Part I. Rulings — Internal Revenue Bulletin 2005-11

Section 263A.—Capital- ization and Inclusion in Inventory Costs of Cer- tain Expenses

26 CFR 1.263A–9: The avoided cost method.

T.D. 9179

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Uniform Capitalization of Interest Expense in Safe Harbor Sale and Leaseback Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains amendments to regulations relating to the capitalization of interest expense incurred in sale and leaseback transactions under the Economic Recovery Tax Act of 1981 (ERTA) safe harbor leasing provisions. The regulations affect taxpayers that provide purchase money obligations in connection with these transactions.

DATES: Effective Date : These regulations are effective February 23, 2005.

Applicability Dates : For dates of applicability, see §1.263A–15(a)(3).

FOR FURTHER INFORMATION CONTACT: Christian Wood, 202–622–4930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR Part 1. On May 20, 2004, the IRS and Treasury Department published in the Federal Register a notice of proposed rulemaking (REG–148399–02, 2004–24 I.R.B. 1066 [69 FR 29113]) by cross reference to temporary regulations (T.D. 9129,

2004–24 I.R.B. 1046 [69 FR 29066]) under section 263A(f) of the Internal Revenue Code (Code). These amendments pertain to the treatment of certain interest expense incurred by the lessor in a sale and leaseback transaction under the ERTA safe harbor leasing provisions (former section 168(f)(8), as enacted by section 201(a) of ERTA, Public Law 97–34, 95 Stat. 214). No comments in response to the proposed regulations or requests to speak at a public hearing were received, and no hearing was held. The proposed regulations under section 263A(f) are adopted by this Treasury decision.

Effective Date

These final regulations generally apply to interest incurred in taxable years beginning on or after May 20, 2004. In the case of property that is inventory in the hands of the taxpayer, these regulations apply to taxable years beginning on or after May 20, 2004. Taxpayers may elect to apply these regulations to interest incurred in taxable years beginning on or after January 1, 1995, or, in the case of property that is inventory in the hands of the taxpayer, to taxable years beginning on or after January 1, 1995 (the general effective date of the interest capitalization regulations).

In addition, for purposes of §1.263A–15(a)(2), the exclusion of purchase money obligations given by the lessor to the lessee (or a party related to the lessee) in a sale and leaseback transaction under former section 168(f)(8) as enacted by ERTA will be considered to be a reasonable position for the application of section 263A(f) in taxable years beginning before January 1, 1995. Consequently, a taxpayer changing a method of accounting for property that is not inventory in the hands of the taxpayer to conform to these regulations may elect to include interest incurred after December 31, 1986, in taxable years beginning on or after December 31, 1986 (the general effective date of section 263A), and before January 1, 1995, in the determination of its adjustment under section 481(a). A taxpayer changing a method of accounting for property that is inventory in the hands of the taxpayer

to conform to these regulations must compute a section 481(a) adjustment and revalue its beginning inventory in the year of change as if the new method of accounting had been in effect during all prior years.

Special Analyses

It has been determined that these final regulations are 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 regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded 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 authors of these regulations are Christian Wood and Grant Anderson of the Office of Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

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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, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.263A–9, paragraph (a)(4)(ix) is added to read as follows:

§1.263A–9 The avoided cost method.

(a) * -

2005–11 I.R.B. 707 March 14, 2005

(4) - - (ix) A purchase money obligation given by the lessor to the lessee (or a party that is related to the lessee) in a sale and leaseback transaction involving an agreement qualifying as a lease under §5c.168(f)(8)–1 through §5c.168(f)(8)–11 of this chapter. See §5c.168(f)(8)–1(e) Example (2) of this chapter.

§1.263A–9T [Removed]

Par. 3. Section 1.263A–9T is removed. Par. 4. In §1.263A–15, paragraph (a)(3) is added to read as follows:

§1.263A–15 Effective dates, transitional rules, and anti-abuse rule.

(a) - - (3) Section 1.263A–9(a)(4)(ix) generally applies to interest incurred in taxable years beginning on or after May 20, 2004. In the case of property that is inventory in the hands of the taxpayer, §1.263A–9(a)(4)(ix) applies to taxable years beginning on or after May 20, 2004. Taxpayers may elect to apply §1.263A–9(a)(4)(ix) to interest incurred in taxable years beginning on or after January 1, 1995, or, in the case of property that is inventory in the hands of the taxpayer, to taxable years beginning on or after January 1, 1995. A change in a taxpayer’s treatment of interest to a method consistent with §1.263A–9(a)(4)(ix) is a change in method of accounting to which sections 446 and 481 apply.

§1.263A–15T [Removed]

Par. 5. Section 1.263A–15T is removed.

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

Approved February 15, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 22, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 23, 2005, 70 F.R. 8729)

Section 301 (5 USC).— Departmental Regulations

26 CFR 301.9000–1: Definitions when used in sec- tions 301.9000–1 through 301.9000–6.

T.D. 9178

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 301 and 602

Testimony or Production of Records in a Court or Other Proceeding

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations replacing the existing regulation that establishes the procedures to be followed by IRS officers and employees upon receipt of a request or demand for disclosure of IRS records or information. The purpose of the final regulations is to provide specific instructions and to clarify the circumstances under which more specific procedures take precedence. The final regulations extend the application of the regulation to former IRS officers and employees as well as to persons who are or were under contract to the IRS. The final regulations affect current and former IRS officers, employees and contractors, and persons who make requests or demands for disclosure.

DATES: Effective Date : These regulations are effective on February 14, 2005.

Applicability Date : For dates of applicability, see §301.9000–7.

FOR FURTHER INFORMATION CONTACT: Scott E. Powers, (202) 622–4580 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)) under control number 1545–1850. The collections of information are in §301.9000–5. This information is required to enable the IRS to provide authorizing officials with a better informed basis upon which to determine whether to grant, deny, or limit testimony or the disclosure of IRS records or information so as to conserve agency resources.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The burden reflected in the notice of proposed rulemaking (REG–140930–02, 2003–2 C.B. 583) relating to the procedures for IRS officers and employees to follow upon receipt of a request or demand for disclosure of IRS records or information was published in the Federal Register (68 FR 40850). Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of Manage- ment and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Internal Revenue Code.

Background

This document contains amendments to 26 CFR Part 301 under 5 U.S.C. 301 and 26 CFR Part 602. On July 9, 2003, a notice of proposed rulemaking (REG–140930–02, 2003–2 C.B. 583) relating to the procedures for IRS officers and employees to follow upon receipt of a request or demand for disclosure of IRS records or information was published in the Federal Register (68 FR 40850). No comments were received from the public in response to the notice of proposed rulemaking. No public hearing was requested or held. The proposed regulations are

March 14, 2005 708 2005–11 I.R.B.

part of the performance of official duties or because of that IRS officer’s or employee’s official status with respect to the administration of the internal revenue laws or any other laws administered by or concerning the IRS. IRS records or information includes, but is not limited to, returns and return information as those terms are defined in section 6103(b)(1) and (2) of the Internal Revenue Code (Code), tax convention information as defined in section 6105 of the Code, information gathered during Bank Secrecy Act and money laundering investigations, and personnel records and other information pertaining to IRS officers and employees. IRS records and information also includes information received, generated or collected by an IRS contractor pursuant to the contractor’s contract or agreement with the IRS. The term does not include records or information obtained by IRS officers and employees, solely for the purpose of a federal grand jury investigation, while under the direction and control of the United States Attorney’s Office. The term IRS records or information nevertheless does include records or information obtained by the IRS before, during, or after a Federal grand jury investigation if the records or information are obtained—

(1) At the administrative stage of a criminal investigation (prior to the initiation of the grand jury);

(2) From IRS files (such as transcripts or tax returns); or

(3) For use in a subsequent civil investigation.

(b) IRS officers and employees means all officers and employees of the United States appointed by, employed by, or subject to the directions, instructions, or orders of the Commissioner or IRS Chief Counsel and also includes former officers and employees.

(c) IRS contractor means any person, including the person’s current and former employees, maintaining IRS records or information pursuant to a contract or agreement with the IRS, and also includes former contractors.

(d) A request is any request for testimony of an IRS officer, employee or contractor or for production of IRS records or information, oral or written, by any person, which is not a demand.

(e) A demand is any subpoena or other order of any court, administrative agency

adopted as amended by this Treasury decision. With the exception of changes that are grammatical in nature, the revisions are discussed below.

Summary of Comments and Explanation of Revisions

The regulations have been clarified by the addition of an example illustrating a situation in which testimony authorization is required. In addition, text and examples have been added to illustrate that even though testimony authorization may not be required, any disclosure of IRS records and information must be proper under the applicable substantive law. For example, any disclosure of returns and return information must comply with section 6103, and any disclosure of tax convention information must comply with section 6105 and be coordinated with the United States Competent Authority.

