Bulletin No. 2005-14 April 4, 2005

HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX Rev. Rul. 2005–20, page 821. Frivolous tax returns; protesting government programs or policies. This ruling emphasizes to taxpayers and to pro- Rev. Rul. 2005–11, page 816. moters and return preparers that liability for federal taxes does Alternative minimum tax; refinanced mortgage interest. not depend on whether the taxpayer agrees with the govern- Interest paid on a home mortgage that has been refinanced ment programs or policies that are funded with tax receipts. more than one time is deductible as qualified housing interest Any argument that taxpayers may refuse to report income or for purposes of the alternative minimum tax to the extent the claim deductions because they oppose particular government interest on the mortgage that was refinanced is qualified hous- programs or policies is frivolous and has no merit. ing interest and the amount of the mortgage indebtedness is not increased. Rev. Rul. 2005–21, page 822. Frivolous tax returns; use of “straw man” to avoid tax. Rev. Rul. 2005–17, page 823. This ruling emphasizes to taxpayers and to promoters and re- Frivolous tax returns; Social Security refund. This ruling turn preparers that a taxpayer cannot avoid income tax on the emphasizes to taxpayers and to promoters and return prepar- erroneous theory that the government has created a separate ers that there is no right to a refund of, or a deduction for, and distinct entity or “straw man,” in place of the taxpayer and Social Security taxes paid based on arguments that a taxpayer that the taxpayer is not responsible for the tax obligations of has waived the right to receive Social Security benefits or has the “straw man”. This argument has no merit and is frivolous. donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous. REG–163314–03, page 835. Proposed regulations provide that a transaction will qualify for Rev. Rul. 2005–18, page 817. nonrecognition treatment under sections 332, 351, or 368 Frivolous tax returns; altering the jurat. This ruling deals of the Code only if there is a transfer and a receipt of net with taxpayers who attempt to reduce their federal tax liability value. The proposed regulations also provide guidance on the by striking or altering the written declaration (the jurat) that ver- circumstances in which and the extent to which a creditor of an ifies that a return, declaration, statement or other document is insolvent corporation may be treated as owning a proprietary made under penalties of perjury. The ruling emphasizes to tax- interest in the target corporation for the purpose of satisfying payers and to promoters and return preparers that striking or the continuity of interest requirement. With respect to section altering the jurat in a manner that negates its validity invalidates 332, the regulations clarify that this section applies only to the return. those cases in which the recipient corporation receives at least partial payment with respect to each class of stock which it Rev. Rul. 2005–19, page 819. owns in the liquidating corporation. Frivolous tax returns; constitutionally based arguments. This ruling emphasizes to taxpayers and to promoters and re- turn preparers that a taxpayer cannot avoid income tax by mak- ing frivolous constitutionally based arguments.

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Finding Lists begin on page ii. Notice 2005–30, page 827. ers that there is no right to a refund of, or a deduction for, This notice sets out some of the most common frivolous argu- Social Security taxes paid based on arguments that a taxpayer ments and schemes that taxpayers use to avoid their tax obli- has waived the right to receive Social Security benefits or has gations. It also identifies civil and criminal penalties that the donated Social Security taxes or benefits to the government. Service may impose against taxpayers who engage in abusive These arguments have no merit and are frivolous. tax-avoidance schemes. Notice 2004–22 modified and super- seded. Rev. Rul. 2005–18, page 817. Frivolous tax returns; altering the jurat. This ruling deals Notice 2005–31, page 830. with taxpayers who attempt to reduce their federal tax liability State and local general sales tax deduction. This notice by striking or altering the written declaration (the jurat) that ver- provides guidance to taxpayers who elect to deduct state and ifies that a return, declaration, statement or other document is local general sales taxes in lieu of state and local income taxes made under penalties of perjury. The ruling emphasizes to tax- under section 164(b)(5) of the Code. payers and to promoters and return preparers that striking or altering the jurat in a manner that negates its validity invalidates the return. EXEMPT ORGANIZATIONS Rev. Rul. 2005–19, page 819. Frivolous tax returns; constitutionally based arguments. Announcement 2005–23, page 845. This ruling emphasizes to taxpayers and to promoters and re- A list is provided of organizations now classified as private foun- turn preparers that a taxpayer cannot avoid income tax by mak- dations. ing frivolous constitutionally based arguments.

Rev. Rul. 2005–20, page 821. EMPLOYMENT TAX Frivolous tax returns; protesting government programs or policies. This ruling emphasizes to taxpayers and to pro- moters and return preparers that liability for federal taxes does REG–160315–03, page 833. not depend on whether the taxpayer agrees with the govern- Proposed regulations under section 3121 of the Code provide ment programs or policies that are funded with tax receipts. guidance regarding the treatment of payments made on ac- Any argument that taxpayers may refuse to report income or count of sickness or accident disability under a workers’ com- claim deductions because they oppose particular government pensation law for purposes of the Federal Insurance Contribu- programs or policies is frivolous and has no merit. tions Act (FICA). Rev. Rul. 2005–21, page 822. Frivolous tax returns; use of “straw man” to avoid tax. EXCISE TAX This ruling emphasizes to taxpayers and to promoters and re- turn preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a separate Rev. Proc. 2005–19, page 832. and distinct entity or “straw man,” in place of the taxpayer and The Service, as a matter of administrative convenience, has that the taxpayer is not responsible for the tax obligations of established that certain truck body type classifications satisfy the “straw man”. This argument has no merit and is frivolous. the weight-based exclusion provided in section 4051(a)(2) of the Code. Notice 2005–25, page 827. Public comments are requested on recommendations for items that should be included on the 2005–2006 Guidance Priority TAX CONVENTIONS List. Taxpayers may submit recommendations for guidance at any time during the year. Recommendations submitted by Announcement 2005–22, page 826. April 30, 2005, will be reviewed for possible inclusion on the This agreement describes taxation of certain scholarships un- original 2005–2006 Guidance Priority List. Recommendations der the U.S.–Austria Income Tax Treaty. A copy of the News received after April 30, 2005, will be reviewed for inclusion in Release issued by the Director, International (U.S. Competent the next periodic update. Authority), on March 1, 2005 (IR–2005–20), is set forth. Notice 2005–30, page 827. This notice sets out some of the most common frivolous argu- ments and schemes that taxpayers use to avoid their tax obli- ADMINISTRATIVE gations. It also identifies civil and criminal penalties that the Service may impose against taxpayers who engage in abusive Rev. Rul. 2005–17, page 823. tax-avoidance schemes. Notice 2004–22 modified and super- Frivolous tax returns; Social Security refund. This ruling seded. emphasizes to taxpayers and to promoters and return prepar-

April 4, 2005 2005–14 I.R.B. The IRS Mission

Provide America’s taxpayers top quality service by helping applying the tax law with integrity and fairness to all. them understand and meet their tax responsibilities and by Introduction

The Internal Revenue Bulletin is the authoritative instrument of court decisions, rulings, and procedures must be considered, the Commissioner of Internal Revenue for announcing official and Service personnel and others concerned are cautioned rulings and procedures of the Internal Revenue Service and for against reaching the same conclusions in other cases unless publishing Treasury Decisions, Executive Orders, Tax Conven- the facts and circumstances are substantially the same. tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the The Bulletin is divided into four parts as follows: Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis. Part I.—1986 Code. This part includes rulings and decisions based on provisions of It is the policy of the Service to publish in the Bulletin all sub- the Internal Revenue Code of 1986. stantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, mod- Part II.—Treaties and Tax Legislation. ify, or amend any of those previously published in the Bulletin. This part is divided into two subparts as follows: Subpart A, All published rulings apply retroactively unless otherwise indi- Tax Conventions and Other Related Items, and Subpart B, Leg- cated. Procedures relating solely to matters of internal man- islation and Related Committee Reports. agement are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also Revenue rulings represent the conclusions of the Service on the included in this part are Bank Secrecy Act Administrative Rul- application of the law to the pivotal facts stated in the revenue ings. Bank Secrecy Act Administrative Rulings are issued by ruling. In those based on positions taken in rulings to taxpayers the Department of the Treasury’s Office of the Assistant Sec- or technical advice to Service field offices, identifying details retary (Enforcement). and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbar- ment and suspension lists, and announcements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be The last Bulletin for each month includes a cumulative index relied on, used, or cited as precedents by Service personnel in for the matters published during the preceding months. These the disposition of other cases. In applying published rulings and monthly indexes are cumulated on a semiannual basis, and are procedures, the effect of subsequent legislation, regulations, published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2005–14 I.R.B. April 4, 2005 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 55.—Alternative exceed $1,000,000. A is not a married in- § 163(h)(4)). In addition, the last sentence Minimum Tax Imposed dividual filing a separate return. of § 56(e)(1) provides that qualified hous- ing interest includes interest on any in- 26 CFR 1.55–1: Alternative minimum taxable in- LAW AND ANALYSIS debtedness resulting from the refinancing come. of indebtedness meeting the requirements Is interest paid on a home mortgage that has been Section 55 of the Internal Revenue of qualified housing interest, but only to refinanced more than one time deductible as qualified Code provides that the alternative mini- the extent that the amount of the indebted- housing interest for purposes of the alternative mini- mum tax is a tax equal to the excess (if ness resulting from such refinancing does mum tax? See Rev. Rul. 2005-11, page 816. any) of the tentative minimum tax for the not exceed the amount of the refinanced taxable year over the regular tax (defined indebtedness immediately before the refi- Section 56.—Adjustments in § 55(c)) for the taxable year. nancing. in Computing Alternative Tentative minimum tax is defined in The legislative history to the enactment Minimum Taxable Income § 55(b)(1)(A) for noncorporate taxpay- of§56aspartoftheTaxReformActof ers as the sum of 26 percent of so much 1986 states “It is clarified that, for mini- (Also§§55,163.) of the taxable excess as does not exceed mum tax purposes, upon a refinancing of $175,000, plus 28 percent of so much of a loan that gives rise to qualified housing Alternative minimum tax; refinanced the taxable excess as exceeds $175,000. interest, interest paid on the loan is treated mortgage interest. Interest paid on a The term “taxable excess” is defined in as qualified housing interest to the extent home mortgage that has been refinanced § 55(b)(1)(ii) as so much of the alternative that (1) it so qualified under the prior loan, more than one time is deductible as qual- minimum taxable income for the taxable and (2) the amount of the loan was not in- ified housing interest for purposes of the year as exceeds the exemption amount pro- creased.” H.R. Conf. Rep. No. 841, 99th alternative minimum tax to the extent the vided for in § 55(d). Cong., 2d Sess., vol. II, at 259 (1986). interest on the mortgage that was refi- Alternative minimum taxable income is Section 163(h) of the Code provides nanced is qualified housing interest and defined in § 55(b)(2) as the taxable income that, in the case of a taxpayer other than a the amount of the mortgage indebtedness of the taxpayer for the taxable year de- corporation, no deduction shall be allowed is not increased. termined with the adjustments provided in for personal interest paid or accrued during §§ 56 and 58, and increased by the amount the taxable year. Under § 163(h)(2)(D), Rev. Rul. 2005–11 of the items of tax preference described in personal interest does not include qualified §57. residence interest. ISSUE Section 56(b) contains the adjust- Qualified residence interest is defined Is interest paid on a home mortgage that ments applicable to individuals, which in § 163(h)(3) as any interest that is paid has been refinanced more than one time include the adjustment for interest in or accrued during the taxable year on deductible as qualified housing interest for § 56(b)(1)(C). Section 56(b)(1)(C) pro- acquisition indebtedness or home equity purposes of the alternative minimum tax? vides that, in determining the amount indebtedness with respect to any quali- allowable as a deduction for interest, fied residence of the taxpayer. Section FACTS § 163(d), which provides limitations on 163(h)(3)(B) defines acquisition indebted- investment interest, and § 163(h), which ness as any indebtedness that is incurred In 1990, A borrowed $100x to purchase disallows deductions for personal inter- in acquiring, constructing, or substan- a principal residence (the 1990 mortgage). est, shall apply, except that in lieu of the tially improving any qualified residence of In 2000, the outstanding principal balance exception under § 163(h)(2)(D) for quali- the taxpayer and is secured by such resi- on the 1990 mortgage was $90x,andA fied residence interest, the term “personal dence. Section 163(h)(3)(B) also provides refinanced the $90x balance of the 1990 interest” shall not include any qualified that acquisition indebtedness includes mortgage (the 2000 mortgage). In 2004, housing interest. any indebtedness secured by such resi- the outstanding principal balance on the Qualified housing interest is defined in dence resulting from the refinancing of 2000 mortgage was $80x. A refinanced § 56(e)(1) as interest that is qualified res- indebtedness meeting the requirements of the $80x balance of the 2000 mortgage and idence interest (as defined in § 163(h)(3)) acquisition indebtedness, or refinancing borrowed an additional $30x.Thus,theto- and is paid or accrued during the taxable of acquisition indebtedness, but only to talamountofA’s mortgage in 2004 was year on indebtedness that is incurred in ac- the extent the amount of the indebted- $110x (the 2004 mortgage). A did not use quiring, constructing, or substantially im- ness resulting from such refinancing does the $30x to acquire, construct, or substan- proving any property that is the principal not exceed the amount of the refinanced tially improve any property that was a prin- residence (within the meaning of § 121) of indebtedness. Under § 163(h)(3)(B)(ii), cipal residence or a qualified residence. At the taxpayer at the time such interest ac- the aggregate amount of acquisition in- no time did A’s indebtedness to acquire his crues, or is a qualified dwelling that is a debtedness for any period cannot exceed principal residence or a qualified residence qualified residence (within the meaning of $1,000,000 (or $500,000 in the case of

2005–14 I.R.B. 816 April 4, 2005 a married individual filing a separate re- HOLDING statement, or other document is made un- turn). der penalties of perjury as required by sec- The term “qualified residence” is de- Interest paid on a home mortgage that tion 6065. The Service also is aware that fined in § 163(h)(4)(A) as the principal res- has been refinanced more than one time is some promoters, including return prepar- idence (within the meaning of § 121) of deductible as qualified housing interest for ers, are advising or recommending that the taxpayer and one other residence of the purposes of the alternative minimum tax taxpayers take frivolous positions, which taxpayer that is selected by the taxpayer for to the extent the interest on the mortgage include striking or otherwise invalidating the taxable year and that is used by the tax- that was refinanced is qualified housing the jurat. Some promoters market a pack- payer as a residence (within the meaning of interest and the amount of the mortgage age, kit, or other materials that claim to § 280A(d)(1)). indebtedness is not increased. show taxpayers how they can avoid pay- The 1990 mortgage is indebtedness in- ingincometaxesbasedontheseandother curred in acquiring A’s principal residence. DRAFTING INFORMATION meritless arguments. The interest paid or accrued on the 1990 This revenue ruling emphasizes to tax- mortgage meets the requirements of qual- The principal author of this revenue rul- payersandtopromotersandreturnpre- ified residence interest under § 163(h)(3). ing is Martin Scully, Jr. of the Office of As- parers that striking or otherwise altering Thus, the interest paid or accrued by A on sociate Chief Counsel (Income Tax & Ac- the jurat in a manner that negates or casts the 1990 mortgage is qualified housing in- counting). For further information regard- doubt on its validity invalidates the return. terest for purposes of the alternative mini- ing this revenue ruling, contact Mr. Scully Any argument that the law does not require mum tax. at (202) 622–4960 (not a toll-free call). written verification of the accuracy of the The last sentence of § 56(e)(1), as clar- return has no merit and is frivolous. ified by the legislative history, indicates The Service is committed to identi- that when § 56(b)(1)(C) was enacted as Section 163.—Interest fying taxpayers who attempt to avoid part of the alternative minimum tax provi- their federal tax obligations by taking sions, Congress intended that interest with 26 CFR 1.163–10T: Qualified residence interest frivolous positions, including frivolous respect to a refinancing of a loan that gives (temporary). positions based on arguments relating to rise to qualified housing interest would Is interest paid on a home mortgage that has been an altered or amended jurat. The Service be deductible for alternative minimum tax refinanced more than one time deductible as qualified will take vigorous enforcement action purposes to the extent the amount of the housing interest for purposes of the alternative mini- against these taxpayers and against pro- loan was not increased. When A refi- mum tax? See Rev. Rul. 2005-11, page 816. moters and return preparers who assist nanced the 1990 mortgage in 2000, the taxpayers in taking these frivolous posi- refinanced amount equaled the amount of tions. Frivolous returns and other similar the outstanding principal. Thus, the inter- Section 6065.—Verification documents submitted to the Service are est paid or accrued on the 2000 mortgage of Returns processed through the Service’s Frivolous is deductible as qualified housing interest Return Program. As part of this program, (Also Section 6702.) for purposes of the alternative minimum the Service confirms whether taxpayers tax because the interest on the 1990 mort- who take frivolous positions have filed Frivolous tax returns; altering the ju- gage is qualified housing interest and the all of their required tax returns, computes rat. This ruling deals with taxpayers who amount of the loan is not increased. the correct amount of tax and interest due, attempt to reduce their federal tax liability Similarly, when A refinanced the 2000 and determines whether civil and crimi- by striking or altering the written declara- mortgage in 2004, the interest on the 2004 nal penalties should apply. The Service tion (the jurat) that verifies that a return, mortgage is qualified housing interest to also determines whether civil or criminal declaration, statement or other document the extent of the outstanding principal bal- penalties should apply to return prepar- is made under penalties of perjury. The ance of the 2000 mortgage at the time of ers, promoters, and others who assist ruling emphasizes to taxpayers and to pro- the refinancing because the interest on the taxpayers in taking frivolous positions, moters and return preparers that striking or 2000 mortgage is qualified housing inter- and recommends whether an injunction altering the jurat in a manner that negates est. However, as part of the 2004 refinanc- should be sought to halt these activities. its validity invalidates the return. ing A borrowed an additional $30x,andA Other information about frivolous tax po- did not use the $30x to acquire, construct, sitions is available on the Service website or substantially improve any property that Rev. Rul. 2005–18 at www.irs.gov. was a principal residence or a qualified res- PURPOSE idence. Accordingly, for alternative mini- ISSUE mum tax purposes A may deduct only the The Service is aware that some taxpay- Whether a document, declaration, or interest paid or incurred on $80x and not ers are attempting to reduce their federal statement that is required to be verified un- the interest attributable to the additional tax liability by striking or otherwise in- der penalties of perjury, pursuant to sec- $30x of the $110x of the 2004 mortgage. validating the written declaration (the ju- tion 6065, is valid if the jurat has been rat) that verifies that a return, declaration, stricken or otherwise altered in a manner

April 4, 2005 817 2005–14 I.R.B. that negates or casts doubt on validity of If the taxpayer adds language to the ju- of taxpayer B to verify the accuracy and the return? rat, or adds language to the return that truthfulness of the Form 1040A. casts doubt on the validity of the jurat, FACTS courts look to the intent and effect of the CIVIL AND CRIMINAL PENALTIES change in order to determine the valid- Situation 1. Individual taxpayer A filed The Service will challenge the claims of ity of the underlying return. A change a Form 1040A individual income tax re- individuals who attempt to avoid or evade that negates or casts doubt on the valid- turn for the 2004 taxable year. Taxpayer their federal tax liability. In addition to li- ity of the jurat, or the taxpayer’s intent A signed the form but crossed out the jurat ability for the tax due plus statutory inter- to affirm the contents of the return under on the return, and wrote the word “void” est, taxpayers who fail to file valid returns penalty of perjury, will void the jurat. See across it. orpaytaxbasedonanargumentthatthey Williams v. Commissioner, 114 T.C. 136, Situation 2. Individual taxpayer B filed can alter or amend the jurat on a return 140–41 (2000) (language added by the tax- a Form 1040A individual income tax re- face substantial civil and criminal penal- payer above the jurat box that denied lia- turn for the 2004 taxable year. Taxpayer B ties. Potentially applicable civil penalties bility for the tax reported on the return still signed the Form 1040A without deleting or include: (1) a $500 penalty imposed under had the effect of vitiating the verification); altering the jurat, but wrote across the top section 6702 when the taxpayer files a doc- Sloan v. Commissioner, 102 T.C. 137, of the Form 1040A that “I deny that I owe ument that purports to be a return but that 141–47 (1994) (language added within the the tax shown on this return.” contains a frivolous position or suggests a jurat box that “[raised] serious questions desire by the taxpayer to delay or impede about whether petitioner [was] ‘denying’ LAW AND ANALYSIS the administration of Federal income tax the accuracy of the information contained laws; (2) the section 6651 additions to tax Section 6011(a) requires any person li- in the return, ‘disclaiming’ the jurat alto- for failure to file a return, failure to pay the able for taxes to file a return that includes gether, or simply protesting the tax laws,” tax owed, and fraudulent failure to file a “the information required by [the] forms ultimately acted to invalidate the return), return; and (3) a penalty of up to $25,000 or regulations” issued by the Service. See aff’d,53F.3d799(7th Cir. 1995). If there under section 6673 if the taxpayer makes also Treas. Reg. sec. 1.6012–1(a)(6) is any doubt whether an addition or alter- frivolous arguments in the United States (prescribing Form 1040 for making an in- ationtothejuratisintendedtonegateor Tax Court. come tax return). Section 6065 mandates deny the jurat, the Service is “entitled to Taxpayers relying on these frivolous that any return, declaration, statement, or construe alterations of the jurat against the positions also may face criminal pros- other document required under the inter- taxpayer... .” Sloan v. Commissioner,53 ecution for: (1) attempting to evade or nal revenue laws and regulations “contain F.3d 799, 800 (7th Cir. 1995). defeat tax under section 7201, for which or be verified by a written declaration that There is no authority under any U.S. the penalty is a significant fine and impris- it is made under the penalties of perjury.” law that supports the position that individ- onmentforupto5years;and(2)willful For taxpayer convenience, paper returns uals may avoid their income tax obliga- failure to file a return under section 7203, all contain a pre-printed written declara- tions by striking or otherwise modifying for which the penalty is a significant fine tion or jurat. the jurat in a manner that casts doubt on and imprisonment for up to a year. It is well settled that if a taxpayer strikes its validity. Moreover, tampering with the Persons, including return preparers, or obliterates the jurat on a tax return or form of a tax return, including the jurat, who promote these frivolous positions and other document, the jurat is void, as is substantially impedes the Service’s ability those who assist taxpayers in claiming tax the underlying return, because the return to process and verify the return. Beard benefits based on these frivolous positions no longer meets the requirements of sec- v. Commissioner, 82 T.C. 766, 776–777 may face civil and criminal penalties and tion 6011(a) and section 6065. See Lucas (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). also may be enjoined by a court pursuant to v. Pilliod Lumber Co., 281 U.S. 245, 248 Courts routinely impose monetary penal- sections 7407 and 7408. Potential penal- (1930) (a return that was not properly ver- ties on taxpayers who cite constitutional ties include: (1) a penalty under section ified under oath by the corporate officers and other frivolous arguments as a basis 6700 for promoting abusive tax shelters; did not meet the requirements of 6011(a) for striking or modifying the jurat. See (2) a $1,000 penalty under section 6701 and section 6065); Borgeson v. United Borgeson, 757 F.2d at 1073 (upholding im- for aiding and abetting the understatement States, 757 F.2d 1071, 1072–73 (10th Cir. position of frivolous return penalty under of tax; and (3) criminal prosecution under 1985) (the plain wording of section 6065 section 6702); Trowbridge v. Commis- section 7206, for which the penalty is a requires the jurat on any return); United sioner, T.C. Memo. 2003–165, aff’d,378 fine of up to $100,000 and imprisonment States v. Moore, 627 F.2d 830, 834 (7th F.3d 432 (5th Cir. 2004). for up to 3 years, for assisting or advising Cir. 1980) (the forms submitted by the tax- In Situation 1, taxpayer A rendered the about the preparation of a false return or payer were not returns because the jurat Form 1040A void by crossing out the jurat other document under the internal revenue was obliterated); Cupp v. Commissioner, and writing “void” across it. In Situation 2, laws. 65 T.C. 68, 78–79 (1975) (documents sub- taxpayer B rendered the Form 1040A void mitted by the taxpayer that were not signed by adding language to the Form 1040A HOLDING under penalty of perjury were not returns), that casts doubt on the validity of the jurat. aff’d without published opinion, 559 F.2d This action represents a failure on the part The law mandates that any return, dec- 1207 (3d Cir. 1977). laration, statement, or other document re-

