Assets produced on a routine and repetitive basis. For purposes of the simplified service cost method and simplified production method provided in the regulations under section 263A of the Code, a taxpayer's self-constructed assets are produced on a routine and repetitive basis in the ordinary course of its trade or business if the assets are either mass-produced (numerous identical goods are manufactured using standardized designs and assembly line techniques) or have a high degree of turnover.

LIFO; price indexes; department stores. The June 2005 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, June 30, 2005.

Final regulations under section 861 of the Code describe the proper basis for determining the source of compensation for labor or personal services performed partly within and partly without the United States.

Proposed regulations under section 6012 of the Code prescribe the form that cooperatives must use to file their income tax returns. The regulations affect all cooperatives that are currently required to file an income tax return on either Form 1120, U.S. Corporation Income Tax Return, or Form 990-C, Farmers' Cooperative Association Income Tax Return. Announcement 84-26 obsoleted.

The purpose of this procedure is to inform authorized IRS e-file providers of their obligations to the Service and to consolidate existing guidance. The procedure combines the rules governing IRS e-file, including the rules regulating Electronic Return Originators (EROs) that electronically file (1) Form 1040 and 1040A, U.S. Individual Income Tax Return, and Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, contained in Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns; (2) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, contained in Rev. Proc. 2001-9; and (3) Form 941, Employer's Quarterly Federal Tax Return, contained in Rev. Proc. 99-39. Rev. Procs. 99-39, 2000-31, and 2001-9 superseded.

Weighted average interest rate update; corporate bond indices; 30-year Treasury securities. The weighted average interest rate for August 2005 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth.

A list is provided of organizations now classified as private foundations.

Final regulations under section 2651 of the Code provide an exception to the general rules for determining the generation assignment of a transferee of property for generation-skipping transfer (GST) purposes. The regulations also provide rules regarding a transferee assigned to more than one generation.

Tool allowance payments. This ruling holds that tool allowances paid to employees are not paid under an accountable plan because the substantiation and return of excess requirements are not met. All tool allowance payments under the arrangement must be included in the employees' gross income, reported on the employees' Forms W-2, and are subject to withholding and payment of federal employment taxes.

This notice provides information about additional criteria that will be applied in selecting proposals for the Internal Revenue Service's Industry Issue Resolution (IIR) program regarding application of accountable plan rules to specific industries.

This notice modifies Notice 2005-4, 2005-2 I.R.B 289, by revising the guidance relating to the Certificate for Biodiesel, which is required as a condition for claiming a credit or payment under sections 6426(c), 6427(e), and 40A of the Code. This notice also provides guidance on issues related to the boidiesel credit or payment that are not addressed in Notice 2005-4. This notice further modifies Notice 2005-4 relating to the Certificate of Person Buying Aviation-Grade Kerosene for Commercial Aviation or Nontaxable Use, which is required to notify a position holder of certain transactions under sections 4081 and 4082. Notice 2005-4 modified.

Section 6343(d) of the Code was added by the Taxpayer Bill of Rights 2 and authorizes the Service to return levied property in certain cases. Final regulations under section 6343 set forth the cases in which the Service may return levied property and the procedures for a taxpayer to request a return of property.

Proposed regulations under section 6012 of the Code prescribe the form that cooperatives must use to file their income tax returns. The regulations affect all cooperatives that are currently required to file an income tax return on either Form 1120, U.S. Corporation Income Tax Return, or Form 990-C, Farmers' Cooperative Association Income Tax Return. Announcement 84-26 obsoleted.

The purpose of this procedure is to inform authorized IRS e-file providers of their obligations to the Service and to consolidate existing guidance. The procedure combines the rules governing IRS e-file, including the rules regulating Electronic Return Originators (EROs) that electronically file (1) Form 1040 and 1040A, U.S. Individual Income Tax Return, and Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, contained in Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns; (2) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, contained in Rev. Proc. 2001-9; and (3) Form 941, Employer's Quarterly Federal Tax Return, contained in Rev. Proc. 99-39. Rev. Procs. 99-39, 2000-31, and 2001-9 superseded.

It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

Actions on Decisions shall be relied upon within the Service only as conclusions applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions.

Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.

The recommendation in every Action on Decision will be summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions; whereas, “acquiescence in result only” indicates disagreement or concern with some or all of those reasons. “Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.

The Actions on Decisions published in the weekly Internal Revenue Bulletin are consolidated semiannually and appear in the first Bulletin for July and the Cumulative Bulletin for the first half of the year. A semiannual consolidation also appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.

The Commissioner does NOT ACQUIESCE in the following Decision:

Sherman-Williams Co. Employee Health Plan Trust v. Commissioner, ^[1]

330 F.3rd 449 (6th Cir. 2003),

rev’g 115 T.C. 440 (2000).

In the following situation, is the tool allowance paid by the employer to the employees paid under an accountable plan such that the payments are excluded from the employees’ gross income and exempt from the withholding and payment of employment taxes?

Employer operates an automobile repair and maintenance business. Employer hires service technicians to work in the business as employees. Employer requires these employees, as a condition of employment, to provide and maintain various tools needed for use in performing repair and maintenance services. Employer pays each employee an hourly wage. In addition, Employer pays each employee a set amount for each hour worked as a “tool allowance” to cover costs the employee incurs for acquiring and maintaining his tools.

Employer sets each employee’s tool allowance annually by using a combination of data from a national survey of average tool expenses for automobile service technicians and specific information concerning tool-related expenses provided by the employee in response to an annual questionnaire completed by all service technicians who work for Employer. Employer does not reimburse expenses paid or incurred for listed property, as defined by § 280F(d) of the Internal Revenue Code (the Code), or depreciation expenses; thus, these expenses are not taken into account in calculating the amount of the annual tool allowance. Employer uses the data to project the employee’s total annual tool expenses. Employer then uses a projection of the total number of hours the employee is expected to work during the year that will require the use of tools to convert the employee’s estimated annual tool expenses into an hourly rate for the tool allowance. Thus, the hourly tool allowance is an estimate of the tool expense projected to be incurred per hour by the employee over the course of the coming year.

At the end of each pay period, each employee reports to Employer his hours worked requiring the use of tools. Employer multiplies the number of hours reported as worked requiring the use of tools by the employee’s hourly rate for the tool allowance and pays the resulting amount to the employee in addition to compensation for services performed during the pay period. On a quarterly statement furnished to each employee, Employer reports: (1) the amount paid to the employee as a tool allowance during the quarter, and (2) the tool expenses estimated to be incurred in the quarter (i.e., the hours reported worked requiring the use of tools times the tool allowance). Employees are not required to provide any substantiation of expenses actually incurred for tools either before or after the quarterly reports are issued. Employer does not require employees to return any portion of the tool allowances that exceeds the expenses they actually incur either before or after the quarterly reports are issued.

Section 61 of the Code provides that gross income means all income from whatever source derived, including compensation for services, fees, commissions, fringe benefits, and similar items.

Section 62(a)(2)(A) of the Code and § 1.62-2(b) of the Income Tax Regulations provide that, for purposes of determining adjusted gross income, an employee may deduct certain business expenses paid by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement with his employer.

