Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

26 CFR 1.401(a)–1: Post-ERISA qualified plans and qualified trusts; in general.

A revenue procedure describes methods for seeking an opinion letter or an advisory letter with respect to a pre-approved plan. See Rev. Proc. 2005-16, page 674.

Section 403.—Taxation of Employee Annuities

26 CFR 1.403(a)–1: Taxation of beneficiary under a qualified annuity plan.

A revenue procedure describes methods for seeking an opinion letter or an advisory letter with respect to a pre-approved plan. See Rev. Proc. 2005-16, page 674.

Section 411.—Minimum Vesting Standards

26 CFR 1.411(d)–4: Section 411(d)(6) protected ben- efits.

T.D. 9176

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Elimination of Forms of Distribution in Defined Contribution Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that would modify the circumstances under which certain forms of distribution previously available are permitted to be eliminated from qualified defined contribution plans. These final regulations affect qualified retirement plan sponsors, administrators, and participants.

DATES: These regulations are effective January 25, 2005.

FOR FURTHER INFORMATION CONTACT: Vernon S. Carter, 202–622–6060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final amendments to 26 CFR part 1 under section 411(d)(6) of the Internal Revenue Code of 1986 (Code) as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (115 Stat. 117).

Section 411(d)(6)(A) of the Code generally provides that a plan will not be treated as satisfying the requirements of section 411 if the accrued benefit of a participant is decreased by a plan amendment. Section 411(d)(6)(B) prior to amendment by EGTRRA provided that an amendment

is treated as reducing an accrued benefit if, with respect to benefits accrued before the amendment is adopted, the amendment has the effect of either eliminating or reducing an early retirement benefit or a retirement-type subsidy, or, except as provided by regulations, eliminating an optional form of benefit.

The IRS published T.D. 8900, 2000–2 C.B. 279 in the Federal Register on September 6, 2000 (65 FR 53901). T.D. 8900, which amended §1.411(d)–4 of the Income Tax Regulations, added paragraph (e) of Q&A–2 to provide for additional circumstances under which a defined contribution plan can be amended to eliminate or restrict a participant’s right to receive payment of accrued benefits under certain optional forms of benefit.

Section 1.411(d)–4, Q&A–2(e)(1), provides that a defined contribution plan may be amended to eliminate or restrict a participant’s right to receive payment of accrued benefits under a particular optional form of benefit without violating the section 411(d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant, the alternative forms of payment that remain available to the participant include payment in a single-sum distribution form that is otherwise identical to the eliminated or restricted optional form of benefit. The amendment cannot apply to a participant for any distribution with an annuity starting date before the earlier of the 90 ^th day after the participant receives a summary that reflects the plan amendment and that satisfies Department of Labor’s requirements for a summary of material modifications under 29 CFR 2520.104b–3, or the first day of the second plan year following the plan year in which the amendment is adopted. Section 1.411(d)–4, Q&A–2(e)(2), provides that a single-sum distribution form is otherwise identical to the optional form of benefit that is being eliminated or restricted only if it is identical in all respects (or would be identical except that it provides greater rights to the participant), except for the timing of payments after commencement. A single-sum distribution form is not otherwise identical to a specified installment form of benefit if the single-sum form:

2005–10 I.R.B. 661 March 7, 2005

date on which the installment form could have commenced;

igibility. Further, an otherwise identical distribution form need not retain any rights or features of the eliminated or restricted optional form of benefit to the extent those rights or features would not be protected from elimination under the anti-cutback rules. The single-sum distribution form would not, however, be disqualified from being an otherwise identical distribution form if the single-sum form provides greater rights to participants than did the eliminated or restricted optional form of benefit.

Section 645(a)(1) of EGTRRA added section 411(d)(6)(E), which provides that, except to the extent provided in regulations, a defined contribution plan is not treated as reducing a participant’s accrued benefit where a plan amendment eliminates a form of distribution previously available under the plan if a single-sum distribution is available to the participant at the same time as the form of distribution eliminated by the amendment and the single-sum distribution is based on the same or greater portion of the participant’s account as the form of distribution eliminated by the amendment. Thus, section 411(d)(6)(E) includes conditions that are similar to those in existing §1.411(d)–4, Q&A–2(e), but without the advance notice condition.

On July 8, 2003, a notice of proposed rulemaking (REG–112039–03, 2003–2 C.B. 504 [68 FR 40581]) was published in the Federal Register to reflect the addition of section 411(d)(6)(E) by EGTRRA. The proposed regulations amended §1.411(d)–4, Q&A–2(e) to eliminate the 90-day advance notice condition on plan amendments otherwise permitted under §1.411(d)–4, Q&A–2(e). Following publication of the proposed regulations, comments were received, but no public hearing was requested. After consideration of the comments received, the pro

posed regulations are adopted as revised by this Treasury decision.

Explanation of Provisions

These final regulations retain the general structure and much of the substance of the proposed regulations, including an example illustrating the provisions. Some changes have been made in connection with a specific recommendation for modification and clarification. The comments received in response to the proposed regulations are generally summarized below.

