SECTION 15. DRAFTING

INFORMATION

The principal authors of this notice are Zoran Stojanovic and Timothy Jones of the Office of Associate Chief Counsel (Tax

Exempt & Government Entities). However, other personnel from the IRS and the Treasury Department participated in its development. For further information regarding this notice and the Application,

APPENDIX A

APPLICATION FOR ALLOCATION OF CLEAN ENERGY RENEWABLE BOND VOLUME CAP

Internal Revenue Service

Washington, D.C.

Dear Sir or Madam:

The following constitutes the application (“Application”) of (Name) (the “Applicant”) for allocation of clean renewable energy bond (“CREB”) volume cap under Section 54(f) of the Internal Revenue Code (the “Code”) (unless otherwise noted, section references herein are to the Code) to finance the project described below. (If a single Application is used to request CREB volume cap for more than one project, then all of the required information in the Application must be provided separately for each project.)

1. Name of Applicant/Issuer

Street Address

City State Zip

Telephone Number Fax Number

2. Status of Issuer - (Select as appropriate)

The Applicant/Issuer is a “qualified issuer ” under section 54(j)(4) because it is—

(i) a “clean renewable energy lender” that is a cooperative owned by, or has outstanding loans to, 100 or more cooperative electrical companies and was in existence on February 1, 2002 or is an affiliate that is owned by such a lender, as demonstrated by the attached documents included as Exhibit D.

(ii) a “cooperative electric company” that is a mutual or cooperative electric company described in section 501(c)(12) or section 1381(a)(2)(C), as demonstrated by the attached documents included as Exhibit D, including a copy of the determination letter previously obtained from the IRS, if any (or other relevant documents).

(iii) a “governmental body” that is a State, territory, possession of the United States, District of Columbia, Indian tribal government, or any political subdivision of the foregoing, as demonstrated by the attached documents included as Exhibit D. (Supporting documents are not required to be attached for governmental bodies that are general purpose governmental entities with substantial taxing, eminent domain, and police powers such as generally a county, city, municipality, township, or borough.)

3. Name of Borrower

Street Address

City State Zip

Telephone Number Fax Number

4. Status of Borrower - (Select as appropriate) The Borrower is a “qualified borrower” under section 54(j)(5) because it is—

(i) a qualified borrower under section 54(j)(5)(A) that is a mutual or cooperative electric company under section 501(c)(12) or section 1381(a)(2)(C), as demonstrated by the attached documents included as Exhibit D, including a copy of the determination letter previously obtained from the IRS, if any (or other relevant documents).

2007–14 I.R.B. 875 April 2, 2007

(ii) a qualified borrower under section 54(j)(5)(B) that is a “governmental body” under section 54(j)(3)(B) and is a State, territory, possession of the United States, District of Columbia, Indian tribal government, or any political subdivision of the foregoing, as demonstrated by the attached documents included as Exhibit D. (Supporting documents are not required to be attached for governmental bodies that are general purpose governmental entities with substantial taxing, eminent domain, and police powers such as generally a county, city, municipality, township, or borough.)

5. Name of Project.

6. Detailed Description of Project. A reasonably detailed description of the project (the “Project”) is set forth below or in attached Exhibit A, including reasonably expected costs of components, such as land, site prep, equipment, installation, other dedicated facilities such as transmission, and capacity:

7. Qualified Project. The Project is a “qualified project” within the meaning of section 54(d)(2)(A) of the Code, because it is a “qualified facility” (as determined under section 45(d) of the Code without regard to section 45(d)(10) and to any placed in service date) that is (select as appropriate)

(1) a wind facility – a facility using wind to produce electricity;

(2) a closed-loop biomass facility – a facility using closed-loop biomass (as defined in section 45(c)) to produce electricity or, if owned by the taxpayer prior to January 1, 2008, a facility using closed-loop biomass to produce electricity which is modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both, but only if the modification is approved under the Biomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation;

(3) an open-loop biomass facility – a facility using open-loop biomass (as defined in section 45(c)) to produce electricity and in the case of a facility using agricultural livestock waste nutrients, the nameplate capacity rating of which is not less than 150 kilowatts;

(4) a geothermal or solar energy facility – a facility using geothermal energy (as defined in section 45(c)) or solar energy to produce electricity (not including a facility described in section 48(a)(3) the basis of which is taken into account by the taxpayer for purposes of determining the energy credit under section 48 of the Code);

(5) a small irrigation power facility – a facility using small irrigation power (as defined in section 45(c)) to produce electricity;

(6) a landfill gas facility – a facility producing electricity from gas derived from the biodegradation of municipal solid waste (as defined in section 45(c));

(7) a trash combustion facility – a facility that burns municipal solid waste (as defined in section 45(c)) to produce electricity;

(8) a refined coal production facility – a facility producing refined coal (as defined in section 45(c)); or

(9) a qualified hydropower facility – a facility engaged in qualified hydropower production (as defined in section 45).

8. Construction Commencement Date and Placed in Service Date. The Borrower begun or expects to begin the construction, installation and equipping of the Project on . The Borrower expects that the Project will be placed into service on or before .

9. Independent Engineer’s Certificate: (If the Application is for more than one Project, a separate certificate must be included for each Project.) Attached as Exhibit B hereto is a certification by an independent, licensed engineer to the effect that the Project will be a “qualified project” within the meaning of section 54(d)(2)(A) and a “qualified facility” within the meaning of section 45(d) of the Code (without regard to section 45(d)(10) of the Code and to any placed in service date) and that the project is technically viable and will produce electricity.

If the project is a qualified hydropower facility —

a . producing incremental hydropower production, then the engineering certificate also must state that the project consists only of efficiency improvements or additions to capacity that produce additional production as described in section 45(c)(8)(B) based on a methodology that would meet Federal Energy Regulatory Commission (FERC) standards; or

April 2, 2007 876 2007–14 I.R.B.

b . that is a nonhydroelectric dam under section 45(c)(8)(C), then the engineering certificate also must state that the facility, when constructed, will meet FERC licensing requirements and other applicable environmental, licensing and regulatory requirements.