Special Analyses

It is hereby certified that the collection of information in these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that of the estimated 1,400 requests received annually, less than 500 of those requests are estimated to be received from small entities. Moreover, the burden associated with complying with the collection of information in these regulations is estimated to be only 1 hour per respondent. 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 Internal Revenue Code, the notice of proposed rulemaking preceding this regulation 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 authors of this final regulation are David Fish and Scott E. Powers, Associate Chief Counsel (Procedure & Administration), Disclosure & Privacy Law Division.

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Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301 PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for Part 301 is amended by adding the following entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.9000–1 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804; Section 301.9000–2 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804; Section 301.9000–3 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804; Section 301.9000–4 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804; Section 301.9000–5 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804; Section 301.9000–6 also issued under 5 U.S.C. 301 and 26 U.S.C. 6103(q) and 7804;

- Par. 2. Section 301.9000–1 is revised and §§301.9000–2 through 301.9000–7 are added to read as follows:

§301.9000–1 Definitions when used in §§301.9000–1 through 301.9000–6.

(a) IRS records or information means any material (including copies thereof) contained in the files (including paper, electronic or other media files) of the Internal Revenue Service (IRS), any information relating to material contained in the files of the IRS, or any information acquired by an IRS officer or employee, while an IRS officer or employee, as a

2005–11 I.R.B. 709 March 14, 2005

(3) The potential effect of the case on the administration of the internal revenue laws or any other laws administered by or concerning the IRS;

(4) The importance of the legal issues presented;

(5) Whether the IRS records or information are available from other sources;

(6) The IRS’s anticipated commitment of time and anticipated expenditure of funds necessary to comply with the request or demand;

(7) The number of similar requests and their cumulative effect on the expenditure of IRS resources;

(8) Whether the request or demand allows a reasonable time for compliance (generally, at least fifteen business days);

(9) Whether the testimony or disclosure is appropriate under the rules of procedure governing the case or matter in which the request or demand arises;

(10) Whether the request or demand involves expert witness testimony;

(11) Whether the request or demand is for the testimony of an IRS officer, employee or contractor who is without personal knowledge of relevant facts;

(12) Whether the request or demand is for the testimony of a presidential appointee or senior executive and whether the testimony of a lower-level official would suffice;

(13) Whether the procedures in §301.9000–5 have been followed; and

(14) Any other relevant factors that may be brought to the attention of the authorizing official.

§301.9000–3 Testimony authorizations.

(a) Prohibition on disclosure of IRS records or information without testimony authorization . Except as provided in paragraph (b) of this section, when a request or demand for IRS records or information is made, no IRS officer, employee or contractor shall testify or disclose IRS records or information to any court, administrative agency or other authority, or to the Congress, or to a committee or subcommittee of the Congress without a testimony authorization. However, an IRS officer, employee or contractor may appear in person to advise that he or she is awaiting instructions from an authorizing official with respect to the request or demand.

or other authority, or the Congress, or a committee or subcommittee of the Congress, and any notice of deposition (either upon oral examination or written questions), request for admissions, request for production of documents or things, written interrogatories to parties, or other notice of, request for, or service for discovery in a matter before any court, administrative agency or other authority.

(f) An IRS matter is any matter before any court, administrative agency or other authority in which the United States, the Commissioner, the IRS, or any IRS officer or employee acting in an official capacity, or any IRS officer or employee (including an officer or employee of IRS Office of Chief Counsel) in his or her individual capacity if the United States Department of Justice or the IRS has agreed to represent or provide representation to the IRS officer or employee, is a party and that is directly related to official business of the IRS or to any law administered by or concerning the IRS, including, but not limited to, judicial and administrative proceedings described in section 6103(h)(4) and (l)(4) of the Internal Revenue Code.

(g) An IRS congressional matter is any matter before the Congress, or a committee or subcommittee of the Congress, that is related to the administration of the internal revenue laws or any other laws administered by or concerning the IRS, or to IRS records or information.

(h) A non-IRS matter is any matter that is not an IRS matter or an IRS congressional matter.

(i) A testimony authorization is a written instruction or oral instruction memorialized in writing within a reasonable period by an authorizing official that sets forth the scope of and limitations on proposed testimony and/or disclosure of IRS records or information issued in response to a request or demand for IRS records or information. A testimony authorization may grant or deny authorization to testify or disclose IRS records or information and may make an authorization effective only upon the occurrence of a precedent condition, such as the receipt of a consent complying with the provisions of section 6103(c) of the Code. To authorize testimony means to issue the instruction described in this paragraph (i).

(j) An authorizing official is a person with delegated authority to authorize tes

timony and the disclosure of IRS records or information.

§301.9000–2 Considerations in responding to a request or demand for IRS records or information.

(a) Situations in which disclosure shall not be authorized . Authorizing officials shall not permit testimony or disclosure of IRS records or information in response to requests or demands if testimony or disclosure of IRS records or information would—

(1) Violate a Federal statute including, but not limited to, sections 6103 or 6105 of the Internal Revenue Code (Code), the Privacy Act of 1974 (5 U.S.C. 552a), or a rule of procedure, such as the grand jury secrecy rule, Fed. R. Crim. P. 6(e);

(2) Violate a specific Federal regulation, including, but not limited to, 31 CFR 103.53; (3) Reveal classified national security information, unless properly declassified;

(4) Reveal the identity of an informant; or

(5) Reveal investigatory records or information compiled for law enforcement purposes that would permit interference with law enforcement proceedings or would disclose investigative techniques and procedures, the effectiveness of which could thereby be impaired.

(b) Assertion of privileges . Any applicable privilege or protection under law may be asserted in response to a request or demand for testimony or disclosure of IRS records or information, including, but not limited to, the following—

(1) Attorney-client privilege; (2) Attorney work product doctrine; and

(3) Deliberative process (executive) privilege.

(c) Non-IRS matters . If any person makes a request or demand for IRS records or information in connection with a nonIRS matter, authorizing officials shall take into account the following additional factors in responding to the request or demand—

(1) Whether the requester is a Federal agency, or a state or local government or agency thereof;

(2) Whether the demand was issued by a Federal or state court, administrative agency or other authority;

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grievant, complainant or representative, for IRS records or information in a personnel, labor relations, government contract, Bivens or FTCA matter, or matter related to informant claims, shall notify promptly the IRS Associate Chief Counsel (General Legal Services) attorney assigned to the case. If no IRS Associate Chief Counsel (General Legal Services) attorney is assigned to the case, the IRS officer, employee or contractor shall notify promptly the IRS Associate Chief Counsel (General Legal Services) attorney servicing the geographic area. The IRS Associate Chief Counsel (General Legal Services) attorney shall notify promptly the authorizing official. The IRS officer, employee or contractor who received the request or demand shall await instructions from the authorizing official.

(e) Requests or demands in IRS con- gressional matters . An IRS officer, employee or contractor who receives a request or demand in an IRS congressional matter shall notify promptly the IRS Office of Legislative Affairs. The IRS officer, employee or contractor who received the request or demand shall await instructions from the authorizing official.

(f) Opposition to a demand for IRS records or information in IRS and non-IRS matters . If, in response to a demand for IRS records or information, an authorizing official has not had a sufficient opportunity to issue a testimony authorization, or determines that the demand for IRS records or information should be denied, the authorizing official shall request the government attorney or other representative of the government to oppose the demand and respectfully inform the court, administrative agency or other authority, by appropriate action, that the authorizing official either has not yet issued a testimony authorization, or has issued a testimony authorization to the IRS officer, employee or contractor that denies permission to testify or disclose the IRS records or information. If the authorizing official denies authorization in whole or in part, the government attorney or other representative of the government shall inform the court, administrative agency or other authority of the reasons the authorizing official gives for not authorizing the testimony or the disclosure of the IRS records or information or take other action in opposition as may be appropriate (including,

(b) Exceptions . No testimony authorization is required in the following circumstances—

(1) To respond to a request or demand for IRS records or information by the attorney or other government representative representing the IRS in a particular IRS matter;

(2) To respond solely in writing, under the direction of the attorney or other government representative, to requests and demands in IRS matters, including, but not limited to, admissions, document production, and written interrogatories to parties;

(3) To respond to a request or demand issued to a former IRS officer, employee or contractor for expert or opinion testimony if the testimony sought from the former IRS officer, employee or contractor involves general knowledge (such as information contained in published procedures of the IRS or the IRS Office of Chief Counsel) gained while the former IRS officer, employee or contractor was employed or under contract with the IRS; or

(4) If a more specific procedure established by the Commissioner governs the disclosure of IRS records or information. These procedures include, but are not limited to, those relating to: procedures pursuant to §601.702(d) of this chapter; Freedom of Information Act requests pursuant to 5 U.S.C. 552; Privacy Act of 1974 requests pursuant to 5 U.S.C. 552a; disclosures to state tax agencies pursuant to section 6103(d) of the Internal Revenue Code (Code); and disclosures to the United States Department of Justice pursuant to an ex parte order under section 6103(i)(1) of the Code.

