troy, MI Economic Development Forum,

Southfield, MI Edina Youth Softball Association,

Edina, MN

April 12, 2004 739 2004-15 I.R.B.

India Forum for Liberty & Justice, Inc.,

Takoma Park, MD Indigenous Games Sports and Events

Management, Fargo, ND Indigenous Stewardship Systems,

Manderson, SD Inter-Agency Council on Child Abuse and

Neglect, Columbia, MO Intercollegiate Taiwanese American

Students Association, Providence, RI Interfacing, Sewickley, PA International Charitable Assistance

Council, Inc., Rockville, MD International Fund for the 21st Century,

Southgate, MI International Society of Agile

Manufacturing, Lafayette, LA Intersection, Maple Grove, MN Islamic Knowledge Services, Inc.,

Chesterfield, MO Iyas Community House, Detroit, MI Jacobs Ladder, Inc., St. Louis, MO James Madison Project, Washington, DC Jasper County Youth Fair Foundation,

Inc., Joplin, MO Joshua M. Gordon SMA Foundation, Inc.,

Rockville, MD Journeymakers, Urbandale, IA Juma Trust, Inc., New York, NY Kansans Respond, Topeka, KS Kansas City Arts Initiative, Inc.,

Kansas City, MO Kansas City International Art Museum,

Inc., Kansas City, MO Kansas Mental Health Association,

Topeka, KS Karl Potach Foundation, Austin, MN KC Fury, Inc., De Soto, KS Kendall Burrows Foundation, Inc.,

Lutherville, MD Kickapoo Color Guard Booster Club,

Springfield, MO Kids N Bits Therapeutic Riding Program,

Teays, WV Kidsway Booster Club, Coffeyville, KS Kidzarts, Inc., Manitowoc, WI KK and Friends, Inc., Rockville, MD Kujichagulia, Inc., Baltimore, MD L Eagles, Inc., Olathe, KS Lakes Area Not for Profit Council,

Branson W, MO Langston Dwelling Resident Council

Foundation, Silver Spring, MD Last Call Ministries, Lincoln, NE Lavista West Parent Auxiliary Wolf Staff,

Lavista, NE Leading Image Development Corporation,

Clinton, MD

Friends of India, Inc., Hyattsville, MD Friends of Quivira National Wildlife

Refuge, Inc., St. John, KS Friends of Takoma Recreation Center,

Washington, DC Friends of the Babbitt Public Library, Inc.,

Babbitt, MN Friends of the Collins Public Library,

Collins, IA Friends of the Madison County Fair,

Madison, NE Friends of the National Institute of

Dental & Craniofacial Research, Washington, DC Friends of the Saline Area Fire

Department, Inc., Ypsilanti, MI Friends of Thomas G. Pullen K-8 Arts

Magnet School, Inc., Bethesda, MD Friends of Wilderness Park, Inc.,

Lincoln, NE Friends Project, Inc., Washington, DC From House to Home, Inc.,

Baltimore, MD Frontier Wild, Ankeny, IA Future Foundation Home, Inc.,

Milwaukee, WI Garden Community Development, Inc.,

Wilmington, DE Gathered in His Name, Perryville, MO Genesis Company USA, Lebanon, MO Genesis Ministries, Inc., St. Albans, WV Georgetown MBA Community Service

Fund, Washington, DC German Shepherd Rescue of Maryland,

Inc., Riverdale, MD Ghana Health Foundation,

Washington, DC Gibson-Chestnut Eney Memorial

Tournament, Inc., Arlington, VA Gibson Network, Inc., Minneapolis, MN Glenville-Emmons School & Community

Foundation, Inc., Glenville, MN Global Development Center,

Washington, DC Global Youth Development, Inc.,

Kansas City, MO Glorious Light Christian Foundation,

Newark, DE Gods Wheels, Inc., Kansas City, MO Good Samaritan Assisted Living, Inc.,

St. Louis, MO Good Samaritan Independent Living, Inc.,

Valley Park, MO Good Samaritan Network of Maryland,

Front Royal, VA Goshen Staff Alumni Association, Inc.,

Gaithersburg, MD

Gospel Music Arts Coalition,

St. Louis, MO Government Training Institute

Foundation, Inc., Alexandria, VA Granville Sharpe Institute, Inc.,

Lanham, MD Great Lakes Ancient Field Musick,

Ray, MI Greater Harvest Housing Corp.,

Baltimore, MD Green Central Safe Haven,

Minneapolis, MN Greenmount Computer Center, Inc.,

Baltimore, MD Gretna Gro Foundation, Gretna, NE Grodno Genealogy Group, Inc.,

Minneapolis, MN Ground Zero Foundation, Bear, DE Gwendolyn, Inc., Salisbury, NC Hallsville Community Betterment,

Hallsville, MO Hampton Roads Youth Foundation,

Alexandria, VA Harpers Ferry Conservancy,

Harpers Ferry, WV Haven of Hope, Kansas City, MO Hayman House, Inc., New Castle, DE Health and Wealth Group of Maryland,

Columbia, MD Healthcare Roundtable Institute,

Westlake Village, CA Heartland Peony Society,

Kansas City, MO Helping Hand of Goodwill Industries of

Kansas, Inc., Topeka, KS Heritage Achievement Foundation,

Centreville, VA Herlihy Resident Council, Inc.,

Wilmington, DE Hesperia Fire Department Auxiliary,

Hesperia, MI Hesston Area Teens, Inc., Hesston, KS Historic Educational Concepts, Inc.,

Salem, MO Historic Fell Point Foundation, Inc.,

Baltimore, MD Hospitality Center for Renewed Hope,

Inc., Timonium, MD Humanitarian Relief Foundation of

the Am Cham Dominican Republic, Washington, DC HWS Therapy, Inc., Wichita, KS Impact Twin Cities, Inc., St. Paul, MN Inca Imports Corp., Warrenton, VA Independence Neighborhood Watch, Inc.,

Independence, MO Independent Demining Assessment

Center, Inc., Washington, DC

2004-15 I.R.B. 740 April 12, 2004

Northern Waters Library Foundation, Inc.,

Ashland, WI Northland Family & Children Support

Council, Inc., Kansas City, MO Northside Inner City Environmental Task

Force, Minneapolis, MN Northwest Middle Schools Cheerleading

Association, High Ridge, MO Not Failing at Life, Arthurdale, WV Olrayma, Inc., St. Louis, MO Omaha Elite Girls Fastpitch Association,

Omaha, NE Omaha World Herald Branching Out

Charitable Foundation, Omaha, NE Ondo Grammar School Old Students

Association, Washington, DC One Step Ahead Day Care, Inc.,

Racine, WI Open Word Teaching Ministries,

Maryland Heights, MO Our Savior Lutheran Church Foundation,

Wayne, NE Outside the Walls Foundation, Eagan, MN Ozark Competition Soccer League, Inc.,

Webb City, MO Ozarks Angels Basketball, Inc.,

Springfield, MO Page County Senior Alliance, Inc.,

Luray, VA Pamaro Arts Society, Overland Park, KS Parenting 2000, Inc., Clayton, MO Parish Net, Inc., Kensington, MD Parish Nurse Institute, Minneapolis, MN Paws for People, Blaine, MN Penelope 38 Charitable Tr., Elkhart, IA Peoples Alternative Service System, Inc.,

Baltimore, MD Philantrotech, Inc., Lowell, MI Pinckney Community Center,

Pinckney, MI Pine Island Union for Youth, Inc.,

Pine Island, MN Pioneer Acres Lodge, Inc., Appleton, WI Play for Peace, Washington, DC Playmates Christian Learning Center,

Fargo, ND Plymouth Westside Players,

Plymouth, MN Polish Heritage Society of Nebraska, Inc.,

Papillion, NE Pop Sustainability, Inc., New York, NY Prairie Haven, Inc., Sioux City, IA Preservation Management Institute,

Monticello, MN Pro K9, Inc., Omaha, NE Professor Pockets Ministries, Inc.,

Poca, WV

Lean on Me Community Services and

Outreach, Dallas, TX Life Changers, Inc., Newport, DE Lift for Life, Peculiar, MO Light Up the Bridges, Inc.,

Charleston, WV Lincoln Park Historical Foundation, Inc.,

Rockville, MD Linn County Community Foundation,

La Cygne, KS Literacy Roundtable, St. Louis, MO Logan Community Foundation, Logan, IA Lome Foundation, Inc., Gaithersburg, MD Lord & Svensen, Inc., Delavan, WI Loudoun Heritage Farm Museum,

Leesburg, VA Madison Idea Foundation, Inc.,

Madison, WI Madison Revitalization and Community

Development Corporation, Madison, WI Magic City Junior Golf Association,

Minot, ND Mahkato Mdewakanton Association,

St. Paul, MN Main Street Revue, Inc., Coleman, WI Manhattan Area Football Association,

Manhattan, KS Marko Foundation, Ltd.,

Clinton Township, MI Martial Arts Serving Kids, Excelsior, MN Maryland Family Christian Center

Church, Capitol Heights, MD Mayo Island Cultural and Recreational

Association, Inc., Richmond, VA McDowell County F A C E S, Welch, WV Meca Foundation, Bowie, MD Medasyst Caring Foundation, Inc.,

Ottumwa, IA Mercers Mills, Inc., Newark, DE Message of the Heart, Inc., Richfield, MN Messiah Ministries International, Inc.,

Front Royal, VA Metro Western Trailriders,

Washington, DC Metropolitan A M E Church

Community Development Corporation, Washington, DC Michigan School Board Leaders

Association, Davison, MI Michigan Spartans Boys & Girls

Basketball Association, Inc., Lathrup Vlg, MI Michigan Urban Search & Rescue

Training Foundation, Inc., Ann Arbor, MI Midwest Media Arts Foundation,

Kansas City, MO Mihan Foundation, New York, NY

Mills Godwin Honorary Foundation,

Norfolk, VA Milwaukee Allstar Basketball &

Youth Development Association, Milwaukee, WI Milwaukee National Organization

for Women Education Fund, Inc., Milwaukee, WI Minnesota Men of Color,

Minneapolis, MN Minnesota Policy Forum, St. Paul, MN Miracle of Women, Washington, DC Missourians for Clean Government,