10. Location of the Project:

Project address or physical location (do not include postal box numbers or mailing address)

City State Zip

County where Project is located

11. Individual to contact for more information about the Project:

Individual Name

Company Name

Street Address

City State Zip

Telephone Number

Fax Number

(Include as appropriate) The contact person is not an authorized official or officer of the Issuer and a properly executed Form 8821 is included with this Application that authorizes the disclosure by the IRS of information that relates to this Application and the Project(s) described above to the contact person.

12. Regulatory Approvals. Identify each regulatory body, the action that must be taken, status of any pending action and the remaining timeframe required to obtain each required approval such as a FERC approval, or siting permits. The plan of the Applicant for obtaining such approvals is as follows: (or attach an Exhibit)

13. Plan of Financing. Include a reasonably detailed description of the plan of financing for the Project, including all reasonably expected sources and uses of financing and other funds, the status of such financing, the anticipated date of bond issuance, the sources of security and repayment for the bonds, the aggregate face amount of bonds expected to be issued for the Project, and the issuer’s reasonably expected schedule for spending proceeds of CREBs. Attached as Exhibit C is a plan of financing for the Project.

14. Refinancings and Reimbursements. (Include the following statements, as applicable.) [(For refinancings, include the following statement.) The Issuer intends to use the proceeds of CREBs to refinance qualified projects in accordance with section 54(d)(2)(B).] [ (For reimbursements, include the following statement.) The Issuer intends to use the proceeds of CREBs to reimburse costs of a qualified project in accordance with section 54(d)(2)(C).] (In addition, the Issuer must demonstrate that the requirements of § 54(d)(2)(B) or (C), as applicable, will be met.)

15. Dollar Amount of Allocation Requested for the Project. To finance the Project, the Applicant hereby requests a CREB allocation in the amount of $ .

16. Prior Allocations for the Project or Related Project. (If the Project or any Related Project (as defined in section 3.f(iii) of this Notice) previously received an allocation of CREBs volume cap, then this paragraph must include a statement to that effect.)

[ If applicable, include the following statement: On (Insert date), the Project previously received a CREBs volume cap allocation in the amount of $ . A copy of the IRS allocation letter for that allocation is attached.]

[ If applicable, include the following statement: On (Insert date), a Related Project previously received a CREBs volume cap allocation in the amount of $ . A copy of the IRS allocation letter for that allocation is attached.]

17. Other allocation requests for Related Projects to the Project. Included below are descriptions of other projects that are Related Projects (as defined in paragraph 16 above) to the Project for which the applicant or other entities are applying for a CREB volume cap allocation. With respect to an applicant on a Related Project other than the Applicant, set forth below are the names, addresses, contact persons, and telephone numbers for any such applicant.

2007–14 I.R.B. 877 April 2, 2007

18. Pooled Financing Bonds. (If the issuer expects to use the requested allocation of CREB volume cap as part of a pooled financing bond within the meaning of section 54(l)(2), then the issuer should include the undertaking noted below.)

[The Applicant Issuer expects to use the requested allocation for CREBs volume cap in a pooled financing bond within the meaning of section 54(i)(2), and the Issuer expressly agrees that it will obtain a written loan commitment for all borrowers from the issue of CREBs to which the requested allocation relates before the issue date of that issue.]

I hereby certify that I am an authorized officer or official of the Applicant and am duly authorized to execute legal documents on behalf of the Applicant in connection with incurring debt and that I am duly authorized to execute legal documents on behalf of the Application in making this Application. Under penalties of perjury, I declare that (i) I have knowledge of the relevant facts and circumstances relating to this Application and the Project(s), (ii) I have examined this Application, and (iii) to the best of my knowledge and belief, all of the facts contained in this Application are true, correct and complete.

By:

Name and Title:

Date:

EXHIBIT A

DESCRIPTION OF THE PROJECT (RESPONSE TO QUESTION 6 OF THE APPLICATION)

(Attached hereto)

EXHIBIT B

ENGINEER’S CERTIFICATE (RESPONSE TO QUESTION 9 OF THE APPLICATION)

(Attached hereto in substantially the form below)

Dated: , 2007

This certificate is being provided to the Internal Revenue Service (“IRS”) in connection with an application (the “Application”) by [ Name of Applicant Issuer : ] (the “Issuer”) to the IRS requesting an allocation of volume cap authority to issue clean renewable energy bonds (“CREBs”) under section 54 of the Internal Revenue Code, as amended (the “Code”). The CREBs are being issued to make a loan to [ Name of qualified borrower : (the “Borrower”), to finance the costs of certain clean renewable energy facilities described more particularly in the Application (the “Project”). The undersigned hereby certifies as follows:

1. I am an independent, licensed engineer, duly qualified to practice the profession of engineering under the laws of the State of , and I am not an officer or employee of the Issuer or the Borrower.

2. I have reviewed the Application for a CREBs volume cap allocation (including the exhibits thereto) of the Issuer of even date herewith describing the Project. To the best of my knowledge, information, and belief, the Project will meet the requirements to be a “qualified project” under section 54(d)(2)(A) of the Code and correspondingly a “qualified facility” under section 45(d) of the Code, determined without regard to section 45(d)(10) of the Code and without regard to any placed in service date).

[ (Include as appropriate) To the best of my knowledge, information, and belief, the Project is a qualified hydropower facility under section 45(d)(9)—

April 2, 2007 878 2007–14 I.R.B.

a. producing incremental hydropower production consisting only of efficiency improvements or additions to capacity that produce additional production as described in section 45(c)(8)(B) based on a methodology that would meet Federal Energy Regulatory Commission (FERC) standards. or

b. that is a nonhydroelectric dam under section 45(c)(8)(C) and the facility, when constructed, will meet FERC licensing requirements and other applicable environmental, licensing and regulatory requirements.]

3. To the best of my knowledge, information and belief, the Project is technically viable and when constructed will produce electricity.

IN WITNESS WHEREOF, I have hereunto affixed my official signature on the date of this Engineer’s Certificate.