(c) Disclosures of IRS records or in- formation with or without testimony au- thorization must be permitted under other applicable law . Any disclosure of IRS records or information that is otherwise permissible under this section must not be prohibited under applicable law. For example, in a case in which returns and return information may be disclosed, the disclosure must be authorized under section 6103, even if any required testimony authorization is obtained. If tax convention information (as defined under section 6105) may be disclosed, in deciding whether the disclosure is authorized, the authorizing official must coordinate the disclosure with the U.S. Competent Authority.

§301.9000–4 Procedure in the event of a request or demand for IRS records or information.

(a) Purpose and scope . This section prescribes procedures to be followed by IRS officers, employees and contractors upon receipt of a request or demand in matters in which a testimony authorization is or may be required.

(b) Notification of the Disclosure Offi- cer . Except as provided in paragraphs (c), (d), and (e) of this section, an IRS officer, employee or contractor who receives a request or demand for IRS records or information for which a testimony authorization is or may be required shall notify promptly the disclosure officer servicing the IRS officer’s, employee’s or contractor’s geographic area. The IRS officer, employee or contractor shall await instructions from the authorizing official concerning the response to the request or demand. An IRS officer, employee, or contractor who receives a request or demand in one of the following matters should not notify the disclosure officer, but should follow the instructions in paragraph (c), (d), or (e) of this section, as applicable:

(1) United States Tax Court cases. (2) Personnel matters, labor relations matters, government contract matters, matters related to informant claims or matters related to the rules of Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, 403 U.S. 388 (1971) (Bivens matters), or matters under the Federal Tort Claims Act (FTCA).

(3) IRS congressional matters. (c) Requests or demands in United States Tax Court cases . An IRS officer, employee or contractor who receives a request or demand for IRS records or information on behalf of a petitioner in a United States Tax Court case shall notify promptly the IRS Office of Chief Counsel attorney assigned to the case. The IRS Office of Chief Counsel attorney shall notify promptly the authorizing official. The IRS officer, employee or contractor who received the request or demand shall await instructions from the authorizing official.

(d) Requests or demands in person- nel, labor relations, government contract, Bivens or FTCA matters, or matters re- lated to informant claims . An IRS officer, employee or contractor who receives a request or demand, on behalf of an appellant,

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but not limited to, filing a motion to quash or a motion to remove to Federal court).

(g) Procedure in the event of an adverse ruling . In the event the court, administrative agency, or other authority rules adversely with respect to the refusal to disclose the IRS records or information pursuant to the testimony authorization, or declines to defer a ruling until a testimony authorization has been received, the IRS officer, employee or contractor who has received the request or demand shall, pursuant to this section, respectfully decline to testify or disclose the IRS records or information.

(h) Penalties . Any IRS officer or employee who discloses IRS records or information without following the provisions of this section or §301.9000–3, may be subject to administrative discipline, up to and including dismissal. Any IRS officer, employee or contractor may be subject to applicable contractual sanctions and civil or criminal penalties, including prosecution under 5 U.S.C. 552a(i), for willful disclosure in an unauthorized manner of information protected by the Privacy Act of 1974, or under section 7213 of the Internal Revenue Code, for willful disclosure in an unauthorized manner of return information.

(i) No creation of benefit or sepa- rate privilege . Nothing in §§301.9000–1 through 301.9000–3, this section, and §§301.9000–5 and 301.9000–6, creates, is intended to create, or may be relied upon to create, any right or benefit, substantive or procedural, enforceable at law by a party against the United States. Nothing in these regulations creates a separate privilege or basis to withhold IRS records or information.

§301.9000–5 Written statement required for requests or demands in non-IRS matters.

(a) Written statement . A request or demand for IRS records or information for use in a non-IRS matter shall be accompanied by a written statement made by or on behalf of the party seeking the testimony or disclosure of IRS records or information, setting forth—

(1) A brief description of the parties to and subject matter of the proceeding and the issues;

(2) A summary of the testimony, IRS records or information sought, the relevance to the proceeding, and the estimated volume of IRS records involved;

(3) The time that will be required to present the testimony (on both direct and cross examination);

(4) Whether any of the IRS records or information is a return or is return information (as defined in section 6103(b) of the Internal Revenue Code (Code)), or tax convention information (as defined in section 6105(c)(1) of the Code), and the statutory authority for the disclosure of the return or return information (and, if no consent to disclose pursuant to section 6103(c) of the Code accompanies the request or demand, the reason consent is not necessary);

(5) Whether a declaration of an IRS officer, employee or contractor under penalties of perjury pursuant to 28 U.S.C. 1746 would suffice in lieu of deposition or trial testimony;

(6) Whether deposition or trial testimony is necessary in a situation in which IRS records may be authenticated without testimony under applicable rules of evidence and procedure;

(7) Whether IRS records or information are available from other sources; and

(8) A statement that the request or demand allows a reasonable time (generally at least fifteen business days) for compliance.

(b) Permissible waiver of statement . The requirement of a written statement in paragraph (a) of this section may be waived by the authorizing official for good cause.

§301.9000–6 Examples.

The following examples illustrate the provisions of §§301.9000–1 through 301.9000–5: Example 1 . A taxpayer sues a practitioner in state court for malpractice in connection with the practitioner’s preparation of a Federal income tax return. The taxpayer subpoenas an IRS employee to testify concerning the IRS employee’s examination of the taxpayer’s Federal income tax return. The taxpayer provides the statement required by §301.9000–5. This is a non-IRS matter. A testimony authorization would be required for the IRS employee to testify. (In addition, the taxpayer would be required to execute an appropriate consent under section 6103(c) of the Code). The IRS would oppose the IRS employee’s appearance in this case because the IRS is a disinterested party with respect to the dispute and would consider the commitment of resources to comply with the subpoena inappropriate.

Example 2 . In a state judicial proceeding concerning child support, the child’s custodial parent subpoenas for a deposition an IRS agent who is examining certain post-divorce Federal income tax returns of the non-custodial parent. This is a non-IRS matter. The custodial parent submits with the subpoena the statement required by §301.9000–5 stating as the reason for the lack of taxpayer consent to disclosure that the non-custodial parent has refused to provide the consent (both a consent from the taxpayer complying with section 6103(c) and a testimony authorization would be required prior to the IRS agent testifying at the deposition). If taxpayer consent is obtained, the IRS may provide a declaration or certified return information of the taxpayer. A deposition would be unnecessary under the circumstances.

Example 3 . The chairperson of a congressional committee requests the appearance of an IRS employee before the committee and committee staff to submit to questioning by committee staff concerning the procedures for processing Federal employment tax returns. This is an IRS congressional matter. Even though questioning would not involve the disclosure of returns or return information, the questioning would involve the disclosure of IRS records or information; therefore, a testimony authorization would be required. The IRS employee must contact the IRS Office of Legislative Affairs for instructions before appearing.

Example 4 . The IRS opens a criminal investigation as to the tax liabilities of a taxpayer. This is an IRS matter. During the criminal investigation, the IRS refers the matter to the United States Department of Justice, requesting the institution of a Federal grand jury to investigate further potential criminal tax violations. The United States Department of Justice approves the request and initiates a grand jury investigation. The grand jury indicts the taxpayer. During the taxpayer’s trial, the taxpayer subpoenas an IRS special agent for testimony regarding the investigation. The records and information collected during the administrative stage of the investigation, including the taxpayer’s tax returns from IRS files, are IRS records and information. A testimony authorization is required for the IRS special agent to testify regarding this information. However, no IRS testimony authorization is required regarding the information collected by the IRS special agent when the IRS special agent was acting under the direction and control of the United States Attorney’s Office in the Federal grand jury investigation. That information is not IRS records or information within the meaning of §301.9000–1(a). Disclosure of that information should be coordinated with the United States Attorney’s Office.

Example 5 . The United States Department of Justice attorney representing the IRS in a suit for refund requests testimony from an IRS revenue agent. This is an IRS matter. A testimony authorization would not be required for the IRS revenue agent to testify because the testimony was requested by the government attorney.

Example 6 . In response to a request by the taxpayer’s counsel to interview an IRS revenue agent who was involved in a case at the administrative level, the United States Department of Justice attorney representing the IRS in a suit for refund asks that the IRS revenue agent be made available to be interviewed. This is an IRS matter. A testimony authorization

March 14, 2005 712 2005–11 I.R.B.

would be required for the IRS revenue agent to testify because the testimony was first requested by taxpayer’s counsel.

Example 7 . A state assistant attorney general, acting in accordance with a recommendation from his state’s department of revenue, is prosecuting a taxpayer under a state criminal law proscribing the intentional failure to file a state income tax return. The assistant attorney general serves an IRS employee with a subpoena to testify concerning the taxpayer’s Federal income tax return filing history. This is a non-IRS matter. This is also a state judicial proceeding pertaining to tax administration within the meaning of section 6103(h)(4) and (b)(4). As such, the requirements of section 6103(h)(4) apply. A testimony authorization would be required for the testimony demand in the subpoena.