2005–14 I.R.B. 818 April 4, 2005 quired under the internal revenue laws and or evade their federal tax obligations tionally-based positions promoted by S, regulations contain a valid jurat. The claim by taking frivolous positions, including A filed a Form W–4, Employee’s With- that taxpayers can reduce their federal tax frivolous constitutional positions. The holding Allowance Certificate, with A’s liability by striking or amending the jurat Service will take vigorous enforcement employer that claimed excess exemp- on a return, declaration, statement, or other action against these taxpayers and against tions so that little or no federal income document is frivolous. promoters and return preparers who assist tax would be withheld from A’s wages taxpayers in taking these frivolous posi- in 2004. Taxpayer A earned $40,000 of DRAFTING INFORMATION tions. Frivolous returns and other similar taxable income in 2004. Relying on these documents submitted to the Service are constitutionally-based positions promoted The principal author of this revenue processed through its Frivolous Return by S, A did not file a federal income tax rulingistheOfficeoftheAssociateChief Program. As part of this program, the return for 2004. Counsel (Procedure and Administration), Service confirms whether taxpayers who 2. Taxpayer B is a United States citi- Administrative Provisions and Judicial take frivolous positions have filed all of zen who earned $40,000 in taxable income Practice Division. For further information their required tax returns, computes the in 2004. On B’s 2004 Form 1040, federal regarding this revenue ruling, contact that correct amount of tax and interest due, income tax return, B wrote “Fifth Amend- office at (202) 622–7950 (not a toll-free and determines whether civil and crimi- ment privilege” on each line and did not call). nal penalties should apply. The Service report any taxable income for the year. also determines whether civil or criminal penalties should apply to return preparers, LAW AND ANALYSIS Section 6651.—Failure to promoters, and others who assist tax- The Sixteenth Amendment provides File Tax Return or to Pay Tax payers in taking frivolous positions, and that Congress shall have the power to recommends whether a court injunction (Also Sections 6662, 6663, 6673, 6702, 7201, 7203, lay and collect taxes on income, from 7206, and 7408.) should be sought to halt these activities. whatever source derived, without appor- Other information about frivolous tax po- tionment among the several states and Frivolous tax returns; constitution- sitions is available on the Service website without regard to any census or enumer- ally based arguments. This ruling em- at www.irs.gov. phasizes to taxpayers and to promoters ation. U.S. CONST. amend. XVI. The and return preparers that a taxpayer can- ISSUES United States Supreme Court has upheld not avoid income tax by making frivolous the constitutionality of the income tax constitutionally based arguments. 1. Whether a taxpayer may refuse to laws enacted subsequent to ratification file a federal income tax return, or to pay of the Sixteenth Amendment. See, e.g., Rev. Rul. 2005–19 federal income tax, based on claims that Brushaber v. Union Pac. R.R. Co.,240 the federal income tax is unconstitutional? U.S. 1 (1916) (relying on the Sixteenth PURPOSE 2. Whether a taxpayer may refuse to file Amendment in holding that the income a federal income tax return based on the tax provisions of the Tariff Act of 1913 The Service is aware that some taxpay- claim that the requirement to do so violates were not unconstitutional). ers are attempting to reduce their federal the prohibition against self-incrimination Promoters who claim that the federal tax liability by claiming that the federal in- contained in the Fifth Amendment to the income tax is unconstitutional often make come tax is unlawful because it violates U.S. Constitution? frivolous arguments that there were de- one or more provisions of the United States fects in the ratification of the Sixteenth Constitution, or that they have a constitu- FACTS Amendment by the states. There are a tional right not to comply with the federal number of variations on these frivolous tax laws. The Service is also aware that 1. Taxpayer A is a United States cit- arguments: (i) versions of the Amendment promoters, including return preparers, are izen who resides in state X. A attended ratified by the states contained defects in advising or recommending that taxpayers seminars on the federal tax system spon- spelling, punctuation, wording, or cap- take frivolous positions based on these ar- soredbyS,anattorney.Smadeclaims italization; (ii) state legislatures did not guments. Some promoters market a pack- at these seminars that the federal income follow proper procedures in ratifying the age, kit, or other materials that claim to tax is unconstitutional because: (a) the amendment; (iii) state governors did not show taxpayers how they can avoid pay- Sixteenth Amendment to the U.S. Consti- sign the amendment; (iv) one or more ing income taxes based on these and other tution, which authorizes a federal income of the states that ratified the Amend- meritless arguments. tax, was not properly ratified by the states; ment was not legally a state; and (v) the This revenue ruling emphasizes to tax- (b) the federal income tax violates the Amendment does not contain an enabling payersandtopromotersandreturnprepar- due process clause of the Fifth Amend- clause. These arguments have no merit, ers that a taxpayer cannot avoid income tax ment to the U.S. Constitution; and (c) and courts have consistently rejected all by making frivolous constitutionally based the payment of taxes is a form of invol- challenges to the constitutionality of the arguments. untary servitude or slavery prohibited by federal income tax following enactment of The Service is committed to identi- the Thirteenth Amendment to the U.S. the Sixteenth Amendment. See Knoblauch fying individuals who attempt to avoid Constitution. Based on these constitu- v. Commissioner, 749 F.2d 200, 201 (5th

April 4, 2005 819 2005–14 I.R.B. Cir. 1984) (“Every court that has con- that person in a criminal prosecution. taxpayer makes frivolous arguments in the sidered this argument has rejected it.”). Courts have routinely held, however, that United States Tax Court. Arguments to the contrary are frivolous. the Fifth Amendment provides no basis Taxpayers relying on these positions The Fifth Amendment prevents the for failing or refusing to file a tax return. also may face criminal prosecution for: federal government from taking property United States v. Stillhammer,706F.2d (1) attempting to evade or defeat tax un- without due process of law. U.S. CONST. 1072, 1076–77 (10th Cir.1983) (“[T]he der section 7201, for which the penalty amend. V. Due process generally includes Fifth Amendment does not serve as a de- is a significant fine and imprisonment for a right to notice and an opportunity to fense for failing to make any tax return, up to 5 years; (2) willful failure to make be heard. The Supreme Court has held and a return containing no information a return or pay tax under section 7203, that the procedures contained in the In- but a general objection based on the Fifth for which the penalty is a significant fine ternal Revenue Code fully satisfy the due Amendment does not constitute a return and imprisonment of up to 1 year; or (3) process rights of taxpayers. See Phillips as required by the Code.”). The remote making false statements on a return under v. Commissioner, 283 U.S. 589, 595–99 possibility that a taxpayer’s statement on section 7206, for which the penalty is a (1931) (“The right of the United States a tax return might be used as evidence in a significant fine and imprisonment for up to collect its internal revenue by sum- future criminal prosecution will not relieve to3years. mary administrative proceedings has long a taxpayer from the obligation to file a tax Persons, including return preparers, been settled. Where, as here, adequate return and properly report income and pay who promote these frivolous positions and opportunity is afforded for a later judicial tax due. See California v. Byers,402U.S. those who assist taxpayers in claiming determination of the legal rights, summary 424, 427–29 (1971) (“[T]he remote pos- tax benefits based on these frivolous ar- proceedings to secure prompt performance sibility of incrimination is insufficient to guments may face penalties and may be of pecuniary obligations to the government defeat strong policies of disclosure called enjoined by a court pursuant to sections have been consistently sustained.”). The for by” government regulatory scheme.). 7407 and 7408. Potential penalties in- argument that due process requires a hear- Additionally, involvement in illegal ac- clude: (1) a $250 penalty under section ing before tax has to be paid or can be tivities will not relieve a person of the 6694 for each return prepared by an in- withheld from wages is frivolous. duty to file a federal income tax return come tax preparer who knew or should The federal income tax only requires because income earned from illegal activ- have known that the taxpayer’s argument payment of taxes on a person’s income. ities is subject to the federal income tax. was frivolous (or $1,000 for each return It does not force a person to labor invol- United States v. Sullivan, 274 U.S. 259, if the return preparer’s actions were will- untarily, or to labor at all. The Thirteenth 263–64 (1927) (“It would be an extreme if ful, intentional or reckless); (2) a penalty Amendment prohibits slavery and invol- not an extravagant application of the Fifth under section 6700 for promoting abusive untary servitude, except as punishment Amendment to say that it authorized a man tax shelters; (3) a $1,000 penalty under when convicted of a crime. U.S. CONST. to refuse to state the amount of his income section 6701 for aiding and abetting the amend. XIII. The Thirteenth Amendment because it had been made in crime.”). understatement of tax; and (4) criminal does not proscribe taxation. See Abney prosecution under section 7206, for which v. Campbell, 206 F.2d 836, 841 (5th CIVIL AND CRIMINAL PENALTIES the penalty is a significant fine and impris- Cir. 1953) (The specification, that the act onment for up to 3 years for assisting or violates the Thirteenth Amendment by In determining the correct amount of advising about the preparation of a false imposing involuntary servitude upon an tax due, the Service will include income return or other document under the inter- employer of domestic servants, seems to that taxpayers attempt to exclude based on nal revenue laws. us far-fetched, indeed frivolous.”). More- frivolous constitutional arguments. In ad- over, a prison sentence for failing to file a dition to liability for tax due plus statutory HOLDINGS federal income tax return is not prohibited interest, individuals who claim tax benefits 1. The Sixteenth Amendment to the by the Thirteenth Amendment. See United on their returns based on these and other U.S. Constitution was properly ratified and States v. Drefke, 707 F.2d 978, 983 (8th frivolous arguments face substantial civil authorizes the federal income tax. Filing a Cir. 1983) (“The Thirteenth Amendment, and criminal penalties. Potentially appli- federal income tax return and paying fed- however, is inapplicable where involun- cable civil penalties include: (1) the sec- eral income tax does not constitute the tak- tary servitude is imposed as punishment tion 6651 additions to tax for failure to ing of property without due process of law for a crime.”). Failing to file a federal file a return, failure to pay the tax owed, under the Fifth Amendment to the U.S. incometaxreturnortopayfederalin- and fraudulent failure to file a return; (2) Constitution. Filing a federal income tax come tax based on the argument that it the section 6662 accuracy-related penalty, return, paying federal income tax, and in- would constitute involuntary servitude is which is equal to 20 percent of the amount carceration for failure to comply with fed- frivolous. of taxes the taxpayer should have paid; (3) eral income tax obligations is not involun- The Fifth Amendment provides that in the section 6663 penalty for civil fraud, tary servitude or slavery prohibited by the a criminal case a person may not be com- which is equal to 75 percent of the amount Thirteenth Amendment to the U.S. Con- pelled to be a witness against himself. U.S. of taxes the taxpayer should have paid; (4) stitution. Arguments to the contrary are CONST. amend. V. This generally means a $500 penalty under section 6702 for fil- frivolous. that a person cannot be forced to answer a ing a frivolous return; and (5) a penalty question if the answer will be used against of up to $25,000 under section 6673 if the

2005–14 I.R.B. 820 April 4, 2005 2. A taxpayer may not properly refuse parers that liability for federal taxes does the Internal Revenue Code. INDOPCO, to file a federal income tax return based on not depend on whether the taxpayer agrees Inc. v. Commissioner, 503 U.S. 79, 84 the claim that the requirement to do so vi- with the government programs or policies (1992). There is no provision in the Inter- olates the prohibition against self-incrimi- that are funded with tax receipts. Any ar- nal Revenue Code that permits taxpayers nation of the Fifth Amendment to the U.S. gument that taxpayers may refuse to report to file returns claiming deductions or cred- Constitution. Arguments to the contrary income or claim deductions because they its that reduce their taxable income by the are frivolous. oppose particular government programs or percentage they estimate the government policies is frivolous and has no merit. spends on programs or policies with which DRAFTING INFORMATION The Service is committed to identify- they disagree. ing taxpayers who attempt to avoid their These frivolous positions are variations This revenue ruling was drafted by the tax obligations by taking frivolous posi- of arguments taxpayers have made about Office of Associate Chief Counsel (Proce- tions, including frivolous positions based religion and taxation that have been re- dure and Administration), Administrative on opposition to government programs or peatedly rejected by the courts. In United Provisions and Judicial Practice Division. policies. The Service will take vigorous States v. Lee, 455 U.S. 252 (1982), a mem- For further information regarding this rev- enforcement action against these taxpayers ber of a religious denomination claimed enue ruling, contact that office at (202) and against promoters and return prepar- that the payment of social security taxes 622–7950 (not a toll-free call). ers who assist taxpayers in taking these violated his First Amendment right to free frivolous positions. Frivolous returns exercise of religion. The United States (Also Sections 6662–6664, 6702.) and other similar documents submitted Supreme Court rejected this argument, to the Service are processed through its stating that “the tax system could not Frivolous tax returns; protesting Frivolous Return Program. As part of this function if denominations were allowed government programs or policies. This program, the Service confirms whether to challenge the tax system because tax ruling emphasizes to taxpayers and to taxpayers who take frivolous positions payments were spent in a manner that vi- promoters and return preparers that lia- have filed all of their required tax re- olates their religious belief.” Id. at 260. bility for federal taxes does not depend turns, computes the correct amount of tax The Court held that religious or moral be- on whether the taxpayer agrees with the and interest due, and determines whether liefs that conflict with the payment of tax government programs or policies that are civil and criminal penalties should ap- provide no basis for resisting the tax. Id. funded with tax receipts. Any argument ply. The Service also determines whether Courts repeatedly have rejected these that taxpayers may refuse to report income civil or criminal penalties should apply and similar arguments that a taxpayer’s or claim deductions because they oppose to return preparers, promoters, and others religious or moral beliefs permit the particular government programs or poli- who assist taxpayers in taking frivolous avoidance of federal taxes, and have cies is frivolous and has no merit. positions, and recommends whether a imposed penalties against taxpayers who court injunction should be sought to halt make these arguments. See Schehl v. Rev. Rul. 2005–20 these activities. Other information about Commissioner, 855 F.2d 364, 367 (6th frivolous tax positions is available on the Cir. 1988) (“Alleged vocal opposition to PURPOSE Service website at www.irs.gov. taxes for a particular reason, and refusal to pay taxes, even if all assertions were The Service is aware that some taxpay- ISSUE taken as true . . . are simply not a basis ers are attempting to reduce or eliminate to challenge an assessment of taxes.”); their federal tax liability by taking the po- Whether a taxpayer’s disagreement Nelson v. United States, 796 F.2d 164 (6th sitionthattheyarenotrequiredtopay with government programs or policies on Cir. 1986) (upholding the applicability taxes if those taxes might be used to sup- moral, ethical, religious or other grounds and constitutionality of a frivolous return port government programs or policies with allows the taxpayer to refuse to file federal penalty imposed against a taxpayer who which they disagree. Common examples tax returns or to refuse to pay part or all of claimed a deduction based on religious include moral, ethical, or religious opposi- the taxpayer’s federal tax liability? objection to war expenditures); Randall tion to government spending for weapons v. Commissioner, 733 F.2d 1565, 1567 programs, military operations, or medical LAW AND ANALYSIS (11th Cir. 1984) (“[A]rguments involving research. The Service is also aware that objections to the Government’s military promoters, including return preparers, are Section 1 of the Internal Revenue Code expenditures as a basis for non-payment of advising or recommending that taxpayers imposes a tax on all taxable income. There taxes have been raised by taxpayers many take frivolous positions based on these ar- is no authority under the Internal Revenue times, and in each instance the courts have guments. Some promoters market a pack- Code or any other applicable law that al- rejected them.”). age, kit, or other materials that claim to lows taxpayers to refuse to file tax returns show taxpayers how they can avoid paying because they do not agree with govern- CIVIL AND CRIMINAL PENALTIES taxes based on these and other meritless ar- ment programs or policies. Further, it is guments. well settled that deductions and credits are The Service will disallow deductions or This revenue ruling emphasizes to tax- a matter of legislative grace and are not al- other claimed tax benefits, including the payersandtopromotersandreturnpre- lowed unless specifically provided for in exclusion of income, based on frivolous ar-

April 4, 2005 821 2005–14 I.R.B. guments regarding opposition to govern- policies. Any claim that individuals may The Service is committed to identify- ment programs or expenditures. In addi- reduce their federal tax liability based on ing taxpayers who attempt to avoid their tion to liability for tax due plus statutory objections to the use of the taxes to sup- tax obligations by taking frivolous posi- interest, individuals who claim tax ben- port government programs or policies is tions, including frivolous positions based efits on their returns based on these and frivolous and has no merit. on meritless “straw man” or similar ar- other frivolous arguments may face sub- guments. The Service will take vigorous stantial civil and criminal penalties. Poten- DRAFTING INFORMATION enforcement action against these taxpayers tially applicable civil penalties include: (1) and against promoters and return prepar- The principal author of this revenue the section 6662 accuracy-related penalty, ers who assist taxpayers in taking these ruling is the Office of the Associate Chief which is equal to 20 percent of the amount frivolous positions. Frivolous returns Counsel (Procedure & Administration) of taxes the taxpayer should have paid; (2) and other similar documents submitted Administrative Provisions and Judicial the section 6663 penalty for civil fraud, to the Service are processed through its Practice Division. For further information which is equal to 75 percent of the amount Frivolous Return Program. As part of this regarding this revenue ruling, contact that of taxes the taxpayer should have paid; (3) program, the Service confirms whether office at (202) 622–7950 (not a toll-free a $500 penalty under section 6702 for fil- taxpayers who take frivolous positions call). ing a frivolous return; and (4) a penalty have filed all of their required tax re- of up to $25,000 under section 6673 if the turns, computes the correct amount of tax taxpayer makes frivolous arguments in the Section 6662.—Imposition and interest due, and determines whether United States Tax Court. of Accuracy-Related civil and criminal penalties should ap- Taxpayers relying on these frivolous ply. The Service also determines whether positions also may face criminal prosecu- Penalty on Underpayments civil or criminal penalties should apply tion for: (1) attempting to evade or defeat (Also Section 6664.) to return preparers, promoters, and others tax under section 7201, for which the who assist taxpayers in taking frivolous penalty is a significant fine and imprison- Frivolous tax returns; use of “straw positions, and recommends whether a ment for up to 5 years; or (2) making false man” to avoid tax. This ruling empha- court injunction should be sought to halt statements on a return under section 7206, sizes to taxpayers and to promoters and re- these activities. Other information about for which the penalty is a significant fine turn preparers that a taxpayer cannot avoid frivolous tax positions is available on the and imprisonment for up to 3 years. income tax on the erroneous theory that Service website at www.irs.gov. Persons who promote these frivolous the government has created a separate and positions and those who assist taxpayers in distinct entity or “straw man,” in place of ISSUE claiming tax benefits based on these posi- the taxpayer and that the taxpayer is not tions may be enjoined by a court pursuant responsible for the tax obligations of the Whether the government’s use of dif- to sections 7407 and 7408 and also may “straw man”. This argument has no merit ferent forms of a taxpayer’s name (e.g., face potential civil and criminal penalties. and is frivolous. different capitalization formats, spellings) Potential penalties include: (1) a $250 creates a “straw man,” which is a separate penalty under section 6694 for each return Rev. Rul. 2005–21 and distinct legal entity from the taxpayer prepared by an income tax return preparer to allow the taxpayer to avoid federal tax who knew or should have known that the PURPOSE obligations? taxpayer’s argument was frivolous (or The Service is aware that some taxpay- $1,000 for each return if the return pre- DISCUSSION OF THE “STRAW MAN” ers are attempting to reduce their federal parer’s actions were willful, intentional, CLAIM tax liability by taking the incorrect posi- or reckless); (2) a penalty under section tion that their incomes are not subject to The “straw man” claim is premised on 6700 for promoting abusive tax shelters; tax based on a theory that the government the erroneous theory that most government (3) a $1,000 penalty under section 6701 has created a separate and distinct entity, or documents do not actually refer to indi- for aiding and abetting the understatement “straw man,” in place of the taxpayer and viduals. Users of the “straw man” the- of tax; and (4) criminal prosecution under that the taxpayer is not responsible for the ory falsely claim that only documents us- section 7206, for which the penalty is a tax obligations of the “straw man.” Some ing an individual’s name with “standard” significant fine and imprisonment for up promoters market a package, kit, or other capitalization, i.e., lower-case with only to 3 years, for assisting or advising about materials that claim to show taxpayers how the beginning letters of each name cap- the preparation of a false return or other they can avoid paying income taxes based italized, are legitimate. These individu- document under the internal revenue laws. on these and other meritless arguments. als erroneously argue that the use of the HOLDING This revenue ruling emphasizes to tax- individual’s name in all upper-case let- payers and to promoters and return prepar- ters, which is common in some govern- Taxpayers may not refuse to file tax ers that a taxpayer cannot avoid income tax ment documents, refers to a separate le- returns and may not claim deductions or on the erroneous theory that the govern- gal entity, called a “straw man.” These in- credits on their tax returns based on their ment has created a “straw man.” This ar- dividuals also erroneously argue that, as opposition to government programs or gument has no merit and is frivolous. a result of the creation of a “straw man,”

2005–14 I.R.B. 822 April 4, 2005 they are not liable for the debts, includ- (7th Cir. 1984) (“[A]ll individuals, natu- 7408. Potential penalties include: (1) a ing the tax debts, of their “straw man,” ral or unnatural, must pay federal income $250 penalty under section 6694 for each that taxing the “straw man” is illegal be- taxontheirwages.. ..”);United States return or claim for refund prepared by an cause the “straw man” is a debt instrument v. Romero, 640 F.2d 1014, 1017 (9th Cir. income tax return preparer who knew or based upon the labor of a real person and 1981) (“[I]n our system of government, should have known that the taxpayer’s ar- is, therefore, a form of slavery, or that no one is free to speak out in open opposition gument was frivolous (or $1,000 for each tax is owed by the real individual because to the provisions of the tax laws, but such return or claim for refund if the return pre- it can be satisfied, or offset, by money in opposition does not relieve a citizen of his parer’s actions were willful, intentional a “Treasury Direct Account” held in the obligation to pay taxes.”). or reckless); (2) a penalty under section name of the “straw man.” 6700 for promoting abusive tax shelters; All individuals are subject to the provi- CIVIL AND CRIMINAL PENALTIES (3) a $1,000 penalty under section 6701 sions of the Internal Revenue Code. Sec- for aiding and abetting the understatement tion 1 imposes a tax on all taxable income. The Service will challenge the claims of of tax; and (4) criminal prosecution under Section 61 provides that gross income in- individuals who attempt to avoid or evade section 7206, for which there is a signif- cludes all income from whatever source their federal tax liability by refusing to file icant fine and imprisonment for up to 3 derived, including compensation for ser- returns and pay tax, and will disallow de- years for assisting or advising about the vices. Adjustments to income, deductions, ductions or other claimed tax benefits, in- preparation of a false return, statement or and credits must be claimed in accordance cluding the exclusion of income, based on other document under the internal revenue with the provisions of the Internal Revenue frivolous “straw man” arguments. In addi- laws. Code, the accompanying Treasury regu- tion to liability for the tax due plus statu- lations, and other applicable federal law. tory interest, individuals who claim tax HOLDING Section 6011 provides that any person li- benefits on their returns, or fail to file re- able for any tax imposed by the Internal turns, based on these and other frivolous The use of different forms of a tax- Revenue Code shall make a return when arguments face substantial civil and crim- payer’s name (different spellings, capital- required by Treasury regulations, and that inal penalties. Potentially applicable civil ization, etc.) does not create a “straw returns must be filed in accordance with penalties include: (1) the section 6651 ad- man” that allows taxpayers to avoid their Treasury regulations and IRS forms. Sec- ditions to tax for failure to file a return, federal tax obligations. Claims based on tion 6012 identifies the persons who are re- failuretopaythetaxowed,andfraudu- “straw man” arguments or on similar argu- quired to file income tax returns. Section lent failure to file a return; (2) the sec- ments, to avoid federal tax obligations, are 6151 requires that taxpayers pay their tax tion 6662 accuracy-related penalty, which frivolous and have no merit. when the return is due. Section 6311 re- is equal to 20 percent of the amount of quires payment of taxes by commercially taxes the taxpayer should have paid; (3) the DRAFTING INFORMATION acceptable means as prescribed by Trea- section 6663 penalty for civil fraud, which sury regulations. is equal to 75 percent of the amount of The author of this ruling is the Office There is no authority under the Inter- taxes the taxpayer should have paid; (4) a of Associate Chief Counsel (Procedure nal Revenue Code or any other applica- $500 penalty under section 6702 for filing and Administration), Administrative Pro- ble law that supports the claim that taxpay- a frivolous return; and (5) a penalty of up to visions and Judicial Practice Division. For ers may avoid their federal tax obligations $25,000 under section 6673 if the taxpayer further information regarding this ruling, based on “straw man” arguments, as de- makes frivolous arguments in the United contact that office at (202) 622–7950 (not scribed in this revenue ruling, or on similar States Tax Court. a toll-free call). arguments. The formatting of a taxpayer’s Taxpayers relying on these theories also name in all upper-case letters on govern- may face criminal prosecution for: (1) at- ment documents or elsewhere has no sig- tempting to evade or defeat tax under sec- Section 6673.—Sanctions nificance whatsoever for federal tax pur- tion 7201, for which there is a significant and Costs Awarded by poses. Courts have rejected as frivolous fine and imprisonment for up to 5 years; Courts “straw man” arguments. United States (2) willful failure to file a return under sec- v. Furman, 168 F.Supp.2d 609 (E.D. La. tion 7203, for which there is a significant (Also Sections 6662, 6663, and 6702.) 2001) (rejecting criminal defendant’s con- fine and imprisonment for up to one year; tention that he was not properly identi- or (3) making false statements on a return, Frivolous tax returns; Social Security fied in federal government documents that statement, or other document under section refund. This ruling emphasizes to taxpay- misspelled his name or used his properly 7206, for which there is a significant fine ers and to promoters and return preparers spelled name in all capital letters). In addi- and imprisonment for up to 3 years. that there is no right to a refund of, or a tion, courts repeatedly have rejected sim- Persons, including return preparers, deduction for, Social Security taxes paid ilar arguments based on frivolous claims who promote these theories and those who based on arguments that a taxpayer has that purport to provide a basis for avoid- assist taxpayers in claiming tax benefits waived the right to receive Social Secu- ing taxes, and have penalized taxpayers based on these frivolous arguments may rity benefits or has donated Social Security who have made these arguments. See, e.g., face penalties and also may be enjoined taxes or benefits to the government. These Lovell v. United States, 755 F.2d 517, 519 by courts pursuant to sections 7407 and arguments have no merit and are frivolous.

