INCOME TAX ADMINISTRATIVE · 2006–10 I.R.B. 546 March 6, 2006. section 1018(f) of the Technical and Mis-cellaneous Revenue Act of 1988, Public Law 100–647 (102 Stat. 3582). Section

Bulletin No. 2006-10March 6, 2006

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. 2006–10, page 557.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for March 2006.

T.D. 9249, page 546.Final regulations under section 468B of the Code provide rulesfor the taxation and reporting of income earned on qualifiedsettlement funds, escrow accounts established in connectionwith sales of property, and disputed ownership funds. Rev. Rul.77–230 obsoleted.

REG–113365–04, page 580.Proposed regulations under section 468B of the Code with-draw in part a notice of proposed rulemaking and re-proposerules relating to the taxation of the income earned on escrowaccounts, trusts, and other funds used during deferred ex-changes of like-kind property, and propose rules under section7872 of the Code regarding below-market loans to facilitatorsof these exchanges. A public hearing is scheduled for June 6,2006.

Notice 2006–7, page 559.This notice, which supplements Notice 2005–98, 2005–52I.R.B. 1211, provides guidance with respect to facilities thatmay be financed with the proceeds of clean renewable energybonds under section 54(a) of the Code. In addition, the noticeprovides guidance with respect to the entities that may ownfacilities financed with the proceeds of clean renewable energybonds and the entities that may issue clean renewable energybonds. Notice 2005–98 supplemented.

ADMINISTRATIVE

REG–122380–02, page 563.Proposed regulations under section 330 of title 31 of the U.S.Code provide proposed amendments to the provisions of Cir-cular 230 relating to various non-shelter items. This documentproposes amendments reflecting the Treasury Department andthe IRS consideration of the comments received in response tothe 2002 advance notice of proposed rulemaking and reflect-ing amendments to section 330 of title 31 made by the Amer-ican Jobs Creation Act of 2004. The regulations also includeconforming amendments to reflect the final regulations relatingto best practices, covered opinions and other written advicepublished as T.D. 9165, 2005–4 I.R.B. 357, and as T.D. 9201,2005–23 I.R.B. 1153, but do not otherwise address those finalregulations. A public hearing is scheduled for June 21, 2006.

Notice 2006–17, page 559.This notice states that the deadline to make an election undersection 165(i) of the Code to deduct in the preceding taxableyear certain losses attributable to Hurricane Katrina, Rita, orWilma is postponed until October 16, 2006.

(Continued on the next page)

Finding Lists begin on page ii.

Notice 2006–20, page 560.This notice supplements Notice 2005–73, 2005–42 I.R.B.723, News Release IR–2005–112, Notice 2005–81, 2005–47I.R.B. 977, and Notice 2005–66, 2005–40 I.R.B. 620, which,under the authority of section 7508A, postponed until Feb-ruary 28, 2006, deadlines for certain taxpayers affected byHurricane Katrina to perform the acts described in Notice2005–73 (e.g., filing returns and other documents, paymentof taxes), and for the Internal Revenue Service (IRS) to performthe acts described in Notice 2005–81 (e.g., assessment, col-lection). The notice further postpones those deadlines throughAugust 28, 2006, for the IRS and for affected taxpayers inthe parishes in Louisiana and the counties in Mississippi andAlabama that the Federal Emergency Management Agency(FEMA) determined were eligible for individual assistance.Notices 2005–66, 2005–73, and 2005–81 supplemented.

March 6, 2006 2006–10 I.R.B.

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.

2006–10 I.R.B. March 6, 2006

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof March 2006. See Rev. Rul. 2006-10, page 557.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of March 2006. See Rev.Rul. 2006-10, page 557.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of March 2006. See Rev. Rul.2006-10, page 557.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 468B.—SpecialRules for DesignatedSettlement Funds26 CFR 1. 468B–1: Qualified settlement funds.

T.D. 9249

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 1 and 602

Escrow Funds and OtherSimilar Funds

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains finalregulations relating to the taxation and re-porting of income earned on qualified set-tlement funds and certain other escrow ac-counts, trusts, and funds, and other relatedrules. The final regulations affect qualifiedsettlement funds, escrow accounts estab-lished in connection with sales of property,disputed ownership funds, and the partiesto these escrow accounts, trusts, and funds.

DATES: Effective Date: These regulationsare effective on February 3, 2006.

Applicability Dates: For dates of appli-cability, see §§1.468B–5(c), 1.468B–7(f),and 1.468B–9(j).

FOR FURTHER INFORMATIONCONTACT: Richard Shevak orA. Katharine Jacob Kiss, (202) 622–4930(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations havebeen reviewed and approved by the Of-fice of Management and Budget in ac-cordance with the Paperwork ReductionAct (44 U.S.C. 3507(d)) under controlnumber 1545–1631. The collections ofinformation in §§1.468B–1(k)(2) and

1.468B–9(c)(2)(ii) are to obtain bene-fits and the collection of information in§1.468B–9(g) is mandatory.

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 validcontrol number assigned by the Office ofManagement and Budget.

The estimated annual burden per re-spondent is .40 hours.

Comments concerning the accuracyof this burden estimate and sugges-tions for reducing this burden shouldbe sent to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:T:SP, Washington, DC20224, and to the Office of Manage-ment and Budget, Attn: Desk Officer forthe Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503.

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.

Background

This document contains amendmentsto 26 CFR part 1 under section 468B ofthe Internal Revenue Code (Code). Thisdocument does not adopt §1.468B–6of a notice of proposed rulemaking(REG–209619–93, 1999–1 C.B. 689)published in the Federal Register on Feb-ruary 1, 1999 (64 FR 4801), relating tothe current taxation and reporting of in-come earned on qualified settlement fundsand certain other escrow accounts, trusts,and funds, which is withdrawn and repro-posed by a notice of proposed rulemaking(REG–113365–04) published elsewherein this issue of the Bulletin. This docu-ment also does not adopt §1.468B–8 ofthe notice of proposed rulemaking, whichis reserved.

Section 468B was added to the Codeby section 1807(a)(7)(A) of the Tax Re-form Act of 1986, Public Law 99–514(100 Stat. 2814), and was amended by

2006–10 I.R.B. 546 March 6, 2006

section 1018(f) of the Technical and Mis-cellaneous Revenue Act of 1988, PublicLaw 100–647 (102 Stat. 3582). Section468B(g) provides that nothing in any pro-vision of law shall be construed as pro-viding that an escrow account, settlementfund, or similar fund is not subject to cur-rent income taxation, and that the Secre-tary shall prescribe regulations providingfor the taxation of such accounts or funds,whether as a grantor trust or otherwise.

On December 23, 1992, final regula-tions (T.D. 8459, 1993–1 C.B. 68) undersection 468B(g) concerning the taxationof qualified settlement funds (QSF) werepublished in the Federal Register (57 FR60983) (the QSF regulations). The QSFregulations do not address the taxation ofother types of escrow accounts, trusts, orfunds. The preamble to the QSF regula-tions states that future regulations wouldaddress the income tax treatment of ac-counts, trusts, or funds other than QSFs,specifically, escrow accounts used in thesale of property and section 1031 qualifiedescrow accounts.

On February 1, 1999, the IRS and theTreasury Department published a notice ofproposed rulemaking (REG–209619–93)in the Federal Register (64 FR 4801) re-garding the proposed income tax treatmentof these other funds. The proposed reg-ulations provide rules for taxing incomeearned by (1) qualified escrow accountsand qualified trusts used in deferred like-kind exchanges under section 1031, (2)pre-closing escrows used in sales or ex-changes of real or personal property, (3)contingent-at-closing escrows establishedon account of contingencies existing at theclosing of certain sales of business or in-vestment property, and (4) disputed own-ership funds established under the juris-diction of a court to hold money or prop-erty subject to disputed claims of owner-ship. Additionally, the proposed regula-tions provide rules permitting a transferorto a QSF to elect taxation of the QSF as agrantor trust.

Written comments responding to thenotice of proposed rulemaking were re-ceived. A public hearing was held onMay 12, 1999. After consideration of thecomments, the proposed regulations areadopted as revised by this Treasury deci-sion.

Explanation of Provisions andSummary of Comments

1. Election to Treat a QualifiedSettlement Fund as a Grantor Trust Under§1.468B–1(k)

The proposed regulations provide that,if there is only one transferor to a qual-ified settlement fund, the transferor maymake an election to treat the qualified set-tlement fund as a grantor trust, all of whichis treated as owned by the transferor (agrantor trust election). The election maybe revoked only for compelling circum-stances upon consent of the Commissionerby private letter ruling.

Commentators recommended expand-ing the scope of the grantor trust electionby allowing the election even if thereare multiple transferors to a qualifiedsettlement fund. Certain commentatorssuggested that this rule could be limited tosituations in which all of the grantors aremembers of the same consolidated group.These comments were not adopted be-cause they would result in undue complex-ity. For example, extending the grantortrust election to multiple-transferor trustswould require the allocation of items ofincome, deduction and credit (includingcapital gains and losses) among the vari-ous transferors. Although §1.671–3 of theIncome Tax Regulations contains rules formaking such allocations, the IRS and theTreasury Department do not believe thatthese rules address the complex sharingarrangements that may arise in a qualifiedsettlement fund. Moreover, if some, butnot all, of the transferors elected grantortrust treatment, another allocation methodwould be necessary to allocate the itemsof income, deduction, and credit (includ-ing capital gains and losses) between thegrantor trust portion of the fund and thequalified settlement fund portion of thefund.

Commentators recommended allowingtransferors to make the grantor trust elec-tion in taxable years after the taxable yearin which the fund is established. This com-ment was not adopted because allowinga grantor trust election for a taxable yearother than the taxable year in which thefund is established gives rise to complexissues regarding the tax treatment of thefund upon conversion to a grantor trust.For example, any deduction claimed by the

transferor for amounts contributed to thequalified settlement fund would need tobe recaptured. Further, adjustments wouldbe necessary to take into account incomepreviously taxed to the qualified settle-ment fund and differences in the account-ing methods used by the transferor and thefund.

However, the final regulations allow atransferor to a qualified settlement fund toelect grantor trust treatment for the fund’sfirst taxable year and all subsequent yearsif the fund was established on or beforeFebruary 3, 2006, and the applicable pe-riod of limitations for filing an amendedreturn has not expired for the qualified set-tlement fund’s first and all subsequent tax-able years, and for the transferor’s cor-responding taxable years. To make thegrantor trust election, the qualified settle-ment fund and the transferor must amendall affected income tax returns.

2. Treatment of Section 1031 QualifiedEscrow Accounts and Qualified Trustsunder §1.468B–6

Section 1.468B–6 of the proposed reg-ulations provides rules for the currenttaxation of income of a qualified escrowaccount or qualified trust used in a de-ferred exchange under section 1031. Theproposed regulations provide that, in gen-eral, the taxpayer (the transferor of theproperty) is the owner of the assets in aqualified escrow account or qualified trustand must take into account all items ofincome, deduction, and credit (includingcapital gains and losses) of the qualifiedescrow account or qualified trust. How-ever, if, under the facts and circumstances,a qualified intermediary or the transfereehas the beneficial use and enjoyment of theassets, then the qualified intermediary ortransferee is the owner of the assets in thequalified escrow account or qualified trustand must take into account all items ofincome, deduction, and credit (includingcapital gains and losses) of the qualifiedescrow account or qualified trust. In ad-dition to other relevant facts and circum-stances, the proposed regulations list threefactors that will be considered in deter-mining whether the qualified intermediaryor transferee, rather than the taxpayer, hasthe beneficial use and enjoyment of assetsof a qualified escrow account or qualifiedtrust. The proposed regulations further

March 6, 2006 547 2006–10 I.R.B.

provide that, if a qualified intermediaryor transferee is the owner of the assetstransferred, section 7872 may apply if thedeferred exchange involves a below-mar-ket loan from the taxpayer to the owner.

The comments reflected substantial dis-agreement on the proper rules for taxingthese arrangements. For example, somecommentators recommended that the factsand circumstances test be replaced by a perse rule requiring transferors to take into ac-count the trust’s or account’s income inall cases. Other commentators urged thatthe ownership factors should apply in allcircumstances. Commentators suggestedthat the rules of §1.468B–6 should apply toall funds held by qualified intermediariesas well as to funds held in a qualified es-crow account or qualified trust, while othercommentators argued that the rules shouldapply only to qualified escrow accountsand qualified trusts. Some commentatorsagreed that certain of these transactionscreate below-market loans, and other com-mentators asserted that the transactions donot create below-market loans.

The IRS and the Treasury Departmenthave concluded that these issues merit fur-ther consideration. Therefore, a notice ofproposed rulemaking published elsewherein this issue of the Bulletin withdraws thatportion of the notice of proposed rulemak-ing that relates to the current taxation ofincome of a qualified escrow account orqualified trust used in a deferred exchangeunder section 1031. This section has beenomitted from the final regulations and ispublished as proposed regulations else-where in this issue of the Bulletin. Thepreamble to those proposed regulationsmore fully discusses the comments re-ceived.

3. Pre-Closing Escrows under §1.468B–7

Section 1.468B–7 provides rules for thetaxation of income earned on certain es-crows established in connection with thesale of property, or pre-closing escrows.The proposed regulations require the pur-chaser to take into account all items ofincome, deduction, and credit (includingcapital gains and losses) of the pre-clos-ing escrow. The only comments receivedwith respect to this section relate to re-porting obligations of the escrow holderor trustee. Those comments are addressedlater in this preamble. The final regula-

tions adopt §1.468B–7 as proposed withminor changes to improve clarity.

4. Contingent-at-Closing Escrows under§1.468B–8

Section 1.468B–8 of the proposed reg-ulations provides rules for taxing the in-come of a contingent-at-closing escrow,which is an escrow account, trust, or fundestablished in connection with the sale orexchange of real or personal property toaccount for contingencies existing at clos-ing. The proposed regulations providethat, in computing taxable income, the pur-chaser must take into account all items ofincome, deduction, and credit (includingcapital gains and losses) of the escrow untilthe date on which specified events occur orfail to occur (the determination date). Be-ginning on the determination date, the pur-chaser and seller must each take into ac-count the income, deductions, and creditsof the escrow that correspond to their re-spective ownership interests in each assetof the escrow.

The IRS and the Treasury Departmenthave concluded that this section requiresfurther consideration. Therefore, this sec-tion has been omitted from the final reg-ulations and will be published as separateregulations.

5. Disputed Ownership Funds under§1.468B–9

Section 1.468B–9 provides rules forthe taxation of a disputed ownership fund(DOF). Under the proposed regulations, aDOF is an escrow account, trust, or fundthat is not a QSF and that (1) is establishedto hold money or property subject to con-flicting claims of ownership, (2) is subjectto the continuing jurisdiction of a court,and (3) requires approval of the court topay or distribute money or property to, oron behalf of, a claimant or transferor.

The final regulations specifically ex-clude bankruptcy estates under title 11 ofthe United States Code from the defini-tion of disputed ownership funds to avoidconflict with section 1398, which providesrules for the taxation of bankruptcy estatesin cases under chapters 7 and 11 of title11 involving individual debtors, and sec-tion 1399, which provides that no separatetaxable entity results from the commence-ment of a case under title 11 except in acase to which section 1398 applies.

The final regulations also exclude liq-uidating trusts from the definition of dis-puted ownership fund, although they mayhave a similar purpose, because liquidat-ing trusts are taxed as grantor trusts. See§301.7701–4(d), which provides that a liq-uidating trust is organized for the primarypurpose of liquidating and distributing as-sets. However, in the case of certain liq-uidating trusts established in connectionwith bankruptcy proceedings, it is uncer-tain who is properly taxable on incomeearned with respect to assets set aside tosatisfy disputed claims of creditors. There-fore, the trustee of a liquidating trust es-tablished pursuant to a plan confirmed bythe court in a case under title 11 of theUnited States Code may, in its first tax-able year, elect to treat an escrow account,trust, or fund that holds assets of the liq-uidating trust that are subject to disputedclaims as a disputed ownership fund. Thetrustee makes an election to treat this por-tion of the liquidating trust as a DOF byattaching an election statement to a timelyfiled Federal income tax return of the DOFfor the taxable year for which the electionbecomes effective. The trustee may revokethe election only with the Commissioner’sconsent by private letter ruling. The regu-lations do not otherwise affect the rules forthe taxation of liquidating trusts.

Under the proposed and final regula-tions, a DOF generally is taxable (1) asa QSF under §1.468B–2 if all the assetstransferred to the fund are passive assets,or (2) as a C corporation in all other cases.The claimants to a DOF also may requesta private letter ruling proposing an alterna-tive method of taxation. These final reg-ulations clarify that a DOF holding ex-clusively passive assets is taxable under§1.468B–2 as if it were a qualified set-tlement fund, but is not subject to all ofthe rules applicable to qualified settlementfunds. Additionally, because the final reg-ulations include certain rules that differfrom, and apply in lieu of, the rules in§1.468B–2, the final regulations expresslyidentify the provisions of §1.468B–2 thatdo not apply.

The final regulations generally followthe substantive rules of the proposed reg-ulations, but have been restructured forgreater clarity. For example, the final reg-ulations provide separate paragraphs forrules applicable to a transferor that is nota claimant to the DOF as well as rules ap-

2006–10 I.R.B. 548 March 6, 2006

plicable to a transferor that is a claimant(transferor-claimant).

Unless a grantor trust election is made,the transfer of money or property to a qual-ified settlement fund generally gives riseto economic performance. In contrast, un-der both the proposed regulations and thefinal regulations, the transfer of money orproperty to a DOF gives rise to economicperformance only if the transferor does notclaim ownership of any part of the prop-erty that is transferred to the DOF (thetransferor is not a transferor-claimant).The transfer of property to the DOF isnot treated as a transfer to the claimantsfor economic performance purposes if thetransferor continues to claim ownershipof some or all of the transferred prop-erty. Consistent with this approach, theproposed regulations provide that, if thetransferor claims ownership of the trans-ferred property after the transfer to thefund, then the transfer of property to theDOF is not treated as a sale or exchangeunder section 1001 and the transferor isnot taxed on distributions that the trans-feror receives from the DOF.

The final regulations further providethat a distribution from the DOF to a trans-feror-claimant is not treated as a sale orexchange under section 1001(a). Distri-butions from the DOF to claimants otherthan the transferor-claimant are deemedto be made first to the transferor-claimantand then from the transferor-claimant toanother claimant. These rules are in-tended to put the transferor-claimant in thesame position for purposes of determiningwhether a deduction is allowable with re-spect to the transfer as it would have beenin if the money or property had not beentransferred first to a DOF.

A commentator requested that the finalregulations exempt court registry fundsfrom the rules for DOFs. The commenta-tor asserted that complying with the DOFrules would impose an undue burden oncourts. This comment was not adoptedbecause an exemption for court registryfunds would be inconsistent with section468B(g), which requires current incometaxation of escrow accounts, settlementfunds, and similar funds. Because courtregistry funds are similar to escrow ac-counts and settlement funds, they fallwithin the plain meaning of the statute.The commentator also requested clarifi-cation of whether bail bonds or appellate

bonds filed with a court are DOFs. Thefinal regulations include an example toclarify that these types of surety bonds donot create DOFs.

6. Information Reporting Requirements

Generally, §§1.468B–6 through1.468B–8 of the proposed regulationsstate that an escrow holder (escrow agent,trustee or other person responsible foradministering the escrow) must reportthe income of an escrow account, trust,or fund on a Form 1099 “in accordancewith” subpart B, Part III, subchapter A,chapter 61, Subtitle F of the Code (cur-rently, sections 6041 through 6050T).Several commentators expressed concernthat these provisions expand the existinginformation reporting obligations in sec-tions 6041 through 6050T.

The proposed regulations were not in-tended to create new information reportingrequirements but merely to alert escrowholders and other responsible persons ofthe potential obligation to report. To clar-ify this intent, the final regulations pro-vide that a payor must report to the extentrequired by sections 6041 through 6050Tand these regulations.

Effect on Other Documents

Rev. Rul. 77–230, 1977–2 C.B. 214, isobsolete as of February 3, 2006.

Effective Date

The regulations apply to qualified set-tlement funds, pre-closing escrows, anddisputed ownership funds created af-ter February 3, 2006. A transferor to aqualified settlement fund, however, maymake a grantor trust election for a quali-fied settlement fund created on or beforeFebruary 3, 2006, if the applicable pe-riod of limitations on filing an amendedreturn has not expired for the qualifiedsettlement fund’s first taxable year andall subsequent taxable years and for thetransferor’s corresponding taxable yearor years. Additionally, for pre-closingescrows and disputed ownership funds es-tablished after August 16, 1986, but beforeFebruary 3, 2006, the IRS will not chal-lenge a reasonable, consistently appliedmethod of taxation.

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. Pursuant to section 7805(f)of the Code, the notice of proposed rule-making preceding these regulations wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-nesses.

Final Regulatory Flexibility ActAnalysis

This final regulatory flexibility analy-sis has been prepared for this Treasury de-cision under 5 U.S.C. 604. The objectiveof the regulations is to ensure that the in-come of certain escrow accounts, trusts,and funds is subject to current taxationby identifying the proper party or partiessubject to tax. Section 468B(g) providesthe legal basis for the requirements of theregulations. The IRS and the TreasuryDepartment are not aware of any Federalrules that may duplicate, overlap, or con-flict with the regulations. An explanationis provided below of the burdens on smallentities resulting from the requirements ofthe regulations. A description also is pro-vided of alternative rules that were consid-ered by the IRS and the Treasury Depart-ment but rejected as too burdensome.

1. Grantor Trust Election

Under §1.468B–1(k), a transferor toa qualified settlement fund may elect tohave the qualified settlement fund treatedas a grantor trust all of which is owned bythe transferor (grantor trust election). Theelection is available only to a qualified set-tlement fund established after February 3,2006. However, a transferor may make agrantor trust election under §1.468B–1(k)for a qualified settlement fund that was es-tablished on or before February 3, 2006, ifthe applicable period of limitations on fil-ing an amended return has not expired forboth the qualified settlement fund’s firsttaxable year and all subsequent taxableyears and the transferor’s correspondingtaxable year or years.

To make a grantor trust election, atransferor must attach a statement to atimely filed (including extensions) Form

March 6, 2006 549 2006–10 I.R.B.

1041, “U.S. Income Tax Return for Estatesand Trusts.” The statement must includethe transferor’s name, address, taxpayeridentification number, and the legend,“§1.468B–1(k) Election.”

Approximately 900 qualified settle-ment fund returns are filed each year.Only a small number of these returnsare filed for newly created qualified set-tlement funds. Because a grantor trustelection may be made only for a qualifiedsettlement fund that has one transferor, theIRS and the Treasury Department believethat a very small number of grantor trustelections will be made each year.

Similarly, the IRS and the Treasury De-partment believe that a very small numberof grantor trust elections will be made forpast years. A retroactive grantor trust elec-tion may impose an additional burden on ataxpayer because the taxpayer may be re-quired to file amended returns. However,this election is voluntary.

The alternatives to the regulations are(1) to limit the grantor trust election by per-mitting the elections only for QSFs estab-lished on or after the date the final regula-tions are published, or (2) to eliminate theopportunity to make a grantor trust elec-tion by retaining the current rules, whichdo not permit the election. These alterna-tives were rejected because they might re-sult in a greater burden on small entitiesthan that imposed by these regulations.

2. Disputed Ownership Funds

Section 1.468B–9(c)(1) provides that adisputed ownership fund is a separate tax-able entity.

Section 1.468B–9(g) requires that atransferor provide to the IRS and the ad-ministrator of a disputed ownership funda statement that itemizes the propertyother than cash transferred to the disputedownership fund during the calendar year.The statement must indicate the basis andholding period of the property. This in-formation is required to substantiate thetransfer and to determine the proper taxconsequences of the transfer to the fundand of a transfer of property from the fundto a claimant. To minimize the burden,no statement is required for transfers ofcash and any two or more transferors mayprovide a combined statement. There areno known alternatives to these rules that

are less burdensome to small entities andaccomplish the purpose of the regulations.

The trustee of a liquidating trust estab-lished pursuant to a plan confirmed by thecourt in a case under title 11 of the UnitedStates Code may, in the liquidating trust’sfirst taxable year, elect to treat an escrowaccount, trust, or fund that holds assets ofthe liquidating trust that are subject to dis-puted claims as a disputed ownership fund.The trustee makes an election by attachingan election statement to a timely filed Fed-eral income tax return of the disputed own-ership fund for the taxable year for whichthe election becomes effective. This elec-tion is voluntary. There are no known al-ternatives to this requirement that are lessburdensome and accomplish the purposeof the regulations.

The IRS and the Treasury Departmentestimate that there are approximately5,000 disputed ownership funds createdannually. Many of these funds do notinvolve small entities.

Drafting Information

The principal authors of theseregulations are Richard Shevak andA. Katharine Jacob Kiss of the Officeof Associate Chief Counsel (Income Tax& Accounting). However, other personnelfrom the IRS and the Treasury Departmentparticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by:

a. Removing the entries for “Section1.468B” and “Sections 1.468B–0 through1.468B–5.”

b. Adding entries for §§1.468B–1through 1.468B–9.

The additions read as follows:Authority: 26 U.S.C. 7805***Section 1.468B–1 also issued under 26

U.S.C. 461(h) and 468B(g).Section 1.468B–2 also issued under 26

U.S.C. 461(h) and 468B(g).

Section 1.468B–3 also issued under 26U.S.C. 461(h) and 468B(g).




Section 1.468B–9 also issued under 26U.S.C. 461(h) and 468B(g).* * *

Par. 2. Section 1.468B–0 is amendedby:

a. Revising the introductory text of§1.468B–0.

b. Revising the entries for §1.468B–1,paragraph (k).

c. Adding an entry for §1.468B–1,paragraph (l).

d. Revising the entry for the sectionheading for §1.468B–5.

e. Adding an entry for §1.468B–5,paragraph (c).

f. Adding entries for §§1.468B–6through 1.468B–9.

The additions and revisions read as fol-lows:

§1.468B–0 Table of contents.

This section lists the table of contentsfor §§1.468B–1 through 1.468B–9.

§1.468B–1 Qualified settlement funds.

* * * * *(k) Election to treat a qualified settle-

ment fund as a subpart E trust.(1) In general.(2) Manner of making grantor trust

election.(i) In general.(ii) Requirements for election state-

ment.(3) Effect of making the election.(l) Examples.

* * * * *

§1.468B–5 Effective dates and transitionrules applicable to qualified settlementfunds.

* * * * *(c) Grantor trust elections under

§1.468B–1(k).(1) In general.(2) Transition rules.

2006–10 I.R.B. 550 March 6, 2006

(3) Qualified settlement funds estab-lished by the U.S. government on or beforeFebruary 3, 2006.

§1.468B–6 Escrow accounts, trusts, andother funds used in deferred exchangesof like-kind property under section1031(a)(3). [Reserved].

§1.468B–7 Pre-closing escrows.

(a) Scope.(b) Definitions.(c) Taxation of pre-closing escrows.(d) Reporting obligations of the admin-

istrator.(e) Examples.(f) Effective dates.(1) In general.(2) Transition rule.

§1.468B–8 Contingent-at-closingescrows. [Reserved].

§1.468B–9 Disputed ownership funds.

(a) Scope.(b) Definitions.(c) Taxation of a disputed ownership

fund.(1) In general.(2) Exceptions.(3) Property received by the disputed

ownership fund.(i) Generally excluded from income.(ii) Basis and holding period.(4) Property distributed by the disputed

ownership fund.(i) Computing gain or loss.(ii) Denial of deduction.(5) Taxable year and accounting

method.(6) Unused carryovers.(d) Rules applicable to transferors that

are not transferor-claimants.(1) Transfer of property.(2) Economic performance.(i) In general.(ii) Obligations of the transferor.(3) Distributions to transferors.(i) In general.(ii) Exception.(iii) Deemed distributions.(e) Rules applicable to trans-

feror-claimants.(1) Transfer of property.(2) Economic performance.(i) In general.