Section 62(c) provides that, for purposes of § 62(a)(2)(A), an arrangement will not be treated as a reimbursement or other expense allowance arrangement if (1) the arrangement does not require the employee to substantiate the expenses covered by the arrangement to the payor, or (2) the arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.

Section 1.62-2(c)(1) of the regulations provides that a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c) if it meets the requirements of business connection, substantiation, and returning amounts in excess of substantiated expenses. If an arrangement meets these requirements, all amounts paid under the arrangement are treated as paid under an accountable plan. § 1.62-2(c)(2)(i). Amounts treated as paid under an accountable plan are excluded from the employee’s gross income, are not required to be reported on the employee’s Form W-2, and are exempt from the withholding and payment of income and employment taxes. § 1.62-2(c)(4).

If an arrangement does not satisfy one or more of these requirements, all amounts paid under the arrangement are treated as paid under a “nonaccountable plan.” § 1.62-2(c)(3). Amounts treated as paid under a nonaccountable plan are included in the employee’s gross income, must be reported as wages or other compensation of the employee’s on Form W-2, and are subject to withholding and payment of income and employment taxes. § 1.62-2(c)(5).

Section 1.62-2(d)(1) provides that an arrangement meets the business connection requirements if it provides advances, allowances, or reimbursements only for business expenses that are allowable as deductions and are paid or incurred by the employee in connection with the performance of services as an employee of the employer. If, however, a payor arranges to pay an amount to an employee regardless of whether the employee incurs (or is reasonably expected to incur) bona fide employee business expenses, the arrangement does not satisfy the business connection requirements and all amounts paid under the arrangement are treated as paid under a nonaccountable plan. § 1.62-2(d)(3)(i).

Section 1.62-2(e)(1) provides that an arrangement meets the substantiation requirements if the arrangement requires each business expense to be substantiated to the payor in accordance with paragraph (e)(3), within a reasonable period of time. An arrangement for those expenses meets the substantiation requirements of § 1.62-2(e)(3) if information submitted to the payor is sufficient to enable the payor to identify the specific nature of each expense and to conclude that the expense is attributable to the payor’s business activity. Generally the employee must submit an expense account or other written statement to the employer showing the business nature and amount of the employee’s expenses. See § 1.162-17(b)(4).

Revenue Procedure 2002-41, 2002-1 C.B. 1098, provides an optional expense substantiation rule applicable only to certain employers in the pipeline construction industry. If an eligible employer’s arrangement to pay employee business expenses otherwise satisfies the business connection and return of excess requirements, and amounts paid under the arrangement do not exceed $13.00 per hour, adjusted for inflation, an employee is deemed to have substantiated the expenses, and amounts paid under the arrangement are treated as paid under an accountable plan.

Section 1.62-2(f)(1) provides that an arrangement meets the return of excess requirements if the arrangement requires the employee to return to the payor within a reasonable period of time any amount paid under the arrangement in excess of substantiated expenses. Section 1.62-2(f)(2) provides authority for the Commissioner to issue rules, for per diem or mileage allowances only, under which an arrangement will be treated as satisfying the return of excess requirement even though the arrangement does not require the employee to return the portion of the allowance related to days or miles of travel substantiated but that exceeds the amount of the employee’s expenses deemed substantiated pursuant to rules prescribed under § 274(d).

Section 1.62-2(g)(2)(ii) provides that if a payor provides employees with a periodic statement, no less frequently than quarterly, stating the amount, if any, paid under the arrangement that exceeds the expenses the employee has substantiated as required by the arrangement, and requesting the employee to substantiate any additional business expenses that have not yet been substantiated (whether or not such expenses relate to the expenses to which the original advance was paid) and/or to return any amounts remaining unsubstantiated within 120 days of the statement, an expense substantiated or an amount returned within that period will be treated as being substantiated or returned within a reasonable period of time.

Additionally, § 1.62-2(k) provides that if a payor’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of § 62(c) and the regulations thereunder, all payments made under the arrangement will be treated as made under a nonaccountable plan.

An amount paid by an employer to an employee to cover expenses incurred by the employee in the course of employment can be excluded from the employee’s income and wages only if a particular Code section provides an exclusion for such amount or if the amount is paid under an accountable plan. No specific section of the Code excludes from wages amounts paid to employees for acquiring and maintaining tools used in the performance of services as employees. Thus, to be excluded from wages, amounts paid to employees to cover expenses incurred to acquire or maintain such tools must be paid under a reimbursement or other expense allowance arrangement that meets the requirements of § 62(c).

An arrangement qualifies as an accountable plan only if it satisfies all three requirements set forth in the statute and regulations. An arrangement that fails to meet one or more of the three requirements will be treated as a nonaccountable plan.

The arrangement described in this revenue ruling fails to meet both the substantiation and the return of excess requirements and thus does not qualify as an accountable plan.

Although reasonable expectations for expenses can be used to establish that a plan meets the business connection requirement, satisfaction of the substantiation and return of excess requirements must be based on expenses actually incurred. The arrangement in the facts of this ruling does not require employees to substantiate the actual expenses they are incurring; rather the employees report their time worked requiring the use of tools, and Employer converts the hours into an amount treated as expenses incurred based on statistical data. Reporting hours worked requiring the use of tools is not the equivalent of substantiating actual expenses incurred. Employers may not substitute a reasonable estimate of expenses to be incurred based on statistical data and hours worked for the substantiation of actual expenses that is required by § 1.62-2(e)(3) absent explicit guidance permitting the use of such deemed substantiation. See, e.g., Rev. Proc. 2002-41.

Employer does not cure the absence of substantiation or return of excess by providing employees with the quarterly statement described in this revenue ruling. Employer does not require employees to provide substantiation of expenses actually incurred nor does Employer require employees to return any excess received within a reasonable period of time after receiving the quarterly statement. Thus, Employer is not providing a periodic statement within the meaning of § 1.62-2(g)(2)(ii).

Each of the accountable plan requirements must be independently satisfied. Thus, even if Employer required the employees to substantiate the actual amount of the expenses, and Employer treated any portion of the tool allowances they receive that exceeded substantiated expenses as additional wages, the arrangement would still not be an accountable plan. With the exception of circumstances where employee expenses are covered through a mileage or per diem allowance pursuant to § 1.62-2(f)(2), an arrangement is not an accountable plan if it includes amounts paid in excess of substantiated expenses in wages rather than requiring that they be returned. See § 1.62-2(f)(1); Rev. Proc. 2004-64, 2004-49 I.R.B. 898, (mileage allowances), or Rev. Proc. 2005-10, 2005-3 I.R.B. 341, (per diem allowances), or any successors.

The arrangement described in this revenue ruling is not an accountable plan. Therefore, the arrangement is a nonaccountable plan and all tool allowances paid under the arrangement must be included in the employees’ gross income, reported as wages on the employees’ Forms W-2, and are subject to withholding and payment of federal employment taxes.

The principal author of this revenue ruling is Joe Spires of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue ruling, contact Jeanne Royal Singley at (202) 622-0047 (not a toll-free call).