Saint Louis, MO Mobile Care for Africa, Inc., McLean, VA Monitors Foundation, Eagan, MN Mothers Touch, Minneapolis, MN MS Wheelchair Maryland, Inc.,

Chevy Chase, MD Mt. Horeb Professional Police

Association, Inc., Mt. Horeb, WI Multilateral Middle East Initiative,

Bloomington, MN Mzuzu Womens and Childrens Health

Center USA, Inc., Silver Spring, MD National Capital Community Service

Academy, Washington, DC National Public Health Forum, Inc.,

Columbia, MD Native American Development

Association, Incorporated, Keshena, WI Nautic Sceptor, Brownstown, MI Nebraska Youth Sports Organization, Inc.,

Omaha, NE Neighbors Concerned About Yacht Club

Expansion, Grosse Pointe Shores, MI Neutral Zone, Inc., Ewing, VA New Beginnings Family Development

Centre, Inc., Willard, MO New Cornerstone, Inc., St. Louis, MO New Generation Training & Learning

Center, Washington, DC New Promise Home for Children,

Olathe, KS Nice Shot Tennis Association,

Kalamazoo, MI Ninth Street Phyllis Wheatley Association,

Wichita, KS No More Victims, Grand Rapids, MI Nomads of Annapolis, Inc.,

Ellicott City, MD North Basketball Association, Inc.,

Rapid City, SD North Dakota Labor Education Council,

Bismarck, ND Northeast Community Development

Corporation, Wilmington, DE Northern Flight Assist, Inc., Shawano, WI

April 12, 2004 741 2004-15 I.R.B.

Twin Bridges Development Corporation,

Crane, MO Umjima Prison Adoption, Incorporated,

St. Louis, MO United Parents, Inc., Wichita, KS Upenzi Kwetu Here There is Love,

St. Paul, MN Valley Community Foundation for

Lifelong Learning, Inc., Elgin, IA Vietnam Center for Community Activity,

Chesterfield, MO Virginia Forward, Inc., Arlington, VA Virtual Association of Lotus Users Across

the Enterprise, Inc., Wayne, PA Visually Impaired Students Congressional

Internship Program, Washington, DC WACIF Initiatives, Inc., Washington, DC Walkers in Darkness, Inc., Columbia, MD Waokiye, Inc., Wilmington, DE Washington D C African American

Museum, Washington, DC Waterbearer Missions International, Inc.,

Beckley, WV WCOE Resource Center, Inc.,

Washington, DC Web of Time, Inc., Williamsburg, VA West Anne Arundel County Chamber

Foundation, Inc., Odenton, MD West End Business Revitalization

Corporation, St. Paul, MN West Virginia Celtic Society, Ltd.,

Hurricane, WV West Virginia Youth Basketball

Corporation, Dunbar, WV Westside Warrior Basketball Club,

Omaha, NE White Buffalo Gazette, Inc., Haysville, KS Wholeness Center, Richfield, MN Wilderness Kingdom Zoo, Inc.,

Bloomfield, IA Winterset Quarterback Club, Inc.,

Winterset, IA Women on a Mission, Kansas City, MO Women With Hope, Incorporated,

Falls Church, VA Womens Prison Chapel Foundation,

Mitchellville, IA World Evangelism Association, Inc.,

Urbandale, IA Worldwide Coalition for the Spiritual

Development of African Church, Washington, DC Wyandotte County Grief Resources

and Information Program, Inc., Kansas City, KS Yes Lord Community Development

Corporation, Inc., Newark, NJ

Progressive Advocacy Support Services,

Traverse City, MI Project for Helping Other People Evolve,

Inc., Washington, DC Project on Liberty and the Workplace,

Washington, DC Project Taney, Inc., Hollister, MO Project Tough, Inc., Baltimore, MD Providers at Midnight Organization,

Maplewood, MN Pulaski County Library Building

Corporation, Lebanon, MO Quaker Workcamps International,

Washington, DC Radiant Ministries, Westphalia, KS Radio Fair America, Washington, DC Raemar Early Childhood Services, Inc.,

Parkersburg, WV Rails on Wheels, Saline, MI Rainbow Academy, Inc.,

Ft. Washington, MD Rainbow Refuge, Inc., St. Louis, MO Rainforest Cafe Friends of the Future

Foundation, Houston, TX Raymore-Peculiar Soccer Club,

Raymore, MO Recovered Wishes, Inc., Springfield, MO Research Institutes Faculty of Arch

Museology Relics of Bejing University, Inc., Washington, DC Resident Council of the James Building,

Washington, DC Resources, Inc., Houston, TX Restoration House of America, Inc.,

Rancho Santa Margari, CA Rich Recovery, Inc., Madison, WI Richard Allen Housing Corporation,

Milwaukee, WI Richard L. Danforth Foundation, Inc.,

Lenexa, KS Rise Zing Akh Unsickle Cell Corp.,

Norfolk, VA Road Home Ministries, Inc.,

Baltimore, MD Rockwood Summit In-Line Hockey Club,

Fenton, MO Sadoi, Inc., Ann Arbor, MI Safety-ID, Inc., Rockville, MD Saints Wrestling Club, Inc., Sioux City, IA Salina Rescue Mission Foundation,

Salina, KS Saline Area Fibromyalgia Syndrome &

Chronic Fatigue Syndrome, Salina, KS School Choice Michigan, Midland, MI Second Chance Dobes, Clinton, MI Second Chance Saint Bernard Rescue,

Inc., Andover, MN Self Reliance Foundation, Greendale, WI

Senior Objective Foundation,

Washington, DC Sentinel the Guarded Place, Inc.,

Baltimore, MD Sevastopol Community Auditorium

Foundation, Inc., Sturgeon Bay, WI Shared Housing, Inc., Poynette, WI Sheepgate Ministries, Richmond, VA Sherman Street Community

Empowerment Center, Grand Rapids, MI Shield of Faith Full Gospel Baptist

Church, St. Louis, MO Sig Jacobson Museum, Brocket, ND Silex Improvement Program, Silex, MO Small Wonders Foundation, Lincoln, NE Smithville Arts Council, Smithville, MO Somali Bravan Community of Minnesota,

Inc., Minneapolis, MN Somali Resource Center,

Minneapolis, MN South Dakota Nonprofit Association,

Sioux Falls, SD Space Business Archives, Alexandria, VA Speaking in Tongues, Maple Grove, MN Spirituality Resource Center, Salina, KS Sportsworks, Inc., High Ridge, MO St. Louis Archaeology, Inc.,

St. Louis, MO St. Louis German Golf Classic,

St. Louis, MO St. Louis Lightning Fastpitch Softball

Club, Inc., Chesterfield, MO St. Louis Stars, Chesterfield, MO St. Louis Torah Federation, St. Louis, MO Storybook Farms, Inc., Montgomery, MO Sudanese Community Center, Inc.,

Falls Church, VA Support Centers of America, McLean, VA Sweet Springs Community Food Pantry,

Sweet Springs, MO Systems, Inc., Kansas City, MO Teen Centers, Inc., Wichita, KS Tender Loving Care, Inc., Pacific Jct., IA TLC Respite Care, Sparta, VA Topeka Siamese Rescue of Kansas, Inc.,

Topeka, KS Total Debt Management, Inc.,

Pikesville, MD Tour Bandits Inline Hockey Club, Inc.,

Saint Charles, MO Traditional African Peoples Institute, Inc.,

Kansas City, MO Transitional Concepts, St. Paul, MN Treat, Inc., Washington, DC Tri-State Office of Juvenile Justice

& Delinquency Prevention, Inc., Huntington, WV

2004-15 I.R.B. 742 April 12, 2004

and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)–7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

Young Peoples Center, Inc.,

Point Pleasant, WV Youth Basketball Association,

Gordon, NE Youth Outreach, Inc., Blue Springs, MO Youth Performance Concepts, Inc.,

Lynchburg, VA Youth Sports Initiative, Inc.,

Kansas City, MO

Youthway Ministries, Blaine, MN

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 Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors

Announcement and Report Concerning Advance Pricing Agreements

Announcement 2004–26

March 30, 2004

This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public concerning Advance Pricing Agreements (APAs) and the APA Program. The first report covered calendar years 1991 through 1999. Subsequent reports covered calendar years 2000, 2001, and 2002. This fifth report describes the experience, structure and activities of the APA Program during calendar year 2003. It does not provide guidance regarding the application of the arm’s length standard.

Matthew W. Frank Director, Advance Pricing Agreement Program

Background

Internal Revenue Code (IRC) § 482 provides that the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more commonly controlled businesses if necessary to reflect clearly the income of such businesses. Under the regulations, the standard to be applied in determining the true taxable income of a controlled business is that of a business dealing at arm’s length with an unrelated business. The arm’s length standard also has been adopted by the international community and is incorporated into the transfer pricing guidelines issued by the Organization for Economic Cooperation and Development (OECD). OECD, TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATORS (1995). Transfer pricing issues by their nature are highly factual and have traditionally been one of the largest issues identified by the IRS in its audits of multinational corporations. The APA Program is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional examination process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment under IRC § 482 for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method (TPM). In 2003, the IRS and taxpayers executed 58 APAs and amended 4 APAs.

Since 1991, with the issuance of Rev. Proc. 91–22, 1991–1 C.B. 526, the IRS has offered taxpayers through the APA Program the opportunity to reach an agreement in advance of filing a tax return on the appropriate TPM to be applied to related party transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Directives Manual (CCDM), ¶¶ 42.10.10 - 42.10.16 (November 15, 1996). Also in 1996, the IRS updated Rev. Proc. 91–22 with the release of Rev. Proc. 96–53, 1996–2 C.B. 375. The APA Program continues to operate under the provisions of Rev. Proc. 96–53, which provides taxpayers with instructions of how to apply for an APA, and what to expect in the processing of the case. In addition, in 1998, the IRS published Notice 98–65, 1998–2 C.B. 803, which set forth streamlined APA procedures for Small Business Taxpayers (SBTs). That Notice also expanded the availability of the lowest APA user fee in an effort to attract taxpayers who may not have the resources to do the sophisticated economic studies normally required in APA submissions.