Example 8 . A former IRS revenue agent is requested to testify in a divorce proceeding. The request seeks testimony explaining the meaning of entries appearing on one party’s transcript of account, which is already in the possession of the parties. This is a non-IRS matter. No testimony authorization is required because the testimony requested from the former IRS employee involves general knowledge gained while the former IRS revenue agent was employed with the IRS.

CFR part or section where identified and described

Example 9 . A Department of Justice attorney requests an IRS employee to testify in a refund suit involving Taxpayer A. The testimony may include tax convention information, as defined in section 6105, which was originally obtained by the IRS from a treaty partner in connection with a tax case against Taxpayer B. While no testimony authorization is necessary, because the testimony is being requested by government counsel in a tax matter, the IRS employee may not testify (or otherwise disclose IRS records or information) without coordinating with the U.S. Competent Authority, as disclosure of tax convention information is governed by section 6105. The disclosure must also meet the requirements in section 6103(h)(4).

Example 10 . In a state court tort action, Defendant subpoenas IRS for Plaintiff’s federal income tax returns for particular taxable years. This is a non-IRS matter. The Disclosure Officer instructs Defendant that the IRS has established procedures for obtaining copies of Federal income tax returns. Section 601.702(d)(1) of this chapter establishes the procedures for obtaining Federal tax returns by requiring written requests for copies of tax returns using IRS Form 4506, “Request for Copy of Tax Return.” At Defendant’s request, Plaintiff executes Form 4506, naming Defendant’s counsel as designee, and the form is properly submitted to IRS. A testimony authorization

would not be required to disclose Plaintiff’s returns to Defendant’s counsel.

§301.9000–7 Effective date.

These regulations are applicable on February 14, 2005.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 4. In §602.101, paragraph (b) is amended by adding an entry for §301.9000–5 in numerical order to the table to read as follows:

§602.101 OMB Control numbers.

- - - (b) - *

Current OMB control No.

301.9000–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1850

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

Approved February 3, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on February 11, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 14, 2005, 70 F.R. 7396)

Section 368.— Definitions Relating to Corporate Reorganizations

26 CFR 1.368–1: Purpose and scope of exception of reorganization exchanges.

T.D. 9182

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reorganizations Under Section 368(a)(1)(E) and Section 368(a)(1)(F)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations regarding reorganizations under section 368(a)(1)(E) and sec

tion 368(a)(1)(F) of the Internal Revenue Code. The regulations affect corporations and their shareholders.

DATES: Effective Date : These regulations are effective on February 25, 2005.

Applicability Date : These regulations apply to transactions occurring on or after February 25, 2005.

FOR FURTHER INFORMATION CONTACT: Robert B. Gray, at (202) 622–7550 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

On August 12, 2004, the IRS and Treasury Department published a notice of proposed rulemaking (REG–106889–04, 2004–38 I.R.B. 501) in the Federal Reg- ister (69 FR 49836) proposing regulations regarding the requirements for a reorganization under section 368(a)(1)(E)

2005–11 I.R.B. 713 March 14, 2005

Section 1374.—Tax Imposed on Certain Built-In Gains

26 CFR 1.1374–3: Net unrealized built-in gain.

T.D. 9180

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Adjustment to Net Unrealized Built-in Gain

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section 1374 that provide for an adjustment to the amount that may be subject to tax under section 1374 in certain cases in which an S corporation acquires assets from a C corporation in an acquisition to which section 1374(d)(8) applies. These final regulations provide guidance to certain S corporations that acquire assets from a C corporation in a carryover basis transaction.

DATES: Effective Date : These regulations are effective February 23, 2005.

Applicability Dates : For dates of applicability, see §1.1374–10.

FOR FURTHER INFORMATION CONTACT: Jennifer D. Sledge, (202) 622–7750 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

This document contains amendments to Income Tax Regulations (26 CFR part 1) under section 1374 of the Internal Revenue Code, relating to the tax imposed on certain recognized built-in gains of S corporations. Section 1374 imposes a tax on an S corporation’s net recognized built-in gain attributable to assets that it held on the date it converted from a C corporation to an S corporation for the 10-year period beginning on the first day the corporation is an S corporation and assets that it acquired

and section 368(a)(1)(F) of the Internal Revenue Code (Code). Generally, a transaction must satisfy the continuity of interest and continuity of business enterprise requirements to qualify as a reorganization under section 368(a). The notice proposed amending §1.368–1(b) to provide that a continuity of interest and a continuity of business enterprise are not required for a transaction to qualify as a reorganization under section 368(a)(1)(E) (E reorganization) or section 368(a)(1)(F) (F reorganization). The notice also proposed amending §1.368–2 to include rules regarding the requirements for a transaction to qualify as an F reorganization and regarding the effects of an F reorganization.

The IRS and Treasury Department have received oral comments urging that the rule providing that the continuity of interest and continuity of business enterprise requirements do not apply to E and F reorganizations be finalized quickly. For the reasons expressed in the preamble to the proposed regulations, this Treasury decision adopts that rule for transactions on or after February 25, 2005. The IRS and Treasury Department continue to study the other issues addressed in the notice of proposed rulemaking, and welcomes further comment on those issues.

Effect on Other Documents

The following publications are obsolete as of February 25, 2005:

Rev. Rul. 69–516, 1969–2 C.B. 56. Rev. Rul. 77–415, 1977–2 C.B. 311. Rev. Rul. 77–479, 1977–2 C.B. 119. Rev. Rul. 82–34, 1982–1 C.B. 59.

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 these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 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 Robert B. Gray of the Office of Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendment 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 in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–1(b) is amended by adding a sentence after the seventh sentence to read as follows:

§1.368–1 Purpose and scope of exception of reorganization exchanges.

- - - (b) Purpose . - - - Notwithstanding the requirements of this paragraph (b), for transactions occurring on or after February 25, 2005, a continuity of the business enterprise and a continuity of interest are not required for the transaction to qualify as a reorganization under section 368(a)(1)(E) or (F). - -

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

Approved February 14, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on February 24, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 25, 2005, 70 F.R. 9219)

March 14, 2005 714 2005–11 I.R.B.

Drafting Information

The principal author of these regulations is Jennifer D. Sledge of the Office of Associate Chief Counsel (Corporate). Other personnel from Treasury and the IRS participated in their development.

- - - -

Proposed 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 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1374–3 is amended by:

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

§1.1374–3 Net unrealized built-in gain.

- - - (b) Adjustment to net unrealized built-in gain - (1) In general . If section 1374(d)(8) applies to an S corporation’s acquisition of assets, some or all of the stock of the corporation from which such assets were acquired was taken into account in the computation of the net unrealized built-in gain for a pool of assets of the S corporation, and some or all of such stock is redeemed or canceled in such transaction, then, subject to the limitations of paragraph (b)(2) of this section, such net unrealized built-in gain is adjusted to eliminate any effect that any built-in gain or built-in loss in the redeemed or canceled stock (other than stock with respect to which a loss under section 165 is claimed) had on the initial computation of net unrealized built-in gain for that pool of assets. For purposes of this paragraph, stock described in section 1374(d)(6) shall be treated as taken into account in the computation of the net unrealized built-in gain for a pool of assets of the S corporation.

(2) Limitations on adjustment - (i) Recognized built-in gain or loss. Net unrealized built-in gain for a pool of assets of the S corporation is only adjusted

from a C corporation in a carryover basis transaction for the 10-year period beginning on the day of the acquisition. A separate determination of the amount subject to tax under section 1374 is required for those assets the S corporation held on the date it converted to C status and each pool of assets the S corporation acquired in a carryover basis transaction from a C corporation. The total amount subject to tax under section 1374 for each pool of assets is limited to that pool’s net unrealized built-in gain (NUBIG) on the date of the conversion or acquisition.

Under the current rules, if X, a C corporation, elects to be an S corporation when it owns some or all of the stock of Y, a C corporation, and Y subsequently transfers its assets to X in a liquidation to which sections 332 and 337(a) apply or in a reorganization described in section 368(a), the built-in gain or built-in loss in Y’s assets may be wholly or partially reflected twice: once in the NUBIG attributable to the assets X owned on the date of its conversion (including the Y stock) and a second time in the NUBIG attributable to Y’s former assets acquired by X in the liquidation of Y. The IRS and Treasury Department recognize that continuing to reflect the built-in gain or the built-in loss in the Y stock at the time of X’s conversion after the liquidation or reorganization is inconsistent with the fact that such liquidation or reorganization has the effect of eliminating that built-in gain or built-in loss. Therefore, on June 25, 2004, the IRS and Treasury Department published in the Federal Register (69 FR 35544) a notice of proposed rulemaking (REG–131486–03, 2004–28 I.R.B. 36) that includes regulations proposing an adjustment to the NUBIG in these cases. In particular, the proposed regulations generally provide that, if an S corporation acquires assets of a C corporation in a carryover basis transaction, some or all of the stock of the C corporation from which such assets were acquired was taken into account in the computation of NUBIG for a pool of assets of the S corporation, and some or all of such stock is redeemed or canceled in such transaction, then, subject to certain limitations, such NUBIG is adjusted to eliminate any effect any built-in gain or built-in loss in the redeemed or canceled stock had on the initial computation of NUBIG for that pool of assets.