In Notice 2003-36, 2003-1 C.B. 992, modified by Notice 2003-59, 2003-2 C.B. 429, the Treasury Department and the Internal Revenue Service indicate that they are aware that uncertainty exists as to what types of property constitute “eligible property” under §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D) of the Income Tax Regulations for which qualifying taxpayers may use the simplified service cost and simplified production methods. In particular, there is uncertainty about the proper interpretation and application of the term “routine and repetitive.” The notice indicates that the Treasury Department and the Service plan to publish guidance that will clarify the types of property that qualify as eligible property under those sections and address the interpretation and application of the term “routine and repetitive.” This revenue ruling clarifies the types of property that qualify as eligible property for purposes of §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D) and how the term “routine and repetitive” is interpreted for this purpose.

Under what circumstances are a taxpayer’s self-constructed assets produced on a routine and repetitive basis in the ordinary course of its trade or business for purposes of the simplified service cost method and the simplified production method (the “simplified methods”) under §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D) of the Income Tax Regulations?

Situation 1. U, a manufacturer of office equipment, produces numerous identical copiers during the year using assembly line techniques. U leases the copiers and does not hold them for sale.

Situation 2. V, a manufacturer of automobiles, regularly produces molds that are specifically designed for the production of particular automobile parts. The molds cannot be adapted for a further or different use after changes or improvements are made to the particular part that is produced by the mold. The molds generally are used for one to three years. Accordingly, the molds have a high degree of turnover.

Situation 3. W, a telephone company, manufactures numerous identical poles using standardized designs and assembly line techniques for use in its business.

Situation 4. X, an electric utility, regularly purchases identical meters and installs them on its customers’ properties. The meters measure the amount of electric current used by X’s customers. X does not manufacture meters. Meters are included in asset class 49.14 under Rev. Proc. 87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785, and have a class life of 30 years.

Situation 5. Y, an electric utility, constructs from various components substations that it uses in transmitting and distributing electricity. Substations and their components are facilities built on land that house an assembly of equipment designed for switching, changing, or regulating the voltage of electricity. Each substation is intended to operate for an extended length of time, is specifically custom designed for a specific geographic site, and serves a particular function within Y’s electrical grid.

Situation 6. Z, a company that owns and operates a national chain of restaurants, continually constructs new restaurants each year. Z generally uses a standardized design when constructing new restaurants. However, local zoning laws and the physical characteristics of the specific construction site require Z to modify the design for each new restaurant.

Section 263A of the Internal Revenue Code provides that producers of real or tangible personal property must capitalize the direct costs and a proper share of the indirect costs of such property.

Section 1.263A-1(e)(3) provides that indirect costs include service costs. For this purpose, § 1.263A-1(e)(4) states that service costs are a type of indirect costs that can be identified specifically with an administrative or support department or function. Service costs include capitalizable service costs, deductible service costs, and mixed service costs. Under § 1.263A-1(e)(4)(ii)(C), mixed service costs include service costs that are partially allocable to production activities and partially allocable to non-production activities.

Section 1.263A-1(g)(3) provides that indirect costs are generally allocated to intermediate cost objectives such as departments or activities prior to the allocation of such costs to property produced. This section further provides that taxpayers are required to allocate indirect costs using either a specific identification method, a standard cost method, a burden rate method, or any other reasonable allocation method (as defined under the principles of § 1.263A-1(f)(4)).

Section 1.263A-2(b) allows producers to use the simplified production method to determine the additional § 263A costs properly allocable to ending inventories of property produced and other “eligible” property on hand at the end of the taxable year. Section 1.263A-2(b)(3)(i)(A) generally provides that the amount of additional § 263A costs that is allocable to eligible property remaining on hand at the close of the taxable year under the simplified production method is computed by multiplying the § 471 costs on hand at the end of the year by an absorption ratio. Section 1.263A-2(b)(3)(ii)(A) provides that the absorption ratio generally is equal to the additional § 263A costs incurred during the year divided by the § 471 costs incurred during the year.

Additional § 263A costs are the costs, other than interest, that were not capitalized under the taxpayer’s method of accounting immediately prior to the effective date of § 263A, but that are required to be capitalized under § 263A. See § 1.263A-1(d)(3). Section 471 costs generally are the costs, other than interest, that the taxpayer capitalized under its method of accounting immediately prior to the effective date of § 263A. See § 1.263A-1(d)(2).

Section 1.263A-2(b)(2)(i) provides that a taxpayer electing to use the simplified production method generally must use the method for all production activities associated with the following categories of eligible property:

Section 1.263A-1(g)(4) generally requires taxpayers to allocate mixed service costs to property produced using reasonable factors or relationships under a direct reallocation method (as defined in § 1.263A-1(g)(4)(iii)(A)), a step-allocation method (as defined in § 1.263A-1(g)(4)(iii)(B)), or any other reasonable allocation method (as defined under the principles of § 1.263A-1(f)(4)).

Section 1.263A-1(h) permits taxpayers to use the simplified service cost method to determine the aggregate portion of mixed service costs incurred during the taxable year that are properly allocable to “eligible property.” The categories of eligible property provided by the simplified service cost method are identical to the four categories of eligible property provided by the simplified production method. Compare § 1.263A-1(h)(2)(i) with § 1.263A-2(b)(2)(i).

Section 1.263A-1(h)(3)(i) provides that under the simplified service cost method, a taxpayer computes its capitalizable mixed service costs by multiplying its total mixed service costs by an allocation ratio. The allocation ratio can be either the labor-based or production-based ratio. See §§ 1.263A-1(h)(4) and (5).

The four categories of eligible property in §§ 1.263A-1(h)(2)(i) and 1.263A-2(b)(2)(i) all share common characteristics that make application of the simplified methods appropriate. Prior to the issuance of the final § 263A regulations, the temporary § 263A regulations, issued under T.D. 8131, 1987-1 C.B. 98, and published in the Federal Register on March 30, 1987, limited the availability of the simplified methods to two categories of property: inventory and non-inventory property held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s trade or business. The preamble to the temporary § 263A regulations indicates that this limitation was prescribed because the simplified methods are not appropriate to account for the casual or occasional production of property. Instead, the simplified methods were “designed to alleviate the administrative burdens of complying with the new capitalization rules in situations where mass production of assets occurs on a repetitive and routine basis, with a typically high ‘turnover’ rate for the produced assets.” See T.D. 8131, 1987-1 C.B. 98, 102. The final regulations retain these two categories of eligible property in §§ 1.263A-1(h)(2)(i)(A) and (B) and 1.263A-2(b)(2)(i)(A) and (B). See T.D. 8482, 1993-2 C.B. 77, published in the Federal Register on August 9, 1993.

Commentators to the temporary regulations suggested that the categories of property eligible for the simplified methods be expanded to other types of property that share the characteristics that are appropriate for application of the methods. In response, Notice 88-86, 1988-2 C.B. 401, published on August 5, 1988, expanded the availability of the simplified methods to:

The final regulations follow Notice 88-86 and expand the categories of produced property eligible for the simplified methods by adding §§ 1.263A-1(h)(2)(i)(C) and (D) and 1.263A-2(b)(2)(i)(C) and (D).

The simplified methods are predicated on the assumption that it is appropriate to allocate production costs on a ratable basis when assets are either mass-produced (i.e., numerous identical goods are manufactured using standardized designs and assembly line techniques) or have a high degree of turnover. In contrast, it is not appropriate to allocate production costs on a ratable basis when assets are neither mass-produced nor have a high degree of turnover.