(ii) Obligations of the trans-feror-claimant.

(3) Distributions to transferor-claimants.

(i) In general.(ii) Deemed distributions.(f) Distributions to claimants other than

transferor-claimants.(g) Statement to the disputed owner-

ship fund and the Internal Revenue Servicewith respect to transfers of property otherthan cash.

(1) In general.(2) Combined statements.(3) Information required on the state-

ment.(h) Examples.(i) [Reserved](j) Effective dates.(1) In general.(2) Transition rule.Par. 3. Section 1.468B–1 is amended

by redesignating paragraph (k) as para-graph (l) and adding a new paragraph (k)to read as follows:

§1.468B–1 Qualified settlement funds.

* * * * *(k) Election to treat a qualified settle-

ment fund as a subpart E trust—(1) In gen-eral. If a qualified settlement fund hasonly one transferor (as defined in para-graph (d)(1) of this section), the transferormay make an election (grantor trust elec-tion) to treat the qualified settlement fundas a trust all of which is owned by the trans-feror under section 671 and the regulationsthereunder. A grantor trust election may bemade whether or not the qualified settle-ment fund would be classified, in the ab-sence of paragraph (b) of this section, as atrust all of which is treated as owned by thetransferor under section 671 and the regu-lations thereunder. A grantor trust electionmay be revoked only for compelling cir-cumstances upon consent of the Commis-sioner by private letter ruling.

(2) Manner of making grantor trustelection—(i) In general. To make agrantor trust election, a transferor mustattach an election statement satisfying therequirements of paragraph (k)(2)(ii) ofthis section to a timely filed (includingextensions) Form 1041, “U.S. Income TaxReturn for Estates and Trusts,” that theadministrator files on behalf of the quali-fied settlement fund for the taxable year in

which the qualified settlement fund is es-tablished. However, if a Form 1041 is nototherwise required to be filed (for exam-ple, because the provisions of §1.671–4(b)apply), then the transferor makes a grantortrust election by attaching an electionstatement satisfying the requirements ofparagraph (k)(2)(ii) of this section to atimely filed (including extensions) incometax return of the transferor for the taxableyear in which the qualified settlement fundis established. See §1.468B–5(c)(2) fortransition rules.

(ii) Requirements for election state-ment. The election statement must includea statement by the transferor that the trans-feror will treat the qualified settlementfund as a grantor trust. The election state-ment must include the transferor’s name,address, taxpayer identification number,and the legend, “§1.468B–1(k) Election.”The election statement and the statementdescribed in §1.671–4(a) may be com-bined into a single statement.

(3) Effect of making the election. If agrantor trust election is made—

(i) Paragraph (b) of this section, and§§1.468B–2, 1.468B–3, and 1.468B–5(a)and (b) do not apply to the qualified set-tlement fund. However, this section (ex-cept for paragraph (b) of this section) and§1.468B–4 apply to the qualified settle-ment fund;

(ii) The qualified settlement fund istreated, for Federal income tax purposes,as a trust all of which is treated as ownedby the transferor under section 671 and theregulations thereunder;

(iii) The transferor must take into ac-count in computing the transferor’s in-come tax liability all items of income, de-duction, and credit (including capital gainsand losses) of the qualified settlement fundin accordance with §1.671–3(a)(1); and

(iv) The reporting obligations imposedby §1.671–4 on the trustee of a trust applyto the administrator.

* * * * *Par. 4. Section 1.468B–5 is amended

by revising the section heading and addingparagraph (c) to read as follows:

§1.468B–5 Effective dates and transitionrules applicable to qualified settlementfunds.

* * * * *

March 6, 2006 551 2006–10 I.R.B.

(c) Grantor trust elections under§1.468B–1(k)—(1) In general. A trans-feror may make a grantor trust electionunder §1.468B–1(k) if the qualified settle-ment fund is established after February 3,2006.

(2) Transition rules. A transferormay make a grantor trust election under§1.468B–1(k) for a qualified settlementfund that was established on or beforeFebruary 3, 2006, if the applicable pe-riod of limitation on filing an amendedreturn has not expired for both the qual-ified settlement fund’s first taxable yearand all subsequent taxable years and thetransferor’s corresponding taxable year oryears. A grantor trust election under thisparagraph (c)(2) requires that the returnsof the qualified settlement fund and thetransferor for all affected taxable yearsare consistent with the grantor trust elec-tion. This requirement may be satisfied bytimely filed original returns or amendedreturns filed before the applicable periodof limitation expires.

(3) Qualified settlement funds estab-lished by the U.S. government on or beforeFebruary 3, 2006. If the U.S. government,or any agency or instrumentality thereof,established a qualified settlement fundon or before February 3, 2006, and thefund would have been classified as a trustall of which is treated as owned by theU.S. government under section 671 andthe regulations thereunder without regardto the regulations under section 468B,then the U.S. government is deemed tohave made a grantor trust election under§1.468B–1(k), and the election is applica-ble for all taxable years of the fund.

Par. 5. Section 1.468B–6 is added andreserved to read as follows:

§1.468B–6 Escrow accounts, trusts, andother funds used in deferred exchangesof like-kind property under section1031(a)(3). [Reserved].

Par. 6. Section 1.468B–7 is added toread as follows:

§1.468B–7 Pre-closing escrows.

(a) Scope. This section provides rulesunder section 468B(g) for the current tax-ation of income of a pre-closing escrow.

(b) Definitions. For purposes of thissection—

(1) A pre-closing escrow is an escrowaccount, trust, or fund—

(i) Established in connection with thesale or exchange of real or personal prop-erty;

(ii) Funded with a down payment,earnest money, or similar payment that isdeposited into the escrow prior to the saleor exchange of the property;

(iii) Used to secure the obligation of thepurchaser to pay the purchase price for theproperty;

(iv) The assets of which, including anyincome earned thereon, will be paid to thepurchaser or otherwise distributed for thepurchaser’s benefit when the property issold or exchanged (for example, by beingdistributed to the seller as a credit againstthe purchase price); and

(v) Which is not an escrow account ortrust established in connection with a de-ferred exchange under section 1031(a)(3).

(2) Purchaser means, in the case of anexchange, the intended transferee of theproperty whose obligation to pay the pur-chase price is secured by the pre-closingescrow;

(3) Purchase price means, in the caseof an exchange, the required considerationfor the property; and

(4) Administrator means the escrowagent, escrow holder, trustee, or otherperson responsible for administering thepre-closing escrow.

(c) Taxation of pre-closing escrows.The purchaser must take into account incomputing the purchaser’s income tax lia-bility all items of income, deduction, andcredit (including capital gains and losses)of the pre-closing escrow. In the case of anexchange with a single pre-closing escrowfunded by two or more purchasers, eachpurchaser must take into account in com-puting the purchaser’s income tax liabilityall items of income, deduction, and credit(including capital gains and losses) earnedby the pre-closing escrow with respect tothe money or property deposited in thepre-closing escrow by or on behalf of thatpurchaser.

(d) Reporting obligations of the admin-istrator. For each calendar year (or portionthereof) that a pre-closing escrow is in ex-istence, the administrator must report theincome of the pre-closing escrow on Form1099 to the extent required by the infor-mation reporting provisions of subpart B,Part III, subchapter A, chapter 61, Subti-

tle F of the Internal Revenue Code and theregulations thereunder. See §1.6041–1(f)for rules relating to the amount to be re-ported when fees, expenses, or commis-sions owed by a payee to a third party arededucted from a payment.

(e) Examples. The provisions of thissection may be illustrated by the followingexamples:

Example 1. P enters into a contract with S for thepurchase of residential property owned by S for theprice of $200,000. P is required to deposit $10,000of earnest money into an escrow. At closing, the$10,000 and the interest earned thereon will be cred-ited against the purchase price of the property. Theescrow is a pre-closing escrow. P is taxable on the in-terest earned on the pre-closing escrow prior to clos-ing.

Example 2. X and Y enter into a contract in whichX agrees to exchange certain construction equipmentfor residential property owned by Y. The contract re-quires X and Y to each deposit $10,000 of earnestmoney into an escrow. At closing, $10,000 and theinterest earned thereon will be paid to X and $10,000and the interest earned thereon will be paid to Y. Theescrow is a pre-closing escrow. X is taxable on the in-terest earned prior to closing on the $10,000 of fundsX deposited in the pre-closing escrow. Similarly, Yis taxable on the interest earned prior to closing onthe $10,000 of funds Y deposited in the pre-closingescrow.

(f) Effective dates—(1) In general. Thissection applies to pre-closing escrows es-tablished after February 3, 2006.

(2) Transition rule. With respect to apre-closing escrow established after Au-gust 16, 1986, but on or before Febru-ary 3, 2006, the Internal Revenue Servicewill not challenge a reasonable, consis-tently applied method of taxation for in-come earned by the escrow or a reasonable,consistently applied method for reportingthe income.

Par. 7. Section 1.468B–8 is added andreserved to read as follows:

§1.468B–8 Contingent-at-closingescrows. [Reserved].

Par. 8. Section 1.468B–9 is added toread as follows:

§1.468B–9 Disputed ownership funds.

(a) Scope. This section provides rulesunder section 468B(g) relating to the cur-rent taxation of income of a disputed own-ership fund.

(b) Definitions. For purposes of thissection—

(1) Disputed ownership fund means anescrow account, trust, or fund that—

2006–10 I.R.B. 552 March 6, 2006

(i) Is established to hold money or prop-erty subject to conflicting claims of owner-ship;

(ii) Is subject to the continuing jurisdic-tion of a court;

(iii) Requires the approval of the courtto pay or distribute money or property to,or on behalf of, a claimant, transferor, ortransferor-claimant; and

(iv) Is not a qualified settlement fundunder §1.468B–1, a bankruptcy estate(or part thereof) resulting from the com-mencement of a case under title 11 of theUnited States Code, or a liquidating trustunder §301.7701–4(d) of this chapter (ex-cept as provided in paragraph (c)(2)(ii) ofthis section);

(2) Administrator means a person des-ignated as such by a court having jurisdic-tion over a disputed ownership fund, how-ever, if no person is designated, the admin-istrator is the escrow agent, escrow holder,trustee, receiver, or other person responsi-ble for administering the fund;

(3) Claimant means a person whoclaims ownership of, in whole or in part,or a legal or equitable interest in, moneyor property immediately before and im-mediately after that property is transferredto a disputed ownership fund;

(4) Court means a court of law or eq-uity of the United States or of any state(including the District of Columbia), ter-ritory, possession, or political subdivisionthereof;

(5) Disputed property means money orproperty held in a disputed ownership fundsubject to the claimants’ conflicting claimsof ownership;

(6) Related person means any personthat is related to a transferor within themeaning of section 267(b) or 707(b)(1);

(7) Transferor means, in general, a per-son that transfers disputed property to adisputed ownership fund, except that—

(i) If disputed property is transferred byan agent, fiduciary, or other person actingin a similar capacity, the transferor is theperson on whose behalf the agent, fidu-ciary, or other person acts; and

(ii) A payor of interest or other incomeearned by a disputed ownership fund is nota transferor within the meaning of this sec-tion (unless the payor is also a claimant);

(8) Transferor-claimant means a trans-feror that claims ownership of, in wholeor in part, or a legal or equitable inter-est in, the disputed property immediately

before and immediately after that prop-erty is transferred to the disputed owner-ship fund. Because a transferor-claimantis both a transferor and a claimant, gener-ally the terms transferor and claimant alsoinclude a transferor-claimant. See para-graph (d) of this section for rules applica-ble only to transferors that are not trans-feror-claimants and paragraph (e) of thissection for rules applicable only to trans-ferors that are also transferor-claimants.

(c) Taxation of a disputed ownershipfund—(1) In general. For Federal incometax purposes, a disputed ownership fundis treated as the owner of all assets thatit holds. A disputed ownership fund istreated as a C corporation for purposes ofsubtitle F of the Internal Revenue Code,and the administrator of the fund must ob-tain an employer identification number forthe fund, make all required income taxand information returns, and deposit all taxpayments. Except as otherwise providedin this section, a disputed ownership fundis taxable as—

(i) A C corporation, unless all the as-sets transferred to the fund by or on be-half of transferors are passive investmentassets. For purposes of this section, pas-sive investment assets are assets of the typethat generate portfolio income within themeaning of §1.469–2T(c)(3)(i); or

(ii) A qualified settlement fund, if allthe assets transferred to the fund by oron behalf of transferors are passive invest-ment assets. A disputed ownership fundtaxable as a qualified settlement fund un-der this section is subject to all the provi-sions contained in §1.468B–2, except thatthe rules contained in paragraphs (c)(3),(4), and (c)(5)(i) of this section apply inlieu of the rules in §1.468B–2(b)(1), (d),(e), (f) and (j).

(2) Exceptions. (i) The claimants toa disputed ownership fund may submita private letter ruling request proposinga method of taxation different than themethod provided in paragraph (c)(1) ofthis section.

(ii) The trustee of a liquidating trust es-tablished pursuant to a plan confirmed bythe court in a case under title 11 of theUnited States Code may, in the liquidatingtrust’s first taxable year, elect to treat an es-crow account, trust, or fund that holds as-sets of the liquidating trust that are subjectto disputed claims as a disputed ownershipfund. Pursuant to this election, creditors

holding disputed claims are not treated astransferors of the money or property trans-ferred to the disputed ownership fund. Atrustee makes the election by attaching astatement to the timely filed Federal in-come tax return of the disputed ownershipfund for the taxable year for which theelection becomes effective. The electionstatement must include a statement thatthe trustee will treat the escrow account,trust, or fund as a disputed ownership fundand must include a legend, “§1.468B–9(c)Election,” at the top of the page. The elec-tion may be revoked only upon consent ofthe Commissioner by private letter ruling.

(3) Property received by the disputedownership fund—(i) Generally excludedfrom income. In general, a disputed own-ership fund does not include an amount inincome on account of a transfer of disputedproperty to the disputed ownership fund.However, the accrual or receipt of incomefrom the disputed property in a disputedownership fund is not a transfer of disputedproperty to the fund. Therefore, a disputedownership fund must include in income allincome received or accrued from the dis-puted property, including items such as—

(A) Payments to a disputed ownershipfund made in compensation for late or de-layed transfers of money or property;

(B) Dividends on stock of a transferor(or a related person) held by the fund; and

(C) Interest on debt of a transferor (or arelated person) held by the fund.

(ii) Basis and holding period. In gen-eral, the initial basis of property trans-ferred by, or on behalf of, a transferorto a disputed ownership fund is the fairmarket value of the property on the dateof transfer to the fund, and the fund’sholding period begins on the date of thetransfer. However, if the transferor is atransferor-claimant, the fund’s initial basisin the property is the same as the basisof the transferor-claimant immediatelybefore the transfer to the fund, and thefund’s holding period for the property isdetermined under section 1223(2).

(4) Property distributed by the disputedownership fund—(i) Computing gain orloss. Except in the case of a distribu-tion or deemed distribution described inparagraph (e)(3) of this section, a disputedownership fund must treat a distributionof disputed property as a sale or exchangeof that property for purposes of section1001(a). In computing gain or loss, the

March 6, 2006 553 2006–10 I.R.B.

amount realized by the disputed ownershipfund is the fair market value of that prop-erty on the date of distribution.

(ii) Denial of deduction. A disputedownership fund is not allowed a deductionfor a distribution of disputed property orof the net after-tax income earned by thedisputed ownership fund made to or onbehalf of a transferor or claimant.

(5) Taxable year and accountingmethod. (i) A disputed ownership fundtaxable as a C corporation under para-graph (c)(1)(i) of this section may com-pute taxable income under any accountingmethod allowable under section 446 andis not subject to the limitations containedin section 448. A disputed ownership fundtaxable as a C corporation may use anytaxable year allowable under section 441.

(ii) A disputed ownership fund taxableas a qualified settlement fund under para-graph (c)(1)(ii) of this section may com-pute taxable income under any accountingmethod allowable under section 446 andmay use any taxable year allowable undersection 441.

(iii) Appropriate adjustments must bemade by a disputed ownership fund ortransferors to the fund to prevent the fundand the transferors from taking into ac-count the same item of income, deduc-tion, gain, loss, or credit (including capitalgains and losses) more than once or fromomitting such items. For example, if atransferor that is not a transferor-claimantuses the cash receipts and disbursementsmethod of accounting and transfers an ac-count receivable to a disputed ownershipfund that uses an accrual method of ac-counting, at the time of the transfer of theaccount receivable to the disputed own-ership fund, the transferor must includein its gross income the value of the ac-count receivable because, under paragraph(c)(3)(ii) of this section, the disputed own-ership fund will take a fair market valuebasis in the receivable and will not in-clude the fair market value in its incomewhen received from the transferor or whenpaid by the customer. If the account re-ceivable were transferred to the disputedownership fund by a transferor-claimantusing the cash receipts and disbursementsmethod, however, the disputed ownershipfund would take a basis in the receivableequal to the transferor’s basis, or $0, andwould be required to report the incomeupon collection of the account.

(6) Unused carryovers. Upon the ter-mination of a disputed ownership fund,if the fund has an unused net operatingloss carryover under section 172, an un-used capital loss carryover under section1212, or an unused tax credit carryover,or if the fund has, for its last taxable year,deductions in excess of gross income, theclaimant to which the fund’s net assets aredistributable will succeed to and take intoaccount the fund’s unused net operatingloss carryover, unused capital loss carry-over, unused tax credit carryover, or ex-cess of deductions over gross income forthe last taxable year of the fund. If thefund’s net assets are distributable to morethan one claimant, the unused net oper-ating loss carryover, unused capital losscarryover, unused tax credit carryover, orexcess of deductions over gross incomefor the last taxable year must be allocatedamong the claimants in proportion to thevalue of the assets distributable to eachclaimant from the fund. Unused carry-overs described in this paragraph (c)(6) arenot money or other property for purposesof paragraph (e)(3)(ii) of this section andthus are not deemed transferred to a trans-feror-claimant before being transferred tothe claimants described in this paragraph(c)(6).

(d) Rules applicable to transferors thatare not transferor-claimants. The rulesin this paragraph (d) apply to transferors(as defined in paragraph (b)(7) of this sec-tion) that are not transferor-claimants (asdefined in paragraph (b)(8) of this section).

(1) Transfer of property. A transferormust treat a transfer of property to a dis-puted ownership fund as a sale or other dis-position of that property for purposes ofsection 1001(a). In computing the gain orloss on the disposition, the amount realizedby the transferor is the fair market valueof the property on the date the transfer ismade to the disputed ownership fund.

(2) Economic performance—(i) Ingeneral. For purposes of section 461(h),if a transferor using an accrual methodof accounting has a liability for whicheconomic performance would otherwiseoccur under §1.461–4(g) when the trans-feror makes payment to the claimant orclaimants, economic performance occurswith respect to the liability when and to theextent that the transferor makes a transferto a disputed ownership fund to resolve orsatisfy that liability.

(ii) Obligations of the transferor. Eco-nomic performance does not occur whena transferor using an accrual method ofaccounting issues to a disputed owner-ship fund its debt (or provides the debtof a related person). Instead, economicperformance occurs as the transferor (orrelated person) makes principal paymentson the debt. Economic performance doesnot occur when the transferor provides toa disputed ownership fund its obligation(or the obligation of a related person) toprovide property or services in the fu-ture or to make a payment described in§1.461–4(g)(1)(ii)(A). Instead, economicperformance occurs with respect to suchan obligation as property or services areprovided or payments are made to thedisputed ownership fund or a claimant.With regard to interest on a debt issuedor provided to a disputed ownership fund,economic performance occurs as deter-mined under §1.461–4(e).

(3) Distributions to transferors—(i)In general. Except as provided in sec-tion 111(a) and paragraph (d)(3)(ii) ofthis section, the transferor must includein gross income any distribution to thetransferor (including a deemed distribu-tion described in paragraph (d)(3)(iii) ofthis section) from the disputed ownershipfund. If property is distributed, the amountincludible in gross income and the basis inthat property are generally the fair marketvalue of the property on the date of distri-bution.

(ii) Exception. A transferor is not re-quired to include in gross income a dis-tribution of money or property that it pre-viously transferred to the disputed owner-ship fund if the transferor did not take intoaccount, for example, by deduction or cap-italization, an amount with respect to thetransfer either at the time of the transferto, or while the money or property washeld by, the disputed ownership fund. Thetransferor’s gross income does not includea distribution of money from the disputedownership fund equal to the net after-taxincome earned on money or property trans-ferred to the disputed ownership fund bythe transferor while that money or propertywas held by the fund. Money distributed toa transferor by a disputed ownership fundwill be deemed to be distributed first fromthe money or property transferred to thedisputed ownership fund by that transferor,then from the net after-tax income of any

2006–10 I.R.B. 554 March 6, 2006

money or property transferred to the dis-puted ownership fund by that transferor,and then from other sources.

(iii) Deemed distributions. If a dis-puted ownership fund makes a distributionof money or property on behalf of a trans-feror to a person that is not a claimant, thedistribution is deemed made by the fund tothe transferor. The transferor, in turn, isdeemed to make a payment to the actualrecipient.

(e) Rules applicable to trans-feror-claimants. The rules in this para-graph (e) apply to transferor-claimants (asdefined in paragraph (b)(8) of this sec-tion).

(1) Transfer of property. A transfer ofproperty by a transferor-claimant to a dis-puted ownership fund is not a sale or otherdisposition of the property for purposes ofsection 1001(a).

(2) Economic performance—(i) In gen-eral. For purposes of section 461(h), ifa transferor-claimant using an accrualmethod of accounting has a liability forwhich economic performance would oth-erwise occur under §1.461–4(g) whenthe transferor-claimant makes payment toanother claimant, economic performanceoccurs with respect to the liability whenand to the extent that the disputed owner-ship fund transfers money or property tothe other claimant to resolve or satisfy thatliability.

(ii) Obligations of the trans-feror-claimant. Economic performancedoes not occur when a disputed owner-ship fund transfers the debt of a trans-feror-claimant (or of a person relatedto the transferor-claimant) to anotherclaimant. Instead, economic performanceoccurs as principal payments on the debtare made to the other claimant. Eco-nomic performance does not occur whena disputed ownership fund transfers toanother claimant the obligation of a trans-feror-claimant (or of a person related to thetransferor-claimant) to provide property orservices in the future or to make a paymentdescribed in §1.461–4(g)(1)(ii)(A). In-stead, economic performance occurs withrespect to such an obligation as propertyor services are provided or payments aremade to the other claimant. With regardto interest on a debt issued or providedto a disputed ownership fund, economicperformance occurs as determined under§1.461–4(e).

(3) Distributions to transferor-claimants—(i) In general. The grossincome of a transferor-claimant doesnot include a distribution to the trans-feror-claimant (including a deemed dis-tribution described in paragraph (e)(3)(ii)of this section) of money or propertyfrom a disputed ownership fund that thetransferor-claimant previously transferredto the fund, or the net after-tax incomeearned on that money or property whileit was held by the fund. If such propertyis distributed to the transferor-claimantby the disputed ownership fund, then thetransferor-claimant’s basis in the propertyis the same as the disputed ownershipfund’s basis in the property immediatelybefore the distribution.

(ii) Deemed distributions. If a disputedownership fund makes a distribution ofmoney or property to a claimant or makesa distribution of money or property on be-half of a transferor-claimant to a personthat is not a claimant, the distribution isdeemed made by the fund to the trans-feror-claimant. The transferor-claimant, inturn, is deemed to make a payment to theactual recipient.

(f) Distributions to claimants other thantransferor-claimants. Whether a claimantother than a transferor-claimant must in-clude in gross income a distribution ofmoney or property from a disputed own-ership fund generally is determined by ref-erence to the claim in respect of which thedistribution is made.

(g) Statement to the disputed ownershipfund and the Internal Revenue Service withrespect to transfers of property other thancash—(1) In general. By February 15 ofthe year following each calendar year inwhich a transferor (or other person actingon behalf of a transferor) makes a trans-fer of property other than cash to a dis-puted ownership fund, the transferor mustprovide a statement to the administrator ofthe fund setting forth the information de-scribed in paragraph (g)(3) of this section.The transferor must attach a copy of thisstatement to its return for the taxable yearof transfer.

(2) Combined statements. If a disputedownership fund has more than one trans-feror, any two or more transferors may pro-vide a combined statement to the admin-istrator. If a combined statement is used,each transferor must attach a copy of thecombined statement to its return and main-

tain with its books and records a sched-ule describing each asset that the transferortransferred to the disputed ownership fund.

(3) Information required on the state-ment. The statement required by para-graph (g)(1) of this section must includethe following information—

(i) A legend, “§1.468B–9 Statement,”at the top of the first page;

(ii) The transferor’s name, address, andtaxpayer identification number;

(iii) The disputed ownership fund’sname, address, and employer identifica-tion number;

(iv) A statement declaring whether thetransferor is a transferor-claimant;

(v) The date of each transfer;(vi) A description of the property (other

than cash) transferred; and(vii) The disputed ownership fund’s ba-

sis in the property and holding period onthe date of transfer as determined underparagraph (c)(3)(ii) of this section.

(h) Examples. The following examplesillustrate the rules of this section:

Example 1. (i) X Corporation petitions the UnitedStates Tax Court in 2006 for a redetermination of itstax liability for the 2003 taxable year. In 2006, theTax Court determines that X Corporation is liable foran income tax deficiency for the 2003 taxable year.X Corporation files an appellate bond in accordancewith section 7485(a) and files a notice of appeal withthe appropriate United States Court of Appeals. In2006, the Court of Appeals affirms the decision of theTax Court and the United States Supreme Court de-nies X Corporation’s petition for a writ of certiorari.

(ii) The appellate bond that X Corporation fileswith the court for the purpose of staying assessmentand collection of deficiencies pending appeal is notan escrow account, trust or fund established to holdproperty subject to conflicting claims of ownership.Although X Corporation was found liable for an in-come tax deficiency, ownership of the appellate bondis not disputed. Rather, the bond serves as securityfor a disputed liability. Therefore, the bond is not adisputed ownership fund.

Example 2. (i) The facts are the same as Example1, except that X Corporation deposits United StatesTreasury bonds with the Tax Court in accordance withsection 7845(c)(2) and 31 U.S.C. 9303.

(ii) The deposit of United States Treasury bondswith the court for the purpose of staying assessmentand collection of deficiencies while X Corporationprosecutes an appeal does not create a disputed own-ership fund because ownership of the bonds is not dis-puted.

Example 3. (i) Prior to A’s death, A was the in-sured under a life insurance policy issued by X, aninsurance company. X uses an accrual method of ac-counting. Both A’s current spouse and A’s formerspouse claim to be the beneficiary under the policyand entitled to the policy proceeds ($1 million). In2005, X files an interpleader action and deposits $1million into the registry of the court. On June 1, 2006,

March 6, 2006 555 2006–10 I.R.B.

a final determination is made that A’s current spouseis the beneficiary under the policy and entitled to themoney held in the registry of the court. The inter-est earned on the registry account is $12,000. Themoney in the registry account is distributed to A’s cur-rent spouse.

(ii) The money held in the registry of the courtconsisting of the policy proceeds and the earningsthereon are a disputed ownership fund taxable as ifit were a qualified settlement fund. See paragraphs(b)(1) and (c)(1)(ii) of this section. The fund’s grossincome does not include the $1 million transferred tothe fund by X, however, the $12,000 interest is in-cluded in the fund’s gross income in accordance withits method of accounting. See paragraph (c)(3)(i) ofthis section. Under paragraph (c)(4)(ii) of this sec-tion, the fund is not allowed a deduction for a distri-bution to A’s current spouse of the $1 million or theinterest income earned by the fund.

(iii) X is a transferor that is not a trans-feror-claimant. See paragraphs (b)(7) and (b)(8)of this section.

(iv) Whether A’s current spouse must include inincome the $1 million insurance proceeds and theinterest received from the fund is determined underother provisions of the Internal Revenue Code. Seeparagraph (f) of this section.

