Temporary and proposed regulations under section 45G of the Code provide guidance regarding the railroad track maintenance credit determined for qualified railroad track maintenance expenditures paid or incurred by a Class II or Class III railroad and other eligible taxpayers during the taxable year. A public hearing on the proposed regulations is scheduled for January 9, 2007.

Temporary and proposed regulations under section 45G of the Code provide guidance regarding the railroad track maintenance credit determined for qualified railroad track maintenance expenditures paid or incurred by a Class II or Class III railroad and other eligible taxpayers during the taxable year. A public hearing on the proposed regulations is scheduled for January 9, 2007.

Proposed regulations under section 853 of the Code would eliminate country-by-country reporting by a regulated investment company (RIC) to its shareholders of foreign source income received by the RIC and foreign taxes paid by the RIC. Under these regulations, the IRS and the Treasury Department would continue to require the reporting of per-country information by RICs to the IRS because this information remains relevant to monitoring compliance with the foreign tax credit provisions.

This notice sets forth additional transition relief under section 409A. The notice generally extends through December 31, 2007, the transition relief that previously had been provided through December 31, 2006, subject to certain exceptions.

This notice provides adjustments to the limitation on housing expenses for purposes of section 911 of the Code for specific locations, based on geographic differences in housing costs, relative to housing costs in the United States.

This notice sets forth additional transition relief under section 409A. The notice generally extends through December 31, 2007, the transition relief that previously had been provided through December 31, 2006, subject to certain exceptions.

Section 906 of Pension Protection Act of 2006; transition rule. This notice provides transition relief for plans of Indian tribal governments to comply with the changes made by section 906 of the Pension Protection Act of 2006 under a reasonable and good faith standard, pending further guidance. The notice also provides for Indian tribal governments to implement a new plan for commercial employees by September 30, 2007, to satisfy this standard as a part of this transition relief.

Weighted average interest rate update; corporate bond indices; 30-year Treasury securities. The weighted average interest rate for October 2006 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth.

Resellers of air transportation. This ruling explains the tax consequences under section 4261 of the Code when a traveler purchases a ticket for taxable transportation from a third party intermediary other than the airline. Rev. Ruls. 75-296 and 80-31 distinguished.

This notice provides guidance on the alternative fuel and alternative fuel mixture credit and payments and the imposition of tax on alternative fuel and alternative fuel mixtures. The notice also provides guidance on the excise tax exemption for blood collector organizations.

Per diem allowances. This procedure provides optional rules for deeming substantiated the amount of certain business expenses of traveling away from home reimbursed to an employee or deductible by an employee or self-employed individual. Rev. Proc. 2005-67 superseded.

This document contains corrections to a notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing (REG-112994-06, 2006-27 I.R.B. 47) relating to the determination of whether a foreign entity shall be treated as a surrogate foreign corporation under section 7874(a)(2)(B) of the Code.

Internal Revenue Service (IRS), Treasury.

Temporary regulations.

This document contains temporary regulations that provide rules for claiming the railroad track maintenance credit under section 45G of the Internal Revenue Code for qualified railroad track maintenance expenditures paid or incurred by a Class II railroad or Class III railroad and other eligible taxpayers during the taxable year. These temporary regulations reflect changes to the law made by the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005. The text of these temporary regulations also serves as the text of the proposed regulations (REG-142270-05) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

Effective Date: These regulations are effective on September 8, 2006.

Applicability Date: For dates of applicability, see §1.45G-1T(g).

Winston H. Douglas, (202) 622-3110 (not a toll-free number).

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

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

* * * * *

In the situation described below, what is the amount paid for taxable transportation for purposes of the tax imposed by § 4261 of the Internal Revenue Code, which person is liable for the tax, and which person is responsible for collecting the tax, filing the required return, and paying over the tax to the government?

Traveler wants to travel between two cities in the United States on a scheduled commercial airline (Airline). Instead of contacting Airline directly for a ticket, Traveler contacts Intermediary, which is in the travel services industry. When Traveler orders a ticket, Traveler pays Intermediary Price X plus Fee Y. Traveler also pays Intermediary the amounts Airline charges on account of the tax imposed by § 4261 and the passenger facility charge (PFC) imposed under § 1113(e) of the Federal Aviation Act of 1958. (See Rev. Rul. 91-61, 1991-2 C.B. 377, for additional information regarding the PFC.) Traveler could have bought a ticket with the same itinerary and class of service from Airline without using Intermediary.

