Section 8. EXAMPLES

A. Transfer of Partnership Interest PRS is a partnership which does not have an election under § 754 in effect. PRS has no liabilities. The fair market value of PRS ’s assets is $4 million and the adjusted basis of PRS ’s assets is $4.3 million. Under § 743(d), PRS has a substantial built-in loss because the adjusted basis of the partnership property exceeds the fair market value of the partnership property by more than $250,000. A, a partner of PRS, sells a 25 percent partnership interest in PRS to B for its fair market value of $1 million. Under § 743(b), an adjustment is required to the adjusted basis of PRS ’s assets with respect to B . Under Section 3 of this notice, B must provide the written notice described in § 1.743–1(k)(2) to PRS within 30 days after the sale, and PRS must attach the statement described in § 1.743–1(k)(1) to the partnership return for the year of the transfer.

B. Distribution of Partnership Property A and B each contribute $2.5 million and C contributes $5 million to a newly formed partnership, PRS, which does not have an election under § 754 in effect. PRS has no liabilities. PRS purchases LMN stock for $3 million and XYZ stock for $7 million. The value of each stock declines to $1 million. PRS distributes LMN stock to C in complete liquidation of C ’s interest in PRS . Under § 732(b), the basis of LMN stock in C ’s hands is $5 million and C would recognize a loss of $4 million if the LMN stock were sold for $1 million. There is a substantial basis reduction within the meaning of § 734(d), because the $2 million increase in the adjusted basis of LMN stock (described in § 734(b)(2)(B)) is greater than $250,000. Under § 734(b), PRS is required to decrease the basis of XYZ stock by $2 million (the amount by which the basis of LMN stock was increased), leaving a basis of $5 million remaining in the XYZ stock. Under Section 3 of this notice, PRS must attach the statement described in § 1.734–1(d) to the partnership return for the year of the distribution.

C. EIP (i) PRS is a domestic partnership with a calendar year taxable year that desires to elect to be treated as an EIP for 2004 and all succeeding taxable years. PRS and all of its partners have a calendar year taxable year. PRS has no liabilities. Other than the making of the election, PRS meets all other requirements to be an EIP under § 743(e)(6). PRS elects to be treated as an EIP by attaching a statement to its income tax return for 2004 in accordance with Section 4 of this notice. (ii) Between October 22 and December 31, 2004, the only transfer of a partnership interest in PRS occurred on November 30, 2004, when A transferred a 10 percent partnership interest to C . The purchase price for the 10 percent partnership interest was $3,000,000. A ’s adjusted basis in A ’s partnership interest on December 31, 2003, was $3,000,000. In 2004, the partnership’s only items of income, gain, loss, and deduction are $3 million of long-term capital gain and $2 million of long-term capital loss. Because PRS has elected to be treated as an EIP, PRS must separately state this gain and loss on its return in accordance with Section 5.B of this notice.

(iii) If A had remained a partner for the entire year, A ’s distributive share of the partnership’s items would have been $300,000 of long-term capital gain

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The estimated annual frequency of responses (used for reporting requirements only) is various.

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 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this notice is Sean I. Kahng of the Office of Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the Treasury Department and the Service participated in its development. For further information regarding this notice, contact Mr. Kahng at (202) 622–3050 (not a toll-free call).

Station, Washington, DC 20044. Alternatively, comments may be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov . Please include “Notice 2005–32” in the subject line of any electronic communications.

Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to CC:PA:LPD:PR (Notice 2005–32), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224.

PAPERWORK REDUCTION ACT

The collections of information contained in this notice have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1939. An agency may not conduct or sponsor, and a person is not required to respond

to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this notice are in Sections 3, 4, and 5. This information is required, and will be used, to assure compliance with the new provisions of the American Jobs Creation Act of 2004. The collections of information are required to obtain a benefit or are mandatory. The likely respondents are individuals and businesses or other for-profit institutions.

The estimated total annual reporting burden and/or recordkeeping burden is 552,100 hours. The estimated annual average burden per respondent/recordkeeper varies from is 0.05 hours to 3 hours, depending on individual circumstances, with an estimated average of 2.07 hours.

The estimated number of respondents and/or recordkeepers is 266,400.

NOTE: This revenue procedure will be reproduced as IRS Publication 4436, General Rules and Specifications for Substitute

Form 941 and Schedule B (Form 941) .

Rev. Proc. 2005–21

TABLE OF CONTENTS

SECTION 1 – PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899

SECTION 2 – WHAT’S NEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900

SECTION 3 – GENERAL REQUIREMENTS FOR REPRODUCING IRS OFFICIAL FORM 941 AND

SCHEDULE B (FORM 941) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900

SECTION 4 – REPRODUCING FORM 941 AND SCHEDULE B (FORM 941) FOR SOFTWARE-GENERATED

PAPER FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901

SECTION 5 – OMB REQUIREMENTS FOR SUBSTITUTE FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901

SECTION 6 – REPRODUCIBLE COPIES OF FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902

SECTION 7 – EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902

Section 1 – Purpose

.01 The purpose of this publication is to provide general rules and specifications from the Internal Revenue Service (IRS) for paper and computer-generated substitutes for the newly revised January 2005 version of Form 941, Employer’s Quarterly Federal Tax Return, and Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors.