Example 4. (i) Corporation B and unrelated indi-vidual C claim ownership of certain rental property.B uses an accrual method of accounting. The rentalproperty is property used in a trade or business. Bclaims to have purchased the property from C’s fa-ther. However, C asserts that the purported sale to Bwas ineffective and that C acquired ownership of theproperty through intestate succession upon the deathof C’s father. For several years, B has maintained andreceived the rent from the property.

(ii) Pending the resolution of the title dispute be-tween B and C, the title to the rental property is trans-ferred to a court-supervised registry account on Feb-ruary 1, 2005. On that date the court appoints R asreceiver for the property. R collects the rent earnedon the property and hires employees necessary for themaintenance of the property. The rents paid to R can-not be distributed to B or C without the court’s ap-proval.

(iii) On June 1, 2006, the court makes a final de-termination that the rental property is owned by C.The court orders C to refund to B the purchase pricepaid by B to C’s father plus interest on that amountfrom February 1, 2005. The court also orders thata distribution be made to C of all funds held in thecourt registry consisting of the rent collected by R andthe income earned thereon. C takes title to the rentalproperty.

(iv) The rental property and the funds held by thecourt registry are a disputed ownership fund underparagraph (b)(1) of this section. The fund is taxableas if it were a C corporation because the rental prop-erty is not a passive investment asset within the mean-ing of paragraph (c)(1)(i) of this section.

(v) The fund’s gross income does not include thevalue of the rental property transferred to the fundby B. See paragraph (c)(3)(i) of this section. Underparagraph (c)(3)(ii) of this section, the fund’s initialbasis in the property is the same as B’s adjusted ba-sis immediately before the transfer to the fund andthe fund’s holding period is determined under sec-tion 1223(2). The fund’s gross income includes therents collected by R and any income earned thereon.For the period between February 1, 2005, and June1, 2006, the fund may be allowed deductions for de-preciation and for the costs of maintenance of theproperty because the fund is treated as owning theproperty during this period. See sections 162, 167,and 168. Under paragraph (c)(4)(ii) of this section,the fund may not deduct the distribution to C of theproperty, or the rents (or any income earned thereon)collected from the property while the fund holds theproperty. No gain or loss is recognized by the fundfrom this distribution or from the fund’s transfer ofthe rental property to C pursuant to the court’s deter-mination that C owns the property. See paragraphs(c)(4)(i) and (e)(3) of this section.

(vi) B is the transferor to the fund. Under para-graphs (b)(8) and (e)(1) of this section, B is a trans-feror-claimant and does not recognize gain or loss un-der section 1001(a) on transfer of the property to thedisputed ownership fund. The money and propertydistributed from the fund to C is deemed to be dis-tributed first to B and then transferred from B to C.See paragraph (e)(3)(ii) of this section. Under para-graph (e)(2)(i) of this section, economic performance

occurs when the disputed ownership fund transfersthe property and any earnings thereon to C. The in-come tax consequences of the deemed transfer fromB to C as well as the income tax consequences of C’srefund to B of the purchase price paid to C’s fatherand interest thereon are determined under other pro-visions of the Internal Revenue Code.

(i) [Reserved](j) Effective dates—(1) In general.

This section applies to disputed ownershipfunds established after February 3, 2006.

(2) Transition rule. With respect to adisputed ownership fund established afterAugust 16, 1986, but on or before Feb-ruary 3, 2006, the Internal Revenue Ser-vice will not challenge a reasonable, con-sistently applied method of taxation for in-come earned by the fund, transfers to thefund, and distributions made by the fund.

PART 602 — OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 9. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 10. In §602.101, paragraph (b)

is amended by adding entries in numericalorder to read, in part, as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *

1.468B–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–16311.468B–9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1631* * * * *

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

Approved January 30, 2006.

Eric Solomon,Acting Deputy Assistant

Secretary of the Treasury.

(Filed by the Office of the Federal Register on February 3,2006, 8:45 a.m., and published in the issue of the FederalRegister for February 7, 2006, 71 F.R. 6197)

Section 482.—Allocationof Income and DeductionsAmong Taxpayers


2006–10 I.R.B. 556 March 6, 2006

Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for March 2006.

Rev. Rul. 2006–10

This revenue ruling provides variousprescribed rates for federal income tax

purposes for March 2006 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520.

REV. RUL. 2006–10 TABLE 1

Applicable Federal Rates (AFR) for March 2006

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 4.58% 4.53% 4.50% 4.49%110% AFR 5.04% 4.98% 4.95% 4.93%120% AFR 5.51% 5.44% 5.40% 5.38%130% AFR 5.98% 5.89% 5.85% 5.82%

Mid-term

AFR 4.51% 4.46% 4.44% 4.42%110% AFR 4.97% 4.91% 4.88% 4.86%120% AFR 5.42% 5.35% 5.31% 5.29%130% AFR 5.88% 5.80% 5.76% 5.73%150% AFR 6.80% 6.69% 6.63% 6.60%175% AFR 7.96% 7.81% 7.74% 7.69%

Long-term

AFR 4.68% 4.63% 4.60% 4.59%110% AFR 5.15% 5.09% 5.06% 5.04%120% AFR 5.64% 5.56% 5.52% 5.50%130% AFR 6.11% 6.02% 5.98% 5.95%

March 6, 2006 557 2006–10 I.R.B.


Adjusted AFR for March 2006

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

3.15% 3.13% 3.12% 3.11%

Mid-term adjusted AFR 3.50% 3.47% 3.46% 3.45%

Long-term adjustedAFR

4.23% 4.19% 4.17% 4.15%


Rates Under Section 382 for March 2006

Adjusted federal long-term rate for the current month 4.23%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.36%


Appropriate Percentages Under Section 42(b)(2) for March 2006Appropriate percentage for the 70% present value low-income housing credit 8.07%

Appropriate percentage for the 30% present value low-income housing credit 3.46%


Rate Under Section 7520 for March 2006

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 5.4%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


2006–10 I.R.B. 558 March 6, 2006

Part III. Administrative, Procedural, and MiscellaneousClean Renewable EnergyBonds

Notice 2006–7

SECTION 1. PURPOSE

This notice provides guidance with re-spect to facilities that may be financedwith the proceeds of clean renewable en-ergy bonds under § 54(a) of the InternalRevenue Code (the Code). In addition,this notice provides guidance with respectto the entities that may own facilities fi-nanced with the proceeds of clean renew-able energy bonds and the entities thatmay issue clean renewable energy bonds.This notice supplements Notice 2005–98,2005–52 I.R.B. 1211, which was publishedon December 27, 2005.

SECTION 2. BACKGROUND

Section 1303 of the Energy Tax Incen-tives Act of 2005, Pub. L. No. 109–58,added § 54 to the Code. In general, § 54authorizes up to $800,000,000 of tax creditbonds to be issued by qualified issuers tofinance certain renewable energy projectsdescribed in § 45(d) of the Code.

Section 54(a) provides that a taxpayerthat holds a “clean renewable energybond” on one or more credit allowancedates of the bond occurring during anytaxable year is allowed as a nonrefundablecredit against Federal income tax for thetaxable year an amount equal to the sumof the credits determined under § 54(b)with respect to such dates. Section 54(d)provides that a “clean renewable energybond” means any bond issued as part of anissue if: (1) the bond is issued by a qual-ified issuer pursuant to an allocation bythe Secretary to the issuer of a portion ofthe national clean renewable energy bondlimitation under § 54(f)(2); (2) 95 percentor more of the proceeds of the issue are tobe used for capital expenditures incurredby qualified borrowers for one or morequalified projects; (3) the qualified issuerdesignates the bond for purposes of § 54and the bond is in registered form; and(4) the issue meets certain requirementsdescribed in § 54(h) with respect to theexpenditure of bond proceeds.

Section 54(j)(4) defines a “qualified is-suer” as: (1) a clean renewable energybond lender (as defined in § 54(j)(2)); (2)a cooperative electric company (as definedin § 54(j)(1)); or (3) a governmental body.Section 54(j)(3) defines the term “gov-ernmental body” as any State, territory,possession of the United States, the Dis-trict of Columbia, Indian tribal govern-ment, or any political subdivision thereof.Section 54(j)(5) provides that a “qualifiedborrower” is: (1) a mutual or cooperativeelectric company described in § 501(c)(12)or § 1381(a)(2)(C); or (2) a governmentalbody. Section 54(d)(2)(A) defines the term“qualified project” as any of the qualifiedfacilities described in §§ 45(d)(1) through(d)(9) (determined without regard to anyplaced in service date) owned by a quali-fied borrower.

Notice 2005–98 solicits applications forallocations of the $800,000,000 clean re-newable energy bond limitation and pro-vides guidance on certain other matters un-der § 54.

SECTION 3. TEMPORARYREGULATIONS

The Treasury Department and the Inter-nal Revenue Service intend to issue tempo-rary and proposed regulations (the “Tem-porary Regulations”) under § 54 to provideguidance to holders and issuers of cleanrenewable energy bonds. It is anticipatedthat the Temporary Regulations will pro-vide, in part, as follows:

1. For purposes of § 54, the term “qual-ified project” includes any facility ownedby a qualified borrower that is function-ally related and subordinate (as determinedunder § 1.103–8(a)(3) of the Income TaxRegulations) to any qualified facility de-scribed in §§ 45(d)(1) through (d)(9) (de-termined without regard to any placed inservice date) and owned by such borrower.

2. For purposes of § 54, the term “polit-ical subdivision” will have the same mean-ing as in § 1.103–1.

3. A clean renewable energy bond maybe issued on behalf of a State or polit-ical subdivision within the meaning of§ 1.103–1(b) under rules similar to thosefor determining whether a bond issued onbehalf of a State or political subdivision,

constitutes an obligation of that State orpolitical subdivision for purposes of § 103.

4. For purposes of § 54, the term “quali-fied borrower” includes an instrumentalityof a State or political subdivision (as deter-mined for purposes of § 103).

SECTION 4. DRAFTINGINFORMATION

The principal authors of this noticeare Timothy L. Jones and Aviva M. Rothof the Office of Associate Chief Counsel(Tax Exempt & Government Entities).However, other personnel from the IRSand the Treasury Department partici-pated in its development. For furtherinformation regarding this notice, contactTimothy L. Jones or Aviva M. Roth at(202) 622–3980 (not a toll-free call).

Postponement of Deadline forMaking an Election to DeductCertain Losses Attributable toHurricanes Katrina, Rita, andWilma

Notice 2006–17

PURPOSE

This notice under § 7508A of the Inter-nal Revenue Code postpones until Octo-ber 16, 2006, the deadline to make an elec-tion under § 165(i) to deduct in the preced-ing taxable year losses attributable to Hur-ricane Katrina, Rita, or Wilma sustainedin Presidentially declared disaster areas inAlabama, Louisiana, Florida, Mississippi,and Texas eligible for Public Assistanceor Public Assistance and Individual Assis-tance.

BACKGROUND

Section 165(i) provides that if a tax-payer sustains a loss attributable to a dis-aster occurring in an area subsequently de-termined by the President of the UnitedStates to warrant assistance by the FederalGovernment under the Robert T. StaffordDisaster Relief and Emergency AssistanceAct, 42 U.S.C. §§ 5121–5206 (the StaffordAct), the taxpayer may elect to deduct that

March 6, 2006 559 2006–10 I.R.B.

loss on the taxpayer’s return for the tax-able year immediately preceding the tax-able year in which the disaster occurred.For purposes of § 165(i), a disaster in-cludes an event declared a major disasterthat occurred in an area later determinedby the Federal Emergency ManagementAgency (FEMA) to be eligible for Individ-ual Assistance, Public Assistance, or both,under the Stafford Act.

Generally, § 1.165–11(e) of the IncomeTax Regulations provides that a taxpayermust make the § 165(i) election by fil-ing a return, an amended return, or a re-fund claim on or before the later of (1) thedue date of the taxpayer’s income tax re-turn (determined without regard to any ex-tension of time for filing the return) forthe taxable year in which the disaster ac-tually occurred, or (2) the due date of thetaxpayer’s income tax return (determinedwith regard to any extension of time for fil-ing the return) for the immediately preced-ing taxable year. The election is irrevoca-ble 90 days after it is made.

Section 7508A provides the Secretarywith authority to postpone the time forperforming certain acts under the internalrevenue laws for up to one year for a tax-payer affected by a Presidentially declareddisaster. Section 301.7508A–1(c)(1) of theRegulations on Procedure and Administra-tion lists several specific acts performedby taxpayers for which § 7508A reliefmay apply, and § 301.7508A–1(c)(1)(vii)allows the Secretary to specify addi-tional acts. Section 301.7508A–1(d)(1)describes several types of “affected tax-payers” eligible for relief under § 7508A.Section 301.7508A–1(d)(1)(vii) autho-rizes the Service to determine that anyother person is affected by a Presidentiallydeclared disaster and therefore eligible forrelief. Under § 301.7508A–1(d)(2), thearea of a Presidentially declared disasterfor which the Service has determined thatthe postponement of one or more dead-lines applies is referred to as a “covereddisaster area.”

AFFECTED TAXPAYERS FOR WHICHTHE SECTION 165(i) DEADLINE ISPOSTPONED

Under the authority of § 7508A and§ 301.7508A–1(d)(2), the Service has de-termined that the counties and parishesthat FEMA has determined to be eligible

for Public Assistance or Public Assistanceand Individual Assistance pursuant to themajor disaster declarations issued in re-sponse to Hurricanes Katrina, Rita, andWilma, are covered disaster areas. See No-tice 2005–73, 2005–42 I.R.B. 723 (Octo-ber 17, 2005) (Katrina); IRS News Re-lease IR–2005–110 (Rita); IRS News Re-lease IR–2005–128 (Wilma); and Publica-tion 4492 for a list of counties and parishesconstituting covered disaster areas.

Under the authority of§ 301.7508A–1(d)(1)(vii), a taxpayeris an “affected taxpayer” to which thepostponement of the deadline for makingthe § 165(i) election applies if (1) thetaxpayer sustained a loss attributable toHurricane Katrina, Rita, or Wilma; (2)the loss occurred in the covered disasterarea for the hurricane (regardless ofwhether the taxpayer’s principal residenceor principal place of business is in oneof the covered disaster areas); and (3)the deadline for the taxpayer to make a§ 165(i) election for that loss, but for thisnotice, would be before October 16, 2006.

Affected taxpayers for purposes ofthis notice and the § 165(i) election arenot affected taxpayers for purposes ofother relief provided by the Service un-less the taxpayer separately qualifies as anaffected taxpayer under other guidance is-sued by the Service. See Notice 2005–73,IR–2005–110, and IR–2005–128 for thedefinition of an affected taxpayer for pur-poses of Hurricanes Katrina, Rita, andWilma.

GRANT OF RELIEF

Under the authority of § 7508A,affected taxpayers, as defined above,are granted a postponement to Octo-ber 16, 2006, to make an election under§ 165(i) for losses attributable to Hurri-cane Katrina, Rita, or Wilma.

In order to assist the Service in identi-fying affected taxpayers to ensure that theyreceive the extension to make the § 165(i)election, affected taxpayers should mark“Hurricane Katrina,” “Hurricane Rita,” or“Hurricane Wilma” in red ink on the top ofthe return, amended return, or refund claimon which they are making the election. SeePublication 4492 for special instructionson completing forms to make the § 165(i)election for a loss attributable to HurricaneKatrina, Rita, or Wilma.

This notice is limited to making of anelection under § 165(i) and does not affectthe application of any other section of theCode or the regulations.

DRAFTING INFORMATION

The principal author of this notice isNorma Rotunno of the Office of AssociateChief Counsel (Income Tax & Account-ing). For further information regardingthis notice, contact Ms. Rotunno at (202)622–7900 (not a toll-free call).

Additional Postponementof Deadlines for CertainTaxpayers Affected ByHurricane Katrina

Notice 2006–20

PURPOSE

This notice supplements Notice2005–73, 2005–42 I.R.B. 723 (October17, 2005); News Release IR–2005–112(September 28, 2005); Notice 2005–81,2005–47 I.R.B. 977 (November 21, 2005);and Notice 2005–66, 2005–40 I.R.B. 620(October 3, 2005) which, under the au-thority of section 7508A, postponed untilFebruary 28, 2006, deadlines for certaintaxpayers affected by Hurricane Katrinato perform the acts described in Notice2005–73 (e.g., filing returns and otherdocuments, payment of taxes), and for theInternal Revenue Service (IRS) to performthe acts described in Notice 2005–81 (e.g.,assessment and collection of tax). Thisnotice further postpones those deadlinesthrough August 28, 2006, for the IRS andfor affected taxpayers in the parishes inLouisiana and the counties in Mississippiand Alabama that the Federal EmergencyManagement Agency (FEMA) determinedwere eligible for Individual Assistance orIndividual and Public Assistance.

Affected Parishes and Counties

On August 28, 2005 and August 29,2005, the President issued four federaldisaster declarations pertaining to Hurri-cane Katrina. The disaster declarationsincluded the states of Louisiana, Mis-sissippi, and Alabama. The Presidentialdeclarations authorized FEMA, under the

2006–10 I.R.B. 560 March 6, 2006

Robert T. Stafford Disaster Relief andEmergency Assistance Act, 42 U.S.C.§§ 5121–5206, to provide assistance tocounties and parishes in each state. Un-der that authority, FEMA determined thatcertain counties and parishes within thosestates were eligible for Individual Assis-tance or Individual and Public Assistance.

Both FEMA and the IRS have closelymonitored the effects of Hurricane Katrinain the Gulf region and, due to continuedwidespread devastation from the hurri-cane and subsequent flooding, the IRS hasdetermined that certain parishes and coun-ties in Louisiana and Mississippi requireadditional disaster relief. These countiesand parishes were hit the hardest by Hur-ricane Katrina and its aftermath and eitherremain uninhabitable or have a large num-ber of displaced individuals and/or trail-ers in use as temporary housing. Theseinclude Cameron, Jefferson, Orleans,Plaquemines, St. Bernard, St. Charles,and St. Tammany parishes in Louisiana,and Hancock, Harrison, and Jackson coun-ties in Mississippi. The Service will au-tomatically provide the additional reliefdescribed below to affected taxpayers inthese parishes and counties.

In addition, the IRS has determined thatsome affected taxpayers in other parishesand counties in Louisiana, Mississippi, andAlabama may require additional disasterrelief. The parishes and counties identi-fied by the IRS in which some taxpayersmay require additional disaster relief areas follows: Alabama (Baldwin, Choctaw,Clarke, Greene, Hale, Marengo, Mobile,Pickens, Sumter, Tuscaloosa, and Wash-ington); Mississippi (Adams, Amite, At-tala, Claiborne, Choctaw, Clarke, Copiah,Covington, Franklin, Forrest, George,Greene, Hinds, Holmes, Humphreys,Jasper, Jefferson, Jefferson Davis, Jones,Kemper, Lamar, Lauderdale, Lawrence,Leake, Lincoln, Lowndes, Madison,Marion, Neshoba, Newton, Noxubee, Ok-tibbeha, Pearl River, Perry, Pike, Rankin,Scott, Simpson, Smith, Stone, Walthall,Warren, Wayne, Wilkinson, Winston,and Yazoo); Louisiana (Acadia, Ascen-sion, Assumption, Calcasieu, East BatonRouge, East Feliciana, Iberia, Iberville,Jefferson Davis, Lafayette, Lafourche,Livingston, Pointe Coupee, St. Helena,St. James, St. John the Baptist, St. Mary,St. Martin, Tangipahoa, Terrebonne, Ver-milion, Washington, West Baton Rouge,

and West Feliciana). In these counties andparishes, affected taxpayers can receiverelief by identifying themselves to the IRSas discussed in the Identifying AffectedTaxpayers section, infra. The counties andparishes in which taxpayers receive re-lief automatically or by self-identificationconstitute a “covered disaster area” withinthe meaning of section 301.7508A–1(d)(2)for purposes of the relief provided by thisnotice. This definition of covered disasterarea differs from the covered disaster areafor purposes of other relief provided bythe IRS, including different counties andparishes.

Affected Taxpayers Whose Acts May bePostponed

Under the authority of section301.7508A–1(d)(1), “affected taxpay-ers” eligible for the relief provided bythis notice include: any individual whoseprincipal residence, and any business en-tity whose principal place of business,is located (or was located on August 29,2005) in the covered disaster area; anyindividual who is a relief worker affil-iated with a recognized government orphilanthropic organization and who is as-sisting in the covered disaster area; anyindividual whose principal residence, andany business entity whose principal placeof business, is not located in the covereddisaster area, but whose records neces-sary to meet a filing or payment deadlineare maintained (or were maintained onAugust 29, 2005) in the covered disasterarea; any estate or trust that has (or had asof August 29, 2005) tax records necessaryto meet a filing or payment deadline in thecovered disaster area; and any spouse ofan affected taxpayer, solely with regard toa joint return of the husband and wife.

Additionally, under section301.7508A–1(d)(1)(vii), the IRS maydetermine that any other person is affectedby a Presidentially-declared disaster andtherefore eligible for relief. Accordingly,the IRS has determined that the followingpersons are also affected by HurricaneKatrina and its aftermath: (1) all workersassisting in the relief activities in the cov-ered disaster areas, regardless of whetherthey are affiliated with recognized gov-ernment or philanthropic organizations;(2) any individual whose principal res-idence, and any business entity whose

principal place of business, is not locatedin the covered disaster area, but whosetax professional/practitioner’s office islocated (or was located as of August29, 2005) in the covered disaster area;and (3) individuals, visiting the covereddisaster area, who were killed or injuredas a result of Hurricane Katrina and itsaftermath. For purposes of (3) above, theestate of an individual visiting the covereddisaster area who was killed as a result ofthe hurricane is also considered to be anaffected taxpayer.

Extension of the Postponement Period

Section 7508A authorizes a postpone-ment of deadlines for up to one year fortaxpayers affected by a Presidentially-de-clared disaster. The IRS has determinedthat affected taxpayers as described inthis notice in the parishes and countiesidentified by the IRS as eligible for addi-tional relief shall receive a further post-ponement through August 28, 2006, ofdeadlines for the acts specified in Notice2005–73 (including the acts listed in sec-tion 301.7508A–1(c)(1) and Rev. Proc.2005–27, 2005–20 I.R.B. 1050). Thus, ifthe last day to perform one of the specifiedacts falls on or after August 29, 2005, andbefore August 28, 2006, then the last dayfor an affected taxpayer to timely performthe act is August 28, 2006. Furthermore,the IRS has concluded that some affectedtaxpayers as described in this notice maystill have difficulty in making timelyfederal tax deposits in accordance withsection 6302. Accordingly, for depositsrequired to be made by affected taxpayerson or after August 29, 2005, and beforeAugust 28, 2006, the IRS will waive theaddition to tax under section 6656 for thefailure to timely make any deposit of taxif the deposit is made on or before August28, 2006. The relief from the failure totimely deposit addition to tax is intendedfor taxpayers who are unable to meet theirdeposit obligations because their (or theirservice provider’s) records, computers, orother essential supporting services weredamaged, or essential personnel were in-jured, by the hurricane or any subsequentflooding. Thus, although the waiver ap-plies to all affected taxpayers, taxpayersthat are reasonably able to make their de-posits are encouraged to do so.

March 6, 2006 561 2006–10 I.R.B.

Likewise, the IRS is granted a furtherpostponement through August 28, 2006,to perform the acts specified in Notice2005–66 (including the acts listed in sec-tion 301.7508A–1(c)(2)), with respect toaffected taxpayers as described in this no-tice in the parishes and counties identifiedby the IRS as eligible for additional relief.Thus, if the last day for the IRS to performone of the specified acts falls on or afterSeptember 6, 2005, and before August 28,2006, then the last day for the IRS to timelyperform the act is August 28, 2006. The actof issuing a notice of final partnership ad-ministrative adjustment (FPAA) to the TaxMatters Partner under section 6223 withrespect to the tax attributable to the part-nership items of partners of any partner-ship that is an affected taxpayer was addedto the list of items postponed for the IRSby Notice 2005–81. If the last date for is-suance of the FPAA is on or after Novem-ber 7, 2005, and before August 28, 2006,then there is a postponement through Au-gust 28, 2006.

Requests for Further Relief

Affected taxpayers described in thisnotice who receive relief under section7508A until August 28, 2006, may re-quest, if applicable, additional time to fileand/or pay after August 28, 2006, underother provisions of the Internal RevenueCode and regulations thereunder.

Section 6081 provides that the Secre-tary may grant a reasonable extension oftime (generally not to exceed six months)for filing any return, declaration, state-ment, or other document required by theCode or by regulations thereunder. Section6161 provides that the Secretary may granta reasonable extension of time (generallynot to exceed six months) for paying theamount (or any installments) of tax shownor required to be shown on any return ordeclaration required by the Code or by reg-ulations thereunder. To the extent that ataxpayer has not previously received a full

six-month extension of time under section6081, then the taxpayer will be entitled torequest an extension of time to file undersection 6081. For example, an affected in-dividual income taxpayer’s 2005 Federalincome tax return (including any payment)is due on April 17, 2006. Under the reliefprovided by this notice, the taxpayer wouldbe required to file the return (and pay) onor before August 28, 2006. As the post-ponement from April 17, 2006, throughAugust 28, 2006, was under the author-ity of section 7508A, the taxpayer wouldbe eligible to request a further extensionof time, up through February 28, 2007, tofile (and pay) under section 6081 and sec-tion 6161. The granting of the extensionof time to file (and pay) would be basedon the standards applicable to all taxpay-ers, not just affected taxpayers.

Except in the case of taxpayers who areabroad, a taxpayer who has previously re-ceived a full six-month extension of timeunder section 6081 will not be entitled torequest an extension of time to file undersection 6081. Although the taxpayer couldnot receive an extension beyond August28, 2006, if the taxpayer is unable to fileby that date, the taxpayer can request thatthe IRS grant relief from any penalty if thefailure to file is due to reasonable causeand not due to willful neglect. The waiverof the penalty would be based on the stan-dards applicable to all taxpayers, not justaffected taxpayers.

Identifying Affected Taxpayers

In order to assist the IRS in identifyingaffected taxpayers as described in this no-tice, to ensure that they receive the reliefto which they are entitled, affected taxpay-ers should mark “Hurricane Katrina” in redink on the top of their returns and otherdocuments for which the IRS has post-poned the due dates. In addition, affectedtaxpayers may identify themselves as eli-gible for relief by calling the IRS Disas-ter Hotline at (866) 562–5227. In the three

Mississippi counties and seven Louisianaparishes where relief is being granted auto-matically, affected taxpayers are nonethe-less strongly encouraged to mark their re-turns and other documents or otherwisealert the IRS to the need for relief. In theother counties and parishes identified inthis notice, and for other affected taxpayers(e.g., relief workers), taxpayers must no-tify the Service in order to ensure that theyreceive the relief. Accordingly, these tax-payers need to mark their returns and doc-uments, or otherwise alert the IRS to theneed for relief. Affected taxpayers shouldalso identify themselves as such if the IRSsends them a notice or makes any other di-rect contact, e.g., telephone calls.

Taxpayers Not Receiving an Extension ofthe Postponement Period

The grant of relief provided by this no-tice applies only to affected taxpayers withrespect to the counties and parishes listedin this notice. If an affected taxpayer de-scribed in Notice 2005–73 is not describedas an affected taxpayer under this notice,and that taxpayer determines that addi-tional time is needed, that taxpayer mayrequest an extension under sections 6081and 6161 (so long as the taxpayer has notpreviously received a full six-month exten-sion of time to file or pay under those pro-visions for the specified act) and/or reliefunder any other provision providing for awaiver of a penalty for reasonable cause,such as sections 6651 and 6656.

DRAFTING INFORMATION

The principal author of this notice isDillon Taylor of the Office of AssociateChief Counsel, Procedure and Administra-tion (Administrative Provisions and Judi-cial Practice Division). For further infor-mation regarding this notice, you may call(202) 622–4940 (not a toll-free call).