Intermediary is neither related to Airline nor under its supervision or control; thus, each transaction between Intermediary and Airline is made at arm’s length. Intermediary neither operates nor charters aircraft. The amount of Fee Y is set solely by Intermediary. Fee Y compensates Intermediary for the service of facilitating Traveler’s purchase of an airline ticket. Intermediary is not compensated by Airline for any services Intermediary provides.

Intermediary passes on to Airline Price X and the amounts Airline charges on account of the tax imposed by § 4261 and the PFC. Intermediary retains Fee Y. Price X and the amounts Airline charges on account of the tax imposed by § 4261 and the PFC are the only amounts required to be paid to Airline as a condition to Traveler receiving air transportation from Airline, and Airline issues a ticket to Traveler in exchange for Intermediary’s payment of these amounts.

Section 4261(a) imposes a tax on the amount paid for taxable transportation (as defined in § 4262) of any person by air and § 4261(b) imposes a tax on the amount paid for each domestic segment of taxable transportation. The § 4261(a) tax is a percentage of the amount paid and the § 4261(b) tax is a fixed dollar amount for each segment. “Taxable transportation” generally includes air transportation that begins and ends in the United States.

Section 4261(d) provides that the tax imposed by § 4261 shall be paid by the person making the payment subject to tax and § 4291 generally provides that any person receiving any payment for taxable air transportation must collect the amount of the tax from the person making the payment. The collector is generally required by regulations to make deposits, file returns, and pay over the tax to the government.

Rev. Rul. 75-296, 1975-2 C.B. 440, considers the application of the § 4261 tax to two situations involving travel agencies. One travel agency (Agency A) is an independent broker that charters an aircraft from an airline and sells tours to individuals and groups. The other travel agency (Agency B), which represents an airline and is under the supervision and control of that airline, is not licensed as a broker. When Agency B sells tours it retains a commission and remits the remainder of the amount collected to the airline. The ruling holds that Agency A is operating as a principal and is required to collect the tax and pay it over to the government. Agency B, because it operates under the control of the airline, is an agent of the airline. As the airline’s agent, Agency B must collect the tax and remit it to the airline, which, in turn, must pay it over to the government.

Rev. Rul. 80-31, 1980-1 C.B. 251, considers the application of the § 4261 tax to a service charge added by an airline to the price of a ticket for the administrative costs involved in the use of that ticket by another person in another city. The ruling concludes that the charge was not an amount paid for taxable transportation because the service is optional, not reasonably necessary to the air transportation itself, and bears a reasonable relation to the cost of providing the service.

S. Rep. No. 105-33, at 158 (1997), 1997-4 C.B. 1067, 1238 (relating to the legislation that became Pub. L. 105-94, 1997-4 (Vol. 1) C.B. 1, which made numerous changes to the air transportation tax), notes that the “air passenger transportation excise taxes are imposed on passengers; transportation providers (generally airlines) are responsible for collecting and remitting the taxes to the Federal Government.”

Under the facts of this revenue ruling, Airline is providing the transportation to Traveler. Intermediary is not providing transportation either directly or indirectly; it is simply facilitating the purchase of taxable transportation. Intermediary is simply a conduit through which Traveler pays Airline for taxable transportation. Thus, Traveler is the person that makes the payment subject to the § 4261 tax and Airline is the person that receives the taxable payment.

An airline’s costs associated with selling tickets are generally necessary to the air transportation the airline provides. This includes the airline’s costs of selling tickets through an unrelated third party. However, Intermediary’s selling costs and profit, if any, are not charged by, or passed on to, Airline and are not reasonably necessary to the air transportation Airline provides to Traveler.

Fee Y is not received by Airline or by an agent of Airline, and is not an “amount paid” for taxable transportation. Rather, Fee Y compensates Intermediary for the service of facilitating Traveler’s purchase of an airline ticket. Therefore, Price X is the amount paid for taxable transportation and is the base on which the § 4261(a) tax is calculated.

Rev. Rul. 75-296 is distinguishable from this case since that ruling addresses only situations in which a travel agent is either acting as a principal on its own behalf by chartering an entire aircraft or acting as an agent of the airline in selling individual tickets. It does not address the situation here in which Intermediary is not under the supervision or control of Airline and is acting on behalf of, and receiving compensation from, Traveler.

