Bulletin No. 2004-20 HIGHLIGHTS OF THIS ISSUE · Bulletin No. 2004-20 May 17, 2004 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the

Bulletin No. 2004-20May 17, 2004

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2004–46, page 915.Royalties; information reporting. This ruling provides guid-ance concerning the reporting requirements of sections 6041and 6050N of the Code for payments by publishers to literaryagents on behalf of an author.

T.D. 9121, page 903.REG–139792–02, page 926.Final, temporary, and proposed regulations under section704(b) of the Code provide guidance on the proper allocationof certain foreign tax expenditures of a partnership. A publichearing on the proposed regulations is scheduled for Septem-ber 14, 2004.

T.D. 9123, page 907.Final regulations under section 1296 of the Code provide pro-cedures for certain U.S. persons holding marketable stock ina passive foreign investment company (PFIC) to elect mark tomarket treatment for that stock under section 1296 and re-lated provisions of sections 1291 and 1295.

T.D. 9124, page 901.Final regulations provide that all activities are subject to the ruleunder section 465 of the Code that amounts borrowed from aperson who has an interest in an activity other than that of acreditor or from a person related to a person (other than theborrower) with such an interest do not increase the amount atrisk in the activity.

REG–116564–03, page 927.Proposed regulations under section 358 of the Code adopt atracing approach in determining the basis of stock and secu-rities received in transactions under sections 355, 368, andcertain transactions that qualify under both section 351 andsection 368.

Rev. Proc. 2004–29, page 918.Use of statistical sampling under section 274(n). This pro-cedure provides the statistical sampling methodology by whicha taxpayer may establish the amount of meal and entertainmentexpenses excepted from the 50% deduction disallowance ofsection 274(n)(1) of the Code.

EXEMPT ORGANIZATIONS

Announcement 2004–36, page 932.A list is provided of organizations now classified as private foun-dations.

Finding Lists begin on page ii.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

May 17, 2004 2004-20 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 132.—CertainFringe Benefits26 CFR 1.132–6: De minimis fringes.

Procedures are provided by which taxpayers mayuse statistical sampling to determine the amount ofexpenses for meals excepted from the 50% deduc-tion disallowance of section 274(n)(1) by reason ofsection 274(n)(2)(B) (relating to de minimis fringes).See Rev. Proc. 2004-29, page 918.

Section 162.—Trade orBusiness Expenses

Procedures are provided by which taxpayers mayuse statistical sampling to determine the amount oftrade or business expenses for meals and entertain-ment excepted from the 50% deduction disallowanceof section 274(n)(1). See Rev. Proc. 2004-29, page918.

Section 274.—Disallowanceof Certain Entertainment,etc., Expenses

Procedures are provided by which taxpayers mayuse statistical sampling to determine the amount ofmeal and entertainment expenses excepted from the50% deduction disallowance of section 274(n)(1).See Rev. Proc. 2004-29, page 918.

Section 465.—DeductionsLimited to Amount at Risk26 CFR 1.465–8: General rules; interest other thanthat of a creditor.

T.D. 9124

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

At-Risk Limitations; InterestOther Than That of a Creditor

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: These regulations finalizethe rules relating to the treatment, for pur-poses of the at-risk limitations, of amounts

borrowed from a person who has an in-terest in an activity other than that of acreditor or from a person related to a per-son (other than the borrower) with such aninterest. These regulations affect taxpay-ers subject to the at-risk limitations andprovide them with guidance necessary tocomply with the law.

DATES: Effective Date: These regulationsare effective May 3, 2004.

Applicability Date: For dates ofapplicability, see §§1.465–8(e) and1.465–20(d).

FOR FURTHER INFORMATIONCONTACT: Tara P. Volungis orChristopher L. Trump, 202–622–3070(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 1 to provide rules relatingto the treatment, for purposes of the at-risklimitations under section 465 of the Inter-nal Revenue Code (Code), of amounts bor-rowed from a person who has an interestin an activity other than that of a creditor.On June 5, 1979, the IRS published in theFederal Register (44 FR 32235) proposedregulations (LR–166–76) relating to thetreatment of investments in certain activi-ties under section 465 of the Code. On July8, 2003, a notice of proposed rulemaking(REG–209377–89, 2003–36 I.R.B. 521[68 FR 40583]) amending §§1.465–8 and1.465–20 of the proposed regulations waspublished in the Federal Register. Nocomments were received from the publicin response to the notice of proposed rule-making. No public hearing was requestedor held. The proposed regulations under§§1.465–8 and 1.465–20 are adopted bythis Treasury decision.

Explanation of Provisions

Section 465 limits the deductibility oflosses to a taxpayer’s economic invest-ment (the amount at risk) in the activity atthe close of a taxable year. A taxpayer is

generally considered at risk in an activityto the extent of cash and the adjusted ba-sis of property contributed by the taxpayerto the activity. In general, a taxpayer’samount at risk also includes any amountsborrowed for use in the activity if the tax-payer is personally liable for repayment orif property other than property used in theactivity is pledged as security.

Under section 465(b)(3), amounts bor-rowed for use in an activity will not in-crease the borrower’s amount at risk in theactivity if the lender has an interest otherthan that of a creditor in the activity (a dis-qualifying interest) or if the lender is re-lated to a person (other than the borrower)who has a disqualifying interest in the ac-tivity. This rule applies even if the bor-rower is personally liable for the repay-ment of the loan or the loan is secured byproperty not used in the activity. Section465(c)(3)(D) provides that this rule appliesto new activities (activities that were notsubject to section 465 before 1978) only tothe extent provided in regulations.

These regulations apply the rule of sec-tion 465(b)(3) to new activities and pro-vide rules for determining when a personhas an interest in an activity other than thatof a creditor. Additional rules are providedwith respect to related persons, interests asa shareholder, and qualified nonrecoursefinancing.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations and,because these regulations do not imposeon small entities a collection of informa-tion requirement, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not ap-ply. Therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counsel

2004-20 I.R.B. 901 May 17, 2004

for Advocacy of the Small Business Ad-ministration for comment on their impacton small business.

Drafting Information

The principal authors of these regula-tions are Tara P. Volungis and ChristopherL. Trump of the Office of Associate ChiefCounsel (Passthroughs and Special Indus-tries). However, other personnel from theIRS and Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding entries in nu-merical order to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Section 1.465–8 also issued under 26

U.S.C. 465.Section 1.465–20 also issued under 26

U.S.C. 465. * * *Par. 2. Sections 1.465–8 and 1.465–20

are added to read as follows:

§1.465–8 General rules; interest otherthan that of a creditor.

(a) In general—(1) Amounts borrowed.This section applies to amounts borrowedfor use in an activity described in section465(c)(1) or (c)(3)(A). Amounts borrowedwith respect to an activity will not increasethe borrower’s amount at risk in the activ-ity if the lender has an interest in the activ-ity other than that of a creditor or is relatedto a person (other than the borrower) whohas an interest in the activity other than thatof a creditor. This rule applies even if theborrower is personally liable for the repay-ment of the loan or the loan is secured byproperty not used in the activity. For ad-ditional rules relating to the treatment ofamounts borrowed from these persons, see§1.465–20.

(2) Certain borrowed amounts ex-cepted. (i) For purposes of determining acorporation’s amount at risk, an interest inthe corporation as a shareholder is not an

interest in any activity of the corporation.Thus, amounts borrowed by a corporationfrom a shareholder may increase the cor-poration’s amount at risk.

(ii) For purposes of determining a tax-payer’s amount at risk in an activity ofholding real property, paragraph (a)(1) ofthis section does not apply to financing thatis secured by real property used in the ac-tivity and is either—

(A) Qualified nonrecourse financingdescribed in section 465(b)(6)(B); or

(B) Financing that, if it were nonre-course, would be financing described insection 465(b)(6)(B).

(b) Loans for which the borrower is per-sonally liable for repayment—(1) Generalrule. If a borrower is personally liable forthe repayment of a loan for use in an activ-ity, a person shall be considered a personwith an interest in the activity other thanthat of a creditor only if the person has ei-ther a capital interest in the activity or aninterest in the net profits of the activity.

(2) Capital interest. For the purposes ofthis section, a capital interest in an activitymeans an interest in the assets of the activ-ity which is distributable to the owner ofthe capital interest upon the liquidation ofthe activity. The partners of a partnershipand the shareholders of an S corporationare considered to have capital interests inthe activities conducted by the partnershipor S corporation.

(3) Interest in net profits. For the pur-poses of this section, it is not necessary fora person to have any incidents of owner-ship in the activity in order to have an in-terest in the net profits of the activity. Forexample, an employee or independent con-tractor any part of whose compensation isdetermined with reference to the net prof-its of the activity will be considered to havean interest in the net profits of the activity.

(4) Examples. The provisions of thisparagraph may be illustrated by the follow-ing examples:

Example 1. A, the owner of a herd of cattle sellsthe herd to partnership BCD. BCD pays A $10,000in cash and executes a note for $30,000 payable to A.The three partners, B, C, and D, each assumes per-sonal liability for repayment of the amount owed A.In addition, BCD enters into an agreement with A un-der which A is to take care of the cattle for BCD inreturn for compensation equal to 6 percent of BCD’snet profits from the activity. Because A has an in-terest in the net profits of BCD’s farming activity, Ais considered to have an interest in the activity otherthan that of a creditor. Accordingly, amounts payable

to A for use in that activity do not increase the part-ners’ amount at risk even though the partners assumepersonal liability for repayment.

Example 2. Assume the same facts as in Example1 except that instead of receiving compensation equalto 6 percent of BCD’s net profits from the activity, Ainstead receives compensation equal to 1 percent ofthe gross receipts from the activity. A does not havea capital interest in BCD. A’s interest in the gross re-ceipts is not considered an interest in the net profits.Because B, C, and D assumed personal liability forthe amounts payable to A, and A has neither a capitalinterest nor an interest in the net profits of the activ-ity, A is not considered to have an interest in the ac-tivity other than that of a creditor with respect to the$30,000 loan. Accordingly, B, C, and D are at riskfor their share of the loan if the other provisions ofsection 465 are met.

Example 3. Assume the same facts as in Example1 except that instead of receiving compensation equalto 6 percent of BCD’s net profits from the activity, Ainstead receives compensation equal to 6 percent ofthe net profits from the activity or $15,000, whicheveris greater. A is considered to have an interest in thenet profits from the activity and accordingly will betreated as a person with an interest in the activity otherthan that of a creditor.

(c) Nonrecourse loans secured by assetswith a readily ascertainable fair marketvalue—(1) General rule. This paragraphshall apply in the case of a nonrecourseloan for use in an activity where the loanis secured by property which has a readilyascertainable fair market value. In the caseof such a loan, a person shall be considereda person with an interest in the activityother than that of a creditor only if theperson has either a capital interest in theactivity or an interest in the net profits ofthe activity.

(2) Example. The provisions of thisparagraph (c) may be illustrated by the fol-lowing example:

Example. X is an investor in an activity describedin section 465(c)(1). In order to raise money for theinvestment, X borrows money from A, the promoter(the person who brought X together with other tax-payers for the purpose of investing in the activity).The loan is secured by stock unrelated to the activitywhich is listed on a national securities exchange. X’sstock has a readily ascertainable fair market value. Adoes not have a capital interest in the activity or aninterest in its net profits. Accordingly, with respectto the loan secured by X’s stock, A does not have aninterest in the activity other than that of a creditor.

(d) Nonrecourse loans secured by as-sets without a readily ascertainable fairmarket value—(1) General rule. Thisparagraph shall apply in the case of a non-recourse loan for use in an activity wherethe loan is secured by property which doesnot have a readily ascertainable fair mar-ket value. In the case of such a loan, aperson shall be considered a person with

May 17, 2004 902 2004-20 I.R.B.

an interest in the activity other than thatof a creditor if the person stands to re-ceive financial gain (other than interest)from the activity or from the sale of in-terests in the activity. For the purposes ofthis section, persons who stand to receivefinancial gain from the activity includepersons who receive compensation forservices rendered in connection with theorganization or operation of the activityor for the sale of interests in the activity.Such a person will generally include thepromoter of the activity who organizes theactivity or solicits potential investors inthe activity.

(2) Example. The provisions of thisparagraph (d) may be illustrated by the fol-lowing example:

Example. A is the promoter of an activity de-scribed in section 465(c)(1). As the promoter, A or-ganizes the activity and solicits potential investors.For these services, A is paid a flat fee of $130x. Thisfee is paid out of the amounts contributed by the in-vestors to the activity. X, one of the investors in theactivity, borrows money from A for use in the activity.X is not personally liable for repayment to A of theamount borrowed. As security for the loan, X pledgesan asset which does not have a readily ascertainablefair market value. A is considered a person with aninterest in the activity other than that of a creditor withrespect to this loan because the asset pledged as secu-rity does not have a readily ascertainable fair marketvalue, X is not personally liable for repayment of theloan, and A received financial gain from the activity.Accordingly, X’s amount at risk in the activity is notincreased despite the fact that property was pledgedas security.

(e) Effective date. This section appliesto amounts borrowed after May 3, 2004.

§1.465–20 Treatment of amountsborrowed from certain persons andamounts protected against loss.

(a) General rule. The followingamounts are treated in the same man-ner as borrowed amounts for which thetaxpayer has no personal liability and forwhich no security is pledged—

(1) Amounts that do not increase thetaxpayer’s amount at risk because they areborrowed from a person who has an inter-est in the activity other than that of a cred-itor or from a person who is related to aperson (other than the taxpayer) who hasan interest in the activity other than that ofa creditor; and

(2) Amounts (whether or not borrowed)that are protected against loss.

(b) Interest other than that of a creditor;cross reference. See §1.465–8 for addi-

tional rules relating to amounts borrowedfrom a person who has an interest in theactivity other than that of a creditor or is re-lated to a person (other than the taxpayer)who has an interest in the activity otherthan that of a creditor.

(c) Amounts protected against loss;cross reference. See §1.465–6 for rulesrelating to amounts protected against loss.

(d) Effective date. This section appliesto amounts borrowed after May 3, 2004.

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

Approved April 26, 2004.

Gregory F. Jenner,Acting Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on April 30, 2004,8:45 a.m., and published in the issue of the Federal Registerfor May 3, 2004, 69 F.R. 24078)

Section 704.—Partner’sDistributive Share26 CFR 1.704–1: Partner’s distributive share.

T.D. 9121


Partner’s Distributive Share:Foreign Tax Expenditures


ACTION: Final and temporary regula-tions.

SUMMARY: The temporary regulationsprovide rules for the proper allocationof partnership expenditures for foreigntaxes. The temporary regulations affectpartnerships and their partners. The textof the temporary regulations also servesas the text of the proposed regulations(REG–139792–02) set forth in this issueof the Bulletin. The final regulations con-sist of technical revisions to reflect theissuance of the temporary regulations.

DATES: Effective Date: These regulationsare effective April 21, 2004.

Applicability Date: For dates of appli-cability, see §1.704–1(b)(1)(ii).

FOR FURTHER INFORMATIONCONTACT: Beverly Katz at202–622–3050 (not a toll-free num-ber).


Background

Subchapter K is intended to permit tax-payers to conduct joint business activitiesthrough a flexible economic arrangementwithout incurring an entity-level tax. Toachieve this goal of a flexible economicarrangement, partners are generally per-mitted to decide among themselves how apartnership’s items will be allocated. Sec-tion 704(a) of the Internal Revenue Code(Code) provides that a partner’s distribu-tive share of income, gain, loss, deduc-tion, or credit shall, except as otherwiseprovided, be determined by the partnershipagreement.

Section 704(b) places a significant lim-itation on the general flexibility of section704(a). Specifically, section 704(b) pro-vides that a partner’s distributive share ofincome, gain, loss, deduction, or credit (oritem thereof) shall be determined in ac-cordance with the partner’s interest in thepartnership (determined by taking into ac-count all facts and circumstances) if the al-location to a partner under the partnershipagreement of income, gain, loss, deduc-tion, or credit (or item thereof) does nothave substantial economic effect. Thus,the statute provides that partnership allo-cations either must have substantial eco-nomic effect or must be in accordance withthe partners’ interests in the partnership.

Section 1.704–1(b)(2)(i) provides thatthe determination of whether an allocationof income, gain, loss, or deduction to apartner has substantial economic effect in-volves a two-part analysis that is made asof the end of the partnership taxable year towhich the allocation relates. First, the al-location must have economic effect withinthe meaning of §1.704–1(b)(2)(ii). Sec-ond, the economic effect of the allocationmust be substantial within the meaning of§1.704–1(b)(2)(iii).

For an allocation to have economic ef-fect, it must be consistent with the under-lying economic arrangement of the part-ners. This means that, in the event that

2004-20 I.R.B. 903 May 17, 2004

there is an economic benefit or burden thatcorresponds to the allocation, the partner towhom the allocation is made must receivesuch economic benefit or bear such eco-nomic burden. §1.704–1(b)(2)(ii). Gen-erally, an allocation of income, gain, loss,or deduction (or item thereof) to a part-ner will have economic effect if, and onlyif, throughout the full term of the partner-ship, the partnership agreement provides:(1) for the determination and maintenanceof the partners’ capital accounts in accor-dance with §1.704–1(b)(2)(iv); (2) for liq-uidating distributions to the partners to bemade in accordance with the positive cap-ital account balances of the partners; and(3) for each partner to be uncondition-ally obligated to restore the deficit bal-ance in the partner’s capital account fol-lowing the liquidation of the partner’s part-nership interest. In lieu of satisfying thethird criterion, the partnership may satisfythe qualified income offset rules set forthin §1.704–1(b)(2)(ii)(d).

Section 1.704–1(b)(2)(iii)(a) providesas a general rule that the economic ef-fect of an allocation (or allocations) is sub-stantial if there is a reasonable possibil-ity that the allocation (or allocations) willaffect substantially the dollar amounts tobe received by the partners from the part-nership, independent of tax consequences.The section further provides that, even ifthe allocation affects substantially the dol-lar amounts, the economic effect of theallocation (or allocations) is not substan-tial if, at the time the allocation (or allo-cations) becomes part of the partnershipagreement, (1) the after-tax economic con-sequences of at least one partner may, inpresent value terms, be enhanced com-pared to such consequences if the alloca-tion (or allocations) were not contained inthe partnership agreement, and (2) there isa strong likelihood that the after-tax eco-nomic consequences of no partner will, inpresent value terms, be substantially di-minished compared to such consequencesif the allocation (or allocations) were notcontained in the partnership agreement.

The regulations under section 704(b)provide that the allocation of certain itemscannot have substantial economic effect,and accordingly provide guidance on allo-cating those items in a manner that will bedeemed to be in accordance with the part-ners’ interests in the partnership. Itemsthat cannot be allocated with substan-

tial economic effect include tax credits,nonrecourse deductions, and recaptureamounts. These items are addressed in§§1.704–1(b)(4) and 1.704–2.

Explanation of Provisions

1. Clarifying the Allocation ofExpenditures for Foreign Taxes

Section 901(b)(5) provides that an indi-vidual who is a partner will, subject to cer-tain limitations, qualify for the foreign taxcredit for his proportionate share of taxesof the partnership paid or accrued duringthe taxable year to a foreign country or toany possession of the United States. Sec-tion 702(a)(6) provides that each partnershall take into account separately his dis-tributive share of the partnership’s taxes,described in section 901, paid or accruedto foreign countries and to possessions ofthe United States. Section 703(a)(2)(B)provides that the partnership is not enti-tled to the deduction for taxes provided insection 164(a) with respect to taxes, de-scribed in section 901, paid or accrued toforeign countries and to possessions of theUnited States. Section 703(b)(3) providesthat elections affecting the computation oftaxable income derived from a partnershipshall be made by the partnership, exceptthat any election under section 901 (relat-ing to taxes of foreign countries and pos-sessions of the United States), will be madeby each partner separately.

These temporary regulations clarify theapplication of the regulations under sec-tion 704 to creditable foreign tax expendi-tures for which the partnership bears legalliability as described in §1.901–2(f). Un-like most other trade or business expenses,foreign taxes described in section 901 or903 are fully creditable against a partner’sU.S. tax liability, subject to certain limita-tions, including primarily the foreign taxcredit limitation under section 904. Forthis reason, the temporary regulations pro-vide that partnership allocations of cred-itable foreign tax expenditures cannot havesubstantial economic effect and, therefore,must be allocated in accordance with thepartners’ interests in the partnership. Acreditable foreign tax is a foreign tax paidor accrued for U.S. tax purposes by a part-nership and that is eligible for a credit un-der section 901(a). A foreign tax is a cred-itable foreign tax for these purposes with-

out regard to whether a partner receivingan allocation of such foreign tax elects toclaim a credit for such amount.

The temporary regulations establisha safe harbor under which partnershipallocations of foreign tax expenditureswill be deemed to be in accordance withthe partners’ interests in the partnership.Under this safe harbor, if the partnershipagreement satisfies the requirements of§1.704–1(b)(2)(ii)(b) or (d) (i.e., capitalaccount maintenance, liquidation accord-ing to capital accounts, and either deficitrestoration obligations or qualified incomeoffsets), then an allocation of a foreign taxexpenditure that is proportionate to a part-ner’s distributive share of the partnershipincome to which such taxes relate (includ-ing income allocated pursuant to section704(c)) will be deemed to be in accor-dance with the partners’ interests in thepartnership. This rule is consistent withthe underlying purposes of the foreign taxcredit, which is to avoid double taxationof foreign source income, and the foreigntax credit limitation, which is to preventforeign tax credits from offsetting tax lia-bility on a taxpayer’s U.S. source income.Also, this rule achieves greater parity be-tween entities that are taxed under foreignlaw at the partner level and entities thatare taxed under foreign law at the entitylevel. If a partnership were taxed underforeign law at the partner level, then theamount of foreign taxes imposed on a part-ner generally would be proportionate tothe partner’s share of the income subjectto the foreign tax. The partner would takeinto account this amount of foreign tax incomputing U.S. tax liability. Likewise, forpartnerships that are taxed under foreignlaw at the entity level, the safe harbor pro-vides that a partner is allowed to take intoaccount in computing U.S. tax liabilitythe share of the partnership’s foreign taxexpenditures that is proportionate to thepartner’s share of the income to whichsuch taxes relate.

If the taxpayer does not satisfy this safeharbor, then the taxpayer’s allocationswill be tested under the partners’ interestsin the partnership standard set forth in§1.704–1(b)(3). Under that standard, thedetermination of a partner’s interest in apartnership is made by taking into accountall facts and circumstances relating to theeconomic arrangement of the partners.Among the facts to be considered are:

May 17, 2004 904 2004-20 I.R.B.

(a) the partners’ relative contributions tothe partnership; (b) the interests of thepartners in economic profits and losses(if different than their interests in taxableincome or loss); (c) the interests of thepartners in cash flow and other non-liq-uidating distributions; and (d) the rightsof the partners to distributions of capitalupon liquidation. Ultimately, the partners’interests in the partnership signify themanner in which the partners have agreedto share the economic benefit or burden (ifany) corresponding to the income, gain,loss, deduction, or credit (or item thereof)that is allocated. The sharing arrangementwith respect to a particular item may ormay not correspond to the overall eco-nomic arrangement of the partners. Thus,a partnership’s allocation of a foreign taxexpenditure that does not satisfy the safeharbor contained in these temporary reg-ulations, may, in unusual circumstances(such as where there is substantial cer-tainty that U.S partners will deduct, ratherthan credit, foreign taxes) be in accordancewith partners’ interests in the partnershipunder §1.704–1(b)(3).

2. Application of §1.704–1(b)(2)(iii)Substantiality Requirement WherePartnership Allocation Has Tax Effect onOwners of Partners

As discussed above, in determiningif the economic effect of a partnershipallocation is substantial, the partnershipmust consider the after-tax economic con-sequences to the partners. The IRS andTreasury have become aware that somepartnerships are taking the position that,in determining if the economic effect of apartnership allocation is substantial, theyneed not consider any tax consequences toan owner of the partner that result from theallocation. The IRS and Treasury believethat such a position is inconsistent withthe policies underlying the substantialeconomic effect rules, because it would al-low a partnership to make tax-advantagedallocations if the tax advantages of the

allocations were to accrue to an owner ofa partner, rather than to the partner itself.The IRS and Treasury are planning to issueguidance on the application of the section704(b) regulations to these situations.

