Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for July 2006.

Proposed regulations under sections 871 and 881 of the Code clarify how the portfolio interest rules apply with respect to interest paid to a partnership (or simple or grantor trust) that has foreign partners (or beneficiaries or owners). A public hearing is scheduled for September 7, 2006.

This notice provides that the Service will not treat a hotel, motel, or other establishment that otherwise satisfies the definition of “lodging facility” under section 856(d)(9) of the Code as other than a “lodging facility” if it is used to provide temporary housing to certain persons affected by Hurricane Katrina or Hurricane Rita, provided the requirements of the notice are satisfied.

Disaster leave-sharing plans. This notice describes certain leave-sharing plans under which employees may deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. For a plan that meets the requirements of this notice, the IRS will not assert that an employee who deposits leave under the plan realizes income or has wages or compensation with respect to the deposited leave, provided the plan treats payments made by the employer to a leave recipient as wages and compensation. No deduction is allowed to an employee who deposits leave.

Casualty and theft losses. This document provides individual taxpayers with safe harbor methods they may use in determining the amount of their casualty and theft loss deductions for personal-use residential real property and certain personal belongings that were damaged, destroyed, or stolen as a result of Hurricanes Katrina, Rita, or Wilma.

Final regulations under sections 3102 and 3121 of the Code contain amendments to the employment tax regulations. The regulations provide guidance concerning the application of the Federal Insurance Contributions Act (FICA) to cash payments made for service not in the course of the employer’s trade or business, for domestic service in a private home of the employer, for agricultural labor, and for service performed as a home worker within the meaning of section 3121(d)(3)(C).

Disaster leave-sharing plans. This notice describes certain leave-sharing plans under which employees may deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. For a plan that meets the requirements of this notice, the IRS will not assert that an employee who deposits leave under the plan realizes income or has wages or compensation with respect to the deposited leave, provided the plan treats payments made by the employer to a leave recipient as wages and compensation. No deduction is allowed to an employee who deposits leave.

This notice supplements and modifies Notice 2006-20, 2006-10 I.R.B. 560, which, under the authority of section 7508A of the Code, postponed until August 28, 2006, deadlines for certain taxpayers affected by Hurricane Katrina. Specifically, this notice provides an additional postponement of time until October 16, 2006, for certain affected taxpayers.

This document contains corrections to temporary regulations (T.D. 9258, 2006-20 I.R.B. 886) relating to amendments to tacking rule requirements of life-nonlife consolidated regulations, and final and temporary regulations (T.D. 9264, 2006-26 I.R.B. 1150) relating to business electronic filing and burden reduction.

This document contains corrections to proposed regulations (REG-134317-05, 2006-26 I.R.B. 1184) relating to guidance necessary to facilitate business electronic filing and burden reduction.

This revenue ruling provides various prescribed rates for federal income tax purposes for July 2006 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the blended annual rate for 2006 for purposes of section 7872.

Internal Revenue Service (IRS), Treasury.

Final regulation.

This document contains final regulations relating to payments made for service not in the course of the employer’s trade or business, for domestic service in a private home of the employer, for agricultural labor, and for service performed as a home worker within the meaning of section 3121(d)(3)(C) of the Internal Revenue Code (Code). These final regulations provide guidance concerning the application of the Federal Insurance Contributions Act (FICA) to these payments. These final regulations affect employers that make these payments and employees that receive these payments. These final regulations provide guidance to assist these taxpayers in complying with the law.

Effective Date: These regulations are effective on June 19, 2006.

Applicability Dates: The regulations relating to payments made for service not in the course of the employer’s trade or business and/or for service performed as a home worker within the meaning of section 3121(d)(3)(C) apply to cash remuneration paid on or after January 1, 1978. The regulations relating to payments made for domestic service in a private home of the employer apply to cash remuneration paid on or after January 1, 1994. The regulations relating to payments for agricultural labor apply to cash remuneration paid on or after January 1, 1988. The regulations relating to computation to the nearest dollar of cash remuneration for domestic service in a private home of the employer apply to cash remuneration paid on or after January 1, 1994.

Selvan Boominathan of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), (202) 622-0047 (not a toll-free call).

Accordingly, 26 CFR part 31 is amended as follows:

This notice supplements and modifies Notice 2006-20, 2006-10 I.R.B. 560 (March 6, 2006), which, under the authority of section 7508A of the Internal Revenue Code, postponed until August 28, 2006, deadlines for certain taxpayers affected by Hurricane Katrina to perform the acts described in Notice 2005-73, 2005-42 I.R.B. 723 (October 17, 2005) (e.g., filing returns and other documents, payment of taxes). It has come to the IRS’s attention that some affected taxpayers need additional time to complete and file individual income tax returns for 2004 and 2005. This notice provides an additional postponement of time in order for certain individual taxpayers affected by Hurricane Katrina to file a 2004 or 2005 income tax return. Specifically, this notice provides an additional postponement of time until October 16, 2006, for affected taxpayers, as described in Notice 2006-20, with respect to the following individual income tax returns: (1) 2004 individual income tax returns, originally due on April 15, 2005, for which taxpayers obtained an extension of time to file until October 15, 2005, under section 6081, and for which Notice 2006-20 postponed the due date to August 28, 2006; and (2) 2005 individual income tax returns, originally due on April 15, 2006, for which Notice 2006-20 postponed the due date to August 28, 2006. Thus, this notice defines a new group of affected taxpayers, which is a subset of affected taxpayers as described in Notice 2006-20, who are eligible for the relief provided by this notice.

The principal author of this notice is Dillon Taylor of the Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division). For further information regarding this notice, you may call (202) 622-4940 (not a toll-free call).

The Internal Revenue Service will not treat a hotel, motel, or other establishment located in the Gulf Opportunity Zone, as defined in § 1400M of the Internal Revenue Code (26 U.S.C. § 1400M), that otherwise satisfies the definition of a “lodging facility” under § 856(d)(9) as other than a “lodging facility” if it is used to provide temporary housing to certain persons affected by Hurricane Katrina or Hurricane Rita, provided the recordkeeping requirements of this notice are satisfied.

On August 28, 2005, and August 29, 2005, the President issued major disaster declarations for the states of Florida, Alabama, Louisiana, and Mississippi as a result of Hurricane Katrina. On September 24, 2005, the President declared major disasters for the states of Louisiana and Texas as a result of Hurricane Rita. These declarations were made pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5206.

Subsequently, the Federal Emergency Management Agency (FEMA) designated certain counties and parishes as being eligible for individual assistance (or individual and public assistance).

