This notice announces that the Treasury Department and IRS will amend regulations section 1.45D-1 to provide guidance on how an entity meets the requirements to be a qualified active low-income community business when its activities involve certain targeted populations under section 45D(e)(2) of the Code. Comments related to section 45D(e)(2) and this notice must be received on or before August 31, 2006.

2006 marginal production rates. This notice announces the applicable percentage under section 613A of the Code to be used in determining percentage depletion for marginal properties for the 2006 calendar year.

2006 enhanced oil recovery credit. The enhanced oil recovery credit for taxable years beginning in the 2006 calendar year is determined without regard to the phase-out for crude oil price increases provided in section 43(b) of the Code.

This notice requests comments for developing record retention standards, including recordkeeping limitation programs, for tax-exempt bond issues. In particular, the notice seeks comments regarding any burdens associated with the record retention requirements that apply to issuers and other parties to tax-exempt bond transactions in order to substantiate compliance with section 103 of the Code. Comments should be received by October 16, 2006.

This notice provides interim guidance on the application of section 409A to accelerated payments to satisfy federal conflict of interest requirements.

Prohibited transactions; first tier excise tax calculations. This ruling describes how the amount involved is calculated with respect to the section 4975 prohibited transaction excise tax if an employer does not timely pay elective deferrals to a qualified plan.

This notice requests comments for developing record retention standards, including recordkeeping limitation programs, for tax-exempt bond issues. In particular, the notice seeks comments regarding any burdens associated with the record retention requirements that apply to issuers and other parties to tax-exempt bond transactions in order to substantiate compliance with section 103 of the Code. Comments should be received by October 16, 2006.

Work opportunity tax credit; welfare-to-work (W-t-W) tax credit. This document sets forth the conclusions of the IRS study relating to Rev. Rul. 2003-112 and announces that no credit will be allowed by the Service for any WOTC and W-t-W tax credit claims without proper certification by a designated local agency in accordance with the statute.

What is the amount involved, for purposes of calculating the prohibited transaction excise tax under § 4975 of the Internal Revenue Code, if an employer does not timely pay elective deferrals to a qualified plan?

Employer X sponsors a calendar year profit-sharing plan that is qualified under § 401(a) of the Internal Revenue Code and contains a qualified cash or deferred arrangement described in § 401(k). Employees of Employer X are paid on a payment date following the close of each payroll period. Pursuant to the terms of the plan, during a specific payroll period, a portion of the pay of each employee was withheld from his or her pay in accordance with a cash or deferred election made by the employee. The aggregate amount withheld for all employees for that payroll period totaled $100,000. Although Employer X could reasonably segregate this amount from its general assets and transmit it to the plan on December 8, 2004, Employer X failed to do so, and did not correct the failure until December 30, 2005.

The interest rate for underpayments under § 6621(a)(2) was 5 percent on December 8, 2004, and on January 1, 2005.

Section 4975(a) imposes a 15% excise tax (the first tier excise tax) on a prohibited transaction. In addition, § 4975(b) imposes a 100% excise tax (the second tier excise tax) on a prohibited transaction if that prohibited transaction is not corrected during the taxable period. The tax applies to any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such). Under § 4975, the applicable excise tax is applied to the amount involved in the prohibited transaction.^[1]

Section 4975(c)(1)(D)^[2] defines a prohibited transaction to include any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. In addition, § 4975(c)(1)(E) defines a prohibited transaction to include any act by a disqualified person who is a fiduciary whereby the fiduciary deals with the income or assets of a plan for his or her own interest or for his or her own account. Section 4975(e)(2) includes in its definition of a disqualified person an employer any of whose employees are covered by the plan.

Section 4975(f)(4) defines the term “amount involved,” generally, as the greater of (1) the amount of money and the fair market value of the other property given or (2) the amount of money and the fair market value of the other property received in such transaction. For purposes of the first tier excise tax, the fair market value is determined as of the date on which the prohibited transaction occurs, whereas, for purposes of the second tier excise tax, the fair market value is the highest fair market value during the taxable period described in § 4975(f)(2).

Section 4975(f)(2) defines the term “taxable period” as the period beginning with the date on which the prohibited transaction occurs and ending on the earliest of (1) the date of the mailing of a statutory notice of deficiency, (2) the date on which the first tier excise tax is assessed, or (3) the date on which correction of the prohibited transaction is completed.

Section 4975(f)(5) defines “correction” as undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards.