Two commentators were concerned that, following the elimination of the 90-day notice requirement, plan participants who counted on being able to retire with an annuity could discover that option is suddenly gone. The commentators argued that the participant may have made plans based on the expectation of receiving an annuity, and that, although participants can purchase annuities with their lump sums, they may find that annuities purchased outside the plan cost more or pay lower amounts than what they were expecting from the plan. The commentators recommended that, to the extent plan sponsors adopt amendments that terminate an annuity option, those plan sponsors should allow participants within 90 days of retiring at the time of the amendment to be permitted to elect that annuity.

The legislative history to section 645(a)(1) of EGTRRA shows that Congress was aware of the notice requirement in existing §1.411(d)–4, Q&A–2(e)(2), and adopted all of the same provisions in section 411(d)(6)(E) as are in existing §1.411(d)–4, Q&A–2(e)(2), except for the notice requirement. See Conference Report No. 107–84, 107 ^th Cong., 1 ^st Session 253–254. Accordingly, these final regulations adopt the amendments in the proposed regulation. The regulations retain the rules under which a defined contribution plan may be amended to eliminate or restrict a participant’s right to receive payment of accrued benefits under a particular optional form of benefit without violating the section 411(d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant, the alternative forms of payment that remain available to the par

ticipant include payment in a single-sum distribution. The regulations clarify that such an amendment can apply only to distributions with annuity starting dates after the amendment is adopted and, therefore, cannot apply to distributions that have already commenced. However, these final regulations remove the 90-day notice condition previously applicable to these plan amendments. ¹

One commentator commented on the example in §1.411(d)–4, Q&A–2(e), of the proposed regulations. The commentator stated it is not clear from the example why the amendment does not apply to P (the participant in the Plan) if P elects to have annuity payments begin before July 1, 2004. The commentator stated that the confusion may result because the example provided that the amendment is adopted on May 2, 2004, but does not provide when the amendment is effective. The example has been revised to reflect the comment.

Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of the Employee Retirement Income Security Act of 1974 (ERISA). Section 204(g)(2) of ERISA, as amended by EGTRRA, provides a parallel rule to section 411(d)(6)(E) of the Code that applies under Title I of ERISA, and authorizes the Secretary of the Treasury to provide exception to this parallel ERISA requirement. Therefore, regulations issued under section 411(d)(6)(E) of the Code apply for purposes of the parallel requirements of section 204(g)(2) of ERISA, as well as for section 411(d)(6)(E) of the Code.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C.

1 The Department of Labor has advised Treasury and the IRS that plans covered by Title I of ERISA are subject to the requirement under Title I that plan amendments be described in a timely summary of material modifications (SMM) or a revised summary plan description (SPD) to be distributed to plan participants and beneficiaries in accordance with applicable Department of Labor disclosure rules (see 29 CFR 2520.104b–3).

March 7, 2005 662 2005–10 I.R.B.

chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Vernon S. Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in their development.

- - - -

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

Paragraph 1. The authority citation for part 1 is amended to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.411(d)–4, Q&A–2(e) is revised to read as follows:

§1.411(d)–4 Section 411(d)(6) protected benefits.

• • • • A–2: - - (e) Permitted plan amendments affect- ing alternative forms of payment under defined contribution plans —(1) General rule . A defined contribution plan does not violate the requirements of section 411(d)(6) merely because the plan is amended to eliminate or restrict the ability of a participant to receive payment of accrued benefits under a particular optional form of benefit for distributions with annuity starting dates after the date the amendment is adopted if, after the plan amendment is effective with respect to the participant, the alternative forms of payment available to the participant include payment in a single-sum distribution form that is otherwise identical to the optional form of benefit that is being eliminated or restricted.

(2) Otherwise identical single-sum dis- tribution . For purposes of this paragraph (e), a single-sum distribution form is oth

erwise identical to an optional form of benefit that is eliminated or restricted pursuant to paragraph (e)(1) of this Q&A–2 only if the single-sum distribution form is identical in all respects to the eliminated or restricted optional form of benefit (or would be identical except that it provides greater rights to the participant) except with respect to the timing of payments after commencement. For example, a single-sum distribution form is not otherwise identical to a specified installment form of benefit if the single-sum distribution form is not available for distribution on the date on which the installment form would have been available for commencement, is not available in the same medium of distribution as the installment form, or imposes any condition of eligibility that did not apply to the installment form. However, an otherwise identical distribution form need not retain rights or features of the optional form of benefit that is eliminated or restricted to the extent that those rights or features would not be protected from elimination or restriction under section 411(d)(6) or this section.

(3) Example . The following example illustrates the application of this paragraph (e):

Example . (i) P is a participant in Plan M, a qualified profit-sharing plan with a calendar plan year that is invested in mutual funds. The distribution forms available to P under Plan M include a distribution of P’s vested account balance under Plan M in the form of distribution of various annuity contract forms (including a single life annuity and a joint and survivor annuity). The annuity payments under the annuity contract forms begin as of the first day of the month following P’s severance from employment (or as of the first day of any subsequent month, subject to the requirements of section 401(a)(9)). P has not previously elected payment of benefits in the form of a life annuity, and Plan M is not a direct or indirect transferee of any plan that is a defined benefit plan or a defined contribution plan that is subject to section 412. Distributions on the death of a participant are made in accordance with plan provisions that comply with section 401(a)(11)(B)(iii)(I). On September 2, 2005, Plan M is amended so that, effective for payments that begin on or after November 1, 2005, P is no longer entitled to any distribution in the form of the distribution of an annuity contract. However, after the amendment is effective, P is entitled to receive a single-sum cash distribution of P’s vested account balance under Plan M payable as of the first day of the month following P’s severance from employment (or as of the first day of any subsequent month, subject to the requirements of section 401(a)(9)).