April 4, 2005 823 2005–14 I.R.B. Rev. Rul. 2005–17 promoters, and others who assist taxpayers to the government of Social Security ben- in taking frivolous positions, and recom- efits. The Tax Court rejected these posi- PURPOSE mends whether a court injunction should tions, characterizing the taxpayers’ failure be sought to halt these activities. Other to pay self-employment tax as negligent The Service is aware that some taxpay- information about frivolous tax positions and sustaining the Service’s disallowance ers are filing claims for refund of the So- is available on the Service’s website at of the charitable contribution deduction. cial Security taxes paid on wages pursuant www.irs.gov. See also Derksen v. Commissioner,84 to the Federal Insurance Contributions Act T.C. 355, 360 (1985) (“There are some (FICA) on the basis that they have waived ISSUES specific exemptions from the [social secu- their right to receive Social Security ben- rity] tax but the desire not to be a part of efits. The Service also is aware that some 1. Whether taxpayers are entitled to a the social security system, standing alone, taxpayers are attempting to reduce or elim- refund of Social Security taxes paid on the is not one of them.”) inate their federal tax liability by taking theory that they have waived the right to A refund claim must be based on a valid similar frivolous return positions, includ- receive Social Security benefits? argument that the taxpayer has overpaid ing reporting as a charitable contribution 2. Whether taxpayers are entitled to a the tax that is lawfully due and owing. See, deduction the amount of Social Security charitable contribution deduction for So- e.g., Lewis v. Reynolds, 284 U.S. 281, 283 taxes paid, on the basis that they are do- cial Security taxes paid on the theory that (1932) (“[T]he taxpayer is not entitled to nating these amounts to the government. those amounts have been donated by them a refund unless he has overpaid his tax.”). Some promoters market a package, kit, or to the government? Further, it is a well settled principle of law other materials, that claim to show taxpay- that deductions and credits are a matter ers how they can obtain a refund or avoid FACTS of legislative grace. See INDOPCO, Inc. paying income taxes based on these and This plan includes claims for refund of v. Commissioner, 503 U.S. 79, 84 (1992); other meritless arguments. This revenue Social Security taxes paid on wages under New Colonial Ice Co. v. Helvering,292 ruling does not apply to individuals who FICA, on the theory that the taxpayer has U.S. 435, 440 (1934). Unless specifically have satisfied the requirements of the re- waived the right to receive Social Secu- provided for in the Internal Revenue Code, ligious exemption from FICA provided in rity benefits. Additionally, some taxpayers no deduction or credit is allowed. Nei- section 3127 of the Internal Revenue Code. claim a charitable contribution deduction ther section 3121, nor any other provision This revenue ruling emphasizes to tax- on the theory that they have donated their of the Internal Revenue Code, allows for payersandtopromotersandreturnprepar- Social Security taxes, or their right to re- a refund of Social Security taxes paid on ers that there is no right to a refund of, or ceive Social Security benefits, to the gov- the grounds that a taxpayer has purportedly a deduction for, Social Security taxes paid ernment. waived all rights to receive Social Secu- based on arguments that a taxpayer has rity benefits. Similarly, no provision of the waived the right to receive Social Secu- LAW AND ANALYSIS Internal Revenue Code allows for a chari- rity benefits or has donated Social Security table contribution deduction based on the taxes or benefits to the government. These Social Security taxes are imposed on purported gift or donation of Social Secu- arguments have no merit and are frivolous. wages as defined in section 3121. There rity taxes or benefits to the government. The Service is committed to identi- is no authority under the Internal Revenue fying taxpayers who attempt to avoid Code (other than the narrow exception to CIVIL AND CRIMINAL PENALTIES their tax obligations by taking frivolous the application of FICA tax provided in the positions, including frivolous positions religious exemption under section 3127) The Service will disallow any claim for basedonargumentsregardingwaiverof or any other applicable law that supports refund of Social Security taxes based on Social Security benefits. The Service the claim that taxpayers may waive their the frivolous argument that a taxpayer has will take vigorous enforcement action right to receive Social Security benefits waived the right to receive Social Security against these taxpayers and against pro- and thereby receive a refund of Social Se- benefits. The Service will also disallow moters and return preparers who assist curity taxes paid. Similarly, there is no any deduction that is based on the theory taxpayers in taking these frivolous posi- provision of law that would allow a tax- that a taxpayer has given or donated the tions. Frivolous returns and other similar payer to claim a charitable contribution de- taxpayer’s Social Security taxes or Social documents submitted to the Service are duction as a result of the donation or gift to Security benefits to the government. In ad- processed through its Frivolous Return the government of the taxpayer’s right to dition to liability for tax due plus statutory Program. As part of this program, the receive Social Security benefits or of So- interest, individuals who claim tax benefits Service confirms whether taxpayers who cial Security taxes paid. on their returns based on these and sim- take frivolous positions have filed all of In Crouch v. Commissioner,T.C. ilar frivolous arguments face substantial their required tax returns, computes the Memo. 1990–309, the taxpayers did not civil and criminal penalties. Potentially correct amount of tax and interest due, pay self-employment tax based on a claim applicable civil penalties include, but are and determines whether civil and crimi- that they had withdrawn from the So- not limited to the following: (1) the sec- nal penalties should apply. The Service cial Security system. The taxpayers also tion 6662 accuracy-related penalty, which also determines whether civil or criminal claimed a charitable contribution deduc- is equal to 20 percent of the amount of penalties should apply to return preparers, tion based on a purported lump-sum gift taxes the taxpayer should have paid; (2)

2005–14 I.R.B. 824 April 4, 2005 the section 6663 penalty for civil fraud, and 7408. Potential penalties include: (1) the position that they have waived the right which is equal to 75 percent of the amount a $250 penalty under section 6694 for each to receive Social Security benefits. More- of taxes the taxpayer should have paid; (3) return or claim for refund prepared by an over, a taxpayer is not entitled to a chari- a $500 penalty under section 6702 for fil- income tax return preparer who knew or table contribution deduction based on the ing a frivolous income tax return; and (4) should have known that the taxpayer’s purported gift or donation of Social Secu- a penalty of up to $25,000 under section position was frivolous (or $1,000 for each rity taxes or benefits to the government. 6673 if the taxpayer makes frivolous argu- return or claim for refund if the return pre- Claims or deductions based on these posi- ments in the United States Tax Court. parer’s actions were willful, intentional tions are frivolous and have no merit. Taxpayers relying on these frivolous or reckless); (2) a penalty under section positions also may face criminal pros- 6700 for promoting abusive tax shelters; DRAFTING INFORMATION ecution for: (1) attempting to evade or (3) a $1,000 penalty under section 6701 This revenue ruling was authored by the defeat tax under section 7201, for which for aiding and abetting the understatement Office of Associate Chief Counsel (Proce- the penalty is a significant fine and impris- of tax; and (4) criminal prosecution under dure and Administration), Administrative onment for up to 5 years; or (2) making section 7206, for which the penalty is a Provisions and Judicial Practice Division. false statements on a return, statement, or significant fine and imprisonment for up to For further information regarding this rev- other document under section 7206, for 3 years for assisting or advising about the enue ruling, contact that office at (202) which the penalty is a significant fine and preparation of a false return, statement, or 622–7950 (not a toll-free call). imprisonment for up to 3 years. other document under the internal revenue Persons, including return preparers, laws. who promote these frivolous positions and those who assist taxpayers in claiming tax HOLDING benefits based on these frivolous positions also may face penalties and may be en- Taxpayers are not entitled to a refund joined by a court pursuant to sections 7407 of the Social Security taxes paid based on

April 4, 2005 825 2005–14 I.R.B. Part II. Treaties and Tax Legislation Subpart A.—Tax Conventions and Other Related Items

Austrian Scholarship MAP U.S.andAustriaAgreeonTax 21 (Other Income) of the U.S.-Austria in- Agreement Treatment of Certain Scholarships come tax treaty. Announcement 2005–22 IR–2005–20, March 1, 2005 The agreement constitutes a Mutual WASHINGTON — The Competent Au- Agreement in accordance with the In- Following is a copy of the News Re- thorities of Austria and the United States come Tax Treaty Between Austria and the lease issued by the Director, International have reached a mutual agreement on the United States. The Treaty entered into (U.S. Competent Authority) on March 1, taxation of certain scholarships under Arti- force on Feb. 1, 1998. 2005 (IR–2005–20). cle 20 (Students and Trainees) and Article The text of the Agreement is as follows:

COMPETENT AUTHORITY AGREEMENT The Competent Authorities of Austria and the United States enter into the following agreement (“Agreement”) concerning the interpretation of Articles 20, 21 and 23 of the Convention Between the Republic of Austria and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income Taxes, signed May 31, 1996. The Agreement is entered into under Article 24 (Mutual Agreement Procedure). For the purposes of this Agreement, “Article” refers to an Article of the Treaty. It is agreed that the exemption described in Article 20 (Students and Trainees) does not apply to payments for maintenance, education or training received by a student who is, or was immediately before visiting the United States, a resident of Austria, and who is present in the United States for the purpose of full-time education at a recognized education institution, if such scholarship is paid out of U.S. sources, e.g. in the case where the payer of income is a U.S. foundation. Accordingly, such a scholarship payment is taxable according to the domestic tax laws of the United States and Austria. In any case, pursuant to Article 23 (Non-Discrimination), Austrian students shall not be subjected in the United States to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which U.S. nationals in the same circumstances are or may be subjected. This principle would mutatis mutandis apply in the reciprocal situation of a U.S. student subject to tax in Austria according to the general rules of Articles 20 and 23. Furthermore it is understood that a scholarship granted for the purposes of postgraduate research derived by a student, who is present in the other Contracting State only for research purposes, and not for the purposes of full-time education at a recognized educational institution nor for full-time training, is not covered by Article 20 (Students and Trainees). The taxable treatment of such payments would be governed by the rules of Article 21 (Other Income) and thus taxable solely by the State of residence.

Robert H. Green Dr. Heinz Jirousek Director, International (LMSB) Deputy Head, International Tax Affairs Division Internal Revenue Service Federal Ministry of Finance U.S. Department of the Treasury

Date Date

2005–14 I.R.B. 826 April 4, 2005 Part III. Administrative, Procedural, and Miscellaneous

Public Comment Invited 3. Whether the recommended guidance Courier’s Desk on Recommendations for can be drafted in a manner so that tax- Internal Revenue Service 2005–2006 Guidance Priority payers can easily understand and apply the Attn: CC:PA:LPD:PR guidance; (Notice 2005–25) List 4. Whether the Service can administer 1111 Constitution Avenue, N.W. the recommended guidance on a uniform Washington, D.C. 20224 Notice 2005–25 basis; and 5. Whether the recommended guidance Alternatively, taxpayers may sub- The Department of Treasury and Inter- reduces controversy and lessens the bur- mit comments electronically via nal Revenue Service invite public com- den on taxpayers or the Service. e-mail to the following address: ment on recommendations for items that Taxpayers may submit recommenda- [email protected]. should be included on the 2005–2006 tions for guidance at any time during the Taxpayers should include “Notice Guidance Priority List. year. Please submit recommendations by 2005–25” in the subject line. All com- Treasury’s Office of Tax Policy and the April 30, 2005, for possible inclusion on ments will be available for public inspec- Service use the Guidance Priority List each the original 2005–2006 Guidance Prior- tion and copying in their entirety. year to identify and prioritize the tax is- ity List. The Service plans to update the For further information regarding this sues that should be addressed through reg- 2005–2006 Guidance Priority List period- notice, contact Crystal Foster of the Office ulations, revenue rulings, revenue proce- ically to reflect additional guidance that of Associate Chief Counsel (Procedure dures, notices, and other published admin- the Treasury Department and the Service and Administration) at (202) 622–7326 istrative guidance. The 2005–2006 Guid- intend to publish during the plan year. (not a toll-free call). ance Priority List will establish the guid- The periodic updates allow the Treasury ance that the Treasury Department and the Department and the Service to respond to Service intend to issue from July 1, 2005, the need for additional guidance that may Frivolous Arguments to Avoid through June 30, 2006. The Treasury De- arise during the plan year. Recommenda- When Filing a Return or Claim partment and the Service recognize the tions for guidance received after April 30, for Refund importance of public input to formulate 2005, will be reviewed for inclusion in the a Guidance Priority List that focuses re- next periodic update. Notice 2005–30 sources on guidance items that are most Taxpayers are not required to submit important to taxpayers and tax administra- recommendations for guidance in any par- SECTION 1. INTRODUCTION. tion. ticular format. Taxpayers should, how- As is the case whenever significant leg- As April 15 approaches, taxpayers are ever, briefly describe the recommended islation is enacted, the Treasury Depart- reminded to steer clear of abusive tax- guidance and explain the need for the guid- ment and the Service have dedicated sub- avoidance schemes that purportedly allow ance. In addition, taxpayers may include stantial resources to published guidance them to reduce or eliminate taxes. If an an analysis of how the issue should be re- projects necessary to implement the provi- idea to save on taxes seems too good to be solved. It would be helpful if taxpayers sions in the American Jobs Creation Act true, it probably is. suggesting more than one guidance project of 2004, Pub. L. No. 108–357, 118 Stat. Many abusive tax-avoidance schemes would prioritize the projects by order of 1418 (“AJCA”), enacted on October 22, are based on frivolous arguments that the importance. If a large number of projects 2004. As a consequence, new guidance Service and the courts have repeatedly are being suggested, it would be helpful if projects were added to the Guidance Pri- rejected. These schemes are often sold by the projects were grouped in terms of high, ority List, as updated on December 21, promoters for a substantial fee, and may medium or low priority. 2004. The Treasury Department and the be sold over the Internet, through adver- Taxpayers should send written com- Service will continue to evaluate the prior- tisements in newspapers and magazines, ments to: ity of each guidance project in light of the at conferences and seminars (including AJCA and other developments during the Internal Revenue Service conferences for professional groups such 2005–2006 plan year. Attn: CC:PA:LPD:PR as doctors or dentists), and through rec- In reviewing recommendations and (Notice 2005–25) ommendations of friends or acquaintances selecting projects for inclusion on the Room 5203 who have learned about these schemes. 2005–2006 Guidance Priority List, the P.O. Box 7604 Section 2 of this notice sets out some of Treasury Department and the Service will Ben Franklin Station the most common frivolous arguments consider the following: Washington, D.C. 20044 used by these abusive tax-avoidance 1. Whether the recommended guid- schemes. The Service is committed to ance resolves significant issues relevant to or hand deliver comments Monday identifying taxpayers who attempt to avoid many taxpayers; through Friday between the hours of their tax obligations by using schemes 2. Whether the recommended guidance 8 a.m. and 4 p.m. to: based on these and other frivolous ar- promotes sound tax administration; guments. Frivolous returns and other

April 4, 2005 827 2005–14 I.R.B. documents submitted to the Service are name in government documents has no District of Columbia is also a citizen of processed through its Frivolous Return significance whatsoever. the United States and is subject to fed- Program. The Service also reviews other eral tax. documents that make frivolous arguments • “Wages are not taxable income, pur- to determine whether the individuals who suant to section 1001, because tax- • “Residents of States, such as New submit these documents have filed re- payers have basis in their labor equal York or California, are residents of quired tax returns and paid all taxes due to the fair market value of the wages a foreign country and therefore not for previous years. they receive; thus, there is no gain to subject to U.S. income tax.” Under Section 3 of this notice identifies poten- be taxed.” All compensation received, its specific conditions and limitations, tial civil and criminal penalties. Taxpay- no matter what the form of payment, section 911 permits a taxpayer to elect ers who engage in abusive tax-avoidance must be included in gross income un- to exclude income from U.S. taxable schemes will be liable for unpaid taxes and der section 61. This includes salary or income only when the taxpayer earns interest. In addition, the Service will im- wages paid in cash, as well as the value income abroad and resides outside the pose civil and criminal penalties against of property and other economic bene- geographic boundaries of the United taxpayers where appropriate. The Service fits received from services performed States. For purposes of section 911, also will determine appropriate penalties or to be performed in the future. Sec- States (e.g., New York or Califor- and consider taking other appropriate ac- tion 1001 governs gain or loss on the nia), the District of Columbia, and tion against persons who promote these disposition of property, and has no ap- Commonwealths and Territories of the schemes and who prepare frivolous returns plication to compensation for services. United States (e.g., Johnston Atoll) are based on those schemes. not foreign countries. • “The 16th Amendment is invalid SECTION2.COMMONFRIVOLOUS because it contradicts the original • “A taxpayer can escape income tax ARGUMENTS. Constitution, was not properly rati- byputtingassetsinanoffshorebank fied, and lacks an enabling clause.” account.” A citizen or resident of the This section sets out some of the most The Sixteenth Amendment to the U.S. United States cannot use an offshore fi- common frivolous arguments used by tax- Constitution, which authorizes the in- nancial arrangement (such as a foreign payers to avoid or evade tax. come tax, was properly ratified by the bank or brokerage account, or a credit states and is valid. Further, the argu- card issued by a foreign bank) to avoid • “A taxpayer can avoid tax by filing ment that the Sixteenth Amendment is his federal tax obligations. Taxpayers a return that reports zero income and invalid due to the lack of an enabling are required to disclose foreign finan- zero tax liability.” All taxpayers who clause is without merit because Con- cial accounts to the Treasury Depart- receive more than the statutory min- gress has the power to lay and collect ment and may face civil and criminal imum amount of gross income, from taxes pursuant to Article 1, Section 8, penalties if they fail to do so. whatever source derived, must file re- Clause 18 of the Constitution. turns and pay tax. No law, including • “A taxpayer can eliminate tax by the Internal Revenue Code, permits a • “A taxpayer can make a ‘claim of establishing a ‘corporation sole.’” A taxpayer who has received wages or right’ to exclude the cost of his labor taxpayer cannot avoid income tax by other income to file a return with zero from income.” There is no “claim of establishing a “corporation sole.” A income and zero tax liability. If a tax- right” doctrine under any federal law, corporation sole may be used only by payer has received income subject to including the Internal Revenue Code, a legitimate religious leader for spe- federal tax, a return showing only ze- that permits a taxpayer to deduct or cific, limited purposes relating to the roes for income and tax liability is not exclude from gross income the value of religious leader’s office. a valid return. Further, inclusion of the his labor. phrase “nunc pro tunc” or other legal • “A taxpayer can place all of his as- jargon on an income tax return does • “Only income from a foreign source sets in a trust to escape income tax not serve to validate an otherwise im- is taxable under section 861.” Sec- while still retaining control over those proper return. tions 861 through 865 do not exclude assets.” A taxpayer who places assets income from taxable income. In par- in a trust but retains certain powers or • “A taxpayer may avoid income tax ticular, nothing in these sections or interests over the assets, including the by referring to a separate ‘straw man’ the Treasury regulations provides that power to control the beneficial enjoy- entity created by the use of the tax- only income earned from certain for- ment of the assets, is treated as the payer’s name in all capital letters in eign sources is subject to U.S. tax. owner of the assets for federal tax pur- government documents.” No author- poses and is subject to tax on the in- ity supports the claim that individu- • “I am not a ‘citizen’ or a ‘person’ come from those assets. als may avoid their federal income tax within the meaning of the Internal obligations based on “straw man” ar- Revenue Code.” A citizen of any one • “A taxpayer can deduct amounts guments. The use of all uppercase of the 50 States (e.g.,NewYork,Cal- paid to maintain his household by es- letters when including an individual’s ifornia) of the United States or of the tablishing a home business.” Business

2005–14 I.R.B. 828 April 4, 2005 expenses, including expenses related deposit the amounts withheld with the required to pay, and do not pay, the to a home-based business, are not de- Service. entire price stated in the sales contract. ductible unless the expenses relate to a legitimate profit-seeking trade or busi- • “A taxpayer can refuse to pay taxes • “Under section 3121 taxpayers can ness. Promoters of home-based busi- if the taxpayer disagrees with the gov- deduct the amount of Social Security ness schemes improperly encourage ernment’s use of the taxes it collects.” taxes paid or get a refund of those taxpayers to claim household expenses No law, including the Internal Revenue taxes.” The Internal Revenue Code im- as business expense deductions when Code, permits a taxpayer to avoid or poses Social Security tax on wages as the purported home-based business is evade tax obligations on the grounds defined in section 3121. Aside from not a legitimate trade or business. that the taxpayer does not agree with the narrow exception for a religious ex- the Government’s past or possible fu- emption under section 3127, a taxpayer • “Nothing in the Internal Revenue ture use of the taxes collected. may not exclude wages from Social Code imposes a requirement to file Security taxation on the basis that the areturn.”Section 6011 expressly au- • “A taxpayer can escape income taxes taxpayer is waiving the right to receive thorizes the Service to require, by or the tax system by submitting a set Social Security benefits, and the Code Treasury regulation, the filing of tax of documents in lieu of a tax return.” does not authorize a deduction for, or returns. Section 6012 identifies per- Taxpayers must file income tax returns refund of, Social Security taxes paid. sons who are required to file income using the forms prescribed by the Ser- tax returns. Under Treasury regula- vice. No law, including the Internal • “A taxpayer may sell (or purchase) tions, taxpayers who receive more Revenue Code, permits taxpayers to the right to claim a child as a quali- than the statutory minimum amount submit a document or series of docu- fying child for purposes of the EIC.” of gross income must file income tax ments to remove themselves from the A taxpayer may not purchase or sell returns. Taxpayers also are required to income tax system. the right to claim a child as a qualify- pay any tax owed. ing child for purposes of the earned in- • “A taxpayer can avoid tax by filing come credit (EIC). In order to claim a • “Filing a tax return is ‘voluntary.’” areturnwithanattachmentthatdis- child as a qualifying child for purposes Some people mistake the word “vol- claims tax liability.” Areturnwithan of the EIC, the child must meet spe- untary” for “optional” — but filing a attached disclaimer of tax liability is cific relationship, residency and age re- tax return is not optional for those who not a valid tax return under the law. quirements. meet the law’s minimum gross income requirements. The word “voluntary,” • “A taxpayer can avoid tax by filing The Service and the courts have repeat- as used in IRS publications and else- a return with an altered penalties of edly rejected these arguments and varia- where, refers to the fact that the U.S. perjury statement.” Alterations to an tions on them, and have rejected numerous tax system is a voluntary compliance income tax return or to the penalties of other tax avoidance schemes and frivolous system. This means only that taxpay- perjury statement may nullify a return. arguments used by taxpayers to avoid or ers themselves determine the correct evade taxes. amount of tax and complete the appro- • “Certain taxpayers can claim a ‘repa- priate returns, rather than have the gov- rations tax credit’ to right wrongs SECTION 3. CIVIL AND CRIMINAL ernment do this for them as is done in done in the past.” No law, including PENALTIES. some other countries. This system of the Internal Revenue Code, permits a self-reporting does not make the filing “reparations tax credit.” Civil and criminal penalties may ap- of tax returns or the payment of tax ply to taxpayers who make frivolous argu- voluntary. For those who do not com- • “By purchasing equipment and ser- ments. Potentially applicable civil penal- ply with this system and fail to self-re- vices for an inflated price, a taxpayer ties include: (1) the section 6651 additions port their tax liability, the tax law au- can use the Disabled Access Credit to to tax for failure to file a return, failure to thorizes various enforced compliance reduce tax or generate a refund.” The pay the tax owed, and fraudulent failure measures. section 44 Disabled Access Credit, to file a return; (2) the section 6662 accu- which is limited to expenses for spe- racy-related penalty, which is equal to 20 • “Because taxes are voluntary, as an cific medical equipment needed to percent of the amount of taxes the taxpayer employer, I don’t have to withhold in- make a business accessible to disabled should have paid; (3) the section 6663 come or employment taxes from my individuals, may only be claimed for penalty for civil fraud, which is equal to employees.” Every taxpayer is respon- amounts actually paid by a taxpayer 75 percent of the amount of taxes the tax- sible for completing and filing required running a legitimate business. Promot- payer should have paid; (4) a $500 penalty returns and paying the correct amount ers of this scheme improperly offer to under section 6702 for filing a frivolous in- of tax. An employer is required by sell equipment or services at inflated come tax return; and (5) a penalty of up to law to withhold income and employ- prices in order to generate a large $25,000 under section 6673 if the taxpayer ment taxes from salary and wages paid credit. Taxpayers participating in this makes frivolous arguments in the United to employees. Employers also must scheme, however, ultimately are not States Tax Court.