Section 141.4975-13 of the Temporary Pension Excise Tax Regulations provides that, under paragraphs (4) and (5) of § 4975(f), § 53.4941(e)-1 of the Foundation Excise Tax Regulations is controlling to the extent those regulations describe terms appearing both in § 4941(e) and § 4975(f). The term “amount involved” appears in both § 4941(e) and § 4975(f).

Section 53.4941(e)-1(b)(2)(ii) provides that, where the transaction involves the use of money or other property, the amount involved is the greater of the amount paid for such use or the fair market value of such use for the period for which the money or other property is used and the amount involved is determined for the entire period that the money or other property is used. In addition, § 53.4941(e)-1(e)(1) provides that, in the instance of a prohibited transaction that is a loan, an additional prohibited transaction is deemed to occur on the first day of each taxable year in the taxable period after the taxable year in which the use occurred. Example (2) of § 53.4941(e)-1(b)(4) illustrates this where principal and interest already have been repaid by stating that, in that context, the amount involved is the principal times the percentage that constitutes the fair market value of the use of money on the date of the transaction for each year or partial year in the taxable period.

Rev. Rul. 2002-43, 2002-2 C.B. 85, addresses a prohibited transaction that spans multiple taxable years in a taxable period where the first tier excise tax rate changes and illustrates that where interest is not repaid in a given year, that interest is added to the principal amount in the subsequent year.

Section 2510.3-102 of the Department of Labor regulations provides that, for purposes of § 4975, amounts withheld from a participant’s wages for contributions to a plan become plan assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets. However, in the case of a plan, such as a section 401(k) plan, in no event does the date on which such contributions become plan assets occur later than the 15^th business day of the month immediately following the month in which the participant contributions are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 15^th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

In the facts above, the failure to transmit the contribution until December 30, 2005, constitutes a prohibited transaction for 2004 and a prohibited transaction for 2005 under § 4975(c)(1). Accordingly, (1) the amount involved for the 2004 prohibited transaction is interest on $100,000 from December 8, 2004, to December 31, 2004, and (2) the amount involved for the 2005 prohibited transaction is interest on the new balance owed to the plan after increasing the principal as a result of there not being a correction of the 2004 prohibited transaction and is calculated from January 1, 2005, to December 30, 2005. The taxable period for the 2004 prohibited transaction begins on December 8, 2004 and ends on December 30, 2005 (the date of the correction), and the taxable period for the 2005 prohibited transaction begins on January 1, 2005 and ends on December 30, 2005 (the date of the correction).

For purposes of calculating the § 4975 excise tax on a timely filed Form 5330 for a failure to transmit participant contributions or amounts that would have otherwise been payable to the participant in cash, under the authority of § 7805, the interest rate for underpayments described in § 6621(a)(2) on the date of the prohibited transaction is an appropriate rate used to calculate the amount involved. The following illustrates the application of this rate to the facts above (and taking into account only the first tier excise tax):

Accordingly, the § 4975(a) first tier excise tax totals $844 ($47 plus $797).

This revenue ruling only applies for purposes of determining the amount involved under § 4975 where there is a failure to transmit participant contributions or amounts that would have otherwise been payable to the participant in cash, and does not apply for self-dealing violations under § 4941.

Solely for purposes of calculating the prohibited transaction excise tax under § 4975, the amount involved if an employer does not timely pay the participant deferrals or contributions to a qualified plan is based on interest on those elective deferrals.

The principal author of this revenue ruling is Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans’ taxpayer assistance telephone service at 877-829-5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday through Friday. Mr. Rubin can be reached at 202-283-9888 (not a toll-free number).

The purpose of this notice is to announce that the Treasury Department and Internal Revenue Service will amend § 1.45D-1 of the Income Tax Regulations to provide guidance on how an entity meets the requirements to be a qualified active low-income community business when its activities involve certain targeted populations under § 45D(e)(2) of the Internal Revenue Code. Taxpayers may rely on this notice until the regulations are issued.

.01 Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in § 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE) described in § 45D(c).

.02 Section 45D(b)(1) provides that an equity investment in a CDE is a “qualified equity investment” if, among other requirements: (A) the investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash; (B) substantially all of the cash is used by the CDE to make qualified low-income community investments; and (C) the investment is designated for purposes of § 45D by the CDE.