By: Seal and/or License number:

Name and Title:

Company:

EXHIBIT C

PLAN OF FINANCING (RESPONSE TO QUESTION 13 OF THE APPLICATION)

(Attached hereto)

EXHIBIT D

DOCUMENTS REGARDING ISSUER OR BORROWER ORGANIZATIONAL STATUS

(RESPONSE TO QUESTION 2 OR 4 OF THE APPLICATION, AS APPLICABLE)

(Attached hereto)

APPENDIX B

CONSENT TO PUBLIC DISCLOSURE OF CERTAIN CLEAN RENEWABLE ENERGY BOND

APPLICATION INFORMATION

In the event that the Application of [ (Insert name of applicant here) : ] (the “Applicant”) for an allocation of authority to issue clean renewable energy bonds (“CREBs”) under section 54 of the Internal Revenue Code is approved, the undersigned authorized representative of the Applicant hereby consents to the disclosure by the Internal Revenue Service through publication of a Notice in the Internal Revenue Bulletin or a press release of the name of applicant (issuer), the name of the borrower (if other than the issuer), the type and location of the project that is the subject of the Application, and the amount of the allocation, if any, of volume cap authority to issue CREBs for such project. The undersigned understands that this information might be published, broadcast, discussed or otherwise disseminated in the public record.

This authorization shall become effective upon the execution thereof. Except to the extent disclosure is authorized herein, the returns and return information of the undersigned taxpayer are confidential and are protected by law under the Internal Revenue Code.

2007–14 I.R.B. 879 April 2, 2007

I certify that I have the authority to execute this consent to disclose on behalf of the taxpayer named below.

Date: Signature:

Print name:

Title:

Name of Applicant-Taxpayer:

Taxpayer Identification Number:

Taxpayer’s Address:

Note: Treasury Regulations require that the Internal Revenue Service must receive this consent within 60 days after it is signed and dated.

As another example, in the case of a taxable year that is not the calendar year and that begins in 2005 and ends in 2006, and a plan year that is the calendar year, the deductible limit for any associated plan year must not reflect the 2006 changes. Thus, if the deductible limit for the taxable year beginning July 1, 2005, and ending June 30, 2006, is determined based upon the plan year beginning in the taxable year (the 2006 calendar plan year), the calculations of such limit must not reflect the limitation based on 150 percent of current liability ( i.e., must be limited to 100 percent of unfunded current liability) and may use the 30-year Treasury rate in place of the corporate rate.

Q–3. What changes to § 404(a)(1) of the Code were made by PPA ’06 for years beginning after December 31, 2005?

A–3. In general, PPA ’06 amended § 404(a)(1) of the Code for years beginning after December 31, 2005, to replace the limitation of § 404(a)(1)(D) based upon unfunded current liability with a limitation based on 150 percent of current liability (140 percent in the case of a multiemployer plan). In addition, PPA ’06 eliminated the § 404(a)(1)(F) option to use any interest rate within 90 percent to 110 percent of the weighted average of the rates of interest on 30-year Treasury securities during the 4-year period ending on the last day before the beginning of the plan year (the permissible 30-year Treasury rate range) for purposes of determining current liability in determining the maximum deduction under § 404(a)(1) rather than an interest rate within the 90 percent to 100 percent of the weighted average of the rates of interest on amounts invested conservatively in long-term investment grade corporate

Certain Deduction Limits Under the Pension Protection Act of 2006

Notice 2007–28

This notice provides guidance on certain of the changes made by the Pension Protection Act of 2006, Pub. L. 109–280 (PPA ’06), to § 404 of the Internal Revenue Code (Code). Section 404 generally provides rules concerning the deduction for contributions to plans of deferred compensation. Some of the PPA ’06 amendments to § 404 are effective for years beginning after December 31, 2005 (the 2006 changes) and others are effective for years beginning after December 31, 2007 (the 2008 changes). This notice provides guidance with respect to the 2006 changes and one related issue. Future guidance will be provided with respect to the 2008 changes.

Q–1. What changes to the rules of § 404 of the Code were made by PPA ’06 for years beginning after December 31, 2005?

A–1. In general, PPA ’06 amended § 404 to modify the deduction permitted for defined benefit pension plans under § 404(a)(1). PPA ’06 also modified the combined limit on deductions for contributions to defined benefit plans and defined contribution plans with overlapping coverage as set forth in § 404(a)(7).

Q–2. To what years do the 2006 changes apply when the taxable year of the employer differs from the plan year of the plan?

A–2. The 2006 changes apply to taxable years of the employer beginning after December 31, 2005.

Under § 1.404(a)–14(c) of the Income Tax Regulations (regulations), if the plan year of the plan and the taxable year of the employer do not coincide, the deductible limit for the taxable year of the employer is permitted to be determined as any one of the following alternatives: (1) the deductible limit determined for the plan year beginning in the taxable year, (2) the deductible limit determined for the plan year ending in the taxable year, or (3) a weighted average of alternatives (1) and (2). A plan year used under any of these alternatives is referred to in this notice as an associated plan year.

The calculations of the deductible limit for a taxable year are based on the calculations with respect to an associated plan year or years and must reflect the law in effect for the taxable year. For example, with respect to the 2006 calendar taxable year, any associated plan year ( i.e., a plan year beginning in 2006 or plan year ending in 2006 that is used to determine the deductible limit for the 2006 taxable year) must reflect the 2006 changes. Thus, if the deductible limit is determined with respect to the plan year ending in 2006 (which begins in 2005), the calculation of the limit with respect to that plan year must reflect the use of an interest rate within the permissible corporate rate range (instead of an interest rate within the permissible 30-year Treasury rate range) (see Q&A–3 below) that was used for purposes of § 412, and must reflect the limitation based upon 150 percent of current liability (in place of the limitation based on 100 percent of current liability) under § 404(a)(1)(D). The funding method and other actuarial assumptions that were used for purposes of § 412 for that plan year must also be used for the calculations of the deductible limit.

April 2, 2007 880 2007–14 I.R.B.

(other than elective deferrals) do not exceed 6 percent of compensation of participants in those plans?