These regulations are proposed to apply for taxable years beginning after the date they are published as final regulations in the Federal Register .

No public hearing was requested or held regarding the proposed regulations. One written comment, however, was received. That comment requested that the proposed regulations be made effective as soon as possible.

These final regulations adopt the proposed regulations without substantive change as final regulations. However, the final regulations do modify the proposed effective date of the regulations. The final regulations apply to section 1374(d)(8) transactions that occur in taxable years beginning after February 23, 2005. The final regulations also provide that an S corporation may apply the regulations to section 1374(d)(8) transactions that occur in taxable years beginning on or before February 23, 2005, if the S corporation (and any predecessors or successors) and all affected shareholders file original or amended returns that are consistent with the regulations for taxable years of the S corporation during the recognition period of the pool of assets the NUBIG of which would be adjusted pursuant to the regulations that are not closed as of the first date after February 23, 2005 that the S corporation files an original or amended return.

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 regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

2005–11 I.R.B. 715 March 14, 2005

the corporation was previously a C corporation; or

(ii) The assets the S corporation acquired from a C corporation in a section 1374(d)(8) transaction. (c) Examples . The following examples illustrate the rules of this section:

Example 1 . Computation of net unrealized built-in gain . (i)(A) X, a calendar year C corporation using the cash method, elects to become an S corporation on January 1, 1996. On December 31, 1995, X has assets and liabilities as follows:

under paragraph (b)(1) of this section to reflect built-in gain or built-in loss in the redeemed or canceled stock that has not resulted in recognized built-in gain or recognized built-in loss during the recognition period.

(ii) Anti-duplication rule . Paragraph (b)(1) of this section shall not be applied to duplicate an adjustment to the net unrealized built-in gain for a pool of assets made pursuant to paragraph (b)(1) of this section.

(3) Effect of adjustment . Any adjustment to the net unrealized built-in gain made pursuant to this paragraph (b) only affects computations of the amount subject to tax under section 1374 for taxable years that end on or after the date of the acquisition to which section 1374(d)(8) applies.

(4) Pool of assets . For purposes of this section, a pool of assets means —

(i) The assets held by the corporation on the first day it became an S corporation, if

Assets FMV Basis Factory $500,000 $900,000 Accounts Receivable 300,000 0 Goodwill 250,000 0

Total 1,050,000 900,000

Liabilities Amount Mortgage $200,000 Accounts Payable 100,000

Total 300,000

(B) Further, X must include a total of $60,000 in taxable income in 1996, 1997, and 1998 under section 481(a).

(ii) If, on December 31, 1995, X sold all its assets to a third party that assumed all its liabilities, X’s amount realized would be $1,050,000 ($750,000

Amount realized $1,050,000 Deduction allowed (A/P) (100,000) Basis of X’s assets (900,000) Section 481 adjustments 60,000

Net unrealized built-in gain 110,000

Example 2. Adjustment to net unrealized built-in gain for built-in gain in eliminated C corporation stock . (i) X, a calendar year C corporation, elects to become an S corporation effective January 1, 2005. On that date, X’s assets (the first pool of assets) have a net unrealized built-in gain of $15,000. Among the assets in the first pool of assets is all of the outstanding stock of Y, a C corporation, with a fair market value of $33,000 and an adjusted basis of $18,000. On March 1, 2009, X sells an asset that it owned on January 1, 2005, and as a result has $10,000 of recognized built-in gain. X has had no other recognized built-in gain or built-in loss. X’s taxable income limitation for 2009 is $50,000. Effective June 1, 2009, X elects under section 1361 to treat Y as a qualified subchapter S subsidiary (QSub). The election is treated as a transfer of Y’s assets to X in a liquidation to which sections 332 and 337(a) apply.

(ii) Under paragraph (b) of this section, the net unrealized built in-gain of the first pool of assets is adjusted to account for the elimination of the Y stock in the liquidation. The net unrealized built-in gain of the first pool of assets, therefore, is decreased by $15,000, the amount by which the fair market value of the Y stock exceeded its adjusted basis as of January

1, 2005. Accordingly, for taxable years ending after June 1, 2009, the net unrealized built-in gain of the first pool of assets is $0.

(iii) Under §1.1374–2(a), X’s net recognized built-in gain for any taxable year equals the least of X’s pre-limitation amount, taxable income limitation, and net unrealized built-in gain limitation. In 2009, X’s pre-limitation amount is $10,000, X’s taxable income limitation is $50,000, and X’s net unrealized built-in gain limitation is $0. Because the net unrealized built-in gain of the first pool of assets has been adjusted to $0, despite the $10,000 of recognized built-in gain in 2009, X has $0 net recognized built-in gain for the taxable year ending on December 31, 2009.

Example 3. Adjustment to net unrealized built-in gain for built-in loss in eliminated C corporation stock . (i) X, a calendar year C corporation, elects to become an S corporation effective January 1, 2005. On that date, X’s assets (the first pool of assets) have a net unrealized built-in gain of negative $5,000. Among the assets in the first pool of assets is 10 percent of the outstanding stock of Y, a C corporation, with a fair market value of $18,000 and an adjusted basis of $33,000. On March 1, 2009, X sells an asset

cash received + $300,000 liabilities assumed = $1,050,000). Thus, X’s net unrealized built-in gain is determined as follows:

that it owned on January 1, 2005, resulting in $8,000 of recognized built-in gain. X has had no other recognized built-in gains or built-in losses. X’s taxable income limitation for 2009 is $50,000. On June 1, 2009, Y transfers its assets to X in a reorganization under section 368(a)(1)(C).

(ii) Under paragraph (b) of this section, the net unrealized built in-gain of the first pool of assets is adjusted to account for the elimination of the Y stock in the reorganization. The net unrealized built-in gain of the first pool of assets, therefore, is increased by $15,000, the amount by which the adjusted basis of the Y stock exceeded its fair market value as of January 1, 2005. Accordingly, for taxable years ending after June 1, 2009, the net unrealized built-in gain of the first pool of assets is $10,000.

(iii) Under §1.1374–2(a), X’s net recognized built-in gain for any taxable year equals the least of X’s pre-limitation amount, taxable income limitation, and net unrealized built-in gain limitation. In 2009, X’s pre-limitation amount is $8,000 and X’s taxable income limitation is $50,000. The net unrealized built-in gain of the first pool of assets has been adjusted to $10,000, so X’s net unrealized built-in gain limitation is $10,000. X, therefore, has $8,000 net

March 14, 2005 716 2005–11 I.R.B.

Section 2702.—Special Valuation Rules in Case of Transfers of Interests in Trusts

26 CFR 25.2702–2: Definitions and valuation rules.

T.D. 9181

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 25

Qualified Interests

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations amending the regulations under the gift tax special valuation rules to provide that a unitrust or annuity interest payable for a specified term of years to the grantor, or to the grantor’s estate if the grantor dies prior to the expiration of the term, is a qualified interest for the specified term. The final regulations also clarify that the exception treating a spouse’s revocable successor interest as a retained qualified interest applies only if the spouse’s annuity or unitrust interest, standing alone, would constitute a qualified interest that meets the requirements of §25.2702–3(d)(3), but for the grantor’s revocation power.

DATES: The regulations are effective July 26, 2004.

FOR FURTHER INFORMATION CONTACT: Juli Ro Kim (202) 622–3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On July 26, 2004, the IRS published in the Federal Register (69 FR 44476) a notice of proposed rulemaking (REG–163679–02, 2004–35 I.R.B. 390) conforming the gift tax regulations defining a qualified interest for purposes of section 2702 to the Tax Court’s decision in Walton v. Commissioner, 115 T.C. 589 (2000), acq. in result, Notice 2003–72, 2003–2 C.B. 964. In Walton, the court declared Example 5 of §25.2702–3(e) to

recognized built-in gain for the taxable year ending on December 31, 2009. X’s net unrealized built-in gain limitation for 2010 is $2,000.