Certain real estate investment trusts (REITs) that own lodging facilities expressed concern that extended stays at those facilities by persons affected by these disasters may cause the REITs to fail to satisfy the income tests under §§ 856(c)(2) and (c)(3). Although rents from real property generally are treated as qualifying income for purposes of these tests, amounts received or accrued from a corporation in which the REIT owns stock are subject to special rules. Under one of these rules, if a REIT leases an interest in real property that is a qualified lodging facility to a taxable REIT subsidiary (TRS) of that REIT, then the lease payments may qualify as rents from real property if the property is operated on behalf of the TRS by a person who is an eligible independent contractor. Section 856(d)(9)(D)(ii) provides that a “lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis. Section 856 and the regulations thereunder do not define the term “transient basis”. Accordingly, the Internal Revenue Service issued Notice 2005-89, 2005-49 I.R.B. 1077, which provided that the Service will not treat an establishment that met the definition of “lodging facility” as anything other than a “lodging facility” if it was used to provide temporary housing to certain persons affected by Hurricane Katrina or Hurricane Rita, provided certain recordkeeping requirements were satisfied. Notice 2005-89 was effective for six months from its effective date, August 28, 2005.

Due to the magnitude of the disaster, the Service has become aware of the continued need for temporary housing for certain persons affected by Hurricanes Katrina and Rita beyond February 28, 2006, the expiration date of Notice 2005-89. Accordingly, for purposes of § 856(d)(9)(D)(ii), the Service will not treat a dwelling unit within a lodging facility located in the Gulf Opportunity Zone as being used other than on a transient basis during any six month period beginning on or after February 28, 2006, through the date on which this notice expires, if the unit is used to provide shelter to (a) an individual whose principal residence for purposes of § 1033(h)(4) on August 28, 2005, was located in a covered disaster area and who has been displaced because the residence has been destroyed or damaged as a result of Hurricane Katrina or Hurricane Rita (a displaced resident); (b) employees of business entities whose principal place of business is located in a covered disaster area who have been relocated to other areas where the business entities have job openings (a displaced employee); or (c) a worker assisting in relief activities in the covered disaster area, whether or not the worker is affiliated with a recognized government or philanthropic organization (a relief worker).

A TRS that is the lessee of a hotel, motel, or other establishment and that seeks to rely on this notice with respect to the provision of shelter to a displaced resident, displaced employee, or relief worker for any period after February 28, 2006, must keep records for each six month period in which it seeks to rely on this notice indicating the dates on which shelter was provided, and the name and address of the displaced resident, displaced employee, or relief worker. In addition, (a) with respect to a displaced employee, the TRS must keep records indicating the individual’s employer, and (b) with respect to any relief worker, the TRS must keep records indicating the name of the individual’s employer or sponsoring organization and the nature of the relief activities undertaken during the individual’s stay.

This notice is effective February 28, 2006, and will expire on August 28, 2007.

The collections of information in the notice have 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 1545-1977.

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 the notice are in the section of this notice entitled “Transient Basis Requirement”. The collections of information are required for compliance with § 856(d)(9)(D). The collections of information are required to obtain a benefit. The likely respondents are corporations.

The estimated total annual reporting burden is 500 hours.

The estimated annual burden per respondent varies from 25-75 hours, depending on the circumstances, with an average of 50 hours. The estimated number of respondents is 10.

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.

The principal author of this notice is Jonathan D. Silver of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact Mr. Silver at (202) 622-3930 (not a toll-free call).

This notice provides guidance on the federal tax consequences of certain leave-sharing plans that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster, as defined herein.

Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 42 U.S.C. § 5170, provides that the President may declare an event a major disaster. The President also may determine that the major disaster warrants individual assistance or individual and public assistance from the federal government under the Stafford Act. See, e.g., 42 U.S.C. § 5170b.

Section 9004 of Pub. L. No. 105-18, 5 U.S.C. § 6391, provides that in the event of a major disaster or emergency, as declared by the President, that results in severe adverse effects for a substantial number of employees, the President may direct the Office of Personnel Management to establish a leave-sharing plan for federal employees who are adversely affected by the disaster or emergency.

Section 61(a) of the Internal Revenue Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived.

Under the facts of Rev. Rul. 90-29, 1990-1 C.B. 11, an employer establishes a leave-sharing plan under which employees who suffer “medical emergencies” may qualify as recipients of leave surrendered to the employer, or deposited in an employer-sponsored leave bank, by other employees. The ruling concludes that the amounts the employer pays to a leave recipient pursuant to the plan are includible in the gross income of the recipient under § 61 as compensation for services provided by that recipient to the employer, and “wages” for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Tax Act (RRTA), the Railroad Unemployment Repayment Tax (RURT), and income tax withholding, unless excluded therefrom under a specific provision of the Code. The ruling also concludes that an employee who surrenders leave to the employer or deposits leave in the leave bank pursuant to the plan does not realize any income or incur any deductible expense or loss upon the surrender or deposit of the leave or its use by the recipient. The ruling also states that its conclusions and rationale apply only to bona fide employer-sponsored leave-sharing arrangements.

Major disaster means (a) a major disaster as declared by the President under § 401 of the Stafford Act, 42 U.S.C. § 5170, that warrants individual assistance or individual and public assistance from the federal government under that Act, or (b) a major disaster or emergency as declared by the President pursuant to 5 U.S.C. § 6391, in the case of employees described in that statute.

Major disaster leave-sharing plan means a plan that meets the requirements of this notice.

Leave donor means a current employee of the employer whose voluntary written request to deposit leave in a leave bank under a major disaster leave-sharing plan is approved by the employer.

Leave recipient means a current employee for whom the employer has approved an application to receive leave under a major disaster leave-sharing plan.

Family member means any family member as defined by the major disaster leave-sharing plan.

For purposes of this notice, a major disaster leave-sharing plan is a written plan meeting each of the following requirements:

1. The plan allows a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. For purposes of the plan, an employee is considered to be adversely affected by a major disaster if the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.

2. The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.

3. The amount of leave that may be donated by a leave donor in any year generally does not exceed the maximum amount of leave that an employee normally accrues during the year.

4. A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank. Each leave recipient must use this leave for purposes related to the major disaster.

5. The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank.

6. A leave recipient may not convert leave received under the plan into cash in lieu of using the leave. However, a leave recipient may use leave received under the plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.

7. The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave-sharing plan.

8. Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. Except for an amount so small as to make accounting for it unreasonable or administratively impracticable, any leave deposited under a major disaster leave-sharing plan that is not used by leave recipients by the end of the period specified in paragraph 5, above, must be returned within a reasonable period of time to the leave donors (or, at the employer’s option, to those leave donors who are still employed by the employer) so that the donor will be able to use the leave. The amount of leave returned to each leave donor must be in the same proportion as the amount of leave donated by the leave donor bears to the total amount of leave donated on account of that major disaster.