A–9. When employer contributions to defined contribution plans (other than elective deferrals) do not exceed 6 percent of compensation of participants in those plans, the combined limit of § 404(a)(7) does not apply to any employer contributions to defined contribution plans. In such a case, the combined limit of § 404(a)(7) ( i.e., the greater of 25 percent of compensation, or the contributions to the defined benefit plan or plans to the extent such contributions do not exceed the amount necessary to satisfy the minimum funding standard for the defined benefit plans, treating a contribution that does not exceed the unfunded current liability as an amount necessary to satisfy the minimum funding standard for each defined benefit plan) applies only to contributions to the defined benefit plans.

Drafting Information

The principal author of this notice is James E. Holland, Jr. of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, contact Mr. Holland at (202) 283–9699 (not a toll-free number).

Request for Comments and Interim Guidance Regarding Allocation of Costs Under the Simplified Methods of Accounting Under § 263A

Notice 2007–29

The Internal Revenue Service and Treasury Department are studying the appropriateness of the use of negative amounts in computing additional costs for purposes of the simplified methods of accounting under § 263A of the Internal Revenue Code. This notice invites public comment on changes to the simplified production method under § 1.263A–2(b) and the simplified resale method under § 1.263A–3(d) of the Income Tax Regulations. This notice also provides interim guidance pending the publication of future guidance.

bonds (the permissible corporate rate range). The current liability is determined pursuant to existing guidance, including, for example, Notice 90–11, 1990–1 C.B. 319. Q–4. When determining the deductible limit in accordance with the 2006 changes, is the deductible limit determined as of the valuation date for the plan year?

A–4. Yes, the deductible limit is determined as of the valuation date for the plan year and is adjusted for interest to the earlier of the end of the plan year or the end of the taxable year of the employer (the “relevant date”). See, for example, § 1.404(a)–14(f)(3) of the regulations.

Q–5. What does § 404(a)(1)(D)(ii) provide and is the adoption of a new plan treated as a plan amendment for purposes of § 404(a)(1)(D)(ii)?

A–5. Section 404(a)(1)(D)(ii) provides that, in the case of a plan which has 100 or fewer participants for the plan year, unfunded current liability shall not include the liability attributable to benefit increases for highly compensated employees (as defined in § 414(q), “HCEs”) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last two years. For purposes of § 404(a)(1)(D)(ii), the adoption of a new plan will not be treated as a plan amendment only if the employer did not maintain a defined benefit plan covering any HCE covered by the new plan during the past 2 years. Thus, for an employer with a taxable year that is the calendar year, if an HCE was covered by a defined benefit plan of the employer at any time during 2004 or 2005, a new plan established during the 2006 taxable year that covers that HCE would be considered a plan amendment for purposes of § 404(a)(1)(D)(ii).

Q–6. What changes to § 404(a)(7) were made by PPA ’06 for years beginning after December 31, 2005?

A–6. In general, PPA ’06 amended § 404(a)(7) of the Code for years beginning after December 31, 2005, to exclude multiemployer plans from consideration and to provide that the combined limit of § 404(a)(7) only applies in the case of employer contributions to one or more defined contribution plans to the extent that such contributions exceed 6 percent of the compensation otherwise paid or accrued

during the taxable year to the beneficiaries under the plan.

Q–7. Is a plan that contains a qualified cash or deferred arrangement described in § 401(k) taken into account for purposes of the combined limit of § 404(a)(7)?

A–7. Yes, a plan that contains a qualified cash or deferred arrangement described in § 401(k) is taken into account for purposes of the combined limit of § 404(a)(7). However, pursuant to § 404(n), elective deferrals as defined in § 402(g)(3) are not taken into account. Thus, matching contributions and nonelective employer contributions are taken into account in applying the limits of § 404(a), including the combined limit of § 404(a)(7). If elective deferrals are the only contributions under a defined contribution plan, then the plan is not taken into account in applying the limits of § 404(a)(7).

Q–8. How does the combined limit of § 404(a)(7) apply when employer contributions to defined contribution plans (other than elective deferrals) exceed 6 percent of compensation of participants in those plans?

A–8. When employer contributions to defined contribution plans (other than elective deferrals) exceed 6 percent of compensation of participants in those plans, the amount of employer contributions to defined contribution plans to which the combined limit of § 404(a)(7) applies is equal to the amount of employer contributions for the plan year less 6 percent of compensation of participants in those plans. Thus, the combined limit of § 404(a)(7) ( i.e., the greater of 25 percent of compensation, or the contributions to the defined benefit plan or plans to the extent such contributions do not exceed the amount necessary to satisfy the minimum funding standard for the defined benefit plans, treating a contribution that does not exceed the unfunded current liability as an amount necessary to satisfy the minimum funding standard for each defined benefit plan) applies to the total of employer contributions to defined benefit plans and employer contributions to defined contribution plans (other than elective deferrals), less 6 percent of compensation of participants in the defined contribution plans.

Q–9. How does the combined limit of § 404(a)(7) apply when employer contributions to defined contribution plans

2007–14 I.R.B. 881 April 2, 2007

The Service and Treasury Department are aware of this viewpoint but are concerned that including negative amounts in additional § 263A costs may result in significant distortions in some situations. Including negative amounts in additional § 263A costs may undercapitalize amounts because the simplified production method formula may remove more of the cost from ending inventory than was actually remaining in ending inventory. Generally, this distortion is caused by the use of a different formula for removing the cost from ending inventory than the formula by which the cost was originally capitalized under § 471. The inclusion of raw materials in the simplified production method formula also may cause distortions. For example, including a negative amount for book depreciation greater than tax depreciation (excess depreciation) in the simplified production method formula may reduce ending inventory by more than the amount of excess depreciation actually remaining in ending inventory. In some circumstances this distortion may be a reversal of the overcapitalization of excess tax depreciation over book depreciation in prior years, and thus, may not be a cause for concern. However, the inclusion can cause significant, lasting distortion in situations in which the taxpayer has a tax basis much lower than book basis in depreciable property.