Example 4. Adjustment to net unrealized built-in gain in case of prior gain recognition . (i) X, a calendar year C corporation, elects to become an S corporation effective January 1, 2005. On that date, X’s assets (the first pool of assets) have a net unrealized built-in gain of $30,000. Among the assets in the first pool of assets is all of the outstanding stock of Y, a C corporation, with a fair market value of $45,000 and an adjusted basis of $10,000. Y has no current or accumulated earnings and profits. On April 1, 2007, Y distributes $18,000 to X, $8,000 of which is treated as gain to X from the sale or exchange of property under section 301(c)(3). That $8,000 is recognized built-in gain to X under section 1374(d)(3), and results in $8,000 of net recognized built-in gain to X for 2007. X’s net unrealized built-in gain limitation for 2008 is $22,000. On June 1, 2009, Y transfers its assets to X in a liquidation to which sections 332 and 337(a) apply. (ii) Under paragraph (b) of this section, the net unrealized built in-gain of the first pool of assets is adjusted to account for the elimination of the Y stock in the liquidation. The net unrealized built-in gain of that pool of assets, however, can only be adjusted to reflect the amount of built-in gain that was inherent in the Y stock on January 1, 2005, that has not resulted in recognized built-in gain during the recognition period. In this case, therefore, the net unrealized built-in gain of the first pool of assets cannot be reduced by more than $27,000 ($35,000, the amount by which the fair market value of the Y stock exceeded its adjusted basis as of January 1, 2005, minus $8,000, the recognized built-in gain with respect to the stock during the recognition period). Accordingly, for taxable years ending after June 1, 2009, the net unrealized built-in gain of the first pool of assets is $3,000. The net unrealized built-in gain limitation for 2009 is $0.

Par. 3. Paragraph (a) of §1.1374–10 is revised to read as follows:

§1.1374–10 Effective date and additional rules.

(a) In general . Sections 1.1374–1 through 1.1374–9, other than §1.1374–3(b) and (c) Examples 2 through 4, apply for taxable years ending on or after December 27, 1994, but only in cases where the S corporation’s return for the taxable year is filed pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994. Section 1.1374–3(b) and (c) Examples 2 through 4 apply to section 1374(d)(8) transactions that occur in taxable years beginning after February 23, 2005. In addition, an S corporation may apply §1.1374–3(b) and (c) Examples 2 through 4 to section 1374(d)(8) transactions that occur in taxable years beginning on or before February 23, 2005, if the S corporation (and any predecessors or

successors) and all affected shareholders file original or amended returns that are consistent with these provisions for taxable years of the S corporation during the recognition period of the pool of assets the net unrealized built-in gain of which would be adjusted pursuant to those provisions that are not closed as of the first date after February 23, 2005, that the S corporation files an original or amended return. For purposes of this section, affected shareholders means all shareholders who received distributive shares of S corporation items in such taxable years. However, the Commissioner may, in appropriate circumstances, permit taxpayers to apply these provisions even if all affected shareholders cannot file consistent returns. In addition, for this purpose, a predecessor of an S corporation is a corporation that transfers its assets to the S corporation in a transaction to which section 381 applies. A successor of an S corporation is a corporation to which the S corporation transfers its assets in a transaction to which section 381 applies.

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

Approved February 14, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on February 22, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 23, 2005, 70 F.R. 8727)

2005–11 I.R.B. 717 March 14, 2005

Other commentators suggested that the regulations also address the treatment of a revocable spousal interest in a Walton -type GRAT when the grantor’s spouse is given a revocable survivor interest in the annuity payments to be made during the balance of the fixed term of the GRAT remaining after the grantor’s death. Specifically, if the grantor dies prior to the expiration of the fixed GRAT term, the annuity interest is payable to the spouse for the balance of that term, subject to the grantor’s power to revoke the spousal interest or, if the spousal interest is revoked, then to the grantor’s estate for the balance of the fixed term. The commentators suggested that regardless of whether the grantor dies during the stated term or survives, the annuity or unitrust interest will be paid for a fixed term of years either to the grantor, the surviving spouse, or the grantor’s estate. Accordingly, the commentators suggested that the interest is payable in all events for a fixed term, and is therefore a qualified interest. The commentators’ suggestion would extend the concept espoused by the Tax Court in Walton of an “undifferentiated unit” consisting of the grantor and the grantor’s estate (see 115 T.C. at 603) to include the grantor, the grantor’s estate, and the grantor’s spouse. Treasury and the IRS do not believe that the Tax Court opinion supports this extension. The spouse’s revocable successor interest is an interest separate and distinct from the interest of the grantor and the grantor’s estate. Further, the use of the spouse’s life expectancy in valuing the retained interest would increase the value of that interest without any guarantee that the spouse would actually receive any part of that interest. For these reasons, the spouse’s revocable successor interest described above does not satisfy the requirements of a qualified interest. Accordingly, this suggestion was not adopted.

Special Analyses

be invalid. The notice of proposed rulemaking also clarifies those parts of the regulations under section 2702 addressing revocable spousal interests that were at issue in Schott v. Commissioner, 319 F.3d 1203 (9 ^th Cir. 2003), rev’g and remanding T.C.M. 2001–110, and Cook v. Commis- sioner, 269 F.3d 854 (7 ^th Cir. 2001), aff’g 115 T.C. 15 (2000). No public hearing was requested or held, but one written comment and some telephone comments were received. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision, and the corresponding proposed regulations are removed. The comments and revisions to the proposed regulations are discussed below.

Summary of Comments

Generally, the commentators agreed with the amendments conforming the regulations to the Walton decision. Several commentators requested that the regulations address the amount includible in the grantor’s gross estate with respect to a Walton -type grantor retained annuity trust (GRAT), if the grantor dies during the GRAT term, including the application of Rev. Rul. 82–105, 1982–1 C.B. 133. In addition, several commentators requested guidance regarding the application of section 2035 if the grantor dies within three years after termination of the term of the GRAT (or grantor retained unitrust (GRUT)). These suggestions were not adopted. The determination of the amount includable in the grantor’s gross estate is an issue different from and governed by different Code sections than the definition of a qualified interest for purposes of section 2702, and is thus beyond the scope of this project. However, Treasury and IRS will consider addressing that issue in future guidance.

Regarding the proposed regulations addressing revocable spousal interests, commentators suggested that section 2702 was enacted to avoid valuation problems and that, because the value of the contingent revocable spousal interest at issue in Schott v. Commissioner is readily determinable using actuarial tables, such an interest should be a qualified interest (as the Ninth Circuit concluded in Schott ).

Treasury and the IRS continue to believe that the proposed regulations properly implement section 2702 and the policy underlying the statute. Uncertainty in valuation is not the only valuation inaccuracy that the statute was intended to correct. A valuation inaccuracy is also present when the value of a retained interest is increased through the use of a joint and survivor (or two-life) annuity or unitrust interest if there is no certainty that the survivorship interest will ever be paid. The revocable spousal interest involved in Schott may best be described as speculative, because it takes effect, if at all, only if the grantor fails to survive the term of the trust, and the duration of the interest, if it takes effect at all, is dependent on the portion of the term remaining at the grantor’s death. The existing regulations make it clear that the ability to actuarially determine an interest is not sufficient to secure recognition of that interest as a qualified interest for purposes of section 2702. Under Example 1 of §25.2702–2(d)(1), neither a retained income interest for life nor a contingent reversionary interest in trust corpus payable to the grantor’s estate if the grantor dies prior to the expiration of the trust term is a qualified interest, notwithstanding that the present value of both the income interest and the contingent reversion is readily determinable actuarially. Just as the contingent reversion in Exam- ple 1 would increase the value of the retained interest without any certainty that the reversion would ever be paid, a revocable spousal interest of the kind at issue in Schott would similarly increase the value of the retained interest without any certainty that the spouse’s survivorship interest would ever be paid.

Some commentators requested that the regulations also confirm the gift tax consequences of the lapse of the grantor’s retained right to revoke the spouse’s successor interest, for example when that revocation right lapses at the end of the GRAT term and the spouse’s successor interest becomes operative. In response, language has been added to §25.2702–3(e), Example 8, to clarify that the grantor makes a completed gift to the spouse when the revocation right lapses on the expiration of the grantor’s retained term (the grantor having survived the term and not having exercised the revocation right). See §25.2511–2(f).

March 14, 2005 718 2005–11 I.R.B.

the transferor’s retained power to revoke the interest. - * *

- - - Par. 4. Section 25.2702–3 is amended as follows:

Paragraphs (d)(2) through (d)(5) are redesignated as paragraphs (d)(3) through (d)(6), respectively.
A new paragraph (d)(2) is added.
In newly designated paragraph (d)(4), the first two sentences are revised.
Newly designated paragraph (d)(5) is revised.
In paragraph (e), Example 5, the last sentence is revised.
In paragraph (e), Example 6, the last sentence is removed and two new sentences are added in its place.
In paragraph (e), new Example 8 and new Example 9 are added.

The revisions and additions read as follows:

§25.2702–3 Qualified interests.

- - - (d) - * (2) Contingencies . A holder’s qualified interest must be payable in any event to or for the benefit of the holder for the fixed term of that interest. Thus, payment of the interest cannot be subject to any contingency other than either the survival of the holder until the commencement, or throughout the term, of that holder’s interest, or, in the case of a revocable interest described in §25.2702–2(a)(6), the transferor’s right to revoke the qualified interest of that transferor’s spouse.
- - - (4) Term of the annuity or unitrust in- terest . The governing instrument must fix the term of the annuity or unitrust and the term of the interest must be fixed and ascertainable at the creation of the trust. The term must be for the life of the holder, for a specified term of years, or for the shorter (but not the longer) of those periods. - * *

(5) Commutation . The governing instrument must prohibit commutation (prepayment) of the interest of the holder.