2006–10 I.R.B. 562 March 6, 2006

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Regulations GoverningPractice Before the InternalRevenue Service

REG–122380–02

AGENCY: Office of the Secretary, Trea-sury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document proposesmodifications of the regulations govern-ing practice before the IRS (Circular 230).These proposed regulations affect indi-viduals who practice before the IRS. Theproposed amendments modify the generalstandards of practice before the IRS. Thisdocument also provides notice of a publichearing on the proposed regulations.

DATES: Written or electronically gener-ated comments must be received by Friday,April 28, 2006. Outlines of topics to bediscussed at the public hearing scheduledfor Wednesday, June 21, 2006 at 10 a.m.,in the auditorium of the Internal RevenueService building at 1111 Constitution Av-enue, NW, Washington, DC 20224, mustbe received by Friday, May 31, 2006.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–122380–02), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044.

Submissions may be hand deliveredMonday through Friday between the hoursof 8 am and 4 pm to: CC:PA:LPD:PR(REG–122380–02), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. 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(IRS and REG–122380–02). The publichearing will be held in auditorium of theInternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning issues forcomment, Brinton T. Warren at (202)622–7800; concerning submissionsof comments and the public hearing,Robin Jones at (202) 622–7180; (nottoll-free numbers).


Background

Section 330 of title 31 of the UnitedStates Code authorizes the Secretary of theTreasury to regulate the practice of rep-resentatives before the Treasury Depart-ment. The Secretary is authorized, afternotice and an opportunity for a proceeding,to censure, suspend or disbar from prac-tice before the Treasury Department thoserepresentatives who are incompetent, dis-reputable, or who violate regulations pre-scribed under section 330 of title 31. TheSecretary also is authorized to impose amonetary penalty against these individu-als. Pursuant to section 330 of title 31, theSecretary has published the regulations inCircular 230 (31 CFR part 10). These reg-ulations authorize the Director of the Of-fice of Professional Responsibility to actupon applications for enrollment to prac-tice before the IRS, to make inquiries withrespect to matters under the Office of Pro-fessional Responsibility’s jurisdiction, toinstitute proceedings to impose a monetarypenalty or to censure, suspend or disbar apractitioner from practice before the IRS,to institute proceedings to disqualify ap-praisers, and to perform other duties nec-essary to carry out these functions.

Circular 230 has been amended period-ically. For example, on June 20, 1994 (59FR 31523), the regulations were amendedto provide standards for tax return prepa-ration by practitioners, to limit the useof contingent fees by practitioners in taxreturn or refund claim preparation and toprovide expedited rules for suspensionfrom practice before the IRS.

On December 19, 2002(REG–122380–02, issued as Announce-ment 2003–5, 2003–1 C.B. 397 [67 FR77724]), the Treasury Department and theIRS issued an advance notice of proposedrulemaking (2002 ANPRM) requestingcomments on amendments to the regula-

tions relating to the Office of ProfessionalResponsibility, unenrolled practice, el-igibility for enrollment, sanctions anddisciplinary proceedings, contingent feesand confidentiality agreements. This doc-ument proposes amendments reflectingthe Treasury Department and the IRSconsideration of the comments received inresponse to the 2002 ANPRM and reflect-ing amendments to section 330 of title 31made by the American Jobs Creation Actof 2004, Public Law 108–357 (118 Stat.1418) (the Jobs Act). The proposed regu-lations include conforming amendmentsto reflect the final regulations relating tobest practices, covered opinions and otherwritten advice published as T.D. 9165,2005–4 I.R.B. 357, on December 20, 2004(69 FR 75839) and as T.D. 9201, 2005–23I.R.B. 1153, on May 19, 2005 (70 FR28824), but do not otherwise addressthose final regulations.

Explanation of Provisions

Over 60 written comments were re-ceived in response to the 2002 ANPRM.All comments were considered and areavailable for public inspection upon re-quest. A number of these comments aresummarized below. Comments relatingto matters about which the Treasury De-partment and the IRS declined to proposechanges are not generally discussed. Thescope of these regulations is limited topractice before the IRS. These regulationsdo not alter or supplant ethical standardsthat might otherwise be applicable to prac-titioners.

Director of the Office of ProfessionalResponsibility

In the 2002 ANPRM, the Treasury De-partment and the IRS solicited commentsrelating to the name of the office and ap-pointment of the Director. In January of2003, the Office of Professional Respon-sibility was established and replaced theoffice of the Director of Practice. Thischange, which was supported by manycommentators, reflects the office’s com-mitment to ensuring the integrity of thetax system and recognition of tax profes-sionals as an integral part of effective taxadministration. The proposed regulations

March 6, 2006 563 2006–10 I.R.B.

change references to the Office of theDirector of Practice to the Office of Pro-fessional Responsibility. The Director ofthe Office of Professional Responsibilityis appointed by the Secretary, or his or herdelegate. The text of the regulations alsowill be changed to eliminate referencesto the Office of the Secretary to reflectthe prior transfer of the Office of Profes-sional Responsibility to the IRS. See 47FR 29918 (July 9, 1982).

Definitions — Practice Before the InternalRevenue Service

On October 22, 2004, the Presidentsigned the Jobs Act. Section 822(b) ofthe Act amends section 330 of title 31of the United States Code by adding aprovision that recognizes the Secretary’sauthority to impose standards for writtenadvice rendered with respect to any entity,transaction plan or arrangement, or otherplan or arrangement having a potential fortax avoidance or evasion. Accordingly,§10.2(d) of the proposed regulations ismodified to clarify that the rendering ofthis written advice is practice before theIRS subject to Circular 230 when it isprovided by a practitioner.

Who may Practice

The Advisory Committee for Tax Ex-empt/Governmental Entities recently sug-gested that individuals who provide tech-nical services to plan sponsors to main-tain the tax qualified status of their re-tirement plans (retirement plan administra-tors) should be authorized to practice pro-vided they demonstrate the competency todo so. The Treasury Department and theIRS are considering this proposal and in-vite public comments even though text isnot proposed in this notice of proposedrulemaking. The Advisory Committee’sproposal suggests limiting the practice bythis group of individuals to representationrelating to filing applications for determi-nation letters, Forms 5500, employee planaudits, and negotiating with the IRS withrespect to voluntary compliance matters.

In addition, the Advisory Committeeproposes procedures for enrollment simi-lar to the current Enrolled Agent program(see §§10.4–10.6), including an examina-tion to determine competency, a renewalprocess and continuing professional edu-

cation requirements. For more informa-tion relating to practice by retirement planadministrators, see Establishing the En-rolled Retirement Plan Agent Under Circu-lar 230, Advisory Committee for Tax Ex-empt/Governmental Entities (June 2005).The Treasury Department and the IRS alsoinvite comments on proposals relating tolimited practice by other individuals thatthe public believes competent to representtaxpayers before the IRS, and whether theDirector of the Office of Professional Re-sponsibility should have the authority toregulate these individuals through IRS no-tice procedures.

Enrollment Procedures

Section 10.5 of the regulations setsforth the applicable procedures relating tothe enrollment of an enrolled agent. Theproposed regulations provide that appli-cants for enrollment must utilize forms andcomply with procedures established andpublished by the Office of ProfessionalResponsibility. The proposed regulationspermit the Office of Professional Respon-sibility to change the “Application forEnrollment to Practice Before the IRS”and other requirements pertaining to theprocedures to apply for enrollment.

Section 10.6 of the regulations setsforth the procedures for renewal of enroll-ment to practice before the IRS. Underthe current regulations, the Director ofthe Office of Professional Responsibilitymust maintain a list of enrolled agents, in-cluding those who are active, inactive andsanctioned. This requirement is combinedwith the roster requirements of §10.90 inthe proposed regulations to clarify that allrosters, including those related to enrolledagents, will be maintained and made avail-able for public inspection in the time andmanner prescribed by the Secretary.

The proposed regulations clarify the re-quirements to maintain active enrollmentto practice before the IRS. An enrolledagent must apply for renewal of enrollmentbetween November 1 and January 31 of therelevant period described in §10.6(d). Theeffective date of renewal is the first dayof the third month following the close ofthe period for renewal, i.e., April 1. Anenrolled agent must complete 72 hours ofcontinuing professional education duringeach enrollment cycle, with a minimum of16 hours (including two hours of ethics)

during each enrollment year. The enroll-ment year is each calendar year, i.e., Jan-uary 1 to December 31, in the enrollmentcycle. The enrollment cycle is the threesuccessive enrollment years preceding theApril 1 effective date of renewal. Thus, anenrolled agent whose social security num-ber ends with 0 must renew enrollment be-tween November 1, 2006, and January 31,2007. The enrolled agent must have com-pleted 72 hours of continuing professionaleducation between January 1, 2004, andDecember 31, 2006, with at least 16 hours(including two hours of ethics) during eachcalendar year. Similarly, the proposed reg-ulations require sponsors of continuing ed-ucation courses to renew their status asqualified sponsors every three years.

The proposed regulations require thata qualifying course enhance professionalknowledge in Federal taxation or Federaltax related matters and be consistent withthe Internal Revenue Code and effectivetax administration.

Limited Practice Before the IRS

In the 2002 ANPRM, the TreasuryDepartment and IRS solicited commentsrelating to limited practice by unenrolledreturn preparers. Most commentatorsopposed expanding the authority of theDirector of the Office of ProfessionalResponsibility to include the authorityto modify the scope of limited practiceby unenrolled preparers without furtheramendment to Circular 230. Most com-mentators agreed that the Director ofthe Office of Professional Responsibilityshould not be given the authority to deter-mine the eligibility for limited practice byunenrolled preparers.

Section 10.7(c)(1)(viii) currently au-thorizes an individual, who is not other-wise a practitioner, to represent a taxpayerduring an examination if that individualprepared the return for the taxable periodunder examination. The proposed regula-tions revoke this authorization because itis inconsistent with the requirement thatall individuals permitted to practice beforethe IRS demonstrate their qualificationsto advise and assist persons in presentingtheir cases to the IRS.

Under the proposed regulations, an un-enrolled return preparer may not representa taxpayer unless otherwise authorized by§10.7(c)(1)(i) – (vii). These individuals no

2006–10 I.R.B. 564 March 6, 2006

longer may negotiate with the IRS on be-half of a taxpayer during an examinationand no longer may bind a taxpayer to aposition during an examination. For ex-ample, an unenrolled return preparer maynot sign a Form 872, “Consent to Extendthe Time to Assess Tax,” with regard tothe tax return prepared for that individual.In addition, an unenrolled return preparermay not agree to any adjustment to the tax-payer’s reported tax liability.

Individuals who are not eligible to prac-tice and who prepare an original returnmay assist in the exchange of informationwith the IRS regarding a taxpayer’s re-turn if the taxpayer has specifically autho-rized the preparer to receive confidentialtax information from the IRS. Revocationof the authority for limited practice willnot preclude a return preparer from assist-ing a taxpayer in responding to questionsregarding the taxpayer’s return. The pro-posed regulations do not preclude an un-enrolled return preparer from accompany-ing a taxpayer to an examination, providedthe taxpayer authorizes the IRS to discloseconfidential tax information to the unen-rolled return preparer.

Practice by Former GovernmentEmployees, Their Partners and TheirAssociates

Section 10.25 sets forth rules governingpractice by former government employ-ees, their business partners and their asso-ciates. These rules were first promulgatedin 1976 to address discrepancies betweenthe Government-wide post-employmentstatute, 18 U.S.C. 207, its implementingregulations and the codes of professionalresponsibility (e.g., ABA Model Rulesof Professional Conduct, AICPA Code ofProfessional Conduct and individual staterules of professional conduct) applicableto practitioners who appear before the IRS.

Section 10.25 of the proposed regula-tions has been conformed with the termi-nology used in 18 U.S.C. 207, and 5 C.F.R.parts 2637 and 2641 (or superseding regu-lations), by eliminating the definitions ofofficial responsibility in §10.25(a)(5), par-ticipate or participation in §10.25(a)(6),and transaction in §10.25(a)(8) and substi-tuting the term particular matter involvingspecific parties in §10.25(a)(4) (formerly§10.25(a)(8)).

The proposed regulations also eliminatethe prohibition in §10.25(b)(3) against as-sisting in the representation in matters inwhich the former employee had official re-sponsibility during the former employee’slast year of service. Existing statutes, reg-ulations and codes of professional respon-sibility are adequate to protect against con-flicts of interest and protect the integrityof the tax system, including the prohibitionon representation in 18 U.S.C. 207.

Section 10.25(b)(2) of the proposedregulations continues to prohibit formeremployees who personally and substan-tially participated in a matter while inGovernment service from representing orassisting in the representation in the samematter while in private practice. In thesematters, the former employee’s firm mayrepresent the taxpayer in the matter if theformer employee is isolated from the mat-ter and isolation statements are filed withthe Office of Professional Responsibilityin accordance with §10.25(c).

Contingent Fees

In the 2002 ANPRM, the Treasury De-partment and the IRS solicited commentsrelating to contingent fees. Most commen-tators opposed further limitations on con-tingent fees under §10.27. The TreasuryDepartment and the IRS continue to be-lieve that a rule restricting contingent feesfor preparing tax returns supports volun-tary compliance with the Federal tax lawsby discouraging return positions that ex-ploit the audit selection process. Addi-tionally, a broader prohibition against con-tingent fee arrangements is appropriate inlight of concerns regarding attorney andauditor independence. The recent shift to-ward even greater independence, includ-ing rules adopted by the Securities and Ex-change Commission (SEC) and the Pub-lic Company Accounting Oversight Board,also support expanding the prohibition oncontingent fees with respect to Federal taxmatters.

Under section 10.27 of the proposedregulations, a practitioner generally isprecluded from charging a contingentfee for services rendered in connectionwith any matter before the Service, in-cluding the preparation or filing of a taxreturn, amended tax return or claim forrefund or credit. A practitioner may, how-ever, charge a contingent fee for services

rendered in connection with the IRS’s ex-amination of, or challenge to, an originaltax return. Practitioners also may chargea contingent fee for services rendered inconnection with the IRS’s examinationof, or challenge to, an amended return orclaim for refund or credit filed prior to thetaxpayer receiving notice of the exami-nation of, or challenge to the original taxreturn. A written notice of examinationwould include the written notice furnishedto taxpayers subject to the CoordinatedIndustry Case procedures requesting astatement showing additional tax due (oran adequate disclosure with respect to anitem or position) to avoid the impositionof certain accuracy-related penalties ifno other written notice of examination isreceived. Contingent fees also may becharged for services rendered in connec-tion with a judicial proceeding arisingunder the Federal tax laws.

Conflicting Interests

Section 10.29 of the regulations pro-hibits a practitioner from representing con-flicting interests before the IRS, exceptwith the express consent of all directly in-terested parties after full disclosure. Sec-tion 10.29 is generally consistent with Rule1.7 of the ABA Model Rules of Profes-sional Conduct (Model Rules), which wasamended just prior to the July 26, 2002amendment to the regulations.

Section 10.29 of the proposed regula-tions clarifies that a practitioner is requiredto obtain consents in writing from each af-fected client in order to represent the con-flicting interests. The written consent mayvary in form. The practitioner may pre-pare a letter to the client outlining the con-flict, as well as the possible implicationsof the conflict, and submit the letter to theclient for the client to countersign. Unlikethe Model Rules, which permit affectedclients to provide informed consent orallyif the consent is contemporaneously docu-mented by the practitioner in writing, anoral consent followed by a confirmationletter authored by the practitioner will notsatisfy §10.29 unless the confirmation let-ter is countersigned by the client.

March 6, 2006 565 2006–10 I.R.B.

Standards With Respect to Tax Returnsand Documents, Affidavits and OtherPapers

Section 10.34 sets forth standards ap-plicable to advice with respect to tax re-turn positions and applicable to prepar-ing or signing returns. Section 10.34 ofthe proposed regulations sets forth stan-dards applicable to practitioners who ad-vise clients with respect to documents, af-fidavits and other papers submitted to theIRS. The proposed regulations also pro-vide separate standards for papers that takea position with respect to Federal tax mat-ters and standards for advising a client tofile papers involving procedural or factualmatters.

Under the proposed regulations, a prac-titioner may not advise a client to take aposition on a submission to the IRS un-less the position is not frivolous. A practi-tioner also may not advise a client to sub-mit a document to the IRS that is meantprimarily for delay; is frivolous or ground-less; or contains or omits information ina manner that demonstrates an intentionaldisregard of a rule or regulation. With re-gard to factual matters, a practitioner mayrely upon information furnished by the tax-payer with respect to tax returns and doc-uments, affidavits and other papers, un-less the information appears to be incor-rect, inconsistent with an important fact oranother factual assumption, or incomplete.These standards would supplement the ex-isting requirement in §10.22 that practi-tioners exercise due diligence in preparing,or assisting in the preparation of, tax re-turns and other documents relating to IRSmatters.

Sanctions

In accordance with section 822(a) of theJobs Act, proposed §10.50 authorizes theSecretary to impose a monetary penaltyagainst a practitioner if the practitioner isshown to be incompetent or disreputable,fails to comply with any regulation in part10, or with intent to defraud, willfully andknowingly misleads or threatens a client orprospective client.

Under the proposed regulations, themonetary penalty may be imposed in addi-tion to, or in lieu of, any other sanction. Ifa practitioner acts on behalf of the practi-tioner’s employer, firm or other entity and

the employer, firm or other entity knew orshould have known of the practitioner’sconduct, the Secretary may impose a mon-etary penalty on the employer, firm orother entity. The Treasury Departmentand the IRS will issue procedures relatingto the imposition of the monetary penaltythrough separate published guidance.

The proposed regulations also containconforming amendments to other provi-sions relating to sanctions.

Incompetence and Disreputable Conduct

In the 2002 ANPRM, the Treasury De-partment and the IRS solicited commentsrelating to whether the definition of disrep-utable conduct should include the willfulfailure of a preparer who is a practitionerto sign a return. Many commentators sup-ported expanding the definition of disrep-utable conduct to specifically include thewillful failure of a practitioner who is a taxreturn preparer to sign a return.

Section 10.51 of the regulations definesdisreputable conduct for which a practi-tioner may be sanctioned. Section 10.51 ofthe proposed regulations modifies the def-inition of disreputable conduct to includewillful failure to sign a tax return preparedby the practitioner. The definition of dis-reputable conduct also includes the disclo-sure or use of returns or return informationby practitioners in a manner not authorizedby the Code, a court of competent juris-diction, or an administrative law judge in aproceeding instituted under section 10.60.

Supplemental Charges

Section 10.65 provides that the Directorof the Office of Professional Responsibil-ity may file supplemental charges against apractitioner or appraiser. Section 10.65 ofthe proposed regulations provides that theDirector may file supplemental chargesagainst a practitioner by amending thecomplaint to reflect the additional chargesif the practitioner is given notice and anopportunity to prepare a defense to thesupplemental charges.

Hearings and Discovery

In the 2002 ANPRM, the TreasuryDepartment and the IRS solicited com-ments relating to expanding discovery andproviding greater procedural protections

in disciplinary proceedings. Most com-mentators supported expanding the useof discovery in disciplinary proceedings.Most commentators also supported pro-viding further procedural protections suchas a guarantee of the right to cross-exam-ine witnesses.

These proposed regulations redesig-nate the provisions relating to hearings,evidence and depositions and discovery.Proposed §10.71 addresses discovery,proposed §10.72 addresses hearings andproposed §10.73 addresses evidence.

1. Motions and requests

Section 10.68 of the regulations setsforth procedures for filing a motion or re-quest with the Administrative Law Judgepresiding over a disciplinary proceeding.The regulations provide that a party is notpresumed to oppose a motion for decisionby default for failure to file a timely answeror for failure to prosecute. The proposedregulations amend §10.68 to expressly al-low a party to file a motion for summaryadjudication if there is no genuine issue asto any material fact.

2. Discovery in Disciplinary Proceedings

Section 10.71 of the proposed regula-tions clarifies the discovery methods avail-able to the parties in preparation for a disci-plinary hearing. The Administrative LawJudge may authorize discovery if the partyseeking discovery establishes that it is nec-essary and relevant. Discovery methodsinclude depositions upon oral examinationand requests for admission. The Admin-istrative Law Judge should weigh factorssuch as the ultimate relevancy and antici-pated costs to determine the least burden-some method in ordering discovery.

Discovery is not permitted if the infor-mation is privileged or the information re-lates to mental impressions, conclusionsor legal theories of any attorney, party, orother representative of a party prepared inanticipation of a proceeding.

To address practitioners’ due processrights without creating a formal court pro-ceeding, the proposed regulations requirethe Director of the Office of ProfessionalResponsibility to turn over the documen-tation used in support of a complaint filedwith the Administrative Law Judge. Under§10.63(d) of the proposed regulations, this

2006–10 I.R.B. 566 March 6, 2006

information must be served on the practi-tioner or appraiser, or the representative,within 10 days of serving the complaint.This requirement, however, is only an ini-tial disclosure of the evidence of record atthe time of the complaint. Supplementalevidence developed during preparation forthe hearing is not prohibited from being in-troduced.

Under §10.62(c) of the proposed regu-lations, the Director of the Office of Pro-fessional Responsibility must notify thepractitioner or appraiser of the time for an-swering the complaint, which cannot beless than 30 days. When determining thetime for answering the complaint, the Di-rector will take into account the amount ofthe evidence in support of the complaintand the complexity of the charges to allowthe practitioner or appraiser time to pre-pare an adequate answer in defense to thecomplaint.

3. Hearings

Section 10.72 of the regulations setsforth the procedures for an administrativehearing pursuant to Circular 230. The Ad-ministrative Law Judge should conduct thehearing within 180 days of the time for fil-ing of the answer, absent circumstances re-quiring that, in the interest of justice, thehearing be held at a later date. The pro-posed regulations amend §10.72 to alloweach party to a disciplinary proceeding, asmay be required for a full and true dis-closure of the facts, to question, in thepresence of the Administrative Law Judge,a person whose statement is offered bythe opposing party. The proposed regula-tions incorporate the requirements of theAdministrative Procedure Act (5 U.S.C.556(d)). The proposed regulations do notprohibit a party from presenting evidencecontained in a deposition if all parties tothe proceeding were given an opportunityfor full examination and cross-examina-tion of the witness under §10.71. The pro-posed regulations generally require pre-hearing memoranda. The AdministrativeLaw Judge may determine that pre-hear-ing memoranda are not necessary or, by or-der, require other information with respectto the disciplinary proceeding.

4. Publicity of Disciplinary Proceedings

Currently, disciplinary proceedingsbrought pursuant to Circular 230 are

closed to the public unless the Adminis-trative Law Judge grants a practitioner’srequest that the proceedings be public. Theproposed regulations amend §10.72(d) toprovide that all hearings, reports, evidenceand decisions in a disciplinary proceedingbe available for public inspection. Theproposed regulations mandate proceduresto protect the identities of any third partytaxpayers contained in returns and returninformation obtained pursuant to section6103(l)(4) for use in an action or proceed-ing under subpart D. The procedures toprotect the identities of third party taxpay-ers also must be observed with respect todiscovery matters.

The Administrative Law Judge must is-sue a protective order in the event thatredactions of taxpayer identifiers renderdocuments unintelligible or may still per-mit indirect identification of the taxpayer.The Administrative Law Judge may, forgood cause, order proceedings closed tothe public or may order nondisclosure ofmaterials associated with the proceeding,such as in the case in which disclosureis prohibited by 18 U.S.C. 1905 or sec-tion 6103. The Administrative Law Judgealso may order limited access to materialswhich are confidential or sensitive in someother way.

The proposed regulations provide that,at the conclusion of a proceeding, the Sec-retary, or his or her delegate, shall ensurethat all returns and return information, in-cluding the names, addresses or other iden-tifying details of third party taxpayers, areredacted and replaced with the code as-signed to the corresponding taxpayer in alldocuments prior to such documents beingmade available for further public inspec-tion.

Decision of Administrative Law Judge

Section 10.76 of the regulations setsforth the requirements for the decision ofthe Administrative Law Judge. The pro-posed regulations amend §10.76 to providethat the Administrative Law Judge shouldrender a decision within 180 days after theconclusion of the hearing. If a party files amotion for summary adjudication, the Ad-ministrative Law Judge should rule on themotion within 60 days after a written re-sponse to the motion for summary adjudi-cation or, if no written response is filed, 90

days after the motion for summary adjudi-cation is filed.

The proposed regulations provide thatthe decision of the Administrative LawJudge will become the final decision ofthe agency 45 days after the date the deci-sion is served on the parties. The Secretarymay, however, either in response to a peti-tion for review filed by a party or on theSecretary’s own initiative, intervene andorder review of the Administrative LawJudge’s decision before the decision be-comes final. The petition for review mustbe filed within 30 days of the date the de-cision is served on the parties.

If the Secretary grants a petition or oth-erwise orders review, the Secretary mustnotify the parties within 45 days from thedate the Administrative Law Judge’s deci-sion is served on the parties. The noticemust state that (1) the decision is under re-view, (2) no final agency decision has beenmade, (3) any action of the AdministrativeLaw Judge is inoperative, and (4) a finaldecision of the agency made by the Secre-tary is required before judicial review canbe obtained. The Secretary will not reviewan interlocutory order or ruling, e.g., a dis-covery request ruling, of the Administra-tive Law Judge prior to the rendering of adecision by the Administrative Law Judgethat would dispose of the proceeding.

Expedited Suspension

Section 10.82 of the regulations autho-rizes the Director of the Office of Profes-sional Responsibility to suspend immedi-ately a practitioner who has engaged in cer-tain conduct. The proposed regulations ex-tend the expedited process to practitionerswho are in egregious noncompliance withtheir tax obligations or have been adjudi-cated as having advanced arguments, re-lating to the practitioner’s own tax obliga-tions or the obligations of the client, pri-marily for delay.

The Treasury Department and the IRSare aware of a number of practitionerswho are not in compliance with their ownFederal tax obligations, but continue torepresent taxpayers, and of situations inwhich practitioners advance frivolous orobstructionist positions relating to theirown tax obligations and the obligations oftheir clients. Under the proposed regula-tions, a practitioner who is not compliantwith the practitioner’s own Federal tax

March 6, 2006 567 2006–10 I.R.B.

obligations may be subject to expediteddisciplinary proceedings. In addition,a practitioner who has been found by acourt of competent jurisdiction to have ad-vanced frivolous arguments or advancedarguments primarily for delay, either relat-ing to a taxpayer’s tax liability or relatingto the practitioner’s own tax liability, willbe subject to an expedited disciplinaryproceeding.

Proposed Effective Date

These regulations are proposed to applyon the date that final regulations are pub-lished in the Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It is herebycertified that these regulations will nothave a significant economic impact ona substantial number of small entities.The general requirements of these regu-lations are substantially the same as therequirements of the regulations that theseregulations replace. Persons authorizedto practice have long been required tocomply with certain standards of conductwhen practicing before the Internal Rev-enue Service. These regulations do notalter the basic nature of the obligationsand responsibilities of these practitioners.These regulations clarify those obligationsin response to public comments, replacecertain terminology to conform with theterminology used in 18 U.S.C. 207, and5 C.F.R. parts 2637 and 2641 (or super-seding regulations), make modificationsto reflect amendments to section 330 oftitle 31 made by the Jobs Act, and makeother modifications to reflect concernsabout greater independence, transparencyand due process. Therefore, a regulatoryflexibility analysis under the RegulatoryFlexibility Act (5 U.S.C. chapter 6) is notrequired. Pursuant to section 7805(f) ofthe Internal Revenue Code, this notice ofproposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small businesses.

Comments and Public Hearing

Before the regulations are adopted as fi-nal regulations, consideration will be givento any written comments (a signed originaland eight (8) copies) and electronic com-ments that are submitted timely to the IRS.The Treasury Department and IRS specif-ically request comments on the clarity ofthe proposed regulations and how they canbe made easier to understand. All com-ments will be available for public inspec-tion and copying.