The IRS will not assert that a leave donor who deposits leave in an employer-sponsored leave bank under a major disaster leave-sharing plan realizes income or has wages, compensation, or rail wages with respect to the deposited leave, provided that the plan treats payments made by the employer to the leave recipient as “wages” for purposes of FICA, FUTA, and income tax withholding, and as “compensation” for purposes of RRTA and “rail wages” for purposes of RURT, unless excluded therefrom under a specific provision of the Code. A leave donor may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.

The principal author of this notice is Shareen S. Pflanz of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Shareen S. Pflanz at (202) 622-4920 (not a toll-free call).

.01 This revenue procedure provides safe harbor methods that individual taxpayers may use in determining the amount of their casualty and theft loss deductions pursuant to § 165 of the Internal Revenue Code for their personal-use residential real property (as defined in section 3.02 of this revenue procedure) and personal belongings (as defined in section 3.03 of this revenue procedure) damaged, destroyed, or stolen as a result of Hurricanes Katrina, Rita, and Wilma (“the 2005 Gulf hurricanes”). Specifically, this revenue procedure provides three safe harbor methods that individuals may use to determine the decrease in fair market value of personal-use residential real property. This revenue procedure also provides a fourth safe harbor method that individuals may use to determine the fair market value of their personal belongings immediately before the 2005 Gulf hurricanes.

.02 The Internal Revenue Service will not challenge an individual’s determination of the decrease in fair market value of personal-use residential real property attributable to one of the 2005 Gulf hurricanes if the individual qualifies for and uses one of the safe harbor methods described in section 4 of this revenue procedure. Furthermore, the IRS will not challenge an individual’s determination of the fair market value of personal belongings immediately before one of the 2005 Gulf hurricanes if the individual qualifies for and uses the safe harbor method described in section 7 of this revenue procedure.

.03 Finally, this revenue procedure requires that if an individual uses the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue procedure, the individual also must take into account the value of any no-cost repairs as described in section 6 of this revenue procedure.

.04 Use of a safe harbor method described in this revenue procedure is not mandatory. An individual may, instead, use the actual reduction in the fair market value of personal-use residential real property or personal belongings, pursuant to § 1.165-7(a)(2) of the Income Tax Regulations, if the individual has proper substantiation.

.05 The safe harbor methods provided in this revenue procedure apply only to the circumstances within the scope of this revenue procedure and may not be used in any other circumstances.

.01 Section 165(a) generally provides that a taxpayer may deduct any loss sustained during the taxable year and not compensated for by insurance or otherwise. With respect to property not connected with a trade or business or a transaction entered into for profit, § 165(c)(3) limits an individual taxpayer’s deductions to losses arising from fire, storm, shipwreck, or other casualty, or from theft.

.02 Section 165(h) imposes two limitations on casualty and theft loss deductions for property not connected with a trade or business or transaction entered into for profit. Section 165(h)(1) provides that any loss to an individual described in § 165(c)(3) shall be allowed only to the extent that the amount of the loss arising from each casualty, or from each theft, exceeds $100. Section 165(h)(2) provides that if personal casualty and theft losses for any taxable year exceed personal casualty and theft gains for the taxable year, the losses are allowed only to the extent of the sum of the amount of the gains, plus so much of the excess as exceeds ten percent of the adjusted gross income of the individual.

.03 Section 1400M(2) defines “Hurricane Katrina disaster area” as an area with respect to which a major disaster has been declared by the President before September 14, 2005, under § 401 of Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”) (42 USC § 5170) by reason of Hurricane Katrina. The Hurricane Katrina disaster area covers the entire states of Alabama, Florida, Louisiana, and Mississippi. Section 1400M(4) defines “Hurricane Rita disaster area” as an area with respect to which a major disaster has been declared by the President before October 6, 2005, under § 401 of the Stafford Act by reason of Hurricane Rita. The Hurricane Rita disaster area covers the entire states of Louisiana and Texas. Section 1400M(6) defines “Hurricane Wilma disaster area” as an area with respect to which a major disaster has been declared by the President before November 14, 2005, under § 401 of the Stafford Act by reason of Hurricane Wilma. The Hurricane Wilma disaster area covers the entire state of Florida.

.04 Section 1400S(b) suspends the limitations on personal casualty and theft loss deductions imposed by § 165(h) if the losses are attributable to the applicable 2005 Gulf hurricane and arose in the (1) Hurricane Katrina disaster area on or after August 25, 2005, (2)Hurricane Rita disaster area on or after September 23, 2005, or (3) Hurricane Wilma disaster area on or after October 23, 2005.

.05 Section 1.165-1(c)(4) provides that in determining the amount of loss sustained, adjustments must be made for any insurance or other compensation received.

.06 Section 1.165-7(b) provides that the amount of a casualty loss is the lesser of (1) the difference between the fair market value of the property immediately before the casualty and the fair market value immediately after the casualty, or (2) the adjusted basis of the property. Section 1012 and § 1.1012-1(a) provide that the basis of property generally is its cost. Section 1016(a)(1) and § 1.1016-2(a) provide that the basis of property is adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments made to the property.

.07 Section 1.165-7(a)(2)(i) provides that to determine the amount of the deductible loss under section 165(a), the fair market value of the property immediately before and immediately after the casualty generally shall be ascertained by competent appraisal. Section 1.165-7(a)(2)(ii) provides that the cost of repairs to the property damaged is acceptable as evidence of the decrease in value of the property if the taxpayer shows that: (1) the repairs are necessary to restore the property to its condition immediately before the casualty; (2) the amount spent for such repairs is not excessive; (3) the repairs do not care for more than the damage suffered; and (4) the value of the property after the repairs does not, as a result of the repairs, exceed the value of the property immediately before the casualty. In order to use the cost-of-repairs method to determine the decrease in fair market value, the taxpayer must actually make the repairs rather than rely on estimates of repairs that will be performed in the future or not at all. See Lamphere v. Commissioner, 70 T.C. 391, 396 (1978), acq., 1978-2 C.B. 2; Farber v. Commissioner, 57 T.C. 714, 719 (1972), acq., 1972-2 C.B. 2.

.08 Section 1.165-8(c) provides that the amount deductible in the case of a theft loss is determined consistently with the manner described in § 1.165-7 for determining the amount of a casualty loss. The fair market value of the property immediately after the theft is considered to be zero.

.09 Section 1.165-7(b)(2)(ii) provides that in determining a casualty loss involving real property and improvements thereon not used in a trade or business or in any transaction entered into for profit, the improvements (such as buildings and ornamental trees and shrubbery) to the property damaged or destroyed are considered an integral part of the property, and no separate basis need be apportioned to the improvements.