Advance Pricing Agreements

An APA generally combines an agreement between a taxpayer and the IRS on an appropriate TPM for the transactions at issue (Covered Transactions) with an agreement between the U.S. and one or more foreign tax authorities (under the authority of the mutual agreement process of our income tax treaties) that the TPM is correct. With such a “bilateral” APA, the taxpayer ordinarily is assured that the income associated with the Covered Transactions will not be subject to double taxation by the IRS and the foreign tax authority. It is the policy of the United States, as reflected in § 7 of Rev. Proc. 96–53 to encourage taxpayers that enter the APA program to seek bilateral or multilateral APAs when competent authority procedures are available with respect to the foreign country or countries involved. However, the IRS may execute an APA with a taxpayer without reaching a competent authority agreement (a “unilateral” APA).

April 12, 2004 743 2004-15 I.R.B.

A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved TPM for U.S. tax purposes. A unilateral APA binds the taxpayer and the IRS, but obviously does not prevent foreign tax administrations from taking different positions on the appropriate TPM for a transaction. As stated in Rev. Proc. 96–53, should a transaction covered by a unilateral APA be subject to double taxation as the result of an adjustment by a foreign tax administration, the taxpayer may seek relief by requesting that the U.S. Competent Authority consider initiating a mutual agreement proceeding, provided there is an applicable income tax treaty in force with the other country.

When a unilateral APA involves taxpayers operating in a country that is a treaty partner, information relevant to the APA (including a copy of the APA and APA annual reports) may be provided to the treaty partner under normal rules and principles governing the exchange of information under income tax treaties.

The APA Program

An IRS team headed by an APA team leader is responsible for the consideration of each APA. As of December 31, 2003, the APA program had 18 team leaders. The team leader is responsible for organizing the IRS APA team. The IRS APA team arranges meetings with the taxpayer, secures whatever information is necessary from the taxpayer to analyze the taxpayer’s related party transactions and the available facts under the arm’s length standard of IRC § 482 and the regulations thereunder (Treas. Reg.), and leads the discussions with the taxpayer.

The APA team generally includes an economist, an international examiner, LMSB field counsel, and, in a bilateral case, a U.S. Competent Authority analyst who leads the discussions with the treaty partner. The economist may be from the APA Program or the IRS field organization. As of December 31, 2003, the APA Program had 7 economists. The APA team may also include an LMSB International Technical Advisor, other LMSB exam personnel, and an Appeals officer.

The APA Process

The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc. 96–53. The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and (5) drafting, review, and execution.

(1) Application

In many APA cases, the taxpayer’s application is preceded by a pre-file conference with the APA staff in which the taxpayer can solicit the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer must disclose its identity when it applies for an APA. Taxpayers must file the appropriate user fee on or before the due date of the tax return for the first taxable year that the taxpayer proposes to be covered by the APA. Many taxpayers file a user fee first and then follow up with a full application later. The procedures for pre-file conferences, user fees, and applications can be found in Rev. Proc. 96–53.

The APA application can be a relatively modest document for a small business taxpayer. Notice 98–65 describes the special APA procedures for small businesses. For most taxpayers, however, the APA application is a substantial document filling several binders. The APA Program makes every effort to reach agreement on the basis of the information provided in the taxpayer’s application.

The application is assigned to an APA team leader who is responsible for the case. The APA team leader’s first responsibility is to organize the APA team. This involves contacting the appropriate LMSB International Territory Manager to secure the assignment of an international examiner to the APA case and the LMSB Counsel’s office to secure a field counsel lawyer. In a bilateral case, the U.S. Competent Authority will assign a U.S. Competent Authority analyst to the team. In a large APA case, the international examiner may invite his or her manager and other LMSB personnel familiar with the taxpayer to join the team. When the APA may affect taxable years in Appeals, the appropriate appellate conferee will be invited to join the team. In all cases, the team leader contacts the Manager, LMSB International Technical Advisors, to determine whether to include a technical advisor on the team. The IRS APA team will generally include a technical advisor if the APA request concerns cost-sharing, intangibles or services. The APA team leader then distributes copies of the APA application to all team members and sets up an opening conference with the taxpayer. The APA office strives to hold this opening conference within 45 days of the assignment of the case to a team leader. At the opening conference, the APA team leader proposes a case plan designed to complete the recommended U.S. negotiating position for a bilateral APA within 9 months from the date the full application was filed and to complete a unilateral APA within 12 months from the application date. In 2003, the median for completing negotiating positions was 15.2 months (average 15.3), and the median for completing unilateral APAs was 9.2 months (average 20.0).

2004-15 I.R.B. 744 April 12, 2004

(2) Due Diligence

The APA team must satisfy itself that the relevant facts submitted by the taxpayer are complete and accurate. This due diligence aspect of the APA is vital to the process. It is because of this due diligence that the IRS can reach advance agreements with taxpayers in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways. Typically, the taxpayer and the APA team will agree to dates for future meetings during the opening conference. In advance of the opening conference, the APA team leader will submit a list of questions to the taxpayer for discussion. The opening conference may result in a second set of questions. These questions are developed by the APA team and provided to the taxpayer through the APA team leader. It is important to note that this due diligence is not an audit and is focused on the transfer pricing issues associated with the transactions in the taxpayer’s application, or such other transactions that the taxpayer and the IRS may agree to add.

(3) Analysis

A significant part of the analytical work associated with an APA is done typically by the APA or IRS field economist assigned to the case. The analysis may result in the need for additional information. Once the IRS APA team has completed its due diligence and analysis, it begins negotiations with the taxpayer over the various aspects of the APA including the selection of comparable transactions, asset intensity and other adjustments, the TPM, which transactions to cover, the appropriate critical assumptions, the APA term, and other key issues. The APA team leader will discuss particularly difficult issues with his or her managers, but generally the APA team leader is empowered to negotiate the APA.

(4) Discussion and Agreement

This phase differs for bilateral and unilateral cases. In a bilateral case, the discussions proceed in two parts and involve two IRS offices — the APA Program and the U.S. Competent Authority. In the first part, the APA team will attempt to reach a consensus with the taxpayer regarding the recommended position that the U.S. Competent Authority should take in negotiations with its treaty partner. This recommended U.S. negotiating position is a paper drafted by the APA team leader and signed by the APA Director that provides the APA Program’s view of the best TPM for the covered transaction, taking into account IRC § 482 and the regulations thereunder, the relevant tax treaty, and the U.S. Competent Authority’s experience with the treaty partner.

The experience of the APA office and the U.S. Competent Authority is that APA negotiations are likely to proceed more rapidly with a foreign competent authority if the U.S. negotiating position is fully supported by the taxpayer. Consequently, the APA Office works together with the taxpayer in developing the recommended U.S. negotiating position. On occasion, the APA team will agree to disagree with a taxpayer. In these cases, the APA office will send a recommended U.S. negotiating position to the U.S. Competent Authority that includes elements with which the taxpayer does not agree. This disagreement is noted in the paper. The APA team leader also solicits the views of the field members of the APA team, and, in the vast majority of APA cases, the international examiner, LMSB field counsel, and other IRS field team members concur in the position prepared by the APA team leader.

Once the APA Program completes the recommended U.S. negotiating position, the APA process shifts from the APA Program to the U.S. Competent Authority. The U.S. Competent Authority analyst assigned to the APA takes the recommended U.S. negotiating position and prepares the final U.S. negotiating position, which is then transmitted to the foreign competent authority. The negotiations with the foreign competent authority are conducted by the U.S. Competent Authority analyst, most often in face-to-face negotiating sessions conducted periodically throughout the year. At the request of the U.S. Competent Authority analyst, the APA team leader may continue to assist the negotiations.

In unilateral APA cases, the discussions proceed solely between the APA Program and the taxpayer. In a unilateral case, the taxpayer and the APA Program must reach agreement to conclude an APA. Like the bilateral cases, the APA team leader almost always will achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. The APA Program has a procedure in which the IRS field personnel are solicited formally for their concurrence in the final APA. This concurrence, or any items in disagreement, is noted in a cover memorandum prepared by the APA team leader that accompanies the final APA sent forward for review and execution.

(5) Drafting, Review, and Execution

Once the IRS and the taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA Program has developed standard language that is incorporated into every APA. The current version of this language is found in Attachment A. APAs are reviewed by the Branch Chief and the APA Director. In addition, the team leader prepares a summary memorandum for the Associate Chief Counsel (International) (ACC(I)). On March 1, 2001, the ACC(I) delegated to the APA Director the authority to execute APAs on behalf of the IRS. See Chief Counsel Notice CC–2001–016. The APA is executed for the taxpayer by an appropriate corporate officer.

April 12, 2004 745 2004-15 I.R.B.

Model APA at Attachment A

[§ 521(b)(2)(B)]

Attachment A contains the current version of the model APA language. As part of its continuing effort to improve its work product, the APA Program has revised the model language to reflect the program’s collective experience with substantive and drafting issues.

The Current APA Office Structure, Composition, and Operation

In 2003, the APA Office consisted of four branches with Branches 1 and 3 staffed with APA team leaders and Branch 2 staffed with economists and a paralegal. Branch 4, the APA West Coast branch, is headquartered in Laguna Niguel, California, with an additional office in San Francisco, and is presently staffed with both team leaders and an economist.

Overall, the APA staff increased from 34 to 36. The APA Program hired a new APA Director and a new team leader. In addition, one team leader transferred to the APA Office from another Chief Counsel function, and one team leader transferred from the APA Office to another Chief Counsel function. The number of APA team leaders increased from 17 to 18, while the number of economists remained constant at 7.

As of December 31, 2003, the APA staff was as follows:

Director’s Office
1 Director
1 Special Counsel to the Director
1 Secretary to the Director

Branch 1 1 Branch Chief 1 Secretary 8 Team Leaders	Branch 2 1 Branch Chief 1 Paralegal 6 Economists	Branch 3 1 Branch Chief 1 Secretary 8 Team Leaders	Branch 4 1 Branch Chief 1 Secretary 2 Team Leaders 1 Economist

APA Training

In 2003, the APA Office continued to emphasize training as a high priority. Training sessions regarded APA-related current developments, new APA office practices and procedures, and international tax law issues. The APA New Hire Training materials were updated, as necessary, throughout the year. The updated materials are available to the public through the APA internet site on the IRS Digital Daily ( www.irs.gov ). These materials do not constitute guidance on the application of the arm’s length standard.