The first three categories of eligible property provided in §§ 1.263A-1(h)(2)(i)(A)-(C) and 1.263A- 2(b)(2)(i)(A)-(C) are either mass-produced and/or have a high degree of turnover or are identical to assets that are mass-produced and/or have a high degree of turnover. The fourth category of eligible property, self-constructed assets produced on a routine and repetitive basis, is similar to these first three categories. It was intended that the fourth category of eligible property provided by the simplified methods, §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D), possess the same characteristics shared by all of the preceding categories of eligible property. Therefore, to be eligible under the fourth category, the property also must be either mass-produced (numerous identical goods are manufactured using standardized designs and assembly line techniques) or have a high degree of turnover (in this case have a relatively short useful life). Mass production does not include all the terms provided by § 263A(g) and § 1.263A-2(a)(1) (for example, install, develop, and improve). Instead property is mass-produced only if it is manufactured numerous times during the year using standardized designs and assembly line techniques.

For example, the fourth category of eligible property provided by the simplified methods, §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D), includes property mass-produced by a vertically integrated business for use in its own business that would have been properly included in inventory of a third party if mass-produced for sale by the third party. Thus, if a telephone company mass-produces its own poles for use in its business, the poles would be eligible property for purposes of §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D).

In Situation 1, U is producing copiers on a routine and repetitive basis for purposes of the simplified methods because the copiers are mass-produced.

In Situation 2, V is producing molds on a routine and repetitive basis for purposes of the simplified methods because the molds have a high degree of turnover.

In Situation 3, W is producing poles on a routine and repetitive basis for purposes of the simplified methods because the poles are mass-produced.

In Situation 4, X is not producing meters on a routine and repetitive basis for purposes of the simplified methods because the meters are neither mass-produced by X nor have a high degree of turnover. Mass production does not include installation of meters and meters do not have a short useful life.

In Situation 5, Y is not producing substations on a routine and repetitive basis for purposes of the simplified methods because the substations are neither mass-produced nor have a high degree of turnover.

In Situation 6, Z is not producing restaurants on a routine and repetitive basis for purposes of the simplified methods because the restaurants are neither mass-produced nor have a high degree of turnover.

For purposes of the simplified methods under §§ 1.263A-1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D), a taxpayer’s self-constructed assets are produced on a routine and repetitive basis in the ordinary course of its trade or business if the assets are either mass-produced (numerous identical goods are manufactured using standardized designs and assembly line techniques) or have a high degree of turnover.

The principal author of this revenue ruling is Scott H. Rabinowitz of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Mr. Rabinowitz at (202) 622-4970 (not a toll-free call).

The following Department Store Inventory Price Indexes for June 2005 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, June 30, 2005.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622-7924 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations that describe the proper basis for determining the source of compensation for labor or personal services performed partly within and partly without the United States. These final regulations will affect individuals who earn compensation for labor or personal services performed partly within and partly without the United States and are needed to provide appropriate guidance regarding the determination of the proper source of that compensation.

Effective Date: These regulations are effective on July 14, 2005.

Applicability Date: For dates of applicability, see §1.861-4(d).

David Bergkuist, (202) 622-3850 (not a toll-free number).

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

The principal author of these final regulations is David Bergkuist of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations relating to the predeceased parent rule, which provides an exception to the general rules of section 2651 of the Internal Revenue Code (Code) for determining the generation assignment of a transferee of property for generation-skipping transfer (GST) tax purposes. These regulations also provide rules regarding a transferee assigned to more than one generation. The regulations reflect changes to the law made by the Taxpayer Relief Act of 1997 and generally apply to individuals, trusts, and estates.

Effective Date: These regulations are effective July 18, 2005.

Lian A. Mito at (202) 622-7830 (not a toll-free number).

Accordingly, 26 CFR part 26 is amended as follows:

The principal author of these regulations is Lian A. Mito of the Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations that amend regulations under section 6343 of the Internal Revenue Code (Code) relating to the return of property in certain cases. The regulations reflect changes made to section 6343 of the Code by the Taxpayer Bill of Rights 2. The regulations also reflect changes affecting levies enacted by the Internal Revenue Service Restructuring and Reform Act of 1998. The regulations affect taxpayers seeking the return of levied property from the Internal Revenue Service (IRS).

Effective Date: These regulations are effective on July 14, 2005.

Applicability Date: For dates of applicability, see §301.6343-3(k).

Kevin B. Connelly, (202) 622-3630 (not a toll-free number).

Accordingly, 26 CFR part 301 is amended as follows:

The principal author of these regulations is Kevin B. Connelly, Office of Associate Chief Counsel (Procedure and Administration), Collection Bankruptcy & Summons Division, CC:PA:CBS, IRS.

* * * * *

This notice provides information about additional criteria that will be applied in considering proposals regarding accountable plans for the Internal Revenue Service’s Industry Issue Resolution (IIR) program. The objective of the IIR Program is to identify frequently disputed or burdensome tax issues that are common to a significant number of business taxpayers that may be resolved through published or other administrative guidance. See Rev. Proc. 2003-36, 2003-1 C.B. 859.

During the IIR Pilot Program, the Service initiated a project involving the tax treatment of employer reimbursements of various equipment-related expenses to employees in a segment of the pipeline construction industry. Whether or not such expenses are included in the employee’s income and wages is governed generally by whether or not the employer makes payments to the employee under an accountable plan in accordance with the requirements of § 62(c) of the Internal Revenue Code.^[2] The industry representatives maintained that their industry practice made compliance with the accountable plan requirements unworkable. As a result of the project, the Service published two pieces of guidance: Rev. Rul. 2002-35, 2002-1 C.B. 1067, making clear that expense reimbursement in the industry is excluded from income and wages only if made in accordance with the accountable plan requirements, and Rev. Proc. 2002-41, 2002-1 C.B. 1098, providing for deemed substantiation of expenses at a specified rate to make it possible for employers in the industry to comply with the accountable plan requirements.

Since the completion of the IIR pilot program, several submissions to the IIR program have asserted that compliance with various aspects of the accountable plan rules set forth under § 62(c) are unduly burdensome for businesses in certain other industries and have asked for published guidance providing administrative relief similar to that provided in Rev. Proc. 2002-41.

The Service provided guidance as part of the IIR pilot project for a segment of the pipeline construction industry because the industry had successfully demonstrated that employers could not comply with the existing accountable plan rules given certain fundamental aspects of their industry practice that could not readily be changed, if changed at all. For purposes of evaluating future IIR submissions raising similar concerns about application of the accountable plan rules in specific industries, the Service will make a comparable assessment as to whether the accountable plan rules are unworkable given aspects of industry practice that cannot be changed at all or cannot be changed without great difficulty. In addition to the requirements of Rev. Proc. 2003-36, factors to be considered in determining whether there is need for relief as to this issue would include, but not be limited to the following:

(a) an established industry history showing that high turnover in the labor force or short-term employment with multiple employers is typical;

(b) large expenses for maintenance, although infrequent, are predictable relative to the compensation paid to the employees for their services;

(c) individual employers are unwilling to reimburse in full for sporadic expenses for equipment maintenance because a significant portion of the reimbursement will accrue to the benefit of a later employer/competitor;

(d) there is a uniformity of expenses across the workforce or the existence of a uniform objective predictive proxy for measuring the expense, and

(e) existing methods of substantiating expenses, such as Rev. Proc. 2004-64, 2004-49 I.R.B. 898 (mileage allowances), do not accurately reflect the expenses incurred by the employees on behalf of the employer.