.10 Due to the widespread devastation from the 2005 Gulf hurricanes, it may be difficult for individuals to determine the decrease in the fair market value of damaged, destroyed, or stolen property using the methods provided in § 1.165-7(a)(2). The IRS and Treasury Department recognize that the statutory suspension of § 165(h) limitations on 2005 Gulf hurricane casualty loss deductions provided by § 1400S reflects Congressional intent to facilitate certain deductions. In view of these unique circumstances, the IRS and Treasury Department believe it is appropriate to provide safe harbor methods for use in determining the amount of casualty and theft loss deductions for certain property damaged, destroyed, or stolen as a result of the 2005 Gulf hurricanes. Therefore, this revenue procedure provides safe harbor methods that individuals may use under § 1.165-7(a)(2)(i) to measure the decrease in the fair market value of their personal-use residential real property that was damaged or destroyed and to determine the pre-hurricane fair market value of personal belongings that were damaged, destroyed, or stolen as a result of one of the 2005 Gulf hurricanes.

.01 In general. An individual who suffered a casualty or theft loss for the individual’s personal-use residential real property or personal belongings damaged, destroyed, or stolen as result of the 2005 Gulf hurricanes may use the safe harbor methods provided in this revenue procedure in determining the amount of the individual’s casualty and theft loss deductions under § 165.

.02 Definition of personal-use residential real property and personal residence. For purposes of this revenue procedure, personal-use residential real property is real property, including improvements (such as buildings and ornamental trees and shrubbery) that is owned by the individual who suffered a casualty loss, that contains at least one personal residence, and that is not used in a trade or business or in a transaction entered into for profit. Personal-use residential real property does not include rental property. For purposes of this revenue procedure, a personal residence is a single family residence, or a single unit within a contiguous group of attached residential units (for example, a townhouse or duplex), owned by the individual who suffered a casualty loss, and consists of the total enclosed square footage of the residence or single unit, including any enclosed structures attached to the residence or single unit. For example, a personal residence includes a basement and an attached garage, but does not include a deck or screened-in porch. For purposes of this revenue procedure, a personal residence does not include a condominium or cooperative unit, or any other property for which the individual who suffered the casualty loss does not own the structural components of the building (such as the foundation, walls, and roof), or owns only a fractional interest in all of the structural components of the building, or a mobile home or trailer.

.03 Definition of personal belongings. For purposes of this revenue procedure, a personal belonging is an item of tangible personal property that is owned by the individual who suffered a casualty or theft loss and that is not used in a trade or business or in a transaction entered into for profit. For purposes of this revenue procedure, personal belongings do not include a boat, aircraft, mobile home, trailer, or vehicle (as defined in section 7.02 of this revenue procedure), or an antique or other asset that maintains or increases its value over time.

.04 Use of three personal-use residential real property safe harbor methods. An individual described in section 3.01 of this revenue procedure may use any of the three safe harbor methods described in section 4 of this revenue procedure to determine the decrease in fair market value for personal-use residential real property located in the Hurricane Katrina disaster area, Hurricane Rita disaster area, or Hurricane Wilma disaster area (see section 2.03 of this revenue procedure) that was damaged or destroyed as a result of one or more of the 2005 Gulf hurricanes. The three personal-use residential real property safe harbor methods are the Insurance Safe Harbor Method described in section 4.02 of this revenue procedure, the Contractor Safe Harbor Method described in section 4.03 of this revenue procedure, and the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue procedure.

.05 Use of Cost Indexes Safe Harbor Method. An individual may use the Cost Indexes Safe Harbor Method if the individual’s personal-use residential real property has suffered, in the circumstances described below, (1) a total loss of a personal residence, (2) a near total loss of a personal residence, (3) interior flooding over 1 foot of a personal residence, (4) structural damage from wind, rain, or debris to a personal residence, (5) roof covering damage from wind, rain, or debris to a personal residence, (6) damage to a detached structure, or (7) damage to wood decking:

(1) Total loss. A total loss of a personal residence occurs if, as a result of a storm surge or catastrophic prolonged flooding due to breaching or overtopping of a protective levee system during one of the 2005 Gulf hurricanes, any one of the following occurred:

(a) The personal residence either collapsed or is structurally unsound (for example, the structural connections in the personal residence, such as nails and anchor bolts, have corroded as a result of prolonged exposure to salt water (including brackish water) over an extended period of time to the extent that they compromise the structural integrity of the personal residence);

(b) The state or local government or any political subdivision thereof has ordered that the personal residence be demolished or relocated;

(c) The individual has sold the personal residence to an unrelated party for a price that reflects the fair market value solely of the land on which the personal residence is situated; or

(d) The personal residence sustained damage that satisfies the definition of near total loss, as described in section 3.05(2) of this revenue procedure, and the individual has demolished the personal residence.

(2) Near total loss. The near total loss of a personal residence occurs if, as a result of a storm surge or catastrophic prolonged flooding due to breaching or overtopping of a protective levee system during one or more of the 2005 Gulf hurricanes, the personal residence sustained severe damage necessitating the removal and disposal of substantially all interior wall frame coverings (including drywall and other wall frame coverings), floorings, electrical lines, ducts, plumbing, and other fixtures. For a personal residence sustaining near total loss, only the wood frame, rafters, and outside façade of the personal residence remain structurally sound and reusable.

(3) Interior flooding over 1 foot. Interior flooding over 1 foot occurs if a personal residence was flooded with salt water (including brackish water) to a height of more than 1 foot as a result of a storm surge or catastrophic prolonged flooding due to breaching or overtopping of a protective levee system during one or more of the 2005 Gulf hurricanes, but did not sustain damage that falls within the definition of total loss or near total loss, as described in section 3.05(1) and (2) of this revenue procedure.

(4) Structural damage from wind, rain, or debris. Structural damage from wind, rain, or debris occurs if a personal residence sustained major structural damage to the roof and/or outside wall(s) as a result of wind or windblown debris from one or more of the 2005 Gulf hurricanes that exposed part or all of the interior of the personal residence to rain or debris, requiring substantial renovation of the damaged areas. Substantial renovation requires the removal and replacement of drywall or other wall frame coverings, replacement of trim, and repair and painting of the damaged interior areas of the personal residence.

(5) Roof covering damage from wind, rain, or debris. Roof covering damage from wind, rain, or debris occurs if a personal residence sustains damage from wind, rain, or windblown debris to roofing felt, shingles, flashings, fascia, or soffit as a result of one or more of the 2005 Gulf hurricanes.