APA Program Statistical Data

[§ 521(b)(2)(C) and (E)]

The statistical information required under § 521(b)(2)(C) is contained in Tables 1 and 9 below; the information required under § 521(b)(2)(E) is contained in Tables 2 and 3 below:

2004-15 I.R.B. 746 April 12, 2004

TABLE 1: APA APPLICATIONS, EXECUTED APAs, AND PENDING APAs ¹

	Unilateral	Bilateral	Multilateral	Year Total	Cumulative Total
APA applications filed during year 2003	44	46		90	766
APAs executed • Year 2003 • 1991–2002	21 206	37 221	7	58 434	492
APA renewals executed during year 2003	8	9		17	108
Revised or Amended APAs executed during year 2003	3	1		4	25
Pending requests for APAs	67	162		229
• Pending Requests for new APAs	46	109		155
• Pending requests for renewal APAs	21	53		74
APAs canceled or revoked	0	0		0	5
APAs withdrawn	2	1		3	83

TABLE 2: MONTHS TO COMPLETE APAs ²

Months to Complete Advance Pricing Agreements in Year 2003

Combined Unilateral, Bilateral, Multilateral: Average	Combined Unilateral, Bilateral, Multilateral: Average	Combined Unilateral, Bilateral, Multilateral: Average	Combined Unilateral, Bilateral, Multilateral: Average	Combined Unilateral, Bilateral, Multilateral: Average	33.7
Combined Unilateral, Bilateral, Multilateral: Median	Combined Unilateral, Bilateral, Multilateral: Median	Combined Unilateral, Bilateral, Multilateral: Median	Combined Unilateral, Bilateral, Multilateral: Median	Combined Unilateral, Bilateral, Multilateral: Median	32.0

Unilateral New	Unilateral New	Unilateral Renewal	Unilateral Renewal	Unilateral Combined	Unilateral Combined
Average	22.3	Average	16.2	Average	20.0
Median	8.5	Median	9.8	Median	9.2

Bilateral/Multilateral New	Bilateral/Multilateral New	Bilateral/Multilateral Renewal	Bilateral/Multilateral Renewal	Bilateral/Multilateral Combined	Bilateral/Multilateral Combined
Average	41.2	Average	42.3	Average	41.5
Median	35.4	Median	50.2	Median	39.4

1 In 2003:

The APA Office and taxpayers agreed to amend four APAs (three unilateral and one bilateral). In one of these, the taxpayer reorganized its business. In three, the changes reflected technical corrections or modifications to minor aspects of the APA.
Reasons for withdrawals included settling principal issues through other venues, jurisdictional issues, taxpayer reorganizations, and changes in facts and circumstances.

2 The average time required to conclude a bilateral APA has historically been split roughly equally between the APA and U.S. Competent Authority Offices.

April 12, 2004 747 2004-15 I.R.B.

TABLE 3: APA COMPLETION TIME – MONTHS PER APA

TABLE 4: RECOMMENDED NEGOTIATING POSITIONS

Recommended Negotiating Positions Completed in Year 2003 19

TABLE 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS

2004-15 I.R.B. 748 April 12, 2004

TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME – MONTHS PER APA

Months	Number of APAs	Months	Number of APAs	Months	Number of APAs	Months
1	0	11	1	21	0	31
2	0	12	0	22	1	32
3	0	13	2	23	0	33
4	0	14	1	24	2	34
5	1	15	3	25	0	35
6	2	16	0	26	1	36
7	1	17	1	27	1	37
8	0	18	0	28	0	38
9	1	19	1	29	0	39
10	0	20	0	30	0	40

TABLE 7: SMALL BUSINESS TAXPAYER APAs ³

Small Business Taxpayer APAs Completed in Year 2003	12
Renewals	8
New	4
Unilateral	8
Bilateral	4

TABLE 8: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs

Months to Complete Small Business Taxpayer APAs in Year 2003

New	New	Renewal	Renewal	Combined	Combined
Average	12.5	Average	13.8	Average	13.0
Median	11.5	Median	11.9	Median	11.5

3 Small Business Taxpayer APAs are processed under the special procedures set forth in Notice 98–65.

April 12, 2004 749 2004-15 I.R.B.

TABLE 9: INDUSTRIES COVERED ⁴

Industry Involved – NAICS Codes	Number
Electronic equipment, appliance and component manufacturing – 335	7–9
Wholesale trade, nondurable goods – 422	4–6
Chemical manufacturing – 325	4–6
Wholesale trade, durable goods – 421	4–6
Credit intermediation and related activities – 522	4–6
Computer and electronic product manufacturing – 334	4–6
Machinery manufacturing – 333	1–3
Broadcasting and telecommunications – 513	1–3
Information service and data processing services – 514	1–3
Securities, commodity contracts and other intermediary and related activities – 523	1–3
Oil and gas extraction – 212	1–3
Motor vehicle and parts dealers – 441	1–3
Food manufacturing – 311	1–3
Apparel manufacturing – 315	1–3
Beverage and tobacco manufacturing – 312	1–3
Fabricated metal manufacturing – 332	1–3
Transportation equipment manufacturing – 336	1–3
Miscellaneous manufacturing – 339	1–3
Sporting goods, hobby, book and music stores – 451	1–3
Air transportation – 481	1–3
Accommodation – 721	1–3
Food services and drinking places – 722	1–3

Trades or Businesses

[§ 521(b)(2)(D)(i)]

The nature of the relationships between the related organizations, trades, or businesses covered by APAs executed in 2003 is set forth in Table 10 below:

TABLE 10: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES

Relationship	Number of APAs
Foreign Parent – U.S. Subsidiary (-ies)	31
U.S. Parent – Foreign Subsidiary (-ies)	23
Foreign Company and U.S. branch(es)	4

4 The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced the U.S. Standard Industrial Classification (SIC) system. NAICS was developed jointly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.

2004-15 I.R.B. 750 April 12, 2004

Covered Transactions

[§ 521(b)(2)(D)(ii)]

The controlled transactions covered by APAs executed in 2003 are set forth in Table 11 and Table 12 below:

TABLE 11: TYPES OF COVERED TRANSACTIONS

Transaction Type	Number
Sale of tangible property into the U.S.	23
Performance of services by Non-U.S. entity	16
Performance of services by U.S. entity	12
Sale of tangible property from the U.S.	9
Use of intangible property by U.S. entity	7
Use of intangible property by Non-U.S. entity	6
Financial products - Non-U.S. parent	2
Financial products - U.S. branch of foreign company	2
Other	11

TABLE 12: TYPES OF SERVICES INCLUDED IN COVERED TRANSACTIONS

Intercompany Services Involved in the Covered Transactions	Number
Administrative	10
Accounting	9
Marketing	9
Distribution	9
Manufacturing services	8
Management	7
Research and development	7
Legal	6
Technical support services	6
Product support	5
Logistical support	5
Headquarters costs	4
Communication service	3
Contract research & development	3
Billing services	3
Purchasing	3
License administration services	2
Assembly	2

April 12, 2004 751 2004-15 I.R.B.

Business Functions Performed and Risks Assumed

[§ 521(b)(2)(D)(ii)]

The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose results are tested in the covered transactions in the APAs executed in 2003 are set forth in Tables 13 and 14 below:

TABLE 13: FUNCTIONS PERFORMED BY THE TESTED PARTY

Functions Performed	Number
Manufacturing	33
Distribution functions	28
Marketing functions	23
Transportation and warehousing	12
Managerial, legal, accounting, finance, personnel, and other support services	11
Research and development	10
Product assembly and/or packaging	9
Trading and risk management of financial products	7
Purchasing and materials management	7
Product design and engineering	6
Licensing of intangibles	6
Technical training and tech support for sales staff (including sub-distributors)	5
Product testing and quality control	4
Process engineering	3
Telecom services	2

TABLE 14: RISKS ASSUMED BY THE TESTED PARTY

Risks Assumed	Number
General business risks (e.g., related to ownership of PP&E)	57
Market risks, including fluctuations in costs, demand, pricing, & inventory	52
Credit and collection risks	37
Financial risks, including interest rates & currency	31
Product liability risks	22
R&D risks	21

2004-15 I.R.B. 752 April 12, 2004

Discussion

The vast majority of APAs have covered transactions that involve numerous business functions and risks. For instance, with respect to functions, companies that manufacture products have typically conducted research and development, engaged in product design and engineering, manufactured the product, marketed and distributed the product, and performed support functions such as legal, finance, and human resources services. Regarding risks, companies have been subject to market risks, R&D risks, financial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process a significant amount of time and effort is devoted to understanding how the functions and risks are allocated amongst the controlled group of companies that are party to the covered transactions.

In its APA submission, the taxpayer must provide a functional analysis. The functional analysis identifies the economic activities performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The importance of the functional analysis derives from the fact that economic theory posits that there is a positive relationship between risk and expected return and that different functions provide different value and have different opportunity costs associated with them. It is important that the functional analysis go beyond simply categorizing the tested party as, say, a distributor. It should provide more specific information since, in the example of distributors, not all distributors undertake similar functions and risks.

Thus, the functional analysis is critical in determining the TPM (including the selection of comparables). Although functional comparability is an essential factor in evaluating the reliability of the TPM (including the selection of comparables), the APA evaluation process also involves consideration of economic conditions such as the economic condition of the particular industry.

In evaluating the functional analysis, the APA program considers contractual terms between the controlled parties and the consistency of the conduct of the parties with respect to the allocation of risk. In accord with the section 482 regulations, the APA program also gives consideration to the ability of controlled parties to fund losses that might be expected to occur as the result of the assumption of risk. Another relevant factor considered in evaluating the functional analysis is the extent to which each controlled party exercises managerial or operational control over the business activities that directly influence the amount of income or loss realized. The section 482 regulations posit that parties at arm’s length will ordinarily bear a greater share of those risks over which they have relatively more control.