Rev. Rul. 80-31 is distinguishable from this case because that ruling did not involve amounts paid to an independent third party that is not under the airline’s supervision or control.

Price X is the amount paid for taxable transportation, Traveler is liable for the tax imposed on Price X, and Airline is responsible for collecting the tax from Traveler, filing the required return, and paying over the tax to the government. Airline may collect the tax and the PFC through Intermediary as part of the transaction in which it receives payment of Price X.

Rev. Ruls. 75-296 and 80-31 are distinguished.

The principal author of this revenue ruling is Taylor Cortright of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Ms. Cortright at (202) 622-3130 (not a toll-free call).

This notice provides transition relief under section 409A of the Internal Revenue Code (Code), applicable to nonqualified deferred compensation plans. The IRS and Treasury Department are currently in the process of finalizing the proposed regulations under section 409A that were published October 4, 2005. The proposed regulations contained a proposed effective date of January 1, 2007 for the final regulations. Although the IRS and Treasury Department expect to issue the final regulations before the end of 2006, commentators have expressed concern that there will not be sufficient time between the issuance of the final regulations and the proposed effective date for taxpayers to analyze the final regulations and come into compliance with them. Commentators have also raised questions and concerns about certain other aspects of the transition relief.

Accordingly, as described in more detail below, this notice provides further transition relief by:

Section 409A was added to the Code by section 885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418). Section 409A generally provides that unless certain requirements are met, 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. Section 409A also includes rules applicable to certain trusts or similar arrangements associated with nonqualified deferred compensation, where such arrangements are located outside of the United States or are restricted to the provision of benefits in connection with a decline in the financial health of the sponsor.

On December 20, 2004, the IRS issued Notice 2005-1, 2005-2 I.R.B. 274 (published as modified on January 6, 2005)), setting forth initial guidance with respect to the application of section 409A, and supplying transition guidance in accordance with the statutory provisions. A notice of proposed rulemaking (REG-158080-04, 2005-43 I.R.B. 786 [70 FR 57930]) was published in the Federal Register on October 4, 2005. The preamble to the proposed regulations clarified and extended certain provisions of the transition guidance provided in Notice 2005-1, generally through December 31, 2006.

Under the proposed regulations, the final regulations were proposed to become effective January 1, 2007. The Treasury Department and the IRS anticipate that the final regulations will be published in 2006. However, in order to allow sufficient time for taxpayers and their representatives to analyze the final regulations and come into compliance, the effective date for the final regulations is expected to be January 1, 2008. Accordingly, this notice provides additional transition relief applicable through December 31, 2007.

.01. Amendment and operation of plans adopted on or before December 31, 2007

A plan adopted on or before December 31, 2007 will not be treated as violating section 409A(a)(2), (3) or (4) on or before December 31, 2007 if the plan is operated through December 31, 2007 in reasonable, good faith compliance with the provisions of section 409A and applicable provisions of Notice 2005-1 and any other generally applicable guidance published with an effective date prior to January 1, 2008, and the plan is amended on or before December 31, 2007 to conform to the provisions of section 409A and the final regulations with respect to amounts subject to section 409A. For such periods, to the extent an issue is not addressed in an applicable provision of Notice 2005-1 or other published guidance with an effective date prior to January 1, 2008, the plan must be operated consistent with a good faith, reasonable interpretation of section 409A, and, to the extent not inconsistent therewith, the plan’s terms.

Compliance with the proposed regulations, or the final regulations prior to their effective date, is not required. However, for periods before January 1, 2008, compliance with the proposed regulations or the final regulations will constitute reasonable, good faith compliance with the statute. To the extent that a provision of either the proposed regulations or the final regulations is inconsistent with a provision of Notice 2005-1, or a provision of the proposed regulations is inconsistent with a provision of the final regulations, the plan may comply with the provision of the proposed regulations, the final regulations or Notice 2005-1.

A plan will not be operating in good faith compliance if discretion provided under the terms of the plan is exercised in a manner that causes the plan to fail to meet the requirements of section 409A. For example, if an employer retains the discretion under the terms of the plan to delay or extend payments under the plan in a manner that violates section 409A and exercises such discretion, the plan will not be considered to be operated in good faith compliance with section 409A with regard to any plan participant. However, an exercise of a right under the terms of the plan by a participant solely with respect to that participant’s benefits under the plan, in a manner that causes the plan to fail to meet the requirements of section 409A, will not be considered to result in the plan failing to be operated in good faith compliance with respect to other participants. For example, the request for and receipt of an immediate payment permitted under the terms of the plan if the participant forfeits 20 percent of the participant’s benefits (a haircut) will be considered a failure of the plan to meet the requirements of section 409A with respect to that participant, but not with respect to all other participants under the plan.