The Service and Treasury Department are considering amending the regulations under § 263A to prohibit the use of some or all negative amounts in computing additional § 263A costs under the existing simplified methods and to provide a new alternative simplified method of cost allocation under § 263A. The Service and Treasury Department will consider a new method that would allow negative amounts in computing additional § 263A costs, avoid requiring changes to existing systems for determining § 471 costs, but reduce distortions. One option under consideration would treat costs related to raw materials differently from those related to work-inprocess or finished goods. Another option would create distinctions based upon the type of cost, with certain permanent items such as basis differences being allocated using a separate formula. Additionally, the Service and Treasury Department are considering whether special rules should be

BACKGROUND

Section 471 provides the general rules for inventories and authorizes the Secretary to determine when the use of inventories are necessary to clearly reflect income and to determine the valuation methods that are acceptable for tax purposes. The regulations under § 471 provide the general rules for the valuation of inventories.

Section 263A was enacted under the Tax Reform Act of 1986, and prescribes uniform capitalization rules for property produced or held for resale. Under § 263A, producers of real or tangible personal property and resellers of real or personal property must capitalize the direct costs and a proper share of the indirect costs of the property. Section 263A requires capitalization of indirect costs but generally does not set forth methods for allocating indirect costs. Instead, in accordance with the legislative history, the regulations under § 263A generally provide that taxpayers must allocate indirect costs to property using detailed or specific cost allocation methods, including a specific identification method, the standard cost method, and methods using burden rates. Alternatively, taxpayers may use the simplified production method or simplified resale method (simplified methods), as applicable.

The legislative history to § 263A indicates that Congress desired the Service to adopt a flexible approach in the § 263A regulations by providing simplified methods and assumptions when the costs and burdens of compliance may outweigh the benefits. Accordingly, the simplified methods are intended to alleviate the administrative burden of complying with the capitalization rules of § 263A.

In general, the simplified methods determine aggregate amounts of additional § 263A costs allocable to ending inventory. Additional § 263A costs generally are those costs, other than interest, that were not capitalized under the taxpayer’s method of accounting immediately prior to the effective date of § 263A, but that are required to be capitalized under § 263A. Under the simplified methods, additional § 263A costs allocable to ending inventory are determined by multiplying § 471 costs (generally, the costs other than interest the taxpayer capitalized under its method of

accounting immediately prior to the effective date of § 263A) remaining on hand at year end by an absorption ratio consisting of a numerator of additional § 263A costs incurred during the taxable year over a denominator of § 471 costs incurred during the taxable year.

At the time the § 263A regulations were issued, some commentators expressed concern that the simplified methods, in particular the simplified production method, would result in allocation of an excessive amount of § 263A costs to raw materials inventories. They suggested that this result occurs because the simplified production method does not take into account the fact that fewer indirect costs are incurred with respect to raw materials that are normally held only a short period of time, compared to other items of inventory held longer. The final regulations did not adopt these recommendations because the simplified production method formula properly reflects the costs of raw materials that are purchased on the last day of the year, and incorporating the suggestions would have reduced the simplicity that the simplified production method was intended to provide.

More recently, controversy has arisen regarding the inclusion of negative amounts in additional § 263A costs and whether aggregate additional § 263A costs may be a negative number. A negative amount may occur, for example, when a taxpayer includes book costs greater than those required for tax purposes in the § 471 cost of inventory. For example, if a taxpayer included book depreciation in § 471 costs in accordance with § 1.471–11(c)(2)(iii)( b ) and the book depreciation is greater than tax depreciation for the year, the taxpayer may have capitalized too much depreciation for purposes of § 263A and must reduce total § 263A costs by the excess. A negative amount may result if the taxpayer does not adjust its § 471 costs to remove this excess depreciation amount but instead makes a negative adjustment to its additional § 263A costs. Some taxpayers have reasoned that allowing negative amounts is consistent with the purpose of the simplified methods to alleviate the administrative burden of complying with the capitalization rules of § 263A and may reduce overcapitalization that sometimes results.

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Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Notice 2007–29), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Alternatively, comments may be submitted electronically directly to the Service via the following e-mail address: Notice.comments@irscounsel.treas.gov . Please include “Notice 2007–29” in the subject line of any electronic communication. All materials submitted will be available for public inspection and copying.

DRAFTING INFORMATION

The principal author of this notice is W. Thomas McElroy, Jr. of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information concerning this notice, contact Mr. McElroy at (202) 622–4970 (not a toll-free number).

Frivolous Positions

Notice 2007–30

PURPOSE

Positions that are the same as or similar to the positions listed in this notice are identified as frivolous for purposes of the penalty for a “frivolous tax return” under section 6702(a) of the Internal Revenue Code and the penalty for a “specified frivolous submission” under section 6702(b). Persons who file a purported return of tax, including an original or amended return, based on one or more of these positions are subject to a penalty of $5,000 if the purported return of tax does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates the self-assessed determination of tax is substantially incorrect. Likewise, persons who submit a “specified submission” (namely, a request for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order) based on one or more of the

provided for smaller taxpayers to compute additional § 263A costs.

INTERIM GUIDANCE

Pending the issuance of additional published guidance, the Service will not challenge the inclusion of negative amounts in computing additional costs under § 263A or the permissibility of aggregate negative additional § 263A costs. These issues will not be raised in any taxable year ending on or before publication of the guidance, and, if already raised as an issue in examination or before Appeals or the Tax Court in a taxable year ending on or before March 12, 2007, the issue will not be pursued by the Service. In addition, pending further published guidance, the Service will not deny consent for changes in method of accounting solely on the basis that the proposed method involves the inclusion of negative amounts in computing additional costs under § 263A or the permissibility of aggregate negative additional § 263A costs. However, the Service will not grant a taxpayer permission to treat a cost as a negative additional § 263A cost unless the taxpayer already treats that cost as a § 471 cost. In other words, the Service will not approve a change in method of accounting to change the costs capitalized under § 471 to begin capitalizing a cost under § 471 and to remove the same cost from ending inventory by treating it as a negative additional § 263A cost. In addition, any taxpayers granted consent to make these changes will be required to conform their methods of accounting to any future published guidance.