April 4, 2005 829 2005–14 I.R.B. Taxpayers who take frivolous positions State and Local General Sales posed on the seller if the tax is separately also may face criminal prosecution for: (1) Tax Deduction stated (as on a contract or receipt) and paid attempting to evade or defeat tax under by the consumer. Section 164(b)(5)(G). section 7201, for which the penalty is a sig- Notice 2005–31 A compensating use tax is treated as a nificant fine and imprisonment for up to 5 sales tax if the tax (1) is imposed on the years; (2) willful failure to file a return un- This notice provides guidance to tax- use, storage, or consumption of an item, der section 7203, for which the penalty is a payers regarding the election to deduct and (2) is complementary to a general sales fine of up to $25,000 and imprisonment for state and local general sales taxes in lieu tax that would be deductible with respect up to one year; and (3) making false state- of state and local income taxes under to similar items. Section 164(b)(5)(E). ments on a return, statement, or other doc- § 164(b)(5) of the Internal Revenue Code Taxpayers who elect to deduct state and ument under section 7206, for which the for taxpayers who elect to itemize deduc- local sales taxes may deduct either actual penalty is a significant fine and imprison- tions under § 63(e). Section 164(b)(5) was sales taxes paid or incurred, as evidenced mentforupto3years. added by § 501 of the American Jobs Cre- by appropriate records, or an amount de- Persons, including return preparers, ation Act of 2004, Pub. L. No. 108–357, termined under tables provided by the Ser- who promote frivolous positions and those and applies for taxable years beginning vice. For 2004, tables are provided in Pub- who assist taxpayers in claiming tax ben- after December 31, 2003, and before Jan- lication 600, Optional State Sales Tax Ta- efits based on frivolous positions may uary 1, 2006. bles. A taxpayer who elects to use the face penalties and may be enjoined by a optional sales tax tables may deduct (1) court pursuant to sections 7407 and 7408. BACKGROUND the amount determined under the tables, as Potential penalties include: (1) a $250 Section 164(a)(3) provides, in part, that provided in the instructions, plus (2) the penalty under section 6694 for each return taxpayers may deduct state and local in- actual amount of state and local general or claim for refund prepared by an income come taxes in the taxable year the taxes are sales taxes paid on motor vehicles, boats, tax return preparer who knew or should paid or incurred. Under § 164(b)(5), tax- and certain other specified items. Section have known that the taxpayer’s position payers may elect to deduct state and local 164(b)(5)(H). was frivolous (or $1,000 for each return general sales taxes in lieu of state and local APPLICATION or claim for refund if the return preparer’s income taxes. actions were willful, intentional or reck- A general sales tax is a tax imposed at Manner of making election to deduct sales less); (2) a penalty under section 6700 one rate with respect to the retail sale of taxes for promoting abusive tax shelters; (3) a broad range of classes of items. Section a $1,000 penalty under section 6701 for 164(b)(5)(B). In determining whether the Taxpayers elect to deduct state and local aiding and abetting the understatement of tax is imposed on a broad range of classes general sales taxes in lieu of state and local tax; and (4) criminal prosecution under of items, the fact that sales taxes do not income taxes on Form 1040, Schedule A, section 7206, for which the penalty is a apply to some or all food, clothing, med- in accordance with the instructions. A tax- significant fine and imprisonment for up to ical supplies, and motor vehicles is disre- payer may elect to deduct state and local 3 years for assisting or advising about the garded. Section 164(b)(5)(C)(i). In deter- general sales taxes in one taxable year and preparation of a false return, statement or mining whether the tax is imposed at one state and local income taxes in another tax- other document under the internal revenue rate, the fact that the tax rate that applies to able year. The election for a taxable year laws. food, clothing, medical supplies, or motor for which the period of limitation for filing a claim for refund or credit under § 6511 SECTION 4. EFFECT ON OTHER vehicles is lower than the general tax rate has not expired may be revoked by filing DOCUMENTS. is disregarded. Section 164(b)(5)(C)(ii). In general, sales taxes that are imposed an amended return for that taxable year. at a rate other than the general rate of tax Notice 2004–22 is modified and super- Definition of motor vehicle seded. are not deductible. However, sales taxes imposed on (1) food, clothing, medical For purposes of deducting state and lo- SECTION 5. ADDITIONAL supplies, or motor vehicles at a rate lower cal general sales taxes, a “motor vehicle” INFORMATION. than the general rate of tax may be de- includes an automobile, motorcycle, mo- ducted, and (2) motor vehicles at a rate in tor home, recreational vehicle, sport util- Other information about frivolous tax excess of the general sales tax rate may be ity vehicle, off-road vehicle, van, or truck positions is available on the Service web- deducted only at the general sales tax rate. (any of which may be either purchased or site at www.irs.gov. Section 164(b)(5)(D) and (F). leased). For these items, if sales taxes are The principal author of this notice is the If the amount of a sales tax is separately imposed at rates that exceed the general Office of Associate Chief Counsel (Proce- stated and paid by the consumer (other sales tax rate, sales tax may be deducted dure & Administration). For further infor- than in connection with a trade or busi- only at the general sales tax rate. mation regarding this notice, contact that ness), the amount of the tax is treated as a office at (202) 622–7800 (not a toll-free tax imposed on and paid by the consumer call). rather than the seller. Therefore, the con- sumer may deduct sales taxes that are im-

2005–14 I.R.B. 830 April 4, 2005 Determination of amount of sales taxes may be determined by multiplying the tax- Use of the optional sales tax tables by paid by using the optional sales tax tables payer’s state table amount by the ratio of taxpayers filing a joint tax return and the local sales tax rate to the state sales tax living in different states The optional sales tax tables provide an rate. amount of sales taxes paid based on a tax- Example. State A imposes a 5.0% general sales Taxpayers who file a joint return, live payer’s state of residence, total available tax in 2004. City B in State A imposes an addi- in different states, and use the optional income, and number of exemptions. tional 1.0% general sales tax in 2004. Taxpayer C sales tax tables must calculate the amount The state of residence is the state where lives in City B. Taxpayer C’s deduction for state sales of the deduction for state and local sales taxes determined under the optional sales tax tables the taxpayer physically resides. A tax- is $1,000. To calculate the additional amount for the taxes by applying their separate incomes payer who lives in different states during City B local sales tax, divide 1.0 (the local City B to the table for each state of residence, tak- the taxable year who elects to use the op- tax rate) by 5.0 (the State A tax rate). The result is ing into account the exemptions for depen- tional sales tax tables must multiply the 0.2. Multiply Taxpayer C’s deduction for state sales dents who resided with each taxpayer, and amount determined under the tables for taxes determined under the optional sales tax tables adding the total. Either spouse (but not by 0.2. The additional City B local sales tax is $200. each state of residence by a fraction, the Taxpayer C’s deductible State A and local sales tax both) may take into account dependents numeratorofwhichisthenumberofdays is $1,000 + $200, or $1,200 (before adding the tax on who did not reside with either taxpayer. physically resident in the state and the de- any specified items). nominatorofwhichisthenumberofdays For 2005, it is expected that the op- Deduction of state and local sales taxes in the year. tional sales tax tables will include local by taxpayers filing tax returns as married Example. Taxpayer S lives in State A from sales taxes if local sales taxes are imposed filing separately January 1 through August 31, 2004 (244 days), and at a uniform rate throughout the state. It is in State B from September 1 through December A married taxpayer filing a separate tax also expected that for 2005, taxpayers will 31, 2004 (122 days). The amount of S’s deduction return who elects to deduct state and local be allowed to determine the deduction for for state and local sales taxes determined under the sales taxes must use the optional sales tax optional sales tax tables would be $500 if S had lived local sales taxes in the manner discussed tables if the taxpayer’s spouse elects to in State A for the entire year and $400 if S had lived above if local sales taxes not included in deduct sales taxes and uses the optional in State B for the entire year. S’s deduction for state the optional sales tax tables are imposed on and local sales taxes is $466 calculated as follows: sales tax tables. the same items taxed by the state. In states In using the optional sales tax tables, where state sales taxes and local sales taxes State A: $500 X 244/366 = $333 a married taxpayer filing a separate return are not imposed on the same items, instruc- State B: $400 X 122/366 = $133 must apply the taxpayer’s separate income tions accompanying the optional sales tax Total $466 and the number of exemptions included on tables for 2005 may provide specific infor- the taxpayer’s return. Total available income is adjusted gross mation for determining the amount of lo- Example. Taxpayers W and H are married, have income (AGI) plus amounts not reflected cal sales taxes from the optional sales tax three children, and file their tax returns as married in AGI that increase spendable income, tables. If none of the preceding options is filing separately. W’s total available income is such as worker’s compensation, public as- available to a taxpayer for 2005, the tax- $40,000, and W includes exemptions for herself and sistance payments, military compensation payer may deduct only actual local sales one child on her tax return. H’s total available income earned in a combat zone, tax-exempt in- taxes paid or incurred, as evidenced by ap- is $60,000, and H includes exemptions for himself and two children on his tax return. W determines terest, the refundable portion of refundable propriate records. the amount of her deduction for state and local sales tax credits, and the nontaxable part of so- taxes under the optional sales tax tables based on cial security, veterans’ or railroad retire- Specified items on which sales taxes $40,000 income and two exemptions. Thus, H must ment benefits and of IRA, pension or an- maybedeductedbytaxpayersusingthe determine the amount of his deduction for state and nuity distributions. optional sales tax tables local sales taxes under the optional sales tax tables based on $60,000 income and three exemptions. The number of exemptions is the num- In addition to the amount determined ber included on the taxpayer’s tax return. DRAFTING INFORMATION See special rule, below, for taxpayers filing under the optional sales tax tables and amounts added for local general sales a joint return and living in different states. The principal author of this notice is taxes, taxpayers may deduct allowable ac- David M. Christensen of the Office of tual state and local general sales taxes paid Deductions for local general sales taxes the Associate Chief Counsel (Income on the purchase of the following items: under the optional sales tax tables Tax and Accounting). For further in- motor vehicles (including automobiles, formation regarding this notice, contact For 2004, the amounts provided in the motorcycles, motor homes, recreational Mr. Christensen at (202) 622–7900 (not a optional sales tax tables do not include vehicles, sport utility vehicles, off-road toll-free call). amounts paid for local general sales taxes. vehicles, vans, and trucks), boats, aircraft, For 2004, taxpayers may add amounts paid homes (including mobile and prefabri- for local general sales taxes to the amount cated homes), and materials to build a determined under the tables. For 2004, the home. amount of local general sales taxes paid

April 4, 2005 831 2005–14 I.R.B. 26 CFR 145.4051–1: Imposition of tax on heavy a vehicle if it is generally available for use classifications of truck body types meet trucks and trailers sold at retail. with the vehicle at a price that is reason- the “suitable for use” standard and sales (AlsoPartI,§4051.) ably competitive with other articles that thereof are excluded from the retail excise Rev. Proc. 2005–19 may be used for the same purpose. Thus, a tax by virtue of § 4051(a)(2): truck chassis which is suitable for use with (1) Platform truck bodies 21 feet or less a vehicle having a gross vehicle weight of in length; SECTION 1. PURPOSE 33,000 pounds or less, is not subject to the (2) Dry freight and refrigerated truck tax imposed by § 4051(a)(1) regardless van bodies 24 feet or less in length; To minimize disputes regarding the de- of the body actually mounted thereon. If (3) Dump truck bodies with load capac- termination of whether a truck body satis- an exempt body is mounted on a taxable ities of 8 cubic yards or less; or fies the weight-based exclusion provided chassis (or a taxable body is mounted on (4) Refuse packer truck bodies with in § 4051(a)(2) of the Internal Revenue an exempt chassis) and the resulting ve- load capacities of 20 cubic yards or less. Code, the Service, as a matter of admin- hicle is a highway vehicle as defined in .02 Bodies Not Within a Classification. istrative convenience, has established cer- § 48.4061(a)–1 of the Manufacturers and The Service has established the classifi- tain body type classification safe harbors. Retailers Excise Tax Regulations, the tax- cations set forth in section 3.01 after a able chassis or body, as the case may be, review of manufacturers’ and retailers’ SECTION 2. BACKGROUND nevertheless remains subject to such tax. data for certain truck body types. A body Under § 145.4051–1(e)(3)(ii), a seller type described above that does not fall .01 In General. Section 4051(a)(1) im- of a completed chassis, body, or vehicle within the classification parameters of its poses a tax on the first retail sale of cer- must establish a weight rating for each ar- body type (for example, a platform truck tain enumerated articles including automo- ticle sold. Since the weight rating of the body longer than 21 feet), or a body type bile truck chassis and bodies and truck chassis and the GVW of a completed ve- not described above, may nevertheless trailer and semitrailer chassis and bodies. hicle would normally be the same, a truck still satisfy the “suitable for use” standard Section 4051(a)(2) provides an exclusion chassis seller is aided in establishing a if the seller can establish that, pursuant from the tax imposed by § 4051(a)(1) for weight rating for a chassis by the guide- to § 145.4051–1(a)(4), the truck body has truck chassis and bodies suitable for use lines set forth in § 145.4051–1(e)(3)(v). practical and commercial fitness for use with a vehicle that has a gross vehicle Section 145.4051–1(e)(3)(v) generally de- with a vehicle having a GVW of 33,000 weight (GVW) of 33,000 pounds or less. fines GVW as the maximum total weight pounds or less. Similarly, § 4051(a)(3) provides an exclu- of a loaded vehicle. sion for truck trailer and semitrailer chas- .02 Reason for Revenue Procedure. SECTION 4. EFFECTIVE DATE sis and bodies suitable for use with a trailer Section 145.4051–1(e)(3)(v) simplifies or semitrailer that has a GVW of 26,000 sellers’ determinations of whether chassis This revenue procedure is effective for pounds or less. meet the “suitable for use” standard for a sales on or after April 4, 2005. In the case Section 145.4051–1(a)(4) of the Tem- weight-based exclusion. However, since of sales before April 4, 2005, the Service porary Excise Tax Regulations Under there are no federal excise tax guidelines will not challenge sellers who take posi- the Highway Revenue Act of 1982 to establish a weight rating for a truck tions consistent with this revenue proce- (Pub. L. 97–424) provides the following body, and because many truck bodies are dure with respect to sales of truck bodies rules for determining whether automobile specialized in nature, sellers do not rou- described in section 3.01. truck chassis and bodies are suitable for tinely ascribe GVW ratings to the bodies DRAFTING INFORMATION use with a vehicle which has a gross ve- they sell. In some cases, sellers do not hicle weight of 33,000 pounds or less and know the GVW of the vehicle on which The principal author of this revenue whether truck trailer or semitrailer chas- the body (or similar bodies sold by others) procedure is Theodore N. Margopulos of sis and bodies are suitable for use with a will be mounted. Thus, it may be difficult the Office of Associate Chief Counsel trailer or semitrailer which has a gross ve- for a seller of a truck body to determine (Passthroughs & Special Industries). For hicle weight of 26,000 pounds or less. The whether the body meets the “suitable for further information regarding this revenue term “suitable for use” is defined as prac- use” standard for a weight-based exclu- procedure, contact Barbara Franklin at tical and commercial fitness for such use. sion. (202) 622–3130 (not a toll-free call). In addition, a chassis or body possesses practical fitness for use with a vehicle if it SECTION 3. APPLICATION performs its intended function up to a gen- erally acceptable standard of efficiency .01 Classifications of Truck Body Types. with the vehicle, and a chassis or body The Service will not challenge a seller’s possesses commercial fitness for use with determination that any of the following

2005–14 I.R.B. 832 April 4, 2005 Part IV. Items of General Interest

Notice of Proposed SUPPLEMENTARY INFORMATION: sickness or accident disability are wages Rulemaking subject to FICA during the first 6 months Background the employee is out of work. Sickness or Accident Disability Prior to its amendment by section This document contains proposed 3(b)(1) of Public Law 97–123, (95 Stat. Payments amendments to 26 CFR part 31 under 1659, 1982–6 I.R.B. 7) (the 1981 Act), section 3121 of the Internal Revenue Code section 3121(a)(2)(B), the predecessor REG–160315–03 (the Code.) Section 3121(a)(2)(A) of the to section 3121(a)(2)(A), excluded from Code excepts from “wages” for FICA tax wages any payments made under a plan AGENCY: Internal Revenue Service purposes payments to an employee or any or system established by an employer on (IRS), Treasury. of his dependents on account of sickness account of sickness or accident disability. or accident disability only if the payments There was no requirement that payments ACTION: Notice of proposed rulemaking. are received under a “workmen’s compen- be made under a workers’ compensation sation law”, hereinafter referred to as a SUMMARY: This document contains pro- law. Thus, the 1981 Act narrowed the workers’ compensation law. The amend- sick pay exclusion by limiting the exclu- posed regulations that provide guidance ment to the regulations provides that for regarding the treatment of payments made sion from FICA to payments made under purposes of section 3121(a)(2)(A) a work- a workers’ compensation law. Section on account of sickness or accident disabil- ers’ compensation law includes a statute ity under a workers’ compensation law for 3(e) of the 1981 Act did not amend the in the nature of a workers’ compensation Code, but specifies for purposes of section purposes of the Federal Insurance Contri- act. butions Act (FICA). 3121(a) of the Code that a payment under Explanation of Provisions a workers’ compensation law does not in- DATES: Written and electronic comments clude a payment made pursuant to a State must be received by June 9, 2005. Current Law temporary disability insurance law. On July 6, 1982, the IRS issued Tempo- ADDRESSES: Send submissions to: Section 3121(a) defines wages for rary regulations (T.D. 7823, 1982–2 C.B. CC:PA:LPD:PR (REG–160315–03), room FICA purposes as all remuneration for 223 [47 FR 29225] July 6, 1982). Section 5203, Internal Revenue Service, POB employment unless specifically excepted. 32.1(a)(1) of the Temporary Employment 7604, Ben Franklin Station, Washing- Section 3121(a)(2)(A) excepts from wages Tax Regulations follows the amendments ton, DC 20044. Submissions may be the amount of any payment (including any made by the 1981 Act providing that hand delivered Monday through Friday amount paid by an employer for insurance payments on account of sickness or acci- between the hours of 8 a.m. and 4 p.m. or annuities, or into a fund, to provide for dent disability are excluded from wages to: CC:PA:LPD:PR (REG–160315–03), any such payment) made to or on behalf for FICA purposes only if paid under Courier’s Desk, Internal Revenue Ser- of, an employee or any of his dependents a workers’ compensation law. Section vice, 1111 Constitution Avenue, NW, under a plan or system established by an 32.1(a)(1). Further, Section 32.1(c) pro- Washington, DC. Alternatively, tax- employer which makes provision for his vides that a payment under a workers’ payer may submit comments elec- employees generally (or for his employees compensation law does not include a pay- tronically, via the IRS Internet site at generally and their dependents) or for a ment made pursuant to a State temporary www.irs.gov/regs or via Federal Rulemak- class or classes of his employees (or for a disability insurance law. Thus, such pay- ing Portal at www.regulations.gov (IRS class or classes of his employees and their ments are wages for FICA purposes. The and REG–160315–03). dependents), on account of sickness or ac- temporary regulations do not address the cident disability, but only if the employee FICA tax treatment of payments made FOR FURTHER INFORMATION receives the payments under a workers’ under a statute in the nature of a workers’ CONTACT: Concerning the proposed reg- compensation law. Section 3121(a)(4) compensation act.1 ulations, David Ford of the Office of Di- provides that wages does not include any For income tax purposes, section vision Counsel/Associate Chief Counsel payment on account of sickness or acci- 104(a)(1) provides that gross income does (Tax Exempt and Government Entities), dent disability made by an employer to not include amounts received under work- (202) 622–6040; concerning submissions or on behalf of an employee after the ex- ers’ compensation actsascompensation of comments, the hearing and/or to be piration of 6 calendar months following for personal injuries or sickness. Section placed on the building access list to at- the last calendar month in which the em- 1.104–1(b) of the Income Tax Regulations tend the hearing, LaNita Van Dyke (202) ployee worked for the employer. Thus, states that section 104(a)(1) of the Code 622–7180 (not toll-free numbers). unless made under a workers’ compensa- excludes from gross income amounts re- tion law, payments received on account of ceived by an employee under a workers’

1 To provide guidance relating to changes made by the Act, the IRS published Revenue Procedure 82–20, 1982–1 C.B. 466, which provided in Q&A 1 that payments under a statute in the nature of a workers’ compensation act were excluded from FICA. Rev. Proc. 82–20 was obsoleted by Revenue Procedure 95–43, 1995–2 C.B. 412, which provides that the temporary regulations generally restate the guidance in Q&A–1 through Q&A–9 of Rev. Proc. 82–20.

April 4, 2005 833 2005–14 I.R.B. compensation act or under a statute in the poses. Thus, the regulations adopt the section 7805(f) of the Code, this notice nature of a workers’ compensation act that same position that was published in Rev. of proposed rulemaking will be submitted provides compensation to the employee Proc. 82–20, the most contemporaneous to the Chief Counsel for Advocacy of the for personal injury or sickness incurred in guidance to the legislation that created the Small Business Administration for com- the course of employment. current statutory scheme. The proposed ment on the impact on small business. The IRS takes the position that gross in- regulations thus align the interpretation of come for income tax purposes is a separate what constitutes payments received under Comments and Requests for Public concept from wages for purposes of FICA. a workers’ compensation law for purposes Hearing Furthermore, exclusions from wages for of section 3121(a)(2)(A) with the interpre- FICA purposes are to be construed nar- tation of amounts received under a work- Before these proposed regulations are rowly. Thus, amounts that are excluded ers’ compensation law for purposes of sec- adopted as final regulations, consideration from gross income, in the absence of a spe- tion 104(a)(1). will be given to any written or electronic cific statutory or regulatory exclusion from These proposed regulations are in- comments that are submitted timely to the wages, constitute wages for FICA. tended to address only the treatment of IRS. The IRS and Treasury Department re- Pursuant to the income tax regulations, payments under a statute in the nature of quest comments on all aspects of the pro- payments made under a statute in the na- a workers’ compensation act for FICA posed regulations and how they can be ture of a workers’ compensation act are purposes. The existing temporary regu- made easier to understand. All comments excluded from gross income under section lations under section 31.1 which address will be available for public inspection and 104. However, there is no regulation at the FICA treatment of payments under a copying. A public hearing may be sched- present addressing whether such payments workers’ compensation law also provide uled if requested in writing by any person are excluded from wages for FICA pur- guidance to third parties making payments that timely submits written comments. If poses. on account of sickness or accident disabil- a public hearing is scheduled, notice of the Through 1989, the IRS issued several ity. Treasury and the IRS are not proposing date, time, and place for the public hearing private letter rulings concluding that pay- any changes to the regulations with respect will be published in the Federal Register. ments made under a statute in the nature to the FICA treatment of third-party sick of a workers’ compensation act were ex- pay. To the extent it is necessary to mod- Drafting Information cluded from gross income and exempt ify the temporary regulations to harmonize from FICA. In 1990, based on the Ser- them with these proposed regulations, the The principal author of these regula- vice’s position that the exclusion from third-party sick pay provisions will be tions is David Ford of the Office of Di- gross income did not necessarily result preserved. To the extent necessary, future vision Counsel/Associate Chief Counsel in an exclusion from wages, and the ab- guidance will also address the treatment of (Tax Exempt/Government Entities). How- sence of a regulation on point, the IRS payments on account of sickness or acci- ever, other personnel from the IRS and reversed its ruling position with respect to dent disability for Federal Unemployment Treasury Department participated in their FICA, holding that payments made under Tax Act and Railroad Retirement Tax Act development. a statute in the nature of a workers’ com- purposes. ***** pensation act are included in wages, until Proposed Effective Date the employee has been absent from work Proposed Amendments to the in excess of six months; once the employee It is proposed that these regulations ap- Regulations has been absent from work for more than ply to payments made on or after the date six months, the payments are excluded the proposed regulation is published as Fi- Accordingly, 26 CFR part 31 is pro- from FICA by section 3121(a)(4). nal in the Federal Register. posed to be amended as follows: Questions have arisen concerning the FICA tax treatment of payments made un- Special Analyses PART 31—EMPLOYMENT TAXES der a statute in the nature of a workers’ AND COLLECTION OF INCOME TAX compensation act to employees of states It has been determined that this notice AT THE SOURCE and local governments who are not eligi- of proposed rulemaking is not a signifi- ble to receive payments under a workers’ cant regulatory action as defined in Exec- Paragraph 1. The authority section for compensation law. Accordingly, the IRS utive Order 12866. Therefore, a regula- part 31 continues to read, in part, as fol- and Treasury are seeking to provide rules tory assessment is not required. It has also lows: to clarify the treatment of such payments been determined that section 553(b) of the Authority26U.S.C.7805*** during the first six months the employee is Administrative Procedure Act (5 U.S.C. Par. 2. Section 31.3121(a)(2)–1 is out of work. chapter 5) does not apply to these regula- amended by: Under the proposed regulations, pay- tions. In addition, because no collection 1. Revising the section heading. ments made under a statute in the nature of information is imposed on small enti- 2. Removing paragraph (a)(1). of a workers’ compensation act will be ties, the provisions of the Regulatory Flex- 3. Redesignating paragraphs (a)(2) treated as having been made under a work- ibility Act (5 U.S.C. chapter 6) do not ap- through (a)(4) as (a)(1) through (a)(3), ers’ compensation law and, therefore, will ply, and, therefore, a Regulatory Flexibil- respectively. be excluded from wages for FICA pur- ity Analysis is not required. Pursuant to 4. Revising paragraph (a)(1).