.02 This publication provides measurements and printing specifications for substitute Form 941 and Schedule B (Form 941). If you need more in-depth information on who must complete the forms and how to complete them, see the Instructions for Form 941 and Publication 15 (Circular E), Employer’s Tax Guide, or visit the IRS website at www.irs.gov .

.03 Forms should not be submitted to the IRS for specific approval. If you are uncertain of any specification and want it clarified, you may submit a letter citing the specification and your understanding of the specification, and enclose an example of the form (if appropriate) to:

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Internal Revenue Service Attn: Substitute Forms Program SE:W:CAR:MP:T:T:SP, IR-6406 1111 Constitution Avenue, NW Washington, DC 20024

Note. Allow at least 30 days for the IRS to respond. .04 However, software developers and form producers should send a blank copy of their substitute Form 941 and Schedule B (Form 941) in pdf format to Victor.V.Martin@irs.gov . The purpose is not specifically for approval but to assist the IRS in preparing to scan these forms. Submitters will only receive comments if a significant problem is discovered through this process. Submitters are not expected to delay marketing their forms in order to receive feedback. In no case should submitters include “live” taxpayer data.

Section 2 – What’s New

.01 We extensively revised Form 941 and Schedule B (Form 941) to enable the IRS to scan the forms and to make them easier to complete. Optical scanning of tax returns enables the IRS to capture data more accurately and efficiently. This will reduce our need to contact filers because of an error in recording amounts reported on their returns.

.02 Because scanning requires conformity, we are publishing this revenue procedure to provide specifications for producing substitutes for the new revisions of Form 941 and Schedule B (Form 941). It is acceptable to produce substitutes of Form 941 and Schedule B (Form 941) using the official IRS form as posted on the IRS website or to produce substitutes based on the format developed by the software industry, which uses a 6x10 grid. Either format must be precisely followed.

.03 We now require filers to check a box at the top of Form 941 to indicate the tax period. We also require that line 1 (“number of employees”) be completed for each quarter. We combined income and social security tax adjustments into a single line (line 7) and no longer require a supporting statement for tips or group-term life insurance adjustments. Because Form 941 is now two pages, filers must enter their name, Employer Identification Number (EIN), and signature on page 2.

.04 There is a new form for reporting discrepancies between Forms 941 and Forms W-2. We recently developed Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. You may use Schedule D (Form 941) to explain the discrepancies between what an employer reported to the Social Security Administration on Form W-2 and what the employer reported to the IRS on Form 941, if the discrepancies are caused by acquisitions, statutory mergers, or consolidations. Areas where discrepancies may occur include social security wages, social security tips, Medicare wages and tips, federal income tax withheld, and advanced earned income payments. We did not include specifications for Schedule D (Form 941) in the exhibits (Section 7) because scanning of Schedule D (Form 941) is not available at this time. However, any substitute paper or computer-generated paper forms should generally follow the specifications for Form 941.

Section 3 – General Requirements for Reproducing IRS Official Form 941 and Schedule B (Form 941)

.01 Do not submit substitute Form 941 and Schedule B (Form 941) to the IRS for approval. Substitute Form 941 and Schedule B (Form 941) that completely conform to the specifications contained in this revenue procedure do not require prior approval from the IRS. Substitute forms filed with the IRS that do not conform may be returned.

.02 Print the form on paper that is 8.5 inches wide by 11 inches deep. .03 Use white paper that meets generally-accepted weight, color, and quality standards (minimum 20lb. white bond paper). Note. Reclaimed fiber in any percentage is permitted provided that the requirements of this standard are met. .04 The IRS prefers printing Form 941 on both sides of a single sheet of paper, but it is acceptable to print on one side of each of two separate sheets of paper.

.05 Make substitute paper forms as identical to the official IRS-printed forms as possible. .06 Print using nonreflective black inks. .07 Use typefaces that are substantially identical in size and shape to the official forms and use rules and shading that are substantially identical to those on the official forms.

.08 Print the form ID codes in the upper right-hand corner of each form using nonreflective black, carbon-based, 12-point (minimum 10-point required) OCR-A font. Use the official paper over-the-counter IRS forms to develop your substitute paper forms. Print “9501” on page 1 of Form 941, “9502” on page 2 of Form 941, and “9503” on Schedule B (Form 941). See Section 4 for form ID codes for software-generated forms.

.09 Print the OMB number in the same location as on the official forms. .10 Print all entry boxes and checkboxes exactly as shown on the official forms. .11 Print your IRS-issued three-letter substitute form printer source code in the middle at the bottom of page 1 of Form 941.