(ii) Plan M does not violate the requirements of section 411(d)(6) (or section 401(a)(11)) merely because, as of November 1, 2005, the plan amendment has eliminated P’s option to receive a distribution in

any of the various annuity contract forms previously available.

(4) Effective date . This paragraph (e) is applicable on January 25, 2005.

---

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

Approved January 10, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury (Tax Policy) .

(Filed by the Office of the Federal Register on January 24, 2005, 8:45 a.m., and published in the issue of the Federal Register for January 25, 2005, 70 F.R. 3475)

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

2005–10 I.R.B. 663 March 7, 2005

Section 501.—Exemption From Tax on Corporations, Certain Trusts, etc.

26 CFR 1.501(a)–1: Exemption from taxation.

Procedures set forth whether a pre-approved plan may receive an opinion letter or an advisory letter that the plan is qualified as to form under § 401 or § 403 of the Internal Revenue Code. See Rev. Proc. 2005-16, page 674.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for March 2005.

Rev. Rul. 2005–13

This revenue ruling provides various prescribed rates for federal income tax purposes for March 2005 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Applicable Federal Rates (AFR) for March 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 3.08% 3.06% 3.05% 3.04% 110% AFR 3.40% 3.37% 3.36% 3.35% 120% AFR 3.70% 3.67% 3.65% 3.64% 130% AFR 4.02% 3.98% 3.96% 3.95%

Mid-term

AFR 3.83% 3.79% 3.77% 3.76% 110% AFR 4.21% 4.17% 4.15% 4.13% 120% AFR 4.60% 4.55% 4.52% 4.51% 130% AFR 4.99% 4.93% 4.90% 4.88% 150% AFR 5.77% 5.69% 5.65% 5.62% 175% AFR 6.74% 6.63% 6.58% 6.54%

Long-term

AFR 4.52% 4.47% 4.45% 4.43% 110% AFR 4.98% 4.92% 4.89% 4.87% 120% AFR 5.43% 5.36% 5.32% 5.30% 130% AFR 5.89% 5.81% 5.77% 5.74%

March 7, 2005 664 2005–10 I.R.B.

REV. RUL. 2005–13 TABLE 2

Adjusted AFR for March 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted AFR 2.23% 2.22% 2.21% 2.21%

Mid-term adjusted AFR 2.91% 2.89% 2.88% 2.87%

Long-term adjusted AFR 4.09% 4.05% 4.03% 4.02%

REV. RUL. 2005–13 TABLE 3

Rates Under Section 382 for March 2005

Adjusted federal long-term rate for the current month 4.09%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.27%

REV. RUL. 2005–13 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for March 2005 Appropriate percentage for the 70% present value low-income housing credit 7.97%

Appropriate percentage for the 30% present value low-income housing credit 3.42%

REV. RUL. 2005–13 TABLE 5

Rate Under Section 7520 for March 2005

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 4.60%

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 6011.—General Requirement of Return, Statement, or List

26 CFR 1.6011–5T: Required use of magnetic media for corporate income tax returns (temporary).

T.D. 9175

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 301

Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to the requirements for filing corporate income tax returns and returns of organizations required to file returns under section 6033 on magnetic media pursuant to section 6011(e) of the Internal Revenue Code (Code). The term magnetic media includes any magnetic media permitted under applicable regulations, revenue procedures, or publications, including electronic filing. The text of the temporary regulations also serves as the text of the proposed regulations (REG–130671–04) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

DATES: These regulations are effective February 12, 2005.

2005–10 I.R.B. 665 March 7, 2005

payers and tax practitioners and to address their concerns. Most corporate returns are prepared with the assistance of tax return preparation software. Some of these returns cannot yet be filed electronically using Modernized e-File because additional software is needed to format the return data and additional hardware may be needed to transmit the return data to the IRS. As a result, some taxpayers may incur incremental costs to make the transition from paper filing to electronic filing using Modernized e-File. After carefully evaluating the benefits of electronic filing and the burdens that might be imposed on filers, the IRS has determined that taxpayers will be able to convert to electronic filing at a reasonable cost and that the benefits to both the IRS and taxpayers substantially outweigh the costs.

These regulations amend the Regulations on Procedure and Administration (26 CFR part 301) relating to the filing on magnetic media pursuant to section 6011(e) of corporate income tax returns, S corporation returns, and returns required under section 6033. These regulations provide that certain large corporations, including S corporations, are required to file their corporate income tax returns electronically. These regulations also provide that certain large exempt organizations, nonexempt charitable trusts, and exempt and nonexempt private foundations are required to file electronically returns required to be filed under section 6033.

