SECTION 6. REQUEST FOR

COMMENTS

.01 In General . The Service and Treasury Department invite taxpayers to submit written comments on issues relating to § 199 and this notice. In particular, the Service and Treasury Department encourage taxpayers to submit written comments on the following issues:

(1) The Service and Treasury Department are aware that several provisions of the Code and regulations require computations based upon taxable income, and that there is confusion concerning the order in which these provisions are to be applied. Taxpayers are invited to submit a list of all provisions of the Code, regulations, and other administrative guidance (if any) that require computations based upon taxable income, and the order in which taxpayers believe they should be applied;

(2) The Service and Treasury Department are concerned that there may be situations in which a contractor does not bear the benefits and burdens of ownership with respect to property (for example, for security reasons), but nevertheless should

year . If a corporation is a member of an EAG for its entire taxable year, the corporation’s § 199 deduction for the taxable year is the amount of the § 199 deduction allocated to the corporation by the EAG. If a corporation is a member of an EAG for a portion of its taxable year, and is either not a member of any EAG, or is a member of another EAG, or both, for another portion of the taxable year, the corporation’s § 199 deduction for the taxable year is the sum of its § 199 deductions for each portion of the taxable year. For example, Corporations X and Y, calendar year corporations, are members of the same EAG for the entire 2005 taxable year. Corporation Z, also a calendar year corporation, is a member of the EAG, of which X and Y are members, for the first half of 2005 and not a member of any EAG for the second half of 2005. During the 2005 taxable year, Z does not join in the filing of a consolidated return. Z makes a § 199 closing of the books election. As a result, Z has $100 of QPAI and $80 of taxable income that is allocated to the first half of the taxable year, and ($200) of QPAI and a $150 taxable loss that is allocated to the second half of the taxable year. Taking into account Z’s QPAI and taxable income allocated to the first half of the taxable year pursuant to the § 199 closing of the books election, the EAG has positive QPAI and taxable income for the taxable year and W–2 wages in excess of the § 199(b) wage limitation. Because the EAG has both positive QPAI and taxable income and sufficient W–2 wages, and because Z has positive QPAI for the first half of the year, a portion of the EAG’s § 199 deduction is allocated to Z. Z is allowed no § 199 deduction for the second half of the taxable year. Thus, despite the fact that Z has ($100) of QPAI and a $70 taxable loss for the entire 2005 taxable year, Z is still entitled to a § 199 deduction for the taxable year equal to the § 199 deduction allocated to Z as a member of the EAG.

(8) Computation of § 199 deduction for members of expanded affiliated group with different taxable years . If members of an EAG have different taxable years, in determining the § 199 deduction of a member (the “computing member”), with respect to each group member, the computing member is required to take into account the taxable income or loss, QPAI, and W–2 wages that are both (1) attributable to the period during which the member of the EAG and

the computing member are both members of the EAG and (2) taken into account in a taxable year that begins after the effective date of § 199 and ends with or within the taxable year of the computing member with respect to which the § 199 deduction is computed.

.10 Trade or Business Requirement . Section 199(d)(5) provides that § 199 is applied by taking into account only items that are attributable to the actual conduct of a trade or business.

.11 Coordination with Alternative Mini- mum Tax . Section 199(d)(6) provides rules to coordinate the deduction allowed under § 199 with the AMT imposed by § 55. The deduction is allowed for purposes of the AMT, except that the deduction is equal to the applicable percent of the lesser of the taxpayer’s: (1) QPAI, determined without regard to subchapter A, Part IV, of the Code; or (2) AMTI (determined without regard to § 199), for the taxable year. For purposes of the preceding sentence, in the case of an individual, AGI (determined without regard to § 199) shall be substituted for AMTI.

.12 Special rules . (1) Certain non- recognition transactions . Except as provided in section 4.09 of the notice (the rules applicable to EAGs), if property is transferred by the taxpayer to an entity in a transaction to which § 351 or 721 applies, then whether the gross receipts derived by the entity are DPGR shall be determined based on the activities performed by the entity without regard to the activities performed by the taxpayer prior to the contribution of the property to the entity.