Related Organizations, Trades, or Businesses Whose Prices or Results are Tested to Determine

Compliance with APA Transfer Pricing Methods

[§ 521(b)(2)(D)(iii)]

The related organizations, trades, or businesses whose prices or results are tested to determine compliance with TPMs prescribed in APAs executed in 2003 are set forth in Table 15 below:

TABLE 15: RELATED ORGANIZATIONS, TRADES, OR BUSINESSES WHOSE PRICES OR RESULTS ARE TESTED ⁵

Type of Organization	Number
U.S. distributor	20
Multiple tested parties	16
U.S. provider of services	11
Non-U.S. provider of services	9
Non-U.S. manufacturer	8
U.S. manufacturer	7
U.S. licensor of intangible property	4
Non-U.S. distributor	4
U.S. dealer in financial products	3

5 “Multiple tested parties” includes covered transactions that utilize profit splits, CUPs, and CUTs.

April 12, 2004 753 2004-15 I.R.B.

Type of Organization	Number
Non-U.S. dealer in financial products	2
Other	4

Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods

[§ 521(b)(2)(D)(iv)]

The TPMs used in APAs executed in 2003 are set forth in Tables 16–20 below:

TABLE 16: TRANSFER PRICING METHODS USED FOR TRANSFERS OF

TANGIBLE AND INTANGIBLE PROPERTY ⁶

TPM Used	Number
CPM: PLI is operating margin	9
CPM: PLI is markup on total costs	7
Unspecified method	6
CUT (intangibles only)	4
CPM: PLI is gross margin	3
CPM: PLI is return on assets or capital employed	3
CPM: PLI is Berry ratio	3
CPM: PLI is other PLI	3
Resale Price Method (tangibles only)	3
Other profit split	3
Residual profit split	2
CUP (tangibles only) – not based on published market data	2
Cost Plus Method (tangibles only)	2
Other	2

TABLE 17: TRANSFER PRICING METHODS USED FOR SERVICES

TPM Used	Number
Cost plus a markup	12
CPM: PLI is markup on total costs	7
Cost with no markup	5
CPM: PLI is Berry ratio	3
Other	3

6 Profit Level Indicators (“PLIs”) used with the Comparable Profit Method of Treas. Reg. § 1.482–5, and as used in these TPM tables, are as follows: (1) operating margin (ratio of operating profit to sales); (2) markup on total costs (comparative markup on total costs); (3) gross margin (ratio of gross profit to sales); (4) rate of return on assets or capital employed (ratio of operating profit to operating assets); and (5) Berry ratio (gross profit to operating expenses).

2004-15 I.R.B. 754 April 12, 2004

TABLE 18: TRANSFER PRICING METHODS USED FOR FINANCIAL PRODUCTS

TPM Used	Number
Interbranch allocation (using indirect evidence of CUPs)	3
Profit split	2

Discussion

The TPMs used in APAs completed during 2003 were based on the section 482 regulations. Under Treas. Reg. § 1.482–3, the arm’s length amount for controlled transfers of tangible property may be determined using the Comparable Uncontrolled Price (CUP) method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), or the Profit Split method. Under Treas. Reg. § 1.482–4, the arm’s length amount for controlled transfers of intangible property may be determined using the Comparable Uncontrolled Transaction (CUT) method, CPM, or the Profit Split Method. An “Unspecified Method” may be used for both tangible and intangible property if it provides a more reliable result than the enumerated methods under the best method rule of Treas. Reg. § 1.482–1(c). For transfers involving the provision of services, Treas. Reg. § 1.482–2(b) provides that services performed for the benefit of another member of a controlled group should bear an arm’s length charge, either deemed to be equal to the cost of providing the services (when non-integral, see Treas. Reg. § 1.482–2(b)(3)) or which should be an amount that would have been charged between independent parties.

In addition, Treas. Reg. § 1.482–2(a) provides rules concerning the proper treatment of loans or advances, and Treas. Reg. § 1.482–7 provides rules for qualified cost sharing arrangements under which the parties agree to share the costs of development of intangibles in proportion to their shares of reasonably anticipated benefits. APAs involving cost sharing arrangements generally address both the method of allocating costs among the parties as well as determining the appropriate amount of the “buy-in” payment due for the transfer of intangibles to the controlled participants.

In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 16, the majority of the APAs followed the specified methods. However, there are several distinguishing points that should be made. The Regulations note that for transfers of tangible property, the Comparable Uncontrolled Price (CUP) method will generally be the most direct and reliable measure of an arm’s length price for the controlled transaction if sufficiently reliable comparable transactions can be identified. Treas. Reg. § 1.482–3(b)(2)(ii)(A). It was the experience of the APA Program in 2003 that in the cases that came into the APA Program, sufficiently reliable CUP transactions were difficult to find. In APAs executed in 2003, there were two covered transactions that used the CUP method; both used internal data on transactions between the taxpayer and unrelated parties.

Similar to the CUP method, for transfers of intangible property, the CUT method will generally provide the most reliable measure of an arm’s length result if sufficiently reliable comparables may be found. Treas. Reg. § 1.482–4(c)(2)(ii). It has generally been difficult to identify external comparables, and APAs using the CUT method tend to rely on internal transactions between the taxpayer and unrelated parties. In 2003, there were four covered transactions that utilized the CUT TPM.

The Cost Plus Method (tangibles only) and Resale Price Method were applied in 2003 in two and three APAs respectively. See Treas. Reg. § 1.482–3(c), (d).

The CPM is frequently applied in APAs. This is because reliable public data on comparable business activities of independent companies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and other relevant considerations is more likely to exist than comparability of product. The CPM also tends to be less sensitive than other methods to differences in accounting practices between the tested party and comparable companies, e.g., classification of expenses as cost of goods sold or operating expenses. Treas. Reg. § 1.482–3(c)(3)(iii)(B), and –3(d)(3)(iii)(B). In addition, the degree of functional comparability required to obtain a reliable result under the CPM is generally less than required under the Resale Price or Cost Plus methods, because differences in functions performed often are reflected in operating expenses, and thus taxpayers performing different functions may have very different gross profit margins but earn similar levels of operating profit. Treas. Reg. § 1.482–5(c)(2).

Table 16 reflects 28 uses of the CPM (with varying PLIs) in covered transactions involving tangible or intangible property. The CPM was also used in some APAs concurrently with other methods.

April 12, 2004 755 2004-15 I.R.B.

The CPM has proven to be versatile in part because of the various PLIs that can be used in connection with the method. Reaching agreement on the appropriate PLI has been the subject of much discussion in many of the cases, and it depends heavily on the facts and circumstances. Some APAs have called for different PLIs to apply to different parts of the covered transactions or with one PLI used as a check against the primary PLI.

The CPM also was used regularly with services as the covered transactions in APAs executed in 2003. There were a total of 10 services covered transactions using the CPM method with various PLIs according to the specific facts of the taxpayers involved. Table 17 reflects the methods used to determine the arm’s length results for APAs involving services transactions.

In 2003, there were two APAs involving tangible or intangible property that used the residual profit split, Treas. Reg. § 1.482–6(c)(3). In residual profit split cases, routine contributions by the controlled parties are allocated routine market returns, and the residual income is allocated among the controlled taxpayers based upon the relative value of their contributions of intangible property to the relevant business activity.

Profit splits have also been used in a number of financial product APAs in which the primary income-producing functions are performed in more than one jurisdiction. Two APAs executed in 2003 applied such a profit split.

There were three financial product APAs involving interbranch allocations. These involve a single taxpayer with branches that act autonomously with respect to the covered transactions, generally involving foreign currency exchanges. These particular APAs determine the appropriate amount of profits attributable to each branch from the activity by reference to the branches’ internal accounting methods. The results take into account all trades, and test the arms length results using statistical tests to verify that controlled trades are priced the same as uncontrolled trades.

Critical Assumptions

[§ 521(b)(2)(D)(v)] Critical Assumptions used in APAs executed in 2003 are described in Table 19 below:

TABLE 19: CRITICAL ASSUMPTIONS

Critical Assumptions involving the following:	Number of APAs
Material changes to the business	57
Material changes to tax and/or financial accounting practices	57
Assets will remain substantially same	16
Catastrophic events	9
No discounts or rebates	6
Use of Mark-to-Market method	4
Other financial ratio	3
Major regulatory changes	2
Changes in affiliated companies	2
Variation in budgeted v. actual expenses	2
Changes in market shares	2
Ratio of R&D to sales	2
Material sales fluctuations	2
Other	13

2004-15 I.R.B. 756 April 12, 2004

Discussion

APAs include critical assumptions upon which their respective TPMs depend. A critical assumption is any fact (whether or not within the control of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the continued existence of which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a particular mode of conducting business operations, a particular corporate or business structure, or a range of expected business volume. Rev. Proc. 96–53, § 5.07. Failure to meet a critical assumption may render an APA inappropriate or unworkable.

A critical assumption may change (and/or fail to materialize) due to uncontrollable changes in economic circumstances, such as a fundamental and dramatic change in the economic conditions of a particular industry. In addition, a critical assumption may change (and/or fail to materialize) due to a taxpayer’s actions that are initiated for good faith business reasons, such as a change in business strategy, mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.

If a critical assumption has not been met, the APA may be revised by agreement of the parties. If such agreement cannot be achieved, the APA may be canceled. If a critical assumption has not been met, it requires taxpayer’s notice to and discussion with the Service, and, in the case of a bilateral APA, competent authority consideration. Rev. Proc. 96–53, § 11.07.

Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties

[§ 521(b)(2)(D)(v), (vi), and (vii)]

The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in 2003 are described in Tables 20 through 22 below. Various formulas for making adjustments to comparables are included as Attachment B.

TABLE 20: SOURCES OF COMPARABLES

Comparable Sources	Number of Times This Source Used
Compustat	44
Disclosure	14
Moody’s	5
Japan Company Handbook	4
Worldscope	4
Dun & Bradstreet	3
Other	8

TABLE 21: COMPARABLE SELECTION CRITERIA

Selection Criteria Considered	Number of Times This Criterion Used
Comparable functions	57
Comparable risks	43
Comparable industry	38
Comparable products	25
Comparable intangibles	21
Comparable terms	4

April 12, 2004 757 2004-15 I.R.B.