The public hearing is scheduled forWednesday, June 21, 2006 at 10:00 a.m.,and will be held in the auditorium of theInternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC. Dueto building security procedures, visitorsmust enter at the Constitution Avenueentrance. All visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediateentrance area more than 30 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATION CON-TACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments byFriday, April 28, 2006, and an outline ofthe topics to be discussed and the time tobe devoted to each topic by May 31, 2006.A period of 10 minutes will be allocated toeach person for making comments.

An agenda showing the scheduling ofthe 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 authors of these reg-ulations are Brinton T. Warren andHeather L. Dostaler of the Office of As-sociate Chief Counsel (Procedure andAdministration), Administrative Provi-sions and Judicial Practice Division.

* * * * *

Proposed Amendments to theRegulations

Paragraph 1. The authority citation for31 CFR part 10 is amended to read as fol-lows:

[Authority: 5 U.S.C. 301, 500,551–559; 31 U.S.C. 321; 31 U.S.C. 330,as amended by P.L. 108–357, Sec. 822]

Par. 2. In Part 10, remove the lan-guage “Director of Practice” and add, in itsplace, the language “Director of the Officeof Professional Responsibility” in each ofthe following sections and paragraphs:

Section 10.4(a), (b) introductory text,(b)(1), (b)(2);

Section 10.5(c), (d), (e);Section 10.6(b), (g)(2)(iii), (g)(2)(iv),

(g)(4), (j)(1), (j)(2), (j)(4), (k)(1), (k)(2),(n);

Section 10.7(c)(2)(iii), (d);Section 10.20(b), (c);Section 10.62(a), (b);Section 10.63(c);Section 10.64(a);Section 10.66;Section 10.69(a)(1), (b);Section 10.73(a);Section 10.81;Section 10.82(a), (c) introductory text,

(c)(3), (d), (e), (f)(1), (g).Par. 3. Section 10.1 is revised to read

as follows:

§10.1 Director of the Office of ProfessionalResponsibility.

(a) Establishment of office. The Of-fice of Professional Responsibility is es-tablished in the Internal Revenue Service.The Director of the Office of ProfessionalResponsibility is appointed by the Secre-tary of the Treasury, or his or her delegate.

(b) Duties. The Director of the Officeof Professional Responsibility acts on ap-plications for enrollment to practice beforethe Internal Revenue Service; makes in-quiries with respect to matters under hisor her jurisdiction; institutes and providesfor the conduct of disciplinary proceed-ings relating to practitioners (and employ-ers, firms or other entities, if applicable)and appraisers; and performs other dutiesas are necessary or appropriate to carry outhis or her functions under this part or asare otherwise prescribed by the Secretaryof the Treasury, or his or her delegate.

2006–10 I.R.B. 568 March 6, 2006

(c) Acting Director of the Office of Pro-fessional Responsibility. The Secretary ofthe Treasury, or his or her delegate, willdesignate an officer or employee of theTreasury Department to act as Director ofthe Office of Professional Responsibilityin the absence of the Director or a vacancyin that office.

(d) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.

Par. 4. Section 10.2 is amended to readas follows:

§10.2 Definitions.

(a) As used in this part, except wherethe text provides otherwise—

(1) Attorney means any person who is amember in good standing of the bar of thehighest court of any State, territory, or pos-session of the United States, including aCommonwealth, or the District of Colum-bia.

(2) Certified public accountant meansany person who is duly qualified to prac-tice as a certified public accountant in anyState, territory, or possession of the UnitedStates, including a Commonwealth, or theDistrict of Columbia.

(3) Commissioner refers to the Com-missioner of Internal Revenue.

(4) Practice before the Internal Rev-enue Service comprehends all matters con-nected with a presentation to the InternalRevenue Service or any of its officers oremployees relating to a taxpayer’s rights,privileges, or liabilities under laws or reg-ulations administered by the Internal Rev-enue Service. Such presentations include,but are not limited to, preparing and fil-ing documents, corresponding and com-municating with the Internal Revenue Ser-vice, rendering written advice with respectto any entity, transaction plan or arrange-ment, or other plan or arrangement havinga potential for tax avoidance or evasion,and representing a client at conferences,hearings and meetings.

(5) Practitioner means any individualdescribed in paragraphs (a), (b), (c), or (d)of §10.3.

(6) A tax return includes an amendedtax return and a claim for refund.

(7) Service means the Internal RevenueService.

(b) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.

Par. 5. Section 10.5 is amended byrevising paragraphs (a) and (b) and addingparagraph (f) to read as follows:

§10.5 Application for enrollment.

(a) Form; address. An applicant for en-rollment must apply as required by formsor procedures established and publishedby the Office of Professional Responsibil-ity, including proper execution of requiredforms under oath or affirmation. The ad-dress on the application will be the addressunder which a successful applicant is en-rolled and is the address to which all corre-spondence concerning enrollment will besent.

(b) Fee. The applicant must pay thefee established and published by the Officeof Professional Responsibility. This feewill be reflected on applicable forms andwill be retained regardless of whether theapplicant is granted enrollment.

* * * * *(f) Effective date. This section is appli-

cable to enrollment applications receivedon or after the date that final regulationsare published in the Federal Register.

Par. 6. Section 10.6 is amended by:1. Removing paragraph (a).2. Redesignating paragraph (c) as para-

graph (a).3. Adding a new paragraph (c).4. Revising paragraphs (d) introduc-

tory text, (d)(5), (d)(6), (d)(7), (e), (f)(1),(f)(2)(iv)(A), (g)(5), (k)(7) and (l).

5. Adding a new paragraph (p).The revisions and additions read as fol-

lows:

§10.6 Enrollment.

* * * * *(c) Change of address. An enrolled

agent must send notification of any changeof address to the address specified by theDirector of the Office of Professional Re-sponsibility. This notification must in-clude the enrolled agent’s name, prior ad-dress, new address, social security numberor tax identification number and the date.

(d) Renewal of enrollment. To main-tain active enrollment to practice beforethe Internal Revenue Service, each indi-

vidual is required to have his or her enroll-ment renewed. Failure to receive notifica-tion from the Director of the Office of Pro-fessional Responsibility of the renewal re-quirement will not be justification for theindividual’s failure to satisfy this require-ment.

* * * * *(5) The Director of the Office of Pro-

fessional Responsibility will notify the in-dividual of his or her renewal of enroll-ment and will issue the individual a cardevidencing enrollment.

(6) A reasonable nonrefundable feemay be charged for each application forrenewal of enrollment filed with the Di-rector of the Office of Professional Re-sponsibility.

(7) Forms required for renewal may beobtained by sending a written request tothe Director of the Office of ProfessionalResponsibility, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC 20224 or from such other sourceas the Director of the Office of Profes-sional Responsibility will publish in theInternal Revenue Bulletin (see 26 CFR§601.601(d)(2)) and on the Internal Rev-enue Service webpage (www.irs.gov).

(e) Condition for renewal: continuingprofessional education. In order to qual-ify for renewal of enrollment, an individ-ual enrolled to practice before the InternalRevenue Service must certify, on the ap-plication for renewal form prescribed bythe Director of the Office of ProfessionalResponsibility, that he or she has satisfiedthe following continuing professional edu-cation requirements.

(1) Definitions. For purposes of thissection—

(i) Enrollment year means January 1 toDecember 31 of each year of an enrollmentcycle.

(ii) Enrollment cycle means the threesuccessive enrollment years preceding theeffective date of renewal.

(iii) The effective date of renewal is thefirst day of the third month following theclose of the period for renewal describedin paragraph (d) of this section.

(2) For renewed enrollment effective af-ter December 31, 2006—(i) Requirementsfor enrollment cycle. A minimum of 72hours of continuing education credit mustbe completed during each enrollment cy-cle.

March 6, 2006 569 2006–10 I.R.B.

(ii) Requirements for enrollment year.A minimum of 16 hours of continuing edu-cation credit, including 2 hours of ethics orprofessional conduct, must be completedduring each enrollment year of an enroll-ment cycle.

(iii) Enrollment during enrollment cy-cle—(A) In general. Subject to paragraph(2)(iii)(B) of this section, an individualwho receives initial enrollment during anenrollment cycle must complete 2 hoursof qualifying continuing education creditfor each month enrolled during the enroll-ment cycle. Enrollment for any part of amonth is considered enrollment for the en-tire month.

(B) Ethics. An individual who receivesinitial enrollment during an enrollment cy-cle must complete 2 hours of ethics or pro-fessional conduct for each enrollment yearduring the enrollment cycle. Enrollmentfor any part of an enrollment year is con-sidered enrollment for the entire year.

(f) Qualifying continuing educa-tion—(1) General. To qualify for contin-uing education credit, a course of learningmust—

(i) Be a qualifying program designed toenhance professional knowledge in Fed-eral taxation or Federal tax related mat-ters, i.e., programs comprised of currentsubject matter in Federal taxation or Fed-eral tax related matters, including account-ing, tax preparation software and taxationor ethics;

(ii) Be a qualifying program consistentwith the Internal Revenue Code and effec-tive tax administration; and

(iii) Be sponsored by a qualifying spon-sor.

(2) * * *(iv) Credit for published articles,

books, etc. (A) Continuing educationcredit will be awarded for publications onFederal taxation or Federal tax related mat-ters, including accounting, tax preparationsoftware, and taxation or ethics, providedthe content of such publications is currentand designed for the enhancement of theprofessional knowledge of an individualenrolled to practice before the InternalRevenue Service. The publication must beconsistent with the Internal Revenue Codeand effective tax administration.

* * * * *(g) * * *

(5) Sponsor renewal—(i) In general. Asponsor maintains its status as a qualifiedsponsor during the sponsor enrollment cy-cle.

(ii) Renewal period. Each sponsor mustfile an application to renew its status asa qualified sponsor between May 1 andJuly 31, 2008. Thereafter, applications forrenewal will be required between May 1and July 31 of every subsequent third year.

(iii) Effective date of renewal. The ef-fective date of renewal is the first day ofthe third month following the close of therenewal period.

(iv) Sponsor enrollment cycle. Thesponsor enrollment cycle is the threesuccessive calendar years preceding theeffective date of renewal.

* * * * *(k) * * *(7) Inactive enrollment status is not

available to an individual who is the sub-ject of a disciplinary matter in the Officeof Professional Responsibility.

(l) Inactive retirement status. An indi-vidual who no longer practices before theInternal Revenue Service may request be-ing placed in an inactive retirement sta-tus at any time and such individual will beplaced in an inactive retirement status. Theindividual will be ineligible to practice be-fore the Internal Revenue Service. Suchindividual must file a timely applicationfor renewal of enrollment at each applica-ble renewal or enrollment period as pro-vided in this section. An individual who isplaced in an inactive retirement status maybe reinstated to an active enrollment sta-tus by filing an application for renewal ofenrollment and providing evidence of thecompletion of the required continuing pro-fessional education hours for the enroll-ment cycle. Inactive retirement status isnot available to an individual who is thesubject of a disciplinary matter in the Of-fice of Professional Responsibility.

* * * * *(p) Effective date. This section is appli-

cable to enrollment effective on or after thedate that final regulations are published inthe Federal Register.

Par. 7. Section 10.7 is amended by:1. Removing paragraph (c)(1)(viii).2. Revising paragraph (c)(2)(ii).3. And adding paragraph (g).The revisions and additions read as fol-

lows:

§10.7 Representing oneself; participatingin rulemaking; limited practice; specialappearances; and return preparation.

* * * * *(c) * * *(2) * * *(ii) The Director, after notice and op-

portunity for a conference, may deny eligi-bility to engage in limited practice beforethe Internal Revenue Service under para-graph (c)(1) of this section to any individ-ual who has engaged in conduct that wouldjustify a sanction under §10.50.

* * * * *(g) Effective date. This section is appli-

cable on the date that final regulations arepublished in the Federal Register.

Par. 8. Section 10.22 is amended by re-vising paragraph (b) and adding paragraph(c) to read as follows:

§10.22 Diligence as to accuracy.

* * * * *(b) Reliance on others. Except as pro-

vided in §§10.34 and 10.35, a practitionerwill be presumed to have exercised duediligence for purposes of this section if thepractitioner relies on the work product ofanother person and the practitioner usedreasonable care in engaging, supervising,training, and evaluating the person, takingproper account of the nature of the rela-tionship between the practitioner and theperson.

(c) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.

Par. 9. Section 10.25 is revised to readas follows:

§10.25 Practice by former Governmentemployees, their partners and theirassociates.

(a) Definitions. For purposes of thissection—

(1) Assist means to act in such a way asto advise, furnish information to, or other-wise aid another person, directly, or indi-rectly.

(2) Government employee is an officeror employee of the United States or anyagency of the United States, including aspecial government employee as definedin 18 U.S.C. 202(a), or of the District ofColumbia, or of any State, or a member ofCongress or of any State legislature.

2006–10 I.R.B. 570 March 6, 2006

(3) Member of a firm is a sole practi-tioner or an employee or associate thereof,or a partner, stockholder, associate, affili-ate or employee of a partnership, joint ven-ture, corporation, professional associationor other affiliation of two or more prac-titioners who represent nongovernmentalparties.

(4) Particular matter involving specificparties is defined at 5 CFR 2637.201(c), orsuperseding post-employment regulationsissued by the U.S. Office of GovernmentEthics.

(5) Practitioner includes any individualdescribed in §10.2(a)(5).

(6) Rule includes Treasury regulations,whether issued or under preparation forissuance as notices of proposed rulemak-ing or as Treasury decisions; revenue rul-ings; and revenue procedures published inthe Internal Revenue Bulletin (see 26 CFR§601.601(d)(2)).

(b) General rules. (1) No former Gov-ernment employee may, subsequent to hisor her Government employment, representanyone in any matter administered by theInternal Revenue Service if the represen-tation would violate 18 U.S.C. 207 or anyother laws of the United States.

(2) No former Government employeewho personally and substantially partic-ipated in a particular matter involvingspecific parties may, subsequent to his orher Government employment, represent orknowingly assist, in that particular matter,any person who is or was a specific partyto that particular matter.

(3) A former Government employeewho within a period of one year priorto the termination of Government em-ployment had official responsibility for aparticular matter involving specific partiesmay not, within two years after his or herGovernment employment is ended, repre-sent in that particular matter any personwho is or was a specific party to that par-ticular matter.

(4) No former Government employeemay, within one year after his or her Gov-ernment employment is ended, appear be-fore any employee of the Treasury Depart-ment in connection with the publication,withdrawal, amendment, modification, orinterpretation of a rule the development ofwhich the former Government employeeparticipated or for which, within a periodof one year prior to the termination of his

or her Government employment, the for-mer government employee had official di-rect responsibility. This paragraph (b)(4)does not, however, preclude such formeremployee from appearing on his or herown behalf or from representing a tax-payer before the Internal Revenue Servicein connection with a particular matter in-volving specific parties involving the ap-plication or interpretation of such a rulewith respect to that particular matter, pro-vided that such former employee does notutilize or disclose any confidential infor-mation acquired by the former employeein the development of the rule.

(c) Firm representation. (1) No mem-ber of a firm of which a former Govern-ment employee is a member may representor knowingly assist a person who was oris a specific party in any particular mat-ter with respect to which the restrictionsof paragraph (b)(2) of this section apply tothe former Government employee, in thatparticular matter, unless the firm isolatesthe former Government employee in sucha way to ensure that the former Govern-ment employee cannot assist in the repre-sentation.

(2) When isolation of a former Gov-ernment employee is required under para-graph (c)(1) of this section, a statement af-firming the fact of such isolation must beexecuted under oath by the former Gov-ernment employee and by another mem-ber of the firm acting on behalf of thefirm. The statement must clearly iden-tify the firm, the former Government em-ployee, and the particular matter(s) requir-ing isolation. The statement must be re-tained by the firm and, upon request, pro-vided to the Director of the Office of Pro-fessional Responsibility.

(d) Pending representation. The pro-visions of this regulation will governpractice by former Government employ-ees, their partners and associates withrespect to representation in particular mat-ters involving specific parties where actualrepresentation commenced before the ef-fective date of this regulation.

(e) This section is applicable on the datethat final regulations are published in theFederal Register.


§10.27 Fees.

(a) In general. A practitioner may notcharge an unconscionable fee in connec-tion with any matter before the InternalRevenue Service.

(b) Contingent fees. (1) Except as pro-vided in paragraphs (b)(2) and (3) of thissection, a practitioner may not charge acontingent fee for services rendered inconnection with any matter before the In-ternal Revenue Service.

(2) A practitioner may charge a contin-gent fee for services rendered in connec-tion with the Service’s examination of, orchallenge to—

(i) An original tax return; or(ii) An amended return or claim for re-

fund or credit filed prior to the taxpayer re-ceiving a written notice of the examinationof, or a written challenge to the original taxreturn.

(3) A practitioner may charge a contin-gent fee for services rendered in connec-tion with any judicial proceeding arisingunder the Internal Revenue Code.

(c) Definitions. For purposes of thissection—

(1) Contingent fee is any fee that isbased, in whole or in part, on whetheror not a position taken on a tax return orother filing avoids challenge by the Inter-nal Revenue Service or is sustained eitherby the Internal Revenue Service or in lit-igation. A contingent fee includes a feethat is based on a percentage of the re-fund reported on a return, that is based on apercentage of the taxes saved, or that oth-erwise depends on the specific result at-tained. A contingent fee also includes anyfee arrangement in which the practitionerwill reimburse the client for all or a por-tion of the client’s fee in the event that aposition taken on a tax return or other fil-ing is challenged by the Internal RevenueService or is not sustained, whether pur-suant to an indemnity agreement, a guaran-tee, rescission rights, or any other arrange-ment with a similar effect.

(2) Matter before the Internal RevenueService includes tax planning and advice,preparing or filing or assisting in prepar-ing or filing returns or claims for refundor credit, and all matters connected with apresentation to the Internal Revenue Ser-vice or any of its officers or employeesrelating to a taxpayer’s rights, privileges,or liabilities under laws or regulations ad-

March 6, 2006 571 2006–10 I.R.B.

ministered by the Internal Revenue Ser-vice. Such presentations include, but arenot limited to, preparing and filing docu-ments, corresponding and communicatingwith the Internal Revenue Service, render-ing written advice with respect to any en-tity, transaction, plan or arrangement, andrepresenting a client at conferences, hear-ings, and meetings.



§10.29 Conflicting interests.

(a) Except as provided by paragraph (b)of this section, a practitioner shall not rep-resent a client in his or her practice beforethe Internal Revenue Service if the repre-sentation involves a conflict of interest. Aconflict of interest exists if—

(1) The representation of one client willbe directly adverse to another client; or

(2) There is a significant risk that therepresentation of one or more clients willbe materially limited by the practitioner’sresponsibilities to another client, a formerclient or a third person or by a personalinterest of the practitioner.

(b) Notwithstanding the existence of aconflict of interest under paragraph (a) ofthis section, the practitioner may representa client if—

(1) The practitioner reasonably believesthat the practitioner will be able to providecompetent and diligent representation toeach affected client;

(2) The representation is not prohibitedby law; and

(3) Each affected client waives the con-flict of interest and gives informed con-sent, confirmed in writing by the affectedclient, at the time the existence of the con-flict of interest is known by the practi-tioner.

(c) Copies of the written consents mustbe retained by the practitioner for at least36 months from the date of the conclusionof the representation of the affected clients,and the written consents must be providedto any officer or employee of the InternalRevenue Service on request.

(d) This section is applicable on the datethat final regulations are published in theFederal Register.


§10.34 Standards with respect to taxreturns and documents, affidavits andother papers.

(a) Tax returns. A practitioner may notsign a tax return as a preparer if the prac-titioner determines that the tax return con-tains a position that does not have a real-istic possibility of being sustained on itsmerits (the realistic possibility standard)unless the position is not frivolous and isadequately disclosed to the Internal Rev-enue Service. A practitioner may not ad-vise a client to take a position on a tax re-turn, or prepare the portion of a tax returnon which a position is taken, unless—

(1) The practitioner determines that theposition satisfies the realistic possibilitystandard; or

(2) The position is not frivolous.(b) Documents, affidavits and other pa-

pers. (1) A practitioner may not advise aclient to take a position on a document, af-fidavit or other paper submitted to the In-ternal Revenue Service unless the positionis not frivolous.

(2) A practitioner may not advise aclient to submit a document, affidavit orother paper to the Internal Revenue Ser-vice—

(i) The purpose of which is to delay orimpede the administration of the Federaltax laws;

(ii) That is frivolous or groundless; or(iii) That contains or omits information

in a manner that demonstrates an inten-tional disregard of a rule or regulation.

(c) Advising clients on potential penal-ties. (1) A practitioner must inform a clientof any penalties that are reasonably likelyto apply to the client with respect to—

(i) A position taken on a tax return if—(A) The practitioner advised the client

with respect to the position; or(B) The practitioner prepared or signed

the tax return; and(ii) Any document, affidavit or other

paper submitted to the Internal RevenueService.

(2) The practitioner also must informthe client of any opportunity to avoid anysuch penalties by disclosure, if relevant,and of the requirements for adequate dis-closure.

(3) This paragraph (c) applies even ifthe practitioner is not subject to a penaltyunder the Internal Revenue Code with re-spect to the position or with respect to thedocument, affidavit or other paper submit-ted.

(d) Relying on information furnished byclients. A practitioner advising a client totake a position on a tax return, document,affidavit or other paper submitted to theInternal Revenue Service, or preparing orsigning a tax return as a preparer, generallymay rely in good faith without verificationupon information furnished by the client.The practitioner may not, however, ignorethe implications of information furnishedto, or actually known by, the practitioner,and must make reasonable inquiries if theinformation as furnished appears to be in-correct, inconsistent with an important factor another factual assumption, or incom-plete.

(e) Definitions. For purposes of thissection:

(1) Realistic possibility. A positionis considered to have a realistic possibil-ity of being sustained on its merits if areasonable and well-informed analysis ofthe law and the facts by a person knowl-edgeable in the tax law would lead sucha person to conclude that the position hasapproximately a one in three, or greater,likelihood of being sustained on its mer-its. The authorities described in 26 CFR1.6662–4(d)(3)(iii), or any successor pro-vision, of the substantial understatementpenalty regulations may be taken into ac-count for purposes of this analysis. Thepossibility that a tax return will not beaudited, that an issue will not be raised onaudit, or that an issue will be settled maynot be taken into account.

(2) Frivolous. A position is frivolous ifit is patently improper.

(f) Effective date. This section is appli-cable to tax returns, documents, affidavitsand other papers filed on or after the datethat final regulations are published in theFederal Register.

Par. 13. In §10.35(b)(1) remove thelanguage “§10.2(e)” and add the language“§10.2(a)(5)” in its place.

Par. 14. Section 10.50 is amended byrevising paragraph (a) and adding para-graphs (c) and (d) to read as follows:

2006–10 I.R.B. 572 March 6, 2006

§10.50 Sanctions.

(a) Authority to censure, suspend, ordisbar. The Secretary of the Treasury, orhis or her delegate, after notice and anopportunity for a proceeding, may cen-sure, suspend, or disbar any practitionerfrom practice before the Internal RevenueService if the practitioner is shown tobe incompetent or disreputable (withinthe meaning of §10.51), fails to complywith any regulation in this part (under theprohibited conduct standards of §10.52),or with intent to defraud, willfully andknowingly misleads or threatens a clientor prospective client. Censure is a publicreprimand.

* * * * *(c) Authority to impose monetary

penalty—(1) In general. (i) The Secretaryof the Treasury, or his or her delegate, afternotice and an opportunity for a proceed-ing, may impose a monetary penalty onany practitioner who engages in conductsubject to sanction under paragraph (a) ofthis section.

(ii) If the practitioner described in para-graph (c)(1)(i) of this section was acting onbehalf of an employer or any firm or otherentity in connection with the conduct giv-ing rise to the penalty, the Secretary of theTreasury, or his or her delegate, may im-pose a monetary penalty on the employer,firm, or entity if it knew, or reasonablyshould have known, of such conduct.

(2) Amount of penalty. The amount ofthe penalty shall not exceed the gross in-come derived (or to be derived) from theconduct giving rise to the penalty.

(3) Coordination with other sanctions.Subject to paragraph (c)(2) of this sec-tion—

(i) Any monetary penalty imposed on apractitioner under this paragraph (c) maybe in addition to or in lieu of any sus-pension, disbarment or censure and maybe in addition to a penalty imposed on anemployer, firm or other entity under para-graph (c)(1)(ii) of this section.

(ii) Any monetary penalty imposed onan employer, firm or other entity may be inaddition to penalties imposed under para-graph (c)(1)(i) of this section.

(d) Effective date. This section is appli-cable to conduct occurring on or after thedate that final regulations are published inthe Federal Register.


§10.51 Incompetence and disreputableconduct.

(a) Incompetence and disreputable con-duct. Incompetence and disreputable con-duct for which a practitioner may be sanc-tioned under §10.50 includes, but is notlimited to:

(1) Conviction of any criminal offenseunder the Federal tax laws.

(2) Conviction of any criminal offenseinvolving dishonesty or breach of trust.

(3) Conviction of any felony under Fed-eral or State law for which the conductinvolved renders the practitioner unfit topractice before the Internal Revenue Ser-vice.

(4) Giving false or misleading informa-tion, or participating in any way in the giv-ing of false or misleading information tothe Department of the Treasury or any offi-cer or employee thereof, or to any tribunalauthorized to pass upon Federal tax mat-ters, in connection with any matter pendingor likely to be pending before them, know-ing such information to be false or mis-leading. Facts or other matters containedin testimony, Federal tax returns, financialstatements, applications for enrollment, af-fidavits, declarations, or any other docu-ment or statement, written or oral, are in-cluded in the term information.

(5) Solicitation of employment as pro-hibited under §10.30, the use of false ormisleading representations with intent todeceive a client or prospective client in or-der to procure employment, or intimatingthat the practitioner is able improperly toobtain special consideration or action fromthe Internal Revenue Service or officer oremployee thereof.

(6) Willfully failing to make a Federaltax return in violation of the Federal taxlaws, or willfully evading, attempting toevade, or participating in any way in evad-ing or attempting to evade any assessmentor payment of any Federal tax.

(7) Willfully assisting, counseling, en-couraging a client or prospective clientin violating, or suggesting to a client orprospective client to violate, any Federaltax law, or knowingly counseling or sug-gesting to a client or prospective client anillegal plan to evade Federal taxes or pay-ment thereof.

(8) Misappropriation of, or failure prop-erly or promptly to remit funds receivedfrom a client for the purpose of paymentof taxes or other obligations due the UnitedStates.

(9) Directly or indirectly attempting toinfluence, or offering or agreeing to at-tempt to influence, the official action ofany officer or employee of the InternalRevenue Service by the use of threats, falseaccusations, duress or coercion, by the of-fer of any special inducement or promiseof an advantage or by the bestowing of anygift, favor or thing of value.

(10) Disbarment or suspension frompractice as an attorney, certified publicaccountant, public accountant or actuaryby any duly constituted authority of anyState, territory, possession of the UnitedStates, including a Commonwealth, or theDistrict of Columbia, any Federal courtof record or any Federal agency, body orboard.

(11) Knowingly aiding and abetting an-other person to practice before the InternalRevenue Service during a period of sus-pension, disbarment or ineligibility of suchother person.

(12) Contemptuous conduct in connec-tion with practice before the Internal Rev-enue Service, including the use of abu-sive language, making false accusations orstatements, knowing them to be false orcirculating or publishing malicious or libelmatter.