- - - (e) * - Example 5 . - * * The interest of A (and A’s estate) to receive the unitrust amount for the specified term of 10 years in all events is a qualified unitrust interest for a term of 10 years.

on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the Notice of Proposed Rulemaking preceding these regulations was submitted to the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Juli Ro Kim, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. Other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 25 is amended as follows:

PART 25—GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Paragraph 1. The authority citation for part 25 continues to read, in part, as follows:

Authority: 25 U.S.C. 7805 * * * Par. 2. In §25.2702–0, the table is amended as follows:

The entries for §25.2702–2(a)(5) through §25.2702–2(a)(9) are redesignated as §25.2702–2(a)(6) through §25.2702–2(a)(10), respectively.
A new entry for §25.2702–2(a)(5) is added.
The entries for §25.2702–3(d)(2) through §25.2702–3(d)(4) are redesignated as §25.2702–3(d)(3) through §25.2702–3(d)(5), respectively.
A new entry for §25.2702–3(d)(2) is added.
An entry for §25.2702–3(d)(6) is added.

The additions read as follows:

§25.2702–0 Table of contents.

§25.2702–2 Definitions and valuation rules.

(a) - -

(5) Holder.

§25.2702–3 Qualified interests.

- - - (d) - - (2) Contingencies.
- - - (6) Use of debt obligations to satisfy the annuity or unitrust payment obligation.
- - - Par. 3. Section 25.2702–2 is amended as follows:

Paragraphs (a)(5) through (a)(9) are redesignated as paragraphs (a)(6) through (a)(10), respectively.
A new paragraph (a)(5) is added.
In newly designated paragraph (a)(6), the second sentence is removed and two sentences are added in its place.
In paragraph (d)(1), Example 6 and Example 7 are removed.
In paragraph (d)(2), introductory text, the language “ Examples 8 - 10 ” is revised to read “ Examples 6 through 8 ”.
In paragraph (d)(2), Examples 8, 9 and 10 are redesignated Examples 6, 7 and 8, respectively. The additions read as follows:

§25.2702–2 Definitions and valuation rules.

(a) - - (5) Holder . The holder is the person to whom the annuity or unitrust interest is payable during the fixed term of that interest. References to holder shall also include the estate of that person.

(6) * * * If a transferor retains a power to revoke a qualified annuity interest or qualified unitrust interest of the transferor’s spouse, then the revocable qualified annuity or unitrust interest of the transferor’s spouse is treated as a retained qualified interest of the transferor. In order for the transferor to be treated as having retained a qualified interest under the preceding sentence, the interest of the transferor’s spouse (the successor holder) must be an interest that meets the requirements of a qualified annuity interest in accordance with §25.2702–3(b) and (d), or a qualified unitrust interest in accordance with §25.2702–3(c) and (d), but for

2005–11 I.R.B. 719 March 14, 2005

Example 6 . - * * As in Example 5, the interest of A (and A’s estate) to receive the unitrust amount for a specified term of 10 years in all events is a qualified unitrust interest for a term of 10 years. However, the right of A’s estate to continue to receive the unitrust amount after the expiration of the 10-year term if A dies within that 10-year period is not fixed and ascertainable at the creation of the interest and is not a qualified unitrust interest.

- - - Example 8 . A transfers property to an irrevocable trust, retaining the right to receive an annuity equal to 6 percent of the initial net fair market value of the trust property for 10 years, or until A’s prior death. At the expiration of the 10-year term, or on A’s death prior to the expiration of the 10-year term, the annuity is to be paid to B, A’s spouse, if then living, for 10 years or until B’s prior death. A retains an inter vivos and testamentary power to revoke B’s interest during the initial 10-year term. If not exercised by A during the initial 10-year term (whether during A’s life or on A’s death), A’s right to revoke B’s interest will lapse upon either A’s death during the 10-year term, or the expiration of A’s 10-year term (assuming A survives the term). Upon expiration of B’s interest (or on the expiration of A’s interest if A revokes B’s interest or if B predeceases A), the trust terminates and the trust corpus is payable to A’s child. Because A has made a completed gift of the remainder interest, the transfer of property to the trust is not incomplete as to all interests in the property and section 2702 applies. A’s annuity interest (A’s right to receive the annuity for 10 years, or until A’s prior death) is a retained interest that is a qualified annuity interest under paragraphs (b) and (d) of this section. In addition, because A has retained the power to revoke B’s interest, B’s interest is treated as an interest retained by A for purposes of section 2702. B’s successive annuity interest otherwise satisfies the requirements for a qualified interest contained in paragraph (d) of this section, but for A’s power to revoke. The term of B’s interest is specified in the governing instrument and is fixed and ascertainable at the creation of the trust, and B’s right to receive the annuity is contingent only on B’s survival, and A’s power to revoke. Following the expiration of A’s interest, the annuity is to be paid for a 10-year term or for B’s (the successor holder’s) life, whichever is shorter. Accordingly, A is treated as retaining B’s revocable qualified annuity interest pursuant to §25.2702–2(a)(6). Because both A’s interest and B’s interest are treated as qualified interests retained by A, the value of the gift is the value of the property transferred to the trust less the value of both A’s qualified interest and B’s qualified interest (subject to A’s power to revoke), each valued as a single-life annuity. If A survives the 10-year term without having revoked B’s interest, then A’s power to revoke lapses and A will make a completed gift to B at that time. Further, if A revokes B’s interest prior to the commencement of that interest, A is treated as making an additional completed gift at that time to A’s child. In either case, the amount of the gift would be the present value of B’s interest determined under section 7520 and the applicable regulations, as of the date the revocation power lapses or the interest is revoked. See §25.2511–2(f).

Example 9 . (i) A transfers property to an irrevocable trust, retaining the right to receive 6 percent of

the initial net fair market value of the trust property for 10 years, or until A’s prior death. If A survives the 10-year term, the trust terminates and the trust corpus is payable to A’s child. If A dies prior to the expiration of the 10-year term, the annuity is payable to B, A’s spouse, if then living, for the balance of the 10-year term, or until B’s prior death. A retains the right to revoke B’s interest. Upon expiration of B’s interest (or upon A’s death if A revokes B’s interest or if B predeceases A), the trust terminates and the trust corpus is payable to A’s child. As is the case in Example 8, A’s retained annuity interest (A’s right to receive the annuity for 10 years, or until A’s prior death) is a qualified annuity interest under paragraphs (b) and (d) of this section. However, B’s interest does not meet the requirements of paragraph (d) of this section. The term of B’s annuity is not fixed and ascertainable at the creation of the trust, because it is not payable for the life of B, a specified term of years, or for the shorter of those periods. Rather, B’s annuity is payable for an unspecified period that will depend upon the number of years left in the original term after A’s death. Further, B’s annuity is payable only if A dies prior to the expiration of the 10-year term. Thus, payment of B’s annuity is not dependent solely on B’s survival, but rather is dependent on A’s failure to survive.

(ii) Accordingly, the amount of the gift is the fair market value of the property transferred to the trust reduced by the value of A’s qualified interest (A’s right to receive the stated annuity for 10 years or until A’s prior death). B’s interest is not a qualified interest and is thus valued at zero under section 2702.

- - - Par. 5. Section 25.2702–7 is amended by adding two sentences at the end of the section to read as follows:

§25.2702–7 Effective dates.

- - Section 25.2702–2(a)(5), the second and third sentences of §25.2702–2(a)(6), §25.2702–3(d)(2), the first two sentences of §25.2702–3(d)(4), the last sentence of §25.2702–3(e), Example 5, the last two sentences of §25.2702–3(e), Example 6, and §25.2702–3(e), Examples 8 and 9, apply for trusts created on or after July 26,

However, the Internal Revenue Service will not challenge any prior application of the changes to Examples 5 and 6 in §25.2702–3(e).

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

Approved February 15, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on February 24, 2005, 8:45 a.m., and published in the issue of the Federal Register for February 25, 2005, 70 F.R. 9222)

Section 6621.—Determina- tion of Rate of Interest

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning April 1, 2005, will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments, and 8 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 3.5 percent.

Rev. Rul. 2005–15

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621–3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

March 14, 2005 720 2005–11 I.R.B.

derpayments for the first calendar quarter in 2005, as provided by Rev. Rul. 2004–111, 2004–51 I.R.B. 989, also applies to such underpayments for the first 15 days in April 2005.

Interest factors for daily compound interest for annual rates of 3.5 percent, 5 percent, 6 percent, and 8 percent are published in Tables 12, 15, 17, and 21 of Rev. Proc. 95–17, 1995–1 C.B. 556, 566, 569, 571, and 575.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue ruling is Crystal Foster of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Foster at (202) 622–7326 (not a toll-free call).

Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(2)(B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹ /2 of 1 percent, the rate is increased to the next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section

6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of January 2005 is 3 percent. Accordingly, an overpayment rate of 6 percent (5 percent in the case of a corporation) and an underpayment rate of 6 percent are established for the calendar quarter beginning April 1, 2005. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2005, is 3.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 2005, is 8 percent. These rates apply to amounts bearing interest during that calendar quarter.