The IRS currently does not have the capability to accept electronic filing of certain types of Form 1120, Form 1120S, Form 990, and Form 990–PF, such as a Form 1120 for a taxpayer that has changed its accounting period or a Form 1120 that is the taxpayer’s final return. These types of returns are excluded from the electronic filing requirement under these regulations. The IRS will announce those returns that are excluded from electronic filing under these regulations in its publications, forms and instructions. The Treasury Department and the IRS intend to require electronic filing of additional corporate income tax returns, excise tax returns and returns required to be filed under section 6033 as the IRS increases its capability to receive these forms electronically, provided that the Treasury Department and the IRS determine that taxpayers are able

FOR FURTHER INFORMATION CONTACT: Michael E. Hara, (202) 622–4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Electronic filing of tax returns benefits taxpayers and the IRS by eliminating the manual processing of returns and reducing errors that are more likely to occur during the manual preparation and processing of paper returns. Electronic filing results in faster settling of accounts and better customer service because the time required to process paper returns is eliminated. The error rate for corporate income tax returns filed on Form 1120, “ U.S. Corporation In- come Tax Return ” and Form 1120S, “ U.S. Income Tax Return for an S Corporation,” on paper is approximately 20 percent. Information returns required to be filed under section 6033, which include Form 990, “ Return of Organization Exempt From In- come Tax,” and Form 990–PF, “ Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation,” that are filed on paper have an error rate of approximately 35 percent. The error rate for paper returns is due in roughly equal parts to IRS processing errors and taxpayer return preparation mistakes. By contrast, electronically filed returns have an error rate of less than one percent because these returns are subject to screening by the IRS prior to being accepted and are not required to be input manually by the IRS. Furthermore, returns required to be filed pursuant to section 6033 must be made available to the public by both the organization and the IRS pursuant to section 6104. Many state charity regulatory agencies rely on these returns. Requiring these returns to be filed electronically improves the accuracy of the information for both public and regulatory oversight of these organizations.

Electronic filing of returns improves taxpayer satisfaction and confidence in the filing process, and may be more cost effective for taxpayers who file electronically. Electronic filing will enable the IRS to review taxpayer submissions expeditiously to reduce audit cycle time and will help the IRS identify emerging trends.

In February 2004, the IRS introduced Modernized e-File, a new electronic filing

system for corporations required to file Form 1120 or Form 1120S and organizations required to file Form 990. During the development of Modernized e-File, the IRS worked closely with taxpayers and tax professionals to ensure that the new electronic filing system would satisfy their needs. Modernized e-File alleviates the burden of filing massive paper returns, which may be up to 50,000 pages in length. Electronically filed returns are processed upon receipt and, shortly thereafter, an IRS acknowledgment message is generated to inform taxpayers or tax professionals that the return has been accepted or rejected. Error messages for rejected returns identify the reasons the return was rejected and make it easier for the taxpayer or tax professional to correct the errors. Modernized e-File streamlines electronic filing by eliminating the need for paper documents to be mailed to the IRS and enables taxpayers to attach forms and schedules, along with other documents, to the return in Portable Document Format (PDF).

Section 6011(e) authorizes the Secretary to prescribe regulations providing the standards for determining which returns must be filed on magnetic media or in other machine-readable form. Section 6011(e)(2) provides that the Secretary may not require any person to file returns on magnetic media unless the person is required to file at least 250 returns during the calendar year. Section 6011(e)(2)(B) requires that the Secretary, prior to issuing regulations requiring these entities to file returns on magnetic media, take into account (among other relevant factors) the ability of the taxpayer to comply at reasonable cost with the requirements of the regulations. The term magnetic media includes any magnetic media permitted under applicable regulations, revenue procedures, or publications, including electronic filing. Recognizing the benefits of electronic filing, Congress enacted section 2001(a) of the IRS Restructuring and Reform Act of 1998, Public Law 105–206, 112 Stat. 727, which states that the policy of Congress is to promote paperless filing, with a long-range goal of providing for the filing of at least 80 percent of all Federal and information returns in electronic form by 2007.

The IRS has partnered with taxpayers and tax practitioners in the design of Modernized e-File to minimize burdens on tax

March 7, 2005 666 2005–10 I.R.B.

to comply with the electronic filing requirements at a reasonable cost.

Explanation of Provisions

To expand electronic filing, these regulations provide that the following taxpayers that are required by the Code or reg

ulations to file at least 250 returns during the calendar year ending with or within the taxpayer’s taxable year are required to file the following tax returns electronically for the taxable years indicated:

Under these regulations, an entity’s assets are determined based on total assets at the end of the taxable year as reported on the entity’s Form 1120, 1120S, or 990.

Some of these large entities already file their returns electronically. In addition, many of these large entities prepare their income tax returns electronically, but file the returns on paper. The Treasury Department and the IRS have determined that these taxpayers are able to comply at a reasonable cost with the requirement to file returns electronically. To eliminate the potential burden of electronic filing on small businesses that may not be able to comply at a reasonable cost, these regulations exclude small corporations and certain exempt organizations with total assets of less than $10 million.