2005–14 I.R.B. 834 April 4, 2005 5. Redesignating paragraph (d) as para- of work as a result of an injury incurred while per- rations. These regulations provide rules graph (f). forming services for the local government. The ordi- requiring the exchange (or, in the case of 6. Adding paragraphs (d) and (e). nance does not limit or otherwise affect the local gov- section 332, a distribution) of net value for ernment’s liability to the employee for the work-re- The revisions and additions are as fol- lated injury. The local ordinance is not a workers’ the nonrecognition rules of subchapter C lows: compensation law, but it is in the nature of a workers’ to apply to the transaction. The regula- compensation act. Therefore, the salary the employee tions also provide guidance on determin- §31.3121(a)(2)–1 Payments on account of receives while out of work as a result of the work-re- ing when and to what extent creditors of sickness or accident disability, medical or lated injury is excluded from wages under section a corporation will be treated as proprietors hospitalization expenses, or death. 3121(a)(2)(A). Example 2. The facts are the same as in Exam- of the corporation in determining whether continuity of interest is preserved in a po- (a) * * * ple 1 except that the local ordinance requires the em- ployer to continue to pay the employee’s full salary tential reorganization. Finally, the regula- (1) Sickness or accident disability of an while the employee is unable to work due to an injury tions provide guidance on whether a dis- employee or any of his dependents, only whether or not the injury is work-related. Thus, the tribution in cancellation or redemption of if payment is received under a workers’ local ordinance does not limit benefits to instances less than all of the shares one corpora- compensation law; of work-related disability. A benefit paid under an tion owns in another corporation satisfies (2) Medical or hospitalization expenses ordinance that does not limit benefits to instances of work-related injuries is not a statute in the nature of a the requirements of section 332. The pro- in connection with sickness or accident workers’ compensation act. Therefore, the salary the posed regulations affect corporations and disability of an employee or any of his de- injured employee receives from the employer while their shareholders. pendents, or out of work is wages subject to FICA even though (3)Deathofanemployeeoranyofhis the employee’s injury is work-related. DATES: Written and electronic comments dependents. Example 3. The facts are the same as in Example 1 except that the local ordinance includes a rebuttable and requests for a public hearing must be ***** presumption that certain injuries, including any heart received by June 8, 2005. (d) Workers’ compensation law.(1)For attack incurred by a firefighter or other law enforce- purposes of paragraph (a)(1) of this sec- ment personnel is work-related. The presumption in ADDRESSES: Send submissions to: the ordinance does not eliminate the requirement that tion, a payment made under a workers’ the injury be work-related in order to entitle the in- CC:PA:LPD:PR (REG–163314–03), room compensation law includes a payment jured worker to full salary. 5203, Internal Revenue Service, POB made pursuant to a statute in the nature of Therefore, the ordinance is a statute in the nature 7604, Ben Franklin Station, Washing- a workers’ compensation act. of a workers’ compensation act, and the salary the ton DC 20044. Submissions may be (2) For purposes of paragraph (a)(1) of injured employee receives pursuant to the ordinance hand delivered Monday through Friday is excluded from wages under section 3121(a)(2)(A). this section, a payment made under a work- between the hours of 8 a.m. to 4 p.m. ers’ compensation law does not include a ***** to CC:PA:LPD:PR (REG–163314–03), payment made pursuant to a State tempo- Courier’s Desk, Internal Revenue Service, rary disability insurance law. Mark E. Matthews, 1111 Constitution Avenue, NW, Wash- (3) If an employee receives a payment Deputy Commissioner for ington, DC or sent electronically, via on account of sickness or accident disabil- Services and Enforcement. the IRS internet site at www.irs.gov/regs ity that is not made under a workers’ com- or via the Federal eRulemaking Por- (Filed by the Office of the Federal Register on March 10, pensation law or a statute in the nature of 2005, 8:45 a.m., and published in the issue of the Federal tal at www.regulations.gov (IRS and a workers’ compensation act, the payment Register for March 11, 2005, 70 F.R. 12164) REG–163314–03). is not excluded from wages as defined by section 3121(a)(2)(A) even if the payment FOR FURTHER INFORMATION must be repaid if the employee receives a CONTACT: Concerning the proposed workers’ compensation award or an award Notice of Proposed regulations on the reorganization pro- under a statute in the nature of a workers’ Rulemaking visions and regarding issues raised by compensation act with respect to the same the proposed regulations with respect period of absence from work. Transactions Involving the to provisions other than those related (4) If an employee receives a payment Transfer of No Net Value to corporate liquidations and subchapter on account of non-occupational injury K, Jean Brenner, (202) 622–7790; con- sickness or accident disability such pay- REG–163314–03 cerning the proposed regulations on cor- ment is not excluded from wages, as porate liquidations, Sean McKeever, (202) definedbysection3121(a)(2)(A). AGENCY: Internal Revenue Service 622–7750; concerning the application of (e) Examples. The following examples (IRS), Treasury. the principles of the proposed regulations illustrate the principles of paragraph (d) of to transfers of propertytopartnerships this section: ACTION: Notice of proposed rulemaking. under subchapter K, Jeanne Sullivan Example 1. A local government employee is in- or Michael Goldman, (202) 622–3070; jured while performing work-related activities. The SUMMARY: This document contains pro- concerning submissions of comments employee is not covered by the State workers’ com- pensation law, but is covered by a local government posed regulations providing guidance re- and/or requests for a public hearing, ordinance that requires the local government to pay garding corporate formations, reorganiza- Treena Garrett, (202) 622–7180 (not the employee’s full salary when the employee is out tions, and liquidations of insolvent corpo- toll-free numbers).

April 4, 2005 835 2005–14 I.R.B. SUPPLEMENTARY INFORMATION: curities ...inanothercorporationaparty of property in cancellation or redemption to the reorganization.” Finally, section 361 of stock. The IRS and the Treasury De- General Background provides that “[n]o gain or loss shall be partment believe that the net value require- recognized to a corporation if such corpo- ment is the appropriate unifying standard The IRS and the Treasury Department rationisapartytoareorganizationandex- because it is more consistent with the statu- believe that there is a need to provide a changes property . . . solely for stock or tory framework of subchapter C, case law, comprehensive set of rules addressing the securities in another corporation a party to and published guidance than any other ap- application of the nonrecognition rules of the reorganization.” proach considered. In addition, the IRS subchapter C of the Internal Revenue Code The authorities interpreting section 332 and the Treasury Department believe that (Code) to transactions involving insolvent have consistently concluded that the lan- the net value requirement is the appropri- corporations and to other transactions that guage of the statute referring to a distribu- ate standard because transactions that fail raise similar issues. The proposed regula- tion in complete cancellation or redemp- the requirement, that is, transfers of prop- tions provide three sets of rules, the princi- tion of stock requires a distribution of net erty in exchange for the assumption of li- pal one of which is that the nonrecognition value. Section 1.332–2(b) provides that abilities or in satisfaction of liabilities, re- rules of subchapter C do not apply unless section 332 applies only if a parent re- semble sales and should not receive non- there is an exchange (or, in the case of sec- ceives at least partial payment for the stock recognition treatment. tion 332, a distribution) of net value (the that it owns in the liquidating corporation. The IRS and the Treasury Department “net value requirement”). The proposed Such payment could not occur unless there considered several other approaches to regulations also provide guidance on the were a distribution of net value. The courts unify and rationalize the nonrecognition circumstances in which (and the extent to have focused in numerous cases on the rules of subchapter C as they applied to which) creditors of a corporation will be effect of liabilities on the distribution re- transactions involving insolvent corpo- treated as proprietors of the corporation in quirement of section 332. In H. G. Hill rations. The IRS and the Treasury De- determining whether continuity of interest Stores, Inc. v. Commissioner, 44 B.T.A. partment considered whether there should is preserved in a potential reorganization. 1182 (1941), a subsidiary liquidated and be special rules for potential nonrecog- The proposed regulations further provide distributed its assets and liabilities to its nition transactions between members of guidance on whether a distribution in can- parent in cancellation of its indebtedness to a consolidated group. Such rules might cellation or redemption of less than all of its parent. The court interpreted the phrase disregard the various exchange require- the shares one corporation owns in another “in complete cancellation or redemption of ments in the statute because of the single corporation satisfies the requirements of all its stock” as requiring that a distribution entity principles generally applicable to section 332. Each of these rules is dis- be made to the parent in its capacity as a corporations joining in the filing of a cussed separately in this preamble. stockholder in order for section 112(b)(6) consolidated return. This approach was (the predecessor of section 332) to apply rejected because there is no consolidated Explanation of Provisions and, thus, held that section 112(b)(6) did return policy that compels a different Exchange of Net Value Requirement not apply because the parent corporation setofrulesforpotential nonrecognition received payment in its capacity as a credi- transactions between members of a con- Background tor and not in its capacity as a stockholder. solidated group. Cf. §1.1502–35T(f)(1); See also Rev. Ruls. 2003–125, 2003–2 Notice 94–49, 1994–1 C.B. 358. The In subchapter C, each of the rules de- C.B. 1243, 70–489, 1970–2 C.B. 53, and current intercompany transaction rules (in scribed below that provides for the general 59–296, 1959–2 C.B. 87. particular those regarding successors in nonrecognition of gain or loss refers to a Rev. Rul. 59–296 holds that the prin- §1.1502–13(j)) could be modified to ex- distribution in cancellation or redemption ciples relevant to liquidations under sec- tend deferral of gain and loss to additional of stock or an exchange for stock. Sec- tion 332 also apply to reorganizations un- situations as long as the assets remained tion 332 provides, in part, that “[n]o gain der section 368. However, other author- in the consolidated group pending later or loss shall be recognized on the receipt ities are not consistent with the approach acceleration events that befall the assets by a corporation of property distributed in of Rev. Rul. 59–296. Most notably, in or successor entities. However, no such complete liquidation of another corpora- Norman Scott, Inc. v. Commissioner,48 rules are being proposed because the case tion...onlyif...thedistribu- T.C. 598 (1967), the Tax Court held that for treating the transferor and transferee tion is by such other corporation in com- a transaction involving an insolvent target members as a single entity seems weakest plete cancellation or redemption of all its corporation qualified as a reorganization when the group’s equity investment in the stock.” Section 351 provides, in part, that under section 368(a)(1)(A). transferor has been eliminated. “[n]o gain or loss shall be recognized if The IRS and the Treasury Department The IRS and the Treasury Department property is transferred to a corporation by have decided to resolve the uncertainties also considered whether satisfying the one or more persons solely in exchange by generally adopting a net value require- words of the relevant statutory provisions for stock in such corporation.” Section 354 ment for each of the described nonrecog- that describe the relationship of the par- provides, in part, that “[n]o gain or loss nition rules in subchapter C. The net value ties to a transaction should be sufficient shall be recognized if stock or securities requirement generally requires that there for applying the nonrecognition rules to a in a corporation a party to a reorganization be an exchange of property for stock, or transaction between the parties. This ap- are . . . exchanged solely for stock or se- in the case of section 332, a distribution proach would essentially take the position

2005–14 I.R.B. 836 April 4, 2005 that the words of distribution or exchange ing whether there is an exchange of net worthless stock in exchange for assets can- in the statute do not state a separate re- value. These rules require, in paragraph not be part of an exchange for stock. quirement but merely describe the most (f)(2)(i) for potential asset reorganizations common form of the transaction to which and paragraph (f)(3)(i) for potential stock Scope of Net Value Requirement the provision is intended to apply. For reorganizations, a surrender of net value example, under this approach, it would be and, in paragraph (f)(2)(ii) for potential as- The proposed regulations provide in sufficient for a transaction to qualify as a set reorganizations and paragraph (f)(3)(ii) §1.368–1(b)(1) that the net value require- distribution in complete liquidation under for potential stock reorganizations, a re- ment does not apply to reorganizations un- section 332 if the corporation to which ceipt of net value. In a potential asset reor- der section 368(a)(1)(E) and 368(a)(1)(F). assets are transferred owned stock meet- ganization (one in which the target corpo- The IRS and the Treasury Department re- ing the requirements of section 1504(a)(2) ration would not recognize gain or loss un- cently issued final regulations (T.D. 9182, at the time of the transfer. Also, under der section 361), the target corporation sur- 2005–11 I.R.B. 713 [70 FR 9219] (Feb. this approach, it would be sufficient for a renders net value if the fair market value 25, 2005)) stating that a continuity of transaction to qualify as a transfer under of the property transferred by it to the ac- business enterprise and a continuity of in- section 351 if a transferor of assets were quiring corporation exceeds the sum of the terest are not required for a transaction to in control (as defined in section 368(c)) of amount of liabilities of the target corpora- qualify as a reorganization under section the corporation to which assets are trans- tion that are assumed by the acquiring cor- 368(a)(1)(E) or (F) because applying the ferred immediately after the transaction. poration and the amount of any money and requirements in those contexts is not nec- However, this approach would require the fair market value of any property (other essary to protect the policies underlying distinguishing, when the structure of the than stock permitted to be received under the reorganization provisions. Because statute does not, between parts of a statute section 361(a) without the recognition of the purpose underlying the net value re- that impose requirements and other parts gain) received by the target corporation. quirement is the same as that underlying that do not. This rule ensures that a target corporation the continuity of interest requirement, the transfers property in exchange for stock. IRS and the Treasury Department have Explanation of rules The IRS and the Treasury Department be- similarly concluded that applying the net lieve that the proposed rule better identi- value requirement to transactions under Net Value Requirement fies whether a target corporation transfers section 368(a)(1)(E) or (F) is not neces- property in exchange for stock than a rule sary to protect the policies underlying the For potential liquidations under section that looks to the issuance or failure to issue reorganization provisions. 332, the net value requirement is effected stock because, when the parties are related, The proposed regulations also pro- by the partial payment rule in §1.332–2(b) the issuance or failure to issue stock might vide in §1.368–1(b)(1) and §1.368–1(f)(4) of the current regulations. The proposed be meaningless. that the net value requirement does not regulations make no modifications to this In a potential stock reorganization apply to a limited class of transactions rule, except, as discussed below, for trans- (one which would be described in sec- that qualify as reorganizations under sec- actions in which the recipient corporation tion 368(a)(1)(B) or section 368(a)(1)(A) tion 368(a)(1)(D). That class of transac- owns shares of multiple classes of stock in by reason of section 368(a)(2)(E)), the tions are the transactions exemplified by the dissolving corporation. The proposed rules are modified to reflect the fact that James Armour, Inc. v. Commissioner,43 regulations also make minor changes to the target corporation remains in exis- T.C. 295 (1964), and Rev. Rul. 70–240, other sections of the regulations under sec- tence. A potential reorganization under 1970–1 C.B. 81. The IRS and the Trea- tion 332 to conform those regulations to section 368(a)(1)(A) by reason of sec- sury Department acknowledge that the changes in the statute. tion 368(a)(2)(E) must satisfy the asset conclusions of the described authorities For potential transactions under sec- reorganization test for the merger of the are inconsistent with the principles of tion 351, the proposed regulations add controlled corporation into the target cor- the net value requirement. Nevertheless, §1.351–1(a)(1)(iii)(A), which requires a poration (for which test the controlled the IRS and the Treasury Department cur- surrender of net value and, in paragraph corporation is treated as the target corpo- rently desire to preserve the conclusions of (a)(1)(iii)(B), a receipt of net value. This ration) and the stock reorganization test for these authorities while they more broadly rule is similar to that for potential asset the acquisition of the target corporation. study issues relating to acquisitive re- reorganizations, discussed below. The In a potential asset reorganization, the organizations under section 368(a)(1)(D), proposed regulations make minor changes target corporation receives net value if the including the continuing vitality of various to other sections of the regulations under fair market value of the assets of the issu- liquidation-reincorporation authorities af- section 351 to conform those regulations ing corporation exceeds the amount of its ter the enactment of the Tax Reform Act of to changes in the statute. liabilities immediately after the exchange. 1986, Public Law 99–514 (100 Stat. 2085 For potential reorganizations under sec- This rule ensures that the target corpora- (1986)). Consistent with the described tion 368, the proposed regulations mod- tion receives stock (or is deemed to re- authorities, the exception is limited to ac- ify §1.368–1(b)(1) to add the requirement ceive stock under the “meaningless ges- quisitive reorganizations of solvent target that there be an exchange of net value. ture” doctrine) having value. This rule is corporations. The proposed regulations Section 1.368–1(f) of the proposed regu- necessary because the IRS and the Trea- provide no specific guidance (other than lations sets forth the rules for determin- sury Department believe that the receipt of in an example incorporating the facts of

April 4, 2005 837 2005–14 I.R.B. Rev. Rul. 70–240, 1970–1 C.B. 81), other section 108(d)(3). One method for valuing same as transfers of assets in exchange for than with regard to the application of the liabilities is to determine the amount of the assumption of liabilities. Accordingly, net value requirement, on when a transac- cash that a willing assignor would pay to in determining whether there is a surren- tion will qualify as a reorganization under a willing assignee to assume the liability der of net value, the proposed regulations section 368(a)(1)(D). In this regard, com- in an arm’s-length transaction. Cf. Prop. treat any obligation of the target corpora- pare Armour with Warsaw Photographic Reg. §1.752–7(b)(2)(ii). tion for which the acquiring corporation is Associates, Inc. v. Commissioner,84T.C. In the course of developing these regu- the obligee as a liability assumed by the ac- 21 (1985). lations, the IRS and the Treasury Depart- quiring corporation. ment considered special issues related to Definition of Liabilities the assumption of nonrecourse liabilities in In Connection With the context of a transaction to which sec- In applying the proposed regulations, tion 332, 351, or 368 might apply. The IRS The proposed regulations take into ac- taxpayers must determine the amount of and the Treasury Department are consider- count not only liabilities assumed in the liabilities of the target corporation that ing a rule similar to the one in Rev. Rul. exchange, but also liabilities assumed “in are assumed by the acquiring corporation. 92–53, 1992–2 C.B. 48, that would disre- connection with” the exchange. The pro- Although the proposed regulations do not gard the amount by which a nonrecourse posed regulations include this rule so that define the term liability, the IRS and the liability exceeds the fair market value of the timing of an acquiring corporation’s Treasury Department intend that the term the property securing the liability when assumption of a target corporation’s liabil- be interpreted broadly. Thus, for purposes determining the amount of liabilities that ity (or a creditor’s discharge of a target cor- of the proposed regulations, a liability are assumed. For example, under such a poration’s indebtedness), whether before should include any obligation of a tax- rule, if an individual transfers an apart- an exchange, in the exchange, or after the payer, whether the obligation is debt for ment building with a fair market value of exchange, will have the same effect in de- federal income tax purposes or whether $175x subject to a nonrecourse obligation termining whether there is a surrender of the obligation is taken into account for of $190x and an adjacent lot of land with net value in the exchange. The proposed the purpose of any other Code section. a fair market value of $10x to a corpora- regulations also take into account, in deter- Generally, an obligation is something that tion, the transferor will have surrendered mining whether there is a surrender of net reduces the net worth of the obligor. The net value because the fair market value value, money and other nonstock consid- IRS and the Treasury Department have of the assets transferred ($175x + $10x) eration received by the target corporation proposed adopting a similar definition exceeds the amount of the liabilities as- in connection with the exchange. of liability for purposes of implementing sumed ($190x - $15x, the amount of the The IRS and the Treasury Department section 358(h) in subchapter K. See Prop. excess nonrecourse indebtedness). Any intend that the substance-over-form doc- Reg. §1.752–1(a)(1)(ii) and Prop. Reg. rule disregarding excess nonrecourse in- trine and other nonstatutory doctrines be §1.752–7(b)(2)(ii) (REG–106736–00, debtedness would be limited to the appli- used in addition to the “in connection 2003–2 C.B. 60 [68 FR 37434]) (June 24, cation of the net value requirement and with” rule in determining whether the pur- 2003). would have no relevance for other federal poses and requirements of the net value Amount of Liabilities income tax purposes, such as the determi- requirement are satisfied. Cf. Rev. Rul. nation of the amount realized under section 68–602, 1968–2 C.B. 135 (holding that The proposed regulations provide no 1001. Comments are requested regarding a parent corporation’s cancellation of a specific guidance on determining the the treatment of nonrecourse indebtedness wholly-owned subsidiary’s indebtedness amount of a liability. The IRS and the and the effect of such treatment when both to it that is an integral part of a liquidation Treasury Department are currently consid- property subject to the nonrecourse indebt- is transitory and, therefore, disregarded). ering various approaches to determining edness and other property are transferred. the amount of a liability. One approach Section 368(a)(1)(C) would be to treat the amount of a liabil- Assumption of Liabilities ity represented by a debt instrument as The proposed regulations remove the its adjusted issue price determined under In general, the IRS and the Treasury De- statement in §1.368–2(d)(1) that the as- sections 1271 through 1275 of the Code partment believe that the principles of sec- sumption of liabilities may so alter the (the OID rules) (perhaps with exceptions tion 357(d) should be applied to determine character of a transaction as to place for certain contingent payment debt in- whether a liability is assumed when more the transaction outside the purposes and struments) while treating the amount of than one person might bear responsibility assumptions of the reorganization provi- other liabilities as the value of such lia- for the liability. Comments are requested sions. Because the proposed regulations bilities. Another approach would be to regarding whether and to what extent the provide more specific guidance regarding treat the amount of all liabilities as the principles of section 357(d) should be in- when the assumption of liabilities will value of such liabilities. Other approaches corporated into the regulations. prevent a transaction from qualifying as a could borrow in whole or in part from The IRS and the Treasury Department reorganization under section 368(a)(1)(C), other authorities such as those relevant believe that transfers of assets in satis- the IRS and the Treasury Department be- to the determination of insolvency under faction of liabilities should be treated the lieve the statement is unnecessary.