3. Effective Date

The provisions of these regulationsgenerally apply for partnership taxableyears beginning on or after the date thatthe temporary regulations are publishedin the Federal Register. A transition ruleis also provided for existing partnerships.Under the transition rule, if a partnershipagreement was entered into before April21, 2004, then the partnership may ap-ply the provisions of §1.704–1(b), as ifthe amendments made by this temporaryregulation had not occurred, until anysubsequent material modification to thepartnership agreement, which includes anychange in ownership, occurs. This transi-tion rule does not apply if, as of April 20,2004, persons that are related to each other(within the meaning of section 267(b) and707(b)) collectively have the power toamend the partnership agreement withoutthe consent of any unrelated party. Noinference regarding the treatment of allo-cations of foreign taxes under §1.704–1(b)(prior to the amendments made by thistemporary regulation) is intended.

Special Analyses

It has been determined that this Trea-sury Decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. Forthe applicability of the Regulatory Flexi-bility Act (5 U.S.C. chapter 6), refer to theSpecial Analyses section of the preambleto the notice of proposed rulemaking onthis subject published in this issue of theBulletin. Pursuant to section 7805(f) of

the Code, this notice of rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.


The principal author of this regulationis Beverly M. Katz, Office of the AssociateChief Counsel (Passthroughs & Special In-dustries). However, other personnel fromthe IRS and Treasury Department partici-pated in its development.

* * * * *


Accordingly, 26 CFR parts 1 and 301are to be amended as follows:


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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.704–1 is amended as

follows:1. Paragraph (b)(0) is amended by

adding entries for §§1.704–1(b)(1)(ii)(a),1.704–1(b)(1)(ii)(b), 1.704–1(b)(4)(viii),1.704–1(b)(4)(ix), 1.704–1(b)(4)(x), and1.704–1(b)(4)(xi).

2. The text of paragraph (b)(1)(ii) isredesignated as paragraph (b)(1)(ii)(a).

3. A heading is added to newly desig-nated paragraph (b)(1)(ii)(a).

4. Paragraphs (b)(1)(ii)(b), (b)(4)(viii),(b)(4)(ix), (b)(4)(x), and (b)(4)(xi) areadded.

5. Paragraph (b)(5) is amended byadding Example 20 through Example 28.

6. The additions read as follows:

§1.704–1 Partner’s distributive share.

* * * * *(b) Determination of partner’s distribu-

tive share—(0) Cross-references.

* * * * *

2004-20 I.R.B. 905 May 17, 2004

Generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(1)(ii)(a)Foreign tax expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(1)(ii)(b)* * * * *[Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(4)(viii)[Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(4)(ix)[Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(4)(x)Allocation of creditable foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(4)(xi)

* * * * *(1) * * *(ii) * * *(a) Generally.(b) Foreign tax expenditures. [Re-

served]. For further guidance, see§1.704–1T(b)(1)(ii)(b).

* * * * *(4) * * *(viii) [Reserved].(ix) [Reserved].(x) [Reserved].(xi) Allocation of creditable foreign

taxes. [Reserved]. For further guidance,see §1.704–1T(b)(4)(xi).

(5) * * * *Examples (20) through (24). [Re-

served].Examples (25) through (28). [Re-

served]. For further guidance, see§1.704–1T(b)(5), Examples (25) through(28).

Par. 3. Section 1.704–1T is added toread as follows:

§1.704–1T Partner’s distributive share(temporary).

(a) through (b)(1)(ii)(a) [Reserved].For further guidance, see §1.704–1(a)through (b)(1)(ii)(a).

(b)(1)(ii)(b) Rules relating to foreigntax expenditures—(1) In general. The pro-visions of paragraphs (b)(4)(xi) (regardingthe allocation of foreign tax expenditures)apply for partnership taxable years begin-ning on or after April 21, 2004.

(2) Transition rule. If a partnershipagreement was entered into before April21, 2004, then the partnership may ap-ply the provisions of this paragraph (b)as if the amendments made by this tem-porary regulation had not occurred, un-til any subsequent material modificationto the partnership agreement, which in-cludes any change in ownership, occurs.This transition rule does not apply if, asof April 20, 2004, persons that are relatedto each other (within the meaning of sec-tion 267(b) and 707(b)) collectively have

the power to amend the partnership agree-ment without the consent of any unrelatedparty.

(b)(1)(iii) through (b)(4)(vii) [Re-served]. For further guidance, see§1.704–1(b)(1)(iii) through (b)(4)(vii).

(b)(4)(viii) through (b)(4)(x) [Re-served].

(b)(4)(xi) Allocations of creditable for-eign taxes—(a) In general. Allocations ofcreditable foreign taxes cannot have sub-stantial economic effect and, accordingly,such expenditures must be allocated in ac-cordance with the partners’ interests in thepartnership. An allocation of a creditableforeign tax will be deemed to be in ac-cordance with the partners’ interests in thepartnership if—

(1) The requirements of either para-graph (b)(2)(ii)(b) or (b)(2)(ii)(d) of thissection are satisfied (i.e., capital accountsare maintained in accordance with para-graph (b)(2)(iv) of this section, liquidatingdistributions are required to be made inaccordance with positive capital accountbalances, and each partner either has anunconditional deficit restoration obliga-tion or agrees to a qualified income offset);and

(2) The partnership agreement providesfor the allocation of the creditable foreigntax in proportion to the partners’ distribu-tive shares of income (including incomeallocated pursuant to section 704(c)) towhich the creditable foreign tax relates.

(b) Creditable foreign taxes. A cred-itable foreign tax is a foreign tax paid oraccrued for U.S. tax purposes by a part-nership and that is eligible for a credit un-der section 901(a). A foreign tax is a cred-itable foreign tax for these purposes with-out regard to whether a partner receivingan allocation of such foreign tax elects toclaim a credit for such amount.

(c) Income related to foreign taxes. Aforeign tax is related to income if the in-come is included in the base upon whichthe taxes are imposed, which determina-tion must be made in accordance with the

principles of §1.904–6. See Examples (25)through (28) of paragraph (b)(5) of thissection.

(b)(5)***Examples 1 through 19 [Reserved]. For

further guidance, see §1.704–1(b)(5), Ex-amples 1 through 19.

Examples 20 through 24 [Reserved].Example 25. (i) A and B form AB, an eligible

entity (as defined in §301.7701–3(a) of this chap-ter), treated as a partnership for U.S. tax purposes.AB’s partnership agreement (within the meaning ofparagraph (b)(2)(ii)(j) of this section) provides thatthe partners’ capital accounts will be determined andmaintained in accordance with paragraph (b)(2)(iv)of this section, that liquidation proceeds will be dis-tributed in accordance with the partners’ positive cap-ital account balances, and that any partner with adeficit balance in his capital account following theliquidation of his interest must restore that deficit tothe partnership. AB operates business M and earnsincome from passive investments in country X. As-sume that country X imposes a 40 percent tax on busi-ness M income, which tax is a creditable foreign tax,but exempts from tax income from passive invest-ments. In year 1, AB earns $100 of income from busi-ness M and $30 from passive investments and paysor accrues $40 of country X taxes. For purposes ofsection 904(d), the income from business M is gen-eral limitation income and the income from the pas-sive investments is passive income. Pursuant to thepartnership agreement, all partnership items, includ-ing creditable foreign taxes, from business M are al-located 60 percent to A and 40 percent to B, and allpartnership items, including creditable foreign taxes,from passive investments are allocated 80 percent toA and 20 percent to B. Accordingly, A is allocated 60percent of the business M income ($60) and 60 per-cent of the country X taxes ($24), and B is allocated40 percent of the business M income ($40) and 40percent of the country X taxes ($16).

(ii) Under paragraph (b)(4)(xi) of this section, the$40 of taxes is related to the $100 of general limita-tion income and no portion of the taxes is related tothe passive income. Because AB’s partnership agree-ment allocates the general limitation income 60/40and the country X taxes 60/40, the allocations of thecountry X taxes are in proportion to the allocation ofthe income to which the foreign tax relates. BecauseAB satisfies the requirement of paragraph (b)(4)(xi)of this section, the allocations of the country X taxesare deemed to be in accordance with the partners’ in-terests in the partnership.

Example 26. (i) A and B form AB, an eligibleentity (as defined in §301.7701–3(a) of this chapter),treated as a partnership for U.S. tax purposes. AB’spartnership agreement (within the meaning paragraph(b)(2)(ii)(j) of this section) provides that the partners’

May 17, 2004 906 2004-20 I.R.B.

capital accounts will be determined and maintained inaccordance with paragraph (b)(2)(iv) of this section,that liquidation proceeds will be distributed in accor-dance with the partners’ positive capital account bal-ances, and that any partner with a deficit balance inhis capital account following the liquidation of his in-terest must restore that deficit to the partnership. ABoperates business M in country X and business N incountry Y. Assume that country X imposes a 40 per-cent tax on business M income, country Y imposes a20 percent tax on business N income, and the countryX and country Y taxes are creditable foreign taxes. Inyear 1, AB has $100 of income from business M and$50 of income from business N. Country X imposes$40 of tax on the income from business M and coun-try Y imposes $10 of tax on the income of business N.Pursuant to the partnership agreement, all partnershipitems, including creditable foreign taxes, from busi-ness M are allocated 75 percent to A and 25 percent toB, and all partnership items, including creditable for-eign taxes, from business N are split evenly betweenA and B (50/50). Accordingly, A is allocated 75 per-cent of the income from business M ($75), 75 percentof the country X taxes ($30), 50 percent of the incomefrom business N ($25), and 50 percent of the countryY taxes ($5). B is allocated 25 percent of the incomefrom business M ($25), 25 percent of the country Xtaxes ($10), 50 percent of the income from businessN ($25), and 50 percent of the country Y taxes ($5).

(ii) Because the income from business M andbusiness N is general limitation income and the part-nership agreement provides for different allocationswith respect to such income, it is necessary to deter-mine which foreign taxes are related to the businessM income and which foreign taxes are related to thebusiness N income. Under paragraph (b)(4)(xi) ofthis section, the $40 of country X taxes is related tobusiness M and the $10 of country Y taxes is relatedto business N. Because AB’s partnership agreementallocates the $40 of country X taxes in the sameproportion as the general limitation income frombusiness M, and the $10 of country Y taxes in thesame proportion as the general limitation incomefrom business N, the allocations of the country Xtaxes and the country Y taxes are in proportion to theallocation of the income to which the foreign taxesrelate. Because AB satisfies the requirements ofparagraph (b)(4)(xi), the allocations of the country Xand country Y taxes are deemed to be in accordancewith the partners’ interests in the partnership.

Example 27. (i) The facts are the same as in Ex-ample 26, except that AB does not actually receivethe $50 accrued with respect to business N until year2. Also assume that A, B and AB each report taxableincome on an accrual basis for U.S. tax purposes andAB reports taxable income on a cash basis for countryX and country Y purposes. In year 1, AB pays coun-try X taxes of $40. In year 2, AB pays country Ytaxes of $10. Pursuant to the partnership agreement,in year 1, A is allocated 75 percent of business M in-come ($75) and country X taxes ($30) and 50 percentof business N income ($25). B is allocated 25 per-cent of business M income ($25) and country X taxes($10) and 50 percent of business N income ($25). Inyear 2, A and B will each be allocated 50 percent ofthe country Y taxes ($5).

(ii) Because the income from business M andbusiness N is general limitation income and the part-nership agreement provides for different allocations

with respect to such income, it is necessary to de-termine which foreign taxes are related to businessM income and which foreign taxes are related tobusiness N income. Under paragraph (b)(4)(xi) ofthis section, $40 of country X taxes is related to the$100 of general limitation income from businessM. Under paragraph (b)(4)(xi), the country Y taximposed in year 2 is allocable to the $50 of businessN income AB recognizes in year 2 under country Ylaw and is treated as paid in year 2 on the $50 ofbusiness N income recognized for U.S. tax purposesin year 1. See §1.904–6(a)(1)(iv) and (c), Example 5.Accordingly, the $10 of country Y taxes is related tothe $50 of general limitation income from businessN. Because AB’s partnership agreement allocates the$40 of country X taxes in proportion to the generallimitation income from business M, and the $10 ofcountry X taxes from business N in proportion to theyear 1 general limitation income from business N, theallocations of the country X and country Y taxes arein proportion to the allocation of the income to whichthe foreign taxes relate. Therefore, AB’s partnershipagreement satisfies the requirement of paragraph(b)(4)(xi)(a)(2) of this section. Because AB also sat-isfies the requirements of paragraph (b)(4)(xi)(a)(1)of this section, the allocations of the country X andY taxes are deemed to be in accordance with thepartners’ interests in the partnership under paragraph(b)(4)(xi) of this section.

Example 28. (i) A and B form AB, an eligibleentity (as defined in §301.7701–3(a) of this chap-ter), treated as a partnership for U.S. tax purposes.AB’s partnership agreement provides that the part-ners’ capital accounts will be determined and main-tained in accordance with paragraph (b)(2)(iv) of thissection, that liquidation proceeds will be distributedin accordance with the partners’ positive capital ac-count balances, and that any partner with a deficit bal-ance in his capital account following the liquidationof his interest must restore that deficit to the partner-ship. AB operates business M in country X. Assumethat country X imposes a 20 percent tax on the net in-come from business M, which tax is a creditable for-eign tax. In year 1, AB earns $300 of gross income,has deductible expenses, exclusive of creditable for-eign taxes, of $100, and pays or accrues $40 of coun-try X tax. For purposes of section 904(d), all incomefrom business M is general limitation income. Pur-suant to the partnership agreement, the first $100 ofgross income each year is allocated to A as a returnon excess capital contributed by A. All remainingpartnership items, including creditable foreign taxes,are split evenly (50/50) between A and B. Assumethat the gross income allocation is not deductible forcountry X purposes.

(ii) Under paragraph (b)(4)(xi) of this section, the$40 of taxes is related to the $200 of general limita-tion net income. In year 1, AB’s partnership agree-ment allocates $150 or 75 percent of the general lim-itation income to A ($100 attributable to the gross in-come allocation plus $50 of the remaining $100 ofnet income) and $50 or 25 percent of the net incometo B. AB’s partnership agreement allocates the coun-try X taxes in accordance with the partners’ shares ofpartnership items remaining after the $100 gross in-come allocation. Therefore, AB allocates the countryX taxes 50 percent to A ($20) and 50 percent to B($20). Under paragraph (b)(4)(xi) of this section, theallocation of country X taxes cannot have substantial

economic effect and must be allocated in accordancewith the partners’ interests in the partnership. AB’sallocations of country X taxes are not deemed to bein accordance with the partners’ interests in the part-nership under paragraph (b)(4)(xi) of this section, be-cause they are not in proportion to the allocation ofthe income to which the country X taxes relates.

(c) through (e)(4)(ii)(b) [Reserved].For further guidance, see §1.704–1(c)through (e)(4)(ii)(b).

John M. Dalrymple,Acting Deputy Commissioner for

Services and Enforcement.

Approved March 25, 2004.


(Filed by the Office of the Federal Register on April 20, 2004,8:45 a.m., and published in the issue of the Federal Registerfor April 21, 2004, 69 F.R. 21405)

Section 1296.—Electionof Mark to Market forMarketable Stock26 CFR 1.1296.1: Mark to market election for mar-ketable stock.

T.D. 9123


Electing Mark to Market forMarketable Stock


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations that provide procedures forcertain United States persons holding mar-ketable stock in a passive foreign invest-ment company (PFIC) to elect mark tomarket treatment for that stock under sec-tion 1296 of the Internal Revenue Codeand related provisions of sections 1291 and1295. These final regulations affect UnitedStates persons owning marketable stock ina PFIC.

DATES: Effective Date: These regulationsare effective May 3, 2004.

2004-20 I.R.B. 907 May 17, 2004

Applicability Date: For dates of appli-cability, see §§1.1291–1(j), 1.1295–1(k),and 1.1296–1(j).

FOR FURTHER INFORMATIONCONTACT: Alexandra K. Helou, (202)622–3840 (not a toll-free number).


Background

On July 31, 2002, the IRS published inthe Federal Register a notice of proposedrulemaking (REG–112306–00, 2002–2C.B. 767) under section 1296 and relatedprovisions of the Internal Revenue Code(Code). Two written comments werereceived in response to the notice of pro-posed rulemaking. No public hearing wasrequested or held on the notice of pro-posed rulemaking. After consideration ofthe comments, the proposed regulationsare adopted as final regulations with themodifications discussed below.

Summary of Public Comments andExplanation of Changes

A. Deferral of Post-October PFIC Lossesby Regulated Investment Companies(RICs) Under section 852(b)(10)

One commentator recommended thatthe regulations provide guidance regard-ing the determination of post-October “netreduction in value” of PFIC stock held bya RIC under section 852(b)(10). Section852(b)(10) provides that taxable incomeof a RIC (other than a RIC to which anelection under section 4982(e)(4) applies)shall be computed without regard to anynet reduction in value occurring after Oc-tober 31 of the taxable year of any stockof a PFIC with respect to which an elec-tion under section 1296(k) is in effect andthat any such reduction shall be treated asoccurring on the first day of the followingtaxable year.

To address concerns relating to a RIC’spost-October period, the commentator pro-vided three recommendations. First, thatthe regulations clarify whether the deferralof post-October PFIC losses under section852(b)(10) is elective or mandatory; sec-ond, that RICs be permitted to defer theirpost-October losses under rules similar to

those that apply to foreign currency gainsand losses under §1.852–11; and third, thatRICs be allowed to include actual post-October dispositions of PFIC stock whencomputing losses eligible for deferral.

The IRS and Treasury have consideredthese recommendations and determinedthat the issues raised with respect to sec-tion 852(b)(10) are issues under the RICtax provisions that are beyond the scopeof this regulations project.

B. Situations Arising From DifferentTax Years of RICs and the ForeignCorporations in Which They Invest

One commentator requested guidancein instances where the RIC and a foreigncorporation in which it invests have differ-ent or “mismatching” taxable years. Thiscommentator noted that a RIC may expe-rience uncertainties with respect to deter-mining its taxable income and minimumdistribution amount in situations where,following the end of its taxable year, theRIC learns that a foreign corporation inwhich it has invested is a PFIC or that theforeign corporation no longer satisfies theincome or asset tests of section 1297(a) forthe current taxable year. To address admin-istrative concerns arising in this situation,this commentator recommended that RICsbe permitted to recognize a change in a for-eign corporation’s PFIC status in the RIC’staxable year within which the taxable yearof the foreign corporation ends.

Issues arising from different taxableyears are not specific to PFICs for which ataxpayer has made a section 1296 election.Accordingly, this issue is beyond the scopeof this regulations project. However, com-ments are requested for approaches thataddress issues arising when a taxpayerand a PFIC have different taxable years.Such issues may be addressed in a futureregulations project.

C. Situations Where a RIC Owns Stock ina Foreign Corporation That No LongerSatisfies the PFIC Definition in theCurrent Year

One commentator suggested that theregulations should address certain issuesthat arise with respect to a shareholderthat has made a section 1296 election forits PFIC stock and the foreign corporation

does not satisfy the income or asset testin section 1297(a) for the year. First, thecommentator suggested that the regula-tions clarify that the character of gainsfrom the disposition of the stock of theforeign corporation during the time thatthe corporation did not qualify as a PFICshould be capital gain. The commen-tator also requested that the regulationsprovide that the character of losses withrespect to stock for which a section 1296election was made but that is recognizedin a taxable year during which the for-eign corporation is not a PFIC be treatedas ordinary income to the extent of anyunreversed inclusions at the time of dispo-sition.

After consideration of these comments,and in accordance with the statutory pro-visions of section 1296, the IRS and Trea-sury have adopted the first comment, butnot the second comment. Accordingly,two examples were added to the regula-tions. Example 2 in §1.1296–1(c)(7) clari-fies that any gain from the disposition ofstock of a foreign corporation that doesnot qualify as a PFIC for the year of dis-position will be capital gain because sec-tion 1296(c)(1)(A) no longer applies atsuch time. In the case of losses with re-spect to stock for which a section 1296election was made but that is recognizedin a taxable year during which the for-eign corporation is not a PFIC, Example4 in §1.1296–1(c)(7) was added to clar-ify that any loss from the disposition ofsuch stock will be a capital loss becausesection 1296(c)(1)(B) no longer applies atsuch time.

Second, the commentator recom-mended that the regulations provide au-tomatic consent for RICs to terminate asection 1296 election during a year thata foreign corporation no longer satisfiesthe requirements for PFIC status. The IRSand Treasury have not adopted this recom-mendation. The IRS and Treasury believethat it is appropriate to require consent ofthe Commissioner to terminate a section1296 election. Under §1.1296–1(h)(3), ashareholder can request the consent of theCommissioner to revoke a section 1296election upon a finding of a substantialchange in circumstances, which may in-clude a foreign corporation ceasing to bea PFIC.

May 17, 2004 908 2004-20 I.R.B.

D. Technical Coordination Issues ArisingFrom Marking PFIC Stock to MarketUnder the Former Proposed §1.1291–8and Notice 92–53

A commentator suggested that the reg-ulations should clarify how the formerproposed §1.1291–8 (see Notice 92–53,1992–2 C.B. 384) and the current statutoryPFIC mark to market rules under section1296 interact. For example, the commen-tator requested clarification concerning theRIC’s adjustments to the basis of its PFICstock to reflect gains previously includedunder the former proposed §1.1291–8.

The IRS and Treasury believe that noadditional clarification is needed. To theextent a taxpayer increased its basis orreceived a new holding period under theformer proposed §1.1291–8, those con-sequences will be respected even thoughthe proposed regulations were withdrawnwithout being finalized following theenactment of current section 1296 (seeINTL–941–86, 1991–1 C.B. 1255 [64 FR5015] (February 2, 1999) withdrawingproposed §1.1291–8). As a result, thesuggestion was not adopted.

This same commentator also recom-mended that Example 2 of proposed§1.1296–1(i)(4) be clarified by specifi-cally providing that the RIC had not madea mark to market election under the formerproposed §1.1291–8. The commentatorsuggested this modification to eliminatepotential ambiguities that may arise overthe relationship between an election underthe former proposed §1.1291–8 and sec-tion 1296. This suggestion was adopted,and the example has been revised accord-ingly.

E. The Regulations Should Allow QualifiedShareholders to Make Protective andRetroactive Mark to Market Elections

One commentator recommended thatthe regulations should provide rules sim-ilar to those contained in the qualifiedelecting fund (QEF) regime for purposesof making a retroactive QEF election. TheIRS and Treasury have considered thiscomment and continue to believe that theappropriate process for retroactive relieffor late mark to market elections is un-der the §301.9100 relief provisions, asset forth in §1.1296–1(h)(1)(iii). Accord-ingly, this suggestion was not adopted.

F. Termination of Existing Section 1296Mark to Market Elections Without theConsent of the Commissioner

One commentator suggested permittinga taxpayer with an existing section 1296election to make a QEF election and ter-minate its existing 1296 election withoutthe consent of the Commissioner. The pro-posed regulations were structured to facil-itate an election for mark to market treat-ment by permitting a taxpayer with an ex-isting QEF election to make a section 1296election and terminate the existing QEFelection without requiring the consent ofthe Commissioner. Conversely, a taxpayerwith an existing section 1296 election ispermitted to make a QEF election only ifthe section 1296 election is terminated asprovided by section 1296 and the regula-tions thereunder (e.g., if the PFIC stockceases to be marketable) or is revoked withconsent of the Commissioner. This ap-proach reflects consideration of the rela-tive administrative burdens imposed undereach set of rules, and the stated intent ofCongress that one of the purposes for en-acting section 1296 was to provide anotheralternative to the interest charge rules ofsection 1291 that would be available in in-stances where taxpayers cannot obtain suf-ficient information to make a QEF elec-tion. See H.R. Rep. No. 105–148, at533 (1997); S. Rep. No. 105–33 at 94(1997). After consideration of the com-ment, the IRS and Treasury continue to be-lieve the rules coordinating QEF electionsand mark to market elections under sec-tion 1296 are appropriate for the reasonsdiscussed above. Accordingly, this recom-mendation was not adopted.

G. Proposals to Enhance the Utility ofQEF Elections for RICs

One commentator provided two sug-gestions focused on enhancing the utilityof QEF elections for RICs. Specifically,the commentator first suggested allow-ing RICs to use U.S. Generally AcceptedAccounting Principles (U.S. GAAP) orInternational Financial Reporting Stan-dards (IFRS) for purposes of computingQEF inclusions under section 1295(a)(2).The commentator also suggested revisingthe retroactive QEF election rules in caseswhere a RIC learns of the PFIC status ofa foreign corporation immediately prior

to the deadline for making a QEF elec-tion. These comments, which raise issuesregarding the QEF rules, are beyond thescope of this regulation. Accordingly,these comments were not adopted but willbe considered in the context of any guid-ance to be issued under the appropriatesubstantive provisions.