(2) Section 1031 exchanges . If a taxpayer exchanges property for replacement property in a transaction to which § 1031 applies, then whether the gross receipts derived from the lease, rental, license, sale, exchange, or other disposition of the replacement property are DPGR shall be determined based solely on the activities performed by the taxpayer.

(3) Section 381 transactions . If a corporation (the acquiring corporation) acquires the assets of another corporation (the target corporation) in a transaction to which § 381(a) applies, the acquiring corporation shall be treated as performing those activities of the target corporation with respect to the acquired assets of the target corporation. Therefore, to the extent that the acquired assets of the target corpora

2005–7 I.R.B. 526 February 14, 2005

Chief Counsel (Tax Exempt and Government Entities) at (202) 622–6040 (not toll-free calls).

Partnership Anti-Mixing Bowl Regulations

Notice 2005–15

The Internal Revenue Service intends to promulgate regulations under §§ 704 and 737 of the Internal Revenue Code to address the income tax consequences of distributions of property following partnership mergers.

BACKGROUND

Rev. Rul. 2004–43, 2004–18 I.R.B. 842, holds that new § 704(c) gain or loss is created when assets are contributed by the transferor partnership to the continuing partnership in an assets-over merger. Rev. Rul. 2004–43 also holds that § 704(c)(1)(B) applies to the newly created § 704(c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over partnership merger, but does not apply to reverse § 704(c) gain or loss resulting from a revaluation of property in the continuing partnership. In addition, Rev. Rul. 2004–43 holds that for purposes of § 737(b), net precontribution gain includes the newly created § 704(c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over partnership merger, but does not include reverse § 704(c) gain or loss resulting from a revaluation of property in the continuing partnership.

Some commentators have argued that Rev. Rul. 2004–43 is not consistent with the current regulations under §§ 704(c)(1)(B) and 737, and that the conclusions in the ruling should not be applied retroactively. In response to these comments, the Treasury Department and the Service intend to issue regulations under §§ 704(c)(1)(B) and 737 implementing the principles of the ruling. The regulations will be effective for distributions occurring after January 19, 2005. Rev. Rul. 2005–10, published in this issue of the Internal Revenue Bulletin, revokes Rev. Rul. 2004–43.

be regarded as satisfying the “by the taxpayer” requirement of § 199(c)(4)(A)(i). Taxpayers are invited to submit comments on such situations;

(3) The Service and Treasury Department request comments on the application of §199 to trusts and estates. In particular, comments are requested on whether the apportionment of distributable net income between the trust and estate and its beneficiaries should govern the determination of the §199 deduction for the taxable year, what rules should apply if there is no distributable net income for the taxable year, how these rules should be applied to split-interest trusts, and the information reporting requirements that should be imposed on the trust or estate and its beneficiaries. Comments are also requested on the application of §199 to pass-thru entities other than partnerships, S corporations, trusts and estates;

(4) The Service and Treasury Department request comments on whether taxpayers should be able to change any allocation or apportionment method of gross receipts or deductions on an amended return and whether there should be restrictions on a taxpayer’s ability to change from one method to another;

(5) The Service and Treasury Department request comments on whether additional modifications or clarifications to the § 861 method would be appropriate, including modifications relating to the determination of the “affiliated group” for purposes of allocating and apportioning expenses that are allocated and apportioned on an affiliated group basis;

(6) The Service and Treasury Department request comments regarding whether members of an EAG should be required to use the same method of allocating and apportioning deductions to DPGR. If members of an EAG were to be able to use different methods of allocating and apportioning deductions, the Service and Treasury Department request comments regarding whether a member’s ability to use the simplified deduction method or the small business simplified overall method should depend on the average annual gross receipts of that member alone or the aggregate average annual gross receipts of all members of the EAG;

(7) The Service and Treasury Department request comments related to the application of § 199 to computer software; and

(8) The Service and Treasury Department invite comments on the appropriateness of the $25,000,000 gross receipts threshold for use of the simplified deduction method.

.02 Addresses for Comments . Send submissions to: CC:PA:LPD:PR (Notice 2005–14), room 5203, Internal Revenue Service, PO Box 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 (Notice 2005–14), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Submissions may also be sent electronically via the Internet to the following e-mail address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2005–14) in the subject line. .03 Deadline for Submission of Com- ments . Comments must be received on or before March 31, 2005.