REQUEST FOR COMMENTS

The Service and Treasury Department specifically request public comments on the following issues:

1. If only some negative amounts are appropriate in computing additional § 263A costs under the existing simplified methods, which costs should be allowed and under what circumstances? For example, should variances that were treated as top-side adjustments (aggregate adjustments to total ending inventory that are not allocated to each item or unit in ending inventory) before enactment of § 263A be treated differently from variances that first arose after enactment of § 263A? If negative amounts may be included in

the numerator of the existing methods for some costs, should aggregate negative additional § 263A costs be prohibited or restricted? Should items that generate a permanent difference, such as basis differences, be allowed under the existing simplified methods, or should they be allocated using a different method?

2. If the use of negative amounts is restricted for certain costs or in certain situations as described in (1) above, what specific modifications should be made to the existing simplified methods to effect this result and how should the negative costs be allocated? Should a new, alternative simplified method be created to allocate the negative costs or all additional § 263A costs?

3. How might a new, alternative simplified method of allocating costs under § 263A be designed that could be used for all additional § 263A costs, positive or negative, in lieu of the existing simplified methods, that would treat costs related to raw materials (including raw material content of work-in-process and finished goods) differently from those related to work-in-process or finished goods (excluding raw material content) and achieve maximum simplicity while reducing distortions? In particular, comments are requested on (a) how costs, including variances and book-tax differences, should be allocated between raw materials, work-inprocess and finished goods, (b) whether only purchasing costs should be allocated to raw materials, (c) whether purchasing, storage, and handling costs of raw materials should be allocated to raw materials, (d) whether § 471 costs should be adjusted for purchased raw materials in transit and beginning inventory, and (e) whether separate absorption ratios should be calculated for raw materials, work-in-process and finished goods, and, if so, how those ratios should be calculated.

4. Should the simplified methods be modified for small taxpayers and if so, how? In particular, how should any changes described above be applied to small taxpayers? What criteria should be used for determining whether a taxpayer is a small taxpayer?

Comments should be submitted in writing on or before July 2, 2007, and should include a reference to Notice 2007–29. Send submissions to: CC:PA:LDP:PR (Notice 2007–29), Room 5203, Internal

2007–14 I.R.B. 883 April 2, 2007

j. An administrative summons issued by the Service is per se invalid and compliance with a summons is not legally required. 2. The Internal Revenue Code is not law (or “positive law”) or its provisions are ineffective or inoperative, including the sections imposing an income tax or requiring the filing of tax returns, because the provisions have not been implemented by regulations even though the provisions in question either (a) do not expressly require the Secretary to issue implementing regulations to become effective or (b) expressly require implementing regulations which have been issued. 3. A taxpayer’s income is excluded from taxation when the taxpayer rejects or renounces United States citizenship because the taxpayer is a citizen exclusively of a State (sometimes characterized as a “natural-born citizen” of a “sovereign state”), that is claimed to be a separate country or otherwise not subject to the laws of the United States. This position includes the argument that the United States does not include all or a part of the physical territory of the 50 States and instead consists of only places such as the District of Columbia, Commonwealths and Territories ( e.g., Puerto Rico), and Federal enclaves ( e.g., Native American reservations and military installations), or similar arguments described as frivolous in Rev. Rul. 2004–28, 2004–1 C.B. 624, or Rev. Rul. 2007–22, 2007–14 I.R.B. 866. 4. Wages, tips, and other compensation received for the performance of personal services are not taxable income or are offset by an equivalent deduction for the personal services rendered, including an argument that a taxpayer has a “claim of right” to exclude the cost or value of the taxpayer’s labor from income or that taxpayers have a basis in their labor equal to the fair market value of the wages they receive, or similar arguments described as frivolous in Rev. Rul. 2004–29, 2004–1 C.B. 627, or Rev. Rul. 2007–19, 2007–14 I.R.B. 843. 5. United States citizens and residents are not subject to tax on their wages

positions listed in this notice are subject to a penalty of $5,000. The penalty may also be applied if the purported return or any portion of the specified submission is not based on a position set forth in this notice, yet reflects a desire to delay or impede the administration of Federal tax laws for purposes of section 6702(a)(2)(B) or 6702(b)(2)(A)(ii).

BACKGROUND

Section 407 of Tax Relief and Health Care Act of 2006, Pub. L. No. 109–432, 120 Stat. 2922 (2006), amended section 6702 to increase the amount of the penalty for frivolous tax returns from $500 to $5,000 and to impose a penalty of $5,000 on any person who submits a “specified frivolous submission.” A submission is a “specified frivolous submission” if it is a “specified submission” (defined in section 6702(b)(2)(B) as a request for a hearing under section 6320 or 6330 or an application under section 6159, 7122 or 7811) and any portion of the submission (i) is based on a position identified by the Secretary as frivolous or (ii) reflects a desire to delay or impede administration of the Federal tax laws. Section 6702 was further amended to add a new subsection (c) requiring the Secretary to prescribe a list of positions identified as frivolous. This notice contains the prescribed list.

DISCUSSION

Frivolous Positions . Positions that are the same as or similar to the following are frivolous.

1. Compliance with the internal revenue laws is voluntary or optional and not required by law, including arguments that: a. Filing a Federal tax or information return or paying tax is purely voluntary under the law, or similar arguments described as frivolous in Rev. Rul. 2007–20, 2007–14 I.R.B. 863. b. Nothing in the Internal Revenue Code imposes a requirement to file a return or pay tax, or that a person is not required to file a tax return or pay a tax unless the Internal Revenue Service responds to the person’s questions, correspondence, or a request to iden

tify a provision in the Code requiring the filing of a return or the payment of tax. c. There is no legal requirement to file a Federal income tax return because the instructions to Forms 1040, 1040A, or 1040EZ or the Treasury regulations associated with the filing of the forms do not display an OMB control number as required by the Paperwork Reduction Act of 1980, 44 U.S.C. § 3501 et seq., or similar arguments described as frivolous in Rev. Rul. 2006–21, 2006–15 I.R.B. 745. d. Because filing a tax return is not required by law, the Service must prepare a return for a taxpayer who does not file one in order to assess and collect tax. e. A taxpayer has an option under the law to file a document or set of documents in lieu of a return or elect to file a tax return reporting zero taxable income and zero tax liability even if the taxpayer received taxable income during the taxable period for which the return is filed, or similar arguments described as frivolous in Rev. Rul. 2004–34, 2004–1 C.B. 619. f. An employer is not legally obligated to withhold income or employment taxes on employees’ wages. g. A taxpayer may “untax” himself or herself at any time or revoke the consent to be taxed and thereafter not be subject to internal revenue taxes. h. Only persons who have contracted with the government by applying for a governmental privilege or benefit, such as holding a Social Security number, are subject to tax, and those who have contracted with the government may choose to revoke the contract at will. i. A taxpayer may lawfully decline to pay taxes if the taxpayer disagrees with the government’s use of tax revenues, or similar arguments described as frivolous in Rev. Rul. 2005–20, 2005–1 C.B. 821.