.03 Under § 45D(b)(2), the maximum amount of equity investments issued by a CDE that may be designated by the CDE as qualified equity investments shall not exceed the portion of the new markets tax credit limitation set forth in § 45D(f)(1) that is allocated to the CDE by the Secretary under § 45D(f)(2).

.04 Section 45D(c)(1) provides that an entity is a CDE only if, among other requirements, the entity is certified by the Secretary as a CDE.

.05 Section 45D(d)(1) provides that the term “qualified low-income community investment” (QLICI) means: (A) any capital or equity investment in, or loan to, any qualified active low-income community business (QALICB) (as defined in § 45D(d)(2)); (B) the purchase from another CDE of any loan made by the entity that is a QLICI; (C) financial counseling and other services specified in regulations prescribed by the Secretary to businesses located in, and residents of, low-income communities; and (D) any equity investment in, or loan to, any CDE.

.06 Under § 45D(d)(2), a QALICB is any corporation (including a nonprofit corporation) or partnership if, among other requirements, (i) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business within any low-income community, (ii) a substantial portion of the use of the tangible property of the entity (whether owned or leased) is within any low-income community, and (iii) a substantial portion of the services performed for the entity by its employees are performed in any low-income community.

.07 Under § 45D(d)(3), with certain exceptions, a qualified business is any trade or business. The rental to others of real property is a qualified business only if, among other requirements, the real property is located in a low-income community.

.08 Section 221 of the American Jobs Creation Act of 2004 (P.L. 108-357) amended § 45D(e)(2) to provide that the Secretary shall prescribe regulations under which one or more targeted populations (within the meaning of § 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20))) may be treated as low-income communities. The regulations shall include procedures for determining which entities are QALICBs with respect to those populations.

.09 The term “targeted population,” as defined in 12 U.S.C. 4702(20) and 12 C.F.R. 1805.201, means individuals, or an identifiable group of individuals, including an Indian tribe, who (A) are low-income persons; or (B) otherwise lack adequate access to loans or equity investments. Under 12 U.S.C. 4702(17) as interpreted by 12 C.F.R. 1805.104, the term “low-income” means having an income, adjusted for family size, of not more than (A) for metropolitan areas, 80 percent of the area median family income; and (B) for non-metropolitan areas, the greater of (i) 80 percent of the area median family income; or (ii) 80 percent of the statewide nonmetropolitan area median family income.

.10 Section 101(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 109-135) (the Act) added new § 1400M(1), which provides that the Gulf Opportunity Zone (GO Zone) is that portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina.

.11 Section 1400M(2) provides that the Hurricane Katrina disaster area is an area with respect to which a major disaster has been declared by the President before September 14, 2005, under section 401 of the Act by reason of Hurricane Katrina. After determination by the President that a disaster area warrants assistance pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the Federal Emergency Management Agency (FEMA) makes damage assessments. The categories for damage assessment in the wake of a hurricane are: flooded area, saturated area, limited damage, moderate damage, extensive damage, and catastrophic damage.

.12 Under § 1400N(m)(1), a CDE shall be eligible for an allocation under § 45D(f)(2) of the increase in the new markets tax credit limitation described in § 1400N(m)(2) only if a significant mission of the CDE is the recovery and redevelopment of the GO Zone. Section 1400N(m)(2) provides that the new markets tax credit limitation otherwise determined under § 45D(f)(1) shall be increased by an amount equal to $300,000,000 for 2005 and 2006 and $400,000,000 for 2007, to be allocated among CDEs to make QLICIs within the GO Zone. CDEs may make such QLICIs under the existing rules of § 1.45D-1 or using the guidance contained in this notice.

.13 On May 24, 2005, the Community Development Financial Institutions (CDFI) Fund published an advance notice of proposed rulemaking (ANPRM) (70 FR 29658) to seek comments from the public with respect to how targeted populations may be treated as eligible low-income communities under § 45D(e)(2). In response to the ANPRM, comments have been received making various suggestions relating to the definition of the term “targeted populations” and proposing amendments to the requirements to be a QALICB under § 1.45D-1.

.14 In conjunction with the publication of Income Tax Regulations specifying how an entity meets the requirements to be a QALICB when its activities involve certain targeted populations under § 45D(e)(2), the CDFI Fund shall provide additional guidance with respect to: (A) the definition of such targeted populations; and (B) administrative procedures relating to the certification of CDEs wishing to serve such populations. Taxpayers may rely upon this notice until such guidance is issued.