The mere cost of collecting records, substantiating expenses and reconciling the amount of expenses with the amount of reimbursements paid does not support a claim of burden meriting relief from the requirements of the accountable plan rules.

The principal author of this notice is Joe Spires of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Jeanne Royal Singley at (202) 622-0047 (not a toll-free call).

This notice modifies Notice 2005-4, 2005-2 I.R.B. 289, as modified by Notice 2005-24, 2005-12 I.R.B. 757, by revising the guidance relating to the Certificate for Biodiesel, which is required as a condition for claiming a credit or payment under §§ 6426(c), 6427(e), and 40A of the Internal Revenue Code. This notice also provides guidance on issues related to the biodiesel credit or payment that are not addressed in Notice 2005-4. This notice further modifies Notice 2005-4 relating to the Certificate of Person Buying Aviation-Grade Kerosene for Commercial Aviation or Nontaxable Use, which is required to notify a position holder of certain transactions under §§ 4081 and 4082.

Notice 2005-4 provides guidance on certain excise tax provisions in the Code that were added or affected by the American Jobs Creation Act of 2004 (Pub. L. 108-357) (the Act).

(a) Section 2 of Notice 2005-4 provides guidance on credits and payments allowed for biodiesel fuel. Section 2(h) of that notice describes the Certificate for Biodiesel that, under the Code, the claimant must obtain “from” the producer of the biodiesel. This notice revises the certificate to clarify that the claimant may obtain the certificate either directly from the producer of the biodiesel or indirectly from a biodiesel reseller.

(b) Section 2(h) of Notice 2005-4 also requires that each claim contain a statement that the claimant has in its possession an unexpired biodiesel certificate. This notice revises that rule so that the claimant generally must submit a copy of the certificate with its claim.

(c) This notice also provides guidance on accounting for commingled biodiesel.

(d) Finally, this notice provides a transitional rule for claims that were made before August 29, 2005.

(e) Accordingly, section 2(h) of Notice 2005-4 is revised to read as follows:

(a) Definition in the Code. Section 6426(c)(3) provides that biodiesel mixture means a mixture of biodiesel and diesel fuel (as defined in § 4083(a)(3)), determined without regard to any use of kerosene, that (1) is sold by the taxpayer producing the mixture to any person for use as a fuel, or (2) is used as a fuel by the taxpayer producing the mixture.

(b) Explanation of terms—(1) The diesel fuel in a biodiesel mixture may be either dyed or undyed. However, taxpayers are reminded of the penalty in § 6715 for the willful alteration of the strength or composition of any dye in dyed fuel. Also see § 48.6715-1 of the Manufacturers and Retailers Excise Tax Regulations.

(2) A biodiesel mixture generally is used as a fuel when it is consumed to produce energy. Thus, for example, a biodiesel mixture that is consumed in a furnace to produce heat is used as a fuel. However, the destruction of a biodiesel mixture in a fire or other casualty loss is not treated as use as a fuel.

(3) A biodiesel mixture is a mixture of biodiesel and diesel fuel containing at least 0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of 999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel mixture.

(4) Kerosene in a mixture of biodiesel and diesel fuel is not included in the volume for purposes of determining whether the biodiesel mixture satisfies the volume requirements set forth in paragraph (b)(3) of this section. Further, the gallons of kerosene in the mixture of biodiesel and diesel fuel are not included in the gallons of biodiesel for which a credit or payment is allowed.

(c) Effective date—(1) In general. Paragraphs (b)(1), (2), and (4) of this section are applicable January 1, 2005, the effective date of Notice 2005-4. Paragraph (b)(3) of this section applies with respect to mixtures produced after August 29, 2005 and, except as provided in paragraph (c)(2) of this section, is not taken into account in determining the tax treatment of any mixture produced on or before that date.

(2) Reliance permitted in certain cases. A taxpayer may rely on paragraph (b)(3) of this section to claim a biodiesel mixture credit for a mixture produced on or before August 29, 2005 if the taxpayer has not taken any action inconsistent with the claim requirements under this notice such as providing a Certificate for Biodiesel or a Statement of Biodiesel Reseller with respect to the biodiesel in the mixture.

(a) In general. Section 40A(d)(2) defines agri-biodiesel as meaning biodiesel derived solely from virgin oils, “including” esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, and mustard seeds, and from animal fats. The language “including” indicates that this list is not exclusive. Thus, for example, biodiesel derived solely from virgin oils includes esters derived from palm oil and fish oil.

(b) Commingled feedstock. If virgin oils and recycled oils are commingled for use as a feedstock in the production of biodiesel, the biodiesel is not derived solely from virgin oils as required by § 40A(d)(2).

(c) Effective date. Paragraph (a) of this section is applicable January 1, 2005, the effective date of Notice 2005-4. Paragraph (b) of this section applies with respect to biodiesel produced after August 29, 2005.

(a) Background. Section 6426 generally allows a biodiesel mixture credit against any tax imposed by § 4081, including those taxes unrelated to biodiesel mixtures or alcohol mixtures. The § 6426 credit is claimed on a Form 720, Quarterly Federal Excise Tax Return, which is filed at the end of each quarter. Section 6427(e)(1) generally allows a payment relating to a person’s production of a biodiesel mixture. The § 6427(e)(1) payment may be claimed before Form 720 is due and as often as once a week if certain conditions are met. However, § 6427(e)(2) provides that no amount is payable under § 6427(e)(1) for any mixture with respect to which an amount is allowed as a credit under § 6426. If a claim is made under § 6427(e) for an amount that is allowable as a credit under § 6426, section 2(d)(2) of Notice 2005-4 provides that payment under § 6427(e) is treated as an excessive amount under § 6206. Unless this excessive amount is repaid with interest before the due date of the Form 720 on which the credit under § 6426 is allowable, it may be assessed as if it were a tax imposed by § 4081 and a penalty under § 6675 may be imposed.

(b) Computation of payment limitation. A person producing biodiesel mixtures outside the bulk transfer/terminal system and liable for tax imposed by § 4081 solely because of the removal or sale of the mixtures can avoid making excessive claims for payment under § 6427(e) by limiting claims filed on a form other than Form 720 to—

(1) 75.6 percent of the total credits and payments allowable with respect to agri-biodiesel used to produce the mixtures (24.4 percent of the allowable credits and payments must be claimed on Form 720); and

(2) 51.2 percent of the total credits and payments allowable with respect to biodiesel other than agri-biodiesel used to produce the mixtures (48.8 percent of the allowable credits and payment must be claimed on Form 720).

(c) Example. The following example illustrates the application of this section:

(1) P is a biodiesel mixture producer. P produces blended taxable fuel outside of the bulk transfer/terminal system by adding biodiesel to taxed diesel fuel. See §§ 48.4081-1(c)(1) and 48.4081-3(g). P has no § 4081 liability other than its liability as a blender on its sale of the biodiesel mixture. During the period August 1 through August 10, 2005, P uses 5,000 gallons of agri-biodiesel to produce a biodiesel mixture. The total of the credits and payments allowable with respect to the biodiesel used to produce the mixture is $5,000 (5,000 x $1.00).