The determination of whether an entity is required to file at least 250 returns is made by aggregating all returns, regardless of type, that the entity is required to file over the calendar year, including, for example, income tax returns, returns required under section 6033, information returns, excise tax returns, and employment tax returns. Under these regulations, corrected or amended returns are not counted in determining whether the 250-return threshold is met. All members of a controlled

group of corporations are required to file their Forms 1120 electronically if the total number of returns required to be filed by the controlled group of corporations is at least 250.

The aggregation of returns required under these regulations is limited to determining whether an entity is required to file Form 1120, Form 1120S, Form 990, or Form 990–PF electronically. These regulations do not affect §301.6011–2(c)(1)(iii), which provides that returns are not to be aggregated for purposes of determining whether information returns must be filed on magnetic media. These regulations also do not affect §301.6721–1(a)(2)(ii), which provides that the 250-return threshold requirements apply separately to original and corrected returns.

Corporations required to file Form 1120 or Form 1120S electronically under these regulations may file amended returns on paper in the form allowed by Rev. Proc. 94–69, 1994–2 C.B. 804, or in the manner prescribed by any subsequent revenue procedure. However, an entity that files an incomplete electronic return and subsequently files an amended paper return before the return’s due date has not complied with the provisions of these regulations be

cause a second return filed before the due date is treated as an original return.

Hardship Waiver

These regulations provide that the Commissioner may waive the requirements to file electronically in cases of undue hardship. Because the Treasury Department and the IRS believe that electronic filing will not impose significant burdens on the taxpayers covered by these regulations, the Commissioner will grant waivers of the electronic filing requirement only in exceptional cases. The Treasury Department and the IRS invite comments from the public regarding the waiver provision in these regulations. Additionally, the IRS will meet with various groups, including software developers and tax practitioners, to assist taxpayers in preparing to file their returns electronically. After considering comments, the Treasury Department and the IRS will issue guidance that will set forth the procedures by which a taxpayer may request a hardship waiver.

Exclusions

These regulations provide exclusions from the requirement to file electronically

2005–10 I.R.B. 667 March 7, 2005

dia under §301.6033–4T of this chapter must be filed in accordance with Internal Revenue Service revenue procedures, publications, forms, or instructions. (See §601.601(d)(2) of this chapter).

Par. 4. Section 1.6037–2T is added to read as follows:

§1.6037–2T Required use of magnetic media for income tax returns of electing small business corporations (temporary).

The return of an electing small business corporation that is required to be filed on magnetic media under §301.6037–2T of this chapter must be filed in accordance with Internal Revenue Service revenue procedures, publications, forms, or instructions. (See §601.601(d)(2) of this chapter).

PART 301—PROCEDURE AND ADMINISTRATION

Par. 5. The authority citation for part 301 is amended by adding entries, in numerical order, to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6011–5T also issued under 26 U.S.C. 6011. - * * Section 301.6033–4T also issued under 26 U.S.C. 6033. - * * Section 301.6037–2T also issued under 26 U.S.C. 6037. - * * Par. 6. Section 301.6011–5T is added to read as follows:

§301.6011–5T Required use of magnetic media for corporate income tax returns (temporary).

(a) Corporate income tax returns re- quired on magnetic media —(1) A corporation required to file a corporate income tax return on Form 1120, “ U.S. Corporation Income Tax Return,” under §1.6012–2 of this chapter must file its corporate income tax return on magnetic media if the corporation is required by the Internal Revenue Code or regulations to file at least 250 returns during the calendar year ending with or within its taxable year, was required to file a corporate income tax return on Form 1120 under §1.6012–2 of this chapter for the preceding taxable year, and has been in existence for at least one year prior to the due date (excluding extensions) of its corporate income tax return. Returns filed on magnetic media must be made in ac

for certain corporations and organizations that have not had a longstanding filing obligation. Corporations and organizations are not required to file their returns electronically if they were not required to file a Form 1120, Form 1120S, Form 990, or Form 990–PF for the preceding taxable year or have not been in existence for at least one calendar year prior to the due date (not including extensions) of their Form 1120, Form 1120S, Form 990, or Form 990–PF.

Date of Filing

A return filed electronically is deemed to be filed on the date of the electronic postmark. See §301.7502–1(d). If a corporation or organization that is required to file electronically fails to do so, the corporation or organization is deemed to have failed to file its return.

Effective Dates

To permit taxpayers sufficient time to implement the requirements of these regulations, these regulations apply to corporations required to file corporate income tax returns with total assets of $50 million or more as shown on their Schedule L of the Form 1120 or 1120S for taxable years ending on or after December 31, 2005, and to corporations required to file corporate income tax returns with total assets of $10 million or more as shown on their Schedule L of their Form 1120 or 1120S for taxable years ending on or after December 31, 2006. These regulations apply to any organization that is required to file Form 990 and that, for a taxable year ending on or after December 31, 2005, has total assets as of the end of the taxable year of $100 million or more or that, for a taxable year ending on or after December 31, 2006, has total assets as of the end of the taxable year of $10 million or more. These regulations will apply to any organization required to file Form 990–PF for taxable years ending on or after December 31, 2006. All other corporations and organizations are encouraged to adopt electronic filing as soon as feasible.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses of the preamble to the cross-reference of proposed rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these temporary regulations is Michael E. Hara, Office of the Associate Chief Counsel (Procedure and Administration), although other personnel from the IRS and Treasury Department participated in their development.