(6) Detached structures. A detached structure consists of a detached structure on personal-use residential real property where the detached structure sustained damage from one or more of the 2005 Gulf hurricanes to the extent that it requires either complete or major rebuilding. A detached structure includes a shed, shop, or detached garage that is not used in connection with a trade or business and that is not equipped with heating or air conditioning. Furthermore, a detached structure is of enclosed wood-frame construction, with some electrical capabilities and little or no interior finishing.

(7) Wood decking. Wood decking consists of pressure treated wood decking attached to a personal residence where the decking was damaged or destroyed by one of the 2005 Gulf hurricanes.

.06 Taking into account no-cost repairs. An individual using the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue procedure must take into account the value of any no-cost repairs as described in section 6 of this revenue procedure.

.07 Use of Personal Belongings Safe Harbor Method. An individual may use the Personal Belongings Safe Harbor Method described in section 7.01 of this revenue procedure to determine the pre-hurricane fair market value of the individual’s personal belongings located in the Hurricane Katrina disaster area, Hurricane Rita disaster area, or Hurricane Wilma disaster area (see section 2.03 of this revenue procedure) that were damaged, destroyed, or stolen as a result of one of the 2005 Gulf hurricanes.

.08 Limited use of safe harbor methods. The safe harbor methods described in sections 4 and 7 are available only in the circumstances described in this revenue procedure.

.01 In general. An individual within the scope of this revenue procedure may use any one of the three safe harbor methods described in this section 4. If an individual owns two or more parcels of personal-use residential real property, the use of a safe harbor method for one parcel does not require the individual to use the same safe harbor method, or any safe harbor method, for any other parcel.

.02 Insurance Safe Harbor Method. Under the Insurance Safe Harbor Method, to determine the decrease in the fair market value of the individual’s personal-use residential real property, an individual may use the estimated loss determined in reports prepared by the individual’s homeowners’ or flood insurance company setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the individual’s personal-use residential real property from one of the 2005 Gulf hurricanes.

.03 Contractor Safe Harbor Method. Under the Contractor Safe Harbor Method, to determine the decrease in the fair market value of the individual’s personal-use residential real property, an individual may use the contract price for the repairs specified in an itemized contract prepared by a contractor, licensed or registered in accordance with State or local regulations, setting forth the costs to restore the individual’s personal-use residential real property to the condition existing immediately prior to the applicable 2005 Gulf hurricane. However, the costs of any improvements or additions that increase the value of the personal-use residential real property above its pre-hurricane value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the contract price for purposes of this safe harbor. To use the Contractor Safe Harbor Method, the contract must be a binding contract signed by the individual and the contractor.

.04 Cost Indexes Safe Harbor Method.

(1) In General. Under the Cost Indexes Safe Harbor Method, an individual may use one or more of the cost indexes, as applicable, provided in this section 4.04 to determine the decrease in the fair market value of personal-use residential real property, including the personal residence, detached structures, and wood decking. Cost indexes are provided for three size categories of personal residences based on the square footage of the personal residence.

In computing the decrease in fair market value under the Cost Indexes Safe Harbor Method, an individual must take into account the value of any no-cost repairs as described in section 6 of this revenue procedure.

If the Cost Indexes Safe Harbor Method described in this section 4.04 is used, the amount determined is the full amount of the decrease in fair market value of that personal-use residential real property, and may not be increased by amounts related to items such as landscaping, debris removal, demolition, etc.

The Cost Indexes Safe Harbor Method applies only to the following three types of improvements on an individual’s personal-use residential real property: a personal residence (as described in section 3.02 of this revenue procedure), a detached structure (as described in section 3.05(6) of this revenue procedure), and a pressure treated wood deck (as described in section 3.05(7) of this revenue procedure). If there is any other type of improvement on an individual’s personal-use residential real property that is not described in sections 3.02, 3.05(6) and 3.05(7) of this revenue procedure, the individual may use the Cost Indexes Safe Harbor Method to determine the decrease in fair market value of the personal-use residential real property, but may not add any amount for the other type of improvements. For example, under the Cost Indexes Safe Harbor Method, no amount may be added to the decrease in fair market value of the personal-use residential real property for a residence that contains a home office, a residence in a structure that contains five or more residential units, a detached structure equipped with heating or air conditioning, or a deck made of synthetic material or hardwood that is not pressure treated.

(2) Special rules for Cost Indexes Safe Harbor Method.

(a) A personal residence may not be subject to more than one of the following tables: Table 1 (Total Loss); Table 2 (Near Total Loss); or Table 3 (Interior Flooding Over 1 Foot).

(b) A personal residence subject to Table 3 (Interior Flooding Over 1 Foot) also may be subject to Table 4 (Structural Damage From Wind, Rain, or Debris), but the square footage flooded may not be included in the square footage used for Table 4 (Structural Damage From Wind, Rain, or Debris).

(c) A personal residence subject to Table 3 (Interior Flooding Over 1 Foot) or Table 4 (Structural Damage From Wind, Rain, or Debris) may also be subject to Table 5 (Roof Covering Damage from Wind, Rain, or Debris).

(d) Table 6 (Detached Structures) and Table 7 (Wood Decking) may apply to any personal-use residential real property to which Table 1 (Total Loss), Table 2 (Near Total Loss), or Table 3 (Interior Flooding Over 1 Foot), Table 4 (Structural Damage From Wind, Rain, or Debris), or Table 5 (Roof Covering Damage From Wind, Rain, or Debris) apply.

(e) If an individual’s personal-use residential real property contains more than one personal residence and the individual uses the Cost Indexes Safe Harbor Method, the individual must apply the applicable table, or combination of tables, to each personal residence.

(3) Tables. The following tables set forth the cost indexes for each corresponding category described in section 3.05 of this revenue procedure:

For a personal residence that falls within the description of a total loss in section 3.05(1) of this revenue procedure, use Table 1 as follows:

(1) Determine the total square footage of the personal residence.

(2) Determine the size of the personal residence based on the total square footage described in Table 1.

(3) Multiply the total square footage of the personal residence (from step 1) by the applicable Cost Index in column 2 of Table 1.

For a personal residence that falls within the description of a near total loss in section 3.05(2) of this revenue procedure, use Table 2 as follows:

(1) Determine the total square footage of the personal residence.

(2) Determine the size of the personal residence based on the total square footage described in Table 2.

(3) Multiply the total square footage of the personal residence (from step 1) by the applicable cost index in column 2 of Table 2.

The cost indexes in Table 3 are applied only to the square footage of the personal residence that was flooded, rather than the total square footage.

For a personal residence that was flooded by salt water (including brackish water) to a height of greater than 1 foot, as described in section 3.05(3) of this revenue procedure, and does not fall within the description of a total loss or near total loss in sections 3.05(1) and (2) of this revenue procedure, use Table 3 as follows:

(1) Determine the total square footage of the personal residence.