(2) On August 11, P files Form 8849, Claim for Refund of Excise Taxes, for the period August 1 - August 10. To avoid an excessive claim, P limits the claim on Form 8849 to $3,780 (75.6 percent of $5,000) reporting 3,780 gallons of agri-biodiesel.

(3) On Form 720, Quarterly Federal Excise Tax Return, P reports liability for IRS No. 60(c) of $1,220 (5,000 gallons x $.244) and claims a credit on Schedule C for $1,220 (24.4 percent of $5,000) for the period August 1 - August 10, reporting on Schedule C 1,220 gallons of agri-biodiesel.

(d) Effective date. This section is applicable January 1, 2005, the effective date of Notice 2005-4.

(a) In general—(1) Section 4 of Notice 2005-4 provides guidance on the taxation of aviation-grade kerosene under the Act. Under sections 4(d) and 4(e), a position holder is not liable for tax if, among other conditions, it obtains a certificate from the operator of the aircraft into which the aviation-grade kerosene is delivered. This certificate, described in section 4(g), is signed by the aircraft operator and includes the name of the position holder.

(2) In a so-called “flash title transaction,” the position holder sells (as defined in § 48.0-2(a)(5)) the aviation-grade kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft.

(3) For purposes of determining whether the conditions of sections 4(d)(1)(ii) and 4(e)(2) of Notice 2005-4 are met in a case described in paragraph (a)(2) of this section, the position holder will be treated as having a certificate (in the form described in section 4(g)) from the operator of the aircraft if: (i) the aircraft operator puts the reseller’s name, address, and employer identification number on the certificate in place of the position holder’s name, address, and employer identification number; and (ii) the reseller provides the position holder with a statement of aviation-grade kerosene reseller. The reseller statement is a statement that is signed under penalties of perjury by a person with authority to bind the reseller; is provided at the bottom or on the back of the certificate (or in an attached document); and contains the reseller’s name, address, and employer identification number, the position holder’s name, address, and employer identification number, and a statement that the reseller has no reason to believe that any information in the accompanying aircraft operator’s certificate is false.

(b) Effective date. This section is applicable August 29, 2005.

The last sentence of section 2(a) of Notice 2005-4 is revised to read as follows: Under the Code’s coordination rules, the sum of all credits and payments per gallon of alcohol or biodiesel may not exceed the credit rate per gallon prescribed in § 40 or 40A, whichever is applicable.

The collection of information contained in this notice has been reviewed and approved by the office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-1915.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this notice are in the following sections.

Section 2 of the notice describes the statement that the biodiesel reseller must give to its buyer with respect to the biodiesel mixture credit or biodiesel credit.

Section 6 of the notice describes the statement that an aviation-grade kerosene reseller must give to the position holder of aviation grade kerosene.

The collections of information are required to obtain a tax benefit. This information will be used to substantiate claims for the tax benefits. The likely respondents are businesses, not-for-profit institutions, and state, local, or tribal governments.

The estimated total annual reporting and or recordkeeping burden is 5,100 hours.

The estimated average annual burden per respondent and/or recordkeeper is approximately is .25 hours.

The estimated number of respondents and recordkeepers is 240.

Books or records relating to a collection of information must be retained as long as their contents may become material to the administration of the internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. § 6103.

Notice 2005-4 is modified as described in sections 2, 6, and 7 of this notice.

The principal authors of this notice are Susan Athy and Deborah Karet of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, please contact Ms. Athy (regarding biodiesel) or Ms. Karet (regarding aviation-grade kerosene) at (202) 622-3130 (not a toll-free call).

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II), and the weighted average interest rate and permissible ranges of interest rates based on the 30-year Treasury securities rate.

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 or 2005 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices.

The composite corporate bond rate for July 2005 is 5.37 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

Section 404(a)(1) of the Code, as amended by the Pension Funding Equity Act of 2004, permits an employer to elect to disregard subclause (II) of § 412(b)(5)(B)(ii) to determine the maximum amount of the deduction allowed under § 404(a)(1).

The rate of interest on 30-year Treasury securities for July 2005 is 4.41 percent. Pursuant to Notice 2002-26, 2002-1 C.B. 743, the Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031.

The following 30-year Treasury rates were determined for the plan years beginning in the month shown below.

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 1-202-283-9703. Mr. Montanaro may be reached at 1-202-283-9714. The telephone numbers in the preceding sentences are not toll-free.

.01 This revenue procedure informs Authorized IRS e-file Providers of their obligations to the Internal Revenue Service (the Service), taxpayers, and other participants in the IRS e-file Program. This revenue procedure combines the rules governing IRS e-file, including the rules regulating Authorized IRS e-file Providers that facilitate the electronic filing of:

(1) Form 1040 and 1040A, U.S. Individual Income Tax Return, and Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, previously contained in Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, and Rev. Proc. 2000-31, 2000-2 C.B. 146;

(2) Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, previously contained in Rev. Proc. 2001-9, 2001-1 C.B. 328; and

(3) the rules governing electronic filing for the Form 941, Employer’s Quarterly Federal Tax Return, previously contained in Rev. Proc. 99-39, 1999-2 C.B. 532.

.02 This revenue procedure also regulates Authorized IRS e-file Providers that facilitate the electronic filing of:

(1) Form 1120, U.S. Corporation Income Tax Return;

(2) Forms 1120S, U.S. Income Tax Return for an S Corporation;

(3) Form 990, Return of Organization Exempt From Income Tax; and

(4) Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation.

.03 IRS e-file allows return filers to file their returns through an ERO, or by using a personal computer, modem or the Internet, and commercial tax preparation software. The returns that can be filed under IRS e-file include:

(1) Form 56, Notice Concerning Fiduciary Relationship;

(2) Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return;

(3) Form 941, Employer’s Quarterly Federal Tax Return;

(4) Form 990, Return of Organization Exempt From Income Tax;

(5) Form 990-EZ, Short Form Return of Organization Exempt From Income Tax;

(6) Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation;

(7) Forms 1040 and 1040A, U.S. Individual Income Tax Return;

(8) Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents;

(9) Form 1065, U.S. Return of Partnership Income;

(10) Form 1120, U.S. Corporation Income Tax Return;

(11) Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations;

(12) Form 1120S, U.S. Income Tax Return for an S Corporation;

(13) Form 1041, U.S. Income Tax Return for Estates and Trusts;

(14) Form 1065, U.S. Return of Partnership Income;

(15) Form 2350, Application for Extension of Time to File U.S. Income Tax Return (or any successor form);

(16) Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return (or any successor form);

(17) Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (or any successor form);

(18) Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return (or any successor form);

(19) Form 8868, Application for Extension of Time To File an Exempt Organization Return (or any successor form); and

(20) Form 9465, Installment Agreement Request.

.04 This revenue procedure does not cover procedures governing electronic filing of Form 1040NR, U.S. Nonresident Alien Income Tax Return. For procedures governing the electronic filing of Form 1040NR, see Rev. Proc. 2000-24, 2000-1 C.B. 1133.