TABLE 22: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES

Adjustment	Number of Times Used
Balance sheet adjustments
Inventory	35
Payables	33
Receivables	33
Property, plant, equipment	10
Accounting adjustments
LIFO to FIFO inventory accounting	11
Accounting reclassifications (e.g., from COGS to operating expenses)	9
Other	1
Profit level indicator adjustments (used to “back into” one PLI from another)
Operating expense	2
Other	5
Miscellaneous adjustments
Foreign exchange	3
Goodwill value or amortization	2
Other	4

Discussion

At the core of most APAs are comparables. The APA program works closely with taxpayers to find the best and most reliable comparables for each covered transaction. In some cases, CUPs or CUTs can be identified. In other cases, comparable business activities of independent companies are utilized in applying the CPM or residual profit split methods. Generally, in the APA Program’s experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of the taxpayer.

For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA Program typically has applied a three-part process. First, a pool of potential comparables has been identified through broad searches. From this pool, companies having transactions that are clearly not comparable to those of the tested party have been eliminated through the use of quantitative and qualitative analyses, i.e., quantitative screens and business descriptions. Then, based on a review of available descriptive and financial data, a set of comparable transactions or business activities of independent companies has been finalized. The comparability of the finalized set has then been enhanced through the application of adjustments.

Sources of Comparables

Comparables used in APAs can be U.S. or foreign. This depends on the relevant market, the type of transaction being evaluated, and the results of the functional and risk analyses. In general, comparables have been located by searching a variety of databases that provide data on U.S. publicly traded companies and on a combination of public and private non-U.S. companies. Table 20 shows the various databases and other sources used in selecting comparables for the APAs executed in 2003.

Although comparables were most often identified from the databases cited in Table 20, in some cases comparables were found from other sources, such as comparables derived internally from taxpayer transactions with third parties.

Selecting Comparables

Initial pools of potential comparables generally are derived from the databases using a combination of industry and keyword identifiers. Then, the pool is refined using a variety of selection criteria specific to the transaction or business activity being tested and the TPM being used.

2004-15 I.R.B. 758 April 12, 2004

The listed databases allow for searches by industrial classification, by keywords, or by both. These searches can yield a number of companies whose business activities may or may not be comparable to those of the entity being tested. Therefore, comparables based solely on industry classification or keyword searches are rarely used in APAs. Instead, the pool of comparables is examined closely, and companies are selected based on a combination of screens, business descriptions, and other information found in the companies’ Annual Reports to shareholders and filings with the U.S. Securities and Exchange Commission (SEC).

Business activities are required to meet certain basic comparability criteria to be considered comparables. Functions, risks, economic conditions, and the property (product or intangible) and services associated with the transaction must be comparable. Determining comparability can be difficult — the goal has been to use comparability criteria restrictive enough to eliminate business activities that are not comparable, but yet not so restrictive as to have no comparables remaining. The APA Program normally has begun with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool of reliable comparables. A determination on the appropriate size of the comparables set, as well as the business activities that comprise the set, is highly fact specific and depends on the reliability of the results.

In addition, the APA Program, consistent with the section 482 regulations, generally has looked at the results of comparables over a multi-year period. Sometimes this has been a three-year period, but it has been more or less, depending on the circumstances of the controlled transaction. Using a shorter period might result in the inclusion of comparables in different stages of economic development or use of atypical years of a comparable due to cyclical fluctuations in business conditions.

Many covered transactions have been tested with comparables that have been chosen using additional criteria and/or screens. These include sales level criteria and tests for financial distress and product comparability. These common selection criteria and screens have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales level screen, for example, has been used to remove companies that, due to their size, might face fundamentally different economic conditions from those of the transaction or business activities being tested. In addition, APA analyses have incorporated selection criteria related to removing companies experiencing “financial distress” due to concerns that companies in financial distress often have experienced unusual circumstances that render them not comparable to the business activity being tested. These criteria include: an unfavorable auditor’s opinion, bankruptcy, and, in certain circumstances, operating losses in a given number of years.

An additional important class of selection criteria is the development and ownership of intangible property. In some cases in which the business activity being tested is a manufacturer, several criteria have been used to ensure, for example, that if the controlled entity does not own significant manufacturing intangibles or conduct research and development (R&D), then neither will the comparables. These selection criteria have included determining the importance of patents to a company or screening for R&D expenditures as a percentage of sales. Again, quantitative screens related to identifying comparables with significant intangible property generally have been used in conjunction with an understanding of the comparable derived from publicly available business information.

Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings, has been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher PP&E), regardless of their industry classification. Similarly, a test involving the ratio of operating expenses to sales has helped to determine whether a company undertakes a significant marketing and distribution function.

Table 23 shows the number of times various screens were used in APAs executed in 2003:

April 12, 2004 759 2004-15 I.R.B.

TABLE 23: COMPARABILITY SCREENS

Comparability/Financial Distress Screen	Time Used
Comparability screens used
Sales	15
R&D/ sales	11
Foreign sales/ total sales	5
Operating expenses/ sales	2
SG&A/ sales	4
Non-startup or start-up	2
Financial distress
Bankruptcy	16
Unfavorable auditor’s opinion	13
Losses in one or more years	9

Adjusting Comparables

After the comparables have been selected, the regulations require that “[i]f there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results.” Treas. Reg. § 1.482–1(d)(2). In almost all cases involving income-statement-based PLIs, certain “asset intensity” or “balance sheet” adjustments for factors that have generally agreed-upon effects on profits are calculated. In addition, in specific cases, additional adjustments are performed to improve reliability.

The most common balance sheet adjustments used in APAs are adjustments for differences in accounts receivable, inventories, and accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on the principle that there is an opportunity cost for holding assets. For these assets it is generally assumed that the cost is a short-term debt interest rate.

To compare the profits of two business activities with different relative levels of receivables, inventory, or payables, the APA Program estimates the carrying costs of each item and adjusts profits accordingly. Although different formulas have been used in specific APA cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions that (1) balance sheet items should be expressed as mid-year averages, (2) formulas should try to avoid using data items that are being tested by the TPM (for example, if sales are controlled, then the denominator of the balance sheet ratio should not be sales), (3) a short-term interest rate should be used, and (4) an interest factor should recognize the average holding period of the relevant asset.

The APA Program also requires that data be compared on a consistent accounting basis. For example, although financial statements may be prepared on a first-in first-out (FIFO) basis, cross-company comparisons are less meaningful if one or more of the comparables use LIFO inventory accounting methods. This adjustment directly affects costs of goods sold and inventories, and therefore affects both profitability measures and inventory adjustments.

Still important in some cases is the adjustment for differences in relative levels of PP&E between a tested business activity and the comparables. Ideally, comparables and the business activity being tested will have fairly similar relative levels of PP&E, since major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E adjustment is made using a medium term interest rate.

Additional adjustments used less frequently include those for differences in other balance sheet items, operating expenses, R&D, or currency risk. Accounting adjustments, such as reclassifying items from cost of goods sold to operating expenses, for example, are also made when warranted to increase reliability. Often, data is not available for both the controlled and uncontrolled transactions in sufficient detail to allow for these types of adjustments.

The adjustments made to comparables or tested parties in APAs executed in 2003 are reflected in Table 22 above.

2004-15 I.R.B. 760 April 12, 2004

Nature of Ranges and Adjustment Mechanisms

[§ 521(b)(2)(D)(viii)-(ix)]

The types of ranges and adjustment mechanisms used in APAs executed in 2003 are described in Table 24 and 25 below.

TABLE 24: TYPES OF RANGES ⁷

Type of Range	Number
Interquartile range	31
Specific point (royalty)	8
Floor (i.e., result must be no less than x)	6
Specific point within CPM range (not floor or ceiling)	3
Financial products - statistical confidence interval to test against internal CUPs	2
Ceiling (i.e., result must be no more than x)	2
Other	7

TABLE 25: ADJUSTMENTS WHEN OUTSIDE OF THE RANGE

Adjustment mechanism	Number
Taxpayer makes an adjustment: to closest edge of single year	15
Taxpayer makes an adjustment: to specified point	11
Taxpayer makes an adjustment: to closest edge of multi-year average	9
Taxpayer makes an adjustment: to median of current year	7
Taxpayer makes an adjustment: to other	6
Taxpayer makes an adjustment: to median of multi-year average	3
Other	3

Discussion

Treas. Reg. § 1.482–1(e)(1) states that sometimes a pricing method will yield “a single result that is the most reliable measure of an arm’s length result.” Sometimes, however, a method may yield “a range of reliable results,” called the “arm’s length range.” A taxpayer whose results fall within the arm’s length range will not be subject to adjustment.

Under Treas. Reg. § 1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable uncontrolled transaction of similar comparability and reliability. If these comparables are of very high quality, as defined in the Regulations, then under Treas. Reg. § 1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the comparables (from the least to the greatest). However, the APA Program has only rarely identified cases meeting the requirements for the full range. If the comparables are of lesser quality, then under Treas. Reg. § 1.482–1(e)(2)(iii)(B), “the reliability of the analysis must be increased, when it is possible to do so, by adjusting the range through application of a valid statistical method to the results of all of the uncontrolled comparables.” One such method, the “interquartile range,” is ordinarily acceptable, although a different statistical method “may be applied if it provides a more reliable measure.” The “interquartile range” is defined as, roughly, the range from the 25th to the 75th percentile of the comparables’ results. See Treas. Reg. § 1.482–1(e)(2)(iii)(C). The interquartile range was used 31 times in 2003.

7 Numbers do not include TPMs with cost or cost-plus methodologies.

April 12, 2004 761 2004-15 I.R.B.

Nineteen covered transactions reflected on Table 24 specified a single, specific result, or “point.” Three of these covered transactions involved a CPM in which the taxpayer agreed to a specific result. Some APAs specify not a point or a range, but a “floor” or a “ceiling”. When a floor is used, the tested party’s result must be greater than or equal to some particular value. When a ceiling is used, the tested party’s result must be less than or equal to some particular value. Six APAs executed in 2003 used a floor and two used a ceiling.

Some APAs look to a tested party’s results over a period of years (multi-year averaging) to determine whether a taxpayer has complied with the APA. In 2003, rolling multi-year averaging was used for 10 covered transactions. Seven of those used three-year averages, one used a four-year average, and the other two used five-year averages. Cumulative multi-year averages were used for three covered transactions. Additionally, six covered transactions used term averages, and one covered transaction used a partial term average.