(13) Giving a false opinion, knowingly,recklessly, or through gross incompetence,including an opinion which is intention-ally or recklessly misleading, or engagingin a pattern of providing incompetentopinions on questions arising under theFederal tax laws. False opinions describedin this paragraph (13) include those whichreflect or result from a knowing misstate-ment of fact or law, from an assertion of aposition known to be unwarranted underexisting law, from counseling or assistingin conduct known to be illegal or fraudu-lent, from concealing matters required bylaw to be revealed, or from consciouslydisregarding information indicating thatmaterial facts expressed in the opinion oroffering material are false or misleading.For purposes of this paragraph (a)(13),reckless conduct is a highly unreasonableomission or misrepresentation involvingan extreme departure from the standardsof ordinary care that a practitioner should

March 6, 2006 573 2006–10 I.R.B.

observe under the circumstances. A pat-tern of conduct is a factor that will betaken into account in determining whethera practitioner acted knowingly, recklessly,or through gross incompetence. Gross in-competence includes conduct that reflectsgross indifference, preparation whichis grossly inadequate under the circum-stances, and a consistent failure to performobligations to the client.

(14) Willfully failing to sign a tax returnprepared by the practitioner when such sig-nature is required by the Federal tax laws.

(15) Willfully disclosing or otherwiseusing a tax return or tax return informationin a manner not authorized by the Inter-nal Revenue Code, contrary to the order ofa court of competent jurisdiction, or con-trary to the order of an administrative lawjudge in a proceeding instituted under sec-tion 10.60.

(b) Effective date. This section is appli-cable to conduct occurring on or after thedate that final regulations are published inthe Federal Register.


§10.52 Violations subject to sanction.

(a) A practitioner may be sanctionedunder §10.50 if the practitioner—

(1) Willfully violates any of the regula-tions (other than §10.33) contained in thispart; or

(2) Recklessly or through gross in-competence (within the meaning of§10.51(a)(13)) violates §10.34, 10.35,10.36 or 10.37.

(b) This section is applicable to conductoccurring on or after the date that finalregulations are published in the FederalRegister.

Par. 17. Section 10.60 is amended byrevising paragraph (a) and adding para-graph (d) to read as follows:

§10.60 Institution of proceeding.

(a) Whenever the Director of the Of-fice of Professional Responsibility deter-mines that a practitioner (or employer, firmor other entity, if applicable) violated anyprovision of the laws governing practicebefore the Internal Revenue Service or theregulations in this part, the Director ofthe Office of Professional Responsibilitymay reprimand the practitioner or, in ac-cordance with §10.62, institute a proceed-

ing for a sanction described in §10.50. Aproceeding is instituted by the filing of acomplaint, the contents of which are morefully described in §10.62.

* * * * *(d) This section is applicable on the date

that final regulations are published in theFederal Register.


§10.61 Conferences.

(a) In general. The Director of theOffice of Professional Responsibility mayconfer with a practitioner, employer, firmor other entity, or an appraiser concerningallegations of misconduct irrespective ofwhether a proceeding has been instituted.If the conference results in a stipulation inconnection with an ongoing proceeding inwhich the practitioner, employer, firm orother entity, or appraiser is the respondent,the stipulation may be entered in the recordby either party to the proceeding.

(b) Resignation or voluntary sanc-tion—(1) In general. In lieu of a proceed-ing being instituted or continued under§10.60(a), a practitioner or appraiser (oremployer, firm or other entity, if applica-ble) may offer a consent to be sanctionedunder §10.50.

(2) Discretion; acceptance or declina-tion. The Director of the Office of Pro-fessional Responsibility may, in his or herdiscretion, accept or decline the offer de-scribed in paragraph (b)(1) of this sec-tion. In any declination, the Director ofthe Office of Professional Responsibilitymay state that he or she would accept theoffer described in paragraph (b)(1) of thissection if it contained different terms. TheDirector of the Office of Professional Re-sponsibility may, in his or her discretion,accept or reject a revised offer submittedin response to the declination or may coun-teroffer and act upon any accepted coun-teroffer.


Par. 19. Section 10.62 is amended byrevising paragraph (c) and adding para-graph (d) to read as follows:

§10.62 Contents of complaint.

* * * * *

(c) Demand for answer. The Directorof the Office of Professional Responsibil-ity must, in the complaint or in a separatepaper attached to the complaint, notify therespondent of the time for answering thecomplaint, which may not be less than 30days from the date of service of the com-plaint, the name and address of the Ad-ministrative Law Judge with whom the an-swer must be filed, the name and addressof the person representing the Director ofthe Office of Professional Responsibilityto whom a copy of the answer must beserved, and that a decision by default maybe rendered against the respondent in theevent an answer is not filed as required.

(d) Effective date. This section is appli-cable to complaints brought on or after thedate that final regulations are published inthe Federal Register.

Par. 20. Section 10.63 is amended by:1. Revising paragraph (a)(4).2. Redesignating paragraph (d) as para-

graph (e).3. Adding new paragraphs (d) and (f).The revisions and additions read as fol-

lows:

§10.63 Service of complaint; serviceof other papers; service of evidence insupport of complaint; filing of papers.

(a) * * *(4) For purposes of this section, “re-

spondent” means the practitioner, em-ployer, firm or other entity, or appraisernamed in the complaint or any other per-son having the authority to accept mail onbehalf of the practitioner, employer, firmor other entity, or appraiser.

* * * * *(d) Service of evidence in support of

complaint. Within 10 days of serving thecomplaint, copies of the evidence in sup-port of the complaint must be served onthe respondent in any manner described inparagraphs (a)(2) and (3) of this section.

* * * * *(f) Effective date. This section is appli-

cable to complaints brought on or after thedate that final regulations are published inthe Federal Register.


2006–10 I.R.B. 574 March 6, 2006

§10.65 Supplemental charges.

(a) In general. The Director of theOffice of Professional Responsibility mayfile supplemental charges, by amendingthe complaint, against the respondent, if,for example—

(1) It appears that the respondent, in theanswer, falsely and in bad faith, denies amaterial allegation of fact in the complaintor states that the respondent has insuffi-cient knowledge to form a belief, when therespondent possesses such information; or

(2) It appears that the respondent hasknowingly introduced false testimony dur-ing the proceedings against the respondent.

(b) Hearing. The supplemental chargesmay be heard with other charges in thecase, provided the respondent is given duenotice of the charges and is afforded a rea-sonable opportunity to prepare a defense tothe supplemental charges.



§10.68 Motions and requests.

(a) Motions—(1) In general. At anytime after the filing of the complaint, anyparty may file a motion with the Admin-istrative Law Judge. Unless otherwise or-dered by the Administrative Law Judge,motions must be in writing and must beserved on the opposing party as providedin §10.63(b). A motion must conciselyspecify its grounds and the relief sought,and, if appropriate, must contain a memo-randum of facts and law in support.

(2) Summary adjudication. Eitherparty may move for a summary adjudi-cation upon all or any part of the legalissues in controversy. If the non-movingparty opposes summary adjudication inthe moving party’s favor, the non-movingparty must file a written response within30 days unless ordered otherwise by theAdministrative Law Judge.

(3) Good Faith. A party filing a mo-tion for extension of time, a motion forpostponement of a hearing, or any othernon-dispositive or procedural motion mustfirst contact the other party to determinewhether there is any objection to the mo-tion, and must state in the motion whetherthe other party has an objection.

(b) Response. Unless otherwise orderedby the Administrative Law Judge, the non-moving party is not required to file a re-sponse to a motion. If the AdministrativeLaw Judge does not order the nonmovingparty to file a response, and the nonmov-ing party files no response, the nonmovingparty is deemed to oppose the motion. If anonmoving party does not respond within30 days of the filing of a motion for deci-sion by default for failure to file a timelyanswer or for failure to prosecute, the non-moving party is deemed not to oppose themotion.

(c) Oral motions; oral argument. (1)The Administrative Law Judge may, forgood cause and with notice to the parties,permit oral motions and oral opposition tomotions.

(2) The Administrative Law Judge may,within his or her discretion, permit oralargument on any motion.

(d) Orders. The Administrative LawJudge should issue written orders dispos-ing of any motion or request and any re-sponse thereto.

(e) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.

Par. 23. Section 10.70 is amendedby revising paragraphs (a) and (b)(6) andadding paragraph (c) to read as follows:

§10.70 Administrative Law Judge.

(a) Appointment. Proceedings on com-plaints for the sanction (as described in§10.50) of a practitioner, employer, firm orother entity, or appraiser will be conductedby an Administrative Law Judge appointedas provided by 5 U.S.C. 3105.

(b) * * *(6) Take or authorize the taking of de-

positions or answers to requests for admis-sion;

* * * * *(c) This section is applicable on the date

that final regulations are published in theFederal Register.

Par. 24. Section 10.73 is removed.

§10.73 [Removed]

Par. 25. Section 10.72 is redesignatedas §10.73.

§10.72 [Redesignated as §10.73]

Par. 26. Section 10.71 is redesignatedas §10.72.

§10.71 [Redesignated as §10.72]

Par. 27. New §10.71 is added to read asfollows:

§10.71 Discovery.

(a) In general. Discovery may be per-mitted, at the discretion of the Adminis-trative Law Judge, only upon written mo-tion demonstrating the relevance, materi-ality and reasonableness of the requesteddiscovery and subject to the requirementsof §10.72(d)(2) and (3). Within 10 daysof receipt of the answer, the Administra-tive Law Judge will notify the parties ofthe right to request discovery and the time-frames for filing a request. A request fordiscovery, and objections, must be filed inaccordance with §10.68. In response to arequest for discovery, the AdministrativeLaw Judge may order:

(1) Depositions upon oral examination;or

(2) Answers to requests for admission.(b) Depositions upon oral examination.

(1) A deposition must be taken before anofficer duly authorized to administer anoath for general purposes or before an of-ficer or employee of the Internal RevenueService who is authorized to administer anoath in Federal tax law matters.

(2) In ordering a deposition, the Ad-ministrative Law Judge will require rea-sonable notice to the opposing party as tothe time and place of the deposition. Theopposing party, if attending, will be pro-vided the opportunity for full examinationand cross-examination of any witness.

(3) Expenses in the reporting of deposi-tions shall be borne by the party at whoseinstance the deposition is taken. Travelexpenses of the deponent shall be borneby the party requesting the deposition, un-less otherwise authorized by Federal lawor regulation.

(c) Requests for admission. Any partymay serve on any other party a writtenrequest for admission of the truth of anymatters which are not privileged and arerelevant to the subject matter of this pro-ceeding. Requests for admission shall notexceed a total of 30 (including any sub-parts within a specific request) without

March 6, 2006 575 2006–10 I.R.B.

the approval from the Administrative LawJudge.

(d) Limitations. Discovery shall not beauthorized if—

(1) The request fails to meet any re-quirement set forth in paragraph (a) of thissection;

(2) It will unduly delay the proceeding;(3) It will place an undue burden on

the party required to produce the discoverysought;

(4) It is frivolous or abusive;(5) It is cumulative or duplicative;(6) It is privileged or otherwise pro-

tected from disclosure by law;(7) It relates to mental impressions,

conclusions, or legal theories of any party,attorney, or other representative, of a partyprepared in anticipation of a proceeding;or

(8) It is available generally to the pub-lic, equally to the parties, or to the partyseeking the discovery through anothersource.

(e) Failure to comply. Where a partyfails to comply with an order of the Admin-istrative Law Judge under this section, theAdministrative Law Judge may, amongother things, infer that the informationwould be adverse to the party failing toprovide it, exclude the information fromevidence or issue a decision by default.

(f) Other discovery. No discovery otherthan that specifically provided for in thissection is permitted.

(g) Effective date. This section is appli-cable to proceedings initiated on or afterthe date that final regulations are publishedin the Federal Register.

Par. 28. Newly designated §10.72 isamended by:

1. Revising paragraph (a).2. Redesignating paragraphs (b), (c)

and (d) as paragraphs (d), (e) and (f), re-spectively.

3. Adding new paragraphs (b) and (c).4. Revising newly designated para-

graph (d).5. Adding a new paragraph (g).The additions and revisions read as fol-

lows:

§10.72 Hearings.

(a) In general—(1) Presiding officer.An Administrative Law Judge will presideat the hearing on a complaint filed under

§10.60 for the sanction of a practitioner,employer, firm or other entity, or appraiser.

(2) Time for hearing. Absent a deter-mination by the Administrative Law Judgethat, in the interest of justice, a hearingmust be held at a later time, the Adminis-trative Law Judge should, on notice suffi-cient to allow proper preparation, schedulethe hearing to occur no later than 180 daysafter the time for filing the answer.

(3) Procedural requirements. (i) Hear-ings will be stenographically recorded andtranscribed and the testimony of witnesseswill be taken under oath or affirmation.

(ii) Hearings will be conducted pur-suant to 5 U.S.C. 556.

(iii) A hearing in a proceeding re-quested under §10.82(g) will be conductedde novo.

(iv) An evidentiary hearing must beheld in all proceedings prior to the is-suance of a decision by the AdministrativeLaw Judge unless—

(A) The Director of the Office of Pro-fessional Responsibility withdraws thecomplaint;

(B) A decision is issued by default pur-suant to §10.64(d);

(C) A decision is issued under§10.82(e);

(D) The respondent requests a decisionon the written record without a hearing; or

(E) The Administrative Law Judgeissues a decision under §10.68(d) or byvirtue of ruling on another motion thatdisposes of the case prior to the hearing.

(b) Cross-examination. A party is enti-tled to present his or her case or defense byoral or documentary evidence, to submitrebuttal evidence, and to conduct cross-ex-amination, in the presence of the Admin-istrative Law Judge, as may be requiredfor a full and true disclosure of the facts.This paragraph (b) does not limit a partyfrom presenting evidence contained withina deposition when the Administrative LawJudge determines that the deposition hasbeen obtained in compliance with the rulesof this subpart D.

(c) Prehearing memorandum. Unlessotherwise ordered by the AdministrativeLaw Judge, each party shall file, andserve on the opposing party or the op-posing party’s representative, prior to anyhearing, a prehearing memorandum con-taining—

(1) A list (together with a copy) of allproposed exhibits to be used in the party’scase in chief;

(2) A list of proposed witnesses, includ-ing a synopsis of their expected testimony,or a statement that no witnesses will becalled;

(3) Identification of any proposed ex-pert witnesses, including a synopsis oftheir expected testimony and a copy ofany report prepared by the expert or at hisor her direction; and

(4) A list of undisputed facts.(d) Publicity of proceedings—(1) In

general. Except as provided in paragraph(d)(3) of this section, all hearings beforethe Administrative Law Judge, all plead-ings filed with the Administrative LawJudge, all evidence received by the Ad-ministrative Law Judge, and all reportsand decisions of the Administrative LawJudge in a proceeding under Subpart Dwill, subject to paragraph (d)(3) of thissection, be public and open to inspection.Copies of these documents may, at theSecretary’s discretion, be made publiclyavailable on the Internal Revenue Servicewebpage (www.irs.gov) or through othermeans.

(2) Returns and return information—(i)Disclosure to practitioner or appraiser.Pursuant to section 6103(l)(4)(A) of the In-ternal Revenue Code, the Secretary, or hisor her delegate, may disclose returns andreturn information, upon written request,to any practitioner or appraiser, or to theauthorized representative of such practi-tioner or appraiser, whose rights are or maybe affected by an administrative action orproceeding under subpart D, but solely foruse in such action or proceeding and onlyto the extent that the Secretary, or his orher delegate, determines that such returnsor return information are or may be rele-vant and material to the action or proceed-ing.

(ii) Disclosure to officers and employ-ees of the Department of Treasury. Pur-suant to section 6103(l)(4)(B) of the Inter-nal Revenue Code, the Secretary may dis-close returns and return information to of-ficers and employees of the Department ofthe Treasury for use in any action or pro-ceeding under subpart D, to the extent nec-essary to advance or protect the interests ofthe United States.

(iii) Use of returns and return infor-mation. Recipients of returns and return

2006–10 I.R.B. 576 March 6, 2006

information under this paragraph (d)(2)may use such returns or return informationsolely in the action or proceeding, or inpreparation for the action or proceeding,with respect to which the disclosure wasmade.

(iv) Procedures for disclosure of re-turns and return information—(A) Re-quests for information. The practitioneror appraiser, or his or her authorized rep-resentative, may request returns or returninformation for use in the action or pro-ceeding, or preparation for such actionor proceeding in accordance with the re-quirements of section 6103(l)(4)(A) of theInternal Revenue Code. The practitioneror appraiser, or his or her authorized repre-sentative, may not obtain returns or returninformation from the Internal RevenueService for use in a disciplinary proceed-ing under subpart D through any otherprocess or procedure.

(B) Responding to requests for infor-mation. The Secretary will respond to aproperly constituted written request for re-turns or return information made pursuantto paragraph (d)(2)(iv)(A) of this sectionby providing—

(1) To the extent authorized by sec-tion 6103(l)(4)(A) of the Internal RevenueCode, returns or return information re-quested by the practitioner or appraiser,coded for identifying all third party tax-payers;

(2) A key to the coded information;(3) A letter informing the practitioner

or appraiser, and his or her authorized rep-resentative, of the restrictions on the useand disclosure of the returns and return in-formation, the applicable damages remedyunder section 7431 of the Internal RevenueCode, and that unauthorized disclosure ofinformation provided by the Internal Rev-enue Service under this paragraph (d)(2) isalso a violation of this part.

(C) Filing documents. The parties mustredact from all documents filed with theAdministrative Law Judge (including at-tachments and exhibits) any names, ad-dresses or other identifying details of thirdparty taxpayers and replace such informa-tion with the code assigned to the corre-sponding taxpayer.

(D) Oral testimony. The parties shallprovide a key to the coded third party re-turns and return information described inparagraph (d)(2)(iv)(B) of this section toeach person giving oral testimony before

the Administrative Law Judge, but onlyto the extent relevant to the person’s tes-timony. The Administrative Law Judgeshould direct all persons giving oral tes-timony to use the code during such testi-mony, or, if impractical, issue a protectiveorder in accordance with paragraph (d)(3)of this section.

(3) Protective measures—(i) Manda-tory protective order. If redaction ofnames, addresses, and other identifyinginformation of third parties would renderdocuments unintelligible for use in theproceeding or may still permit indirectidentification of any third party taxpayer,the Administrative Law Judge will is-sue a protective order to ensure that suchidentifying information is available to theparties and the Administrative Law Judgefor purposes of the proceeding, but is notdisclosed to, or open to inspection by, thepublic.

(ii) Authorized orders. (A) Upon mo-tion by a party or any other affected per-son, and for good cause shown, the Admin-istrative Law Judge may make any orderwhich justice requires to protect any per-son in the event disclosure of informationis prohibited by law, privileged, confiden-tial, or sensitive in some other way, includ-ing, but not limited to, one or more of thefollowing—

(1) That disclosure of information bemade only on specified terms and condi-tions, including a designation of the timeor place;

(2) That certain matters not be inquiredinto, or that the inquiry be limited to cer-tain matters or to any other extent;

(3) That the hearing or deposition beconducted with no one present exceptpersons designated by the AdministrativeLaw Judge;

(4) That a deposition or any written ma-terials be sealed, and be opened only by or-der of the Administrative Law Judge;

(5) That a trade secret or other informa-tion not be disclosed, or be disclosed onlyin a designated way; and

(6) That the parties simultaneously filespecified documents or information en-closed in sealed envelopes to be openedonly as directed by the AdministrativeLaw Judge.

(B) If a discovery request has beenmade, then the movant shall attach as anexhibit to a motion for a protective orderunder this section a copy of any discovery

request in respect of which the motion isfiled.

(iii) Denials. If a motion for a protec-tive order is denied in whole or in part,then the Administrative Law Judge may,on such terms or conditions as he or shedeems just, order any party or person tocomply with, or respond in accordancewith, the procedure involved.

(iv) Conclusion of Proceedings. At theconclusion of a proceeding the Secretary,or his or her delegate, shall ensure thatall returns and return information, includ-ing the names, addresses or other identi-fying details of third party taxpayers, areredacted and replaced with the code as-signed to the corresponding taxpayer in alldocuments prior to such documents beingmade available for further public inspec-tion.



Par. 29. Newly designated §10.73 isamended by:

1. Revising paragraph (b).2. Redesignating paragraphs (c), (d),

and (e) as paragraphs (d), (e), and (f), re-spectively.

3. Adding new paragraphs (c) and (g).4. Revising newly designated para-

graph (d).The revisions and additions read as fol-

lows:

§10.73 Evidence.

* * * * *(b) Depositions. The deposition of any

witness taken pursuant to §10.71 may beadmitted into evidence in any proceedinginstituted under §10.60.

(c) Requests for admission. Any matteradmitted in response to a request for ad-mission under §10.71 is conclusively es-tablished unless the Administrative LawJudge on motion permits withdrawal ormodification of the admission. Any ad-mission made by a party is for the purposesof the pending action only and is not an ad-mission by such party for any other pur-pose, nor may it be used against such partyin any other proceeding.

(d) Proof of documents. Official docu-ments, records, and papers of the InternalRevenue Service and the Office of Profes-sional Responsibility are admissible in ev-

March 6, 2006 577 2006–10 I.R.B.

idence without the production of an offi-cer or employee to authenticate them. Anysuch documents, records, and papers maybe evidenced by a copy attested or identi-fied by an officer or employee of the Inter-nal Revenue Service or the Treasury De-partment, as the case may be.




§10.76 Decision of Administrative LawJudge.

(a) In general—(1) Hearings. Within180 days after the conclusion of a hear-ing and the receipt of any proposed find-ings and conclusions timely submitted bythe parties, the Administrative Law Judgeshould enter a decision in the case. The de-cision must include a statement of findingsand conclusions, as well as the reasons orbasis for making such findings and conclu-sions, and an order of censure, suspension,disbarment, monetary penalty, disqualifi-cation, or dismissal of the complaint.

(2) Summary adjudication. In the eventthat a motion for summary adjudicationis filed, the Administrative Law Judgeshould rule on the motion for summaryadjudication within 60 days after the partyin opposition files a written response, orif no written response is filed, within 90days after the motion for summary adjudi-cation is filed. A decision shall thereafterbe rendered if the pleadings, depositions,admissions, and any other admissible evi-dence show that there is no genuine issueof material fact and that a decision may berendered as a matter of law. The decisionmust include a statement of conclusions,as well as the reasons or basis for makingsuch conclusions, and an order of censure,suspension, disbarment, monetary penalty,disqualification, or dismissal of the com-plaint.

(3) Returns and return information.In the decision, the Administrative LawJudge should use the code assigned to thirdparty taxpayers (described in §10.72(d)).

(b) Standard of proof. If the sanctionis censure or a suspension of less than sixmonths’ duration, the Administrative LawJudge, in rendering findings and conclu-sions, will consider an allegation of fact to

be proven if it is established by the partywho is alleging the fact by a preponderanceof the evidence in the record. If the sanc-tion is a monetary penalty, disbarment ora suspension of six months or longer du-ration, an allegation of fact that is neces-sary for a finding against the practitionermust be proven by clear and convincingevidence in the record. An allegation offact that is necessary for a finding of dis-qualification against an appraiser must beproven by clear and convincing evidencein the record.

(c) Copy of decision. The Administra-tive Law Judge will provide the decision tothe Director of the Office of ProfessionalResponsibility, with a copy to the Direc-tor’s authorized representative, and a copyof the decision to the respondent or the re-spondent’s authorized representative.

(d) When final. The decision of the Ad-ministrative Law Judge will become the fi-nal decision of the agency 45 days after thedate the Administrative Law Judge’s deci-sion is served on the parties unless, eitherin response to a petition for review to theSecretary, or his or her delegate, filed bya party, or on his or her own initiative, theSecretary, or his or her delegate, providesthe written notice described in §10.77(e) tothe parties.

(e) Effective date. This section is appli-cable to proceedings initiated on or afterthe date that final regulations are publishedin the Federal Register.


§10.77 Petition for review of decision ofAdministrative Law Judge.

(a) Petition for review. Any party to theproceeding under subpart D may file a pe-tition for review of the decision of the Ad-ministrative Law Judge with the Secretary,or his or her delegate.

(1) Briefs. The petition must include abrief that states exceptions to the decisionof the Administrative Law Judge and sup-porting reasons for such exceptions.

(2) Publicity of review—(i) In general.All petitions and briefs, any responsesthereto, filed with the Secretary, or hisor her delegate, and all decisions of theSecretary, or his or her delegate, will bepublic and open to inspection. Copies ofthese documents may, at the Secretary’sdiscretion, be made publicly available on

the Internal Revenue Service webpage(www.irs.gov) or through other means.

(ii) Returns and return information.The parties must delete from all docu-ments filed with the Secretary, or his orher delegate, (including attachments andexhibits) and the Secretary, or his or herdelegate, will delete from the decisionany names, addresses or other identifyingdetails of third party taxpayers and replacethe information with the code assigned tothird party taxpayers in accordance with§10.72(d).

(b) Time and place for filing of petitionfor review. The petition for review, andbrief, must be filed, in duplicate, with theDirector of the Office of Professional Re-sponsibility within 30 days of the date thatthe decision of the Administrative LawJudge is served on the parties. The Direc-tor of the Office of Professional Respon-sibility will immediately furnish a copy ofthe petition to the Secretary or his or herdelegate who decides appeals. A copy ofthe petition for review must be sent to anynon-petitioning party. If the Director of theOffice of Professional Responsibility filesa petition for review, he or she shall certifyto the respondent that the petition has beenfiled along with a copy of the petition.

(c) Discretionary review. In determin-ing whether to grant review of the deci-sion of the Administrative Law Judge, theSecretary, or his or her delegate, may con-sider whether the petition for review showsthat—

(1) A prejudicial error was likely com-mitted in the conduct of the proceeding; or

(2) The decision—(i) Likely contains a finding or conclu-

sion of material fact or conclusion of lawthat is clearly erroneous; or

(ii) The Secretary, or his or her dele-gate, determines that such error should bereviewed.

(d) Secretary review other than pur-suant to a petition for review. The Secre-tary, or his or her delegate, may, on his orher own initiative, order review of any Ad-ministrative Law Judge decision within 45days of the date of the decision.

(e) Notice of review. If the Secretary,or his or her delegate, grants a petition forreview or orders review on his or her owninitiative, the Secretary, or his or her dele-gate, will notify the parties, within 45 daysfrom the date the decision of the Adminis-

2006–10 I.R.B. 578 March 6, 2006

trative Law Judge is served on the parties,that—

(1) The decision of the AdministrativeLaw Judge has been taken under review bythe Secretary, or his or her delegate;

(2) No final agency decision has beenmade;

(3) The action of the AdministrativeLaw Judge, including the decision and or-der, is inoperative pending review by theSecretary, or his or her delegate; and

(4) A final decision of the agency to bemade by the Secretary is required beforejudicial review can be obtained.

(f) Deemed denial. A petition for re-view will be deemed to be denied wherethe Secretary, or his or her delegate, issuesno notice of review.

(g) Interlocutory review. The Secre-tary will not review an Administrative LawJudge’s ruling prior to the AdministrativeLaw Judge rendering a decision that woulddispose of the entire proceeding.

(h) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.


§10.78 Decision on review.

(a) Scope of review. If the Secretary, orhis or her delegate, provides written noticeto the parties pursuant to §10.77 that a de-cision of the Administrative Law Judge isunder review, the Secretary, or his or herdelegate, may affirm, reverse, modify, setaside or remand for further proceedings, inwhole or in part, the decision by the Ad-ministrative Law Judge and may make anyfindings and conclusions that in his or herjudgment are proper and on the basis of therecord. The decision of the AdministrativeLaw Judge will not be reversed unless it isestablished that the decision is clearly erro-neous in light of the evidence in the recordand applicable law. Issues that are exclu-sively matters of law will be reviewed denovo. In the event that the Secretary, orhis or her delegate, determines that thereare unresolved issues raised by the record,the case may be remanded to the Adminis-trative Law Judge to elicit additional testi-mony or evidence. A copy of the agencydecision will be provided by the Secretary,or his or her delegate, contemporaneouslyto the Director of the Office of Professional

Responsibility and the respondent or theirauthorized representatives.

(b) Record on review. The Director ofthe Office of Professional Responsibilitymust provide the entire record, includingcopies of any petition for review, brief, andany reply brief, to the Secretary, or his orher delegate, within 30 days of the datethe Secretary, or his or her delegate, pro-vides written notice to the parties pursuantto §10.77 that a decision of the Administra-tive Law Judge is under review. The Direc-tor of the Office of Professional Respon-sibility shall certify to the respondent thatsuch documents have been so provided.