.05 This revenue procedure also does not cover providers of information returns that are filed under the FIRE (Filing Information Returns Electronically) Program. The information returns not covered by this revenue procedure include:

(1) Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding;

(2) Form 1098, Mortgage Interest Statement;

(3) Form 5498, Individual Retirement Arrangement Contribution Information;

(4) Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips;

(5) Form W-2G, Certain Gambling Winnings; and

(6) Questionable Forms W-4, Employee’s Withholding Allowance Certificate. See Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W2-G Magnetically or Electronically.

.01 Section 1.6011-1(a) of the Income Tax Regulations provides that every person subject to income tax must make a return or statement as required by the regulations. The return or statement must include the information required by the applicable regulations or forms.

.02 Section 301.6061-1(b) of the Regulations on Procedure and Administration authorizes the Secretary to prescribe in forms, instructions, or other appropriate guidance the method of signing any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations.

.03 Section 1.6012-5 provides that the Commissioner may authorize the use, at the option of a person required to make a return, of a composite return in lieu of any form specified in 26 CFR Part 1 (Income Tax), subject to such conditions, limitations, and special rules governing the preparation, execution, filing, and correction thereof as the Commissioner may deem appropriate.

.04 Section 6011(e)(1) of the Internal Revenue Code (the Code) gives specific authority for the Service and the Treasury Department to “prescribe regulations providing standards for determining which returns must be filed on magnetic media or in other machine-readable form.” On January 12, 2005, the Service and the Treasury Department published in the Federal Register (T.D. 9175, 2005-10 I.R.B. 665 [70 FR 2012-01]) temporary regulations mandating the electronic filing of certain Forms 1120, 1120S, 990 and 990-PF under sections 301.6011-5T, 301.6037-2T, and 301.6033-4T. On November 12, 1999, the Service and the Treasury Department also published in the Federal Register (T.D. 8843, 1999-2 C.B. 590 [64 FR 61502]) final regulations mandating the electronic filing of certain Forms 1065 under section 301.6011-3.

.05 This revenue procedure combines the rules governing IRS e-file including the rules governing electronic filing of:

(1) Form 1040 and 1040A, U.S. Individual Income Tax Return, and Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, contained in Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, and Rev. Proc. 2000-31, 2000-2 C.B. 146;

(2) Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, contained in Rev. Proc. 2001-9; and

(3) Form 941, Employer’s Quarterly Federal Tax Return, contained in Rev. Proc. 99-39.

.06 This revenue procedure also includes the rules governing electronic filing of:

(1) Form 990, Return of Organization Exempt From Income Tax;

(2) Form 990-EZ, Short Form Return of Organization Exempt From Income Tax;

(3) Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation;

(4) Form 1041, U.S. Income Tax Return for Estates and Trusts;

(5) Form 1065, U.S. Return of Partnership Income;

(6) Form 1120, U.S. Corporation Income Tax Return;

(7) Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; and

(8) Form 1120S, U.S. Income Tax Return for an S Corporation.

.07 Many of the rules governing participation in IRS e-file are now set forth in IRS Publications. See section 5.01 of this revenue procedure.

.01 Authorized IRS e-file Provider. A participant in IRS e-file is referred to as an “Authorized IRS e-file Provider.” The five categories of Authorized IRS e-file Providers are:

(1) ELECTRONIC RETURN ORIGINATOR. An Electronic Return Originator (ERO) originates the electronic submission of returns.

(2) INTERMEDIATE SERVICE PROVIDER. An Intermediate Service Provider receives tax return information from an ERO (or from a taxpayer or tax exempt organization that files electronically using a personal computer, modem or the Internet, and commercial tax preparation software), processes the return information, and either forwards the information to a Transmitter, or sends the information back to the ERO (or taxpayer or exempt organization).

(3) SOFTWARE DEVELOPER. A Software Developer develops software for the purposes of (a) formatting electronic return information according to publications issued by the Service that set forth electronic return file specifications and record layouts for tax returns; and/or (b) transmitting electronic tax return information directly to the Service.

(4) TRANSMITTER. A Transmitter transmits electronic return information directly to the Service.

(5) REPORTING AGENT. A Reporting Agent is an accounting service, franchiser, bank, service bureau, or other entity that complies with Rev. Proc. 2003-69, 2003-2 C.B. 403, and is authorized to perform one or more of the acts listed in Rev. Proc. 2003-69 on behalf of a taxpayer.

The five categories of Authorized IRS e-file Providers are not mutually exclusive. For example, an ERO can, at the same time, be a Transmitter, Software Developer, or Intermediate Service Provider depending on the function(s) performed.

.02 Responsible Official. A Responsible Official is an individual with authority over the IRS e-file operation of the office(s) of the Authorized IRS e-file Provider, is the first point of contact with the Service, and has authority to sign revised IRS e-file applications. A Responsible Official is responsible for ensuring that the Authorized IRS e-file Provider adheres to the provisions of this revenue procedure and the publications and notices governing the IRS e-file Program.

.01 Sole proprietors, businesses, and organizations that wish to become an Authorized IRS e-file Provider must apply for participation and must be accepted by the Service.

.02 The procedures governing application to the IRS e-file Program are included in Publication 3112, IRS e-file Application and Participation.

.03 The circumstances under which the Service may deny participation in the IRS e-file Program are also included in Publication 3112. An applicant who is denied participation may seek administrative review of the denial. See section 8 of this revenue procedure.

.04 To continue participation in the IRS e-file Program, an Authorized IRS e-file Provider must adhere to all requirements of this revenue procedure and the publications and notices governing IRS e-file.

.01 To ensure that returns are accurately and efficiently filed, an Authorized IRS e-file Provider must comply with the provisions of this revenue procedure and all publications and notices governing IRS e-file. The Service will from time to time update such publications and notices to reflect changes to the program. It is the responsibility of the Authorized IRS e-file Provider to ensure that it complies with the latest version of all publications and notices. The publications and notices governing the IRS e-file Program include:

(1) Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns;

(2) Publication 1345A, Filing Season Supplement for Authorized IRS e-file Providers of Individual Income Tax Returns;

(3) Publication 1346, Electronic Return File Specifications and Record Layouts for Individual Income Tax Returns;

(4) Publication 1436, Test Package for Electronic Filers of Individual Income Tax Returns;

(5) Publication 1437, Procedures for the 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;

(6) Publication 1438, File Specifications, Validation Criteria and Record Layouts for the 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;

(7) Publication 1438-A, (Supplement) 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;

(8) Publication 1474, Technical Specifications Guide For Reporting Agent Authorization For Magnetic Tape/Electronic Filers and Federal Tax Depositors;

(9) Publication 1524, Procedures for 1065 e-file Program, U.S. Return of Partnership Income;

(10) Publication 1525, File Specifications, Validation Criteria and Record Layouts for the 1065 e-file Program, U.S. Return of Partnership Income;

(11) Publication 1855, Technical Specifications Guide for the Electronic Filing of Form 941, Employer’s Quarterly Federal Tax Return;

(12) Publication 3112, IRS e-file Application and Participation;

(13) Publication 3416, 1065 e-file Program, U.S. Return of Partnership Income (Publication 1525 Supplement);

(14) Publication 3715, Technical Specifications Guide for the Electronic Filing of Form 940, Employer’s Federal Unemployment (FUTA) Tax Return;

(15) Publication 3823, Employment Tax e-file System Implementation and User Guide;

(16) Publication 4162, Modernized e-File Test Package for Forms 1120/1120S;

(17) Publication 4163, Modernized e-File Information for Authorized IRS e-file Providers of Forms 1120/1120S;

(18) Publication 4164, Modernized e-File Guide for Software Developers and Transmitters;

(19) Publication 4205, Modernized e-File Test Package for Exempt Organization Filings;

(20) Publication 4206, Modernized e-File Information for Authorized IRS e-file Providers of Exempt Organization Filings; and

(21) Postings to the IRS web site at: http://www.irs.gov on the Internet, and published guidance in the Internal Revenue Bulletin and the Federal Register.