.02. Change in payment elections or conditions on or before December 31, 2007

The transition relief provided in section XI.C. of the preamble to the proposed regulations generally continues to apply through December 31, 2007, with certain clarifications described below, and subject to limitations for certain discounted stock rights also described below. Accordingly, with respect to amounts subject to section 409A, a plan may provide, or be amended to provide, for new payment elections on or before December 31, 2007, with respect to both the time and form of payment of such amounts and the election or amendment will not be treated as a change in the time or form of payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), provided that the plan is so amended and elections are made on or before December 31, 2007. With respect to an election or amendment to change a time and form of payment made on or after January 1, 2006 and on or before December 31, 2006, the election or amendment may apply only to amounts that would not otherwise be payable in 2006 and may not cause an amount to be paid in 2006 that would not otherwise be payable in 2006. With respect to an election or amendment to change a time and form of payment made on or after January 1, 2007 and on or before December 31, 2007, the election or amendment may apply only to amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007. So, for example, where an amount would otherwise be payable upon an event, such as a separation from service, an election in 2006 cannot change the amount that would be payable in 2006 if the service provider separated from service in 2006. In addition, a deferral election may be made with respect to an amount that is a short-term deferral within the meaning of proposed § 1.409A-1(b)(4), provided that the election is made before January 1, 2008 and before the year in which the amount would otherwise have been paid.

This provision applies to elections or amendments by a service provider, a service recipient, or both a service provider and a service recipient. A service provider or service recipient may make more than one change or amendment under this relief, provided that each such change or amendment is made in accordance with the deadlines and conditions set forth in the applicable transition relief. For example, a service provider that in 2005 elected to change the time and form of payment of deferred compensation to a lump sum payment in 2010, may elect again in 2006 or 2007 to change the time and form of payment in accordance with this paragraph. However, a service provider that in 2005 elected to be paid an amount in 2006 may not in 2006 change the time and form of payment to be paid in a later year.

Similarly, except as provided below with respect to certain discounted stock rights, an outstanding stock right that provides for a deferral of compensation subject to section 409A may be amended to provide for fixed payment terms consistent with section 409A, or to permit holders of such rights to elect fixed payment terms consistent with section 409A, and such amendment or election will not be treated as a change in the time and form of payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), provided that the option or right is so amended and any elections are made, on or before December 31, 2007. For this purpose, a stock right will not be treated as payable in a year solely because the stock right is exercisable during that year, if the stock right is also reasonably expected to be exercisable in a subsequent year.

.03 Payments linked to qualified plans

The ability to link a payment election under a nonqualified deferred compensation plan to an election under a qualified plan has also been extended through 2007. In addition, this relief is extended to payment elections under nonqualified deferred compensation plans that are linked to certain additional employer plans, including section 403(b) annuities, section 457(b) eligible plans, and certain foreign broad-based plans. Accordingly, for periods ending on or before December 31, 2007, an election as to the time and form of a payment under a nonqualified deferred compensation plan that is controlled by a payment election made by the service provider or beneficiary of the service provider under a qualified employer plan described in proposed § 1.409A-1(a)(2), a plan that includes a trust described in section 402(d), a plan described in section 1022(i)(1) or (2) of the Employee Retirement Income Security Act, or a foreign broad-based plan described in proposed § 1.409A-1(a)(3)(v), will not violate the requirements of section 409A, provided that the determination of the time and form of the payment is made in accordance with the terms of the nonqualified deferred compensation plan that govern payment elections, as in effect on October 3, 2004. For example, where a nonqualified deferred compensation plan provides as of October 3, 2004, that the time and form of payment to a service provider or beneficiary will be the same time and form of payment elected by the service provider or beneficiary under a qualified plan, it will not be a violation of section 409A for the plan administrator to make or commence payments under the nonqualified deferred compensation plan on or after January 1, 2005, and on or before December 31, 2007, pursuant to the payment election under the qualified plan. Notwithstanding the foregoing, other provisions of the Internal Revenue Code and common law tax doctrines continue to apply to any election as to the time and form of a payment under a nonqualified deferred compensation plan.