.01 Notice of Proposed Rulemaking. The Treasury Department and Internal Revenue Service are developing regulations to provide guidance on how an entity meets the requirements to be a QALICB when its activities involve certain targeted populations under § 45D(e)(2). Taxpayers may rely on this notice until the regulations are issued. Based upon the statutory changes made by the American Jobs Creation Act of 2004 and in response to comments received in response to the CDFI Fund ANPRM, the Treasury Department and Internal Revenue Service expect to amend § 1.45D-1 to provide guidance consistent with this notice.

.02 Low-Income Community. Section 1.45D-1 will be amended to provide that, for purposes of § 45D(e)(2), targeted populations that will be treated as a low-income community are individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons as defined in section 3.03 of this notice or who are individuals who otherwise lack adequate access to loans or equity investments as defined in section 3.04 of this notice.

.03 Low-Income Persons.

(1) Definition. For purposes of § 45D(e)(2), an individual shall be considered to be low-income if the individual’s family income, adjusted for family size, is not more than (A) for metropolitan areas, 80 percent of the area median family income; and (B) for non-metropolitan areas, the greater of (i) 80 percent of the area median family income; or (ii) 80 percent of the statewide nonmetropolitan area median family income.

(2) QALICB Requirements for Low-Income Targeted Populations.

(a) In general. Section 1.45D-1(d)(4)(A), (B), and (C) will be amended to provide that a QALICB for low-income targeted populations, with respect to any taxable year, is a corporation (including a nonprofit corporation) or a partnership engaged in the active conduct of a qualified business as defined in § 1.45D-1(d)(5) if:

(i) at least 50 percent of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with individuals who are low-income persons for purposes of § 45D(e)(2),

(ii) at least 40 percent of the entity’s employees are individuals who are low-income persons for purposes of § 45D(e)(2), or

(iii) at least 50 percent of the entity is owned by individuals who are low-income persons for purposes of § 45D(e)(2).

(b) Employee. The determination of whether an employee is a low-income person must be made at the time the employee is hired. If the employee is a low-income person at the time of hire, that employee is considered a low-income person for purposes of § 45D(e)(2) throughout the time of employment, without regard to any increase in the employee’s income after the time of hire.

(c) Owner. The determination of whether an owner is a low-income person must be made at the time the QLICI is made. If an owner is a low-income person at the time the QLICI is made, that owner is considered a low-income person for purposes of § 45D(e)(2) throughout the time the ownership interest is held by that owner.

(3) 120-Percent-Income Restriction.

(a) In general.

(i) In no case will an entity be treated as a QALICB under section 3.03 of this notice if the entity is located in a population census tract for which the median family income exceeds 120 percent of:

(A) in the case of a tract not located within a metropolitan area, the statewide median family income, or

(B) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (120-percent-income restriction).

(ii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 120-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use.

(b) Population Census Tract Location.

(i) For purposes of the 120-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 120 percent of the applicable median family income under section 3.03(3)(a)(i)(A) or (B) of this notice (non-qualifying population census tract) if:

(A) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in § 1.45D-1(d)(5)) within one or more non-qualifying population census tracts (non-qualifying gross income amount);

(B) at least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts (non-qualifying tangible property usage); and

(C) at least 40 percent of the services performed for the entity by its employees are performed in one or more non-qualifying population census tracts (non-qualifying services performance).

(ii) The entity is considered to have the non-qualifying gross income amount if the entity has non-qualifying tangible property usage or non-qualifying services performance of at least 50 percent instead of 40 percent.

(iii) If the entity has no employees, the entity is considered to have the non-qualifying gross income amount as well as non-qualifying services performance if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts.

(4) Rental of Real Property for Low-Income Targeted Populations. In addition, § 1.45D-1(d)(5)(ii) will be amended to provide that the rental to others of real property for low-income targeted populations that otherwise satisfies the requirements to be a qualified business will be treated as located in a low-income community if at least 50 percent of the entity’s total gross income is derived from rentals to individuals who are low-income persons for purposes of section 45D(e)(2) and/or to a QALICB that meets the requirements for low-income targeted populations under section 3.03(2)(a)(i) or (ii) and 3.03(2)(b) of this notice.

.04 Individuals who Otherwise Lack Adequate Access to Loans or Equity Investments.