Adjustments

Under Treas. Reg. § 1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the Service may adjust the result “to any point within the arm’s length range.” Accordingly, an APA may permit or require a taxpayer and its related parties to make an adjustment after the year’s end to put the year’s results within the range, or at the point specified by the APA. Similarly, to enforce the terms of an APA, the Service may make such an adjustment. When the APA specifies a range, the adjustment is sometimes to the closest edge of the range, and sometimes to another point such as the median of the interquartile range. Depending on the facts of each case, such automatic adjustments are not always permitted. APAs may specify that in such a case there will be a negotiation between the competent authorities involved to determine whether and to what extent an adjustment should be made. APAs may permit automatic adjustments unless the result is far outside the range specified in the APA. Thus APAs provide flexibility and efficiency, permitting adjustments when normal business fluctuations and uncertainties push the result somewhat outside the range.

In order to conform the taxpayer’s books to these tax adjustments, the APA usually permits a “compensating adjustment” as long as certain requirements are met. Such compensating adjustments may be paid between the related parties with no interest, and the amount transferred will not be considered for purposes of penalties for failure to pay estimated tax. See § 11.02 Rev. Proc. 96–53.

APA Term and Rollback Lengths

[§ 521(b)(2)(D)(x)]

The various term lengths for APAs executed in 2003 are set forth in Table 26 below:

TABLE 26: TERMS OF APAs

APA Term in Years	Number of APAs
1	1
2	0
3	3
4	11
5	29
6	5
7	5
8	3
9	0
10	0
11	1

Number of rollback years to which an APA TPM was applied in 2003 is set forth in Table 27 below:

2004-15 I.R.B. 762 April 12, 2004

TABLE 27: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM

Number of Rollback Years	Number of APAs
1	3
2	1
3	3
4	2
5 or more	4

Nature of Documentation Required

[§ 521(b)(2)(D)(xi)]

APAs executed in 2003 required that taxpayers provide various documents with their annual reports. These documents are described in Table 28 below:

TABLE 28: NATURE OF DOCUMENTATION REQUIRED ⁸

Documentation	Number of Times Required
Statement identifying all material differences between Taxpayer’s business operations during APA Year and description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there have been no such material differences, a statement to that effect	57
Description of any failure to meet Critical Assumptions or, if there have been none, a statement to that effect	57
Statement identifying all material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those described or used in Taxpayer’s request for APA, or if there have been none, statement to that effect	57
Financial analysis demonstrating Taxpayer’s compliance with TPM	57
Description of, reason for, and financial analysis of, any Compensating Adjustments with respect to APA Year, including means by which any Compensating Adjustment has been or will be satisfied	57
Organizational chart	51
Financial statements as prepared in accordance with US GAAP	50
Certified public accountant’s opinion that financial statements present fairly financial position of Taxpayer and the results of its operations, in accordance with US GAAP	49
Financial statements as prepared in accordance with a foreign GAAP	15
Certified public accountant’s opinion that financial statements present fairly financial position of Taxpayer and the results of its operations, in accordance with a foreign GAAP	14
Various work papers	10
Book to tax reconciliations	10
Profit & Loss statement	6
Schedule of costs and expenses (e.g., intercompany allocations)	6
Certified public accountant’s review of financial statements	3

8 The first eight categories of documentation listed in this table were drawn from the standard APA language used in 2003. The facts and circumstances of some APAs may eliminate the need for some standard documentation requirements.

April 12, 2004 763 2004-15 I.R.B.

Documentation	Number of Times Required
Description of any matters economically or substantively related to the covered transactions, but that are not subject to the APA	2
Other	16

Approaches for Sharing of Currency or Other Risks

[§ 521(b)(2)(D)(xii)]

During 2003, there were 31 tested parties that faced financial risks, including interest rate and currency risks. Three APAs provide specific approaches for dealing with currency risk, including adjustment mechanisms and critical assumptions.

Efforts to Ensure Compliance with APAs

[§ 521(b)(2)(F)]

As described in Rev. Proc. 96–53, section 11, APA taxpayers are required to file annual reports to demonstrate compliance with the terms and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual report review, the APA program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review provides current information on the success or problems associated with the various TPMs adopted in the APA process.

All reports received by the APA Office are tracked by one designated APA team leader who also has the primary responsibility for annual report review. One of the economists also spends a significant amount of time reviewing annual reports. Other APA team leaders also assist in this review, especially when the team leader who negotiated the case is available, since that person will already be familiar with the relevant facts and terms of the agreement. Once received by the APA Office, the annual report is sent out to the district personnel with exam jurisdiction over the taxpayer.

The statistics for the review of APA annual reports are reflected in Table 29 below. As of December 31, 2003, there were 222 pending annual reports. In 2003, there were 303 reports closed.

TABLE 29: STATISTICS OF ANNUAL REPORTS

Number of APA annual reports pending as of December 31, 2003	222
Number of APA annual reports closed in Year 2003	3039
Number of APA annual reports requiring adjustment in Year 2003	11
Number of taxpayers involved in adjustments	5
Number of APA annual reports required to be filed in Year 2003	235
Number of APA annual reports actually filed in Year 2003	235
Number of APA annual report cases over one year old	66

9 This number differs from previously published figures because of annual reports closed but not yet entered on the system used to compile those statistics.

2004-15 I.R.B. 764 April 12, 2004

ATTACHMENT A

ADVANCE PRICING AGREEMENT

between

[ Insert Taxpayer’s Name ]

and THE INTERNAL REVENUE SERVICE

PARTIES

The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [ Insert Taxpayer’s Name ], EIN (Taxpayer).

RECITALS

Taxpayer’s principal place of business is [ City, State ]. [ Insert general description of taxpayer and other relevant parties ] .

This APA contains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions under I.R.C. section 482, any applicable tax treaties, and the Treasury Regulations.

Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for capitalized terms not elsewhere defined in this APA.

{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending to , executed on . ]

AGREEMENT

The Parties agree as follows:

Covered Transactions . This APA applies to the Covered Transactions, as defined in Appendix A.
Transfer Pricing Method . Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
Term . This APA applies to Taxpayer’s taxable years ending through (APA Term).
Operation .

a. Revenue Procedure 96–53 governs the interpretation, legal effect, and administration of this APA.

b. Nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Revenue Procedure 96–53 (including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.

Compliance .

a. For each taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA, then the IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the Covered Transactions.

b. If Taxpayer does not comply, then the IRS may:

i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482 consistent with this APA;

ii. cancel or revoke this APA under section 11.05 or 11.06 of Revenue Procedure 96–53; or

iii. revise this APA, if the Parties agree.

c. Taxpayer must timely file an Annual Report for each APA Year in accordance with Appendix C and section 11.01 of Revenue Procedure 96–53. Taxpayer must file an original and four copies of the Annual Report by the later of (a) 90 days after the time prescribed by law (including extensions) for filing its federal income tax return for the APA Year covered by the report, or (b) 90 days after the effective date of this APA. [ The Service and the Taxpayer may agree to alternative filing dates .] The IRS may request additional information reasonably necessary to clarify or complete the Annual Report. Taxpayer will provide all requested information within 30 days. Additional time may be allowed for good cause.

April 12, 2004 765 2004-15 I.R.B.

d. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial Statements, and other APA Records, for the APA Term and any other year necessary to verify compliance. For Taxpayer to comply with this APA, an independent certified public accountant must { use the following or an alternative } render an opinion that the Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.

e. In accordance with section 11.04 of Revenue Procedure 96–53, Taxpayer will (1) maintain its APA Records, and (2) make them available to IRS in connection with an examination under section 11.03. Compliance with this subparagraph constitutes compliance with the record-maintenance provisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any taxable year during the APA Term.

f. If Taxpayer’s actual transactions do not result in compliance with the TPM, Taxpayer:

i. Must report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on its timely filed U.S. Return. However, for any APA Year, if Taxpayer’s timely filed U.S. Return is filed no later than 60 days after the effective date of this APA, then Taxpayer may instead report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on an amended U.S. Return filed no later than 120 days after the effective date of this APA.

ii. May make compensating adjustments under Revenue Procedure 96–53, section 11.02, subject to any modifications or restrictions in Appendix A or elsewhere in this APA.

g. { Insert when U.S. Group or Foreign Group contains more than one member .} [This APA addresses the arm’s-length nature of prices charged or received in the aggregate between Taxpayer[s] and Foreign Participants. Except as explicitly provided, this APA does not address and does not bind the IRS with respect to prices charged or received, or the relative amounts of income or loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]

h. The True Taxable Income within the meaning of Treasury Regulations section 1.482–1(a)(1) of a member of an affiliated group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.

i. {Optional for US Parent Signatories} To the extent that Taxpayer’s compliance with this APA depends on certain acts of Foreign Group members, Taxpayer will ensure that each Foreign Group member will perform such acts.

Critical Assumptions . This APA’s critical assumptions, within the meaning of Revenue Procedure 96–53, section 5.07, appear in Appendix B. Revenue Procedure 96–53, section 11.07, governs if any critical assumption has not been met.
Disclosure . This APA, and any background information related to this APA or the APA Request, are: (1) considered “return information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written determination” under I.R.C. section 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does not reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
Disputes . If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate Chief Counsel (International), to the extent reasonably practicable, before seeking alternative remedies. If any dispute arises that is not related to interpreting this APA, the Parties will seek to resolve the dispute in a manner consistent with Revenue Procedure 96–53, section 11.03(4).
Materiality . In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material facts” in Revenue Procedure 96–53, section 11.05(1).
Section Captions . This APA’s section captions, which appear in italics, are for convenience and reference only. The captions do not affect in any way the interpretation or application of this APA.
Entire Agreement and Severability . This APA is the complete statement of the Parties’ agreement. The Parties will sever, delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.
Successor in Interest . This contract binds, and inures to the benefit of, any successor in interest to Taxpayer.
Notice . Any notices required by this APA or Revenue Procedure 96–53 must be in writing. Taxpayer will send notices to the IRS at the address and in the manner set forth in Revenue Procedure 96–53, section 5.13(2). The IRS will send notices to:

2004-15 I.R.B. 766 April 12, 2004

Effective date and Counterparts . This APA is effective starting on the date, or later date of the dates, upon which all Parties execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.