2005–14 I.R.B. 838 April 4, 2005 Section 721 its creditors may receive acquiring corpo- mulation is similar to the relation back ration stock in exchange for their claims analysis that the Tax Court used in Atlas The IRS and the Treasury Department and its shareholders may receive nothing. Oil. recognize that the principles in the pro- Thus, without special rules, most potential posed rules under section 351 may be ap- reorganizations of corporations in bank- Explanation of provisions plied by analogy to other Code sections ruptcy would fail the continuity of inter- that are somewhat parallel in scope and ef- est requirement. The Supreme Court ad- The proposed regulations add new fect, such as section 721, dealing with the dressed this problem in Helvering v. Al- §1.368–1(e)(6), which describes the cir- contribution of property to a partnership in abama Asphaltic Limestone Co.,315U.S. cumstances in which creditors of a cor- exchange for a partnership interest. The 179 (1942), in which it held that, for practi- poration generally, and which creditors IRS and the Treasury Department request cal purposes, the old continuity of interest in particular, will be treated as holding a comments on whether rules similar to the in the shareholders shifted to the creditors proprietary interest in a target corporation rules of the proposed regulations should not later than the time “when the creditors immediately before a potential reorga- be proposed in the context of subchapter took steps to enforce their demands against nization. In general, the proposed rules K and the considerations that might jus- the insolvent debtor. In this case, that was adopt the standard for reorganizations un- tify distinguishing the relevant provisions the date of the institution of bankruptcy der section 368(a)(1)(G) recommended in subchapter K from those provisions that proceedings. From that time on, they had in the Senate Finance Committee Report are the subject of these proposed regula- effective command over the property.” See to the Bankruptcy Tax Act of 1980. The tions. also Palm Springs Holding Corp. v. Com- proposed regulations also provide that missioner, 315 U.S. 185 (1942) (holding creditors of an insolvent target corporation Continuity of Interest that the legal procedure employed by the not in a title 11 or similar case may be Background creditors to obtain effective command over treated as holding a proprietary interest in a corporation’s property was not material the corporation even though they take no The Code provides general nonrecog- when the corporation was insolvent). Not- steps to obtain effective command over nition treatment for reorganizations de- withstanding Palm Springs, it is not clear the corporation’s property, other than their scribed in section 368. A transaction must when creditors of an insolvent corporation agreement to receive stock in the potential comply with both the statutory require- not in a title 11 or similar case may be con- reorganization. The proposed regulations, ments of the reorganization provisions sidered proprietors for purposes of satisfy- at §1.368–1(e)(6)(ii), provide specific and various nonstatutory requirements, ing the continuity of interest requirement. guidance on how to quantify the propri- including the continuity of interest re- In Atlas Oil & Refining Corp. v. Com- etary interest of the target corporation so quirement, to qualify as a reorganization. missioner, 36 T.C. 675 (1961), the court that taxpayers may determine whether a See §1.368–1(b). The purpose of the con- held that only creditors who in fact receive substantial part of the value of the pro- tinuity of interest requirement is to ensure stock in the acquiring corporation, by rela- prietary interests in the target corporation that reorganizations are limited to readjust- tion back, can be deemed to have been eq- is preserved in the potential reorganiza- ments of continuing interests in property uity owners at the time of the transfer. The tion. Because a creditor of a corporation under modified corporate form and to pre- court stated that the fact that a more senior mayholdclaimsinmorethanoneclass, vent transactions that resemble sales from class of creditors may have had “effective the proposed regulations generally refer qualifying for nonrecognition of gain or command” over the assets in the case will to claims of a particular class of creditors loss available to corporate reorganizations. not make them proprietors if they do not in rather than to creditors in a particular class. See §§1.368–1(b), 1.368–1(e)(1). Conti- fact exercise their right to receive stock in The proposed regulations treat claims nuity of interest requires that a substantial the acquiring corporation. of the most senior class of creditors to re- part of the value of the proprietary inter- In the Bankruptcy Tax Act of 1980, ceive a proprietary interest in the issuing ests in the target corporation be preserved Public Law 96–589 (94 Stat. 3389 (1980)), corporation and claims of all equal classes in the reorganization. See §1.368–1(e)(1); Congress added section 368(a)(1)(G), pro- of creditors (together, the senior claims) see also LeTulle v. Scofield,308U.S. viding for a new type of reorganization ap- differently from the claims of classes of 415 (1940); Helvering v. Minnesota Tea plicable to corporations in title 11 or sim- creditors junior to the senior claims (the Co., 296 U.S. 378 (1935); Pinellas Ice & ilar cases. In the legislative history to junior claims). The proposed regulations Cold Storage Co. v. Commissioner,287 that statute, Congress stated its expectation treat senior claims as representing, in part, U.S. 462 (1933); Cortland Specialty Co. that the courts and the Treasury Depart- a creditor claim against the corporation, v. Commissioner,60F.2d937(2dCir. ment would determine whether the con- and, in part, a proprietary interest in the 1932), cert. denied, 288 U.S. 599 (1933). tinuity of interest requirement is satisfied corporation. This rule mitigates the ad- Generally, it is the shareholders who in a potential reorganization under sec- verse effect on continuity of interest of se- hold the proprietary interests in a corpo- tion 368(a)(1)(G) by treating as proprietors nior creditors seeking payment primarily ration. However, when a corporation is the most senior class of creditors who re- in nonstock consideration while still tak- in bankruptcy, the corporation’s stock may ceived stock, together with all interests ing some payment in shares of stock of the be worthless and eliminated in the restruc- equal and junior to them, including share- acquiring corporation. The determination turing. In this case, when the corpora- holders. See S. Rep. No. 1035, 96th of what part of a senior claim is a propri- tion engages in a potential reorganization, Cong., 2d Sess. 36–37 (1980). This for- etary interest in the target corporation is

April 4, 2005 839 2005–14 I.R.B. made by calculating the average treatment demption of all its stock. In Spaulding It has also been determined that section for all senior claims. Thus, the proposed Bakeries, Inc. v. Commissioner, 252 F.2d 553(b) of the Administrative Procedures regulations, at §1.368–1(e)(2)(ii)(B), pro- 693 (2d Cir. 1958), aff’g 27 T.C. 684 Act (5 U.S.C. chapter 5) does not apply to vide that the value of a proprietary inter- (1957), the Second Circuit concluded that these proposed regulations and, because est in the target corporation represented by for a distribution to be made in cancella- the regulation does not impose a collection a senior claim is determined by multiply- tion or redemption of “all the stock,” pay- of information on small entities, the Regu- ing the fair market value of the creditor’s ment must be made on each class of stock. latory Flexibility Act (5 U.S.C. chapter 6) claim by a fraction, the numerator of which See also H. K. Porter Co. v. Commissioner, does not apply. Pursuant to section 7805(f) is the fair market value of the proprietary 87 T.C. 689 (1986). of the Internal Revenue Code, this notice interests in the issuing corporation that are of proposed rulemaking will be submitted received in the aggregate in exchange for Explanation of provisions to the Chief Counsel for Advocacy of the the senior claims, and the denominator of Small Business Administration for com- which is the sum of the amount of money The current regulations provide that ment on its impact on small business. and the fair market value of all other con- section 332 applies only to those cases in sideration (including the proprietary inter- which the recipient corporation receives at Comments and Requests for Public ests in the issuing corporation) received in least partial payment for the stock that it Hearing the aggregate in exchange for such claims. owns in the liquidating corporation. The Before these proposed regulations are The effect of this rule is that there is 100 proposed regulations clarify that section adopted as final regulations, consideration percent continuity of interest if each se- 332appliesonlytothosecasesinwhich will be given to any written comments (a nior claim is satisfied with the same ratio the recipient corporation receives at least signed original and 8 copies) or comments of stock to nonstock consideration and no partial payment for each class of stock transmitted via Internet that are submitted junior claim is satisfied with nonstock con- that it owns in the liquidating corpora- timelytotheIRS.TheIRSandtheTrea- sideration. tion, an interpretation consistent with the sury Department request comments on the The proposed regulations, at Second Circuit’s holding in Spaulding clarity of the proposed rules and how they §1.368–1(e)(6)(ii)(A), provide that the Bakeries andtheTaxCourt’sholdingin can be made easier to understand. All entire amount of a junior claim represents H. K. Porter. The IRS and the Treasury comments will be available for public in- a proprietary interest in the target corpo- Department have adopted this approach spection and copying. A public hearing ration immediately before the potential because they believe that it is appropriate will be scheduled if requested in writing reorganization. Thus, the value of the pro- for a taxpayer to recognize loss when it by any person that timely submits written prietary interest represented by that claim fails to receive a distribution on a class of comments. If a public hearing is sched- is the fair market value of the claim (which stock in liquidation of its subsidiary. The uled, notice of the date, time, and place for value is generally determined by reference recipient corporation would recognize the public hearing will be published in the to the amount of money and the fair mar- such a loss if the distribution qualified as Federal Register. ket value of the consideration received in a reorganization. The proposed regulations also confirm exchange therefor). Drafting Information The rules in the proposed regulations that when the liquidation fails to qualify are intended to work in conjunction with under section 332 because the recipient The principal authors of these pro- the current continuity of interest rules. Ac- corporation did not receive at least partial posed regulations are Jean Brenner and cordingly, the proposed regulations mod- payment for each class of stock but did re- Sean McKeever of the Office of Associate ify §1.368–1(e)(1)(ii), relating to the ef- ceive at least partial payment for at least Chief Counsel (Corporate). However, fect on continuity of interest of distribu- one class of stock, the transaction may other personnel from the IRS and the tions or redemptions before a potential re- qualify as a corporate reorganization under Treasury Department participated in their organization, and §1.368–1(e)(2), relating section 368. development. to the effect on continuity of interest of ac- ***** quisitions of proprietary interests by per- Proposed Effective Date sons related to the issuing corporation, to Proposed Amendments to the These proposed regulations will apply ensure that the purpose of these rules is ef- Regulations to transactions that occur after the date fected when creditors’ claims represent the they are published as final regulations in proprietary interests in the target corpora- Accordingly, 26 CFR part 1 is proposed the Federal Register. tion. to be amended as follows:

Section 332 Special Analyses PART 1—INCOME TAXES

Background It has been determined that this no- Paragraph 1. The authority citation for tice of proposed rulemaking is not a part 1 is amended by revising the entry Section 332 requires that a subsidiary’s significant regulatory action as defined for “Section 1.351–1” to read, in part, as liquidating distribution to its parent corpo- in Executive Order 12866. Therefore, follows: ration be in complete cancellation or re- a regulatory assessment is not required. Authority: 26 U.S.C. 7805 * * *

2005–14 I.R.B. 840 April 4, 2005 Section 1.351–1 also issued under 26 reorganization, P Corporation will recognize gain or that are assumed by the transferee in con- U.S.C. 351. * * * loss on its Q Corporation preferred stock under sec- nection with the transfer and the amount of Par. 2. Section 1.332–2 is amended by: tion 331. any money and the fair market value of any 1. Revising the first sentence of para- Par. 3. Section 1.351–1 is amended by: other property (other than stock permitted graph (a). 1. Revising the first sentence of para- to be received under section 351(a) with- 2. Revising paragraph (b). graph (a)(1) introductory text. out the recognition of gain) received by 3. Revising the heading of the Example 2. Adding a sentence after the last sen- thetransferorinconnectionwiththetrans- in paragraph (e). tence in paragraph (a)(1) introductory text fer. For this purpose, any obligation of the 4. Adding Example 2 to paragraph (e). and revising the phrase “For purposes of transferor for which the transferee is the The revisions and addition read as fol- this section” at the end of paragraph (a)(1) obligee that is extinguished for federal in- lows: introductory text to read “In addition, for cometaxpurposesinconnectionwiththe purposes of this section”. transfer is treated as a liability assumed by §1.332–2 Requirements for 3. Revising paragraphs (a)(1)(i) and the transferee; or nonrecognition of gain or loss. (a)(1)(ii). (B) The fair market value of the as- 4. Removing the concluding text imme- sets of the transferee does not exceed the (a) The nonrecognition of gain or loss diately following paragraph (a)(1)(ii). amount of its liabilities immediately after is limited to the receipt of property by 5. Adding paragraphs (a)(1)(iii) and the transfer; a corporation that is the actual owner of (a)(1)(iv). (iv) Paragraph (a)(1)(iii) of this section stock (in the liquidating corporation) meet- 6. Adding Example 4 at the end of para- applies to transfers occurring after the date ing the requirements of section 1504(a)(2). graph (a)(2). these proposed regulations are published *** 7. Revising paragraph (b)(1). as final regulations in the Federal Regis- (b) Section 332 applies only when the The revisions, removal, and additions ter. recipient corporation receives at least par- read as follows: (2) * * * tial payment for each class of stock that it owns in the liquidating corporation. If §1.351–1 Transfer to corporation ***** section 332 does not apply, see section controlled by transferor. Example 4. A, an individual, transfers an apart- 165(g) regarding the allowance of losses ment building with a fair market value of $175x to for worthless securities for a class of stock Corporation X. The building is subject to a nonre- (a)(1) Section 351(a) provides, in gen- course obligation of $190x and no other asset is sub- for which no payment is received. Further, eral, for the nonrecognition of gain or loss ject to that liability. A receives 10 shares of Cor- if section 332 does not apply and the recip- upon the transfer by one or more persons poration X stock in the exchange. Immediately af- ient corporation receives partial payment ofpropertytoacorporationsolelyinex- ter the exchange, Corporation X is solvent and A for at least one class of stock that it owns change for stock of such corporation if, im- owns 100% of its outstanding stock. Under paragraph in the liquidating corporation, see section (a)(1)(iii) of this section, the 10 shares of Corporation mediately after the exchange, such person X stock received by A will not be treated as issued for 368(a)(1) regarding potential qualification or persons are in control of the corpora- property because the fair market value of the apart- of the distribution as a reorganization. If tion to which the property was transferred. ment building does not exceed the amount of A’s lia- section 332 does not apply and the distri- * * * For purposes of this section, stock bilities assumed by Corporation X. Therefore, section bution does not qualify as a reorganization, rights and stock warrants are not included 351 does not apply to the exchange. see section 331 for those classes of stock in the term stock. In addition, for purposes ***** for which partial payment is received. of this section — (b)(1) When property is transferred to ***** (i) Stock will not be treated as issued for a corporation by two or more persons in (e) * * * property if it is issued for services rendered exchange for stock, as described in para- Example 1.*** or to be rendered to or for the benefit of the graph (a) of this section, and the stock re- Example 2. P Corporation owns all of the out- issuing corporation; ceived is received in disproportion to the standing preferred and common stock of Q Corpora- (ii) Stock will not be treated as issued transferor’s prior interest in such property, tion. The preferred stock is not stock described in for property if it is issued for property section 1504(a)(4). The fair market value of Q Cor- the entire transaction will be given tax ef- poration’s assets exceeds the amount of its liabilities which is of relatively small value in com- fect in accordance with its true nature, and but does not exceed the liquidation preference on the parison to the value of the stock already the transaction may be treated as if the Q Corporation’s preferred stock. Q Corporation liq- owned (or to be received for services) by stock had first been received in propor- uidates and distributes all of its assets to P Corpora- the person who transferred such property tion and then some of such stock had been tion. P Corporation receives partial payment for its and the primary purpose of the transfer is Q Corporation preferred stock but receives nothing used to make gifts (section 2501 et seq.), to for its Q Corporation common stock. The receipt by to qualify under this section the exchanges pay compensation (sections 61(a)(1) and P Corporation of the properties of Q Corporation is of property by other persons transferring 83(a)), or to satisfy obligations of the trans- not a distribution received by P Corporation in com- property; and feror of any kind. plete liquidation of Q Corporation within the mean- (iii) Stock will not be treated as issued ing of section 332. Thus, under section 165(g), P for property if either — ***** Corporation is entitled to a worthless security deduc- tion for its Q Corporation common stock. The trans- (A) The fair market value of the trans- Par. 4. Section 1.368–1 is amended by: action may qualify as a reorganization under section ferred property does not exceed the sum of 1. Removing the last sentence of para- 368(a)(1)(C). If the transaction does not qualify as a the amount of liabilities of the transferor graph (a).

April 4, 2005 841 2005–14 I.R.B. 2. Redesignating paragraph (b) as para- binding on January 28, 1998, and at all is a proprietary interest in the target cor- graph (b)(1). times thereafter. poration, the value of the proprietary inter- 3. Removing the third sentence of para- est is the fair market value of the creditor’s ***** graph (b)(1) and adding two sentences in claim. (e) * * * its place. (B) Claims of creditors of most senior (1) * * * 4. Removing the seventh sentence of classes. For a claim of the most senior (i) * * * See paragraph (e)(6) of this sec- paragraph (b)(1). class of creditors receiving a proprietary tion for rules related to when a creditor’s 5. Adding paragraph (b)(2). interest in the issuing corporation and a claim against a target corporation is a pro- 6. Adding a sentence after the fifth sen- claim of any equal class of creditors, the prietary interest in the corporation. * * * tence of paragraph (e)(1)(i). value of the proprietary interest in the tar- (ii) * * * A proprietary interest in the 7. Adding a sentence at the end of para- get corporation represented by the claim is target corporation is not preserved to the graph (e)(1)(ii). determined by multiplying the fair market extent that creditors (or former creditors) 8. Revising the text of paragraph (e)(2). value of the claim by a fraction, the numer- of the target corporation that own a pro- 9. Redesignating paragraphs (e)(6) and ator of which is the fair market value of the prietary interest in the corporation under (e)(7) as paragraphs (e)(7) and (e)(8), re- proprietary interests in the issuing corpo- paragraph (e)(6) of this section (or would spectively, and adding a new paragraph ration that are received in the aggregate in be so treated if they had received the con- (e)(6). exchange for the claims of those classes of sideration in the potential reorganization) 10. Adding Example 10 to the end of creditors, and the denominator of which is receive payment for the claim prior to the paragraph (e)(7). the sum of the amount of money and the potential reorganization. 11. Adding a sentence at the end of fair market value of all other consideration (2)***Aproprietaryinterestinthe paragraph (e)(8). (including the proprietary interests in the target corporation is not preserved if, in 12. Adding paragraph (f). issuing corporation) received in the aggre- connection with a potential reorganization, The additions and revisions read as fol- gate in exchange for such claims. a person related (as defined in paragraph lows: (iii) Bifurcated claims. If a creditor’s (e)(3) of this section) to the issuing corpo- claim is bifurcated into a secured claim and ration acquires either a proprietary inter- §1.368–1 Purpose and scope of exception an unsecured claim pursuant to an order est in the target corporation or stock of the to reorganization exchanges. in a title 11 or similar case (as defined in issuing corporation that was furnished in section 368(a)(3)) or pursuant to an agree- ***** exchange for a proprietary interest in the ment between the creditor and the debtor, (b)(1) * * * Requisite to a reorganiza- target corporation for consideration other the bifurcation of the claim and the alloca- tion under the Internal Revenue Code are than stock of the issuing corporation. The tion of consideration to each of the result- a continuity of business enterprise through preceding sentence does not apply to the ing claims will be respected in applying the the issuing corporation under the modi- extent those persons who were the direct rules of this paragraph (e)(6). fied corporate form as described in para- or indirect owners of the target corporation (iv) Effect of treating creditors as pro- graph (d) of this section, a continuity of prior to the potential reorganization main- prietors. The treatment of a creditor’s interest as described in paragraph (e) of tain a direct or indirect proprietary interest claim as a proprietary interest in the tar- this section (except as provided in sec- in the issuing corporation. get corporation shall not preclude treating tion 368(a)(1)(D)), and an exchange of net ***** shares of the target corporation as propri- value as described in paragraph (f) of this (6) Creditors’ claims as proprietary in- etary interests in the target corporation. section. Notwithstanding the requirements terests—(i) In general. A creditor’s claim (7) * * * of this paragraph (b)(1), an exchange of net against a target corporation may be a pro- value is not required for a transaction to ***** prietary interest in the target corporation if qualify as a reorganization under section Example 10. Creditors treated as owning a pro- the target corporation is in a title 11 or sim- prietary interest. T has assets with a fair market value 368(a)(1)(E) or (F) and, to the extent pro- ilar case (as defined in section 368(a)(3)) of $150x and liabilities of $200x. T has two classes vided in paragraph (f)(4), for a transaction or the amount of the target corporation’s of creditors, the senior creditors with claims of $50x, to qualify as a reorganization under section and the junior creditors with claims of $150x. T trans- liabilities exceeds the fair market value of 368(a)(1)(D). * * * fers all of its assets to P in exchange for $95x and its assets immediately prior to the poten- (2) Effective dates. The third and fourth shares of P stock with a fair market value of $55x. tial reorganization. In such cases, if any The T senior creditors receive in the aggregate $40x sentences of paragraph (b)(1) of this sec- creditor receives a proprietary interest in andPstockwithafairmarketvalueof$10xinex- tion apply to transactions occurring af- the issuing corporation in exchange for its change for their claims. Each T senior creditor re- ter the date these proposed regulations ceives stock and nonstock consideration in the same claim, every claim of that class of credi- are published as final regulations in the proportion. The T junior creditors receive $55x and tors and every claim of all equal and ju- Federal Register. The fifth and sixth P stock with a fair market value of $45x in exchange nior classes of creditors (in addition to the for their claims. The T shareholders receive no con- sentences apply to transactions occurring claims of shareholders) is a proprietary in- sideration in exchange for their T stock. Under para- after January 28, 1998, except that they terest in the target corporation immediately graph (e)(6) of this section, because the amount of T’s do not apply to any transaction occurring liabilities exceeds the fair market value of its assets prior to the potential reorganization. pursuant to a written agreement which is immediately prior to the potential reorganization, the (ii) Value of proprietary interest—(A) claims of the creditors of T may be proprietary inter- In general. Generally, if a creditor’s claim ests in T. Because the senior creditors receive propri-

2005–14 I.R.B. 842 April 4, 2005 etary interests in P in the transaction in exchange for poration for which the acquiring corpora- of its liabilities immediately after the ex- their claims, their claims and the claims of the junior tion is the obligee that is extinguished for change. creditors and the T shareholders are treated as propri- federal income tax purposes in connection (5) Examples. For purposes of the ex- etary interests in T immediately prior to the transac- tion. Under paragraph (e)(6)(ii) of this section, the with the exchange is treated as a liability amples in this paragraph (f)(5), each of value of the senior creditors’ proprietary interests in assumed by the acquiring corporation; and P, S, and T is a corporation; all corpo- T is $10x, the value of the proprietary interests in P (ii) Receipt of net value.Thefairmar- rations have only one class of stock out- that they received in exchange for their claims. In ad- ket value of the assets of the issuing corpo- standing; A, B, C, and D are individuals; dition, the value of the junior creditors’ proprietary ration exceeds the amount of its liabilities and the transaction is not otherwise sub- interests in T immediately prior to the transaction is $100x, the value of their claims. Because P is treated immediately after the exchange. ject to recharacterization. Except as other- as acquiring 50 percent of the value of the proprietary (3) Stock transactions. There is an ex- wise provided, no person is related to any interests in T in exchange for P stock ($55x/$110x), change of net value in a potential reor- other person and the fair market value of a substantial part of the value of the proprietary in- ganization under section 368(a)(1)(B) or the assets of each corporation exceeds the terests in T is preserved. Therefore, the continuity of section 368(a)(1)(A) by reason of section amount of its liabilities immediately prior interest requirement is satisfied. 368(a)(2)(E) only if — to the transaction described in the exam- (8) * * * The sixth sentence of para- (i) Surrender of net value.Thefair ple. The following examples illustrate the graph (e)(1)(i) of this section, the last sen- market value of the assets of the target application of this paragraph (f). tence of paragraph (e)(1)(ii) of this section, corporation exceeds the sum of the amount Example 1. T has assets with a fair market value paragraph (e)(2) of this section, paragraph of the liabilities of the target corporation of $50x and liabilities of $75x, all of which are owed (e)(6) of this section, and Example 10 of to A. T transfers all of its assets to S in exchange for S immediately prior to the exchange and the paragraph (e)(7) of this section apply to stock with a fair market value of $50x. T distributes amount of any money and the fair market transactions occurring after the date these the S stock to A in exchange for the T debt owed to value of any other property (other than A. T dissolves. T’s shareholders receive nothing in proposed regulations are published as final stock permitted to be received under sec- exchange for their T stock. Under paragraph (f)(2)(i) regulations in the Federal Register. tion 354 without the recognition of gain of this section, T surrenders net value because the fair (f) Exchanges of net value—(1) Gen- market value of the property transferred by T ($50x) and nonqualified preferred stock within eral rule. An exchange of net value re- exceeds the sum of the amount of liabilities that are the meaning of section 351(g)) received by quires that there be both a surrender of net assumed by S in connection with the exchange ($0x) the shareholders of the target corporation and the amount of any money and the fair market value and a receipt of net value. Whether in connection with the exchange. For this value of any other property (other than stock per- there is a surrender of net value is deter- purpose, assets of the target corporation mitted to be received under section 361(a) without mined by reference to the assets and lia- the recognition of gain) received by T in connection that are not held immediately after the bilities of the target corporation. Whether with the exchange ($0x). In addition, under para- exchange and liabilities of the target cor- there is a receipt of net value is determined graph (f)(2)(ii) of this section, T receives net value poration that are extinguished for federal because the fair market value of the assets of S ex- by reference to the assets and liabilities of income tax purposes in the exchange other ceeds the amount of its liabilities immediately after theissuingcorporation(asdefinedinpara- than ones, if any, to the corporation into the exchange. Therefore, under paragraph (f) of this graph (b) of this section). The purpose of section, there is an exchange of net value. which the target corporation merges in the the exchange of net value requirement is Example 2. P owns all of the stock of both S case of a potential reorganization under to prevent transactions that resemble sales and T. T has assets with a fair market value of $100x section 368(a)(1)(A) by reason of section and liabilities of $160x, all of which are owed to P. T (including transfers of assets in satisfac- 368(a)(2)(E) are disregarded; and transfers all of its assets to S in exchange for S stock tion of liabilities) from qualifying for non- (ii) Receipt of net value.Thefairmar- with a fair market value of $100x. T distributes the recognition of gain or loss available to cor- S stock to P in exchange for the T debt owed to P. ket value of the assets of the issuing corpo- porate reorganizations. T dissolves. P receives nothing in exchange for its T ration exceeds the amount of its liabilities (2) Asset transactions. There is an ex- stock. Under paragraph (f)(2)(i) of this section, T sur- immediately after the exchange. renders net value because the fair market value of the change of net value in a potential reorga- (4) Exception. The requirement that property transferred by T ($100x) exceeds the sum of nization to which section 361 would apply there be an exchange of net value does the amount of liabilities of T assumed by S in connec- only if — tion with the exchange ($0x) and the amount of any not apply to a transaction that would oth- (i) Surrender of net value.Thefair money and the fair market value of any other property erwise qualify as a reorganization under market value of the property transferred (other than stock permitted to be received under sec- section 368(a)(1)(D) by reason of section tion 361(a) without the recognition of gain) received by the target corporation to the acquir- 354orsomuchofsection356asrelates by T in connection with the exchange ($0x). In addi- ing corporation exceeds the sum of the to section 354, provided that the fair mar- tion, under paragraph (f)(2)(ii) of this section, T re- amount of liabilities of the target corpora- ceives net value because the fair market value of the ket value of the property transferred to the tion that are assumed by the acquiring cor- assets of S exceeds the amount of its liabilities im- acquiring corporation by the target corpo- poration in connection with the exchange mediately after the exchange. Therefore, under para- ration exceeds the amount of liabilities of graph (f) of this section, there is an exchange of net and the amount of any money and the fair the target corporation immediately before value. The result would be the same if no S stock market value of any other property (other the exchange (including any liabilities can- were issued. than stock permitted to be received under Example 3. ThefactsarethesameasinExam- celled, extinguished, or assumed in con- section 361(a) without the recognition of ple 2, except that T’s debt is owed to B. T transfers nection with the exchange), and the fair gain) received by the target corporation in all of its assets to S in exchange for the assumption market value of the assets of the acquiring of T’s liabilities. T dissolves. The obligation to B is connection with the exchange. For this corporation equals or exceeds the amount outstanding immediately after the transfer. P receives purpose, any obligation of the target cor- nothing in exchange for its T stock. Under paragraph