.04 Substitutions of non-discounted stock options and stock appreciation rights for discounted stock options and stock appreciation rights

Notice 2005-1, Q&A-18(d) provides that it will not be a material modification to replace a stock option or stock appreciation right otherwise providing for a deferral of compensation under section 409A with a stock option or stock appreciation right that would not have constituted a deferral of compensation under section 409A if it had been granted upon the original date of grant of the replaced stock option or stock appreciation right, provided that the cancellation and reissuance occurs on or before December 31, 2005. Section XI.H. of the preamble to the proposed regulations extended the period during which the cancellation and reissuance may occur until December 31, 2006, but only to the extent a cancellation and resissuance in 2006 does not result in the cancellation of a deferral in exchange for cash or vested property in 2006. Except with respect to certain discounted stock rights described in section 3.07 below, the period during which the cancellation and reissuance may occur is extended until December 31, 2007, but only to the extent such cancellation and reissuance in 2007 does not result in the cancellation of a deferral in exchange for cash or vested property in 2007. For example, a discounted option generally may be replaced through December 31, 2007 with an option that would not have provided for a deferral of compensation, although the exercise of such a discounted option in 2007 before the cancellation and replacement generally would result in a violation of section 409A.

Where replacement stock options or stock appreciation rights that would not constitute deferred compensation subject to section 409A are issued in accordance with the conditions set forth in Notice 2005-1, Q&A-18(d), the preamble to the proposed regulations and this notice, such replacement stock options or stock appreciation rights will be treated for purposes of section 409A as if granted on the grant date of the original stock option or stock appreciation right. For a discussion of certain methods that commentators proposed to use to compensate option holders for the value of a lost discount, see section XI.H. of the preamble to the proposed regulations.

.05 Collectively bargained arrangements.

A nonqualified deferred compensation arrangement maintained pursuant to one or more collective bargaining agreements in effect on October 3, 2004 is not required to comply with the provisions of section 409A on or before the earlier of the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after October 3, 2004) or December 31, 2009.

.06 Other transition issues

Notice 2005-1, Q&A-21 provided relief with respect to certain initial deferral elections, generally providing that certain requirements would not be applicable to elections made on or before March 15, 2005. One of the conditions of the requirement was that the plan be amended to comply with the requirements of section 409A in accordance with Notice 2005-1, Q&A-19. Notice 2005-1, Q&A-19 generally required that plans be amended by December 31, 2005. The March 15, 2005 deadline for initial deferral elections was not extended in the preamble to the proposed regulations; however, the plan amendment requirement generally was extended to December 31, 2006. Although the initial deferral election relief contained in Notice 2005-1, Q&A-21 only referred to the requirements of Notice 2005-1, Q&A-19, the Treasury Department and the IRS have become aware that many taxpayers interpreted the extension of the plan amendment deadlines as flowing through to the requirements of Notice 2005-1, Q&A-21. To avoid unintentional noncompliance in this area, the deadline for a plan to be amended to reflect use of the relief provided in Notice 2005-1, Q&A-21 is extended to December 31, 2007. However, taxpayers retain the burden of demonstrating satisfaction of the requirement by showing that the deferral election was made by the March 15, 2005 deadline, in accordance with the plan terms in effect on or before December 31, 2005 (other than a requirement to make a deferral election on or before March 15, 2005). See Notice 2005-1, Q&A-21.

.07 Transition relief not extended for certain discounted stock rights

The transition relief provided in the preamble to the proposed regulations and described in this notice is not extended for any stock option or stock appreciation right (stock right) that:

(A) was granted with respect to stock of a corporation that as of the date of grant had issued any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934;

(B) was granted to a person who, as of the date of grant, was subject to the disclosure requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to such issuer; and

(C) with respect to the grant of such stock right, such corporation either has reported or reasonably expects to report a financial expense due to the issuance of a stock right with an exercise price lower than the fair market value of the underlying stock at the date of grant that was not timely reported on financial statements or reports for the period in which the related expense should have been reported under generally accepted accounting principles.

Commentators to the proposed regulations expressed concerns regarding the application of the final regulations, once effective, to outstanding deferrals such as, for example, outstanding stock rights. The Treasury Department and the IRS anticipate addressing these issues in connection with the issuance of the final regulations.