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.12 Print “For Privacy Act and Paperwork Reduction Act Notice, see the back of the Payment Voucher” at the bottom of page 1 of Form 941.

.13 Print “For Paperwork Reduction Act Notice, see separate instructions" at the bottom of Schedule B (Form 941). .14 Do not print the form catalog number (“Cat. No.”) at the bottom of the forms or instructions. .15 Do not print the Government Printing Office (GPO) symbol at the bottom of the forms or instructions. .16 See Exhibits A and B in Section 7.

Section 4 – Reproducing Form 941 and Schedule B (Form 941) for Software-Generated Paper Forms

.01 You may use the 6x10 grid exhibits (C and D) at the end of this document to develop a software version of Form 941 and Schedule B (Form 941). Please follow the specifications exactly to develop the fields.

.02 If you are developing software that is designed using the 6x10 grid in the exhibits, you may make the following modifications. See Exhibits C and D in Section 7.

.03 If producing both the form and the data or the form only, print your 3-letter IRS-issued form printer source code in Row 63, Columns 49–51 on page 1 of Form 941.

.04 If producing only the data on the form, print your 4-digit software industry form code in Row 4, Columns 58–61 on page 1 of Form 941. See the National Association of Computerized Tax Processors (NACTP) website at www.nactp.org for information on these codes.

.05 Print “For Privacy Act and Paperwork Reduction Act Notice, see the Payment Voucher” at the bottom of page 1 of Form 941. .06 Print “For Paperwork Reduction Act Notice, see separate instructions" at the bottom of Schedule B (Form 941). .07 Do not print the form catalog number (“Cat. No.”) at the bottom of the forms or instructions. .08 Do not print the Government Printing Office (GPO) symbol at the bottom of the forms or instructions. .09 To enable accurate scanning and processing, enter data on Form 941 and Schedule B (Form 941) as follows:

Section 5 – OMB Requirements for Substitute Forms

.01 The Paperwork Reduction Act (the Act) of 1995 (Public Law 104-13) requires that:

April 18, 2005 901 2005–16 I.R.B.

printed forms and are also shown in the exhibits.)

(1) Why the IRS needs the information,

(2) How it will be used, and

(3) Whether or not the information is required to be furnished to the IRS.

.02 This information must be provided to any users of official or substitute IRS forms or instructions. .03 The OMB requirements for substitute IRS forms are:

(1) OMB No. XXXX-XXXX (preferred) or

(2) OMB# XXXX-XXXX (acceptable).

.04 If no instructions are provided to users on your forms, you must furnish to them the exact text of the Privacy Act and Paperwork Reduction Act Notice.

Section 6 – Reproducible Copies of Forms

.01 You can order official IRS forms and information copies of federal tax materials by calling the IRS National Distribution Center at 1-800-829-3676. Other ways to get federal tax material include:

.02 The IRS also offers an alternative to downloading electronic files and provides current and prior year access to tax forms and instructions through its Federal Tax Forms CD-ROM. Order Publication 1796, IRS Federal Tax Products CD-ROM, by using the IRS website at www.irs.gov/cdorders or by calling 1-877-CDFORMS (1-877-233-6767).

Section 7 – Exhibits

.01 Please follow the specifications indicated in the following exhibits to produce substitute Form 941 and Schedule B (Form 941). .02 These forms are subject to review and possible change as required. Therefore, employers are cautioned against overstocking supplies of privately-printed substitutes.

.03 Do not submit substitute Form 941 and Schedule B (Form 941) to the IRS for approval. Substitute Form 941 and Schedule B (Form 941) that completely conform to the specifications contained in this revenue procedure may be privately printed without prior approval from the IRS. Substitute forms filed with the IRS that do not conform may be returned. See Section 3 of this publication.

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2005–16 I.R.B. 908 April 18, 2005

.04 The Service believes that, in the interest of sound tax administration and to reduce the burden on taxpayers, it is appropriate to provide a safe harbor procedure that, if followed, will cause the right of election to be disregarded for purposes of determining whether a CRAT or CRUT that is within the scope of this revenue procedure meets the requirements of § 664(d) continuously from the date the trust is created. This procedure generally requires that S irrevocably waive the right of election with regard to the assets of the CRAT or CRUT to ensure that no part of the trust will be used to satisfy the elective share.

.05 No waiver of the right of election is required if the applicable state law does not provide S with a right of election, exercisable at the time of G ’s death, to receive an elective share of G ’s estate. For example, in community property jurisdictions, elective share provisions are generally unnecessary because S typically has vested ownership in one-half of the community property. Additionally, no waiver is required if, under applicable state law, S ’s elective share of G ’s estate may not include any assets of the CRAT or CRUT (other than the annuity or unitrust interest payable to S as the named recipient). For example, no waiver is required if, under applicable state law, the trust’s property is excluded from the base for computing the elective share by reason of G ’s receipt of adequate and full consideration for the transfer or the written consent to or joinder in the transfer by S and, in fact, the consideration is paid or the consent or joinder is given.