- - - -

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.6011–5T is added to read as follows:

§1.6011–5T Required use of magnetic media for corporate income tax returns (temporary).

The return of a corporation that is required to be filed on magnetic media under §301.6011–5T of this chapter must be filed in accordance with Internal Revenue Service revenue procedures, publications, forms, or instructions. (See §601.601(d)(2) of this chapter).

Par. 3. Section 1.6033–4T is added to read as follows:

§1.6033–4T Required use of magnetic media for returns by organizations required to file returns under section 6033 (temporary).

The return of an organization that is required to be filed on magnetic me

March 7, 2005 668 2005–10 I.R.B.

cordance with applicable revenue procedures, publications, forms, or instructions. In prescribing revenue procedures, publications, forms, or instructions, the Commissioner may direct the type of magnetic media filing. (See §601.601(d)(2) of this chapter).

(2) All members of a controlled group of corporations must file their corporate income tax returns on magnetic media if the aggregate number of returns required to be filed by the controlled group of corporations is at least 250.

(b) Waiver . The Commissioner may grant waivers of the requirements of this section in cases of undue hardship. A request for waiver must be made in accordance with applicable revenue procedures or publications. The waiver also will be subject to the terms and conditions regarding the method of filing as may be prescribed by the Commissioner.

(c) Failure to file . If a corporation fails to file a corporate income tax return on magnetic media when required to do so by this section, the corporation is deemed to have failed to file the return. (See section 6651 for the addition to tax for failure to file a return). In determining whether there is reasonable cause for failure to file the return, §301.6651–1(c) and rules similar to the rules in §301.6724–1(c)(3) (undue economic hardship related to filing information returns on magnetic media) will apply.

(d) Meaning of terms . The following definitions apply for purposes of this section:

(1) Magnetic media . The term magnetic media means any magnetic media permitted under applicable regulations, revenue procedures, or publications. These generally include magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically permitted under the applicable regulations, procedures, publications, forms, or instructions. (See §601.601(d)(2) of this chapter).

(2) Corporation . The term corporation means a corporation as defined in section 7701(a)(3). (3) Controlled group of corporations . The term controlled group of corporations means a group of corporations as defined in section 1563(a).

(4) Corporate income tax return . The term c orporate income tax return means a Form 1120, “ U.S. Corporation Income Tax Return,” along with all other related

forms and schedules that are required to be attached to the Form 1120.

(5) Determination of 250 returns . For purposes of this section, a corporation or controlled group of corporations is required to file at least 250 returns if, during the calendar year ending with or within the taxable year of the corporation or the controlled group, the corporation or the controlled group is required to file at least 250 returns of any type, including information returns. If the corporation is a member of a controlled group, the determination of the number of returns includes all returns required to be filed by all members of the controlled group during that calendar year.

(e) Example . The following example illustrates the provisions of paragraph (d)(5) of this section:

Example . The taxable year of Corporation X, a fiscal year taxpayer with assets in excess of $10 million, ends on September 30. During the calendar year ending December 31, 2007, X was required to file one Form 1120, “ U.S. Corporation Income Tax Return,” 100 Forms W–2, “ Wage and Tax State- ment,” 146 Forms 1099–DIV, “ Dividends and Distri- butions,” one Form 940, “ Employer’s Annual Fed- eral Unemployment (FUTA) Tax Return,” and four Forms 941, “ Employer’s Quarterly Federal Tax Re- turn .” Because X is required to file 252 returns during the calendar year that ended within its taxable year ending September 30, 2008, X is required to file its Form 1120 electronically for its taxable year ending September 30, 2008.

(f) Effective dates . This section applies to corporate income tax returns for corporations that report total assets at the end of the corporation’s taxable year that equal or exceed $50 million on Schedule L of their Form 1120, for taxable years ending on or after December 31, 2005. This section applies to corporate income tax returns for corporations that report total assets at the end of the corporation’s taxable year that equal or exceed $10 million on Schedule L of their Form 1120, for taxable years ending on or after December 31, 2006.

Par. 7. Section 301.6033–4T is added to read as follows:

§301.6033–4T Required use of magnetic media for returns by organizations required to file returns under section 6033 (temporary).

(a) Returns by organizations required to file returns under section 6033 on mag- netic media . An organization required to file a return under section 6033 on Form 990, “ Return of Organization Ex-

empt From Income Tax,” or Form 990–PF, “ Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation,” must file its Form 990 or 990–PF on magnetic media if the organization is required by the Internal Revenue Code or regulations to file at least 250 returns during the calendar year ending with or within its taxable year, was required to file its Form 990 or Form 990–PF under section 6033 for the preceding taxable year, and has been in existence for at least one calendar year prior to the due date (excluding extensions) of its Form 990 or Form 990–PF. Returns filed on magnetic media must be made in accordance with applicable revenue procedures, publications, forms, or instructions. In prescribing revenue procedures, publications, forms, or instructions, the Commissioner may direct the type of magnetic media filing. (See §601.601(d)(2) of this chapter).