(1) In general. Section 3.04 of this notice may be applied only with regard to QLICIs made under the increase in the new markets tax credit limitation pursuant to § 1400N(m)(2). Therefore, only CDEs with a significant mission of recovery and redevelopment of the GO Zone that receive an allocation from the increase described in § 1400N(m)(2) may make QLICIs from that allocation pursuant to the rules in section 3.04 of this notice.

(2) GO Zone Targeted Population. For purposes of targeted populations under § 45D(e)(2), an individual is considered to otherwise lack adequate access to loans or equity investments only if the individual was displaced from his or her principal residence as a result of Hurricane Katrina and/or the individual lost his or her principal source of employment as a result of Hurricane Katrina (GO Zone Targeted Population). In order to meet this definition, the individual’s principal residence or principal source of employment, as applicable, must have been located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.

(3) QALICB Requirements for the GO Zone Targeted Population.

(a) In general. Section 1.45D-1(d)(4)(A), (B), and (C) will be amended to provide that a QALICB for the GO Zone Targeted Population, with respect to any taxable year, is a corporation (including a nonprofit corporation) or a partnership engaged in the active conduct of a qualified business as defined in § 1.45D-1(d)(5) if:

(i) at least 50 percent of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with the GO Zone Targeted Population, low-income persons as defined in section 3.03 of this notice, or some combination thereof;

(ii) at least 40 percent of the entity’s employees consist of the GO Zone Targeted Population, low-income persons as defined in section 3.03 of this notice, or some combination thereof; or

(iii) at least 50 percent of the entity is owned by the GO Zone Targeted Population, low-income persons as defined in section 3.03 of this notice, or some combination thereof.

(b) Location.

(i) In general. In order to be a QALICB under section 3.04(3) of this notice, the entity must be located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina (qualifying population census tract).

(ii) Determination.

(A) For purposes of the preceding paragraph, an entity will be considered to be located in a qualifying population census tract if:

(1) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in § 1.45D-1(d)(5)) within one or more qualifying population census tracts (gross income requirement);

(2) at least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more qualifying population census tracts (use of tangible property requirement); and

(3) at least 40 percent of the services performed for the entity by its employees are performed in one or more qualifying population census tracts (services performed requirement).

(B) The entity is deemed to satisfy the gross income requirement if the entity meets either the use of tangible property requirement or the services performed requirement of at least 50 percent instead of 40 percent.

(C) If the entity has no employees, the entity is deemed to satisfy the services performed requirement as well as the gross income requirement if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more qualifying population census tracts.

(4) 200-Percent-Income Restriction.

(a) In general.

(i) In no case will an entity be treated as a QALICB under section 3.04 of this notice if the entity is located in a population census tract for which the median family income exceeds 200 percent of:

(A) in the case of a tract not located within a metropolitan area, the statewide median family income, or

(B) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income (200-percent-income restriction).

(ii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is not located in a metropolitan area.

(iii) The 200-percent-income restriction shall not apply to an entity located within a population census tract with a population of less than 2,000 if such tract is located in a metropolitan area and more than 75 percent of the tract is zoned for commercial or industrial use.

(b) Population Census Tract Location.

(i) For purposes of the 200-percent-income restriction, an entity will be considered to be located in a population census tract for which the median family income exceeds 200 percent of the applicable median family income under section 3.04(4)(a)(i)(A) or (B) of this notice (non-qualifying population census tract) if:

(A) at least 50 percent of the total gross income of the entity is derived from the active conduct of a qualified business (as defined in § 1.45D-1(d)(5)) within one or more non-qualifying population census tracts (non-qualifying gross income amount);

(B) at least 40 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts (non-qualifying tangible property usage); and

(C) at least 40 percent of the services performed for the entity by its employees are performed in one or more non-qualifying population census tracts (non-qualifying services performance).

(ii) The entity is considered to have the non-qualifying gross income amount if the entity has non-qualifying tangible property usage or non-qualifying services performance of at least 50 percent instead of 40 percent.

(iii) If the entity has no employees, the entity is considered to have the non-qualifying gross income amount as well as non-qualifying services performance if at least 85 percent of the use of the tangible property of the entity (whether owned or leased) is within one or more non-qualifying population census tracts.

(5) Rental of Real Property for the GO Zone Targeted Population. In addition, § 1.45D-1(d)(5)(ii) will be amended to provide that the rental to others of real property for the GO Zone Targeted Population that otherwise satisfies the requirements to be a qualified business will be treated as located in a low-income community if at least 50 percent of the entity’s total gross income is derived from rentals to the GO Zone Targeted Population, low-income persons as defined in section 3.03 of this notice, or some combination thereof and/or to a QALICB that meets the requirements for the GO Zone Targeted Population under section 3.04(3)(a)(i) or (ii) of this notice.