(2) Determine the size of the personal residence based on the total square footage described in Table 3.

(3) Determine the square footage of the flooded area of the personal residence.

(4) Multiply the flooded square footage (from step 3) by the applicable cost index in column 2 of Table 3.

The cost indexes in Table 4 apply only to the square footage of the damaged area of the personal residence, rather than the total square footage. Personal residences that sustained 100% wind, rain, or debris damage are those that sustained major structural damage throughout the entire personal residence necessitating substantial renovation (as defined in section 3.05(4) of this revenue procedure) of all of the rooms in the personal residence.

For a personal residence that sustained structural damage from wind, rain, or debris, use Table 4 as follows:

(1) Determine the total square footage of the personal residence.

(2) Determine the square footage of the damaged portion of the personal residence by adding the square footage of each room needing substantial renovation.

(3) Determine the percent of square footage of the personal residence that was damaged by dividing the square footage that was damaged (from step 2) by the total square footage (from step 1).

(4) Multiply the square footage of the damaged area (from step 2) by the applicable cost index in column 2 of Table 4 (based on the percent of damage range in column 1 of Table 4).

If the personal residence sustained roof covering damage from wind, rain, or debris as described in section 3.05(5) of this revenue procedure, apply the applicable cost index in Table 5 to the total square footage under the roof (including the porch, patios, and overhangs).

For a personal residence that sustained roof covering damage from wind, rain, or debris, as described in section 3.05(5) of this revenue procedure, use Table 5 as follows:

(1) Determine the total square footage of the ground floor of the personal residence.

(2) Add to the total square footage of the ground floor (from step 1) the square footage of any area of the roof that extends beyond the ground floor, such as porches and attached carports, to determine the total square footage under the roof.

(3) Determine the applicable cost index in column 2 of Table 5 based on the total square footage of the personal residence.

(4) Multiply the total square footage under the roof (from step 2) by the applicable cost index in column 2 of Table 5 (from step 3).

For a detached structure on personal-use residential real property, as described in section 3.05(6) of this revenue procedure, apply the applicable cost index in Table 6 as follows:

(1) Determine the total square footage of the detached structure.

(2) Determine the size of the detached structure based on the total square footage described in column 1 of Table 6.

(3) Multiply the total square footage of the detached structure (from step 1) by the applicable cost index in column 2 of Table 6.

For pressure treated wood decking attached to a personal residence, as described in section 3.05(7) of this revenue procedure, apply the cost index in Table 7 as follows:

(1) Determine the square footage of the damaged area of the deck.

(2) Multiply the square footage of the damaged area of the deck (from step 1) by the cost index in column 2 of Table 7.

The following examples illustrate the application of the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue procedure.

Example 1. Prior to Hurricane Katrina, an individual purchased a personal residence for $300,000. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structures. The personal residence was flooded by nine feet of salt water for over three weeks due to a breach in a levee, causing the structural connections in the personal residence to corrode to the extent they must be replaced. The personal residence is located in the Hurricane Katrina disaster area. Insurance and other reimbursements total $100,000. The individual obtained from the insurance company a report setting forth the estimated damage to the personal residence. The individual also obtained from a licensed contractor a binding contract signed by the contractor and the individual itemizing the contract price to repair the damage to the personal residence. The individual chooses to use the Cost Indexes Safe Harbor Method. Because the salt water corrosion damage to the personal residence falls within the definition of total loss, as defined in section 3.05(1) of this revenue procedure, the individual uses Table 1 of the Cost Indexes Safe Harbor Method to determine the decrease in fair market value of the personal-use residential real property. The individual multiplies the square footage of the personal residence by the cost index for a Medium Personal Residence in Table 1, as follows:

The individual compares the decrease in fair market value, $296,000, with the basis in the personal-use residential real property, $300,000, and from the smaller of these two amounts, $296,000, subtracts the insurance and other reimbursements of $100,000. The individual is entitled to a casualty loss deduction of $196,000 ($296,000 - $100,000).

Example 2. Assume the same facts in Example 1, except that the individual purchased the personal-use residential real property twenty years ago for $120,000, and paid no additional amounts for improvements or remodeling. The individual compares the decrease in fair market value, calculated using the Cost Indexes Safe Harbor Method in Example 1, with the basis of the personal-use residential real property. Since the basis of $120,000 is less than the decrease in fair market value, $296,000, the individual’s casualty loss is limited to the basis of $120,000. After subtracting insurance and other reimbursements of $100,000 from the basis of $120,000, the individual is entitled to a casualty loss deduction of $20,000 ($120,000 - $100,000 = $20,000).

Example 3. The individual’s personal residence is substantially damaged by a storm surge from Hurricane Katrina. The individual’s personal-use residential real property is located in the Hurricane Katrina disaster area. The damage falls within the definition of near total loss, as defined in section 3.05(2) of this revenue procedure, since all of the drywall, floorings, electrical lines, ducts, plumbing, and other fixtures need to be replaced. Prior to Hurricane Katrina, the individual purchased the personal-use residential real property for $190,000 and spent $10,000 for improvements to remodel the residence. Immediately prior to Hurricane Katrina, the adjusted basis of the property was $200,000 ($190,000 cost + $10,000 improvements). The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structures. The individual paid $5,000 to have debris cleared from the personal-use residential real property. Insurance and other reimbursements total $100,000.

Because the damage to the personal residence falls within the definition of near total loss, the individual uses Table 2 of the Cost Indexes Safe Harbor Method to determine the decrease in fair market value of the personal-use residential real property. Using Table 2 of the Cost Indexes Safe Harbor Method, the decrease in fair market value of the personal-use residential real property is determined by multiplying the square footage of the personal residence by the cost index for a Medium Personal Residence as follows:

Because the individual chooses to use the Cost Index Safe Harbor Method for determining the decrease in fair market value, the $5,000 debris removal costs are not added to the safe harbor amount of $240,000. The individual compares the adjusted basis of the personal-use residential real property to the decrease in fair market value determined by using the Cost Indexes Safe Harbor Method. Since the adjusted basis of $200,000 is less than the decrease in fair market value, $240,000, the individual’s casualty loss is limited to the adjusted basis of $200,000. After subtracting $100,000, the amount of insurance and other reimbursements received, from the adjusted basis of $200,000, the individual is entitled to a casualty loss deduction of $100,000 ($200,000 - $100,000 = $100,000).