(c) Reply and supplemental briefs. TheSecretary, or his or her delegate, may orderthe filing of a reply brief that responds tothe petition for review, either before theperiod for notice of review expires or aftera notice of review is issued. The Secretary,or his or her delegate, may order the partiesto file supplemental briefs on any or allissues.


Par. 33. Section 10.82 is amended byrevising paragraph (b) and adding para-graph (h) to read as follows:

§10.82 Expedited suspension.

* * * * *(b) To whom applicable. This section

applies to any practitioner who, within fiveyears of the date a complaint instituting aproceeding under this section is served:

(1) Has had his or her license to prac-tice as an attorney, certified public accoun-tant, or actuary suspended or revoked forcause (not including failure to pay a pro-fessional licensing fee) by any authority orcourt, agency, body, or board described in§10.51(a)(11).

(2) Has, irrespective of whether an ap-peal has been taken, been convicted of anycrime under title 26 of the United StatesCode, any crime involving dishonesty orbreach of trust, or any felony for which theconduct involved renders the practitionerunfit to practice before the Internal Rev-enue Service.

(3) Has violated conditions imposed onthe practitioner pursuant to §10.79(d).

(4) Has demonstrated a pattern of egre-gious conduct by—

(i) Failing to file a return or pay a tax,required annually by the Internal RevenueCode, during three of the five immediatelyproceeding taxable years; or

(ii) Failing to file a return or pay a tax,required more frequently than annually bythe Internal Revenue Code, during four ofthe seven immediately proceeding tax pe-riods; and

(iii) Is not in compliance with his orher Federal tax obligations at the time thenotice of suspension is issued under para-graph (f) of this section.

(5) Has been sanctioned by a court ofcompetent jurisdiction, whether in a civilor criminal proceeding (including suits forinjunctive relief), relating to a taxpayer’stax liability or relating to the practitioner’sown tax liability, for—

(i) Instituting or maintaining proceed-ings primarily for delay;

(ii) Advancing frivolous or groundlessarguments; or

(iii) Failing to pursue available admin-istrative remedies.

* * * * *(h) Effective date. This section is appli-



§10.90 Records.

(a) Roster. The Director of the Office ofProfessional Responsibility will maintain,and may make available for public inspec-tion in the time and manner prescribed bythe Secretary, or his or her delegate, rostersof—

(1) Enrolled agents, including individu-als—

(i) Granted active enrollment to prac-tice;

(ii) Whose enrollment has been placedin inactive status for failure to meet therequirements for renewal of enrollment;

(iii) Whose enrollment has been placedin inactive retirement status; and

(iv) Whose offer of consent to resignfrom enrollment has been accepted by theDirector of the Office of Professional Re-sponsibility under §10.61;

(2) Individuals (and employers, firmsor other entities, if applicable) censured,suspended, or disbarred from practice be-fore the Internal Revenue Service or upon

March 6, 2006 579 2006–10 I.R.B.

whom a monetary penalty was imposed;and

(3) Disqualified appraisers.(b) Other records. Other records of the

Director of the Office of Professional Re-sponsibility may be disclosed upon spe-cific request, in accordance with the ap-plicable disclosure rules of the InternalRevenue Service and the Treasury Depart-ment.

(b) Effective date. This section is appli-cable on the date that final regulations arepublished in the Federal Register.


§10.91 Saving provision.

Any proceeding instituted under thispart prior to July 26, 2002, for which afinal decision has not been reached orfor which judicial review is still availablewill not be affected by these revisions.Any proceeding under this part based onconduct engaged in prior to the effectivedates of these revisions, which is institutedafter that date, shall apply subpart D andE or this part as revised, but the conductengaged in prior to the effective date ofthese revisions shall be judged by the reg-ulations in effect at the time the conductoccurred.


Approved February 2, 2006.

Arnold I. Havens,General Counsel,

Office of the Secretary.


Partial Withdrawal of Notice ofProposed Rulemaking, Noticeof Proposed Rulemaking, andNotice of Public Hearing

Escrow Accounts, Trusts, andOther Funds Used DuringDeferred Exchanges ofLike-Kind Property

REG–113365–04 andREG–209619–93

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Partial withdrawal of notice ofproposed rulemaking, notice of proposedrulemaking, and notice of public hearing.

SUMMARY: This document withdraws inpart a notice of proposed rulemaking un-der section 468B of the Internal RevenueCode (Code) relating to the taxation andreporting of income earned on qualifiedsettlement funds and certain other funds,trusts, and escrow accounts. This docu-ment also contains proposed regulationsunder section 468B regarding the taxa-tion of the income earned on escrow ac-counts, trusts, and other funds used dur-ing deferred exchanges of like-kind prop-erty, and proposed regulations under sec-tion 7872 regarding below-market loans tofacilitators of these exchanges. The pro-posed regulations affect taxpayers that en-gage in deferred like-kind exchanges andescrow holders, trustees, qualified inter-mediaries, and others that hold funds dur-ing deferred like-kind exchanges. Thisdocument also provides notice of a publichearing on these proposed regulations.

DATES: Written or electronic commentsmust be received by May 8, 2006. Outlinesof topics to be discussed at the public hear-ing scheduled for June 6, 2006, at 10 a.m.must be received by May 16, 2006.

ADDRESSES: Send submissions toCC:PA:LPD:PR (REG–113365–04), room5203, Internal Revenue Service, POB7604, 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–113365–04),

courier’s desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, tax-payers may submit electronic com-ments directly to the IRS internet site atwww.irs.gov/regs or via the Federal eRule-making Portal at www.regulations.gov(IRS-REG–113365–04). The public hear-ing will be held in the auditorium, InternalRevenue Building, 1111 Constitution Av-enue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations under section 468B,A. Katharine Jacob Kiss, (202) 622–4930;concerning the proposed regulations un-der section 7872, David Silber, (202)622–3930; concerning submission of com-ments, the hearing, and/or to be placed onthe building access list to attend the hear-ing, Treena Garrett, (202) 622–3401 (nottoll-free numbers).


Background

This document withdraws §1.468B–6of a notice of proposed rulemaking(REG–209619–93, 1999–1 C.B. 689)relating to the taxation of qualified set-tlement funds and certain other escrowaccounts, trusts, and funds under section468B(g) that was published in the Fed-eral Register (64 FR 4801) on February1, 1999 (the 1999 proposed regulations).This document contains new proposed reg-ulations that provide rules under sections468B(g) and 7872 regarding the taxationof qualified escrow accounts, qualifiedtrusts, and other escrow accounts, trusts,or funds used during section 1031 deferredexchanges of like-kind property.

Section 468B was added by section1807(a)(7)(A) of the Tax Reform Act of1986 (Public Law 99–514, 100 Stat. 2814)and was amended by section 1018(f) ofthe Technical and Miscellaneous RevenueAct of 1988 (Public Law 100–647, 102Stat. 3582). Section 468B(g) providesthat nothing in any provision of law shallbe construed as providing that an escrowaccount, settlement fund, or similar fundis not subject to current income tax andthat the Secretary shall prescribe regula-tions providing for the taxation of suchaccounts or funds whether as a grantortrust or otherwise.

2006–10 I.R.B. 580 March 6, 2006

Section 7872 was added to the InternalRevenue Code by the Tax Reform Act of1984 (Public Law No. 98–369, 98 Stat.494). Section 7872 provides rules forcertain direct and indirect below-marketloans enumerated in section 7872(c)(1).The legislative history of section 7872states that the term loan is to be inter-preted broadly for purposes of section7872, potentially encompassing any trans-fer of money that provides the transferorwith a right to repayment. See H.R. Rep.98–861, 98th Cong., 2d Sess. 1018 (1984).

In general, section 7872 recharac-terizes a below-market loan (a loan inwhich the interest rate charged is lessthan the applicable Federal rate (AFR)) asan arm’s-length transaction in which thelender makes a loan to the borrower at theAFR, coupled with an imputed paymentor payments to the borrower sufficientto fund all or part of the interest that theborrower is treated as paying on that loan.The amount, timing, and characterizationof the imputed payments to the borrowerunder a below-market loan depend on therelationship between the borrower and thelender and whether the loan is character-ized as a demand loan or a term loan.

Written comments responding to the1999 proposed regulations under section468B were received. A public hearingwas held on May 12, 1999. After consid-eration of all the comments, portions ofthe 1999 proposed regulations are adoptedin a Treasury decision (T.D. 9249) pub-lished elsewhere in this issue of the Bul-letin. The rules relating to the taxationof qualified escrow accounts, qualifiedtrusts, and other escrow accounts, trusts,or funds used during deferred exchangesof like-kind property under section 1031have been substantially revised and arereproposed in this notice of proposedrulemaking. All comments received inconnection with the 1999 proposed regu-lations will continue to be considered infinalizing these proposed regulations.

Explanation of Provisions andSummary of Comments

1. Overview

Section 1.468B–6 of the 1999 proposedregulations provides rules for the currenttaxation of income of a qualified escrowaccount or qualified trust used in a sec-

tion 1031 deferred exchange of like-kindproperty. The 1999 proposed regulationsprovide that, in general, the taxpayer (thetransferor of the property) is the owner ofthe assets in a qualified escrow accountor qualified trust and must take into ac-count all items of income, deduction, andcredit (including capital gains and losses)of the qualified escrow account or qual-ified trust. However, if, under the factsand circumstances, a qualified intermedi-ary or transferee has the beneficial use andenjoyment of the assets, then the qualifiedintermediary or transferee is the owner ofthe assets in the qualified escrow accountor qualified trust and must take into ac-count all items of income, deduction, andcredit (including capital gains and losses)of the qualified escrow account or quali-fied trust. The 1999 proposed regulationsfurther provide that, if a qualified inter-mediary or transferee is the owner of theassets transferred, the transaction may becharacterized as a below-market loan fromthe taxpayer to the owner to which section7872 may apply.

The comments received reflect dif-fering interpretations of the 1999 pro-posed regulations and disagreement on theproper rules for taxing these transactions.The comments address three major issues(1) whether §1.468B–6 should apply to allfunds and accounts maintained by qual-ified intermediaries to facilitate deferredlike-kind exchanges as well as to qualifiedescrow accounts and qualified trusts (thescope of the rules); (2) whether the regu-lations should adopt a per se rule in placeof the facts and circumstances ownershiptest; and (3) whether these arrangementsmay be properly characterized as loans.Other comments requested clarification ofthe information reporting provisions.

2. Scope of the Rule

Section 1.1031(k)–1(g) of the IncomeTax Regulations provides safe harbors thatallow taxpayers to engage in deferred ex-changes of like-kind property and to avoidbeing determined to be in actual or con-structive receipt of the proceeds from thesale of the taxpayers’ relinquished prop-erty during the exchange period. The pro-ceeds may be held in a qualified escrowaccount or qualified trust or may be heldby a qualified intermediary. The 1999 pro-posed regulations address the treatment of

only qualified escrow accounts and quali-fied trusts whether or not used by a qual-ified intermediary, and do not address ac-counts or funds used by a qualified inter-mediary that are not qualified escrow ac-counts or qualified trusts.

Commentators on the 1999 proposedregulations stated that qualified intermedi-aries may maintain funds in accounts thatare not qualified escrow accounts or quali-fied trusts, including accounts in which theproceeds of a disposition of relinquishedproperty are commingled with other as-sets, such as the proceeds from deferredlike-kind exchanges entered into by othertaxpayers. Some commentators recom-mended applying the rules of §1.468B–6to income earned on amounts held in anyescrow account, trust, or other account orfund used by a qualified intermediary inconnection with a deferred like-kind ex-change. They suggested that the limitedscope of the 1999 proposed regulationsmay result in uncertainty and inconsistenttreatment of the different types of accountsthat may be used for similar purposes indeferred like-kind exchanges.

Other commentators took the contraryposition, that is, that applying the rulesproposed in 1999 to accounts other thanqualified escrow accounts or qualifiedtrusts is inappropriate. One commentatorstated that at least one party (either thetaxpayer or the qualified intermediary)is taxed on the income earned on everyaccount used by a qualified intermediary.Therefore, the commentator reasoned, be-cause there are no instances of homelessincome (income that is not currently beingtaxed because the identity of the taxpayerhas yet to be determined), applying theproposed regulations to escrow accountsor funds that are not qualified escrowaccounts or qualified trusts would not ad-vance the purpose of the statute. Anothercommentator opined that section 468Bwas intended to apply only to segregatedaccounts.

Other commentators urged that the1999 proposed regulations be finalizedwithout change or that the appropriaterules for taxation of accounts used indeferred like-kind exchanges other thanqualified escrow accounts and qualifiedtrusts should be considered at a later time.

The IRS and the Treasury Departmenthave concluded that the same rules shouldapply to all escrow accounts, trusts, and

March 6, 2006 581 2006–10 I.R.B.

funds used during deferred exchanges toprovide certainty and consistency of treat-ment. Additionally, the IRS and the Trea-sury Department have concluded that therules should apply equally to escrow ac-counts, trusts, and funds used during ex-changes that are intended to qualify as like-kind but fail to satisfy a requirement ofsection 1031. Therefore, these regulationspropose to apply to exchange funds, de-fined as the relinquished property (if heldin kind), cash, or cash equivalent that se-cures an obligation of a transferee to trans-fer replacement property, or the proceedsfrom a transfer of relinquished property,held in a qualified escrow account, qual-ified trust, or other escrow account, trust,or fund during a deferred exchange.

3. Facts and Circumstances OwnershipTest

Under the 1999 proposed regulations,the taxpayer generally is treated as theowner of a qualified escrow account orqualified trust and is taxed on the income.If, under the facts and circumstances, how-ever, a qualified intermediary or transfereehas the beneficial use and enjoyment of theassets in the account, the qualified interme-diary or transferee is the owner and is taxedon the income. The 1999 proposed regula-tions provide three factors that will be con-sidered in addition to other relevant factsand circumstances in determining whetherthe transferee or qualified intermediary,rather than the taxpayer, has the beneficialuse and enjoyment of the assets of the ac-count or trust (1) who enjoys the use of theearnings of the account or trust; (2) whoreceives the benefit from appreciation inthe value of the assets; and (3) who bearsany risk of loss from a decline in the valueof the assets. The 1999 proposed regula-tions include two examples that concludethat the taxpayer is the owner of the assetsif the income from a qualified escrow ac-count or qualified trust is paid to the quali-fied intermediary or transferee as compen-sation for services performed for the tax-payer. See Old Colony Trust v. Commis-sioner, 279 U.S. 716 (1929).

Some commentators recommended thatthe facts and circumstances test be elim-inated and that the regulations provide aper se rule that the taxpayer must alwaystake into account all items of income, de-duction, and credit (including capital gains

and losses) of the exchange funds in com-puting the taxpayer’s income tax liabil-ity. They suggested that the taxpayer al-ways owns the exchange funds and anyincome earned on the funds that is re-tained by the qualified intermediary con-stitutes compensation to the qualified in-termediary for services rendered to the tax-payer in facilitating the deferred like-kindexchange. Therefore, consistent with theprinciples of Old Colony Trust, the tax-payer should be taxed on all the earningsin all cases.

Other commentators urged that the factsand circumstances test should be retained.They stated that like-kind exchanges areoften structured so that a qualified inter-mediary has all the benefits and burdens ofownership of the exchange funds and that,in those circumstances, a qualified inter-mediary is the owner of the assets undergeneral tax principles. These commenta-tors explained that qualified intermediariesfrequently charge separately stated feesthat are the same if the earnings are paidto the taxpayer or retained by the qualifiedintermediary, indicating, they asserted,that the qualified intermediary’s retentionof the income is not properly character-ized as compensation for services. Thesecommentators further suggested, there-fore, that in appropriate cases the qualifiedintermediary is the actual owner of theassets and the Old Colony Trust doctrineis inapplicable. These commentators alsorecommended that the rules should besufficiently broad to permit parties to de-ferred like-kind exchanges flexibility instructuring the transactions, for examplein the disposition of the income earnedand in the use of commingled rather thansegregated accounts.

A commentator recommended modify-ing the ownership rule to allow the alloca-tion of the tax liability among the parties tothe exchange and the qualified intermedi-ary to the extent that those parties actuallyshare the income earned on a qualified es-crow account or qualified trust.

To enhance administrability, providegreater certainty, and ensure consistenttreatment of taxpayers, these proposedregulations eliminate the facts and cir-cumstances ownership test and proposespecific rules that determine whether theincome of an escrow account, trust, orfund used in a deferred like-kind exchangeis taxed to the taxpayer or to an exchange

facilitator, which is a qualified intermedi-ary, transferee, or other party that holds theexchange funds. These rules are discussedfurther below.

Because the ownership test has beeneliminated, these proposed regulationsalso eliminate the requirement in the 1999proposed regulations that the parties pro-vide a statement to the escrow holder ortrustee when the taxpayer is not the ownerof the assets.

4. Loan Treatment

One commentator argued that the treat-ment of a qualified intermediary as ac-quiring the relinquished property under thesection 1031 regulations applies solely forpurposes of section 1031. This commenta-tor suggested that proceeds from the sale ofthe relinquished property in a deferred ex-change are properly characterized in one ofonly two ways: (1) the taxpayer owns thefunds and is taxed on the earnings; or (2)under section 7872, the taxpayer is treatedas lending the funds to the qualified inter-mediary, in which case the qualified inter-mediary (or exchange facilitator) owns thefunds and is treated as paying interest onthe loan. The commentator also urged that,for reasons of administrative convenience,the parties should be permitted to elect ei-ther characterization and the rules shouldapply prospectively.

Other commentators stated that, if aqualified intermediary has the benefits andburdens of ownership, the funds are ownedby the qualified intermediary and not thetaxpayer, and therefore could not be loanedby the taxpayer. Because the taxpayer isdeemed not to have actual or constructivereceipt of the exchange funds under therules of §1.1031(k)–1, these commentatorsreasoned that a taxpayer cannot lend assetsit does not possess.

The IRS and the Treasury Departmentagree with the comment that exchangefunds held by exchange facilitators inconnection with deferred like-kind ex-changes are properly characterized eitheras the taxpayer’s funds or as loans fromthe taxpayer to the qualified intermediaryor other exchange facilitator. Character-izing the exchange funds as having beenloaned is consistent with the broad defi-nition of the term loan in the legislativehistory of section 7872. The provisionsof §1.1031(k)–1 stating that the taxpayer

2006–10 I.R.B. 582 March 6, 2006

is deemed to not have actual or construc-tive receipt of the exchange funds if thesafe harbors apply do not preclude loantreatment. These rules permit taxpayersto engage in like-kind exchanges on adeferred basis but are not statements ofgeneral tax principles. See §1.1031–1(n).

Therefore, these proposed regulationsprovide that exchange funds are treated, asa general rule, as loaned by a taxpayer toan exchange facilitator, and the exchangefacilitator takes into account all items ofincome, deduction, and credit (includingcapital gains and losses). If, however,the escrow agreement, trust agreement, orexchange agreement specifies that all theearnings attributable to exchange fundsare payable to the taxpayer, the exchangefunds are not treated as loaned from thetaxpayer to the exchange facilitator, andthe taxpayer takes into account all items ofincome, deduction, and credit (includingcapital gains and losses). If an exchangefacilitator commingles exchange fundswith other funds (for example, for invest-ment purposes), all the earnings attribut-able to the exchange funds are treated aspaid to the taxpayer if the exchange facili-tator pays the taxpayer all the earnings ofthe commingled account that are allocableon a pro-rata basis (using a reasonablemethod that takes into account the timethat the exchange funds are in the commin-gled account, actual rate or rates of return,and the respective principal balances) tothe taxpayer’s exchange funds. Paymentsfrom the exchange funds, or from the earn-ings attributable to the exchange funds,for the taxpayer’s transactional expensesare treated as first paid to the taxpayer andthen paid by the taxpayer to the recipient.Transactional expenses include the costsof land surveys, appraisals, title examina-tions, termite inspections, transfer taxes,and recording fees. An exchange facili-tator’s fee is a transactional expense onlyif the escrow agreement, trust agreement,or exchange agreement, as applicable,provides that (1) the amount of the feepayable to the exchange facilitator is fixedon or before the date of the transfer ofthe relinquished property by the taxpayer(either by stating the fee as a fixed dollaramount in the agreement or determiningthe fee by a formula, the result of whichis known on or before the transfer of therelinquished property by the taxpayer),and (2) the amount of the fee is payable

by the taxpayer regardless of whether theearnings attributable to the exchange fundsare sufficient to pay the fee.

5. Treatment under Section 7872 of Loansto Exchange Facilitators

The 1999 proposed regulations providethat if a qualified intermediary or trans-feree is the owner of the assets transferred,section 7872 may apply “if the deferred ex-change involves a below-market loan fromthe taxpayer to the owner.”

Several commentators did not agreethat section 7872 could apply to exchangefunds and suggested that the referenceshould be deleted. Commentators alsosuggested that, even if a transfer of theexchange funds from the taxpayer to anexchange facilitator is a loan, it wouldconstitute a loan given in consideration forthe sale or exchange of property (withinthe meaning of section 1274(c)(1)) or adeferred payment on account of a sale orexchange of property (within the meaningof section 483) and would be exempt fromsection 7872 under the rules containedin §1.7872–2(a)(2)(ii) of the proposedregulations that were published in theFederal Register (LR–165–84, 1985–2C.B. 812 [50 FR 33553]) on August 20,1985 (the 1985 proposed regulations).These commentators further argued thatexchange facilitator loans should be ex-empted from section 7872 because thoseloans must be repaid within six months.These commentators argued that the sec-tion 1274 exclusion of debt instrumentspayable within six months evidences Con-gress’ intent that burdensome reportingand recordkeeping requirements shouldnot apply to short-term loans.

Having considered the comments re-ceived, the IRS and the Treasury Depart-ment conclude that section 7872, ratherthan sections 1274 or 483, applies to loansfrom taxpayers to exchange facilitators.Therefore, these proposed regulations pro-vide special rules under section 7872 forthe treatment of exchange facilitator loans.Under these proposed regulations, an ex-change facilitator loan is a transactionthat, under §1.468B–6(c)(1), is treated asa loan from the taxpayer to an exchangefacilitator in connection with a section1031 deferred exchange. Below-marketexchange facilitator loans are treated ascompensation-related loans under section

7872(c)(1)(B) and are treated as demandloans for purposes of section 7872.

A commentator suggested that, if sec-tion 7872 applies to these transactions,interest should be tested and imputed atan alternative rate (similar to the alterna-tive rate in §1.1274–4(a)(iii)) rather thanat the short-term AFR. These proposedregulations provide an alternative rate(the 182-day rate) for exchange facilitatorloans for purposes of section 7872. Thisrate is equal to the investment rate on a182-day Treasury bill determined on theauction date that most closely precedesthe date that the exchange facilitator loanis made. This rate is based on semi-an-nual compounding and may be found atwwws.publicdebt.treas.gov/AI/OFBills.The IRS and the Treasury Departmentrequest comments regarding alternativerates for exchange facilitator loans un-der section 7872, including whether the182-day Treasury bill rate is an appropri-ate rate. Notwithstanding §1.7872–13 ofthe 1985 proposed regulations, the tax-payer and exchange facilitator may usethe approximate method to determine theamount of forgone interest on an exchangefacilitator loan.

One commentator urged that a de min-imis exception for loans of exchangefunds under $10,000,000 should be addedunder §1.7872–5T because these loansare without significant tax effect. Sev-eral other commentators opined that§1.7872–5T(b)(14) should exempt loansof exchange funds from section 7872 be-cause they are loans without significanttax effect. However, the proposed regu-lations provide that exchange facilitatorloans are not eligible for the exemp-tions listed in §1.7872–5T(b), including§1.7872–5T(b)(14). An exchange fa-cilitator loan may be excepted from theapplication of section 7872 only if theloan qualifies for the $10,000 de minimisexception in section 7872(c)(3) for com-pensation-related loans.

6. Information Reporting

The 1999 proposed regulations statethat an escrow holder or trustee must re-port the income of the escrow, trust, orfund on Form 1099 in accordance withsubpart B, Part III, subchapter A, chapter61, Subtitle F of the Code (currently, sec-tions 6041 through 6050T), and provide

March 6, 2006 583 2006–10 I.R.B.

rules for identifying the payee. Severalcommentators expressed concern thatthese provisions expand the existing infor-mation reporting obligations in sections6041 through 6050T. The 1999 proposedregulations were not intended to createnew information reporting requirementsbut merely to alert responsible persons ofthe potential obligation to report. To clar-ify this intent, these proposed regulationsprovide that a payor must report to theextent required by sections 6041 through6050T and these regulations.

To enhance compliance, a commenta-tor recommended that payors should be re-quired to furnish Forms 1099 to corporatepayees involved in deferred like-kind ex-changes. This suggestion was not adoptedbecause it would be inconsistent with pro-visions of sections 6041 through 6050Tand the regulations thereunder that exemptpayments to corporations from the infor-mation reporting requirements.

7. Effective Dates

Sections 1.468B–6 and 1.7872–16 ap-ply, respectively, to transfers of propertymade by taxpayers and to exchange facili-tator loans issued after the date these regu-lations are published as final regulations inthe Federal Register. Section 1.468B–6of these proposed regulations incorporatesa transition rule similar to the transitionrule in the 1999 proposed regulations. Thetransition rule provides that, with respectto transfers of property made by taxpay-ers after August 16, 1986, but on or beforethe date these regulations are published asfinal regulations in the Federal Register,the IRS will not challenge a reasonable,consistently applied method of taxation forincome attributable to exchange funds.

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. An initial regula-tory flexibility analysis has been preparedfor this notice of proposed rulemaking un-der 5 U.S.C. 603. The analysis is set forthbelow under the heading “Initial Regula-tory Flexibility Analysis.” Pursuant to sec-tion 7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to the

Chief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small businesses.

Initial Regulatory Flexibility Analysis

The reasons for promulgation of theserules, and their legal basis, are set forthin this preamble under the heading “Back-ground.”

These rules impact exchange facilita-tors that hold exchange funds for taxpay-ers engaging in deferred exchanges of like-kind property. Exchange facilitators maybe individuals, large entities such as banks,or small businesses. The IRS and the Trea-sury Department estimate that nationwidethere are approximately 325 small busi-nesses providing services as exchange fa-cilitators, primarily as qualified intermedi-aries. For this purpose, a small businessis defined as a business with annual re-ceipts of up to $1.5 million, as providedin the Small Business Administration sizestandards set forth at 13 CFR 121.201 forNAICS code 531390 (other activities re-lated to real estate).

Section 1.468B–6(c)(2) provides thatexchange funds are not treated as loanedto an exchange facilitator if all the earn-ings attributable to the exchange funds arepaid to a taxpayer. If the exchange facili-tator commingles the exchange funds, theexchange facilitator will be required toaccount for the earnings attributable to thetaxpayer’s exchange funds.

As an alternative to these rules, retain-ing the facts and circumstances test of the1999 proposed regulations was consideredbut rejected because the test lacks admin-istrability and is subject to abuse. Otheralternatives were considered and rejectedas inconsistent with the statutory require-ments of section 7872.

The number of transactions involvingsmall entities that will be impacted bythese regulations, and the full extent ofthe economic impact, cannot be preciselydetermined. Exchange facilitators maysimplify the accounting for the earningsattributable to each taxpayer’s exchangefunds held in a commingled account by de-positing each taxpayer’s exchange fundsin a segregated account and paying thetaxpayer all the earnings of that account.

Comments are requested on the natureand extent of the economic burden im-posed on small entities by these rules and

on alternatives that would be less burden-some to small entities.

The IRS and the Treasury Departmentare not aware of any duplicative, overlap-ping, or conflicting federal rules.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any electronic or writ-ten comments (a signed original and eight(8) copies) that are submitted timely to theIRS. The IRS and the Treasury Departmentspecifically request comments on the clar-ity of the proposed regulations and howthey may be made easier to understand.All comments will be available for publicinspection and copying.