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14. A “reparations” tax credit exists, including arguments that African-American taxpayers may claim a tax credit on their Federal income tax returns as reparations for slavery or other historical mistreatment, that Native Americans are entitled to an analogous credit (or are exempt from Federal income tax on the basis of a treaty), or similar arguments described as frivolous in Rev. Rul. 2004–33, 2004–1 C.B. 628, or Rev. Rul. 2006–20, 2006–15 I.R.B.
16. A Native American or other taxpayer who is not an employer engaged in a trade or business may nevertheless claim (for example, in an amount exceeding all reported income) the Indian Employment Credit under section 45A, which explicitly requires, among other criteria, that the taxpayer be an employer engaged in a trade or business to claim the credit.
17. A taxpayer’s wages are excluded from Social Security taxes if the taxpayer waives the right to receive Social Security benefits, or a taxpayer is entitled to a refund of, or may claim a charitable-contribution deduction for, the Social Security taxes that the taxpayer has paid, or similar arguments described as frivolous in Rev. Rul. 2005–17, 2005–1 C.B. 823.
18. Taxpayers may reduce or eliminate their Federal tax liability by altering a tax return, including striking out the penalty-of-perjury declaration, or attaching documents to the return, such as a disclaimer of liability, or similar arguments described as frivolous in Rev. Rul. 2005–18, 2005–1 C.B.
20. A taxpayer is not obligated to pay income tax because the government has created an entity separate and distinct from the taxpayer—a “straw man”—that is distinguishable from the taxpayer by some variation of the taxpayer’s name, and any tax obligations are exclusively those of the “straw man,” or similar arguments described as frivolous in Rev. Rul. 2005–21, 2005–1 C.B. 822.
21. Inserting the phrase “nunc pro tunc” on a return or other document filed with or submitted to the Service has a legal effect, such as reducing a tax

or other income derived from sources within the United States, as only foreign-based income or income received by nonresident aliens and foreign corporations from sources within the United States is taxable, and similar arguments described as frivolous in Rev. Rul. 2004–30, 2004–1 C.B. 622. 6. A taxpayer has been removed or redeemed from the Federal tax system though the taxpayer remains a United States citizen or resident, or similar arguments described as frivolous in Rev. Rul. 2004–31, 2004–1 C.B. 617. 7. Only certain types of taxpayers are subject to income and employment taxes, such as employees of the Federal government, corporations, nonresident aliens, or residents of the District of Columbia or the Federal territories, or similar arguments described as frivolous in Rev. Rul. 2006–18, 2006–15 I.R.B. 743. 8. Only certain types of income are taxable, for example, income that results from the sale of alcohol, tobacco, or firearms or from transactions or activities that take place in interstate commerce. 9. Federal income taxes are unconstitutional or a taxpayer has a constitutional right not to comply with the Federal tax laws for one of the following reasons: a. The First Amendment permits a taxpayer to refuse to pay taxes based on religious or moral beliefs. b. A taxpayer may withhold payment of taxes or the filing of a tax return until the Service or other government entity responds to a First Amendment petition for redress of grievances. c. Mandatory compliance with, or enforcement of, the tax laws invades a taxpayer’s right to privacy under the Fourth Amendment. d. The requirement to file a tax return is an unreasonable search and seizure contrary to the Fourth Amendment. e. Income taxation, tax withholding, or the assessment or collection of tax is a “taking” of property without due process of law or

just compensation in violation of the Fifth Amendment. f. The Fifth Amendment privilege against self-incrimination grants taxpayers the right not to file returns or the right to withhold all financial information from the Service. g. Mandatory or compelled compliance with the internal revenue laws is a form of involuntary servitude prohibited by the Thirteenth Amendment. h. Individuals may not be taxed unless they are “citizens” within the meaning of the Fourteenth Amendment. i. The Sixteenth Amendment was not ratified, has no effect, contradicts the Constitution as originally ratified, lacks an enabling clause, or does not authorize a non-apportioned, direct income tax. j. Taxation of income attributed to a trust, which is a form of contract, violates the constitutional prohibition against impairment of contracts. k. Similar constitutional arguments described as frivolous in Rev. Rul. 2005–19, 2005–1 C.B. 819. 10. A taxpayer is not a “person” within the meaning of section 7701(a)(14) or other provisions of the Internal Revenue Code, or similar arguments described as frivolous in Rev. Rul. 2007–22, 2007–14 I.R.B. 866. 11. Federal Reserve Notes are not taxable income when paid to a taxpayer because they are not gold or silver and may not be redeemed for gold or silver. 12. In a transaction using gold and silver coins, the value of the coins is excluded from income or the amount realized in the transaction is the face value of the coins and not their fair market value for purposes of determining taxable income. 13. A taxpayer with a home-based business may deduct as business expenses the costs of maintaining the taxpayer’s household along with personal expenses, or similar arguments described as frivolous by Rev. Rul. 2004–32, 2004–1 C.B. 621.