.02 The publications and notices listed in section 5.01 supplement this revenue procedure. A violation of any provision of these publications and notices is considered a violation of this revenue procedure and may subject an Authorized IRS e-file Provider to the sanctions provided in section 7 of this revenue procedure.

.03 The security of taxpayer accounts and personal information is a top priority for the IRS. It is the responsibility of each Authorized IRS e-file Provider to have security systems in place to prevent unauthorized access to taxpayer accounts and personal information by third parties. The Gramm-Leach-Bliley Act, codified at 15 U.S.C. §§ 6801-6827, includes rules applicable to Authorized IRS e-file Providers that are designed to ensure the security and privacy of taxpayer information. Violation of the provisions of the Gramm-Leach-Bliley Act and the implementing rules and regulations promulgated by the Federal Trade Commission, or violations of the non-disclosure rules contained in sections 6713 or 7216 or the regulations promulgated thereunder, are considered violations of this revenue procedure and may subject an Authorized IRS e-file Provider to the sanctions provided in section 7 of this revenue procedure. See section 6.01 of this revenue procedure.

.04 In addition to the responsibilities defined in 5.01, 5.02, and 5.03 above, additional Authorized IRS e-file Providers responsibilities may be defined in statutes and regulations.

.01 Penalties for Disclosure or Use of Information.

(1) An Authorized IRS e-file Provider, except a Software Developer that does not have access to taxpayer information, is a tax return preparer under the definition of section 301.7216-1(b)(2). Tax return preparers are subject to criminal penalties for unauthorized disclosure or use of tax return information. See section 7216 of the Internal Revenue Code and section 301.7216-1(a). In addition, section 6713 establishes civil penalties for unauthorized disclosure or use of income tax return information by tax return preparers.

(2) Under section 301.7216-2(h), disclosure of tax return information among Authorized IRS e-file Providers for the purpose of electronically filing a return is permissible. For example, an ERO may pass on tax return information to an Intermediate Service Provider and/or a Transmitter for the purpose of having an electronic return formatted and transmitted to the Service.

.02 Other Preparer Penalties.

(1) Preparer penalties may be asserted against an individual or firm meeting the definition of an income tax return preparer under section 7701(a)(36) and section 301.7701-15. Preparer penalties that may be asserted under appropriate circumstances include, but are not limited to, those set forth in sections 6694, 6695, and 6713.

(2) Under section 301.7701-15(d)(1), Authorized IRS e-file Providers are not income tax return preparers for the purpose of assessing most preparer penalties as long as their services are limited to “typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund.”

(3) If an ERO, Intermediate Service Provider, Transmitter, or the product of a Software Developer alters the income tax return information in a nonsubstantive way, this alteration will be considered to come under the “mechanical assistance” exception described in section 301.7701-15(d)(1), and will not cause an Authorized IRS e-file Provider to become an income tax preparer. A nonsubstantive change is a correction or change limited to a transposition error, misplaced entry, spelling error, or arithmetic correction.

(4) If an ERO, Intermediate Service Provider, Transmitter, or the product of a Software Developer alters income tax return information in a way that does not come under the “mechanical assistance” exception, such Authorized IRS e-file Provider may be held liable for income tax return preparer penalties. See section 301.7701-15; Rev. Rul. 85-189, 1985-2 C.B. 341 (describing a situation where a Software Developer was determined to be an income tax return preparer and subject to certain preparer penalties).

.03 Other Penalties. In addition to the above specified provisions, the Service may assert all appropriate preparer, nonpreparer, and disclosure penalties against an Authorized IRS e-file Provider as warranted under the circumstances.

.01 The Service will monitor Authorized IRS e-file Providers for compliance with the rules governing IRS e-file. The Service may sanction an Authorized IRS e-file Provider for violating any provision of this revenue procedure or the publications and notices governing IRS e-file.

.02 Sanctions that the Service may impose upon an Authorized IRS e-file Provider for violations described in section 7.01 of this revenue procedure include a written reprimand, suspension or expulsion from the program, and other sanctions, depending on the severity of the infraction. Publication 3112 describes the infraction categories and the rules governing the imposition of sanctions.

.01 An applicant that has been denied participation in IRS e-file (see section 4.03 of this revenue procedure) has the right to an administrative review. During the administrative review process, the denial of participation remains in effect.

.02 An Authorized IRS e-file Provider may seek administrative review for any sanction the Service may impose under section 7 of this revenue procedure.

.03 Publication 3112 describes the procedures regarding administrative review of a denial of participation in IRS e-file and any sanction imposed by the Service.

.01 The Service regularly conducts pilot programs to introduce new technology into the IRS e-file Program. These pilot programs are usually conducted within a limited geographic area or within a limited taxpayer or practitioner community. The Service establishes rules for participating in these pilot programs and embodies these rules in an implementing document typically referred to as a “Memorandum of Understanding” or “Memorandum of Agreement.” Pilot participants must agree to the provisions of the implementing document in order to participate in the pilot program.

.02 An implementing document supplements this revenue procedure, but does not supersede it.

.03 A violation of a provision of an implementing document is considered a violation of this revenue procedure and may subject the participant to sanctions (see section 7 of this revenue procedure).

Rev. Proc. 99-39, 1999-2 C.B. 532; Rev. Proc. 2000-31, 2000-2 C.B. 146; and Rev. Proc. 2001-9, 2001-1 C.B. 328 are superseded.

This revenue procedure is effective August 29, 2005.

All questions regarding this revenue procedure should be directed to the Internal Revenue Service. The telephone number for this purpose is (202) 283-0261 (not a toll-free number).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking.

This document contains proposed regulations that prescribe the form that cooperatives must use to file their income tax returns. The regulations affect all cooperatives that are currently required to file an income tax return on either Form 1120, “U.S. Corporation Income Tax Return,” or Form 990-C, “Farmers’ Cooperative Association Income Tax Return.”

Written or electronic comments and requests for a public hearing must be received by October 27, 2005.

Send submissions to: CC:PA:LPD:PR (REG-149436-04), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-149436-04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at www.irs.gov/regs, or via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-149436-04). A public hearing may be scheduled if requested by any person who timely submits comments.

Concerning the proposed regulations, Donnell M. Rini-Swyers, (202) 622-4910; concerning submissions of comments, or to request a hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).

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

The principal author of these regulations is Donnell M. Rini-Swyers, Office of Assistant Chief Counsel (Procedure & Administration).

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The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.