Nothing in this notice is intended to limit the scope or applicability of the transition relief provided in Notice 2005-1 and the proposed regulations. In addition, this notice is not intended to limit the scope or applicability of the guidance provided in Notice 2005-94, 2005-52 I.R.B. 1208 (transition guidance with respect to 2005 reporting and withholding obligations); Notice 2006-4, 2006-3 I.R.B. 307 (transition guidance with respect to certain outstanding stock rights); Notice 2006-33, 2006-5 I.R.B. 754 (transition guidance with respect to the application of section 409A(b)); or Notice 2006-64, 2006-29 I.R.B. 88 (transition guidance with respect to the application of section 409A to accelerated payments necessary to meet federal ethics requirements).

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

This notice provides adjustments to the limitation on housing expenses for purposes of section 911 of the Internal Revenue Code (Code) for specific locations, on the basis of geographic differences in housing costs relative to housing costs in the United States.

Section 911(a) of the Code allows a qualified individual to elect to exclude from U.S. gross income the foreign earned income and housing cost amount of such individual. Section 911(c)(1), as amended by section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), defines the term “housing cost amount” as an amount equal to the excess of (A) the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under section 911(c)(2), over (B) 16 percent of the exclusion amount (computed on a daily basis) in effect under section 911(b)(2)(D) for the calendar year in which such taxable year begins ($67.73 per day for 2006, or $82,400 for the full year), multiplied by the number of days of that taxable year within the applicable period described in section 911(d)(1). The applicable period is the period during which the individual meets the tax home requirement of section 911(d)(1) and either the bona fide residence requirement of section 911(d)(1)(A) or the physical presence requirement of section 911(d)(1)(B). Assuming that the entire taxable year of a qualified individual is within the applicable period, the section 911(c)(1)(B) amount for 2006 is $13,184 ($82,400 x .16).

Section 515 of TIPRA also added a new section 911(c)(2)(A) of the Code, which limits the housing expenses taken into account in section 911(c)(1)(A) to an amount equal to the product of — (i) 30 percent (adjusted as may be provided under the Secretary’s authority under section 911(c)(2)(B)) of the amount in effect under section 911(b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by (ii) the number of days of that taxable year within the applicable period described in section 911(d)(1). Thus, for the year 2006, a qualified individual whose entire taxable year is within the applicable period is limited to maximum housing expenses of $24,720 ($82,400 x .30). Accordingly, the maximum housing cost amount a qualified individual may exclude from income in year 2006 is $11,536 ($24,720 - $13,184). The TIPRA changes apply to taxable years beginning after December 31, 2005.

To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, section 911(c)(4)(A) of the Code provides that such amount shall be treated as a deduction in computing adjusted gross income. Under section 911(c)(4)(B), however, the amount of this deduction is limited to the excess of the foreign earned income of the individual for the taxable year over the amount of such income excluded from gross income under section 911(a).

In addition, section 911(d)(7) of the Code prohibits the total amount excluded or deducted under section 911 for the taxable year from exceeding the individual’s foreign earned income for such year. Further, section 911(b)(1)(B) excludes from the definition of foreign earned income certain amounts, including amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof. As a result, the exclusion or deduction from gross income of the housing cost amount under section 911 is not available to an individual whose earned income consists solely of amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof.

Section 911(c)(2)(B) of the Code authorizes the Secretary to issue regulations or other guidance to adjust the percentage under section 911(c)(2)(A)(i) based on geographic differences in housing costs relative to housing costs in the United States. The Joint Explanatory Statement of the Committee of Conference accompanying TIPRA states the conferees’ intent that the Secretary be permitted to use publicly available data, such as the Quarterly Report Indexes published by the U.S. Department of State or any other information that the Secretary deems reliable, in making adjustments. See H.R. Conf. Rep. No. 304, 109^th Cong., 1^st Sess. 309 (2005).

Accordingly, the following table, which was derived from the Living Quarters Allowance table prepared by the Office of Allowances of the U.S. Department of State as of August 20, 2006, identifies locations within countries with high housing costs relative to housing costs in the United States, and provides an adjusted limitation on housing expenses for a qualified individual incurring housing expenses in one or more of these high cost localities in 2006 to use (in lieu of the otherwise applicable limitation of $24,720) in determining his or her housing expenses under section 911(c)(2)(A) of the Code. The table will be updated each year by administrative pronouncement (e.g., through issuing a notice, amending Form 2555 or the instructions thereto, or by making a revised table available on the IRS website at http://www.irs.gov), beginning in 2007, based on the living quarters allowance for employees of the U.S. Department of State who are in Group 2, with family, contained in the first Living Quarters Allowance table released in that calendar year by the Office of Allowances of the U.S. Department of State.