H. Additional Revisions

The final regulations also clarify thatthe regulations apply to taxable years be-ginning on or after May 3, 2004. Addi-tionally, the several examples in proposed§1.1296–1(c) have been grouped togetherin new §1.1296–1(c)(7) in order to makethe regulation more readable.

Special Analysis

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations,and, because the regulations do not im-pose a collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursuantto section 7805(f) of the Code, the notice ofproposed rulemaking preceding these reg-ulations was submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on its impacton small business.


The principal author of these regula-tions is Alexandra K. Helou, Office ofAssociate Chief Counsel (International).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *


Accordingly, 26 CFR part 1 is amendedas follows:

2004-20 I.R.B. 909 May 17, 2004


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.1296–1 also issued under 26

U.S.C. 1296(g) and 26 U.S.C. 1298(f).* * *

Par. 2. §1.1291–0 (table of contents) isamended by revising the introductory textand by adding the entries for §1.1291–1 toread as follows:

§1.1291–0 Treatment of shareholdersof certain passive foreign investmentcompanies; table of contents.

This section contains a listing of theheadings for §§1.1291–1, 1.1291–9, and1.1291–10.

§1.1291–1 Taxation of U.S. persons thatare shareholders of section 1291 funds.

(a) through (b) [Reserved].(c) Coordination with other PFIC rules.(1) and (2) [Reserved].(3) Coordination with section 1296:

distributions and dispositions.(4) Coordination with mark to market

rules under chapter 1 of the Internal Rev-enue Code other than section 1296.

(i) In general.(ii) Coordination rule.(d) [Reserved].(e) Exempt organization as shareholder.(1) In general.(2) Effective date.(f) through (i) [Reserved].(j) Effective date.

* * * * *Par. 3. Section 1.1291–1 is amended

by:1. Revising paragraphs (a) through (d).2. Adding paragraphs (f) through (j).The revisions and additions read as fol-

lows:

§1.1291–1 Taxation of U.S. persons thatare shareholders of section 1291 funds.

(a) and (b) [Reserved].(c) Coordination with other PFIC rules.(1) and (2) [Reserved].(3) Coordination with section 1296:

distributions and dispositions. If PFICstock is marked to market under sec-tion 1296 for any taxable year, then,

except as provided in §1.1296–1(i), sec-tion 1291 and the regulations thereundershall not apply to any distribution withrespect to section 1296 stock (as definedin §1.1296–1(a)(2)), or to any dispositionof such stock, for such taxable year.

(4) Coordination with mark to marketrules under chapter 1 of the Internal Rev-enue Code other than section 1296—(i) Ingeneral. If PFIC stock is marked to mar-ket for any taxable year under section 475or any other provision of chapter 1 of theInternal Revenue Code, other than section1296, regardless of whether the applica-tion of such provision is mandatory orresults from an election by the taxpayer oranother person, then, except as provided inparagraph (c)(4)(ii) of this section, section1291 and the regulations thereunder shallnot apply to any distribution with respectto such PFIC stock or to any disposition ofsuch PFIC stock for such taxable year. See§§1.1295–1(i)(3) and 1.1296–1(h)(3)(i)for rules regarding the automatic termina-tion of an existing election under section1295 or section 1296 when a taxpayermarks to market PFIC stock under section475 or any other provision of chapter 1 ofthe Internal Revenue Code.

(ii) Coordination rule—(A) Notwith-standing any provision in this section to thecontrary, the rule of paragraph (c)(4)(ii)(B)of this section shall apply to the first tax-able year in which a United States per-son marks to market its PFIC stock un-der a provision of chapter 1 of the InternalRevenue Code, other than section 1296, ifsuch foreign corporation was a PFIC forany taxable year, prior to such first tax-able year, during the United States per-son’s holding period (as defined in section1291(a)(3)(A) and §1.1296–1(f)) in suchstock, and for which such corporation wasnot treated as a QEF with respect to suchUnited States person.

(B) For the first taxable year of a UnitedStates person that marks to market its PFICstock under any provision of chapter 1 ofthe Internal Revenue Code, other than sec-tion 1296, such United States person shall,in lieu of the rules under which the UnitedStates person marks to market, apply therules of §1.1296–1(i)(2) and (3) as if theUnited States person had made an electionunder section 1296 for such first taxableyear.

(d) [Reserved].

* * * * *(f) through (i) [Reserved].(j) Effective dates. This section applies

for taxable years beginning on or after May3, 2004, except as otherwise provided inparagraph (e)(2) of this section.

Par. 4. §1.1295–0 (table of contents) isamended by:

1. Revising the entries for§1.1295–1(i)(3) and (i)(4) and addingparagraph (i)(5), (i)(5)(i), and (i)(5)(ii).

2. Revising the entry for §1.1295–1(k).The revisions and addition read as fol-

lows:

§1.1295–0 Table of contents. * * *

§1.1295–1 Qualified electing funds.

* * * * *(i) * * *(3) Automatic termination.(4) Effect of invalidation, termination

or revocation.(5) Election after invalidation, termina-

tion or revocation.(i) In general.(ii) Special rule.

* * * * *(k) Effective dates.

* * * * *

§1.1295–1 Qualified electing funds.

Par. 5. Section 1.1295–1 is amendedby:

1. Redesignating paragraphs (i)(3) and(i)(4) as paragraphs (i)(4) and (i)(5), re-spectively.

2. Adding a new paragraph (i)(3).3. Revising newly designated para-

graph (i)(5).4. Revising paragraph (k).The revisions and addition read as fol-

lows:

§1.1295–1 Qualified electing funds

* * * * *(i) * * *(3) Automatic termination. If a United

States person, or the United States share-holder on behalf of a controlled foreigncorporation, makes an election pursuant tosection 1296 and the regulations thereun-der with respect to PFIC stock for which aQEF election is in effect, or marks to mar-ket such stock under another provision ofchapter 1 of the Internal Revenue Code, the

May 17, 2004 910 2004-20 I.R.B.

QEF election is automatically terminatedwith respect to such stock that is marked tomarket under section 1296 or another pro-vision of chapter 1 of the Internal RevenueCode. Such termination shall be effectiveon the last day of the shareholder’s tax-able year preceding the first taxable yearfor which the section 1296 election is ineffect or such stock is marked to marketunder another provision of chapter 1 of theInternal Revenue Code.

Example. Corp Y, a domestic corporation, ownsdirectly 100 shares of marketable stock in foreigncorporation FX, a PFIC. Corp Y also owns a 50percent interest in FP, a foreign partnership that owns200 shares of FX stock. Accordingly, under section1298(a)(3) and §1.1296–1(e)(1), Corp Y is treated asindirectly owning 100 shares of FX stock. Corp Yalso owns 100 percent of the stock of FZ, a foreigncorporation that is not a PFIC. FZ owns 100 shares ofFX stock, and therefore under section 1298(a)(2)(A),Corp Y is treated as owning the 100 shares of FXstock owned by FZ. For taxable year 2005, Corp Yhas a QEF election in effect with respect to all 300shares of FX stock that it owns directly or indirectly.See generally §1.1295–1(c)(1). For taxable year2006, Corp Y makes a timely election pursuant tosection 1296 and the regulations thereunder. Forpurposes of section 1296, Corp Y is treated as own-ing stock held indirectly through a partnership, butnot through a foreign corporation. Section 1296(g);§1.1296–1(e)(1). Accordingly, Corp Y’s section1296 election covers the 100 shares it owns directlyand the 100 shares it owns indirectly through FP,but not the 100 shares owned by FZ. With respectto the first 200 shares, Corp Y’s QEF election isautomatically terminated effective December 31,2005. With respect to the 100 shares Corp Y ownsthrough foreign FZ, Corp Y’s QEF election remainsin effect unless invalidated, terminated, or revokedpursuant to this paragraph (i).

* * * * *(5) Effect after invalidation, termina-

tion, or revocation— (i) In general. With-out the Commissioner’s consent, a share-holder whose section 1295 election wasinvalidated, terminated, or revoked underthis paragraph (i) may not make the section1295 election with respect to the PFIC be-fore the sixth taxable year in which the in-validation, termination, or revocation be-came effective.

(ii) Special rule. Notwithstandingparagraph (i)(5)(i) of this section, a share-holder whose section 1295 election wasterminated pursuant to paragraph (i)(3)of this section, and either whose section1296 election has subsequently been ter-minated because its PFIC stock ceased tobe marketable or who no longer marks tomarket such stock under another provisionof chapter 1 of the Internal Revenue Code,

may make a section 1295 election withrespect to its PFIC stock before the sixthtaxable year in which its prior section 1295election was terminated.

* * * * *(k) Effective dates. Except as oth-

erwise provided, paragraphs (b)(2)(iii),(b)(3), (b)(4), and (c) through (j) of thissection are applicable to taxable years ofshareholders beginning after December31, 1997. However, taxpayers may applythe rules under paragraphs (b)(4), (f) and(g) of this section to a taxable year begin-ning before January 1, 1998, provided thestatute of limitations on the assessment oftax has not expired as of April 27, 1998,and, in the case of paragraph (b)(4) ofthis section, the taxpayers who filed thejoint return have consistently applied therules of that section to all taxable yearsfollowing the year the election was made.Paragraph (b)(3)(v) of this section is ap-plicable as of February 7, 2000, however,a taxpayer may apply the rules to a taxableyear prior to the applicable date providedthe statute of limitations on the assess-ment of tax for that taxable year has notexpired. Paragraphs (i)(3) and (i)(5)(ii)of this section are applicable for taxableyears beginning on or after May 3, 2004.

Par. 6. Section 1.1296–1 is added toread as follows:

§1.1296–1 Mark to market election formarketable stock.

(a) Definitions—(1) Eligible RIC. Aneligible RIC is a regulated investmentcompany that offers for sale, or has out-standing, any stock of which it is theissuer and which is redeemable at net assetvalue, or that publishes net asset valua-tions at least annually.

(2) Section 1296 stock. The term sec-tion 1296 stock means marketable stockin a passive foreign investment company(PFIC), including any PFIC stock owneddirectly or indirectly by an eligible RIC,for which there is a valid section 1296 elec-tion. Section 1296 stock does not includestock of a foreign corporation that previ-ously had been a PFIC, and for which asection 1296 election remains in effect.

(3) Unreversed inclusions—(i) Gen-eral rule. The term unreversed inclusionsmeans with respect to any section 1296stock, the excess, if any, of—

(A) The amount of mark to market gainincluded in gross income of the UnitedStates person under paragraph (c)(1) ofthis section with respect to such stock forprior taxable years; over

(B) The amount allowed as a deduc-tion to the United States person under para-graph (c)(3) of this section with respect tosuch stock for prior taxable years.

(ii) Section 1291 adjustment. Theamount referred to in paragraph(a)(3)(i)(A) of this section shall includeany amount subject to section 1291 un-der the coordination rule of paragraph(i)(2)(ii) of this section.

(iii) Example. An example of the com-putation of unreversed inclusions is as fol-lows:

Example. A, a United States person, acquiredstock in Corp X, a foreign corporation, on January 1,2005, for $150. At such time and at all times there-after, Corp X was a PFIC and A’s stock in Corp X wasmarketable. For taxable years 2005 and 2006, CorpX was a nonqualified fund subject to taxation undersection 1291. A made a timely section 1296 electionwith respect to the X stock, effective for taxable year2007. The fair market value of the X stock was $200as of December 31, 2006, and $240 as of December31, 2007. Additionally, Corp X made no distributionwith respect to its stock for the taxable years at issue.In 2007, pursuant to paragraph (i)(2)(ii) of this sec-tion, A must include the $90 gain in the X stock in ac-cordance with the rules of section 1291 for purposesof determining the deferred tax amount and any appli-cable interest. Nonetheless, for purposes of determin-ing the amount of the unreversed inclusions pursuantto paragraph (a)(3)(ii) of this section, A will includethe $90 of gain that was taxed under section 1291 andnot the interest thereon.

(iv) Special rule for regulated invest-ment companies. In the case of a regulatedinvestment company which had electedto mark to market the PFIC stock held bysuch company as of the last day of thetaxable year preceding such company’sfirst taxable year for which such companymakes a section 1296 election, the amountreferred to in paragraph (a)(3)(i)(A) of thissection shall include amounts previouslyincluded in gross income by the companypursuant to such mark to market elec-tion with respect to such stock for priortaxable years. For further guidance, seeNotice 92–53, 1992–2 C.B. 384, (see also601.601(d)(2) of this chapter).

(b) Application of section 1296 elec-tion—(1) In general. Any United Statesperson and any controlled foreign corpora-tion (CFC) that owns directly, or is treatedas owning under this section, marketablestock, as defined in §1.1296–2, in a PFIC

2004-20 I.R.B. 911 May 17, 2004

may make an election to mark to marketsuch stock in accordance with the provi-sions of section 1296 and this section.

(2) Election applicable to specificUnited States person. A section 1296election applies only to the United Statesperson (or CFC that is treated as a U.S.person under paragraph (g)(2) of thissection) that makes the election. Accord-ingly, a United States person’s section1296 election will not apply to a transfereeof section 1296 stock.

(3) Election applicable to specific cor-poration only. A section 1296 election ismade with respect to a single foreign cor-poration, and thus a separate section 1296election must be made for each foreign cor-poration that otherwise meets the require-ments of this section. A United States per-son’s section 1296 election with respect tostock in a foreign corporation applies toall marketable stock of the corporation thatthe person owns directly, or is treated asowning under paragraph (e) of this section,at the time of the election or that is subse-quently acquired.

(c) Effect of election—(1) Recognitionof gain. If the fair market value of section1296 stock on the last day of the UnitedStates person’s taxable year exceeds its ad-justed basis, the United States person shallinclude in gross income for its taxable yearthe excess of the fair market value of suchstock over its adjusted basis (mark to mar-ket gain).

(2) Character of gain. Mark to marketgain, and any gain on the sale or otherdisposition of section 1296 stock, shall betreated as ordinary income.

(3) Recognition of loss. If the adjustedbasis of section 1296 stock exceeds its fairmarket value on the last day of the UnitedStates person’s taxable year, such personshall be allowed a deduction for such tax-able year equal to the lesser of the amountof such excess or the unreversed inclusionswith respect to such stock (mark to marketloss).

(4) Character of loss—(i) Losses notin excess of unreversed inclusions. Anymark to market loss allowed as a deductionunder paragraph (c)(3) of this section, andany loss on the sale or other dispositionof section 1296 stock, to the extent thatsuch loss does not exceed the unreversedinclusions attributable to such stock, shallbe treated as an ordinary loss, deductiblein computing adjusted gross income.

(ii) Losses in excess of unreversed in-clusions. Any loss recognized on the saleor other disposition of section 1296 stockin excess of any prior unreversed inclu-sions will be subject to the rules generallyapplicable to losses provided elsewhere inthe Internal Revenue Code and the regula-tions thereunder.

(5) Application of election to separatelots of stock. In the case in which a UnitedStates person purchased or acquired sharesof stock in a PFIC at different prices, therules of this section shall be applied ina manner consistent with the rules of§1.1012–1.

(6) Source rules. The source of anyamount included in gross income underparagraph (c)(1) of this section, or the al-location and apportionment of any amountallowed as a deduction under paragraph(c)(3) of this section, shall be determinedin the same manner as if such amountswere gain or loss (as the case may be) fromthe sale of stock in the PFIC.

(7) Examples. The following examplesillustrate this paragraph (c):

Example 1. Treatment of gain as ordinary in-come. A, a United States individual, purchases stockin FX, a foreign corporation that is not a PFIC, in1990 for $1,000. On January 1, 2005, when the fairmarket value of the FX stock is $1,100, FX becomes aPFIC. A makes a timely section 1296 election for tax-able year 2005. On December 31, 2005, the fair mar-ket value of the FX stock is $1,200. For taxable year2005, A includes $200 of mark to market gain (theexcess of the fair market value of FX stock ($1,200)over A’s adjusted basis ($1,000)) in gross income asordinary income and pursuant to paragraph (d)(1) ofthis section increases his basis in the FX stock by thatamount.

Example 2. Treatment of gain as capital gain.The facts are the same as in Example 1. For taxableyear 2006, FX does not satisfy either the asset testor the income test of section 1297(a). A does notrevoke the section 1296 election it made with respectto the FX stock. On December 1, 2006, A sells theFX stock when the fair market value of the stock is$1,500. For taxable year 2006, A includes $300 ofgain (the excess of the fair market value of FX stock($1,500) over A’s adjusted basis ($1,200)) in grossincome as long-term capital gain because at the timeof sale of the FX stock by A, FX did not qualify asa PFIC, and, therefore, the FX stock was not section1296 stock at the time of the disposition. Further, A’sholding period for non-PFIC purposes was more thanone year.

Example 3. Treatment of losses as ordinary wherethey do not exceed unreversed inclusions. The factsare the same as in Example 1. On December 1, 2006,A sells the stock in FX for $1,100. At that time, A’sunreversed inclusions (the amount A included in in-come as mark to market gain) with respect to the stockin FX are $200. Accordingly, for taxable year 2006,A recognizes a loss on the sale of the FX stock of

$100, (the fair market value of the FX stock ($1,100)minus A’s adjusted basis ($1,200) in the stock) that istreated as an ordinary loss because the loss does notexceed the unreversed inclusions attributable to thestock of FX.

Example 4. Treatment of losses as long-term cap-ital losses. The facts are the same as in Example 3,except that FX does not satisfy either the asset testor the income test of section 1297(a) for taxable year2006. For taxable year 2006, A’s $100 loss from thesale of the FX stock is treated as long-term capitalloss because at the time of the sale of the FX stock byA FX did not qualify as a PFIC, and, therefore, theFX stock was not section 1296 stock at the time ofthe disposition. Further, A’s holding period in the FXstock for non-PFIC purposes was more than one year.

Example 5. Long-term capital loss treatment oflosses in excess of unreversed inclusions. The factsare the same as in Example 3, except that A sells hisFX stock for $900. At the time of A’s sale of theFX stock on December 1, 2006, A’s unreversed inclu-sions with respect to the FX stock are $200. Accord-ingly, the $300 loss recognized by A on the disposi-tion is treated as an ordinary loss to the extent of hisunreversed inclusions ($200). The amount of the lossin excess of A’s unreversed inclusions ($100) will betreated as a long-term capital loss because A’s hold-ing period in the FC stock for non-PFIC purposes wasmore than one year.

Example 6. Application of section 1296 electionto separate lots of stock. On January 1, 2005, CorpA, a domestic corporation, purchased 100 shares (firstlot) of stock in FX, a PFIC, for $500 ($5 per share).On June 1, 2005, Corp A purchased 100 shares (sec-ond lot) of FX stock for $1,000 ($10 per share). CorpA made a timely section 1296 election with respectto its FX stock for taxable year 2005. On December31, 2005, the fair market value of FX stock was $8per share. For taxable year 2005, Corp A includes$300 of gain in gross income as ordinary income un-der paragraph (c)(1) of this section with respect to thefirst lot, and adjusts its basis in that lot to $800 pur-suant to paragraph (d)(1) of this section. With respectto the second lot, Corp A is not permitted to recog-nize a loss under paragraph (c)(3) of this section fortaxable year 2005. Although Corp A’s adjusted basisin that stock exceeds its fair market value by $200,Corp A has no unreversed inclusions with respect tothat particular lot of stock. On July 1, 2006, Corp Asells 100 shares of FX stock for $900. Assuming thatCorp A adequately identifies (in accordance with therules of §1.1012–1(c)) the shares of FX stock sold asbeing from the second lot, Corp A recognizes $100 oflong term capital loss pursuant to paragraph (c)(4)(ii)of this section.

(d) Adjustment to basis—(1) Stock helddirectly. The adjusted basis of the sec-tion 1296 stock shall be increased by theamount included in the gross income ofthe United States person under paragraph(c)(1) of this section with respect to suchstock, and decreased by the amount al-lowed as a deduction to the United Statesperson under paragraph (c)(3) of this sec-tion with respect to such stock.

(2) Stock owned through certain for-eign entities. (i) In the case of section

May 17, 2004 912 2004-20 I.R.B.

1296 stock that a United States person istreated as owning through certain foreignentities pursuant to paragraph (e) of thissection, the basis adjustments under para-graph (d)(1) of this section shall apply tosuch stock in the hands of the foreign entityactually holding such stock, but only forpurposes of determining the subsequenttreatment under chapter 1 of the InternalRevenue Code of the United States personwith respect to such stock. Such increaseor decrease in the adjusted basis of the sec-tion 1296 stock shall constitute an adjust-ment to the basis of partnership propertyonly with respect to the partner making thesection 1296 election. Corresponding ad-justments shall be made to the adjusted ba-sis of the United States person’s interestin the foreign entity and in any intermedi-ary entity described in paragraph (e) of thissection through which the United Statesperson holds the PFIC stock.

(ii) Example. The following exampleillustrates this paragraph (d)(2):

Example. FP is a foreign partnership. Corp A, adomestic corporation, owns a 20 percent interest inFP. Corp B, a domestic corporation, owns a 30 per-cent interest in FP. Corp C, a foreign corporation, withno direct or indirect shareholders that are U.S. per-sons, owns a 50% interest in FP. Corp A, Corp B, andFP all use a calendar year for their taxable year. In2005, FP purchases stock in FX, a foreign corpora-tion and a PFIC, for $1,000. Corp A makes a timelysection 1296 election for taxable year 2005. On De-cember 31, 2005, the fair market value of the PFICstock is $1,100. Corp A includes $20 of ordinary in-come in taxable year 2005 under paragraphs (c)(1)and (2) of this section. Corp A increases its basis inits FP partnership interest by $20. FP increases itsbasis in the FX stock to $1,020 solely for purposesof determining the subsequent treatment of Corp A,under chapter 1 of the Internal Revenue Code, withrespect to such stock. In 2006, FP sells the FX stockfor $1,200. For purposes of determining the amountof gain of Corp A, FP will be treated as having $180in gain of which $20 is allocated to Corp A. Corp A’s$20 of gain will be treated as ordinary income underparagraph (c)(2) of this section. For purposes of de-termining the amount of gain attributable to Corp B,FP will be treated as having $200 gain, $60 of whichwill be allocated to Corp B.

(3) Stock owned indirectly by an eligibleRIC. Paragraph (d)(2) of this section shallalso apply to an eligible RIC which is anindirect shareholder under §1.1296–2(f) ofstock in a PFIC and has a valid section1296 election in effect with respect to thePFIC stock.

(4) Stock acquired from a decedent. Inthe case of stock of a PFIC which is ac-quired by bequest, devise, or inheritance(or by the decedent’s estate) and with re-

spect to which a section 1296 election wasin effect as of the date of the decedent’sdeath, notwithstanding section 1014, thebasis of such stock in the hands of the per-son so acquiring it shall be the adjusted ba-sis of such stock in the hands of the dece-dent immediately before his death (or, iflesser, the basis which would have beendetermined under section 1014 without re-gard to this paragraph).

(5) Transition rule for individuals be-coming subject to United States incometaxation—(i) In general. If any individ-ual becomes a United States person in ataxable year beginning after December 31,1997, solely for purposes of this section,the adjusted basis, before adjustments un-der this paragraph (d), of any section 1296stock owned by such individual on the firstday of such taxable year shall be treated asbeing the greater of its fair market value orits adjusted basis on such first day.

(ii) An example of the transition rulefor individuals becoming subject to UnitedStates income taxation is as follows:

Example. A, a nonresident alien individual, pur-chases marketable stock in FX, a PFIC, for $50 in1995. On January 1, 2005, A becomes a United Statesperson and makes a timely section 1296 election withrespect to the stock in accordance with paragraph (h)of this section. The fair market value of the FX stockon January 1, 2005, is $100. The fair market valueof the FX stock on December 31, 2005, is $110. Un-der paragraph (d)(5)(i) of this section, A computesthe amount of mark to market gain or loss for theFX stock in 2005 by reference to an adjusted basisof $100, and therefore A includes $10 in gross in-come as mark to market gain under paragraph (c)(1)of this section. Additionally, under paragraph (d)(1)of this section, A’s adjusted basis in the FX stock forpurposes of this section is increased to $110 (and to$60 for all other tax purposes). A sells the FX stockin 2006 for $120. For purposes of applying section1001, A must use its original basis of $50, with anyadjustments under paragraph (d)(1) of this section,$10 in this case, and therefore A recognizes $60 ofgain. Under paragraph (c)(2) of this section (whichis applied using an adjusted basis of $110), $10 ofsuch gain is treated as ordinary income. The remain-ing $50 of gain from the sale of the FX stock is longterm capital gain because A held such stock for morethan one year.