Example 4. The first floor of an individual’s personal residence was flooded with 4 feet of salt water as a result of a storm surge during Hurricane Katrina. As a result of the flooding, all of the flooring and drywall on the first floor needs to be replaced. The second floor of the personal residence is not damaged. While the personal residence sustained flooding of more than 1 foot of salt water, it did not sustain damage that falls within the definition of total loss or near total loss in sections 3.05(1) and (2) of this revenue procedure. Therefore, the personal residence sustained interior flooding over 1 foot as described in section 3.05(3) of this revenue procedure. In addition, the pressure treated wood deck attached to the personal residence was completely destroyed by Hurricane Katrina. The personal-use residential real property is located in the Hurricane Katrina disaster area. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any detached structure. The total square footage of the flooded rooms on the first floor is 1,000 square feet. Prior to Hurricane Katrina, the individual purchased the personal-use residential real property for $200,000. Insurance and other reimbursements total $90,000. The individual chooses to use the Cost Indexes Safe Harbor Method.

To calculate the decrease in fair market value of the personal-use residential real property, the individual uses the first column of Table 3 to determine the size of the personal residence based on the total square footage of the personal residence. The individual multiplies the flooded square footage of the personal residence, 1,000 square feet, by $92, the cost index for a Medium Personal Residence in column 2 of Table 3.

The wood deck is 200 square feet.

Using Table 7, the individual multiplies the square footage of the damaged area of the deck, 200 square feet, by the cost index of $15 in column 2 of Table 7.

To determine the total decrease in fair market value of the personal-use residential real property the individual adds $3,000 to $92,000.

The individual then compares the adjusted basis of the personal-use residential real property, $200,000, to the decrease in fair market value determined by using the Cost Indexes Safe Harbor Method, $95,000. Since the decrease in fair market value of $95,000 is less than the basis of $200,000, the individual’s casualty loss is $95,000. After subtracting $90,000, the amount of insurance and other reimbursements, from $95,000, the individual is entitled to a casualty loss deduction of $5,000 ($95,000 - $90,000 = $5,000).

Example 5. Prior to Hurricane Rita, an individual purchased personal-use residential real property for $200,000 and spent $5,000 for improvements to the personal-use residential real property. Two trees fell into the individual’s personal residence during Hurricane Rita, destroying a portion of the roof. Rain from the hurricane soaked the walls and flooring of two bedrooms and the living room, necessitating removal and replacement of drywall and wood paneling, roof panels, trusses, and flooring. The rest of the personal residence remains undamaged. The personal residence was not flooded by salt water. Therefore, the damage constitutes structural damage from wind, rain, or debris, as described in section 3.05(4) of this revenue procedure. The individual’s personal-use residential real property is located in the Hurricane Rita disaster area. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structure. The damaged two bedrooms and living room total 1,000 square feet. Insurance and other reimbursements total $100,000.

The individual chooses to use the Cost Indexes Safe Harbor Method. Using Table 4, the percentage of square footage of the personal residence that was damaged by the hurricane is determined by dividing the total square footage of the personal residence by the square footage of the personal residence that was damaged as follows:

The individual uses the cost index in column 2 of Table 4 for 26% to 50% damage and multiplies it by the number of square feet that were damaged.

The roof covering also sustained damage that necessitated replacement of all roof shingles, felt lining, and flashings. The total square footage of the ground floor of the personal residence is 2,000 square feet. The total square footage under the roof, including porches, patios, and overhangs, is 2,200 square feet. The individual multiplies the cost index for a Medium Personal Residence in Table 5 by 2,200 square feet, the total square footage under the roof.

The individual adds $12,650 to $132,000 to determine the total decrease in fair market value of the personal-use residential real property.

The individual compares the decrease in fair market value, $144,650, with the adjusted basis, $205,000, and from the smaller of these two amounts, $144,650, subtracts insurance and other reimbursements of $100,000. The individual is entitled to a casualty loss deduction of $44,650 ($144,650 - $100,000 = $44,650).

Example 6. Winds from Hurricane Rita caused a tree to fall across a detached garage located on an individual’s personal-use residential real property. Prior to Hurricane Rita, the individual purchased the personal-use residential real property for $200,000. The personal residence is located in the Hurricane Rita disaster area. The personal residence is not damaged by Hurricane Rita. The personal-use residential real property does not contain any decking or other detached structure. The garage suffered significant damage and requires major rebuilding. The total square footage of the garage is 400 square feet. The garage was not insured.

The individual chooses to use the Cost Indexes Safe Harbor Method. Because the garage is a detached structure, as described in section 3.05(6) of this revenue procedure, the individual uses Table 6 to determine the decrease in fair market value of the personal-use residential real property. Using Table 6, the individual multiplies the total square footage of the garage, 400 square feet, by the cost index of $38 in column 2 of Table 6.

The individual’s basis in the personal-use residential real property is $200,000. The individual compares the decrease in fair market value, $15,200, with the basis, $200,000. Since the decrease in fair market value is less than the basis, the individual is entitled to a casualty loss deduction of $15,200.

Example 7. Winds from Hurricane Wilma blew down a pine tree that destroyed part of a pressure treated wooden deck attached to the back of an individual’s personal residence. The personal-use residential real property is located in the Hurricane Wilma disaster area. The individual’s basis in the personal-use residential real property is $200,000. Neither the personal residence nor any detached structure was damaged by the fallen tree. The deck is 450 square feet. It is necessary to rebuild one-half of the deck. The remaining half of the deck is not damaged, and remains structurally sound.

The individual chooses to use the Cost Indexes Safe Harbor Method. Because the deck is wood decking as described in section 3.05(7) of this revenue procedure, the individual uses Table 7 to determine the decrease in fair market value of the personal-use residential real property.

The square footage of the damaged area of the deck is one-half of 450 square feet, which is 225 square feet. Using Table 7, the individual multiplies the square footage of the damaged area of the deck, 225 square feet, by the cost index of $15 in column 2 of Table 7.

The individual compares the decrease in fair market value, $3,375, with the basis, $200,000. Since the decrease in fair market value is less than the basis, the individual is entitled to a casualty loss deduction of $3,375.

Under § 165(a), a casualty loss must be reduced by insurance or other amounts received, such as amounts given to an individual to repair the damage to the individual’s property due to the casualty. This includes the value of repairs to, or rebuilding of, the individual’s personal-use residential real property provided by another party at no cost to the individual (“no-cost repairs”), such as the repair or rebuilding of an individual’s personal residence by volunteers. No-cost repairs include repairs made for a de minimis or token cost, donation, or gratuity.

An individual who uses the Cost Indexes Safe Harbor Method provided in section 4.04 of this revenue procedure to determine the decrease in the fair market value of the individual’s personal-use residential real property must reduce the loss, determined using the Cost Indexes Safe Harbor Method, by the value of any no-cost repairs. For this purpose, the value of a no-cost repair is based upon the total square footage completely repaired at no cost to the individual. The total square footage completely repaired at no cost to the individual is multiplied by the same cost index the individual used to determine the decrease in the fair market value of the individual’s personal-use residential real property. This amount is then subtracted from the loss determined under the Cost Indexes Safe Harbor Method.