A public hearing has been scheduled forJune 6, 2006, at 10 a.m., in the auditorium,Internal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC. Due tobuilding security procedures, visitors mustenter at the Constitution Avenue entrance.In addition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance more than 30 minutes before thehearing starts. For information about hav-ing your name placed on the building ac-cess list to attend the hearing, see the “FORFURTHER INFORMATION CONTACT”section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit electronic or written comments andan outline of topics to be discussed and thetime devoted to each topic (signed origi-nal and eight (8) copies) by May 16, 2006.A period of 10 minutes will be allotted toeach person for making comments.

An agenda showing the scheduling ofthe 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 authors of these reg-ulations are A. Katharine Jacob Kissof the Office of Associate Chief Coun-sel (Income Tax & Accounting) andRebecca Asta of the Office of AssociateChief Counsel (Financial Institutions &

2006–10 I.R.B. 584 March 6, 2006

Products). However, other personnel fromthe IRS and the Treasury Department par-ticipated in their development.

* * * * *

Withdrawal of Proposed Amendmentsto the Regulations

Accordingly, under the author-ity of 26 U.S.C. 7805, §§1.468B–6and 1.1031(k)–1(g)(3)(i) and (h)(2)of a notice of proposed rulemaking(REG–209619–93) amending 26 CFRpart 1 that was published in the FederalRegister (64 FR 4801) on February 1,1999, are withdrawn.

Proposed Amendments to theRegulations

Accordingly, under the authority of 26U.S.C. 7805, 26 CFR part 1 is proposed tobe amended as 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 1.468B–6 also issued under 26

U.S.C. 468B(g).* * *Section 1.7872–16 also issued under 26

U.S.C. 7872.* * *Par. 2. Section 1.468B–0 is amended

by revising the entries for §1.468B–6 toread as follows:

§1.468B–0 Table of contents.

* * * * *

§1.468B–6 Escrow accounts, trusts,and other funds used during deferredexchanges of like-kind property undersection 1031(a)(3).

(a) Scope.(b) Definitions.(1) In general.(2) Exchange funds.(3) Exchange facilitator.(4) Transactional expenses.(i) In general.(ii) Special rule for certain fees for ex-

change facilitator services.(c) Taxation of exchange funds.(1) Exchange funds generally treated as

loaned to an exchange facilitator.

(2) Exchange funds not treated asloaned to an exchange facilitator.

(i) Scope.(ii) Treatment of the taxpayer.(d) Information reporting requirements.(e) Examples.(f) Effective dates.(1) In general.(2) Transition rule.

* * * * *Par. 3. Section 1.468B–6 is added to

read as follows:

§1.468B–6 Escrow accounts, trusts,and other funds used during deferredexchanges of like-kind property undersection 1031(a)(3).

(a) Scope. This section provides rulesunder section 468B(g) relating to the cur-rent taxation of escrow accounts, trusts,and other funds used during deferred ex-changes.

(b) Definitions. The definitions in thisparagraph (b) apply for purposes of thissection.

(1) In general. Deferred exchange, es-crow agreement, escrow holder, exchangeagreement, exchange period, qualifiedescrow account, qualified intermediary,qualified trust, relinquished property, re-placement property, taxpayer, trust agree-ment, and trustee have the same meaningsas in §1.1031(k)–1; deferred exchangealso includes any exchange intended toqualify as a deferred exchange, and quali-fied intermediary also includes any personor entity intended by a taxpayer to be aqualified intermediary within the meaningof §1.1031(k)–1(g)(4).

(2) Exchange funds. Exchange fundsmeans relinquished property, cash, or cashequivalent, that secures an obligation ofa transferee to transfer replacement prop-erty, or proceeds from a transfer of relin-quished property, held in a qualified es-crow account, qualified trust, or other es-crow account, trust, or fund during an ex-change period.

(3) Exchange facilitator. Exchange fa-cilitator means a qualified intermediary,transferee, escrow holder, trustee, or otherparty that holds exchange funds for a tax-payer during an exchange period.

(4) Transactional expenses—(i) In gen-eral. Transactional expenses means theusual and customary expenses paid or

incurred in connection with a deferredexchange. For example, the costs of landsurveys, appraisals, title examinations,termite inspections, transfer taxes, andrecording fees are transactional expenses.Except as provided in paragraph (b)(4)(ii)of this section, the fee for the services ofan exchange facilitator is not treated as atransactional expense.

(ii) Special rule for certain fees for ex-change facilitator services. The fee for theservices of an exchange facilitator will betreated as a transactional expense if the es-crow agreement, trust agreement, or ex-change agreement, as applicable, providesthat—

(A) The amount of the fee payable tothe exchange facilitator is fixed on or be-fore the date of the transfer of the relin-quished property by the taxpayer (either bystating the fee as a fixed dollar amount inthe agreement or determining the fee by aformula, the result of which is known onor before the transfer of the relinquishedproperty by the taxpayer); and

(B) The amount of the fee is payableby the taxpayer regardless of whether theearnings attributable to the exchange fundsare sufficient to pay the fee.

(c) Taxation of exchange funds—(1) Ex-change funds generally treated as loanedto an exchange facilitator. Except as pro-vided in paragraph (c)(2) of this section,exchange funds are treated as loaned froma taxpayer to an exchange facilitator. Theexchange facilitator must take into ac-count all items of income, deduction, andcredit (including capital gains and losses)attributable to the exchange funds. See§1.7872–16 to determine if a loan froma taxpayer to an exchange facilitator is abelow-market loan for purposes of section7872.

(2) Exchange funds not treated asloaned to an exchange facilitator—(i)Scope. This paragraph (c)(2) applies if,in accordance with an escrow agreement,trust agreement, or exchange agreement,as applicable, all the earnings attributableto a taxpayer’s exchange funds are paidto the taxpayer. For purposes of this para-graph (c)(2)—

(A) Any payment from the taxpayer’sexchange funds, or from the earningsattributable to the taxpayer’s exchangefunds, for a transactional expense of thetaxpayer (as defined in paragraph (b)(4) of

March 6, 2006 585 2006–10 I.R.B.

this section) is treated as first paid to thetaxpayer and then paid by the taxpayer tothe recipient; and

(B) If an exchange facilitator commin-gles (for investment or otherwise) the tax-payer’s exchange funds with other fundsor assets (whether or not the taxpayer’sfunds are in a segregated account), all theearnings attributable to the taxpayer’s ex-change funds are paid to the taxpayer if allof the earnings of the commingled funds orassets that are allocable on a pro-rata basis(using a reasonable method that takes intoaccount the time that the exchange fundsare in the commingled account, actual rateor rates of return, and the respective ac-count balances) to the taxpayer’s exchangefunds either are paid to the taxpayer or aretreated as paid to the taxpayer under para-graph (c)(2)(i)(A) of this section.

(ii) Treatment of the taxpayer. If thisparagraph (c)(2) applies, exchange fundsare not treated as loaned from a taxpayer toan exchange facilitator. The taxpayer musttake into account all items of income, de-duction, and credit (including capital gainsand losses) attributable to the exchangefunds.

(d) Information reporting requirements.A payor (as defined in §1.6041–1) mustreport the income attributable to exchangefunds on Form 1099 to the extent requiredby the information reporting provisions ofsubpart B, Part III, subchapter A, chapter61, Subtitle F of the Internal RevenueCode, and the regulations thereunder.See §1.6041–1(f) for rules relating to theamount to be reported when fees, expensesor commissions owed by a payee to a thirdparty are deducted from a payment.

(e) Examples. The provisions of thissection are illustrated by the following ex-amples in which T is a taxpayer that uses acalendar taxable year and the cash receiptsand disbursements method of accounting.The examples are as follows:

Example 1. All earnings attributable to exchangefunds paid to taxpayer. (i) T enters into a deferredexchange with R. The sales agreement provides thatT will transfer property (the relinquished property) toR and R will transfer replacement property to T. R’sobligation to transfer replacement property to T is se-cured by cash equal to the fair market value of the re-linquished property that R will deposit into a qualifiedescrow account that T establishes with B, a financialinstitution. T enters into an escrow agreement with Bthat provides that all the earnings attributable to theexchange funds will be paid to T.

(ii) On February 1, 2006, T transfers propertywith a fair market value of $100,000 to R and R de-

posits $100,000 in T’s qualified escrow account withB. Between February 1 and June 1, 2006, T’s ex-change funds earn $750. On June 1, 2006, R trans-fers replacement property worth $100,000 to T andB pays $100,000 from the qualified escrow accountto R. Additionally, on June 1, B credits the qualifiedescrow account with $750 of earnings and pays theearnings to T.

(iii) Under paragraph (b) of this section, the$100,000 deposited with B are exchange funds andB is an exchange facilitator. Because all the earningsattributable to the exchange funds are paid to T inaccordance with the escrow agreement, paragraph(c)(2) of this section applies. The exchange funds arenot treated as loaned from T to B, and T must takeinto account in computing T’s income tax liability for2006 the $750 of earnings credited to the qualifiedescrow account.

Example 2. Payment of transactional expensesfrom earnings. (i) The facts are the same as in Exam-ple 1, except that the escrow agreement provides that,prior to paying the earnings to T, B may deduct anyamounts B has paid to third parties for T’s transac-tional expenses. B pays a third party $350 on behalfof T for a survey of the replacement property. Af-ter deducting $350 from the earnings attributable toT’s qualified escrow account, B pays T the remain-der ($400) of the earnings.

(ii) Under paragraph (b)(4) of this section, the costof the survey is a transactional expense. Under para-graph (c)(2)(i)(A) of this section, the $350 that B paysfor the survey is treated as first paid to T and thenfrom T to the third party. Therefore, all the earningsattributable to T’s exchange funds are paid or treatedas paid to T in accordance with the escrow agreement,and paragraph (c)(2) of this section applies. The ex-change funds are not treated as loaned from T to B,and T must take into account in computing T’s in-come tax liability for 2006 the $750 of earnings cred-ited to the qualified escrow account.

Example 3. Earnings retained by exchange fa-cilitator as compensation for services. (i) The factsare the same as in Example 1, except that the es-crow agreement provides that B also may deduct anyoutstanding fees owed by T for B’s services in fa-cilitating the deferred exchange. In accordance withparagraph (b)(4)(ii) of this section, the escrow agree-ment provides for a fixed fee of $200 for B’s services,which is payable by T regardless of the amount ofearnings attributable to the exchange funds. Becausethe earnings on the exchange funds in this case ex-ceed $200, B retains $200 as the unpaid portion of itsfee and pays T the remainder ($550) of the earnings.

(ii) Under paragraph (b)(4) of this section, B’s feeis treated as a transactional expense. Under paragraph(c)(2)(i)(A) of this section, the $200 that B retains forits fee is treated as first paid to T and then from Tto B. Therefore, all the earnings attributable to T’sexchange funds are paid or treated as paid to T in ac-cordance with the escrow agreement, and paragraph(c)(2) of this section applies. The exchange funds arenot treated as loaned from T to B, and T must takeinto account in computing T’s income tax liability for2006 the $750 of earnings credited to the qualified es-crow account.

Example 4. Stated rate of interest on account lessthan earnings attributable to exchange funds. (i) Thefacts are the same as in Example 1, except that theescrow agreement provides that the qualified escrow

account will earn a stated rate of interest. B investsthe exchange funds and earns $750, but credits $500to the qualified escrow account at the stated rate. Bpays to T the $500 of interest earned at the stated rateon the qualified escrow account.

(ii) Paragraph (c)(1) of this section applies and theexchange funds are treated as loaned from T to B. Bmust take into account in computing B’s income taxliability all items of income, deduction, and credit (in-cluding capital gains and losses) attributable to theexchange funds. Paragraph (c)(2) of this section doesnot apply because B does not pay all the earnings at-tributable to the exchange funds to T. See §1.7872–16for rules relating to exchange facilitator loans.

Example 5. Exchange funds deposited by ex-change facilitator with financial institution in ac-count in taxpayer’s name. (i) The facts are the sameas in Example 1, except that, instead of enteringinto an escrow agreement, T enters into an exchangeagreement with QI, a qualified intermediary. The ex-change agreement provides that R will pay $100,000to QI, QI will deposit $100,000 into an account witha financial institution under T’s name and taxpayeridentification number (TIN), and all the earningsattributable to the account will be paid to T.

(ii) On February 1, 2006, T transfers propertywith a fair market value of $100,000 to R, R deliv-ers $100,000 to QI, and QI deposits $100,000 into amoney market account with B, a financial institutionunrelated to QI, under T’s name and TIN. BetweenFebruary 1 and June 1, 2006, the account earns $500of interest at the stated rate established by B. On June1, 2006, QI uses $100,000 of the funds in the accountto purchase replacement property identified by T andtransfers the replacement property to T. B pays to Tthe $500 of interest earned on the money market ac-count.

(iii) Under paragraph (b) of this section, the$100,000 QI receives from R for the relinquishedproperty are exchange funds and QI is an exchangefacilitator. B is not an exchange facilitator. T hasno direct relationship with B, and QI, not B, holdsthe exchange funds on behalf of T. Because all theearnings attributable to the exchange funds held byQI are paid to T in accordance with the exchangeagreement, paragraph (c)(2) of this section applies.The exchange funds are not treated as loaned fromT to QI, and T must take into account in computingT’s income tax liability for 2006 the $500 of interestearned on the money market account.

Example 6. All earnings attributable to commin-gled exchange funds paid to taxpayer. (i) The factsare the same as in Example 5, except that the ex-change agreement does not specify how the $100,000QI receives from R must be invested.

(ii) On February 1, 2006, QI deposits the$100,000 with B, a financial institution, in a pre-ex-isting interest-bearing account under QI’s name andTIN. The account has a total balance of $275,000immediately thereafter. On the last day of eachmonth between February and June, 2006, the accountearns interest as follows: $690 in February, $920 inMarch, $516 in April, and $986 in May. On April 11,2006, QI deposits $50,000 in the account. On May15, 2006, QI withdraws $175,000 from the account.

(iii) QI calculates T’s pro-rata share of the earn-ings allocable to the $100,000 based on the actualreturn, the average daily principal balances, and a30-day month convention, as follows:

2006–10 I.R.B. 586 March 6, 2006

MonthAccount’s

Avg. Daily Bal.T’s

Avg. Daily Bal. T’s Share*MonthlyInterest T’s End. Bal.**

February $275,000 $100,000 36.4% $690 $100,251March $275,690 $100,251 36.4% $920 $100,586April $309,943 $100,586 32.5% $516 $100,754May $236,626 $100,754 42.6% $986 $101,174

* T’s Average Daily Balance ÷ Account’s Average Daily Balance**T’s beginning balance + [(T’s share)(Monthly Interest)]

(iv) On June 1, 2006, QI uses $100,000 of thefunds to purchase replacement property identified byT and transfers the property to T. QI pays $1,174,the earnings of the account allocated to T’s exchangefunds, to T.

(v) Under paragraph (b) of this section, the$100,000 from the sale of the relinquished propertyare exchange funds and QI is an exchange facilitator.Because QI uses a reasonable method to calculatethe pro-rata share of account earnings allocableto T’s exchange funds and pays all those earningsto T, paragraph (c)(2) of this section applies. Theexchange funds are not treated as loaned from Tto QI. T must take into account in computing T’sincome tax liability for 2006 the $1,174 of earningsattributable to T’s exchange funds.

(f) Effective dates—(1) In general.This section applies to transfers of prop-erty made by taxpayers after the date theseregulations are published as final regula-tions in the Federal Register.

(2) Transition rule. With respect totransfers of property made by taxpayers af-ter August 16, 1986, but on or before thedate these regulations are published as fi-nal regulations in the Federal Register,the Internal Revenue Service will not chal-lenge a reasonable, consistently appliedmethod of taxation for income attributableto exchange funds.

Par. 4. Section 1.1031(k)–1 is amendedby adding a sentence at the end of para-graph (h)(2) to read as follows:

§1.1031(k)–1 Treatment of deferredexchanges .

* * * * *(h) * * *(2) * * * For rules under section

468B(g) relating to the current taxationof qualified escrow accounts, qualifiedtrusts, and other escrow accounts, trusts,and funds used during deferred exchangesof like-kind property, see §1.468B–6.

* * * * *Par. 5. Section 1.7872–16 is added to

read as follows:

§1.7872–16 Loans to an exchangefacilitator under §1.468B–6.

(a) Special rules applicable to loansmade to an exchange facilitator un-der §1.468B–6—(1) Scope. This sec-tion applies to a transaction that, under§1.468B–6(c)(1), is treated as a loan toan exchange facilitator in connection witha deferred exchange (exchange facilita-tor loan). For purposes of this section,the terms deferred exchange, exchangeagreement, exchange facilitator, exchangefunds, qualified intermediary, replace-ment property, and taxpayer have thesame meanings as in §1.468B–6(b).

(2) Treatment as compensation-relatedloans. If an exchange facilitator loan is abelow-market loan, the loan is treated asa compensation-related loan under section7872(c)(1)(B).

(3) Treatment of exchange facilitatorloan as a demand loan. For purposes ofsection 7872, exchange facilitator loansare treated as demand loans.

(4) 182-day rate for exchange facil-itator loans. For purposes of section7872(f)(2), in lieu of the applicable Fed-eral rate (AFR) provided under section1274(d)(1), the taxpayer and the exchangefacilitator must use the 182-day rate for anexchange facilitator loan. For purposes ofthe preceding sentence, the 182-day rate isequal to the investment rate on a 182-dayTreasury bill determined on the auctiondate that most closely precedes the datethat the exchange facilitator loan is made.

(5) Use of approximate method permit-ted. The taxpayer and exchange facilita-tor may use the approximate method under§1.7872–13(b)(2) to determine the amountof forgone interest on any exchange facili-tator loan.

(b) No exemption for below-market ex-change facilitator loans. If an exchangefacilitator loan is a below-market loan,

the loan is not eligible for the exemp-tions listed under §1.7872–5T(b), includ-ing §1.7872–5T(b)(14) (relating to loanswithout significant-tax effect).

(c) Example. The provisions of this sec-tion are illustrated by the following exam-ple.

Example. (i) T enters into a deferred exchangewith QI, a qualified intermediary. The exchange isgoverned by an exchange agreement. The exchangefunds held by QI pursuant to the exchange agreementare treated as loaned to QI under §1.468B–6(c)(1).Under paragraph (a)(1) of this section, the loanbetween T and QI is an exchange facilitator loan.The exchange agreement between T and QI providesthat no earnings will be paid to T. On December 1,2006, T transfers property with a fair market valueof $1,000,000 to QI and QI deposits $1,000,000 in amoney market account. On March 1, 2007, QI uses$1,000,000 of the funds in the account to purchasereplacement property identified by T, and transfersthe replacement property to T. The amount loaned forpurposes of section 7872 is $1,000,000 and the loanis outstanding for three months. The 182-day rateunder paragraph (a)(4) of this section is 1 percent,compounded semi-annually.

(ii) Under paragraph (a) of this section, the loanfrom T to QI is treated as a compensation-relateddemand loan. Because there is no interest payableon the loan from T to QI, the loan is a below-marketloan under section 7872. Under section 7872(e)(2),the amount of forgone interest on the loan for 2006is $833 ($1,000,000*.01/2*1/6). Under section7872(e)(2), the forgone interest for 2007 is $1667($1,000,000*.01/2*2/6). The $833 for 2006 isdeemed transferred as compensation by T to QI andretransferred as interest by QI to T on December 31,2006. The $1667 for 2007 is deemed transferred ascompensation by T to QI and retransferred as interestby QI to T on March 1, 2007.

(d) Effective date. This section appliesto exchange facilitator loans issued afterthe date these regulations are published asfinal regulations in the Federal Register.



March 6, 2006 587 2006–10 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.

2006–10 I.R.B. i March 6, 2006

Numerical Finding List1

Bulletin 2006–1 through 2006–10

Announcements:

2006-1, 2006-1 I.R.B. 260

2006-2, 2006-2 I.R.B. 300

2006-3, 2006-3 I.R.B. 327

2006-4, 2006-3 I.R.B. 328

2006-5, 2006-4 I.R.B. 378

2006-6, 2006-4 I.R.B. 340

2006-7, 2006-4 I.R.B. 342

2006-8, 2006-4 I.R.B. 344

2006-9, 2006-5 I.R.B. 392

2006-10, 2006-5 I.R.B. 393

2006-11, 2006-6 I.R.B. 420

2006-12, 2006-6 I.R.B. 421

2006-13, 2006-7 I.R.B. 462

2006-14, 2006-8 I.R.B. 516

Notices:

2006-1, 2006-4 I.R.B. 347

2006-2, 2006-2 I.R.B. 278

2006-3, 2006-3 I.R.B. 306

2006-4, 2006-3 I.R.B. 307

2006-5, 2006-4 I.R.B. 348

2006-6, 2006-5 I.R.B. 385

2006-7, 2006-10 I.R.B. 559

2006-8, 2006-5 I.R.B. 386

2006-9, 2006-6 I.R.B. 413

2006-10, 2006-5 I.R.B. 386

2006-11, 2006-7 I.R.B. 457

2006-12, 2006-7 I.R.B. 458

2006-13, 2006-8 I.R.B. 496

2006-14, 2006-8 I.R.B. 498

2006-15, 2006-8 I.R.B. 501

2006-16, 2006-9 I.R.B. 538

2006-17, 2006-10 I.R.B. 559

2006-18, 2006-8 I.R.B. 502

2006-19, 2006-9 I.R.B. 539

2006-20, 2006-10 I.R.B. 560

Proposed Regulations:

REG-107722-00, 2006-4 I.R.B. 354

REG-104385-01, 2006-5 I.R.B. 389

REG-122380-02, 2006-10 I.R.B. 563

REG-137243-02, 2006-3 I.R.B. 317

REG-133446-03, 2006-2 I.R.B. 299

REG-113365-04, 2006-10 I.R.B. 580

REG-148568-04, 2006-6 I.R.B. 417

REG-106418-05, 2006-7 I.R.B. 461

REG-138879-05, 2006-8 I.R.B. 503

REG-143244-05, 2006-6 I.R.B. 419

REG-146459-05, 2006-8 I.R.B. 504

Revenue Procedures:

2006-1, 2006-1 I.R.B. 1

2006-2, 2006-1 I.R.B. 89

2006-3, 2006-1 I.R.B. 122

2006-4, 2006-1 I.R.B. 132

2006-5, 2006-1 I.R.B. 174

2006-6, 2006-1 I.R.B. 204

2006-7, 2006-1 I.R.B. 242

2006-8, 2006-1 I.R.B. 245

2006-9, 2006-2 I.R.B. 278

2006-10, 2006-2 I.R.B. 293

2006-11, 2006-3 I.R.B. 309

2006-12, 2006-3 I.R.B. 310

2006-13, 2006-3 I.R.B. 315

2006-14, 2006-4 I.R.B. 350

2006-15, 2006-5 I.R.B. 387

2006-16, 2006-9 I.R.B. 539

Revenue Rulings:

2006-1, 2006-2 I.R.B. 261

2006-2, 2006-2 I.R.B. 261

2006-3, 2006-2 I.R.B. 276

2006-4, 2006-2 I.R.B. 264

2006-5, 2006-3 I.R.B. 302

2006-6, 2006-5 I.R.B. 381

2006-7, 2006-6 I.R.B. 399

2006-8, 2006-9 I.R.B. 520

2006-9, 2006-9 I.R.B. 519

2006-10, 2006-10 I.R.B. 557

Tax Conventions:

2006-6, 2006-4 I.R.B. 340

2006-7, 2006-4 I.R.B. 342

2006-8, 2006-4 I.R.B. 344

Treasury Decisions:

9231, 2006-2 I.R.B. 272

9232, 2006-2 I.R.B. 266

9233, 2006-3 I.R.B. 303

9234, 2006-4 I.R.B. 329

9235, 2006-4 I.R.B. 338

9236, 2006-5 I.R.B. 382

9237, 2006-6 I.R.B. 394

9238, 2006-6 I.R.B. 408

9239, 2006-6 I.R.B. 401

9240, 2006-7 I.R.B. 454

9241, 2006-7 I.R.B. 427

9242, 2006-7 I.R.B. 422

9243, 2006-8 I.R.B. 475

9244, 2006-8 I.R.B. 463

9246, 2006-9 I.R.B. 534

9247, 2006-9 I.R.B. 521

9248, 2006-9 I.R.B. 524

9249, 2006-10 I.R.B. 546

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin2005–52, dated December 27, 2005.

March 6, 2006 ii 2006–10 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletin 2006–1 through 2006–10

Notices:

2002-35

Clarified and modified by

Notice 2006-16, 2006-9 I.R.B. 538

2005-44

Supplemented by

Notice 2006-1, 2006-4 I.R.B. 347

2005-66

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-73

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-81

Supplemented by

Notice 2006-20, 2006-10 I.R.B. 560

2005-98

Supplemented by

Notice 2006-7, 2006-10 I.R.B. 559

Proposed Regulations:

REG-131739-03

Corrected by

Ann. 2006-10, 2006-5 I.R.B. 393

REG-138647-04

Corrected by

Ann. 2006-4, 2006-3 I.R.B. 328

REG-158080-04

Corrected by

Ann. 2006-11, 2006-6 I.R.B. 420

Revenue Procedures:

96-52

Superseded by

Rev. Proc. 2006-10, 2006-2 I.R.B. 293

97-27

Modified by

Rev. Proc. 2006-11, 2006-3 I.R.B. 309

Modified and amplified by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2002-9

Modified by

Rev. Proc. 2006-11, 2006-3 I.R.B. 309

Modified and amplified by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310Rev. Proc. 2006-14, 2006-4 I.R.B. 350Rev. Proc. 2006-16, 2006-9 I.R.B. 539

Revenue Procedures— Continued:

2002-17

Modified by

Rev. Proc. 2006-14, 2006-4 I.R.B. 350

2003-38

Modified by

Rev. Proc. 2006-16, 2006-9 I.R.B. 539

2004-23

Superseded for certain taxable years by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2004-40

Superseded by

Rev. Proc. 2006-9, 2006-2 I.R.B. 278

2005-1

Superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1

2005-2

Superseded by

Rev. Proc. 2006-2, 2006-1 I.R.B. 89

2005-3

Superseded by

Rev. Proc. 2006-3, 2006-1 I.R.B. 122

2005-4

Superseded by

Rev. Proc. 2006-4, 2006-1 I.R.B. 132

2005-5

Superseded by

Rev. Proc. 2006-5, 2006-1 I.R.B. 174

2005-6

Superseded by

Rev. Proc. 2006-6, 2006-1 I.R.B. 204

2005-7

Superseded by

Rev. Proc. 2006-7, 2006-1 I.R.B. 242

2005-8

Superseded by

Rev. Proc. 2006-8, 2006-1 I.R.B. 245

2005-9

Superseded for certain taxable years by

Rev. Proc. 2006-12, 2006-3 I.R.B. 310

2005-12

Section 10 modified and superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1

2005-24

Modified by

Notice 2006-15, 2006-8 I.R.B. 501

2005-61

Superseded by

Rev. Proc. 2006-3, 2006-1 I.R.B. 122

Revenue Procedures— Continued:

2005-68

Superseded by

Rev. Proc. 2006-1, 2006-1 I.R.B. 1Rev. Proc. 2006-3, 2006-1 I.R.B. 122

Revenue Rulings:

55-355

Obsoleted by

T.D. 9244, 2006-8 I.R.B. 463

74-503

Revoked by

Rev. Rul. 2006-2, 2006-2 I.R.B. 261

77-230

Obsoleted by

T.D. 9249, 2006-10 I.R.B. 546

Treasury Decisions:

9203

Corrected by

Ann. 2006-12, 2006-6 I.R.B. 421

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,2005.

2006–10 I.R.B. iii March 6, 2006 U.S. GPO: 2006—320–797/20047