(e) Stock owned through certain foreignentities—(1) In general. Except as pro-vided in paragraph (e)(2) of this section,the following rules shall apply in determin-ing stock ownership for purposes of thissection. PFIC stock owned, directly or in-directly, by or for a foreign partnership,foreign trust (other than a foreign trust de-scribed in sections 671 through 679), orforeign estate shall be considered as be-

ing owned proportionately by its partnersor beneficiaries. PFIC stock owned, di-rectly or indirectly, by or for a foreigntrust described in sections 671 through 679shall be considered as being owned pro-portionately by its grantors or other per-sons treated as owners under sections 671through 679 of any portion of the trust thatincludes the stock. The determination ofa person’s proportionate interest in a for-eign partnership, foreign trust or foreignestate will be made on the basis of all thefacts and circumstances. Stock consideredowned by reason of this paragraph shall,for purposes of applying the rules of thissection, be treated as actually owned bysuch person.

(2) Stock owned indirectly by eligibleRICs. The rules for attributing ownershipof stock contained in §1.1296–2(f) will ap-ply to determine the indirect ownership ofPFIC stock by an eligible RIC.

(f) Holding period. Solely for purposesof sections 1291 through 1298, if section1296 applied to stock with respect to thetaxpayer for any prior taxable year, the tax-payer’s holding period in such stock shallbe treated as beginning on the first day ofthe first taxable year beginning after thelast taxable year for which section 1296 soapplied.

(g) Special rules—(1) Certain disposi-tions of stock. To the extent a United Statesperson is treated as actually owning stockin a PFIC under paragraph (e) of this sec-tion, any disposition which results in theUnited States person being treated as nolonger owning such stock, and any disposi-tion by the person owning such stock, shallbe treated as a disposition by the UnitedStates person of the stock in the PFIC.

(2) Treatment of CFC as a United Statesperson. In the case of a CFC that owns, oris treated as owning under paragraph (e) ofthis section, section 1296 stock:

(i) Other than with respect to the sourc-ing rules in paragraph (c)(6) of this sec-tion, this section shall apply to the CFCin the same manner as if such corporationwere a United States person. The CFC willbe treated as a foreign person for purposesof applying the source rules of paragraph(c)(6).

(ii) For purposes of subpart F of part IIIof subchapter N of the Internal RevenueCode—

(A) Amounts included in the CFC’sgross income under paragraph (c)(1) or

2004-20 I.R.B. 913 May 17, 2004

(i)(2)(ii) of this section shall be treated asforeign personal holding company incomeunder section 954(c)(1)(A); and

(B) Amounts allowed as a deductionunder paragraph (c)(3) of this section shallbe treated as a deduction allocable to for-eign personal holding company income forpurposes of computing net foreign basecompany income under §1.954–1(c).

(iii) A United States shareholder, as de-fined in section 951(b), of the CFC shallnot be subject to section 1291 with respectto any stock of the PFIC for the period dur-ing which the section 1296 election is in ef-fect for that stock, and the holding periodrule of paragraph (f) of this section shallapply to such United States shareholder.

(iv) The rules of this paragraph (g)(2)shall not apply to a United States personthat is a shareholder of the PFIC for pur-poses of section 1291, but is not a UnitedStates shareholder under section 951(b)with respect to the CFC making a section1296 election.

(3) Timing of inclusions for stock ownedthrough certain foreign entities. In the caseof section 1296 stock that a United Statesperson is treated as owning through certainforeign entities pursuant to paragraph (e)of this section, the mark to market gain ormark to market loss is determined in accor-dance with paragraphs (c) and (i)(2)(ii) ofthis section as of the last day of the tax-able year of the foreign partnership, for-eign trust or foreign estate and then in-cluded in the taxable year of such UnitedStates person that includes the last day ofthe taxable year of the entity.

(h) Elections—(1) Timing and mannerfor making a section 1296 election—(i)United States persons. A United Statesperson that owns marketable stock in aPFIC, or is treated as owning marketablestock under paragraph (e) of this section,on the last day of the taxable year of suchperson, and that wants to make a section1296 election, must make a section 1296election for such taxable year on or beforethe due date (including extensions) of theUnited States person’s income tax returnfor that year. The section 1296 electionmust be made on the Form 8621, “Returnby a Shareholder of a Passive Foreign In-vestment Company or Qualified ElectingFund”, included with the original tax re-turn of the United States person for thatyear, or on an amended return, provided

that the amended return is filed on or be-fore the election due date.

(ii) Controlled foreign corporations.A section 1296 election by a CFC shallbe made by its controlling United Statesshareholders, as defined in §1.964–1(c)(5),and shall be included with the Form 5471,“Information Return of U.S. Persons WithRespect To Certain Foreign Corpora-tions”, for that CFC by the due date (in-cluding extensions) of the original incometax returns of the controlling United Statesshareholders for that year. A section 1296election by a CFC shall be binding on allUnited States shareholders of the CFC.

(iii) Retroactive elections for PFICstock held in prior years. A late section1296 election may be permitted only in ac-cordance with §301.9100 of this chapter.

(2) Effect of section 1296 election—(i)A section 1296 election will apply to thetaxable year for which such election ismade and remain in effect for each suc-ceeding taxable year unless such electionis revoked or terminated pursuant to para-graph (h)(3) of this section.

(ii) Cessation of a foreign corporationas a PFIC. A United States person will notinclude mark to market gain or loss pur-suant to paragraph (c) of this section withrespect to any stock of a foreign corpora-tion for any taxable year that such foreigncorporation is not a PFIC under section1297 or treated as a PFIC under section1298(b)(1) (taking into account the hold-ing period rule of paragraph (f) of this sec-tion). Cessation of a foreign corporation’sstatus as a PFIC will not, however, termi-nate a section 1296 election. Thus, if aforeign corporation is a PFIC in a taxableyear after a year in which it is not treatedas a PFIC, the United States person’s orig-inal election (unless revoked or terminatedin accordance with paragraph (h)(3) of thissection) continues to apply and the share-holder must include any mark to marketgain or loss in such year.

(3) Revocation or termination of elec-tion—(i) In general. A United States per-son’s section 1296 election is terminatedif the section 1296 stock ceases to be mar-ketable; if the United States person elects,or is required, to mark to market the sec-tion 1296 stock under another provision ofchapter 1 of the Internal Revenue Code;or if the Commissioner, in the Commis-sioner’s discretion, consents to the UnitedStates person’s request to revoke its sec-

tion 1296 election upon a finding of a sub-stantial change in circumstances. A sub-stantial change in circumstances for thispurpose may include a foreign corporationceasing to be a PFIC.

(ii) Timing of termination or revocation.Where a section 1296 election is termi-nated automatically (e.g., the stock ceasesto be marketable), section 1296 will ceaseto apply beginning with the taxable year inwhich such termination occurs. Where asection 1296 election is revoked with theconsent of the Commissioner, section 1296will cease to apply beginning with the firsttaxable year of the United States person af-ter the revocation is granted unless other-wise provided by the Commissioner.

(4) Examples. The operation of therules of this paragraph (h) is illustrated bythe following examples:

Example 1. A, a United States person, owns stockin FX, a PFIC. A makes a QEF election in 1996 withrespect to the FX stock. For taxable year 2005, Amakes a timely section 1296 election with respect toits stock, and thus its QEF election is automaticallyterminated pursuant to §1.1295–1(i)(3). In 2006, A’sstock in FX ceases to be marketable, and therefore itssection 1296 election is automatically terminated un-der paragraph (h)(3) of this section. Beginning withtaxable year 2006, A is subject to the rules of section1291 with respect to its FX stock unless it makes anew QEF election. See §1.1295–1(i)(5).

Example 2. The facts are the same as in Example1, except that A’s stock in FX becomes marketableagain in 2007. A may make a new section 1296 elec-tion with respect to the FX stock for its taxable year2007, or thereafter. A will be subject to the coordina-tion rules under paragraph (i) of this section unless itmade a new QEF election in 2006.

(i) Coordination rules for first year ofelection—(1) In general. Notwithstandingany provision in this section to the con-trary, the rules of this paragraph (i) shallapply to the first taxable year in whicha section 1296 election is effective withrespect to marketable stock of a PFIC ifsuch foreign corporation was a PFIC forany taxable year, prior to such first tax-able year, during the United States per-son’s holding period (as defined in para-graph (f) of this section) in such stock, andfor which such corporation was not treatedas a QEF with respect to such United Statesperson.

(2) Shareholders other than regulatedinvestment companies. For the first taxableyear of a United States person (other than aregulated investment company) for whicha section 1296 election is in effect withrespect to the stock of a PFIC, such United

May 17, 2004 914 2004-20 I.R.B.

States person shall, in lieu of the rules ofparagraphs (c) and (d) of this section—

(i) Apply the rules of section 1291 toany distributions with respect to, or dispo-sition of, section 1296 stock;

(ii) Apply section 1291 to the amount ofthe excess, if any, of the fair market valueof such section 1296 stock on the last dayof the United States person’s taxable yearover its adjusted basis, as if such amountwere gain recognized from the dispositionof stock on the last day of the taxpayer’staxable year; and

(iii) Increase its adjusted basis in thesection 1296 stock by the amount of ex-cess, if any, subject to section 1291 underparagraph (i)(2)(ii) of this section.

(3) Shareholders that are regulated in-vestment companies. For the first taxableyear of a regulated investment companyfor which a section 1296 election is in ef-fect with respect to the stock of a PFIC,such regulated investment company shallincrease its tax under section 852 by theamount of interest that would have beenimposed under section 1291(c)(3) for suchtaxable year if such regulated investmentcompany were subject to the rules of para-graph (i)(2) of this section, and not thisparagraph (i)(3). No deduction or increasein basis shall be allowed for the increase intax imposed under this paragraph (i)(3).

(4) The operation of the rules of thisparagraph (i) is illustrated by the followingexamples:

Example (1). A, a United States person and a cal-endar year taxpayer, owns marketable stock in FX,a PFIC that it acquired on January 1, 1992. At alltimes, A’s FX stock was a nonqualified fund subjectto taxation under section 1291. A made a timely sec-tion 1296 election effective for taxable year 2005. Atthe close of taxable year 2005, the fair market valueof A’s FX stock exceeded its adjusted basis by $10.Pursuant to paragraph (i)(2)(ii) of this section, A musttreat the $10 gain under section 1291 as if the FXstock were disposed of on December 31, 2005. Fur-ther, A increases its adjusted basis in the FX stock bythe $10 in accordance with paragraph (i)(2)(iii) of thissection.

Example (2). Assume the same facts as in Ex-ample (1), except that A is a RIC that had not madean election prior to 2005 to mark to market the PFICstock. In taxable year 2005, A includes $10 of ordi-nary income under paragraph (c)(1) of this section,and such amount is not subject to section 1291. Aalso increases its tax imposed under section 852 bythe amount of interest that would have been deter-mined under section 1291(c)(3), and no deduction ispermitted for such amount. Finally, under paragraph(d)(1) of this section, A increases its adjusted basis inthe FX stock by $10.

(j) Effective date. The provisions inthis section are applicable for taxable yearsbeginning on or after May 3, 2004.

Par. 7. Section 1.1296(e)–1 is redesig-nated as §1.1296–2 and amended by:

1. Revising paragraph (b)(2).2. Adding paragraph (b)(3).3. Revising both references to “sections

958(a)(1) and (2)” in paragraph (f)(1) toread “section 1298(a)”.

The revisions and addition read as fol-lows:

§1.1296–2 Definition of marketable stock.

* * * * *(b) * * *(2) Special rule for year of initial public

offering. For the calendar year in which acorporation initiates a public offering of aclass of stock for trading on one or morequalified exchanges or other markets, asdefined in paragraph (c) of this section,such class of stock meets the requirementsof paragraph (b)(1) of this section for suchyear if the stock is regularly traded on suchexchanges or markets, other than in deminimis quantities, on 1/6 of the days re-maining in the quarter in which the offer-ing occurs, and on at least 15 days duringeach remaining quarter of the taxpayer’scalendar year. In cases where a corpora-tion initiates a public offering of a class ofstock in the fourth quarter of the calendaryear, such class of stock meets the require-ments of paragraph (b)(1) of this section inthe calendar year of the offering if the stockis regularly traded on such exchanges ormarkets, other than in de minimis quanti-ties, on the greater of 1/6 of the days re-maining in the quarter in which the offer-ing occurs, or 5 days.

(3) Anti-abuse rule. Trades that have asone of their principal purposes the meetingof the trading requirements of paragraph(b)(1) or (2) of this section shall be dis-regarded. Further, a class of stock shallnot be treated as meeting the trading re-quirement of paragraph (b)(1) or (2) of thissection if there is a pattern of trades con-ducted to meet the requirement of para-graph (b)(1) or (2) of this section. Simi-larly, paragraph (b)(2) of this section shallnot apply to a public offering of stockthat has as one of its principal purposesto avail itself of the reduced trading re-quirements under the special rule for thecalendar year of an initial public offering.

For purposes of applying the immediatelypreceding sentence, consideration will begiven to whether the trading requirementsof paragraph (b)(1) of this section are sat-isfied in the subsequent calendar year.

* * * * *Par. 8. Section 1.6031(a)–1 is amended

by:1. Redesignating the text of paragraph

(b)(1) as (b)(1)(i).2. Adding a heading to newly desig-

nated paragraph (b)(1)(i).3. Adding paragraph (b)(1)(ii).The additions read as follows:

§1.6031(a)–1 Return of Partnershipincome.

* * * * *(b) * * * (1) * * * (i) Filing requirement.

* * *(ii) Special rule. For purposes of this

paragraph (b)(1) and paragraph (b)(3)(iii)of this section, a foreign partnership willnot be considered to have derived incomefrom sources within the United Statessolely because a U.S. partner marks tomarket his pro rata share of PFIC stockheld by the foreign partnership pursuant toan election under section 1296.

* * * * *


Approved April 7, 2004.



Section 6050N.—ReturnsRegarding Paymentsof Royalties26 CFR 1.6050N–1: Statements to recipients of roy-alties.(Also: 6041, 1.6041–1.)

Royalties; information reporting.This ruling provides guidance concern-ing the reporting requirements of sections6041 and 6050N of the Code for paymentsby publishers to literary agents on behalfof an author.

2004-20 I.R.B. 915 May 17, 2004

Rev. Rul. 2004–46

ISSUES

What is the correct information report-ing for royalty payments made by a pub-lisher for the rights to an author’s book orother literary composition if such royaltiesare paid to the author’s literary agent whothen forwards all or part of such paymentsto the author?

FACTS

A publisher enters into a contract for thelicense to use an author’s literary works.The author is an individual. Pursuant to thecontract, the publisher pays the author’sroyalties directly to the author’s literaryagent. The literary agent, upon receivingthe royalties, subtracts his commission andexpenses and then forwards the balance tothe author pursuant to a contract betweenthe literary agent and the author. Duringcalendar year 2004, the royalties paid bythe publisher exceeded $10.

LAW AND ANALYSIS

Section 6041 of the Internal RevenueCode provides that all persons engaged ina trade or business who make a payment inthe course of such trade or business to an-other person of rent, salaries, wages, pre-miums, annuities, compensations, remu-nerations, emoluments, or other fixed ordeterminable gains, profits, and income of$600 or more in any taxable year shall ren-der a true and accurate return setting forththe amount of such gains, profits, and in-come, and the name and address of the re-cipient of such payment.

Section 1.6041–1(a)(1)(i) of the In-come Tax Regulations provides that thepayments required to be reported undersection 6041 include the following: (1)salaries, wages, commissions, fees, andother forms of compensation for servicesrendered aggregating $600 or more; and(2) interest, rents, royalties, annuities,pensions, and other gains, profits, andincome aggregating $600 or more. Thereturn of information required by section1.6041–1(a)(1)(i) must be made on Form1099. See section 1.6041–1(a)(2).

Sections 6041(a) and 1.6041–1(a)(ii)provide that payments for which an infor-mation return is required by, or under theauthority of, section 6050N(a) (relating

to royalties), are not subject to reportingunder section 1.6041–1(a)(1)(i).

Section 6050N(a) provides that everyperson who: (1) makes payments of royal-ties (or similar amounts) aggregating $10or more to any other person during anycalendar year, or (2) receives payments ofroyalties (or similar amounts) as a nomineeand who makes payments aggregating $10or more during any calendar year to anyother person with respect to the royalties(or similar amounts) so received, shall filea return setting forth the aggregate amountof such payments and the name and ad-dress of the recipient of such payment.Section 6050N(b) provides that every per-son required to make a return under sec-tion 6050N(a) must furnish a statement toeach person whose name is required to beset forth in such return. Form 1099–MISCis used for this reporting requirement.

The legislative history to section 6050Nprovides that section 6050N applies toroyalty payments for the right to exploitintangible property, such as copyrights,trade names, trademarks, books and otherliterary compositions. See H.R. Conf.Rep. No. 99–841, 99th Cong., 2nd Sess.II–788–789 (1986), 1986–3 (Vol. 4) C.B.788–789.

Section 6050N(c) provides that sec-tion 6050N does not apply to any amountpaid to a person described in section6049(b)(4)(A) through (F). Section6049(b)(4)(A) describes a corporationas such a person.

Section 1.6050N–1(c)(2) provides thatthe term payor shall have the meaningascribed to it under section 1.6049–4(a).Section 1.6049–4(a)(2) defines a payoras a person who: (1) makes a paymentof the type and of the amount subject toreporting under section 6049 (or underan applicable section of 26 CFR chapter1) to any other person during a calendaryear; or (2) collects on behalf of anotherperson payments of the type and of theamount subject to reporting under section6049 (or under an applicable section of26 CFR chapter 1), or who otherwise actsas a middleman (as defined in paragraph(f)(4) of section 6049) with respect to suchpayment.

Based on the facts described above,both the publisher and the literary agentare payors of royalties for purposes of sec-tion 6050N. The royalty payments madeby the publisher to the literary agent and

the royalty payments made by the literaryagent to the author thus are not reportableunder section 6041 and the regulationsthereunder because such payments arepayments to which 6050N applies. Thepublisher must file Form 1099–MISCreporting payments of royalties to the lit-erary agent pursuant to section 6050N. Ifthe literary agent is a corporation, no Form1099–MISC is required pursuant to sec-tions 6050N(c) and 6049(b)(4)(A). The lit-erary agent must file a Form 1099–MISCfor the royalties paid to the author regard-less of whether the literary agent receivesa Form 1099–MISC from the publisher.

Section 301.6011–1(b) provides thatthe Internal Revenue Service may pre-scribe in forms, instructions, or otherappropriate guidance the information ordocumentation required to be includedwith any return. The instructions to Form1099–MISC provide that gross royalties(before reduction for fees, commissions,or expenses) paid by a publisher directly toan author or literary agent or paid by a lit-erary agent to an author must be reportedon Form 1099–MISC. Thus, althoughthe literary agent may have subtractedcommissions and expenses before mak-ing the payment to the author, the Form1099–MISC required to be filed by the lit-erary agent must report the gross amountof royalties received from the publisherpursuant to section 6050N.

Payments by a publisher to a liter-ary agent for an author’s services (e.g.,speaker fees) that do not constitute roy-alties are not reportable under section6050N. The information reporting forsuch payments is governed by section6041 and the regulations thereunder. Insuch case, section 1.6041–1(e) would ap-ply to determine whether the literary agentor the publisher must report the fees to theauthor. See sections 1.6041–1(e)(i) and1.6041–1(e)(5), Example 6.

HOLDING

Pursuant to section 6050N, a publisherwho makes royalty payments to a literaryagent for the rights to an author’s book orother literary composition must file an in-formation return with respect to the pay-ments to the literary agent unless the liter-ary agent is a corporation. In addition, theliterary agent (whether or not a corpora-tion) who receives such payments and for-

May 17, 2004 916 2004-20 I.R.B.

wards all or part of such payments to theauthor must file an information return re-porting the gross amount of royalty pay-ments pursuant to section 6050N.

DRAFTING INFORMATION

The principal author of this revenueruling is Tiffany P. Smith of the Officeof Associate Chief Counsel (Procedure

and Administration). For further informa-tion regarding this revenue ruling, contactTiffany P. Smith at (202) 622–4910 (not atoll-free call).

2004-20 I.R.B. 917 May 17, 2004

Part III. Administrative, Procedural, and Miscellaneous26 CFR 601.105: Examination of returns and claimsfor refund, credit or abatement; determination of cor-rect tax liability.(Also Part I, §§ 132, 162, 274; 1.132–6.)

Rev. Proc. 2004–29

SECTION 1. PURPOSE

This revenue procedure provides thestatistical sampling methodology thata taxpayer may use in establishing theamount of substantiated meal and enter-tainment expenses excepted from the 50%deduction disallowance of § 274(n)(1) ofthe Internal Revenue Code by reason of§ 274(n)(2)(A), (B), (C), (D), or (E).

SECTION 2. BACKGROUND

.01 Section 162(a) allows a deductionfor all ordinary and necessary expensespaid or incurred during the taxable year incarrying on any trade or business, includ-ing certain expenses for meals and enter-tainment.

.02 Section 274(d) disallows a § 162deduction for any expense for travel (in-cluding meals and lodging while awayfrom home), entertainment, gifts, or listedproperty unless the taxpayer substantiatesthe elements of the expense by adequaterecords or by sufficient evidence. See§ 1.274–5T of the Income Tax Regula-tions.

.03 Section 274(n)(1) provides that theamount allowable as a deduction for anyexpense for food or beverages, or anyitem with respect to an activity that is ofa type generally considered to constituteentertainment, amusement, or recreation,or with respect to a facility used in connec-tion with these activities, may not exceed50% of the amount of the expense.

.04 Section 274(n)(2)(A) providesthat the 50% deduction disallowance of§ 274(n)(1) does not apply to expensesdescribed in § 274(e)(2) (expenses treatedon the taxpayer’s return as compensationto an employee under chapter 1 and aswages to the employee for purposes ofchapter 24), (e)(3) (expenses paid or in-curred under a reimbursement or similararrangement in connection with the per-formance of services), (e)(4) (recreationaland similar expenses for employees),

(e)(7) (expenses relating to items availableto the public), (e)(8) (expenses relating toentertainment sold to customers), or (e)(9)(expenses includible in income of personswho are not employees).

.05 Section 274(n)(2)(B) providesthat the 50% deduction disallowance of§ 274(n)(1) does not apply to an expensefor food or beverages that is excludablefrom the gross income of the recipientunder § 132(e) (relating to de minimisfringe benefits excluded from income un-der § 132(a)(4)).

.06 Section 132(e) defines a de min-imis fringe as any property or service thevalue of which is (after taking into ac-count the frequency with which similarfringes are provided by the employer tothe employer’s employees) so small asto make accounting for it unreasonableor administratively impracticable. Under§ 1.132–6(c), a cash fringe benefit (otherthan overtime meal money and local trans-portation fare) is never excludable as a deminimis fringe benefit. For example, ex-penses for meals and entertainment reim-bursed to employees under an accountableplan (as defined in § 1.62–2(c)(2)) do notqualify as de minimis fringe benefits.

.07 Section 1.132–6(b) provides thatthe frequency with which similar fringesare provided by the employer to the em-ployer’s employees is generally deter-mined by reference to the frequency withwhich the employer provides the fringesto each individual employee. However,if it would be administratively difficultto determine frequency with respect toindividual employees, the frequency withwhich similar fringes are provided by theemployer to the employer’s employees isdetermined by reference to the workforceas a whole. This exception to the em-ployee-measured frequency requirementdoes not apply to overtime meals, mealmoney, or local transportation fare.

.08 Section 274(n)(2)(C) providesthat the 50% deduction disallowance of§ 274(n)(1) does not apply to an expensecovered by a package involving a ticketdescribed in § 274(l)(1)(B) (exception forcertain charitable sports events).

.09 Section 274(n)(2)(D) providesthat the 50% deduction disallowance of§ 274(n)(1) does not apply to taxable

payments or reimbursements of movingexpenses of an employee by the employer.