WITNESS,

The Parties have executed this APA on the dates below.

[Taxpayer Name in all caps]

By: Date: , 20 Jane Doe Sr. Vice President (Taxes)

IRS

By: Date: , 20 Matthew W. Frank Director, Advance Pricing Agreement Program

APPENDIX A

COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)

1. Covered Transactions .

[ Define the Covered Transactions .]

2. TPM .

{Note: If appropriate, adapt language from the following examples.}

CUP Method

The TPM is the comparable uncontrolled price (CUP) method. The price charged for must equal between and (the Arm’s Length Range). Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly reflect such pricing.

Resale Price Method (RPM)

The TPM is the resale price method (RPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly reflect a gross margin (defined as gross profit divided by sales revenue as those terms are defined in Treasury Regulations sections 1.482–5(d)(1) and (2)) of between % and % (the Arm’s Length Range) for the Covered Transactions.

Cost Plus Method

The TPM is the cost plus method. Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly reflect a ratio of gross profit to production costs (within the meaning of Treasury Regulations sections 1.482–3(d)(1) and (2)) of between % and % (the Arm’s Length Range) for the Covered Transactions.

CPM with Berry Ratio PLI

The TPM is the comparable profits method (CPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly reflect a gross profit to operating expenses ratio (as those terms are defined in Treasury Regulations sections 1.482–5(d)(2) and (3)) of between and (the Arm’s Length Range) for the Covered Transactions.

April 12, 2004 767 2004-15 I.R.B.

CPM using an Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s reported operating profit (within the meaning of Treasury Regulations sections 1.482–5(d)(5)) must clearly reflect an operating margin (defined as the ratio of operating profit to sales revenue as those terms are defined in Treasury Regulations section 1.482–5(d)(1) and (4)) of between % and % (the Arm’s Length Range) for the Covered Transactions.

CPM using a Three-year Rolling Average Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s Three-Year Rolling Average operating margin is defined as follows for any APA Year: the sum of Taxpayer’s reported operating profit (within the meaning of Treasury Regulations section 1.482–5(d)(5)) for that APA Year and the two preceding years, divided by the sum of Taxpayer’s sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year and the two preceding years. Taxpayer’s Three-Year Rolling Average operating margin must be between % and % (the Arm’s Length Range.)

Residual Profit Split Method

The TPM is the residual profit split method. Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly reflect the following: [ insert description of profit-split mechanism ].

[ Insert additional provisions as needed .]

3. Adjustments.

{For use with a CPM}

For each APA Year, if Taxpayer’s year-end [Three-Year Rolling Average] {specify PLI used} for the Covered Transactions is not in compliance with the TPM, Taxpayer will make an adjustment that brings its [Three-Year Rolling Average] {specify PLI used} to {if the TPM specifies a point value, use that; if the TPM specifies an Arm’s Length Range, use the nearest edge of the Arm’s Length Range or a point such as the median within the Arm’s Length Range} .

[ Insert additional provisions as needed .]

APPENDIX B

CRITICAL ASSUMPTIONS

This APA’s critical assumptions are:

The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods and classifications [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the same as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.

[ Insert additional provisions as needed. ]

APPENDIX C

APA RECORDS AND ANNUAL REPORT

APA RECORDS

The APA Records will consist of:

All documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other writings that support the information provided in such documents.
[Insert here other records as required.]

ANNUAL REPORT

The Annual Report will include a cover sheet and a table of contents. The cover sheet will specify:

i. the Parties to the APA;

ii. the APA Term (defined in section 3 of this APA);

iii. the APA’s effective date (defined in section 14 of this APA);

2004-15 I.R.B. 768 April 12, 2004

iv. whether the APA is a renewal, and if so the term of the prior APA;

v. whether the APA has been amended, and if so the amendment’s effective date;

vi. any information needed to distinguish the APA at issue from any other APAs involving the same parties;

vii. any changes to the Taxpayer notice information in section 13 of this APA.

The table of contents and the Annual Report will be organized as listed below. Taxpayer must include the following items in its Annual Report for each APA Year.

Statements that fully identify, describe, analyze, and explain:

a. All material differences between any of Taxpayer’s business operations (including functions, risks, markets, contractual terms, economic conditions, property or services, and assets employed) during the APA Year and the description of the business operations contained in the APA Request. If there have been no material differences, the Annual Report will include a statement to that effect.

b. All material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those described or used in Taxpayer’s request for this APA. If there have been no such material changes, the Annual Report will include a statement to that effect.

c. Any failure to meet any critical assumption. If there have been no failures, the Annual Report will include a statement to that effect.

d. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or is otherwise relevant to the TPM.

e. Any changes to Taxpayer’s financial accounting methods that were made to conform to U.S. GAAP changes and that affect the Covered Transactions.

f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 5(f)(ii) of this APA for the APA Year, including but not limited to:

i. the amounts paid or received by each affected entity;

ii. the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the specific affected line item(s) of any affected U.S. Return; and

iii. the date(s) and means by which the payments are or will be made.

g. The amounts, description, reason for, and financial analysis of any book-tax differences relevant to the TPM for the APA Year, as reflected on Schedule M–1 of the U.S. Return for the APA Year.

The Financial Statements, and any necessary account detail to show compliance with the TPM, with a copy of the independent certified public accountant’s opinion required by paragraph 5(d) of this APA.
A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and reference the Financial Statements in sufficient account detail to allow the IRS to determine whether Taxpayer has complied with the TPM.
An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities that are parties to the Covered Transactions or are otherwise relevant to the TPM.

April 12, 2004 769 2004-15 I.R.B.

APPENDIX D

DEFINITIONS

The following definitions control for all purposes of this APA. The definitions appear alphabetically below:

Term	Definition
Annual Report	A report within the meaning of Revenue Procedure 96–53, section 11.
APA	This Advance Pricing Agreement, which is an “advance pricing agreement” within the meaning of Revenue Procedure 96–53, section 1.
APA Records	The records specified in Appendix C.
APA Request	Taxpayer’s request for this APA dated , including any amendments or supplemental or additional information thereto.
Covered Transaction	This term is defined in Appendix A.
Financial Statements	The financial statements prepared in accordance with U.S. GAAP and stated in U.S. dollars.
Foreign Group	Worldwide Group members that are not U.S. persons.
Foreign Participants	[name the foreign entities involved in Covered Transactions].
I.R.C.	The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106–170	The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 96–53	Rev. Proc. 96–53, 1996–2 C.B. 375.
Transfer Pricing Method (TPM)	A transfer pricing method within the meaning of Treasury Regulations section 1.482–1(b) and Revenue Procedure 96–53, section 3.02.
U.S. GAAP	U.S. generally-accepted accounting principles.
U.S. Group	Worldwide Group members that are U.S. persons.
U.S. Return	For each taxable year, the “returns with respect to income taxes under subtitle A” that Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for partnership: For each taxable year, the “return” that Taxpayer must “make” in accordance with I.R.C. section 6031.}
Worldwide Group	Taxpayer and all organizations, trades, businesses, entities, or branches (whether or not incorporated, organized in the United States, or affiliated) owned or controlled directly or indirectly by the same interests.

2004-15 I.R.B. 770 April 12, 2004

ATTACHMENT B

FORMULAS FOR BALANCE SHEET ADJUSTMENTS

Definitions of Variables:

AP = average accounts payable

AR = average trade accounts receivable, net of allowance for bad debt

cogs = cost of goods sold

INV = average inventory, stated on FIFO basis

opex = operating expenses (general, sales, administrative, and depreciation expenses)

PPE = property, plant, and equipment, net of accumulated depreciation

sales = net sales

tc = total cost (cogs + opex, as defined above)

h = average accounts payable or trade accounts receivable holding period, stated as a fraction of a year

i = interest rate

t = entity being tested

c = comparable

Equations:

If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):

Receivables Adjustment (“RA”): RA = {[(AR ) x sales ] - AR } x {i/[1+(i x h )]} t / salest c c c

Payables Adjustment (“PA”): PA = {[(AP ) x sales ] - AP } x {i/[1+(i x h )]} t / salest c c c

Inventory Adjustment (“IA”): IA = {[(INV ) x sales ] - INV t / salest c c } x i

PP&E Adjustment (“PPEA”): PPEA = {[(PPE ) x sales ] - PPE } x i t / salest c c

If Sales are controlled (generally, costs in the denominator of PLI): ¹⁰

Receivables Adjustment (“RA”): RA = {[(AR ) x tc ] - AR } x {i/[1+(i x h )]} t / tct c c c

Payables Adjustment (“PA”): PA = {[(AP ) x tc ] - AP } x {i/[1+(i x h )]} t / tct c c c

Inventory Adjustment (“IA”): IA = {[(INV ) x tc ] - INV t / tct c c } x i

PP&E Adjustment (“PPEA”): PPEA = {[(PPE ) x tc ] - PPE } x i t / tct c c

Then Adjust Comparables as Follows:

adjusted sales RA c = salesc +

adjusted cogs c = cogsc + PA - IA

adjusted opex c = opexc - PPEA

10 Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).

April 12, 2004 771 2004-15 I.R.B.

Application of Circular 230 to Municipal Bond Opinions

Announcement 2004–29

On December 30, 2003, the Treasury Department published a notice of proposed rulemaking in the Federal Register (REG–122379–02, 2004–5 I.R.B. 392) proposing modifications to rules governing practice before the Internal Revenue Service (Circular 230). Section 10.35 (Requirements for certain tax shelter opinions) of the proposed regulations is proposed to

be effective for opinions rendered after the date that final regulations are published in the Federal Register.

The Treasury Department and the IRS are continuing to consider all comments on the proposed regulations. In the meantime, the Treasury Department and the IRS announce that, in final regulations, the definition of tax shelter opinion for purposes of section 10.35 will not apply, if at all, to written advice concerning municipal bonds rendered less than 120 days after the publication of such final regulations in the Federal Register. Conforming

changes, if necessary, will be made to section 10.36(b).

The principal author of this notice is Heather L. Dostaler of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division, but other personnel from the IRS and Treasury Department participated in its development. For further information regarding this notice, contact Heather L. Dostaler at (202) 622–4940 (not a toll-free number).

2004-15 I.R.B. 772 April 12, 2004