(b) Waiver . The Commissioner may grant waivers of the requirements of this section in cases of undue hardship. A request for waiver must be made in accordance with applicable revenue procedures or publications. The waiver also will be subject to the terms and conditions regarding the method of filing as may be prescribed by the Commissioner.

(c) Failure to file . If an organization required to file a return under section 6033 fails to file an information return on magnetic media when required to do so by this section, the organization is deemed to have failed to file the return. (See section 6652 for the addition to tax for failure to file a return.) In determining whether there is reasonable cause for failure to file the return, §301.6652–2(f) and rules similar to the rules in §301.6724–1(c)(3) (undue economic hardship related to filing information returns on magnetic media) will apply.

(d) Meaning of terms . The following definitions apply for purposes of this section:

(1) Magnetic media . The term magnetic media means any magnetic media permitted under applicable regulations, revenue procedures, or publications. These generally include magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically permitted under the applicable regulations, procedures, publications, forms or instructions. (See §601.601(d)(2) of this chapter).

2005–10 I.R.B. 669 March 7, 2005

“ U.S. Income Tax Return for an S Corpo- ration,” along with all other related forms and schedules that are required to be attached to the Form 1120S.

(4) Electing small business corpora- tion . The term electing small business corporation means an S corporation as defined in section 1361(a)(1).

(5) Determination of 250 returns . For purposes of this section, a corporation is required to file at least 250 returns if, during the calendar year ending with or within the taxable year of the corporation, the corporation is required to file at least 250 returns of any type, including information returns.

(e) Example . The following example illustrates the provisions of paragraph (d)(5) of this section. In the example, the corporation is a calendar year taxpayer:

Example . In 2007, Corporation S, an electing small business corporation with assets in excess of $10 million, is required to file one Form 1120S, “ U.S. Corporation Income Tax Return,” 100 Forms W–2, “ Wage and Tax Statement,” 146 Forms 1099–DIV, “ Dividends and Distributions,” one Form 940, “ Em- ployer’s Annual Federal Unemployment (FUTA) Tax Return,” four Forms 941, “ Employer’s Quarterly Federal Tax Return .” Because S is required to file 252 returns during the calendar year, S is required to file its 2007 Form 1120S electronically.

(f) Effective dates . This section applies to returns of electing small business corporations that report total assets at the end of the corporation’s taxable year that equal or exceed $50 million on Schedule L of Form 1120S for taxable years ending on or after December 31, 2005. This section applies to returns of electing small business corporations that report total assets at the end of the corporation’s taxable year that equal or exceed $10 million on Schedule L of Form 1120S for taxable years ending on or after December 31, 2006.

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

Approved January 6, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury .

(Filed by the Office of the Federal Register on January 11, 2005, 8:45 a.m., and published in the issue of the Federal Register for January 12, 2005, 70 F.R. 2012)

(2) Return required under section 6033 . The term return required under section 6033 means a Form 990, “ Return of Or- ganization Exempt From Income Tax,” and Form 990–PF, “ Return of Private Foun- dation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation,” along with all other related forms and schedules that are required to be attached to the Form 990 or Form 990–PF.

(3) Determination of 250 returns . For purposes of this section, an organization is required to file at least 250 returns if, during the calendar year ending with or within the taxable year of the organization, the organization is required to file at least 250 returns of any type, including information returns.

(e) Example . The following example illustrates the provisions of paragraph (d)(3) of this section. In the example, the organization is a calendar year taxpayer:

Example . In 2006, Organization T, with total assets in excess of $10 million, is required to file one Form 990, “ Return of Organization Exempt From In- come Tax,” 200 Forms W–2, “ Wage and Tax State- ment,” and 60 Forms 1099–MISC, “ Miscellaneous Income .” Because T is required to file 261 returns during the calendar year, T must file its 2006 Form 990 electronically. (f) Effective dates . This section applies to any organization required to file Form 990 for a taxable year ending on or after December 31, 2005, that has total assets as of the end of the taxable year of $100 million or more. This section applies to any organization required to file Form 990 for a taxable year ending on or after December 31, 2006, that has total assets as of the end of the taxable year of $10 million or more. This section applies to any organization required to file Form 990–PF for taxable years ending on or after December 31, 2006. Par. 8. Section 301.6037–2T is added to read as follows:

§301.6037–2T Required use of magnetic media for returns of electing small business corporation (temporary).

(a) Returns of electing small business corporation required on magnetic media . An electing small business corporation required to file an electing small business return on Form 1120S, “ U.S. Income Tax Return for an S Corporation,” under §1.6037–1 of this chapter must file its Form 1120S on magnetic media if the small business corporation is required by

the Internal Revenue Code and regulations to file at least 250 returns during the calendar year ending with or within its taxable year, was required to file its Form 1120S under §6037–1 of this chapter for the preceding taxable year, and has been in existence for at least one calendar year prior to the due date (excluding extensions) of its Form 1120S. Returns filed on magnetic media must be made in accordance with applicable revenue procedures, publications, forms, or instructions. In prescribing revenue procedures, publications, forms, or instructions, the Commissioner may direct the type of magnetic media filing. (See §601.601(d)(2) of this chapter).