.10 Section 274(n)(2)(E) providesthat the 50% deduction disallowance of§ 274(n)(1) does not apply to expenses forfood or beverages (i) required by Federallaw to be provided to crew members of acommercial vessel, (ii) provided to crewmembers of certain commercial vessels, or(iii) provided on or in proximity to certainoil or gas platforms or drilling rigs.

SECTION 3. SCOPE

This revenue procedure applies to ataxpayer filing an original return, un-der examination, in litigation, or makinga refund claim that desires to establishwith respect to its income tax liability theamount of substantiated expenses paidor incurred for meals and entertainmentexcepted from the 50% deduction dis-allowance of § 274(n)(1) by reason of§ 274(n)(2)(A), (B), (C), (D), or (E).

SECTION 4. APPLICATION

.01 In general. A taxpayer filing anoriginal return, under examination, in lit-igation, or making a refund claim, mayuse statistical sampling in connection withestablishing, with respect to its incometax liability, the amount of the taxpayer’ssubstantiated expenses paid or incurredfor meals and entertainment exceptedfrom the 50% deduction disallowance of§ 274(n)(1) by reason of § 274(n)(2)(A),(B), (C), (D), or (E) by following theprocedures provided in Appendix A (Sam-pling Plan Standards), Appendix B (Sam-pling Documentation Standards), Appen-dix C (Technical Formulas), and (in thecase of de minimis fringes) in paragraph4.02 of this revenue procedure.

.02 Additional procedures required forde minimis fringe benefits.

(1) Reimbursements under accountableplans. In conducting the study, expensesfor meals and entertainment reimbursed byemployers to employees under an account-able plan may not be treated as de minimisfringe benefits.

(2) Determination of frequency. To es-tablish the amount of identified expensesthat are excepted from § 274(n)(1) by rea-son of § 274(n)(2)(B), a taxpayer is re-quired to determine the frequency with

May 17, 2004 918 2004-20 I.R.B.

which similar fringes were provided by thetaxpayer to the taxpayer’s employees onan employee-measured or employer-mea-sured basis, as described in paragraphs (3)and (4) below. Thus, after selecting a sta-tistical sample, as discussed below, the tax-payer may be required to review documen-tation from outside both the sample andthe target population (the set of items fromwhich the sample is drawn) to identify sim-ilar fringes included in employees’ grossincome and similar fringes previously ex-cluded from employees’ gross income asde minimis fringe benefits.

(3) Employee-measured frequency.(a) In general. When using em-

ployee-measured frequency to determinethe amount of identified expenses thatare excepted from § 274(n)(1) by reasonof § 274(n)(2)(B), the taxpayer must es-tablish the frequency with which similarfringes were provided to each individualemployee of the taxpayer. Therefore, af-ter identifying the statistical sample, thetaxpayer must review the remainder of thetarget population (and records that docu-ment similar fringes that are not includedin the target population) to identify the ag-gregate number of similar fringes providedto the individual employees included inthe statistical sample.

(b) Example. Taxpayer maintains ameal and entertainment expense accountthat includes invoices for meals providedin-kind to Taxpayer’s employees that maybe de minimis fringe benefits. The in-voices specifically identify the employeeswho received the in-kind meals. There-fore, it would not be administrativelydifficult to determine the frequency withwhich in-kind meals were provided to in-dividual employees, and Taxpayer mustdetermine the frequency with which itprovided in-kind meals to each of the indi-vidual employees included in the sample.Taxpayer has no other accounts that in-clude expenses for in-kind meals providedto employees.

Taxpayer selects a statistical sampleof the meal and entertainment expenseaccount that identifies 10 employees whohave received in-kind meals. In orderto determine if the meals are de minimisfringes, Taxpayer must review documen-tation (such as invoices) in the remainderof the target population to identify allin-kind meals provided to each of the

10 individual employees included in thesample. Taxpayer must consider in-kindmeals that Taxpayer included in each em-ployee’s gross income and similar fringespreviously excluded from the employees’gross income as de minimis fringe benefitsin determining the frequency with whichsimilar fringes were provided to each ofthe 10 employees. After conducting thisreview, Taxpayer determines (after con-sidering both the value and frequency ofthe meals) that the meals provided to 4 ofthe 10 employees in the sample are de min-imis fringe benefits not subject to the 50%deduction disallowance of § 274(n)(1).Taxpayer may increase proportionatelythe deductible amount of expenses in thepopulation not subject to the § 274(n)(1)limitation. See paragraph 6 of AppendixA.

(4) Employer-measured frequency.(a) In general. When using em-

ployer-measured frequency to determinethe amount of identified expenses that areexcepted from § 274(n)(1) by reason of§ 274(n)(2)(B), the taxpayer must establishthe frequency with which similar fringeswere provided to the taxpayer’s workforceas a whole. Thus, the target populationmust include all relevant records priorto selection of the statistical sample inorder to determine the aggregate numberof similar fringes provided to all eligibleemployees and the aggregate number ofemployees eligible to receive such fringes.

(b) Example. Taxpayer maintains ameal and entertainment expense accountthat includes invoices for meals providedin-kind to Taxpayer’s employees that maybe de minimis fringe benefits. The in-voices are for in-kind meals of a typefor which it is administratively difficultto identify the particular employees whoreceived the meals, and the invoices donot specifically identify those employees.Therefore, it would be administrativelydifficult to determine the frequency withwhich in-kind meals were provided toindividual employees, and Taxpayer maydetermine the frequency with which sim-ilar fringes were provided by Taxpayerto Taxpayer’s employees by reference toall employees eligible to receive in-kindmeals. Taxpayer maintains an account inaddition to the meal and entertainmentexpense account that includes expensesfor in-kind meals provided to employees.

Taxpayer’s workforce includes 500 em-ployees who are eligible to receive thefringe benefit of in-kind meals.

Taxpayer merges the meal and enter-tainment expense account and the otheraccount that includes expenses for in-kindmeals to create a target population that in-cludes all relevant records and conducts astatistical sample of the merged accounts.In determining whether the in-kind mealsincluded in the sample are de minimisfringes, Taxpayer must consider in-kindmeals that Taxpayer included in eligi-ble employees’ gross income and similarfringes previously excluded from employ-ees’ gross income as de minimis fringebenefits. Taxpayer identifies in the sample50 in-kind meals provided to employees.The 50 meals represent 1000 in-kind mealsin the target population as a whole, or twomeals per eligible employee. Assumingthat the provision of two meals with agiven cost per eligible employee results ina value that is so small as to make account-ing for it unreasonable or administrativelyimpracticable, Taxpayer may treat all ofthe in-kind meals in the meal and enter-tainment expense account as de minimisfringe benefits not subject to the 50%deduction disallowance of § 274(n)(1),subject, however, to a pro rata reductionto the extent that any in-kind meals areevaluated under employee-measured fre-quency and fail to qualify as de minimisfringes.

.03 Limitations.(1) This revenue procedure does not au-

thorize the use of statistical sampling tosubstantiate meal and entertainment ex-penses as required by § 274(d).

(2) This revenue procedure does not au-thorize the use of statistical sampling to de-termine a taxpayer’s liability for employ-ment taxes or whether an amount is ex-cludable from a taxpayer’s income.

(3) This revenue procedure does not es-tablish the correctness of a taxpayer’s in-terpretation of § 274(n) or characterizationof meal and entertainment expenses as ex-penses excepted from § 274(n)(1).

(4) This revenue procedure does notpreclude the Internal Revenue Servicefrom raising or pursuing any income, em-ployment, or other tax issues identified inthe review of a statistical sample.

2004-20 I.R.B. 919 May 17, 2004

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after May 3,2004. However, with respect to the use ofstatistical sampling by a taxpayer for a tax-able year ending before May 3, 2004, forwhich the applicable period of limitationshas not expired, the Service will permit,but not require, application of this revenueprocedure.

SECTION 6. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–1847.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validOMB control number.

The collection of information in thisrevenue procedure is in Appendix B. Thisinformation is required to ensure compli-ance with the statistical sampling method-ology contained in this revenue procedure.The information will be used to evaluatecompliance with the procedures describedin this revenue procedure. The collectionof information is mandatory. The likelyrecordkeepers are businesses or other for-profit institutions.

The estimated total annual recordkeep-ing burden is 3200 hours. The estimatedannual burden per recordkeeper variesfrom six to ten hours, depending on indi-vidual circumstances, with an estimatedaverage of eight hours. The estimatednumber of recordkeepers is 400.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Kari L. Fisher of the Officeof Associate Chief Counsel (Income Tax

and Accounting). For further informationregarding this revenue procedure, con-tact Ms. Fisher at (202) 622–4970 (nota toll-free call). For further informationregarding Appendices A, B and C, con-tact Ed Cohen of the Large and Mid-SizeBusiness Division at (212) 719–6693 (nota toll-free call).

APPENDIX A

SAMPLING PLAN STANDARDS

The statistical sampling must be con-ducted in accordance with the followingmethodology.

1. Statistical (probability) samplingmethodology may not include the use ofjudgment sampling.

2. Taxpayers may apply the results of astatistical sample only to the taxable yearsincluded in the sample.

3. A statistical sample may include datafrom no more than three consecutive tax-able years.

4. Data from a taxable year may beincluded in only one statistical sample.

5. The estimated amount of expensesnot subject to the § 274(n)(1) limitationmust be based on a statistical (probabil-ity) sample, in which each sampling unithas a known (non-zero) chance of selec-tion, using either a simple random sam-pling method or stratified random sam-pling method.

6. In general, the computation of theestimated amount of expenses not subjectto the § 274(n)(1) limitation must be at theleast advantageous 95% one-sided con-fidence limit. The “least advantageous”confidence limit is either the upper orlower limit that results in the least benefitto the taxpayer. However, if the precisionof the change in the estimated deductibleamount of expenses not subject to the§ 274(n)(1) limitation (see paragraph 9below) divided by the change in the esti-mated deductible amount of expenses notsubject to the § 274(n)(1) limitation doesnot exceed 10%, the point estimate maybe used in place of the least advantageousconfidence limit. All strata for which“substantially all” of the population sam-pling units are sampled will be treated as100% strata. That is, the overall point esti-mate and its precision will be estimated bytreating all 100% strata appropriately forthe sample design used. Also, the calcu-

lation of the denominator for the relativeprecision will exclude all 100% strata. Forthis revenue procedure, “substantially all”is defined as 80% or more.

7. Recognizing that many methodsexist to estimate population values fromthe sample data, the Service will consideracceptable only the following estimators.Variable estimators permitted include themean (also known as the direct projectionmethod), difference (using “paired vari-ables”), (combined) ratio (using a variableof interest and a “correlated” variable), and(combined) regression (using a variableof interest and a “correlated” variable).The first variable used for the difference,ratio and regression estimators must bethe variable used in the mean estimator.The second variable used for the differ-ence, ratio and regression estimators mustbe a variable that can be paired with thefirst variable and should be related to thefirst variable. For example, in a typicalaudit-sampling situation, the first variablewould be the audited value of a trans-action and the second variable would bethe originally reported value of the sametransaction. Since the latter two variablemethods are statistically biased, there mustbe a demonstration that the bias is neg-ligible before the Service will accept themethod.

8. Variable sampling plans must use thequalifying final estimate with the smallestoverall standard error as an absolute value(for example, the size of the estimate isirrelevant in the determination of the re-ported value).

9. Variable sampling plans must cal-culate confidence limits by addition andsubtraction of the precision of the esti-mate from the point estimate in which thedetermination of precision proceeds bymultiplication of the standard error by (i)the 95% one-sided confidence coefficientbased on the Student’s t-distribution withthe appropriate degrees of freedom, or (ii)1.645 (the normal distribution), assumingthe sample size is at least 100 in eachnon–100% stratum.

10. For either the (combined) ratio orregression methods, to demonstrate littlestatistical bias exists, the following appliesafter excluding all strata tested on 100%basis (the entire population of a stratum isselected for evaluation).

a. The total sample size of all stratamust be at least 100 units.

May 17, 2004 920 2004-20 I.R.B.

b. Each stratum for a population es-timate should contain at least 30 sampleunits.

c. The coefficient of variation of thepaired variable must be 15% or less. Thecoefficient of variation of the paired vari-able (y) is defined as the standard error ofthe total “y” variables divided by point es-timate of the total “y” variables when the“y” variables are commonly the reportedvalues in accounting situations.

d. The coefficient of variation of theprimary variable of interest, represented byeither the corrected value or the differencebetween the reported and corrected valuesin common accounting situations, must be15% or less. The coefficient of variationfor the corrected value (x) is defined asthe standard error of the total “x” vari-ables divided by point estimate of the to-tal “x” variables when the “x” variables arecommonly the corrected values in account-ing situations. The coefficient of variationfor the difference (d) between the reportedand corrected values (x-y) is defined asthe smaller of the standard error of the to-tal “x-y” or total “d” variables divided bythe amount equaling total population valuerepresented by “Y” plus point estimate ofthe total “x-y” or total “d” variables or thestandard error of the total “x-y” or total“d” variables divided by the total “x-y” ortotal “d” variables when the “x-y” vari-ables are commonly the difference (“d”)between the reported (“y”) and corrected(“x”) values in accounting situations.

e. For only the (combined) ratiomethod, the reported values of units mustbe of the same sign.

11. When sampling the same expenseaccounts for multiple taxable years, if a

single projection does not materially af-fect other computations that are more ap-propriately made on a yearly basis, it ispermissible to combine the accounts intoone population. There should be alloca-tion of the combined result by a reasonablemethod determined prior to the selection ofthe sampling units.

12. A written sampling plan is requiredprior to the execution of a sample. A planmust include the following:

a. The objective of the plan including adescription of the value for estimation andthe applicable taxable year(s);

b. Population definition and reconcilia-tion of the population to the tax return;

c. Definition of the sampling frame;d. Definition of the sampling unit;e. Source of the random numbers, the

starting point or seed, and the method ofselection;

f. Sample size, along with supportingfactors in the determination;

g. Method to associate random num-bers to the frame;

h. Steps to ensure that the serializationof the frame is independent of the drawingof random numbers;

i. Steps for evaluating the samplingunit; and

j. The estimator that was used for ap-praising the sample.

APPENDIX B

SAMPLING DOCUMENTATIONSTANDARDS

The taxpayer must retain adequatedocumentation to support the statisticalapplication, sample unit findings, and all

aspects of the sample plan and execution.The execution of the sample must includeinformation for each of the followingitems:

1. The seed or starting point of therandom numbers;

2. The pairing of random numbers tothe frame along with supporting informa-tion to retrace the process;

3. List of sampling units selected andthe results of the evaluation of each unit;

4. Supporting documentation such asnotes, invoices, purchase orders, projectdescriptions, etc., which support the con-clusion reached about each sample item;

5. The calculation of the projected esti-mate(s) to the population, including com-putation of the standard error of the esti-mate(s);

6. A statement describing any slips orblemishes in the execution of the samplingprocedure and any pertinent decision rules;and

7. Computation of all associated adjust-ments.

APPENDIX C

TECHNICAL FORMULAS

The formulas below are included toclarify the statistical sampling terms usedand to ensure consistent application ofthe procedures described in the revenueprocedure.

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)MEAN ESTIMATOR

STRATIFIEDMEAN ESTIMATOR

Sample Mean of Audited Amounts

Estimate of Total Audited Amount

2004-20 I.R.B. 921 May 17, 2004

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)MEAN ESTIMATOR

STRATIFIEDMEAN ESTIMATOR

Estimated Standard Deviation of the Audited Amount

Estimated Standard Error of the Total Audited Amount

Achieved Precision of the Total Audited Amount

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)DIFFERENCE ESTIMATOR

STRATIFIEDDIFFERENCE ESTIMATOR

Estimate of Total Difference


Estimated Standard Deviation of the Difference Amount

Estimated Standard Error of the Difference Amount

Achieved Precision of the Difference Amount

May 17, 2004 922 2004-20 I.R.B.

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)RATIO ESTIMATOR

STRATIFIEDCOMBINED RATIO ESTIMATOR

Estimated Ratio of Audited Amount to Recorded Amount


Estimated Standard Deviation of the Ratio

Estimated Standard Deviation of the Ratio in ith Stratum

Estimated Standard Error of the Ratio Amounts

Achieved Precision of the Ratio Amounts

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)REGRESSION ESTIMATOR

STRATIFIEDCOMBINED REGRESSION ESTIMATOR

Estimated Regression Coefficient


2004-20 I.R.B. 923 May 17, 2004

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)REGRESSION ESTIMATOR

STRATIFIEDCOMBINED REGRESSION ESTIMATOR

Estimated Standard Deviation of the Regression Amounts

Estimated Covariance between the Audited and Recorded Amounts in ith Stratum

Estimated Standard Deviation between the Audited and Recorded Amounts in ith Stratum

Estimated Standard Error of the Audited and Recorded Amounts

Achieved Precision of the Audited and Recorded Amounts

Definition of Symbols

TERM DEFINITION

n Sample Size

N Population Size

x The value of the sampling unit that is being used as the primary variable of interest. In audit sampling,this would be the audited (or revised) value of the transaction.

y The value of the sampling unit that is being used as the “paired” variable that is related to the variableof interest. In audit sampling, this would be the reported (or original) value of the transaction.

d The value of the sampling unit that is the difference between “paired” variable (y) and the variableof interest (x). That is, d = x – y. In audit sampling, this would be the difference (or the change)of each transaction’s value.

X The total value of the primary variable of interest. In audit sampling, this would be the estimated totalaudited value of the population. Typically, this value is not known for the entire population and isestimated based on the probability sample selected.

May 17, 2004 924 2004-20 I.R.B.

TERM DEFINITION

Y The total value of the variable that is paired with variable of interest. In audit sampling, this wouldbe the total reported value of the population. Typically, this value is known for the entire populationand may be estimated based on the probability sample selected.

D The total value of the difference between the “paired” variable and the variable of interest. In auditsampling, this would be the estimated total difference of the population. Typically, this value is notknown for the entire population and is estimated based on the probability sample selected.

UR The confidence coefficient which is based on either the Student’s t-distribution or the normaldistribution. For example, a 95% one-sided confidence coefficient based on the normal distribution is1.645. This term is often referred to as the t-value and the z-value.

2004-20 I.R.B. 925 May 17, 2004

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulationsand Notice of Public Hearing

Partner’s Distributive Share:Foreign Tax Expenditures

REG–139792–02


ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions and notice of public hearing.

SUMMARY: This document contains pro-posed regulations relating to the properallocation of partnership expenditures forforeign taxes. The proposed regulationsaffect partnerships and their partners. Inthis issue of the Bulletin, the IRS is issu-ing temporary regulations (T.D. 9121) thatmodify the rules relating to the proper allo-cation of creditable foreign taxes. The textof the temporary regulations also servesas the text of these proposed regulations.This document also contains a notice ofpublic hearing on these proposed regula-tions.

DATES: Written or electronic commentsmust be received by Tuesday, August 24,2004. Outlines of topics to be discussed atthe public hearing scheduled for Tuesday,September 14, 2004, at 10 a.m., must bereceived by Tuesday, August 24, 2004.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–139792–02), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–139792–02),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Wash-ington, DC. Alternatively, taxpayers maysubmit electronic comments directly to theIRS internet site at www.irs.gov/regs orwww.regulations.gov. The public hearing

will be held in the Auditorium, InternalRevenue Building, 1111 Constitution Av-enue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Beverly M. Katz, (202)622–3050; concerning submissionsand the hearing, Treena Garrett, (202)622–7180 (not toll-free numbers).


Background

The temporary regulations amend therules in 26 CFR part 1 regarding the alloca-tion of foreign taxes among partners undersection 704(b). The text of the temporaryregulations also serves as the text of theseproposed regulations. The preamble to thetemporary regulations explains the regula-tion.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations,and because these regulations do not im-pose on small entities a collection of infor-mation requirement, the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) does notapply. Therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.All comments will be available for publicinspection and copying.

A public hearing has been scheduledfor Tuesday, September 14, 2004, at 10a.m. in the Auditorium, Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. Because of access re-strictions, visitors will not be admitted be-yond the immediate entrance area morethan 30 minutes before the hearing starts.For information about having your nameon the building access list to attend thehearing, see the FOR FURTHER INFOR-MATION CONTACT portion of this pre-amble. The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments must submit writ-ten or electronic comments by Tuesday,August 24, 2004, and an outline of thetopics to be discussed and the time to bedevoted to each topic (a signed originaland eight (8) copies) by Tuesday, August24, 2004. A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal author of this regulationis Beverly M. Katz, Office of the AssociateChief Counsel (Passthroughs & Special In-dustries). However, other personnel fromthe IRS and Treasury Department partici-pated in its development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 301are proposed to be amended as follows:


Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.704–1 is amended as

follows:1. Paragraphs (b)(1)(ii)(b) and

(b)(4)(xi) are added.2. Paragraph (b)(5) is amended by

adding Example 25 through Example 28.

May 17, 2004 926 2004-20 I.R.B.

The additions and revisions read as fol-lows.

§1.704–1 Partner’s distributive share.

* * * * *(b) * * *(1) * * *(ii) * * *(b) [The text of this proposed

amendment is the same as the text of§1.704–1T(b)(1)(ii)(b) published else-where in this issue of the Bulletin].

* * * * *(4) * * *(xi) [The text of this proposed

amendment is the same as the text of§1.704–1T(b)(4)(xi) published elsewherein this issue of the Bulletin].

* * * * *(5) [The text of this proposed amend-

ment of §1.704–1(b)(5) is the same as thetext of §1.704–1T(b)(5) published else-where in this issue of the Bulletin].

John M. Dalrymple,Acting Deputy Commissioner for

Services and Enforcement.

(Filed by the Office of the Federal Register on April 20, 2004,8:45 a.m., and published in the issue of the Federal Registerfor April 21, 2004, 69 F.R. 21454)

Notice of ProposedRulemaking

Determination of Basisof Stock or SecuritiesReceived In Exchange for,or With Respect to, Stockor Securities in CertainTransactions

REG–116564–03


ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations under section 358 thatprovide guidance regarding the determina-tion of the basis of stock or securities re-ceived in exchange for, or with respect to,stock or securities in certain transactions.

These proposed regulations affect share-holders of corporations.

DATES: Written or electronic commentsmust be received by July 2, 2004.

ADDRESSES: Send submissions toCC:PA:LPD:PR (REG–116564–03),Room 5203, Internal Revenue Service,P.O. Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand delivered Monday through Fri-day between the hours of 8 am and 4 pmto: CC:PA:LPD:PR (REG–116564–03),Courier’s desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC 20044, or sent electronically, viathe IRS Internet site at www.irs.gov/regsor via the Federal eRulemaking Portal atwww.regulations.gov (indicate IRS andREG–116564–03).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Theresa Kolish, EmidioJ. Forlini, Jr. or Reginald Mombrun,(202) 622–7930, concerning submis-sions of comments, Treena Garrett, (202)622–7180 (not toll-free numbers).


Background and Explanation ofProvisions

Section 1012 of the Internal RevenueCode (Code) provides that the basis ofproperty is generally the cost of such prop-erty. Section 1.1012–1(c) provides that,if shares of stock are sold or transferredby a taxpayer who purchased or acquiredlots of stock on different dates or at dif-ferent prices, and the lot from which thestock was sold or transferred cannot be ad-equately identified, the stock sold or trans-ferred is charged against the earliest ofsuch lots purchased or acquired in order todetermine the basis of such stock.

Under this rule, a shareholder hasgreater flexibility in planning the taxconsequences of the sale by specificallyidentifying the shares sold. The rules foradequate identification operate differentlydepending on the manner in which theshares are held and actions taken by theshareholder. For example, when sharesare held through a broker, an adequateidentification is effected by giving the

proper instructions to the broker. This ruleallows identification without regard to theparticular shares physically transferred bythe broker. The rule also allows identifi-cation when several lots are representedby a single share certificate. However, if ashareholder holds a different share certifi-cate for each lot, the identity of the sharesis determined by the specific certificatesold.

Section 358(a)(1) generally providesthat the basis of property received pur-suant to an exchange to which section351, 354, 355, 356, or 361 applies is thesame as that of the property exchanged,decreased by the fair market value of anyother property (except money) received bythe taxpayer, the amount of any money re-ceived by the taxpayer, and the amount ofloss to the taxpayer which was recognizedon such exchange, and increased by theamount which was treated as a dividend,and the amount of gain to the taxpayerwhich was recognized on such exchange(not including any portion of such gainwhich was treated as a dividend). Section358(b)(1) provides that, under regulationsprescribed by the Secretary, the basis de-termined under section 358(a)(1) must beallocated among the properties received inthe exchange or distribution.

