Section 4. Procedures for Closing Cases

a. Notice of Election. To notify the Service of their intent to participate in this settlement initiative, persons must send the Notice of Election (Form 13656 for Executives and Related Persons and Form 13657 for Corporations) on or before May 23, 2005. The Service will not extend the time period for submitting the Notice of Election. If the Related Person is a pass-through entity, each member of the entity must sign the election.

The Notice of Election should be sent by certified mail or designated delivery service (within the meaning of § 7502(f)) and must be sent to:

INTERNAL REVENUE SERVICE Attn: Announcement 2005–19 MC 4166 NWSAT 4050 Alpha Rd. Farmers Branch, TX 75244

Persons under examination or in Appeals also should provide a copy of the No

been exercised or the restricted stock has not vested by February 22, 2005, the terms of the closing agreement entered into pursuant to this announcement must include the following —

1. For the Executive and Related Per- son—

i. In the year the option is exercised or the restricted stock vests, the Executive must recognize total compensation income as determined under Section 3(a)(1). Gain must be recognized in accordance with Section 3(a)(2), except that the taxable year the option is exercised or the restricted stock vests is substituted for the taxable year that the Related Person disposed of the stock or, if not yet disposed of, the taxable year that includes December 31, 2004. Interest on the deferred payment obligation must be included in income as described in Section 3(a)(3). Annuity payments must be included in income as described in Section 3(a)(4). All other payments made on the deferred payment obligation before exercise (or vesting) must be recognized as compensation income in the years in which the payments are received. If the Executive received cash or property other than the deferred payment obligation before February 22, 2005, the Executive must recognize compensation income in the year received.

ii. The Executive must pay the employee’s share of FICA tax on the compensation determined under Section 3(a)(1) in the same taxable year(s) the compensation income is recognized under Section 3(c)(1)(i). iii. The Executive or Related Person may deduct the Transaction Costs paid by the Executive or Related Person (as appropriate) but only in the year the Executive recognizes income under Section 3(c)(1)(i) and only to the extent of compensation income recognized by the Executive up to and including that year. The Executive or the Related Person (as appropriate) must include in income for the taxable year that includes December 31, 2004, any Transaction Costs deducted or amortized in years before February 22, 2005, including amounts claimed in a year barred by the period of limitations on assessments.

iv. Unless the Executive filed a valid disclosure under Announcement 2002–2,

the Executive must pay an accuracy-related penalty of ten percent on the underpayment attributable to the Transaction in the taxable year(s) determined under Section 3(c)(1)(i). For the taxable year(s) determined under Section 3(c)(1)(i), the amount of the underpayment attributable to the Transaction is equal to the increased tax resulting from the income recognized under Sections 3(a)(1) and (2).

v. The Related Person is entitled to basis in the stock (or the option before exercise) equal to the sum of (i) the income and gain recognized under Sections 3(a)(1) and (2), (ii) the exercise price paid for the stock when the option is exercised, and (iii) the amount, if any paid, for the option or restricted stock by the Executive.

2. For the Corporation—

i. The Corporation may claim a deduction (if otherwise allowable in the year of transfer, exercise, or vesting) for the compensation income as determined under Section 3(a)(1) for the taxable year that includes the taxable year(s) in which the Executive would recognize the compensation income under Section 3(c)(1)(i).

ii. The Corporation may deduct the Transaction Costs paid by the Corporation as described in Section 3(b)(3) in the taxable year the Corporation claims the compensation deduction under Section 3(c)(2)(i). iii. The Corporation must pay the employer’s share of FICA tax on the compensation income determined under Section 3(a)(1) for the calendar year ending during the taxable year in which the Corporation claims the compensation deduction under Section 3(c)(2)(i). In addition, for the same taxable year, the Corporation must pay the employee’s share of the FICA tax for each Non-participating Executive.

iv. If the Corporation participates in this settlement initiative and one or more of its Executives do not, then for each Non-participating Executive, the Corporation must satisfy its income tax withholding liability by paying an amount equal to the applicable flat supplemental withholding rate (including the mandatory 35 percent rate for supplemental wages in excess of $1,000,000) times the Executive’s compensation income as determined under Section 3(a)(1) for the taxable year in

March 14, 2005 746 2005–11 I.R.B.

(1) withholding for supplemental wages, (2) employer’s and employee’s FICA taxes, (3) failure to deposit penalties, (4) accuracy-related penalties on failure to pay income tax withholding or FICA tax, (5) disallowance of deduction for Transaction Costs paid on behalf of the Executive and associated accuracy-related penalties, (6) information reporting penalty for furnishing incorrect W–2s, and (7) disallowance of deduction for stock option compensation income. Independent Appeals’ consideration will be available for Corporations not taking part in this settlement initiative with respect to disputed tax and penalty issues following full development of these issues by the Service.