The regulations will be revised to incorporate the guidance set forth in this notice. Taxpayers may rely on this notice for designations made by the Secretary after October 22, 2004. Therefore, taxpayers may apply section 3.03 of this notice for all QLICIs made on or after October 22, 2004, and may apply section 3.04 of this notice for all QLICIs made by CDEs from allocations under § 1400N(m).

.01 The Internal Revenue Service and Treasury Department invite taxpayers to submit written comments on issues relating to § 45D(e)(2) and this notice. In particular, the Internal Revenue Service and Treasury Department encourage taxpayers to submit written comments regarding circumstances under which an entity can be a QALICB when its activities involve individuals, or an identifiable group of individuals, including an Indian tribe, who otherwise lack adequate access to loans or equity investments under 12 U.S.C. 4702(20).

.02 Send comments to: CC:PA:LPD:PR (Notice 2006-60), room 5203, Internal Revenue Service, PO Box 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 (Notice 2006-60), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Submissions may also be sent electronically via the Internet to the following e-mail address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2006-60) in the subject line. Comments must be received on or before August 31, 2006.

The principal author of this notice is Lauren Ross Taylor of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Taylor at (202) 622-3040 (not a toll-free call).

This notice announces the applicable percentage under section 613A of the Internal Revenue Code to be used in determining percentage depletion for marginal properties for the 2006 calendar year.

Section 613A(c)(6)(C) of the Code defines the term “applicable percentage” for purposes of determining percentage depletion for oil and gas produced from marginal properties. The applicable percentage is the percentage (not greater than 25 percent) equal to the sum of 15 percent, plus one percentage point for each whole dollar by which $20 exceeds the reference price (determined under § 45K(d)(2)(C)) for crude oil for the calendar year preceding the calendar year in which the taxable year begins. The reference price determined under § 29(d)(2)(C) for the 2005 calendar year is $50.26.

Table 1 contains the applicable percentages for marginal production for taxable years beginning in calendar years 1991 through 2006.

The principal author of this notice is Jaime C. Park of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Park at (202) 622-3120 (not a toll-free call).

Section 43(b)(3)(B) of the Internal Revenue Code requires the Secretary to publish an inflation adjustment factor. The enhanced oil recovery credit under § 43 for any taxable year is reduced if the “reference price,” determined under § 45K(d)(2)(C), for the calendar year preceding the calendar year in which the taxable year begins is greater than $28 multiplied by the inflation adjustment factor for that year. The credit is phased out in any taxable year in which the reference price for the preceding calendar year exceeds $28 (as adjusted) by at least $6.

The term “inflation adjustment factor” means, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990.

Because the reference price for the 2005 calendar year ($50.26) exceeds $28 multiplied by the inflation adjustment factor for the 2005 calendar year by $11.78, the credit for enhanced oil recovery credit for qualified costs paid or incurred in 2006 is phased out completely.

Table 1 contains the GNP implicit price deflator used for the 2006 calendar year, as well as the previously published GNP implicit price deflators used for the 1991 through 2005 calendar years.

Table 2 contains the inflation adjustment factor and the phase-out amount for taxable years beginning in the 2006 calendar year as well as the previously published inflation adjustment factors and phase-out amounts for taxable years beginning in 1991 through 2005 calendar years.

The principal author of this notice is Jaime C. Park of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Park at (202) 622-3120 (not a toll-free call).

This notice requests comments for developing record retention standards, including recordkeeping limitation programs, for tax-exempt bond issues. In particular, the Service is seeking comments on managing any burdens potentially associated with the record retention requirements that apply to issuers and other parties to tax-exempt bond transactions in order to substantiate compliance with section 103 of the Internal Revenue Code and related provisions.

In general, under section 103(a), gross income does not include interest on any State or local bond if certain requirements are met. Various provisions of the Code and the Income Tax Regulations, including, but not limited to, sections 103, 141-150, and 6001, impose record retention requirements on issuers and other parties to tax-exempt bond transactions in order to substantiate compliance with section 103 and related provisions.