Section 1.358–2(a)(2) provides that, ifas the result of an exchange or distribu-tion under section 354, 355, 356, or for-mer 371(b) a shareholder who owned stockof only one class before the transactionowns stock of two or more classes after thetransaction, then the basis of all the stockheld before the transaction (as adjusted un-der §1.358–1) must be allocated amongthe stock of all classes (whether or notreceived in the transaction) held immedi-ately after the transaction in proportion tothe fair market values of the stock of eachclass. In addition, §1.358–2(a)(3) providesthat, if as the result of an exchange undersection 354, 355, 356, or former 371(b)a security holder who owned only secu-rities, all of one class, before the trans-action, owns securities or stock of morethan one class, or owns both stock and se-curities, then the basis of all the securi-ties held before the transaction (as adjustedunder §1.358–1) must be allocated amongall the stock and securities (whether or notreceived in the transaction) held immedi-ately after the transaction in proportion to

2004-20 I.R.B. 927 May 17, 2004

the fair market values of the stock of eachclass and the securities of each class.

Section 1.358–2(a)(4) provides that, inevery case in which, before the transac-tions, a person owned stock of more thanone class or securities of more than oneclass or owned both stock and securities, adetermination must be made, upon the ba-sis of all the facts, of the stock or securi-ties received with respect to stock and se-curities of each class held (whether or notsurrendered). The allocation described in§1.358–2(a)(2) is separately made as to thestock of each class with respect to whichthere is an exchange or distribution and theallocation described in §1.358–2(a)(3) isseparately made with respect to the secu-rities of each class, part or all of which aresurrendered in the exchange.

Section 1.358–2(a)(5) provides a spe-cial rule that applies in cases in which ashareholder retains stock or securities pur-suant to a plan of recapitalization undersection 368(a)(1)(E). In those cases, thebasis of the stock retained remains un-changed.

When all of the taxpayer’s stock in atarget corporation is transferred in a reor-ganization in exchange for stock of the ac-quiring corporation or the issuing corpora-tion, it may be difficult to identify physi-cally which share of stock of the target cor-poration was surrendered for which shareof stock of the acquiring or issuing cor-poration. Questions have arisen regardingwhether, for purposes of section 1012 andthe regulations thereunder, a shareholderthat sells or transfers shares of stock re-ceived in an exchange or distribution towhich section 354, 355, or 356 applies canidentify that share as being traceable to aparticular lot of exchanged shares and, ifso, how such an identification can be ef-fected.

A number of authorities have addressedthis issue but have reached inconsistent re-sults. For example, in Arrott v. Commis-sioner, 136 F.2d 449 (3d Cir. 1943), thecourt reasoned that the shares surrenderedin an acquisitive reorganization lost theiridentity when traded for new shares in thereorganization and held that the basis of theshares acquired was determined by averag-ing the basis of the shares exchanged. Ac-cord Commissioner v. Bolender, 82 F.2d591 (7th Cir. 1936); Helvering v. Stifel, 75F.2d 583 (4th Cir. 1935); Commissioner v.Von Gunten, 76 F.2d 670 (6th Cir. 1935);

see also Revenue Ruling 55–355, 1955–1C.B. 418.

On the other hand, other courts have re-jected the average basis method for deter-mining the basis of stock received in a reor-ganization. For example, in Bloch v. Com-missioner, 148 F.2d 452 (9th Cir. 1945),the court permitted the basis of blocks ofstock received in an acquisitive reorgani-zation to be traced to the basis of the sur-rendered stock. The court reasoned thatwhere the shareholder can trace the “trans-migrations” of shares of stock, there is noreason the shareholder should not be enti-tled to identify which shares are sold. InKraus v. Commissioner, 88 F.2d 616 (2dCir. 1937), the court held that if a taxpayeracquires a corporation’s stock at differenttimes and at different prices and exchangesthat stock in a recapitalization, the bases ofthat stock are not blended or averaged incomputing the basis of the acquired stock.See also Osrow v. Commissioner, 49 T.C.333 (1968).

The IRS and Treasury Department haveconsidered whether tracing or averagingis the more appropriate method for de-termining the basis of stock received ina reorganization described in section 368or a distribution to which section 355 ap-plies. In view of the carryover basis ruleof section 358, the IRS and Treasury arenot convinced that a reorganization is anevent that justifies averaging the bases ofthe exchanged blocks of stock. Moreover,the IRS and Treasury Department are con-cerned that averaging the bases of the ex-changed blocks of stock may inappropri-ately limit the ability of taxpayers to ar-range their affairs or may afford opportuni-ties for the avoidance of certain provisionsof the Code.

The authorities holding that the basisof shares received in a reorganization isdetermined by the average basis methodhave reached that conclusion on the basisthat it is not possible to match shares re-ceived with shares surrendered. The IRSand Treasury Department do not believethat this inability requires the use of theaverage basis method. When stock of onecorporation is surrendered in exchange forstock of another corporation in a reorga-nization, the documents governing the re-organization will typically identify howmany, and what class of, shares of the tar-get corporation are being exchanged forhow many, and what class of, shares of the

acquiring or issuing corporation. That is,the exchanging shareholder will know thatone or more shares of the acquiring or is-suing corporation are being received in ex-change for one or more shares of the tar-get corporation. However, when the share-holder sells or transfers stock of the acquir-ing or issuing corporation, it may not knowwhich share of stock of the target corpo-ration corresponds to a particular share ofthe acquiring or issuing corporation. Al-though, in some cases, the exchange maypresent obstacles to physical tracing, theseobstacles are not materially different fromthose that exist in the absence of a reorga-nization where shares are held through abroker or consolidated in a single certifi-cate. Thus, the IRS and Treasury Depart-ment believe that it is appropriate to permitshareholders to identify the shares of theacquiring corporation sold or transferredby reference to the shares surrendered inexchange therefor.

These proposed regulations remove§1.358–2(a)(2) through (5) and (c) andreplace these provisions with a more com-plete set of rules for determining the basisof each share or security received in a re-organization described in section 368 anda distribution to which section 355 applies.These proposed regulations generally pro-vide that the basis of each share of stockor security received in an exchange towhich section 354, 355, or 356 applieswill be the same as the basis of the shareor shares of stock or security or securitiesexchanged therefor. The determinationof which share of stock or security is re-ceived in exchange for, or with respect to,a particular share of stock or security willbe made in accordance with the terms ofthe exchange or distribution.

If more than one share of stock or se-curity (or a combination of shares of stockand securities) is received in exchange forone share of stock or security, the basisof the share of stock or security surren-dered will be allocated to the shares and/orsecurities received based on the fair mar-ket value of the shares and/or securities re-ceived. In addition, if one share of stock orsecurity is received in respect of more thanone share of stock or security or a fractionof a share of stock or security is received,the basis of the shares of stock or securitiessurrendered must be allocated to the sharesof stock or securities received in a mannerthat, to the greatest extent possible, reflects

May 17, 2004 928 2004-20 I.R.B.

that a share of stock or security receivedis received in respect of shares of stock orsecurities acquired on the same date and atthe same price. Therefore, if a shareholderthat acquired 2 shares of stock of a targetcorporation on Date 1 for $2 each and 2shares of stock of the target corporation onDate 2 for $3 each and the shareholder ex-changes such shares for 2 shares of the ac-quiring corporation, one share of the ac-quiring corporation will be treated as ac-quired for the shares of the target corpora-tion acquired on Date 1 and the other sharewill be treated as acquired for the sharesof the target corporation on Date 2. Ac-cordingly, one share will have a basis of$4 and the other share will have a basis of$6. This rule avoids, to the greatest extentpossible, creating shares or securities withsplit holding periods.

In the case of an exchange to whichboth section 351 and section 354 or sec-tion 356 applies, however, these rules donot apply if, in connection with the ex-change, the shareholder or security holderalso exchanges property for stock or se-curities in an exchange to which neithersection 354 nor 356 applies or liabilitiesof the shareholder or security holder areassumed. This limitation on the applica-tion of these rules is intended to prevent aconflict between, on the one hand, thoserules that apply to determine the basis ofstock received in an exchange to whichsection 351 applies (including the effect ofthe application of section 357(c)) and, onthe other hand, these proposed rules.

In the case of a distribution to whichsection 355 applies in connection withwhich there is no exchange of shares ofstock or securities but only the receipt ofadditional shares of stock or securities,these proposed regulations provide thatthe basis of each share of stock or securityof the distributing corporation is allocatedbetween the share of stock or security ofthe distributing corporation and the shareof stock or security received with respectto such share of stock or security of thedistributing corporation in proportion totheir fair market values. If one share ofstock or security is received in respect ofmore than one share of stock or security ora fraction of a share of stock or security isreceived, the basis of each share of stockor security of the distributing corporationmust be allocated to the shares of stockor securities received in a manner that re-

flects that, to the greatest extent possible,a share of stock or security received isreceived in respect of shares of stock orsecurities acquired on the same date andat the same price.

The IRS and Treasury Department rec-ognize that, in certain cases, the share-holder will not be able to identify whichparticular share (or portion of a share) ofstock or security was exchanged for, or re-ceived with respect to, a particular share(or portion of a share) of stock or secu-rity. In these cases, the proposed regu-lations permit the shareholder or securityholder to designate which share or securitywas received in exchange for, or in respectof, which share or security. Such designa-tion, however, must be consistent with theterms of the exchange or distribution.

The designation must be made on or be-fore the first date on which the basis of ashare or security received is relevant, forexample, the date on which a share or se-curity received is sold or is transferred inan exchange described in section 351 orsection 721 or a reorganization describedin section 368. The designation is bind-ing for purposes of determining the Fed-eral tax consequences of subsequent trans-actions involving any share or security re-ceived or property received with respectto such share or security. If the share-holder fails to make a designation, thenthe shareholder will not be able to iden-tify which shares are sold or transferredfor purposes of determining the basis ofproperty sold or transferred under section1012 and §1.1012–1(c) and, instead, willbe treated as selling or transferring theshare received in respect of the earliestshare purchased or acquired.

The current regulations under section358 include references to transactionsdescribed in former sections 371(b) and374, which were repealed by section11801(a)(19) of Public Law 101–508 (104Stat. 1388) effective November 5, 1990.To reflect the repeal of these sections,these proposed regulations remove thereferences to sections 371(b) and 374 asthey currently appear in the regulationsunder section 358.

Effective Date

These regulations are proposed to ap-ply to exchanges and distributions of stockor securities occurring after the date these

regulations are published as final regula-tions in the Federal Register.

Effect on Other Documents

These proposed regulations would ob-solete Revenue Ruling 55–355, 1955–1C.B. 418, for transactions occurring afterthe date these regulations are published asfinal regulations in the Federal Register.

Special Analysis

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C chap-ter 5) does not apply to these regulations,and, because the regulations do not im-pose a collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursuantto section 7805(f) of the Code, this noticeof proposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight copies) thatare submitted timely to the IRS. Alterna-tively, taxpayers may submit commentselectronically via the IRS Internet site atwww.irs.gov/regs or via the Federal eRule-making Portal at www.regulations.gov.The IRS and Treasury Department requestcomments on the clarity of the proposedrules and how they can be made easier tounderstand. All comments will be avail-able for public inspection and copying.A public hearing may be scheduled ifrequested in writing by any person whotimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place of the hearing will bepublished in the Federal Register.


The principal authors of these regu-lations are Reginald Mombrun, TheresaKolish, and Emidio J. Forlini, Jr. of theOffice of the Associate Chief Counsel

2004-20 I.R.B. 929 May 17, 2004

(Corporate), IRS. However, other per-sonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.358–2 also issued under 26

U.S.C. 358. * * *Par. 2. Section 1.358–1 is amended by:1. Revising paragraph (a).2. Adding paragraph (c).The revision and addition read as fol-

lows:

§1.358–1 Basis to distributees.

(a) In the case of an exchange or distri-bution to which section 354 or 355 appliesin which, under the law applicable to theyear in which the exchange is made, onlynonrecognition property is received, thesum of the basis of all of the stock and se-curities in the corporation whose stock andsecurities are exchanged or with respect towhich the distribution is made, held imme-diately after the transaction, plus the basisof all stock and securities received in thetransaction shall be the same as the basis ofall the stock and securities in such corpora-tion held immediately before the transac-tion allocated in the manner described in§1.358–2. In the case of an exchange towhich section 351 or 361 applies in which,under the law applicable to the year inwhich the exchange was made, only non-recognition property is received, the basisof all the stock and securities received inthe exchange shall be the same as the basisof all property exchanged therefor. If in anexchange or distribution to which section351, 356, or 361 applies both nonrecog-nition property and “other property” arereceived, the basis of all the property ex-cept “other property” held after the trans-action shall be determined as described inthe preceding two sentences decreased by

the sum of the money and the fair mar-ket value of the “other property” (as of thedate of the transaction) and increased bythe sum of the amount treated as a divi-dend (if any) and the amount of the gainrecognized on the exchange, but the termgain as here used does not include any por-tion of the recognized gain that was treatedas a dividend. In any case in which ataxpayer transfers property with respect towhich loss is recognized, such loss shallbe reflected in determining the basis of theproperty received in the exchange. The ba-sis of the “other property” is its fair marketvalue as of the date of the transaction. See§1.460–4(k)(3)(iv)(A) for rules relating tostock basis adjustments required where acontract accounted for using a long-termcontract method of accounting is trans-ferred in a transaction described in section351 or a reorganization described in sec-tion 368(a)(1)(D) with respect to which therequirements of section 355 (or so much ofsection 356 as relates to section 355) aremet.

* * * * *(c) Effective date. Paragraph (a) of

this section applies to exchanges or dis-tributions of stock and securities after thedate these regulations are published as fi-nal regulations in the Federal Register.Paragraph (b) of this section applies to ex-changes or distributions of stock and secu-rities after December 31, 1953.

Par. 3. Section 1.358–2 is amended by:1. Revising paragraphs (a)(1) and

(a)(2).2. Removing paragraphs (a)(3), (a)(4),

and (a)(5).3. Revising paragraphs (b)(1) and (c).4. Adding paragraph (d).The revisions and addition read as fol-

lows:

§1.358–2 Allocation of basis amongnonrecognition property.

(a) Allocation of basis in exchanges ordistributions to which section 354, 355, or356 applies. (1) As used in this paragraph,the term stock means stock which is not“other property” under section 356. Theterm securities means securities (includ-ing, where appropriate, fractional parts ofsecurities) which are not “other property”under section 356.

(2)(i) If a shareholder or security holdersurrenders a share of stock or a security

in an exchange under the terms of section354, 355, or 356, the basis of each share ofstock or security received in the exchangeshall be the same as the basis of the alloca-ble portion of the share or shares of stockor security or securities exchanged there-for (as adjusted under §1.358–1). If morethan one share of stock or security is re-ceived in exchange for one share of stockor one security, the basis of the share ofstock or security surrendered shall be allo-cated to the shares of stock or securities re-ceived in the exchange in proportion to thefair market value of the shares of stock orsecurities received. If one share of stock orsecurity is received in respect of more thanone share of stock or security or a fractionof a share of stock or security is received,the basis of the shares of stock or securitiessurrendered must be allocated to the sharesof stock or securities received in a mannerthat reflects, to the greatest extent possible,that a share of stock or security receivedis received in respect of shares of stock orsecurities acquired on the same date and atthe same price.

(ii) If a shareholder or security holderreceives one or more shares of stock or oneor more securities in a distribution underthe terms of section 355 (or so much ofsection 356 as relates to section 355) anddoes not surrender any shares of stock orsecurities in connection with the distribu-tion, the basis of each share of stock orsecurity of the distributing corporation (asdefined in §1.355–1(b)), as adjusted under§1.358–1, shall be allocated between theshare of stock or security of the distribut-ing corporation with respect to which thedistribution is made and the share or sharesof stock or security or securities (or alloca-ble portions thereof) received with respectto the share of stock or security of the dis-tributing corporation in proportion to theirfair market values. If one share of stock orsecurity is received in respect of more thanone share of stock or security or a fractionof a share of stock or security is received,the basis of each share of stock or secu-rity of the distributing corporation must beallocated to the shares of stock or securi-ties received in a manner that reflects that,to the greatest extent possible, a share ofstock or security received is received in re-spect of shares of stock or securities ac-quired on the same date and at the sameprice.

May 17, 2004 930 2004-20 I.R.B.

(iii) If a shareholder or security holderthat purchased or acquired shares of stockor securities in a corporation on differ-ent dates or at different prices exchangessuch shares of stock or securities under theterms of section 354, 355, or 356, or re-ceives a distribution of shares of stock orsecurities under the terms of section 355,and the shareholder or security holder isnot able to identify which particular shareof stock or security (or portion of a share ofstock or security) is received in exchangefor, or with respect to, a particular share ofstock or security, the shareholder or secu-rity holder may designate which share ofstock or security is received in exchangefor, or with respect to, a particular share ofstock or security, provided that such des-ignation is consistent with the terms of theexchange or distribution. The designationmust be made on or before the first dateon which the basis of a share of stock orsecurity received is relevant. The basis ofthe shares or securities received, for exam-ple, is relevant when such shares or securi-ties are sold or otherwise transferred. Thedesignation will be binding for purposes ofdetermining the Federal tax consequencesof any sale or transfer of, or distributionwith respect to, the shares or securities re-ceived. If the shareholder fails to make adesignation, then the shareholder will notbe able to identify which shares are soldor transferred for purposes of determiningthe basis of property sold or transferred un-der section 1012 and §1.1012–1(c) and, in-stead, will be treated as selling or transfer-ring the share received in respect of the ear-liest share purchased or acquired.

(iv) Paragraphs (a)(2)(i) through (iii) ofthis section shall not apply to determinethe basis of a share of stock or security re-ceived by a shareholder or security holderin an exchange described in both section351 and section 354 or section 356, if, inconnection with the exchange, the share-holder or security holder exchanges prop-erty for stock or securities in an exchangeto which neither section 354 nor 356 ap-plies or liabilities of the shareholder or se-curity holder are assumed.

(b) Allocation of basis in exchanges towhich section 351 or 361 applies. (1) Asused in this paragraph (b), the term stockrefers only to stock which is not “otherproperty” under section 351 or 361 andthe term securities refers only to securities

which are not “other property” under sec-tion 351 or 361.

* * * * *(c) Examples. The application of para-

graphs (a) and (b) of this section is illus-trated by the following examples:

Example 1. (i) Facts. F, an individual, acquired20 shares of Corporation N stock on Date 1 for $3each and 10 shares of Corporation N stock on Date 2for $6 each. On Date 3, Corporation O acquires theassets of Corporation N in a reorganization under sec-tion 368(a)(1)(A). Pursuant to the terms of the plan ofreorganization, F receives 2 shares of Corporation Ostock for each share of Corporation N stock. There-fore, F receives 60 shares of Corporation O stock.Pursuant to section 354, F recognizes no gain or losson the exchange. F is not able to identify which sharesof Corporation O stock are received in exchange foreach share of Corporation N stock.

(ii) Analysis. Under paragraph (a)(2) of this sec-tion, F has 40 shares of Corporation O each of whichhas a basis of $1.50 and is treated as having been ac-quired on Date 1 and 20 shares of Corporation O eachof which has a basis of $3 and is treated as havingbeen acquired on Date 2. On or before the date onwhich the basis of a share of Corporation O stock re-ceived becomes relevant, F may designate which ofthe shares of Corporation O have a basis of $1.50 andwhich have a basis of $3.

Example 2. (i) Facts. The facts are the same as inExample 1, except that instead of receiving 2 sharesof Corporation O stock for each share of CorporationN stock, F receives 11/2 shares of Corporation O stockfor each share of Corporation N stock. Therefore, Freceives 45 shares of Corporation O stock. Again,F is not able to identify which shares (or portions ofshares) of Corporation O stock are received in ex-change for each share of Corporation N stock.

(ii) Analysis. Under paragraph (a)(2) of this sec-tion, F has 30 shares of Corporation O each of whichhas a basis of $2 and is treated as having been ac-quired on Date 1 and 15 shares of Corporation O eachof which has a basis of $4 and is treated as havingbeen acquired on Date 2. On or before the date onwhich the basis of a share of Corporation O stock re-ceived becomes relevant, F may designate which ofthe shares of Corporation O have a basis of $2 andwhich have a basis of $4.

Example 3. (i) Facts. E, an individual, purchased20 shares of Class A stock of Corporation P on Date1 for $3 per share and 10 shares of Class B stock ofCorporation P on Date 2 for $3 per share. On Date 3,E exchanges each share of Class A stock for one shareof new Class C stock and one share of new Class Dstock in a reorganization under section 368(a)(1)(E).Pursuant to section 354, E recognizes no gain or losson the exchange. On the date of the exchange, the fairmarket value of each share of Class A stock is $6, thefair market value of each share of Class C stock is$2, and the fair market value of each share of ClassD stock is $4. E is not able to identify which sharesof Class C and Class D stock of Corporation P arereceived in exchange for each share of Class A stockof Corporation P.

(ii) Analysis. Under paragraph (a)(2) of this sec-tion, because E receives one share of Class C stockand one share of Class D stock for each share of ClassA stock, the basis of each share of Class A stock sur-

rendered is allocated to one share of Class C stockand one share of Class D stock in proportion to theirfair market values. Therefore, $1 of the basis of eachshare of Class A stock is allocated to each share ofClass C stock and $2 of the basis of each share ofClass A stock is allocated to each share of Class Dstock. E’s basis in each share of Class B stock re-mains $3.

Example 4. (i) Facts. G, an individual, purchased10 shares of Corporation Q stock on Date 1 for $2 pershare and 10 shares of Corporation Q stock on Date 2for $5 per share. On Date 3, Corporation R acquiresthe stock of Corporation Q in a reorganization undersection 368(a)(1)(B). Pursuant to the terms of the re-organization, G receives one share of Corporation Rstock for every 2 shares of Corporation Q stock. Pur-suant to section 354, G recognizes no gain or loss onthe exchange. G is not able to identify which portionof each share of Corporation R stock is received inexchange for each share of Corporation Q stock.

(ii) Analysis. Under paragraph (a)(2) of this sec-tion, G has 5 shares of Corporation R each of whichhas a basis of $4 and is treated as having been ac-quired on Date 1 and 5 shares of Corporation R eachof which has a basis of $10 and is treated as havingbeen acquired on Date 2. On or before the date onwhich the basis of a share of Corporation R stock re-ceived becomes relevant, G may designate which ofthe shares of Corporation R have a basis of $4 andwhich have a basis of $10.

Example 5. (i) Facts. The facts are the same as inExample 4, except that, in addition to transferring thestock of Corporation Q to Corporation R, G transfersland to Corporation R. In addition, after the transac-tion, G owns stock of Corporation R satisfying the re-quirements of section 368(c). G’s transfer of the Cor-poration Q stock to Corporation R is an exchange de-scribed in sections 351 and 354. G’s transfer of landto Corporation R is an exchange described in section351.

(ii) Analysis. Pursuant to paragraph (a)(2)(iv) ofthis section, because neither section 354 nor section356 applies to the transfer of land to Corporation R,the rules of paragraphs (a)(2)(i) through (iii) of thissection do not apply to determine G’s basis in theCorporation R stock received in the transaction.

Example 6. (i) Facts. H, an individual, purchased10 shares of Corporation T stock on Date 1 for $3 pershare and 10 shares of Corporation T stock on Date 2for $6 per share. On Date 3, Corporation V, a newlyformed, wholly owned subsidiary of Corporation U,merges with and into Corporation T with CorporationT surviving. As part of the plan of merger, H receivesone share of Corporation U stock for each share ofCorporation T stock. In connection with the transac-tion, Corporation U assumes a liability of H. In addi-tion, after the transaction, H owns stock of Corpora-tion U satisfying the requirements of section 368(c).H’s transfer of the Corporation T stock to Corpora-tion U is an exchange described in sections 351 and354.

(ii) Analysis. Pursuant to paragraph (a)(2)(iv) ofthis section, because, in connection with the transferof the Corporation T stock to Corporation U, Corpo-ration U assumed a liability of H, the rules of para-graphs (a)(2)(i) through (iii) of this section do not ap-ply to determine H’s basis in the Corporation U stockreceived in the transaction.