(b) Waiver . The Commissioner may grant waivers of the requirements of this section in cases of undue hardship. A request for waiver must be made in accordance with applicable revenue procedures or publications. The waiver also will be subject to the terms and conditions regarding the method of filing as may be prescribed by the Commissioner.

(c) Failure to file . If an electing small business corporation fails to file a return on magnetic media when required to do so by this section, the corporation is deemed to have failed to file the return. (See section 6651 for the addition to tax for failure to file a return.) In determining whether there is reasonable cause for failure to file the return, §301.6651–1(c) and rules similar to the rules in §301.6724–1(c)(3) (undue economic hardship related to filing information returns on magnetic media) will apply.

(d) Meaning of terms . The following definitions apply for purposes of this section:

(1) Magnetic media . The term magnetic media means any magnetic media permitted under applicable regulations, revenue procedures, or publications. These generally include magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically permitted under the applicable regulations, procedures, publications, forms, or instructions. (See §601.601(d)(2) of this chapter).

(2) Corporation . The term corporation means a corporation as defined in section 7701(a)(3). (3) Electing small business corporation return . The term electing small business corporation return means a Form 1120S,

March 7, 2005 670 2005–10 I.R.B.

Section 6031.—Return of Partnership Income

26 CFR 1.6031(a)–1: Return of partnership income.

T.D. 9177

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Return of Partnership Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations that authorize the Commissioner to provide exceptions to the requirements of section 6031(a) of the Internal Revenue Code for certain partnerships by guidance published in the Internal Revenue Bulletin. The regulations adopt the rules of the temporary regulations without any changes.

DATES: Effective Date: These regulations are effective November 5, 2003.

FOR FURTHER INFORMATION CONTACT: David A. Shulman, (202) 622–3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On November 10, 2003, the IRS and Treasury published a notice of proposed rulemaking by cross reference to temporary regulations (REG–115472–03, 2003–2 C.B. 1215) in the Federal Reg- ister, and temporary regulations in T.D. 9094 (2003–2 C.B. 1201 [68 FR 63733]), under section 6031 of the Internal Revenue Code (Code). Written comments and requests for a public hearing were solicited. No public hearing was requested, and no comments were received. Therefore, the proposed regulations under section 6031 are adopted as final regulations without any changes. The temporary regulations are removed.

Explanation of Provisions

The following is a general explanation of the provisions in the final regulations, which are the same as the provisions in the temporary regulations.

The Commissioner may, in published guidance, provide an exception to the reporting requirements of section 6031(a) for partnerships in situations in which all or substantially all of the partnership’s income is derived from the holding or disposition of tax-exempt obligations (as defined in section 1275(a)(3) and §1.1275–1(e)) or shares in a RIC that pays exempt-interest dividends (as defined in section 852(b)(5)). The exception may be conditioned on substitute reporting and eligibility and other requirements. In conjunction with issuance of the temporary regulations, the Commissioner published Rev. Proc. 2003–84, 2003–2 C.B. 1159, which provides for an exception to section 6031 for specified eligible partnerships.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. These regulations impose no new collection of information on small entities; therefore a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is David A. Shulman of the Office of the Associate Chief Counsel (Passthroughs & Special Industries), IRS. 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 amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entry for §1.6031(a)–1T, and revising the entry for §1.6031(a)–1 to read, in part, as follows:

Authority: 26 U.S.C. 7805. - * * Section 1.6031(a)–1 also issued under section 404 of the Tax Equity and Fiscal Responsibility Act of 1982) Public Law 97–248; 96 Stat. 324, 669) (TEFRA). * * * Par. 2. Section 1.6031(a)–1 is amended as follows:

1. In paragraph (a)(1), the first sentence is amended by removing the language “and §1.6031(a)–1T” immediately following the language “of this section”.

2. Paragraphs (a)(3)(ii) and (f) are revised.

The revisions read as follows:

§1.6031(a)–1 Return of partnership income.

(a) * - (3) - * (ii) The Commissioner may, in guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)( b ) of this chapter), provide for an exception to partnership reporting under section 6031 and for conditions for the exception, if all or substantially all of a partnership’s income is derived from the holding or disposition of tax-exempt obligations (as defined in section 1275(a)(3) and §1.1275–1(e)) or shares in a regulated investment company (as defined in section 851(a)) that pays exempt-interest dividends (as defined in section 852(b)(5)).

• • • • (f) Effective dates . This section applies to taxable years of a partnership beginning after December 31, 1999, except that —

(1) Paragraph (b)(3) of this section applies to taxable years of a foreign partnership beginning after December 31, 2000; and

(2) Paragraph (a)(3)(ii) of this section applies to taxable years of a partnership beginning on or after November 5, 2003.

2005–10 I.R.B. 671 March 7, 2005

§1.6031(a)–1T [REMOVED]

Par. 3. Section 1.6031(a)–1T is removed.

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

Approved January 26, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury (Tax Policy) .

(Filed by the Office of the Federal Register on February 10, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 11, 2005, 70 F.R. 7176)

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2005. See Rev. Rul. 2005-13, page 664.

March 7, 2005 672 2005–10 I.R.B.