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36. A person may represent a taxpayer before the Service or in court proceedings even if the person does not have a power of attorney from the taxpayer, has not been enrolled to practice before the Service, or has not been admitted to practice before the court.
37. A civil action to collect unpaid taxes or penalties must be personally authorized by the Secretary of the Treasury and the Attorney General.
38. A taxpayer’s income is not taxable if the taxpayer assigns or attributes the income to a religious organization (a “corporation sole” or ministerial trust) claimed to be tax-exempt under section 501(c)(3), or similar arguments described as frivolous in Rev. Rul. 2004–27, 2004–1 C.B. 625.
39. The Service is not an agency of the United States government but rather a private-sector corporation or an agency of a State or Territory without authority to administer the internal revenue laws.
40. Any position described as frivolous in any revenue ruling or other published guidance in existence when the return adopting the position is filed with or the specified submission adopting the position is submitted to the Service. Returns or submissions that contain positions not listed above, which on their face have no basis for validity in existing law, or which have been deemed frivolous in a published opinion of the United States Tax Court or other court of competent jurisdiction, may be determined to reflect a desire to delay or impede the administration of Federal tax laws and thereby subject to the $5,000 penalty.

The list of frivolous positions above will be periodically revised as required by section 6702(c).

DRAFTING INFORMATION

The principal author of this notice is the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact the Office of Associate Chief Counsel (Procedure & Administration), Administrative Provisions & Judicial Practice Division, Branch 2, at (202) 622–4940 (not a toll-free call).

payer’s tax liability, or similar arguments described as frivolous in Rev. Rul. 2006–17, 2006–15 I.R.B. 748. 20. A taxpayer may avoid tax on income by attributing the income to a trust, including the argument that a taxpayer can put all of the taxpayer’s assets into a trust to avoid income tax while still retaining substantial powers of ownership and control over those assets or that a taxpayer may claim an expense deduction for the income attributed to a trust, or similar arguments described as frivolous in Rev. Rul. 2006–19, 2006–15 I.R.B. 749. 21. A taxpayer may lawfully avoid income tax by sending income offshore, including depositing income into a foreign bank account. 22. By purchasing equipment and services for an inflated price (which may or may not have been actually paid), a taxpayer can use the section 44 Disabled Access Credit to reduce tax or generate a refund irrespective of whether the taxpayer is a small business that purchased the equipment or services to comply with the requirements of the Americans with Disabilities Act. 23. A taxpayer is allowed to buy or sell the right to claim a child as a qualifying child for purposes of the Earned Income Tax Credit. 24. An IRS Form 23C, Assessment Cer- tificate — Summary Record of As- sessments, is an invalid record of assessment for purposes of section 6203 and Treas. Reg. § 301.6203–1, the Form 23C must be personally signed by the Secretary of the Treasury for an assessment to be valid, the Service must provide a copy of the Form 23C to a taxpayer if requested before taking collection action, or similar arguments described as frivolous in Rev. Rul. 2007–21, 2007–14 I.R.B. 865. 25. A tax assessment is invalid because the assessment was made from a section 6020(b) substitute for return, which is not a valid return. 26. A statutory notice of deficiency is invalid because the taxpayer to whom the notice was sent did not file an income tax return reporting the deficiency or because the statutory notice of deficiency was unsigned or not

signed by the Secretary of the Treasury or by someone with delegated authority. 27. A Notice of Federal Tax Lien is invalid because it is not signed by a particular official (such as by the Secretary of the Treasury), or because it was filed by someone without delegated authority. 28. The form or content of a Notice of Federal Tax Lien is controlled by or subject to a state or local law, and a Notice of Federal Tax Lien that does not comply in form or content with a state or local law is invalid. 29. A collection due process notice under section 6320 or 6330 is invalid if it is not signed by the Secretary of the Treasury or other particular official, or if no certificate of assessment is attached. 30. Verification under section 6330 that the requirements of any applicable law or administrative procedure have been met may only be based on one or more particular forms or documents (which must be in a certain format), such as a summary record of assessment, or that the particular forms or documents or the ones on which verification was actually determined must be provided to a taxpayer at a collection due process hearing. 31. A Notice and Demand is invalid because it was not signed, was not on the correct form ( e.g., a Form 17), or was not accompanied by a certificate of assessment when mailed. 32. The United States Tax Court is an illegitimate court or does not, for any purported constitutional or other reason, have the authority to hear and decide matters within its jurisdiction. 33. Federal courts may not enforce the internal revenue laws because their jurisdiction is limited to admiralty or maritime cases or issues. 34. Revenue Officers are not authorized to issue levies or Notices of Federal Tax Lien or to seize property in satisfaction of unpaid taxes. 35. A Service employee lacks the authority to carry out the employee’s duties because the employee does not possess a certain type of identification or credential, for example, a pocket commission or a badge, or it is not in the correct form or on the right medium.

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the contributor will be considered to be due to reasonable cause and not due to willful neglect provided that all of the following requirements are met:

(1) All fundraising solicitations by (or on behalf of) the tax-exempt political organization contain a clear request (in a conspicuous and easily recognizable format) for the contributor’s address and, if the contributor is an individual, the contributor’s occupation and employer (consistent with the instructions for Form 8872) and include a statement that the political organization is subject to Federal taxes and penalties if it fails to disclose this information to the Service. A fundraising solicitation includes any solicitation of contributions or gifts in written (including electronically such as via the internet or by facsimile or email) or printed form, by television or radio, or by telephone.

(2) For each contribution for which the contributor has not provided the required information, such as the contributor’s address, occupation and employer, the tax-exempt political organization makes a written (including electronically such as via the internet or by facsimile or email) request, or an oral request memorialized in writing, to the contributor for the required information within 30 days of receipt of the contribution. The information request may thank the contributor for the contribution, but must not include material on any other subject or an additional solicitation. Each information request must include a statement that the tax-exempt political organization is subject to Federal taxes and penalties if it fails to disclose this information to the Service. In addition, each information request that is not oral or electronic must include a pre-addressed return envelope or postcard. Each oral or electronic information request must include the mailing or Internet address to which the required information should be submitted instead of a pre-addressed return envelope or postcard.

(3) If the contributor has not responded to the information request by the due date of the Form 8872 and in the tax-exempt political organization’s records, including contributor records, fundraising records or previously filed Forms 8872, the tax-exempt political organization has information about the contributor that is requested by the Form

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of cor- rect tax liability. (Also Part I, § 527.)

Rev. Proc. 2007–27