April 4, 2005 843 2005–14 I.R.B. (f)(2)(i) of this section, T does not surrender net value tion 368(a)(1)(A) by reason of section 368(a)(2)(D) a fair market value of $400x and liabilities of $500x, because the fair market value of the property trans- if the exchange of net value requirement in paragraph and T has assets with a fair market value of $1000x ferred by T ($100x) does not exceed the sum of the (f)(1) of this section did not apply. Whether there is and liabilities of $600x. P acquires all of the stock of amount of liabilities of T assumed by S in connection a surrender of net value is determined by reference T. C and D exchange all of their T stock, with a fair with the exchange ($160x). Therefore, under para- to the actual merger of T into S. Thus, T surrenders market value of $400x, for P stock with a fair market graph (f) of this section, there is no exchange of net net value because the fair market value of the prop- value of $300x immediately after the transaction. P value. The result would be the same if S stock were erty transferred by T ($300x) exceeds the sum of the cancels all of the stock held by A and B immediately issued. amount of liabilities of T assumed by S in connec- prior to the exchange. Under paragraph (f)(3)(i) of Example 4. ThefactsarethesameasinExam- tion with the exchange ($0x) and the amount of any this section, there is a surrender of net value because ple 3, except that S first assumes the T debt owed to money and the fair market value of any other property the fair market value of the assets of T held immedi- B and subsequently T transfers all of its assets to S (other than stock permitted to be received under sec- ately prior to the exchange that are held immediately in exchange for S stock with a fair market value of tion 361(a) without the recognition of gain) received after the exchange ($1000x) exceeds the amount of $100x. If S’s assumption of the T debt is made in by T in connection with the exchange ($0x). Whether liabilities of T ($600x) immediately prior to the ex- connection with the subsequent transfer of T assets to there is a receipt of net value is determined by ref- change and the amount of any money and the fair mar- S, under paragraph (f)(2)(i) of this section, T does not erence to the issuing corporation, in this case, P. T ket value of any other property (other than stock per- surrender net value because the fair market value of receives net value because the fair market value of mitted to be received under section 354 without the the property transferred by T ($100x) does not exceed the assets of P exceeds the amount of the liabilities of recognition of gain and nonqualified preferred stock the sum of the amount of liabilities of T assumed by P immediately after the exchange. Therefore, under within the meaning of section 351(g)) received by S in connection with the exchange ($160x). There- paragraph (f) of this section, there is an exchange of the shareholders of T ($0x). In addition, under para- fore, under paragraph (f) of this section, there is no net value. graph (f)(3)(ii) of this section, there is a receipt of exchange of net value. Example 8. P owns all of the stock of both S and net value because the fair market value of the assets Example 5. P owns 70% of the stock of T. A owns T. T transfers all of its assets to S in exchange for of P ($800x), which includes the fair market value the remaining 30% of the stock of T. T has assets $34x, the assets’ fair market value. Following this of the stock of T, exceeds the amount of its liabili- with a fair market value of $100x and liabilities of transfer, T pays its debts of $2x and dissolves, dis- ties ($500x) immediately after the exchange. There- $160x, all of which are owed to P. T merges into P. A tributing the remaining $32x to P. Assume the trans- fore, under paragraph (f) of this section, there is an receives nothing in exchange for its T stock. Under action would qualify as a reorganization under section exchange of net value. To the extent that C and D (f)(2)(i) of this section, even though T’s obligation to 368(a)(1)(D) by reason of section 354 or so much of surrender T stock with a value in excess of the value P is extinguished in the transaction, it is treated as a section 356 as relates to section 354 if the net value of the P stock they receive, the tax consequences of liability assumed by P. Thus, under paragraph (f)(2)(i) requirement in paragraph (f)(1) of this section did not the surrender of the additional stock are determined of this section, T does not surrender net value because apply. Under paragraph (f)(2) of this section, there based on the facts and circumstances. the fair market value of the property transferred by T is no exchange of net value because the fair market (6) Effective date. This paragraph (f) ($100x) does not exceed the sum of the amount of value of the property transferred by T ($34x) does not applies to transactions occurring after the liabilities of T assumed by P in connection with the exceed the amount of money received by T in con- exchange ($160x). Therefore, under paragraph (f) of nection with the exchange ($34x). However, under date these proposed regulations are pub- this section, there is no exchange of net value. paragraph (f)(4) of this section, because the transac- lished as final regulations in the Federal Example 6. A owns all of the stock of S. S has tion would otherwise qualify as a reorganization un- Register. assets with a fair market value of $200x and liabili- der section 368(a)(1)(D) and the other requirements Par. 5. Section 1.368–2 is amended ties of $500x, all of which are owed to T. The S debt of paragraph (f)(4) of this section are satisfied, the by revising paragraph (d)(1) to read as fol- has a fair market value of $200x. In addition to the S exchange of net value requirement does not apply. debt, T has other assets that have a fair market value Accordingly, the transaction qualifies as a reorgani- lows: of $700x. T has no liabilities. T transfers all of its zation under section 368(a)(1)(D). assets to S in exchange for S stock with a fair market Example 9. A and B own all of the stock of T. T §1.368–2 Definition of terms. value of $900x. T distributes the S stock to its share- has assets with a fair market value of $500x and lia- holders in exchange for their T stock. T dissolves. S bilities of $900x, all of which are owed to C and D, ***** cancels all of its stock held by its shareholders im- security holders of T. P acquires all of the stock and (d) * * * mediately prior to the exchange. Under paragraph securities of T in exchange for P voting stock. In the (1)(i) One corporation must acquire (f)(2)(i) of this section, T surrenders net value be- transaction, A and B receive nothing in exchange for substantially all the properties of another cause the fair market value of the property transferred their stock of T. C and D exchange all of their secu- by T ($900x) exceeds the sum of the amount of lia- rities of T for stock of P. Under paragraph (f)(3)(i) of corporation solely in exchange for all or bilities of T assumed by S in connection with the ex- this section, there is a surrender of net value because part of its own voting stock, or solely in change ($0x) and the amount of any money and the the fair market value of the assets of T held imme- exchange for all or a part of the voting fair market value of any other property (other than diately prior to the exchange that are held immedi- stock of a corporation which is in control stock permitted to be received under section 361(a) ately after the exchange ($500x) exceeds the sum of of the acquiring corporation. For example, without the recognition of gain) received by T in con- the amount of liabilities of T immediately prior to the nection with the exchange ($0x). In addition, un- exchange ($0x, disregarding the liabilities of $900x Corporation P owns all the stock of Corpo- der paragraph (f)(2)(ii) of this section, T receives net extinguished in the exchange) and the amount of any ration A. All the properties of Corporation value because the fair market value of the assets of money and the fair market value of any other prop- W are transferred to Corporation A either S ($900x) exceeds the amount of the liabilities of S erty (other than stock permitted to be received under solely in exchange for voting stock of ($0x) immediately after the exchange. Therefore, un- section 354 without the recognition of gain and non- Corporation P or solely in exchange for der paragraph (f) of this section, there is an exchange qualified preferred stock within the meaning of sec- of net value. tion 351(g)) received by the shareholders of T ($0x). less than 80 percent of the voting stock of Example 7. P owns all of the stock of S. T has In addition, under paragraph (f)(3)(ii) of this section, Corporation A. Either of such transactions assets with a fair market value of $300x and liabil- there is a receipt of net value because the fair market constitutes a reorganization under section ities of $650x, $500x of which are owed to P and value of the assets of P exceeds the amount of the li- 368(a)(1)(C). However, if the properties of $150x of which are owed to A. T merges into S. In abilities of P immediately after the exchange. There- Corporation W are acquired in exchange the merger, P stock is issued to A in satisfaction of the fore, under paragraph (f) of this section, there is an debt owed to A by T. Also in the merger, P contributes exchange of net value. for voting stock of both Corporation P to the capital of T the debt P is owed. Assume the Example 10. A and B own all of the stock of P, and and Corporation A, the transaction will merger would qualify as a reorganization under sec- C and D own all of the stock of T. P has assets with not constitute a reorganization under sec-

2005–14 I.R.B. 844 April 4, 2005 tion 368(a)(1)(C). In determining whether A C Dysart Park Association, Berkshire Interfaith Community the exchange meets the requirement of Banning, CA Investment Fund, Incorporated, “solely for voting stock,” the assumption ACAB Corporation and Affiliates, Lenox, MA by the acquiring corporation of liabilities New York, NY Bethel-Laurel Hill Community of the transferor corporation, or the fact Ace It Education, Inc., Revere, MA Preservation, Inc., Setauket, NY that property acquired from the transferor ACERRP Corporation, New Hartford, NY Bethel Park Athletic Office, corporation is subject to a liability, shall Addie Talbott-H L Neblett Community Bethel Park, PA be disregarded. Section 368(a)(1)(C) does Foundation, Inc., Owensboro, KY BGRASS, Inc., Cincinnati, OH not prevent consideration of the effect of Adele Organization, Bronx, NY Bloomfield Education Foundation, Inc., an assumption of liabilities on the general African-American Builders & Associates, Bloomfield, CT character of the transaction but merely Philadelphia, PA Blue Nile Passage, Inc., New York, NY provides that the requirement that the African American Law Enforcement Bogey Bear Foundation, exchange be solely for voting stock is sat- Community Center, Philadelphia, PA Mercer Island, WA isfied if the only additional consideration Agnes Center for Education, Inc., Bolton Senior Housing Corporation, is an assumption of liabilities. Brooklyn, NY Bolton, MA (ii) Paragraph (d)(1)(i) of this section All the Way Home, Inc., Mt. Pocono, PA Brasarte the Damaceno Brazilian Cultural applies to transactions occurring after the Allied Workers for the Blind of Kansas Exchange, Oakland, CA date these proposed regulations are pub- City Missouri, Kansas City, MO Brevard County 4H Youth Foundation, lished as final regulations in the Federal Almira Stephan Memorial Playhouse, Inc., Cocoa, FL Register. Inc., Meriden, CT Brian P. Stack Civic Association, Inc., American Friends of YCTV, Inc., Union City, NJ ***** Washington, DC Bridge Center for Autism, Inc., American National Opera, Denver, CO Cincinnatus, NY Mark E. Matthews, Amicus for Children, Inc., Bridges Football Club, Inc., Deputy Commissioner for Douglasville, PA New York, NY Services and Enforcement. Amistad Institute, Inc., Brooklyn, NY Bristol Bandits, Inc., Avon, CT (Filed by the Office of the Federal Register on March 9, 2005, Angels Reside Here, Inc., New York, NY Brookville High School Athletic Booster 8:45 a.m., and published in the issue of the Federal Register Angels Wings, Inc., Trenton, NJ Club, Lynchburg, VA for March 10, 2005, 70 F.R. 11903) A N N A Foundation, Inc., Rimrock, AZ Bryon Chamberlain Foundation, Aquinas Institute of Rochester Scholarship Parker, CO Foundation, Inc., Rochester, NY BTWS Cheerleading Booster Association, Foundations Status of Certain Arlington High School Golf Booster Club, Inc., Pensacola, FL Organizations Arlington, TX Bulldog Conditioning Club, Inc., Art of Living, Inc., Philadelphia, PA Silver Spring, MD Announcement 2005–23 Asociacion De Puertorriiguenos En Mai BWH Anethesia Research and Education of NJ, Camden, NJ Foundation, Inc., Boston, MA The following organizations have failed Assembly Productions, Inc., California Area School District, to establish or have been unable to main- New York, NY California, PA tain their status as public charities or as op- Association for Homeless American California Sportfishing Protection erating foundations. Accordingly, grantors Veterans, Inc., Las Vegas, NV Alliance, Woodland, CA and contributors may not, after this date, Association for Retarded Citizens of Pike California Youth Expeditions, rely on previous rulings or designations County, Hawley, PA Petaluma, CA in the Cumulative List of Organizations Association of Young Christians Cameron County Junior Olympic Archery (Publication 78), or on the presumption International, Victorville, CA Development Club, San Benito, TX arising from the filing of notices under sec- Ateret Seminary of Queens, Inc., Candlelight Ministries, Chicago, IL tion 508(b) of the Code. This listing does Flushing, NY Canine Causes, Mountain View, CA not indicate that the organizations have lost Baldwinsville Rotary Club Foundation, Caranet, Inc., Cincinnati, OH their status as organizations described in Inc., Baldwinsville, NY Carbonaro Childrens Playground section 501(c)(3), eligible to receive de- Ballet Education Parent Partnership, Inc., Foundation, Inc., Valley Stream, NY ductible contributions. Phoenix, AZ Cared Foundation, Newport Beach, CA Former Public Charities. The follow- Barre 2000 and Beyond, Inc., Barre, VT Caring Community Association, ing organizations (which have been treated Bea Institute for Educational Success, Philadelphia, PA as organizations that are not private foun- Inc., Boston, MA Caring for Loved Ones, Inc., dations described in section 509(a) of the Beauty for Ashes Outreach, Inc., Long Beach, CA Code) are now classified as private foun- Atlanta, GA Carpe Diem Equine Rescue, Inc., dations: Beith Matityahu, Brooklyn, NY Staten Island, NY Bennett Academy of Music, Inc., Catholic Youth in Action, Inc., 2nd Street Family Center, Allentown, PA Oakland Park, FL Lawrence, MA

April 4, 2005 845 2005–14 I.R.B. Cato-Meridian Community Recreation Community Playhouse Corporation, FAAAS, Inc., Centerville, MA Center Foundation, Inc., Cato, NY Ewing, NJ Faces Project, Stafford, VA Center for Education and Human Services, Complementary and Alternative, F A I R Fairness Advocates Brooklyn, NY Colorado Springs, CO for Intergenerational Rights, Center for International Development, Composers Group International, Inc., Philadelphia, PA Half Moon Bay, CA New York, NY Fall River Group Homes, Inc., Center for Sacred Partnership, Inc., Comprehensive Family Counseling, Inc., Kingston, MA Pittsburgh, PA Baltimore, MD Family Assistance Ministries, Central Texas Coyotes Inline Hockey Concord Center, Omaha, NE San Clemente, CA Club, Copperas Cove, TX Conductive Education of the Greater Family Health Alliance, Inc., Charitable Quest Gift Fund, Philadelphia Area, Strafford, PA Philadelphia, PA Philadelphia, PA Connextion, Inc., Iron River, MI Field Band Foundation, Inc., Cherubim, Sierra Vista, AZ Corpus Christi A & WMA, Johannesburg, South Africa Chess Education Association Foundation, Corpus Christi, TX Filmaid, Seattle, WA Scottsdale, AZ Countryside High School Cheerleading Findley Lake Nature Center, Chichester Education Foundation, Inc., Booster Club, Clearwater, FL Findley Lake, NY Boothwyn, PA County Ventura Irish-American Cultural Fish and Chips, Fairfield, OH Child Esteem Theatre Foundation, Foundation, Ventura, CA Five Acre School Parent Service Redwood City, CA Creating Entrepreneur Opportunities, Organization, Inc., Carlsborg, WA Chimes PA, Inc., Exton, PA San Diego, CA For the Love of Health Education and Chinese Culture Foundation, Denville, NJ Crisis Alcohol & Drug Abuse Center of Humanity, Washington, DC Chisholm Trail Convention, Scotland Co., Inc., Laurinburg, NC Fort Hill Avenue, Inc., Lynn, MA Round Rock, TX Daley Foundation, Jamaica, NY Fort Irwin Middle School Booster Club, Christian Charitable Childrens Fund Darlenes Support Group & Animal Fort Irwin, CA of Kazakhstan Titiana Corporation, Rescue, Vancouver, WA Foster-King Dance Collection, Bolton, MA Davison Business Professional Womens San Diego, CA Christian East African and Equitorial Service Club, Davison, MI Foundation for Local Churches and Development Trust, Grove City, PA DBMS Drill Team Booster Club, Charities, Little Valley, NY Christian Evangelistic Ministries, Wildomar, CA Foundation for West Virginia, Inc., San Antonio, TX Delta Regional Foundation, Shenandoah Junction, WV Christmas Wish Org., Brooklyn, NY Cleveland, MS Fountain Youth Ministries, Inc., Chrysalis Residential and Community Designs for Living Ministries, Tucson, AZ Support, Inc., Brewer, ME Danville, PA Free Foundation, Inc., Durham, NC Church of Jesus Christ Itnaelc, Devine Intervention in America, Freire Center a Popular Education Folsom, AZ Woodland Hills, CA Center for Democratic Change, Cithara Women’s Chorale, Camp Hill, PA DFW Tejanos Soccer Club, Arlington, TX Minneapolis, MN Citizens Council on Affordable Higher Diman Alumni Association, Incorporated, Friends of Anna, Inc., Staten Island, NY Education, Inc., Holmdel, NJ Fall River, MA Friends of Lakeway, Littleton, NH Citizens for Life, Saugus, MA Dimitri House, Inc., Rochester, NY Friends of Lock One Conestoga Coalition Against Negligent Absentee Disabled Veterans Helping Veterans, Navigation Co. 1826, Lancaster, PA Parents International, Niagara Falls, NY Elephant Butte, NM Friends of Massapequa Preserve, Inc., Coexistence Initiative, Inc., Duxbury Recreation Foundation, Inc., Massapequa, NY New York, NY Duxbury, MA Friends of Plymouth Bay House, Inc., Coghill Foundation, Inc., Littleton, CO Earlville Community Center, Inc., Plymouth, MA Colonade Ministries, Cincinnati, OH Earlville, NY Friends of Santa Ana Parks Recreation & Colorado School Parent Teacher East River Sailing Camp, North, VA Community Services, Santa Ana, CA Organization, Muscatine, IA Eatontown Foundation for Excellence in Friends of the Burn Center, Inc., Common Sense Foundation, Education, Inc., Eatontown, NJ Miami, FL Richmond, VA Educational Funding Services, Inc., Friends of the Camden Library, Inc., Commonwealth Cyber School, Mission Viejo, CA Camden, NJ Lancaster, PA Erasmus Foundation, Inc., Potomac, MD Friends of the Clock Tower, Community&NeighborhoodFundof Eric Fund, Inc., Huntington, NY Biddeford, ME Greater Richmond, Richmond, VA ETA TAU Chapter of Sigma Alpha Friends of the Francis A. Gregory Community Christian School, Sorority, Long Beach, CA Regional Library, Washington, DC Westfield, MA EVCAP, Lake Elsinore, CA Full Cry Husky Rescue, Inc., Community Health Access Project, Inc., Evelyn Douglin Center for Childrens Kings Park, NY Hawthorne, CA Services, Inc., Brooklyn, NY Future Partners, San Francisco, CA Every Life Counts, Inc., Brooklyn, NY

2005–14 I.R.B. 846 April 4, 2005 Galveston Brain Injury Association, Homeowner Education Collaborative of Kenton Conservancy, Inc., Covington, KY Galveston, TX Oregon, Portland, OR Kids 2000, Dayton, OH George Koonce, Sr. Foundation, House of Hope, Inc., New Haven, CT Kids Company, Inc., New Richmond, WI New Bern, NC Hummingbird Cafe, Jamul, CA Kidsters, Inc., Reading, PA Georgia Injured Workers Union, Inc., Imago Foundation, Ltd., New York, NY Kingdom of Allah, Minneapolis, MN Atlanta, GA Imperial Band Boosters, Imperial, CA Kingsborough Community College Germantown House Development Imperial Valley Community Health Alumni Association, Inc., Mineola, NY Corporation, Inc., Philadelphia, PA Organization, Imperial, CA Konocti Music Foundation, Girls Adults Boys Seniors Organization, Increase the Peace, Inc., Short Hills, NJ Lower Lake, CA Cula Vista, CA Independent Baptist Church Planters of Korean-American Family Love Glacial Lakes Pheasant Restoration, America, Jacksonville, FL Counseling Center, Inc., Flushing, NY Roslyn, SD Indian Orchard Main Street Partnership, Lake Region Community Concert Go Venture, Inc., Anthony, NM Incorporated, Indian Orchard, MA Association, Devils Lake, ND Gold View Health Center Corp., Indiana Chapter of the American Launch, Inc., Atlanta, GA Roswell, GA Academy of Medical Acupuncture, Inc., Lifeline Community Christian Center, Good Company, Inc., Atlanta, GA Carmel, IN Inc., Clearwater, FL Govenor Livingston High School Innovative Treatment Alternative, Inc., Lions Clubs Diabetes Education Center, Hockey Boosters Association, Inc., Philadelphia, PA Inc., Mineola, NY Berkeley Heights, NJ Insight for New Housing, Inc., Bronx, NY Little Peoples Music, Inc., Oreland, PA Greater New Bedford Career Educator Institute for the Advancement of Farming, Living Stone Foundation, Inc., Partnership, Inc., New Bedford, MA Kansas City, MO Leominster, MA Greater Smithtown Educational Intentional Intervention Program Loading Zone Theatre, Inc., Foundation, Smithtown, NY of Horizon Community Church, New York, NY GSN Foundation, Reno, NV Port St. Lucie, FL Lord Jesus Christ Out Reach Ministries, Habonim Dror Camp Na Aleh, Inc., Interlude Ministries, Inc., Deltona, FL New York, NY Birmingham, AL Love Faith 3 Hope Ministries, Hackettstown Rotary Foundation, Inc., International Organization for the Blind, Decatur, GA Hackettstown, NJ Inc., Mount Dora, FL Lowcountry Region of the South Hancock Creek Elementary School PTO, International Partnership for Health NFP, Carolina National Heritage Corridor, Inc., N. Fort Myers, FL Chicago, IL Charleston, SC Hancock Park Garden Club, International Society for Hyperbaric Lower West Side Community Enrichment Los Angeles, CA Oxygenation U Cerebral, Center, Inc., Buffalo, NY Hanover Senior Community, Inc., Laud By Sea, FL Lowndes Interagency Coordinating Washington, DC International Voice of Health Science, Council, Inc., Valdosta, GA Harambee Community Development Inc., Denver, CO MAARS Musicians and Artists Against Corporation, Lilburn, GA Islamic Family and Community Services, Rape, Winston-Salem, NC Hatboro Fire and Rescue Company, Philadelphia, PA Madrigal Wellness & Study Center, Inc., Horsham, PA J. Frank Dobie Band Parents Organization, Perkinsville, VT Haverhill Affordable Residence Trust, Houston, TX Mahelona Medical Center Charitable Inc., Haverhill, MA Jackie Robinson Park Conservancy, Foundation, Kapaa, HI Hawaii Kai Educational Foundation, New York, NY Marine Cadet Corps, Attleboro, MA Honolulu, HI Jasper Childrens Theater, Inc., Jasper, AL Marlboro Educational Foundation, Healthy Parenting Program, Bronx, NY Jasper Endowment for Growth in Incorporated, Marlboro, NJ Healthy Solutions, Inc., Mount Holly, NJ Academics, Inc., Jasper, TN Mary Jane Combemale Memorial Heart of Texas-Hico, Dallas, TX Jeffrey M. Shumake Memorial Foundation, Inc., Warrenton, VA Heart of Texas-Kilgore, Inc., Dallas, TX Scholarship Fund, Inc., Strafford, PA Mass Community Health Services, Inc., Heartfelt Enterprises, Inc., Jewish Identity Project of NY, Inc., Brockton, MA Huntington Beach, CA Brooklyn, NY Mass211, Inc., Worcester, MA Helix Choral Booster, La Mesa, CA Journeys in Educational Travel, Massachusetts First Vote Corporation, Helping Hands Recovery Ministries, Copperas Cove, TX Boston, MA Atascadero, CA Jupiter Corale, Ltd., New York, NY Masterworks Center, San Diego, CA Her Hearts Wish, Encinitas, CA Just Say Yes, Inc., Memphis, TN Max Field Center, Inc., Brooklyn, NY Hermandad En San Miguel, Bronx, NY Kahal Yisreal International, McHenry Police Officers Charitable Highland House, Inc., New Castle, PA New York, NY Association, Inc., McHenry, IL Holiday Wish, Wrentham, MA Kappel Film Production Association, Memphis Hope Center Healthcare, Inc., Holyoke Neighborhood Networks Center, Wonder Lake, IL Memphis, TN Inc., Holyoke, MA Katie B. Jackson Resident Council, Inc., Mentoring Coalition of San Diego County, Home That Works, Inc., Clayton, NJ Philadelphia, PA Encinitas, CA