The Service has received inquiries regarding the scope and nature of records that issuers and other parties to tax-exempt bond transactions must retain. In addition, the Service has received requests for guidance addressing State and local governmental recordkeeping requirements in the tax-exempt bond context. For example, industry representatives have recommended that the Service issue guidance that would permit a combination of assumptions, certifications, and summaries of original documents to ease the compliance burden.

The Service requests comments for developing record retention standards, including recordkeeping limitation programs, for tax-exempt bond issues. Comments are invited regarding all aspects of compliance with recordkeeping requirements for tax-exempt bond transactions, including whether different programs may be appropriate for specific types of bond records or specific classes of tax-exempt bond issues. Interested persons should send comments to CC:PA:LPD:PR (Notice 2006-63), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice 2006-63), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C. Comments may also be transmitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include “Notice 2006-63” in the subject line of any electronic communications. Written comments should be received by October 16, 2006. All comments will be available for public inspection and copying.

The principal authors of this notice are Barbara M. Pettoni of the Office of Associate Chief Counsel (Procedure & Administration) and Steven A. Chamberlin of the Tax Exempt Bonds Division, Office of Outreach, Planning & Review (Tax Exempt & Government Entities). For further information regarding this notice, please contact Ms. Pettoni at (202) 622-4910 or Mr. Chamberlin at (636) 940-6466 (not a toll-free call).

Section 409A was added to the Internal Revenue Code as part of the American Jobs Creation Act of 2004, Pub. Law No. 108-357, 118 Stat. 1418. Section 409A generally provides that all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. The IRS issued Notice 2005-1, 2005-1 C.B. 274, on December 20, 2004 (published as modified on January 6, 2005) and issued proposed regulations (REG-158080-04, 2005-2 C.B. 786) under section 409A on September 29, 2005 (70 Fed. Reg. 57930 (Oct. 4, 2005)). The proposed regulations do not limit the application of the guidance provided in Notice 2005-1.

Section 409A(a)(3) provides that a plan may not permit acceleration of the time or schedule of payment for nonqualified deferred compensation subject to section 409A except as provided in regulations by the Secretary. The legislative history to section 409A provides that it was intended that the Secretary would provide limited exceptions to the prohibition on acceleration of payments, including, for example, a distribution necessary to comply with Federal conflict of interest requirements. H.R. Conf. Rep. No. 108-755, at 731 (2004). Both Notice 2005-1, Q&A-15(c) and § 1.409A-3(h)(2)(ii) of the proposed regulations provide that a plan may permit such acceleration of the time and schedule of a payment of nonqualified deferred compensation subject to the requirements of section 409A as may be necessary to comply with a certificate of divestiture (as defined in section 1043(b)(2)).

Commentators, including the Office of Government Ethics, expressed concern about the indication in Notice 2005-1 and the proposed regulations that a “certificate of divestiture” (as defined in section 1043(b)(2)) would be effective to permit an accelerated payment of nonqualified deferred compensation subject to section 409A. The Office of Government Ethics issues such certificates of divestiture so that an employee may defer recognition of capital gains when property is sold to comply with conflict of interest provisions. Because payment under a nonqualified deferred compensation plan is treated as ordinary income, rather than as capital gain, the Office of Government Ethics could not issue a certificate of divestiture in connection with an accelerated payment under such a plan.

Accordingly, until further guidance is issued, a nonqualified deferred compensation arrangement subject to section 409A may permit such acceleration of the time or schedule of payment as is necessary to satisfy requirements established pursuant to a written determination by the Office of Government Ethics that: (1) divestiture of the financial interest or termination of the financial arrangement is reasonably necessary to comply with any Federal conflict of interest statute, regulation, rule or executive order (including section 208 of title 18, United States Code), or is requested by a congressional committee as a condition of confirmation; and (2) specifies the financial interest to be divested or terminated. Of course, amounts actually paid pursuant to such acceleration generally will be includible in income by the recipient.

The principal author of this notice is Stephen Tackney of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the Treasury Department and the IRS participated in its development. For further information regarding this notice, contact Stephen Tackney at (202) 927-9639 (not a toll-free call).

On August 8, 2005, in IR-2005-81, the Internal Revenue Service and the Treasury Department announced that the Industry Issue Resolution (IIR) Program would address concerns relating to “member of a family receiving assistance” requirements for the work opportunity and welfare-to-work tax credits. Employers had expressed concern that, before the issuance of Rev. Rul. 2003-112, 2003-2 C.B. 1007, states applied the family-member requirements in a manner inconsistent with the holding in that revenue ruling and, as a result, employers were not permitted to claim credits that should have been allowed. A multi-functional team was formed to analyze the relevant facts. Based upon the analysis conducted by the team, the IRS and Treasury have concluded that the states applied the family-member requirements in a manner consistent with the holding of Rev. Rul. 2003-112 in all but a small number of cases and that these cases had an insignificant impact on the aggregate amount of work opportunity and welfare-to-work tax credits employers were permitted to claim. Consequently, no administrative resolution through the IIR program is appropriate.