2004-20 I.R.B. 931 May 17, 2004

Example 7. (i) Facts. J, an individual, purchased5 shares of Corporation X stock for $4 per share onDate 1 and 5 shares of Corporation X stock for $8per share on Date 2. Corporation X owns all of theoutstanding stock of Corporation Y. The fair marketvalue of the stock of Corporation X, excluding thestock of Corporation Y, is $900. The fair market valueof the stock of Corporation Y is $900. In a distribu-tion to which section 355 applies, Corporation X dis-tributes all of the stock of Corporation Y pro rata toits shareholders. No stock of Corporation X is surren-dered in connection with the distribution. In the dis-tribution, J receives 2 shares of Corporation Y stockwith respect to each share of Corporation X stock.Pursuant to section 355, J recognizes no gain or losson the receipt of the shares of Corporation Y stock. Jis not able to identify which share of Corporation Ystock is received in respect of each share of Corpora-tion X stock.

(ii) Analysis. Under paragraph (a)(2) of thissection, because J receives 2 shares of CorporationY stock with respect to each share of CorporationX stock, the basis of each share of Corporation Xstock is allocated between such share of CorporationX stock and two shares of Corporation Y stock inproportion to the fair market value of those shares.Therefore, each of the 5 shares of Corporation Xstock acquired on Date 1 will have a basis of $2 andeach of the 10 shares of Corporation Y stock receivedwith respect to those shares will have a basis of $1.In addition, each of the 5 shares of Corporation Xstock acquired on Date 2 will have a basis of $4 andeach of the 10 shares of Corporation Y stock receivedwith respect to those shares will have a basis of $2.On or before the date on which the basis of a shareof Corporation Y stock received becomes relevant,H may designate which of the shares of CorporationY have a basis of $1 and which have a basis of $2.

(d) Effective date. This section appliesto exchanges or distributions of stock andsecurities after the date these regulationsare published as final regulations in theFederal Register.



Foundations Status of CertainOrganizations

Announcement 2004–36

The following organizations have failedto establish or have been unable to main-tain their status as public charities or as op-erating foundations. Accordingly, grantorsand contributors may not, after this date,rely on previous rulings or designationsin the Cumulative List of Organizations

(Publication 78), or on the presumptionarising from the filing of notices under sec-tion 508(b) of the Code. This listing doesnot indicate that the organizations have losttheir status as organizations described insection 501(c)(3), eligible to receive de-ductible contributions.

Former Public Charities. The follow-ing organizations (which have been treatedas organizations that are not private foun-dations described in section 509(a) of theCode) are now classified as private foun-dations:

1A Directors Champs Program, Inc.,Southlake, TX

1st Lt. Alan Michael Hook MemorialFund, Torrance, CA

3rd Power Foundation, Copiague, NY1420 Foundation for Sustainable

Development Education, Orlando, FLA. P. Hart Precious Moments Daycare,

East Orange, NJAccess New York, Inc., Jamaica, NYActors Summit, Akron, OHAdolescent Health Alliance, Inc.,

New York, NYAfrican American Childrens Theatre,

Ltd., Milwaukee, WIAfrican American Health Initiative, Inc.,

Louisville, KYAfrican American Males Making a

Difference, Charlottesville, VAAfrican Diaspora Music and Art, Inc.,

New York, NYAhepa 371 II, Inc., Detroit, MIAirlie Gardens Foundation, Inc.,

Wilmington, NCAiun Foundation for International

Education and Democracy, Inc.,Salem, OR

Akron Newstead Youth Center, Inc.,Akron, NY

Al Horton Memorial Rotary Foundation,Desert Hot Springs, CA

Allegheny West Business EducationFoundation, Pittsburgh, PA

Alliance Charitable Foundation, Inc.,Amesbury, MA

Alma Rangel Gardens HousingDevelopment Fund Company, Inc.,New York, NY

Alpha House Project, Inc., Duluth, GAAlternative Community Living Services,

Inc., Marietta, GAAlternative Medical Institute, Inc.,

Winsted, CT

Amani Christian CommunityDevelopment Corp., Pittsburgh, PA

America Alevit Cultural Center, Inc.,Brooklyn, NY

Amherst Domestic Violence Task Force,Inc., East Amherst, NY

Anais Enterprises, Greensboro, NCAnshei Bnai Torah, Monsey, NYArlington Golden Pride Band Booster,

Riverside, CAArt Sanctuary, Philadelphia, PAArt Works Studio School, Incorporated,

Washington, DCAtlanta Metropolitan Amateur Athletic

Club, Atlanta, GAAtlantic Chamber Orchestra, Portland, MEAts Foundation, Inc., Paoli, PAAzimuth Education Foundation,

Lake Forest, CABabylon Village Educational Foundation,

Inc., Babylon, NYBaltimore County Small Business

Resource Center, Inc., Towson, MDBanning Police Activities League, Inc.,

Banning, CABarcare, Inc., Edison, NJBeaver Girls Bantam Basketball Program,

Beaver, PABedford Girls Basketball, Bedford, INBeginning With Books, Pittsburgh, PABelievers Community Outreach,

Los Angeles, CABelleville Public Schools District

118 Educational Foundation, Ltd.,Belleville, IL

Bentley Hall Development Corporation,Inc., Philadelphia, PA

Beth Chinuch Soro Bohel, Inc.,Brooklyn, NY

Black Geeks Online, Washington, DCBlack Men for Progress, Farrell, PABlack Swamp Arts Council, Archbold, OHBlacksburg Volunteer Fire Department,

Blacksburg, VABloomfield Amateur Boxing Association,

Inc., Bloomfield, CTBloomington Activities Foundation,

Bloomington, MNBlue Ridge Education Fund, Inc.,

Roanoke, VABlue Shift Theatre Ensemble, Boone, NCBlue Society of Center Pennsylvania,

Shermans Dale, PABobby Telfer Memorial Scholarship Fund,

Lansing, MIBooks for Kids, Inc., Raleigh, NCBoyer Center for Education and Society,

Grantham, PA

May 17, 2004 932 2004-20 I.R.B.

Brea Olinda Wildcat Softball Boosters,Brea, CA

Brick City Soccer Club, Inc., Newark, NJBriercrest Family of Schools USA

Foundation, Point Roberts, WABuffalo Neighborhood Network, Inc.,

Buffalo, NYBulgaria America Cultural Exchange,

Inc., Larchmont, NYCalifornia Condor Youth Wrestling,

Huntington, CACalifornia Conservatory of Music,

Menlo Park, CACalifornia Inland Region of Narcotics

Annonomous, Banning, CACal-Lee Retirement Villa, Inc.,

Southern Pines, NCCamden Urban Ministry Initiative, Inc.,

Camden, NJCamp Cathedral School of the Arts, Inc.,

Atlanta, GACapital Area Housing Resource Center,

Inc., Trenton, NJCare Consulting Services, Inc.,

Frederick, MDCare Link Services, Lima, OHCaring Citizens for Action, Inc.,

La Mesa, CACaritas of Yucaipa, Solana Beach, CACarolina Christian Education Foundation,

Fayetteville, NCCarroll Elementary PTO, Inc.,

Shermans Dale, PACelebration Christian Life Community,

Ridgewood, NJCenter for Natural Resources,

Stockton, MOCenter in the City, Scranton, PACentral Park Towers, Inc., Kansas City, KSCentral School District Foundation,

Park Hills, MOCentury High School Model United

Nations Support Group, Santa Ana, CACharity Childrens Home at Ebenezer,

N. Wilkesboro, NCCharleston Rotary Charitable Foundation,

Charleston, ILChatham Cultural Center, Inc.,

Chatham, MACheltenham York Road Nursing

and Rehabilitation Center, Inc.,Philadelphia, PA

Child & Family Profile, Inc., Chicago, ILChild Assault Prevention of Ottawa

County, Port Clinton, OHChildrens Dance Theatre of Ashland,

Ashland, OR

Christian Learning Centers of the Upstate,Easley, SC

Christmas in April Topeka Shawnee Co.,Inc., Topeka, KS

Christmas in April West End Cities,Ontario, CA

Christs Mission, Marion, ILCity of Orange Public Library Foundation,

Orange, CAClassical New Jersey Society, Inc.,

Plainfield, NJClayton Rotary Foundation, Inc.,

Clayton, GACleveland Center and Shelter,

Cleveland, OHCleveland Foot and Ankle Clinic,

Cleveland, OHCleveland Lumberjacks Charities, Inc.,

Cleveland, OHClover Commons, Inc., Rock Hill, SCCoalition on Autism, Plains, PAColesville Lions Foundation, Inc.,

Silver Spring, MDColquitt Options, Albany, GAColumbia South Rotary Foundation,

Columbia, MOCommissioners Honor Camp Cadet, Inc.,

Hershey, PACommunities in School of Maryland, Inc.,

Baltimore, MDCommunities in School of Prince Georges

County, Inc., Hyattsville, MDCommunity Builders of Durham, Inc.,

Durham, NCCommunity Connections, N. Platte, NECommunity Enforcement Authority, Inc.,

Atlanta, GACommunity Foundation of Mahoning

Valley, Youngstown, OHCommunity Technology Development,

Inc., Newton, MACommunity Voices Collaborative

of the District of Columbia, Inc.,Washington, DC

Compassionate Outreach MinistriesChristian Academy, Inc.,Winter Park, FL

Connecticut Sports Institute BaseballAssociation, Inc., Bridgeport, CT

Consumer Benefits Work AmericaProgram, Mount Holly, NJ

Contextual Program DevelopmentFoundation, Washington, DC

Cook County Intervention, Oak Lawn, ILCosta Mesa Community Foundation,

Costa Mesa, CACoventry High School Gridiron Club,

Inc., Coventry, CT

Cross Connection Family Services,Philadelphia, PA

Cross High Band Booster, Cross, SCDance Harrison Street, Inc., Easton, MDDecalogue Education Fund, Inc.,

Chicago, ILDepth Foundation, Inc., Northport, MIDiakonia Media Group, Inc.,

Duxbury, MADillsboro Tomorrow, Inc., Dillsboro, NCDimensions Dance Company,

St. Louis, MODisability Technologies, Inc.,

Hedgesville, WVDistrict Heights Community Development

Corporation, District Heights, MDDl Blades, Detroit Lakes, MNDoc Communications Media Group,

Somerset, NJDowningtown Community Center, Inc.,

Downingtown, PADowntown Senior Center, Inc.,

Scranton, PADowntown Yonkers Management

Association, Inc., Yonker, NYDressing to Succeed Licking County, Inc.,

Newark, OHDuanesburg Education Foundation, Inc.,

Duanesburg, NYDuneland Building Trades Corp.,

Chesterton, INDunkard Creek Watershed Assn., Inc.,

Morgantown, WVDurham Regional Financial Center,

Durham, NCDusty Wings of the Desert, Inc.,

Palm Desert, CAEagle Valley Senior Housing, Inc.,

Allentown, PAEast End Business & Merchants Council,

Bridgeport, CTEastfield Youth Activities, Nebo, NCEastside Community Economic

Development Corporation,Charlotte, NC

Eaton Area Senior Center, Inc.,Charlotte, MI

Eau Claire High School Foundation,Chapin, SC

Education Express Company, Howell, NJEducational Foundation of Park Forest

Chicago Heights, Inc., Park Forest, ILEducational Netcasting Foundation, Inc.,

Cambridge, MAEllwood City Education Foundation,

Ellwood City, PAElvie Neighborhood Community

Association, Inc., Wilson, NC

2004-20 I.R.B. 933 May 17, 2004

Emmanuel Bible Institute, New York, NYEmpire Theatre Co., Chicago, ILEnrichment and Training Center,

Black Mountain, NCE S P, Ltd., Dover, NHEssex County Educational Foundation,

Inc., W. Orange, NJEssex Itv, Inc., Newark, NJEvangelical Catholic, Inc., Columbus, WIFair Housing for America, Riverside, CAFair Lawn Association for Special

Education, Fair Lawn, NJFair Tide, Inc., Kittery, MEFamily Art Studio, Inc., St. Louis, MOFamily Depot, Inc., St. Louis, MOFamily First, Hamden, CTFamily Law and Policy Institute, Inc.,

Washington, DCFamily Life Home Christian School

Independent Study Program,San Marcos, CA

Family Preservation Program, Inc.,Warm Springs, VA

Family Support Network of VanceGranville Franklin and Warren,Oxford, NC

Family Support Systems, Pacifica, CAFauna Communications Research

Institute, Hillsborough, NCFederacion De Organizaciones Mexicanas

En Nueva Inglaterra, Inc., Chelsea, MAFederal Enterprise Community of Buffalo,

Inc., Buffalo, NYFirst Flight, Inc., Sumter, SCFirst Night Pittsburgh, Inc., Pittsburgh, PAFirst Step Childcare & Preschool, Inc.,

Waterford Wks, NJFlights for Humanity, Incorporated,

Littleton, MAFoundation for Charter Schools, Inc.,

Newark, NJFoundation for the Advancement of

Sexual Equity, Long Beach, CAFoundation for United States Russian

Cultural Relations, Inc., Alexandria, VAFoundations Reach Youth, Richmond, VAF R A M E S, Flint, MIFranco Foundation, Inc.,

Silver Spring, MDFreedom Through Christ Ministry, Inc.,

Bloomington, INFreehold Borough Educational

Foundation, Inc., Freehold, NJFreehold Township Foundation for

Educational Excellence Incorporate,Freehold, NJ

Friends of Cabot Woods, Inc.,Newton, MA

Friends of Charlotte Advantage CharterSchool, Inc., Charlotte, NC

Friends of Clinton Youth and FamilyService Bureau, Inc., Clinton, CT

Friends of College Wrestling, Inc.,Grand Rapids, MI

Friends of Everett Arena, Concord, NHFriends of Kalamazoo Advantage

Academy, Inc., Kalamazoo, MIFriends of Mountain History, Inc.,

Asheville, NCFriends of Octavio Paz Charter School,

Inc., Chicago, ILFriends of Poway High Foundation,

Poway, CAFriends of Rocky Mount Charter School,

Inc., Battleboro, NCFriends of Seacoast Hospice,

Portsmouth, NHFriends of the Public Library, Clive, IAFriends of the School, Inc., Portland, INFriends of Wasatch Summit Counties

Childrens Justice Center, Park City, UTFriends of Worc, Inc., Lake Success, NYFriends of Wvon, Chicago, ILFriends Who Care, Inc., New York, NYFrontiers Journal, Inc., Rhinebeck, NYGary Wheaton Memorial Tri State

Respiratory Clinics, Vincennes, INGateway Management Corporation,

Buffalo, NYGEM Recreation & Health Center,

Kill Devil Hills, NCGenesis Corporation, Thomasville, NCGeoffrey Lance Foundation for Spinal

Cord Injury Res and Support,Philadelphia, PA

Georgia Institute for CommunityDevelopment and Outreach, Inc.,Atlanta, GA

Get the Message, Inc., Baltimore, MDGhana Computer Literacy & Distant

Education, Incorporated, Chicago, ILGilgal Development Corporation,

Plainfield, NJGlobal Childrens Health & Environment

Fund, Washington, DCGlobal Education Foundation,

Alexandria, VAGolden Dogs Academy, Inc.,

Mount Vernon, OHGranite State Federation of Families, Inc.,

Manchester, NHGreat Expectations Weight Loss Camp,

Inc., Oakville, CTGreat Pond Foundation, Inc.,

Edgartown, MA

Greater Grand Forks Community CenterLLC, Grand Forks, ND

Greater Hope Life Center, Inc.,New York, NY

Greater Options for Adolescent Lives,Inc., Boston, MA

Greater Philadelphia Cancer Foundation,Philadelphia, PA

Greater Southern Brooklyn HealthCoalition, Inc., Brooklyn, NY

Greenville Chinese School,Greenville, NC

Greenwich Agora, Inc., Greenwich, CTGrosse Pointe South Choir Boosters, Inc.,

Grosse Pointe Farms, MIHall-Light and Associates, Hampton, VAHamilton County Self Help Housing,

Webster City, IAHampden County Land Trust, Inc.,

Monson, MAHand Craft Alliance, Waynesboro, VAHands & Minds, Inc., Cambridge, MAHands on Helpers, Inc., Princeton, NJHappy Times Development Corporation,

Inc., Philadelphia, PAHarlem Renaissance Economic

Development Corporation,New York, NY

Hartford Teen Center,White River Junction, VT

Hawaii Ola Waimanalo, Honolulu, HIHawkeye East Wrestling Club, Inc.,

Christiansburg, VAHealth, Incorporated, Sioux City, IAHeart and Soul Ministries, Inc.,

Altoona, PAHeartland Opera Theatre, Webb City, MOHellas United Fc, Inc., Boston, MAHenry White Experimental Farm

Foundation, Belleville, ILHeritage Band Boosters, Monroeville, INHerminia M. Roque Memorial Social

Service Center, Chicago, ILHigh Tech High Foundation,

San Diego, CAHillel of Rockland County, Inc.,

Monsey, NYHillside Business Association,

Duluth, MNHinsdale South High School Foundation,

Darien, ILHiram Foundation, Incorporated,

Long Beach, CAHispanic National Law Enforcement

Association New York ChapterFoundation, New York, NY

Historical Advancement Association,Philadelphia, PA

May 17, 2004 934 2004-20 I.R.B.

Hoffman Estates Park District Foundation,Hoffman Estates, IL

Holy Care, Inc., Lanham, MDHoly Cross Neighborhood Development,

Inc., Pittsburgh, PAHome of Hope Learning and Resource

Center, Inc., Hinesville, GAHomegrown, Inc., Brockton, MAHope & Help, Inc., Brooklyn, NYHope and New Dreams of Adelphi, Inc.,

Adelphi, MDH O P E Initiatives, Inc., Heralding

Opportunities Potentials Education,Macon, GA

Housing Opportunities Made Economical,Inc., Fredericksburg, VA

Human Family Foundation,Annandale, VA

Humanist Ministries, Inc., Milwaukee, WIHunter College High School

Chinese Parents Association, Inc.,New York, NY

Huntsville Bible Students, Huntsville, ALI Vote Project, Inc., Wilmington, DEIce Dogs Hockey Club,

Dearborn Heights, MIIndependence Empowerment Center, Inc.,

Manassas, VAIndependent Tech Alumni Council, Inc.,

Boston, MAIndo-Pacific Conservation Alliance,

Washington, DCInfinities Chamber Ensemble, Inc.,

Kensington, NHInnerchange Freedom Initiative,

Washington, DCIntelliport Corporation, Chillicothe, OHInternational Centre for Eyecare

Education Foundation,So. San Francisco, CA

International Concerned Friendsand Family of Mumia Abu Jamal,Philadelphia, PA

International Housing & Family ServicesCorp., Thousand Oaks, CA

International Society for CraniofacialSurgery, Philadelphia, PA

Interscholastic Athletic Association ofMaryland, Inc., Baltimore, MD

Ivan Pravilov Dainius Zubrus HockeyClub and School, Mounds View, MN

Jersey Knights, E. Brunswick, NJJHS Boys Soccer Boosters,

Shepherdstown, WVJHS Girls Soccer Boosters,

Harpers Ferry, WVJocobus Academy Group Home, Inc.,

Baltimore, MD

Jones College Scholarship Fund,Charlotte, NC

Kemper Military School and Endowment,Inc., Boonville, MO

Key Works Association, Chicago, ILKings Highway, Inc., Mt. Holly, NJKuntu Repertory Theatre, Pittsburgh, PAKutag, Kankakee, ILKVMH Charitable Foundation, Inc.,

Waimea, HILa Quinta High School Foundation,

La Quinta, CALaguna Hills High School Friends

of Model United Nations,Laguna Hills, CA

Lake City Education Foundation,Lake City, MN

Lakeview Parent Teacher Council,Warsaw, IN

Lakeville Performing Arts, Lakeville, MNLakewood Community Mediation Center,

Inc., Lakewood, NJLakewood Redevelopment Corp.,

Atlanta, GALapiedra Family Firefighters Memorial

Fund, Staten Island, NYLeadership Akron, Akron, OHLeaven Center, Eden Prairie, MNLebanon Riverside NH Rotary Charities,

Inc., West Lebanon, NHLesc House Housing Development Fund

Corp., New York, NYLexington Area Economic Development

Corporation, Lexington, MOLibertyville Hockey Club Organization,

Incorporated, Libertyville, ILLibrary Foundation of Madison County,

Inc., Canton, MSLife Long Learning Group, Matthews, NCLincoln Park Elementary School PTO,

Lincoln Park, NJLiverpool High School Student Activities,

Liverpool, NYLiving Letters Ministries, Inc.,

St. Louis, MOLove Is, Incorporated, Ontario, CALoving Hands, Inc., South Bend, INLow Country Artists and Artisans Society,

Savannah, GALutheran Social Services of Central Ohio

Mansfield Housing, Inc., Columbus, OHMahwah Ramapo Ridge Home and

School Organization, Inc., Mahwah, NJMain Line Academy of Music, Inc.,

Ardmore, PAMaine Rural Network, Standish, MEMake It Happen Foundation, Inc.,

Atlanta, GA

Managing Earths Resources, Inc.,Beverly, MA

Mars Hill Media, Minneapolis, MNMarthas Vineyard Touchdown Club,

Oak Bluffs, MAMassachusetts Mental Health Counselors

Association, Inc., Natick, MAMcFarland Education Foundation,

McFarland, CAMcPherson County Connections, Inc.,

McPherson, KSMcPherson Junior Pups Basketball Club,

McPherson, KSMedia Unit, Inc., Syracuse, NYMediation Association of Northwest

Ohio, Toledo, OHMedway Youth Community Organization,

Inc., Medway, MAMental Health Consumer Advocates of

Rhode Island, Inc., Providence, RIMental Health Workers Without Borders

USA, Inc., New York, NYMerrimack Valley Regional Animal

Shelter, Inc., Newburyport, MAMerry Mixers, Inc., Marblehead, MAMetro Health Florida, Inc., Roswell, GAMetro Health Indiana II, Inc., Roswell, GAMetro Health Vermont, Inc., Roswell, GAMetro Universal Career Center, Inc.,

Lithonia, GAMillrace Playground Committee,

Millersville, MDMission Twenty Eight Ninteen,

Medina, OHMissouri Centers for Independent Living,

Kansas City, MOMissouri Sports Development Office,

Inc., Saint Peters, MOMobridge Family Resource Center,

Mobridge, SDMontgomery County Womens Fair

Committee, Inc., Rockville, MDMountain Vista Advocates,

Apple Valley, CAMountaineer Region of Narcotics

Anonymous, Morgantown, WVMt. Olivet of Harlem Housing

Development, New York, NYMulti-Cultural Center, Chicago, ILMultiple Sclerosis Association of

America Gardens at Evesham, Inc.,Cherry Hill, NJ

Museum of the Americas Foundation,Inc., Arlington, VA

Music in the City, Inc., Kansas City, MOMusic Outreach Program,

Washington, DC

2004-20 I.R.B. 935 May 17, 2004

Naim Frasheri School of Madison, Inc.,Middleton, WI

National Institute for Prostate &Urological Research, Chicago, IL

National Organization for Children, Inc.,Morrisville, PA

Native American Medicine PersonsAssociation, Maple Grove, MN

Native American Society for HistoricalPreservation, Inc., Hessel, MI

Near South Family Life CenterCollaborative, Inc., Chicago, IL

Neighborhoods Incorporated of HammondIndiana, Hammond, IN

Neil J. Brassell Jr, Foundation for YouthDevelopment, Bensalem, PA

New Bern Family Resources, Inc.,New Bern, NC

New Creation Community DevelopmentCorporation, Reading, PA

New Day Development Corporation,Kansas City, MO

New Jersey Association of Child CareResource and Referral Agencies,Pennington, NJ

New Life Community Services,Philadelphia, PA

New Life Multi Cultural FamilyCommunity Center, Inc., Brockton, MA

New Light Family Life & EducationalCenter, Richmond, VA

New Sudanese Association of Oregon,Portland, OR

New York City Center for Urban WildlifeRehabilitation, New York, NY

New York State Association for Women inAdministration, Inc., Baldwinsville, NY

Newton County Help Center, Neosho, MONimrod Project, Highland Park, MINoahs Ark a Safe Place, Inc.,