April 4, 2005 847 2005–14 I.R.B. Meor Yitzchak, Brooklyn, NY New York Surgical Society, Inc., Peoples Childrens Project Haiti, Metropolitan Child Services, Inc., New York, NY Hiawatha, KS Brooklyn, NY Newman Foundation, Inc., Pettit Foundation, Inc., New York, NY Mets All Stars, Garland, TX Solana Beach, CA Phenix Foundation, San Bernardino, CA Miama Foundation, Millwood, NY North American Friends of Elkabetz, Philadelphia Workforce Investment Miami City Mission Youth Center, Inc., Worcester, MA Board, Inc., Philadelphia, PA Miami, FL North Coast Digital Cinema Forum, Inc., Phoenix Project of Northwest Ohio, Inc., Middle School of the Arts Foundation, Lyndhurst, OH Perrysburg, OH Inc., West Palm Beach, FL North Country Coordinated Transport, Piedra Vista Football Booster Club, Minnesota Section of the Optical Society Inc., Saranac Lake, NY Farmington, NM of America, Stillwater, MN North Escambia Swim Booster Club, Porter-Fields Empowerment Zone, Minority Artist Association, Syracuse, NY Bratt, FL San Bernardino, CA Miss Willies Where Childhood Never Okaloosa County Readiness Coalition, Portland Area Youth Center, Portland, MI Ends, Inc., Atlanta, GA Inc., Ft. Walton, FL Power Cheer Panthers Association, Mohau Childrens Charities for South On the Road to Recovery, Inc., Louisville, KY Africa, Inc., Sandy Hook, CT Manchester, NH Powerlink, Pittsburgh, PA M O R E Foundation, Inc., Open the World, Incorporated, Wilton, CT Preparing for a Degree, Los Alamitos, CA Ridgefield Park, NJ Operation K I D, Tempe, AZ Professional People of Color Network, Morristown Community Development Optimum Resource Institute, Inc., State College, PA Corporation, Morristown, NJ Orange, CA Progress Trust, Inc., Philadelphia, PA Mosaic Communities, Evanston, IL Orange After School Program, Inc., Project Heal, Inc., Marlton, NJ Motivational Movement, Inc., E. Barre, VT Project Hope Mission, Asbury Park, NJ New York, NY Osho Foundation America, Inc., Project New Covenant, Philadelphia, PA Mountain Area Youth Organization, New York, NY Project Salud, Inc., Kennet Square, PA Oakhurst, CA Otumfuo Fund, Inc., Bronx, NY Promethea Theatre Company, Mt. Lebanon Baptist Church Early Our Lady of Victory Educational Pittsburgh, PA Learning Center, Inc., Brooklyn, NY Foundation, Inc., Gainesville, FL Prometheus Foundation, Seattle, WA Mushroom Genome & Mycodiversity Oxford Academy Foundation, PSI Educational Foundation, Preservation Project, Olympia, WA Cypress, CA Fayetteville, AR MX-99, Bloomington, IN Pace Charter School of Hamilton Parent P-W-C Exchange Foundation for Naramake Family Resource Center, Teacher Organization, Hamilton, NJ the Prevention of Child Abuse, Norwalk, CT Pacific Rehabilitation Industries, Ft. Washington, PA Natalies Wish, Inc., Crestline, CA Honolulu, HI Qadosh Project, Chicago, IL National Charitable Trust From Advent, Pacific Semmba Systems, Inc., Quad Cities Railroad Educational Hartford, CT Alameda, CA Association, East Molene, IL National Council of Theotokos Pakistan Literacy Fund, New York, NY Queenship of Mary Radio Corporation, Communities, Inc., Mahwah, NJ Pancho Villa Historical Cemetery, Milltown, NJ National Hispanic Business Association, Ocala, FL Ramona Ag Boosters, Ramona, CA Austin, TX Parent-Child Bible Institute & Seminary, Rebuilding Our Community, Inc., National Institute for Driver Behavior, Inc., Brooklyn, NY New Orleans, LA Inc., Cheshire, CT Parent Mentor & Family Foundation, Reid Christian Enrichment Center, Inc., NC Association of Personal & Business Waukegan, IL Lanham Seabrook, MD Coaches, Inc., Cary, NC Parent Teacher Association of the Earth Reredos Male Vocal Ensemble, NCCCAEA, Inc., Morehead City, NC School, Inc., New York, NY Somerville, MA Near North Civic Association, Parents of Children With Food Allergies, Richmond County Enrichment Newark, OH Inc., Natick, MA Corporation, Rockingham, NC Neighborhood Connections, Inc., Parents-Teachers Association of Right Choice Communications Brandon, VT Manhattan Center for Science and, International, Inc., Holly, MI Network of Sisters & Friends, Bowie, MD New York, NY Riley House, Boston, MA New Century Center, Martinez, CA Parsippany Trackers Booster Club, Riverside National Cemetery Memorial New Jersey Spirit, Marlton, NJ Parsippany, NJ Honor Detail, Riverside, CA New Millenium Cultural and Art Passavant Memorial Homes Foundation, Rocky Point Alumni Foundation, Inc., Foundation, Inc., N. Brunswick, NY Pittsburgh, PA Rocky Point, NY New York Korean-American Lions Club Peace of Mind Battered Center, Rose Brigade, Rosebud, TX Charities, Inc., New York, NY Antioch, CA Rural Elders, Inc., Weed, CA New York State School Age Care Pegram Elementary Parent-Teacher Ruth Larkey Foundation for Children Coalition, Inc., Albany, NY Organization, Pegram, TN With Digestive & Nutritional Diseases, People First of Arizona, Phoenix, AZ New York, NY

2005–14 I.R.B. 848 April 4, 2005 Sachem Alumni Community Foundation, Spencer Cable Access Corporation, Warren Yacht Restoration Society, Ronkonkoma, NY Spencer, MA Warren, RI Samaritan Housing Foundation II, Inc., Sports Legacy Foundation, Pittsburgh, PA Washburn Traveling Boys Basketball, Atlanta, GA St. Clair-Sanilac County Nurse Examiner Minneapolis, MN Samaritan Housing Foundation III, Inc., Program, Marysville, MI Washington Park Foundation, Inc., Atlanta, GA St. Peters Athletic Foundation, Inc., Providence, RI Samaritan Housing Foundation V, Inc., Jersey City, NJ Washington State Association of the Deaf, Waban, MA Start-A-Heart, Inc., Redondo Beach, CA Lakewood, WA San Luis Police Activities Athletics Student Volunteer Optometric Services West Boca Travel Baseball Club, League, Inc., San Luis, AZ to Humanity of Southern California, Boca Raton, FL San Luis Valley Welfare Advocates, Los Angeles, CA Winchendon Community Enrichment Alamosa, CO Suncook Soccer Club, Pembroke, NH Foundation, Inc., Winchendon, MA Saraswati Worship Foundation, Inc., Supporters of the Golden Door Charter WMRC, Inc., Meadville, PA Jamaica, NY School, Inc., Jersey City, NJ Woman to Woman, Camdenton, MO Second Chance Parrot Rescue, Susquehanna County Interfaith, Women of Rejuvenate Spirit, Inc., Robertsville, MO Montrose, PA Burlington, VT Shared Perspectives on Therapies, Teaneck Charter School Community Womens Bobsleigh Foundation, San Francisco, CA Organization, Inc., Teaneck, NJ Westerville, OH Shirat Moshe, Brooklyn, NY Telethon Italy US Foundation, Womens Business Closet, Charlton, MA Sindhi Association of Florida, Miami, FL New York, NY Women’s Multimedia Center, Skaneateles Splash, Inc., Skaneateles, NY Tennis Dream Fund, Inc., Cambridge, MA Claremont, CA Soar 21st Century Support Organization Thomas McCarthy Foundation, Womens New Media Alliance, Inc., for the Advancement, New Orleans, LA Manford, CA Los Angeles, CA Social Cultural Academic and Life Timothy Mark Capers Foundation, Work 101 Development Corp., Enrichment, Tempe, AZ White Plains, NY Brooklyn, NY Solomons House, Inc., Swansea, MA Token Creek Watershed Association, Workforce Partners, Inc., New Britain, CT Songs Unlimited, Inc., Conway, AR Windsor, WI World for Humanity, Inc., Brooklyn, NY Soul Noodle Soup Foundation, T O P S, Inc., Memphis, TN Wyandanch Economic and Cultural Stone Mountain, GA Toshas Gift of Love, Atlanta, GA Council, Inc., Wyandanch, NY South Bronx Rhythm Revue, Inc., Toys for Girls and Boys, Inc., York County Youth Network, York, PA Bronxville, NY Cleveland, OH York Mothers Center, Mount Wolf, PA South Central Region of National Council Traci Hall & Company, Philadelphia, PA Young Friends of the Environment, Inc., of State Garden Clubs, Inc., Alva, OK Treasure Valley Youth Alliance, Inc., Miami, FL South Hill Neighborhood Association, Boise, ID Youth 20–20 A La Palma Community Grand Rapids, MI Trinity Park Ministry, Inc., Project, La Palma, CA South Tampa Softball Club, Tampa, FL Orchard Park, NY Youth Performing Arts Group, Inc., Southeast Community Business True Life Community Resource Center, Richmond, VA and Education Partnership, Inc., Ocala, FL Canal Winchester, OH TWM Foundation, Pittsburgh, PA If an organization listed above submits Southeast Missouri Regional UIC Athletic Alumni Corp., Chicago, IL information that warrants the renewal of Community Development Corporation, UMA Foundation, Inc., Dorchester, MA its classification as a public charity or as Lilbourn, MO Understanding Manic Depression, Inc., a private operating foundation, the Inter- Southern New Jersey Standards New York, NY nalRevenueServicewillissuearulingor Consortium, Inc., Cherry Hill, NJ Uniting Americas Children, determinationletterwiththerevisedclas- Southern West Virginia Action for Youth, Moreno Valley, CA sification as to foundation status. Grantors Inc., Williamson, WV Universal Friends, Lombard, IL and contributors may thereafter rely upon Southside Christian Charities, Inc., Upper Arlington Community Orchestra, such ruling or determination letter as pro- Jacksonville, FL Inc., Columbus, OH videdinsection1.509(a)–7oftheIncome Southwest Phila Youth and Community Vermont Liturgical & Music Association, Tax Regulations. It is not the practice of Educational Service Center, Inc., Woodstock, VT the Service to announce such revised clas- Philadelphia, PA Vine Street Community Center Council, sification of foundation status in the Inter- Sparkling Dancers Drill Dance Team, Inc., Roxbury, MA nal Revenue Bulletin. Warren, MI Vista Botanical Gardens, Vista, CA

April 4, 2005 849 2005–14 I.R.B. Definition of Terms Revenue rulings and revenue procedures and B, the prior ruling is modified because of a prior ruling, a combination of terms (hereinafter referred to as “rulings”) that it corrects a published position. (Compare is used. For example, modified and su- have an effect on previous rulings use the with amplified and clarified, above). perseded describes a situation where the following defined terms to describe the ef- Obsoleted describes a previously pub- substance of a previously published ruling fect: lished ruling that is not considered deter- is being changed in part and is continued Amplified describes a situation where minative with respect to future transac- without change in part and it is desired to no change is being made in a prior pub- tions. This term is most commonly used in restate the valid portion of the previously lished position, but the prior position is be- a ruling that lists previously published rul- published ruling in a new ruling that is self ingextendedtoapplytoavariationofthe ings that are obsoleted because of changes contained. In this case, the previously pub- fact situation set forth therein. Thus, if in laws or regulations. A ruling may also lished ruling is first modified and then, as an earlier ruling held that a principle ap- be obsoleted because the substance has modified, is superseded. plied to A, and the new ruling holds that the been included in regulations subsequently Supplemented is used in situations in same principle also applies to B, the earlier adopted. which a list, such as a list of the names of ruling is amplified. (Compare with modi- Revoked describes situations where the countries, is published in a ruling and that fied,below). position in the previously published ruling list is expanded by adding further names in Clarified is used in those instances is not correct and the correct position is subsequent rulings. After the original rul- where the language in a prior ruling is be- beingstatedinanewruling. ing has been supplemented several times, a ing made clear because the language has Superseded describes a situation where new ruling may be published that includes caused, or may cause, some confusion. the new ruling does nothing more than re- the list in the original ruling and the ad- It is not used where a position in a prior state the substance and situation of a previ- ditions, and supersedes all prior rulings in ruling is being changed. ously published ruling (or rulings). Thus, the series. Distinguished describes a situation the term is used to republish under the Suspended is used in rare situations where a ruling mentions a previously pub- 1986 Code and regulations the same po- to show that the previous published rul- lished ruling and points out an essential sition published under the 1939 Code and ings will not be applied pending some difference between them. regulations. The term is also used when future action such as the issuance of new Modified is used where the substance it is desired to republish in a single rul- or amended regulations, the outcome of of a previously published position is being ing a series of situations, names, etc., that cases in litigation, or the outcome of a changed. Thus, if a prior ruling held that a were previously published over a period of Service study. principle applied to A but not to B, and the time in separate rulings. If the new rul- new ruling holds that it applies to both A ing does more than restate the substance Abbreviations

The following abbreviations in current use ER—Employer. PRS—Partnership. and formerly used will appear in material ERISA—Employee Retirement Income Security Act. PTE—Prohibited Transaction Exemption. publishedintheBulletin. EX—Executor. Pub. L.—Public Law. F—Fiduciary. REIT—Real Estate Investment Trust. FC—Foreign Country. Rev. Proc.—Revenue Procedure. A—Individual. FICA—Federal Insurance Contributions Act. Rev. Rul.—Revenue Ruling. Acq.—Acquiescence. FISC reign International Sales Company. S diary. B—Individual. —Fo —Subsi FPH—Foreign Personal Holding Company. S.P.R.—Statement of Procedural Rules. BE—Beneficiary. F.R. —Federal Register. Stat.—Statutes at Large. BK—Bank. FUTA eral Unemployment Tax Act. T Corporation. B.T.A.—Board of Tax Appeals. —Fed —Target FX—Foreign corporation. T.C.—Tax Court. C—Individual. G.C.M.—Chief Counsel’s Memorandum. T.D. —Treasury Decision. C.B.—Cumulative Bulletin. GE e. TFE feree. CFR—Code of Federal Regulations. —Grante —Trans GP—General Partner. TFR—Transferor. CI—City. GR—Grantor. T.I.R.—Technical Information Release. COOP—Cooperative. IC nce Company. TP er. Ct.D.—Court Decision. —Insura —Taxpay I.R.B.—Internal Revenue Bulletin. TR—Trust. CY—County. LE—Lessee. TT—Trustee. D—Decedent. LP Partner. U.S.C. ted States Code. DC—Dummy Corporation. —Limited —Uni LR—Lessor. X—Corporation. DE—Donee. M Y Del. Order—Delegation Order. —Minor. —Corporation. Nonacq. nacquiescence. Z ion. DISC—Domestic International Sales Corporation. —No —Corporat O—Organization. DR—Donor. P—Parent Corporation. E—Estate. PHC l Holding Company. EE—Employee. —Persona PO—Possession of the U.S. E.O.—Executive Order. PR—Partner.

2005–14 I.R.B. i April 4, 2005 Numerical Finding List1 Notices— Continued: Revenue Rulings— Continued: Bulletins 2005–1 through 2005–14 2005-27, 2005-13 I.R.B. 795 2005-10, 2005-7 I.R.B. 492 2005-28, 2005-13 I.R.B. 796 2005-11, 2005-14 I.R.B. 816 Announcements: 2005-29, 2005-13 I.R.B. 796 2005-12, 2005-9 I.R.B. 628 2005-30, 2005-14 I.R.B. 827 2005-13, 2005-10 I.R.B. 664 2005-1, 2005-1 I.R.B. 257 2005-31, 2005-14 I.R.B. 830 2005-14, 2005-12 I.R.B. 749 2005-2, 2005-2 I.R.B. 319 2005-15, 2005-11 I.R.B. 720 2005-3, 2005-2 I.R.B. 270 Proposed Regulations: 2005-16, 2005-13 I.R.B. 777 2005-4, 2005-2 I.R.B. 319 2005-17, 2005-14 I.R.B. 823 2005-5, 2005-3 I.R.B. 353 REG-117969-00, 2005-7 I.R.B. 533 2005-18, 2005-14 I.R.B. 817 2005-6, 2005-4 I.R.B. 377 REG-125628-01, 2005-7 I.R.B. 536 2005-19, 2005-14 I.R.B. 819 2005-7, 2005-4 I.R.B. 377 REG-129709-03, 2005-3 I.R.B. 351 2005-20, 2005-14 I.R.B. 821 2005-8, 2005-4 I.R.B. 380 REG-148701-03, 2005-13 I.R.B. 802 2005-21, 2005-14 I.R.B. 822 2005-9, 2005-4 I.R.B. 380 REG-148867-03, 2005-9 I.R.B. 646 2005-22, 2005-13 I.R.B. 787 2005-10, 2005-5 I.R.B. 450 REG-160315-03, 2005-14 I.R.B. 833 2005-11, 2005-5 I.R.B. 451 REG-163314-03, 2005-14 I.R.B. 835 Tax Conventions: 2005-12, 2005-7 I.R.B. 555 REG-122847-04, 2005-13 I.R.B. 804 2005-13, 2005-8 I.R.B. 627 REG-130370-04, 2005-8 I.R.B. 608 2005-3, 2005-2 I.R.B. 270 2005-14, 2005-9 I.R.B. 653 REG-130671-04, 2005-10 I.R.B. 694 2005-17, 2005-10 I.R.B. 673 2005-15, 2005-9 I.R.B. 654 REG-131128-04, 2005-11 I.R.B. 733 2005-22, 2005-14 I.R.B. 826 REG-139683-04, 2005-4 I.R.B. 371 2005-16, 2005-10 I.R.B. 702 Treasury Decisions: 2005-17, 2005-10 I.R.B. 673 REG-152354-04, 2005-13 I.R.B. 805 2005-18, 2005-9 I.R.B. 660 REG-152914-04, 2005-9 I.R.B. 650 9164, 2005-3 I.R.B. 320 2005-19, 2005-11 I.R.B. 744 REG-152945-04, 2005-6 I.R.B. 484 9165, 2005-4 I.R.B. 357 2005-20, 2005-12 I.R.B. 772 REG-159824-04, 2005-4 I.R.B. 372 9166, 2005-8 I.R.B. 558 2005-21, 2005-12 I.R.B. 776 Revenue Procedures: 9167, 2005-2 I.R.B. 261 2005-22, 2005-14 I.R.B. 826 9168, 2005-4 I.R.B. 354 2005-23, 2005-14 I.R.B. 845 2005-1, 2005-1 I.R.B. 1 9169, 2005-5 I.R.B. 381 2005-2, 2005-1 I.R.B. 86 9170, 2005-4 I.R.B. 363 Notices: 2005-3, 2005-1 I.R.B. 118 9171, 2005-6 I.R.B. 452 2005-1, 2005-2 I.R.B. 274 2005-4, 2005-1 I.R.B. 128 9172, 2005-6 I.R.B. 468 2005-2, 2005-3 I.R.B. 337 2005-5, 2005-1 I.R.B. 170 9173, 2005-8 I.R.B. 557 2005-3, 2005-5 I.R.B. 447 2005-6, 2005-1 I.R.B. 200 9174, 2005-9 I.R.B. 629 2005-4, 2005-2 I.R.B. 289 2005-7, 2005-1 I.R.B. 240 9175, 2005-10 I.R.B. 665 2005-5, 2005-3 I.R.B. 337 2005-8, 2005-1 I.R.B. 243 9176, 2005-10 I.R.B. 661 2005-6, 2005-5 I.R.B. 448 2005-9, 2005-2 I.R.B. 303 9177, 2005-10 I.R.B. 671 2005-7, 2005-3 I.R.B. 340 2005-10, 2005-3 I.R.B. 341 9178, 2005-11 I.R.B. 708 2005-8, 2005-4 I.R.B. 368 2005-11, 2005-2 I.R.B. 307 9179, 2005-11 I.R.B. 707 2005-9, 2005-4 I.R.B. 369 2005-12, 2005-2 I.R.B. 311 9180, 2005-11 I.R.B. 714 2005-10, 2005-6 I.R.B. 474 2005-13, 2005-12 I.R.B. 759 9181, 2005-11 I.R.B. 717 2005-11, 2005-7 I.R.B. 493 2005-14, 2005-7 I.R.B. 528 9182, 2005-11 I.R.B. 713 2005-12, 2005-7 I.R.B. 494 2005-15, 2005-9 I.R.B. 638 9183, 2005-12 I.R.B. 754 2005-13, 2005-9 I.R.B. 630 2005-16, 2005-10 I.R.B. 674 9184, 2005-12 I.R.B. 753 2005-14, 2005-7 I.R.B. 498 2005-17, 2005-13 I.R.B. 797 9185, 2005-12 I.R.B. 749 2005-15, 2005-7 I.R.B. 527 2005-18, 2005-13 I.R.B. 798 9186, 2005-13 I.R.B. 790 2005-16, 2005-8 I.R.B. 605 2005-19, 2005-14 I.R.B. 832 9187, 2005-13 I.R.B. 778 9189, 2005-13 I.R.B. 788 2005-17, 2005-8 I.R.B. 606 Revenue Rulings: 2005-18, 2005-9 I.R.B. 634 2005-19, 2005-9 I.R.B. 634 2005-1, 2005-2 I.R.B. 258 2005-20, 2005-9 I.R.B. 635 2005-2, 2005-2 I.R.B. 259 2005-21, 2005-11 I.R.B. 727 2005-3, 2005-3 I.R.B. 334 2005-22, 2005-12 I.R.B. 756 2005-4, 2005-4 I.R.B. 366 2005-23, 2005-11 I.R.B. 732 2005-5, 2005-5 I.R.B. 445 2005-24, 2005-12 I.R.B. 757 2005-6, 2005-6 I.R.B. 471 2005-25, 2005-14 I.R.B. 827 2005-7, 2005-6 I.R.B. 464 2005-26, 2005-12 I.R.B. 758 2005-8, 2005-6 I.R.B. 466 2005-9, 2005-6 I.R.B. 470

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27, 2004.

April 4, 2005 ii 2005–14 I.R.B. Finding List of Current Actions on Revenue Procedures— Continued: Revenue Procedures— Continued: Previously Published Items1 98-16 2005-8 Modified and superseded by Modified by Bulletins 2005–1 through 2005–14 Rev. Proc. 2005-11, 2005-2 I.R.B. 307 Rev. Proc. 2005-16, 2005-10 I.R.B. 674 Announcements: 2000-20 2005-9 2001-77 Modified and superseded by Modified by Modified by Rev. Proc. 2005-16, 2005-10 I.R.B. 674 Rev. Proc. 2005-17, 2005-13 I.R.B. 797 Rev. Proc. 2005-16, 2005-10 I.R.B. 674 2001-22 Revenue Rulings: Notices: Superseded by Rev. Proc. 2005-12, 2005-2 I.R.B. 311 69-516 88-30 Obsoleted by 2002-9 Obsoleted by T.D. 9182, 2005-11 I.R.B. 713 Modified and amplified by Notice 2005-4, 2005-2 I.R.B. 289 Rev. Proc. 2005-9, 2005-2 I.R.B. 303 77-415 88-132 Obsoleted by 2004-1 Obsoleted by T.D. 9182, 2005-11 I.R.B. 713 Superseded by Notice 2005-4, 2005-2 I.R.B. 289 Rev. Proc. 2005-1, 2005-1 I.R.B. 1 77-479 89-29 Obsoleted by 2004-2 Obsoleted by T.D. 9182, 2005-11 I.R.B. 713 Superseded by Notice 2005-4, 2005-2 I.R.B. 289 Rev. Proc. 2005-2, 2005-1 I.R.B. 86 82-34 89-38 Obsoleted by 2004-3 Obsoleted by T.D. 9182, 2005-11 I.R.B. 713 Superseded by Notice 2005-4, 2005-2 I.R.B. 289 Rev. Proc. 2005-3, 2005-1 I.R.B. 118 92-63 2004-22 Modified and superseded by 2004-4 Modified and superseded by Rev. Rul. 2005-3, 2005-3 I.R.B. 334 Superseded by Notice 2005-30, 2005-14 I.R.B. 827 Rev. Proc. 2005-4, 2005-1 I.R.B. 128 95-63 2004-38 Modified and superseded by 2004-5 Obsoleted by Rev. Rul. 2005-3, 2005-3 I.R.B. 334 Superseded by T.D. 9186, 2005-13 I.R.B. 790 Rev. Proc. 2005-5, 2005-1 I.R.B. 170 2004-43 2004-80 Revoked by 2004-6 Clarified and modified by Rev. Rul. 2005-10, 2005-7 I.R.B. 492 Superseded by Notice 2005-22, 2005-12 I.R.B. 756 Rev. Proc. 2005-6, 2005-1 I.R.B. 200 2004-103 Updated by Superseded by 2004-7 Notice 2005-17, 2005-8 I.R.B. 606 Rev. Rul. 2005-3, 2005-3 I.R.B. 334 Superseded by 2005-4 Rev. Proc. 2005-7, 2005-1 I.R.B. 240 Treasury Decisions: Modified by Notice 2005-24, 2005-12 I.R.B. 757 2004-8 9170 Superseded by 2005-17 Corrected by Rev. Proc. 2005-8, 2005-1 I.R.B. 243 Clarified and modified by Ann. 2005-13, 2005-8 I.R.B. 627 Notice 2005-22, 2005-12 I.R.B. 756 2004-18 Obsoleted in part by Proposed Regulations: Rev. Proc. 2005-15, 2005-9 I.R.B. 638

REG-149519-03 2004-35 Corrected by Corrected by Ann. 2005-11, 2005-5 I.R.B. 451 Ann. 2005-4, 2005-2 I.R.B. 319

REG-114726-04 2004-60 Corrected by Superseded by Ann. 2005-10, 2005-5 I.R.B. 450 Rev. Proc. 2005-10, 2005-3 I.R.B. 341

Revenue Procedures: 2005-6 Modified by 84-58 Rev. Proc. 2005-16, 2005-10 I.R.B. 674 Superseded by Rev. Proc. 2005-18, 2005-13 I.R.B. 798

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27, 2004.

2005–14 I.R.B. iii*U.S. Government Printing Office: 2005—310–365/70009 April 4, 2005