.01 Certain personal belongings. Except as provided in section 7.02 of this revenue procedure, an individual may use the safe harbor method in this section 7.01 to determine the fair market value of the individual’s personal belongings immediately before a 2005 Gulf hurricane in order to compute a casualty or theft loss. If an individual chooses to use the Personal Belongings Safe Harbor Method, the individual must apply that method to all personal belongings for which a loss is claimed under § 165 except those specifically excluded in section 7.02 of this revenue procedure.

To use this safe harbor method, an individual must first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the individual owned the personal belonging using the percentages in the Personal Belongings Valuation Table below. If the personal belonging was owned by the individual for nine or more years, the pre-hurricane fair market value is 10% of the current replacement cost under this safe harbor method.

To determine the casualty or theft loss deduction for personal belongings that were damaged, destroyed or stolen:

(1) Determine the decrease in the fair market value of each personal belonging by subtracting the fair market value of the personal belonging immediately after the hurricane from the fair market value of the personal belonging immediately before the hurricane, determined as described above. If a personal belonging was destroyed or stolen as a result of a 2005 Gulf hurricane its fair market value after the hurricane is zero.

(2) Determine the basis of each of the personal belongings (generally its cost).

(3) Compare the decrease in fair market value (from step 1) to the basis of the personal belonging (from step 2). From the lesser of the basis or decrease in fair market value, subtract any insurance or other reimbursements the individual receives or expects to receive for the personal belonging.

.02 Exclusions. An individual may not use the Personal Belongings Safe Harbor Method for a boat, aircraft, mobile home, trailer, vehicle, or an antique or other asset that maintains or increases its value over time. For purposes of this revenue procedure, a vehicle is an automobile, motorcycle, motor home, recreational vehicle, sport utility vehicle, off-road vehicle, van, or truck.

An individual may determine the pre-hurricane value of a boat, aircraft, mobile home, trailer, or vehicle by consulting established pricing sources. See Rev. Rul. 2002-67, 2002-2 C.B. 873.

.03 Example. An individual’s personal belongings included a chair destroyed by Hurricane Wilma within the Hurricane Wilma disaster area. The individual purchased the chair for $70 four years prior to Hurricane Wilma. The cost to replace the chair with a new chair is $100. The chair is not insured.

Using the Personal Belongings Safe Harbor Method, the individual computes the fair market value of the chair immediately before the hurricane by multiplying the current replacement cost of the chair, $100, by the applicable percentage of replacement cost from the Personal Belongings Valuation table, 60%:

The individual determines the decrease in the fair market value of the chair by subtracting $0, the fair market value of the chair immediately after the hurricane, from $60, the fair market value of the chair immediately before the hurricane.

The individual compares the basis of $70 to the decrease in fair market value of $60. Since the decrease in fair market value is less than the basis, the individual is entitled to a casualty loss deduction of $60.

This revenue procedure is effective for losses that arose in the (1) Hurricane Katrina disaster area on or after August 25, 2005, and are attributable to Hurricane Katrina; (2) Hurricane Rita disaster area on or after September 23, 2005, and are attributable to Hurricane Rita; and (3) Hurricane Wilma disaster area on or after October 23, 2005, and are attributable to Hurricane Wilma.

Individuals who use one of the personal-use residential real property safe harbor methods provided in section 4 of this revenue procedure should attach a statement to Form 4684, Casualties and Thefts, stating that the individual used “Rev. Proc. 2006-32 to determine the individual’s Hurricane Katrina, Rita, or Wilma (as applicable) casualty loss deduction and list the specific safe harbor method used, including the table numbers, where applicable (for example, “I/We used Rev. Proc. 2006-32 in determining my/our Hurricane Katrina casualty loss deduction using the Cost Indexes Safe Harbor Method, specifically Tables 3, 6, and 7.”). Also, in completing Form 4684, if an individual uses any of the personal-use residential real property safe harbor methods in section 4 of this revenue procedure, for each of those properties do not enter an amount in line 5 or 6 and enter the decrease in fair market value determined under the safe harbor method on line 7 and mark “Revenue Procedure 2006-32” in red ink on the top of the Form 4684.

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-0074. Please refer to the Paperwork Reduction Act statement accompanying Form 1040, U.S. Individual Income Tax Return, for further information.

The principal author of this revenue procedure is Norma Rotunno of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Ms. Rotunno at (202) 622-7900 or Sharon Hall at (202) 622-4950 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations under sections 871 and 881 of the Internal Revenue Code (Code) relating to the exclusion from gross income of portfolio interest paid to a nonresident alien individual or foreign corporation. These regulations clarify how the portfolio interest rules apply with respect to interest paid to a partnership (or simple or grantor trust) that has foreign partners (or beneficiaries or owners). This document also provides notice of a public hearing.

Written or electronic comments must be received by August 13, 2006. Outlines of topics to be discussed at the public hearing scheduled for Thursday, September 7, 2006, at 10 a.m., must be received by August 24, 2006.

Send submissions to: CC:PA:LPD:PR (REG-118775-06), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions also may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-118775-06), 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-118775-06). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the proposed regulations, Jason Kleinman, (202) 622-3840; concerning the submissions of comments, the hearing, and/or to be placed on the building access list to attend the 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 the proposed regulations is Jason Kleinman, 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.

Correcting amendment.

This document contains corrections to temporary regulations (T.D. 9258, 2006-20 I.R.B. 886) that were published in the Federal Register on Tuesday April 25, 2006 (71 FR 23856) relating to guidance regarding amendments to tacking rule requirements of Life-Nonlife consolidated regulations under section 1502; and final and temporary regulations (T.D. 9264, 2006-26 I.R.B. 1150), that were published in the Federal Register on Tuesday, May 30, 2006 (71 FR 30591) relating to guidance necessary to facilitate business electronic filing and burden reduction.

The amendment to §1.1502-76T that was published April 25, 2006, is effective April 25, 2006. The amendments to §§1.1563-1 and 602.101 and the removal of §1.1502-76T that was published on May 30, 2006, is effective May 30, 2006.

Grid Glyer, (202) 622-7930 (not a toll-free number).

Internal Revenue Service (IRS), Treasury.

Correction to notice of proposed rulemaking by cross-reference to temporary regulations.

This document contains corrections to a notice of proposed rulemaking by cross-reference to temporary regulations (REG-134317-05, 2006-26 I.R.B. 1184) that was published in the Federal Register on Tuesday, May 30, 2006 (71 FR 30640) relating to guidance necessary to facilitate business electronic filing and burden reduction.

Grid Glyer, (202) 622-7930 (not a toll-free number).