Under section 6621(b)(2)(B), the 5 percent rate that applies to estimated tax un

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD RATE

In 1995–1 C.B. DAILY RATE TABLE

Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 1978 7% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 1980 6% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 1982 12% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 1982 20% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 1983 16% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 1983 11% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 1984 11% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 1984 11% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 1986 10% Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 1986 9% Table 23, pg. 577

2005–11 I.R.B. 721 March 14, 2005

March 14, 2005 722 2005–11 I.R.B.

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 - PRESENT

NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

1995–1 C.B. RATE TABLE PG

Jan. 1, 1999—Mar. 31, 1999 7% 19 573 Apr. 1, 1999—Jun. 30, 1999 8% 21 575 Jul. 1, 1999—Sep. 30, 1999 8% 21 575 Oct. 1, 1999—Dec. 31, 1999 8% 21 575 Jan. 1, 2000—Mar. 31, 2000 8% 69 623 Apr. 1, 2000—Jun. 30, 2000 9% 71 625 Jul. 1, 2000—Sep. 30, 2000 9% 71 625 Oct. 1, 2000—Dec. 31, 2000 9% 71 625 Jan. 1, 2001—Mar. 31, 2001 9% 23 577 Apr. 1, 2001—Jun. 30, 2001 8% 21 575 Jul. 1, 2001—Sep. 30, 2001 7% 19 573 Oct. 1, 2001—Dec. 31, 2001 7% 19 573 Jan. 1, 2002—Mar. 31, 2002 6% 17 571 Apr. 1, 2002—Jun. 30, 2002 6% 17 571 Jul. 1, 2002—Sep. 30, 2002 6% 17 571 Oct. 1, 2002—Dec. 31, 2002 6% 17 571 Jan. 1, 2003—Mar. 31, 2003 5% 15 569 Apr. 1, 2003—Jun. 30, 2003 5% 15 569 Jul. 1, 2003—Sep. 30, 2003 5% 15 569 Oct. 1, 2003—Dec. 31, 2003 4% 13 567 Jan. 1, 2004—Mar. 31, 2004 4% 61 615 Apr. 1, 2004—Jun. 30, 2004 5% 63 617 Jul. 1, 2004—Sep. 30, 2004 4% 61 615 Oct. 1, 2004—Dec. 31, 2004 5% 63 617 Jan. 1, 2005—Mar. 31, 2005 5% 15 569 Apr. 1, 2005—Jun. 30, 2005 6% 17 571

2005–11 I.R.B. 723 March 14, 2005

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

1995–1 C.B. RATE TABLE PG

Jan. 1, 1991—Mar. 31, 1991 13% 31 585 Apr. 1, 1991—Jun. 30, 1991 12% 29 583 Jul. 1, 1991—Sep. 30, 1991 12% 29 583 Oct. 1, 1991—Dec. 31, 1991 12% 29 583 Jan. 1, 1992—Mar. 31, 1992 11% 75 629 Apr. 1, 1992—Jun. 30, 1992 10% 73 627 Jul. 1, 1992—Sep. 30, 1992 10% 73 627 Oct. 1, 1992—Dec. 31, 1992 9% 71 625 Jan. 1, 1993—Mar. 31, 1993 9% 23 577 Apr. 1, 1993—Jun. 30, 1993 9% 23 577 Jul. 1, 1993—Sep. 30, 1993 9% 23 577 Oct. 1, 1993—Dec. 31, 1993 9% 23 577 Jan. 1, 1994—Mar. 31, 1994 9% 23 577 Apr. 1, 1994—Jun. 30, 1994 9% 23 577 Jul. 1, 1994—Sep. 30, 1994 10% 25 579 Oct. 1, 1994—Dec. 31, 1994 11% 27 581 Jan. 1, 1995—Mar. 31, 1995 11% 27 581 Apr. 1, 1995—Jun. 30, 1995 12% 29 583 Jul. 1, 1995—Sep. 30, 1995 11% 27 581 Oct. 1, 1995—Dec. 31, 1995 11% 27 581 Jan. 1, 1996—Mar. 31, 1996 11% 75 629 Apr. 1, 1996—Jun. 30, 1996 10% 73 627 Jul. 1, 1996—Sep. 30, 1996 11% 75 629 Oct. 1, 1996—Dec. 31, 1996 11% 75 629 Jan. 1, 1997—Mar. 31, 1997 11% 27 581 Apr. 1, 1997—Jun. 30, 1997 11% 27 581 Jul. 1, 1997—Sep. 30, 1997 11% 27 581 Oct. 1, 1997—Dec. 31, 1997 11% 27 581 Jan. 1, 1998—Mar. 31, 1998 11% 27 581 Apr. 1, 1998—Jun. 30, 1998 10% 25 579 Jul. 1, 1998—Sep. 30, 1998 10% 25 579 Oct. 1, 1998—Dec. 31, 1998 10% 25 579 Jan. 1, 1999—Mar. 31, 1999 9% 23 577 Apr. 1, 1999—Jun. 30, 1999 10% 25 579 Jul. 1, 1999—Sep. 30, 1999 10% 25 579 Oct. 1, 1999—Dec. 31, 1999 10% 25 579

March 14, 2005 724 2005–11 I.R.B.

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT - Continued

1995–1 C.B. RATE TABLE PG

Jan. 1, 2000—Mar. 31, 2000 10% 73 627 Apr. 1, 2000—Jun. 30, 2000 11% 75 629 Jul. 1, 2000—Sep. 30, 2000 11% 75 629 Oct. 1, 2000—Dec. 31, 2000 11% 75 629 Jan. 1, 2001—Mar. 31, 2001 11% 27 581 Apr. 1, 2001—Jun. 30, 2001 10% 25 579 Jul. 1, 2001—Sep. 30, 2001 9% 23 577 Oct. 1, 2001—Dec. 31, 2001 9% 23 577 Jan. 1, 2002—Mar. 31, 2002 8% 21 575 Apr. 1, 2002—Jun. 30, 2002 8% 21 575 Jul. 1, 2002—Sep. 30, 2002 8% 21 575 Oct. 1, 2002—Dec. 30, 2002 8% 21 575 Jan. 1, 2003—Mar. 31, 2003 7% 19 573 Apr. 1, 2003—Jun. 30, 2003 7% 19 573 Jul. 1, 2003—Sep. 30, 2003 7% 19 573 Oct. 1, 2003—Dec. 31, 2003 6% 17 571 Jan. 1, 2004—Mar. 31, 2004 6% 65 619 Apr. 1, 2004—Jun. 30, 2004 7% 67 621 Jul. 1, 2004—Sep. 30, 2004 6% 65 619 Oct. 1, 2004—Dec. 31, 2004 7% 67 621 Jan. 1, 2005—Mar. 31, 2005 7% 19 573 Apr. 1, 2005—Jun. 30, 2005 8% 21 575

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT

1995–1 C.B. RATE TABLE PG

Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572 Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574 Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572 Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66 620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1, 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570 Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568 Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570 Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570 Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570 Jan. 1, 2000—Mar. 31, 2000 5.5% 64 618 Apr. 1, 2000—Jun. 30, 2000 6.5% 66 620 Jul. 1, 2000—Sep. 30, 2000 6.5% 66 620 Oct. 1, 2000—Dec. 31, 2000 6.5% 66 620

2005–11 I.R.B. 725 March 14, 2005

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT - Continued

1995–1 C.B. RATE TABLE PG

Jan. 1, 2001—Mar. 31, 2001 6.5% 18 572 Apr. 1, 2001—Jun. 30, 2001 5.5% 16 570 Jul. 1, 2001—Sep. 30, 2001 4.5% 14 568 Oct. 1, 2001—Dec. 31, 2001 4.5% 14 568 Jan. 1, 2002—Mar. 31, 2002 3.5% 12 566 Apr. 1, 2002—Jun. 30, 2002 3.5% 12 566 Jul. 1, 2002—Sep. 30, 2002 3.5% 12 566 Oct. 1, 2002—Dec. 31, 2002 3.5% 12 566 Jan. 1, 2003—Mar. 31, 2003 2.5% 10 564 Apr. 1, 2003—Jun. 30, 2003 2.5% 10 564 Jul. 1, 2003—Sep. 30, 2003 2.5% 10 564 Oct. 1, 2003—Dec. 31, 2003 1.5% 8 562 Jan. 1, 2004—Mar. 31, 2004 1.5% 56 610 Apr. 1, 2004—Jun. 30, 2004 2.5% 58 612 Jul. 1, 2004—Sep. 30, 2004 1.5% 56 610 Oct. 1, 2004—Dec. 31, 2004 2.5% 58 612 Jan. 1, 2005—Mar. 31, 2005 2.5% 10 564 Apr. 1, 2005—Jun. 30, 2005 3.5% 12 566

March 14, 2005 726 2005–11 I.R.B.