Washington, PANon-Profit Alliance Center for Leadership

Development, Inc., Dorchester, MANonquit Street Neighborhood Association

and Land Trust, Inc., Dorchester, MANorth Andover Coalition Against Risky

Behavior, Inc., North Andover, MANorth Carolina Amateur Wrestling

Association, Mooresville, NCNorth Carolina Family Resource

Coalition, Swannanoa, NCNorth Carolina Shore and Beach

Preservation Association, Inc.,Oak Island, NC

North Crown Heights NostrandAve. Merchants Association, Inc.,Brooklyn, NY

North Hero Education Foundation, Inc.,North Hero, VT

Northborough Education Foundation,Inc., Northborough, MA

Northeastern Pennsylvania DiversityEducation Consortium, Dallas, PA

Northfield Community SchoolOrganization, Inc., Northfield, VT

Northmont Future Bolts Basketball,Dayton, OH

Northmont Traveling Baseball,Dayton, OH

Northside Norfolk Rotary Foundation,Norfolk, VA

Northview Choral Music Organization,Sylvania, OH

Oak Grove Parent Teacher Organization,Green Oaks, IL

OCPM Research Foundation,Cleveland, OH

Old Silver Spring House Tour Association,Inc., Silver Spring, MD

Omega First, Incorporated, Charlotte, NCOmicron Zeta Charitable and Educational

Fund, Inc., Raleigh, NCOrange County Health Research Alliance,

Santa Ana, CAOrange County Scholastic Foundation,

Irvine, CAOur Town Civic Organization, Inc.,

Westminster, VTOverture Theatre Corp., Woodbury, NYPaddle Providence, Inc., Providence, RIPanther Partners, Inc., Vista, CAParents Advocating Challenging

Education, Saint Charles, MOParents Coalition for Literacy, Inc.,

Richmond, INPartners With Parents, Inc.,

Los Angeles, CAPathways Retreat & Education Center,

Madison, VAPatrick Marsh Parent Student Teacher

Organization, Sun Prairie, WIPeaks at Raleigh, Inc., Asheville, NCPeople are Surviving Today, Gallatin, TNPerennial Garden Club, Washington, DCPeter V. Destephano Foundation for

Budd Chiari Syndrome Research,Lombard, IL

Pieces, Inc., Saint Charles, MOPiedmont Bioethics Network,

High Point, NCPikesville High School Music Boosters,

Inc., Baltimore, MDPinecrest School Parent Council,

East Lansing, MIPlace of Our Own, Inc., Baltimore, MD

Pleasants County Humane Society, Inc.,Saint Marys, WV

Portage County Culture Festival, Inc.,Stevens Point, WI

Portuguese Cultural Center, Inc.,Danbury, CT

Professional Reading Outreach, Inc.,Falls Church, VA

Progress in Education, Contoocook, NHProject Freedom, Inc., Boston, MAProject on African American International

Law, Chicago, ILProject Success of Decatur and Macon

County, Decatur, ILProkids Athletic League, Inc., Atlanta, GAProsthetic Abilities Center of Excellence,

San Diego, CAProviders Caring for Kids, Inc.,

New York, NYPsalms Foundation, Inc., Annapolis, MDPTA-PTO Thrift Shop, Inc.,

Lynchburg, VARadio Maria, Inc., Landsdale, PARaise the Bar, Inc., Stamford, CTRallying Against Drugs Association,

Rialto, CAReaching Children for God, Inc.,

Maineville, OHRebuilding Together Bergen County, Inc.,

Ridgewood, NJRecovery Plus II, Inc., Chicago, ILRed Devil Wrestling Club, Inc.,

Lowell, INRefreshing Waters for Life Ministry, Inc.,

Attica, NYRegion 15 Education Foundation, Inc.,

Middlebury, CTResponse International, King George, VARHA Affordable Housing IV, Inc.,

Atlanta, GARHS Spirit Squad Booster, Ramona, CARing of Fire Productions, Inc.,

Brooklyn, NYRio Rancho Astronomical Society, Inc.,

Rio Rancho, NMRiverside Community Foundation,

Incorporated, Washington, IARiverwatch Association, Mineola, NYRiverworks a Creative Center, Inc.,

Dobbs Ferry, NYRMP Ministries, Inc., Charlotte, NCRobert C. Hill Elementary PTO,

Romeoville, ILR O C H Foundation, Inc., Durham, NCRockwell Swaledale Education

Foundation, Charles City, IARoss Camper Brunson Family Services,

Baltimore, MD

May 17, 2004 936 2004-20 I.R.B.

Rotary Club of Marthas VineyardCharitable Foundation, Inc.,W. Yarmouth, MA

Rotary Club of Northport New YorkCharity Fd, Inc., Northport, NY

Rotary Club of Temecula Foundation,Murrieta, CA

Rotary Healthy Youth Foundation,Roseville, MN

Roxborough Education Foundation, Inc.,Philadelphia, PA

Russian American Voters EducationalLeague, Inc., Richmond Hill, NY

Safe Harbor Community Services, Inc.,Manchester, NH

San Diego Cultural Arts Alliance,San Diego, CA

San Diego National and InternationalBlack Film Festival, San Diego, CA

Sandra Starr Foundation, Princeton, NJS. E. Gross School Parent Teacher

Organization, Brookfield, ILSea Girt P A R K S, Inc., Sea Girt, NJSecond Chance Services Unlimited, Inc.,

Randallstown, MDSelf Foundation, Philadelphia, PASelf Training Institute, Philadelphia, PAServant Missions Unlimited, Inc.,

Roswell, GASeymour Basketball Fan Club, Inc.,

Seymour, INShades of Strength, Pacifica, CASleepy Eye Area Home Health, Inc.,

Eden Prairie, MNSmart Start Day Care, Inc., Monett, MOSocial Lites Scholarship Fund, Rialto, CASociety for the Education and Eradication

of Depression, Inc., Robbinsville, NJSociety of Many Faces, Inc.,

Brooklyn, NYSonrise Development Corporation,

Englewood, NJSouth Atlanta Redevelopment

Corporation, Atlanta, GASouth Jersey Opportunities

Industrializations Centers, Inc.,Camden, NJ

South Memphis Youth Initiative, Inc.,Memphis, TN

Sparks Family of Edutainment Media,Inc., Silver Spring, MD

Special Services Home & SchoolAssociation, Inc., Ridgewood, NJ

Spring Hope Elementary School ParentTeacher Organization, Spring Hope, NC

Springfield Peer Lending, Inc.,Springfield, MA

St. Anthony Homes, Inc., Bel Air, MD

St. James Park Day Care, Inc., Bronx, NYStanly Net, Albemarle, NCSteelville Community Development and

Care Corporation, Salem, MOStepping Stone Community Theater,

Shrewsbury, MAStone Mountain Charter School, Inc.,

Stone Mountain, GAStory County Child Abuse Council,

Ames, IAStreet Talk, Glencoe, ILStudent Outreach Program, Inc.,

Wilton, CTSubstance Awareness Greater Anderson

Coalition, Cincinnati, OHSudanese Development Initiative, Inc.,

Palm Beach, FLSupport Education and Research

for Chronic Hepatitis C, Inc.,Jamaica Plain, MA

Synergy Residential Academy,Minneapolis, MN

Tarheel Community DevelopmentCorporation, New Bern, NC

Team Thunder Wheelchair Sports,Willow Wood, OH

Tebucky Jones Youth Foundation,New Britain, CT

Ted Williams Housing Corporation,Oceanside, CA

Teen Rap, Jackson, MITeens Taking Charge, Inc., Atlanta, GATimeless Charities, Inc., Morris Plains, NJTINC Road School Parent Teachers

Organization, Inc., Flanders, NJToms River Community Foundation, Inc.,

Toms River, NJTorrance Mission Health Center,

Torrance, CATramway Elementary PTO, Inc.,

Sanford, NCTrans Action San Diego, San Jose, CATransitional Services, Inc.,

St. Michaels, MDTri Star Employee Development Corp.,

San Antonio, TXTrilogy Fleming of Topeka KS, Inc.,

Scottsdale, AZTrue Hens, Inc., Wilmington, DETypical Life Corporation, Mount Wolf, PAUnited Clayton Area Network for Youth,

Inc., Clayton, NCUnity Center, Snow Hill, NCUniversity City Community Development,

Charlotte, NCUniversity of Cincinnati, Cincinnati, OHUpaya Institute, Incorporated,

New York, NY

Upper Iowa Audubon Society, Cresco, IAUpper Neuse River Basin Association,

Inc., Rtp, NCUrban Bankers Coalition Foundation,

Inc., New York, NYValerius Parent Teacher Organization,

Urbandale, IAVance Housing, Inc., Beckley, WVVermont Student Opportunity Scholarship

Fund, Williston, VTVickery Crek Middle School PTO,

Cumming, GAVilla Farnese, Philadelphia, PAVoices That Listen, Oaklawn, ILWall Watchers, Matthews, NCWatertown Boosters Association,

Watertown, MAWaterville Valley Music Center,

New York, NYWayne County Enrichment & Fitness

Center, Goldsboro, NCWells Sports Complex, Inc., Escanaba, MIWest Side 2000, Chicago, ILWest Virginia Center for Civic Life, Inc.,

Charleston, WVWestern Catarba County Family Resource

Center, Inc., Newton, NCWestern Maryland YMCA Services

Corporation, Cumberland, MDWestern North Carolina Safety & Fire

Education Assn., Weaverville, NCWestfield United Soccer Club, Inc.,

Westfield, MAWeston Education Foundation, Inc.,

Weston, VTWhaling City Rowing Club,

New Bedford, MAWhitehall Coplay Class Memorial

Scholarship Foundation, Inc.,Whitehall, PA

Wide Sky Theatre Company, Inc.,New York, NY

Williamsburg Film Festival, Inc.,Toano, VA

Wilmington Education Fund, Inc.,Wilmington, VT

Window of Hope Community Services,Incorporated, Berkeley, IL

Windsor Healing Centre, Incorporated,Catlett, VA

Wiscupa, Inc., Oshkosh, WIWomen of NU, Chicago, ILWomens Business Institute, Inc.,

Tustin, CAWomens Social Impact Workshop, Inc.,

Philadelphia, PAWood Ridge High School Band Parents

Association, Wood-Ridge, NJ

2004-20 I.R.B. 937 May 17, 2004

Woodcliff Lake PFA, Inc., Woodcliff, NJWoodcock Foundation, Inc.,

Baltimore, MDWoodland Park Middle School Music

Booster Club, San Marcos, CAYes Youth Outreach, Inc., Omaha, NEYoung Equestrians Program,

Plymouth, MNYouth Force, Inc., Bronx, NY

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-

vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

May 17, 2004 938 2004-20 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2004-20 I.R.B. i May 17, 2004

Numerical Finding List1

Bulletins 2004–1 through 2004–20

Announcements:

2004-1, 2004-1 I.R.B. 254

2004-2, 2004-3 I.R.B. 322

2004-3, 2004-2 I.R.B. 294

2004-4, 2004-4 I.R.B. 357

2004-5, 2004-4 I.R.B. 362

2004-6, 2004-3 I.R.B. 322

2004-7, 2004-4 I.R.B. 365

2004-8, 2004-6 I.R.B. 441

2004-9, 2004-6 I.R.B. 441

2004-10, 2004-7 I.R.B. 501

2004-11, 2004-10 I.R.B. 581

2004-12, 2004-9 I.R.B. 541

2004-13, 2004-9 I.R.B. 543

2004-14, 2004-10 I.R.B. 582

2004-15, 2004-11 I.R.B. 612

2004-16, 2004-13 I.R.B. 668

2004-17, 2004-12 I.R.B. 635

2004-18, 2004-12 I.R.B. 639

2004-19, 2004-13 I.R.B. 668

2004-20, 2004-13 I.R.B. 673

2004-21, 2004-13 I.R.B. 673

2004-22, 2004-14 I.R.B. 709

2004-23, 2004-13 I.R.B. 673

2004-24, 2004-14 I.R.B. 714

2004-25, 2004-15 I.R.B. 737

2004-26, 2004-15 I.R.B. 743

2004-27, 2004-14 I.R.B. 714

2004-28, 2004-16 I.R.B. 818

2004-29, 2004-15 I.R.B. 772

2004-30, 2004-17 I.R.B. 833

2004-31, 2004-18 I.R.B. 854

2004-32, 2004-18 I.R.B. 860

2004-33, 2004-18 I.R.B. 862

2004-34, 2004-19 I.R.B. 895

2004-35, 2004-17 I.R.B. 839

2004-36, 2004-20 I.R.B. 932

2004-37, 2004-17 I.R.B. 839

2004-38, 2004-18 I.R.B. 878

2004-39, 2004-17 I.R.B. 840

2004-40, 2004-17 I.R.B. 840

2004-41, 2004-18 I.R.B. 879

2004-42, 2004-17 I.R.B. 840

Court Decisions:

2078, 2004-16 I.R.B. 773

Notices:

2004-1, 2004-2 I.R.B. 268

2004-2, 2004-2 I.R.B. 269

2004-3, 2004-5 I.R.B. 391

2004-4, 2004-2 I.R.B. 273

Notices— Continued:

2004-5, 2004-7 I.R.B. 489

2004-6, 2004-3 I.R.B. 308

2004-7, 2004-3 I.R.B. 310

2004-8, 2004-4 I.R.B. 333

2004-9, 2004-4 I.R.B. 334

2004-10, 2004-6 I.R.B. 433

2004-11, 2004-6 I.R.B. 434

2004-12, 2004-10 I.R.B. 556

2004-13, 2004-12 I.R.B. 631

2004-14, 2004-9 I.R.B. 526

2004-15, 2004-9 I.R.B. 526

2004-16, 2004-9 I.R.B. 527

2004-17, 2004-11 I.R.B. 605

2004-18, 2004-11 I.R.B. 605

2004-19, 2004-11 I.R.B. 606

2004-20, 2004-11 I.R.B. 608

2004-21, 2004-11 I.R.B. 609

2004-22, 2004-12 I.R.B. 632

2004-23, 2004-15 I.R.B. 725

2004-24, 2004-13 I.R.B. 642

2004-25, 2004-15 I.R.B. 727

2004-26, 2004-16 I.R.B. 782

2004-27, 2004-16 I.R.B. 782

2004-28, 2004-16 I.R.B. 783

2004-29, 2004-17 I.R.B. 828

2004-30, 2004-17 I.R.B. 828

2004-31, 2004-17 I.R.B. 830

2004-32, 2004-18 I.R.B. 847

2004-33, 2004-18 I.R.B. 847

2004-34, 2004-18 I.R.B. 848

2004-35, 2004-19 I.R.B. 889

2004-36, 2004-19 I.R.B. 889

Proposed Regulations:

REG-106590-00, 2004-14 I.R.B. 704

REG-116664-01, 2004-3 I.R.B. 319

REG-129447-01, 2004-19 I.R.B. 894

REG-106681-02, 2004-18 I.R.B. 852

REG-122379-02, 2004-5 I.R.B. 392

REG-139792-02, 2004-20 I.R.B. 926

REG-139845-02, 2004-5 I.R.B. 397

REG-165579-02, 2004-13 I.R.B. 651

REG-166012-02, 2004-13 I.R.B. 655

REG-115471-03, 2004-14 I.R.B. 706

REG-116564-03, 2004-20 I.R.B. 927

REG-121475-03, 2004-16 I.R.B. 793

REG-126459-03, 2004-6 I.R.B. 437

REG-126967-03, 2004-10 I.R.B. 566

REG-128309-03, 2004-16 I.R.B. 800

REG-149752-03, 2004-14 I.R.B. 707

REG-153172-03, 2004-15 I.R.B. 729

REG-156232-03, 2004-5 I.R.B. 399

REG-156421-03, 2004-10 I.R.B. 571

REG-167217-03, 2004-9 I.R.B. 540

REG-167265-03, 2004-15 I.R.B. 730

Revenue Procedures:

2004-1, 2004-1 I.R.B. 1

2004-2, 2004-1 I.R.B. 83

2004-3, 2004-1 I.R.B. 114

2004-4, 2004-1 I.R.B. 125

2004-5, 2004-1 I.R.B. 167

2004-6, 2004-1 I.R.B. 197

2004-7, 2004-1 I.R.B. 237

2004-8, 2004-1 I.R.B. 240

2004-9, 2004-2 I.R.B. 275

2004-10, 2004-2 I.R.B. 288

2004-11, 2004-3 I.R.B. 311

2004-12, 2004-9 I.R.B. 528

2004-13, 2004-4 I.R.B. 335

2004-14, 2004-7 I.R.B. 489

2004-15, 2004-7 I.R.B. 490

2004-16, 2004-10 I.R.B. 559

2004-17, 2004-10 I.R.B. 562

2004-18, 2004-9 I.R.B. 529

2004-19, 2004-10 I.R.B. 563

2004-20, 2004-13 I.R.B. 642

2004-21, 2004-14 I.R.B. 702

2004-22, 2004-15 I.R.B. 727

2004-23, 2004-16 I.R.B. 785

2004-24, 2004-16 I.R.B. 790

2004-25, 2004-16 I.R.B. 791

2004-26, 2004-19 I.R.B. 890

2004-27, 2004-17 I.R.B. 831

2004-29, 2004-20 I.R.B. 918

Revenue Rulings:

2004-1, 2004-4 I.R.B. 325

2004-2, 2004-2 I.R.B. 265

2004-3, 2004-7 I.R.B. 486

2004-4, 2004-6 I.R.B. 414

2004-5, 2004-3 I.R.B. 295

2004-6, 2004-4 I.R.B. 328

2004-7, 2004-4 I.R.B. 327

2004-8, 2004-10 I.R.B. 544

2004-9, 2004-6 I.R.B. 428

2004-10, 2004-7 I.R.B. 484

2004-11, 2004-7 I.R.B. 480

2004-12, 2004-7 I.R.B. 478

2004-13, 2004-7 I.R.B. 485

2004-14, 2004-8 I.R.B. 511

2004-15, 2004-8 I.R.B. 515

2004-16, 2004-8 I.R.B. 503

2004-17, 2004-8 I.R.B. 516

2004-18, 2004-8 I.R.B. 509

2004-19, 2004-8 I.R.B. 510

2004-20, 2004-10 I.R.B. 546

2004-21, 2004-10 I.R.B. 544

2004-22, 2004-10 I.R.B. 553

2004-23, 2004-11 I.R.B. 585

2004-24, 2004-10 I.R.B. 550

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin2003–52, dated December 29, 2003.

May 17, 2004 ii 2004-20 I.R.B.

Revenue Rulings— Continued:

2004-25, 2004-11 I.R.B. 587

2004-26, 2004-11 I.R.B. 598

2004-27, 2004-12 I.R.B. 625

2004-28, 2004-12 I.R.B. 624

2004-29, 2004-12 I.R.B. 627

2004-30, 2004-12 I.R.B. 622

2004-31, 2004-12 I.R.B. 617

2004-32, 2004-12 I.R.B. 621

2004-33, 2004-12 I.R.B. 628

2004-34, 2004-12 I.R.B. 619

2004-35, 2004-13 I.R.B. 640

2004-36, 2004-12 I.R.B. 620

2004-37, 2004-11 I.R.B. 583

2004-38, 2004-15 I.R.B. 717

2004-39, 2004-14 I.R.B. 700

2004-40, 2004-15 I.R.B. 716

2004-41, 2004-18 I.R.B. 845

2004-42, 2004-17 I.R.B. 824

2004-43, 2004-18 I.R.B. 842

2004-44, 2004-19 I.R.B. 885

2004-46, 2004-20 I.R.B. 915

Tax Conventions:

2004-3, 2004-7 I.R.B. 486

Treasury Decisions:

9099, 2004-2 I.R.B. 255

9100, 2004-3 I.R.B. 297

9101, 2004-5 I.R.B. 376

9102, 2004-5 I.R.B. 366

9103, 2004-3 I.R.B. 306

9104, 2004-6 I.R.B. 406

9105, 2004-6 I.R.B. 419

9106, 2004-5 I.R.B. 384

9107, 2004-7 I.R.B. 447

9108, 2004-6 I.R.B. 429

9109, 2004-8 I.R.B. 519

9110, 2004-8 I.R.B. 504

9111, 2004-8 I.R.B. 518

9112, 2004-9 I.R.B. 523

9113, 2004-9 I.R.B. 524

9114, 2004-11 I.R.B. 589

9115, 2004-14 I.R.B. 680

9116, 2004-14 I.R.B. 674

9117, 2004-15 I.R.B. 721

9118, 2004-15 I.R.B. 718

9119, 2004-17 I.R.B. 825

9120, 2004-19 I.R.B. 881

9121, 2004-20 I.R.B. 903

9122, 2004-19 I.R.B. 886

9123, 2004-20 I.R.B. 907

9124, 2004-20 I.R.B. 901

2004-20 I.R.B. iii May 17, 2004

Findings List of Current Actions onPreviously Published Items1

Bulletins 2004–1 through 2004–20

Announcements:

93-60

Obsoleted by

Rev. Proc. 2004-23, 2004-16 I.R.B. 785

2003-56

Modified by

Ann. 2004-11, 2004-10 I.R.B. 581

Notices:

98-5

Withdrawn by

Notice 2004-19, 2004-11 I.R.B. 606

2000-4

Obsoleted by

T.D. 9115, 2004-14 I.R.B. 680

2003-76

Modified by

Notice 2004-19, 2004-11 I.R.B. 606

2004–2

Modified by

Notice 2004–25, 2004–15 I.R.B. 727

Proposed Regulations:

REG-110896-98

Corrected by

Ann. 2004-14, 2004-10 I.R.B. 582

REG-115037-00

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-138499-02

Partially withdrawn by

REG-106590-00, 2004-14 I.R.B. 704

REG-143321-02

Withdrawn by

REG-156232-03, 2004-5 I.R.B. 399

REG-146893-02

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-163974-02

Corrected by

Ann. 2004-13, 2004-9 I.R.B. 543

REG-166012-02

Corrected by

Ann. 2004-40, 2004-17 I.R.B. 840

Revenue Procedures:

85-35

Obsoleted by

Rev. Proc. 2004-26, 2004-19 I.R.B. 890

87-19

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

93-15


Rev. Proc. 2004-18, 2004-9 I.R.B. 529

94-41

Superseded by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

94-55


Rev. Proc. 2004-18, 2004-9 I.R.B. 529

98-16

Suspended by

Notice 2004-12, 2004-10 I.R.B. 556

2000-38

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2000-50

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2001-10

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2001-23

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2002-9

Modified and amplified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509Rev. Proc. 2004-23, 2004-16 I.R.B. 785

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311Ann. 2004-16, 2004-13 I.R.B. 668

2002-28

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2002-71

Superseded by

Rev. Proc. 2004-13, 2004-4 I.R.B. 335

2003-1

Superseded by

Rev. Proc. 2004-1, 2004-1 I.R.B. 1

2003-2

Superseded by

Rev. Proc. 2004-2, 2004-1 I.R.B. 83

Revenue Procedures— Continued:

2003-3

As amplified by Rev. Proc. 2003-14, and as

modified by Rev. Proc. 2003-48 superseded by

Rev. Proc. 2004-3, 2004-1 I.R.B. 114

2003-4

Superseded by

Rev. Proc. 2004-4, 2004-1 I.R.B. 125

2003-5

Superseded by

Rev. Proc. 2004-5, 2004-1 I.R.B. 167

2003-6

Superseded by

Rev. Proc. 2004-6, 2004-1 I.R.B. 197

2003-7

Superseded by

Rev. Proc. 2004-7, 2004-1 I.R.B. 237

2003-8

Superseded by

Rev. Proc. 2004-8, 2004-1 I.R.B. 240

2003-23

Modified and superseded by

Rev. Proc. 2004-14, 2004-7 I.R.B. 489

2003-26

Supplemented by

Rev. Proc. 2004-17, 2004-10 I.R.B. 562

2003-29

Obsoleted, except as provided in section 5.02, by

Rev. Proc. 2004-24, 2004-16 I.R.B. 790

2003-64

Modified by

Rev. Proc. 2004-21, 2004-14 I.R.B. 702

2004-1

Corrected by

Ann. 2004-8, 2004-6 I.R.B. 441

2004-4

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-5

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-6

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

Revenue Rulings:

55-748

Modified and superseded by

Rev. Rul. 2004-20, 2004-10 I.R.B. 546

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,2003.

May 17, 2004 iv 2004-20 I.R.B.

Revenue Rulings— Continued:

92-19

Supplemented in part by

Rev. Rul. 2004-14, 2004-8 I.R.B. 511

94-38

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

98-25

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

2004-38

Modified by

Rev. Proc. 2004-22, 2004-15 I.R.B. 727

Treasury Decisions:

9088

Corrected by

Ann. 2004-39, 2004-17 I.R.B. 840

2004-20 I.R.B. v May 17, 2004*U.S. Government Printing Office: 2004—304–778/60135