Section 51 of the Internal Revenue Code allows a work opportunity tax credit (WOTC) to an employer who paid qualified wages during the taxable year to an individual who is a member of a targeted group described in section 51(d). To be a member of a targeted group, an individual must be certified by the designated local agency (state workforce agency) as satisfying the applicable conditions for that group. To qualify for three of the targeted groups (qualified IV-A recipient, qualified veteran, and qualified food stamp recipient), the individual must be certified by the state workforce agency as being “a member of a family receiving assistance” under a stated benefit program for a specified period of time.

Section 51A allows a welfare-to-work (W-t-W) tax credit to an employer who paid qualified wages during the taxable year to an individual who is a long-term family assistance recipient. A long-term family assistance recipient under section 51A must be certified as “a member of a family receiving assistance” under rules similar to the certification requirements for qualified IV-A recipients, qualified veterans, and qualified food stamp recipients under section 51.

In 2002, the Internal Revenue Service received a request for clarification of the standards under which an individual could be certified as “a member of a family receiving assistance” who qualifies for inclusion in one of these four groups (affected groups). The Service then issued Rev. Rul. 2003-112, which holds that an individual can be certified as a member of a family receiving assistance if the individual’s family receives assistance for the requisite period and the individual is included on the grant (and thus receives assistance) for some portion of the specified period.

During the period before publication of the ruling, some state workforce agencies might have applied standards differing from the standard in Rev. Rul. 2003-112. Because the Service did not limit the retroactive effect of the ruling, the application of a different standard could have resulted in an incorrect denial of certification for some employees. Under normal procedures, an employer that believes a denial of certification is incorrect would request that the state workforce agency reconsider its denial and would be allowed a credit only if, after reconsideration, the agency certified the employee.

A trade association representing service providers that screen employees for credit eligibility and assist employers in submitting requests for their certification proposed an alternative procedure. Under the alternative procedure, employers would be permitted to claim credits for a percentage of requests for certification that were denied before issuance of Rev. Rul. 2003-112. The proposal became the subject of an Industry Issue Resolution (IIR) project.

The trade association asserted that its member data indicated that certification rates varied among states and were lower for the targeted groups requiring certification as a member of a family receiving assistance (affected groups). However, the data did not provide a complete picture of WOTC employers and certification rates. The data also did not differentiate between denials for administrative reasons (such as lack of timeliness or original signature) and denials for technical reasons (failure to meet a statutory requirement for a targeted group), nor did it provide a valid basis for determining what proportion of the denials for technical reasons were the result of the application of a standard differing from that set forth in Rev. Rul. 2003-112.

In response to the IIR submission, the Service undertook a study to determine whether a significant portion of the denials of requests for certification issued before the publication of Rev. Rul. 2003-112 were the result of state agencies taking a position inconsistent with the conclusion in the revenue ruling. In doing so, the Service worked with state authorities and the Department of Labor to collect data on the reasons for denials of requests for certification in the four affected groups and conducted a statistical analysis of that data. The Service also considered information presented by interested parties. Based upon this study, the Service has determined that only an insignificant fraction (less than one percent) of the denials of requests for certification in the four affected groups resulted from state workforce agencies taking a position inconsistent with Rev. Rul. 2003-112.

Accordingly, the Service and Treasury have concluded that any failures prior to the issuance of Rev. Rul. 2003-112 to apply a standard consistent with the standard set forth in the ruling had a negligible effect on the aggregate amount of credits taxpayers were permitted to claim. Therefore, no Internal Revenue Service administrative resolution is necessary or appropriate, and no credit will be allowed by the Service for any WOTC and W-t-W tax credit claims without proper certification by a designated local agency in accordance with the statute. An employer that believes an employee was improperly denied certification prior to the publication of Rev. Rul. 2003-112 may request that the appropriate state workforce agency reconsider the denial.

The principal author of this announcement is Karin Loverud of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Karin Loverud at (202) 622-6080 (not a toll-free call).