A qualified individual incurring housing expenses in one or more of the high cost localities identified above for the year 2006 may use the adjusted limit provided in the table (in lieu of $24,720) in determining his or her housing cost amount on Form 2555, Foreign Earned Income. A qualified individual who does not incur housing expenses in a locality identified above for the year 2006 is limited to maximum housing expenses of $67.73 per day ($24,720 per year) in determining his or her housing cost amount.

This notice is effective for taxable years beginning on or after January 1, 2006.

The principal author of this notice is Paul J. Carlino of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Carlino at (202) 622-3840 (not a toll-free call).

Comments are requested on the method identified in the notice for annual updates to the list contained in this notice. If a taxpayer believes that the average housing costs for a specific location differ significantly from the amount provided in this notice, the IRS and Treasury Department are particularly interested in information on housing costs that can be verified through publicly available data. Comments may be submitted to CC:PA:LPD:PR (Notice 2006-87), Room 5203, Internal Revenue Service, PO Box 7604, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4:30 p.m. to Crystal Mall 4, room 108, 1901 South Bell Street, Arlington, VA 22202, Attn: CC:PA:LPD:PR (Notice 2006-87). Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2006-87) in the subject line.

This notice summarizes the changes made to § 414(d) of the Internal Revenue Code (the Code) by section 906 of the Pension Protection Act of 2006 (PPA ’06) under which plans established and maintained by Indian tribal governments and certain related entities are governmental plans. This notice also provides transition relief under a reasonable and good faith standard with respect to compliance with the PPA ’06 changes to § 414(d) pending further guidance, and invites comments from the public on whether additional transition issues need to be addressed. In addition, this notice provides approaches that give Indian tribal governments until September 30, 2007, to implement a new plan for commercial employees to satisfy the reasonable and good faith compliance standard as part of this transitional relief.

Section 414(d) of the Code generally provides that a “governmental plan” includes a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. A governmental plan is exempt from many of the plan qualification requirements under § 401(a) and other sections of the Code. For example, governmental plans are exempt from the minimum participation and vesting requirements under §§ 410 and 411, certain nondiscrimination and coverage requirements, funding requirements under § 412, and the joint and survivor annuity rules under § 417. See the last sentence of § 401(a) (the flush language following § 401(a)(36)).

PPA ’06 changed § 414(d)^[1] to amend the definition of “governmental plan” with respect to plans of an Indian tribal government, a subdivision of an Indian tribal government, or an agency or instrumentality thereof (ITG). Section 906(a)(1) of PPA ’06 states:

The Joint Committee on Taxation’s Technical Explanation^[2] provides that an employee all of whose services for an ITG are in the performance of essential governmental services and not in the performance of commercial activities (whether or not such activities are an essential governmental function) is an employee who can be covered under a governmental plan as described in § 414(d) of the Code. For example, a governmental plan includes a plan of a tribal government all of the participants of which are teachers in tribal schools, but a governmental plan does not include a plan covering tribal employees who are employed by a hotel, casino, service station, convenience store, or marina operated by a tribal government.

Section 906(c) of PPA ’06 provides that the amendments made by section 906 apply to any year beginning on or after the date of enactment, which is August 17, 2006. The Joint Committee on Taxation’s Technical Explanation (p. 244) states that the amendments apply to plan years beginning on or after the date of enactment.

Under section 1107 of PPA ’06, a plan amendment made pursuant to any amendment made by PPA ’06 may be retroactively effective, and does not violate the anti-cutback rules of § 411(d)(6) of the Code, except as provided by the Secretary of the Treasury, if, in addition to meeting the other applicable requirements, the amendment is made on or before the last day of the first plan year beginning on or after January 1, 2009 (2011 in the case of a governmental plan). Thus, an ITG must operate in accordance with the applicable changes to § 414(d) made by PPA ’06 as of the related PPA ’06 effective date, i.e., the first day of the first plan year beginning on or after August 17, 2006. Further, a plan established and maintained by an ITG that is designed to be a governmental plan under § 414(d) as amended by PPA ’06 must be amended to the extent necessary to reflect these changes by the last day of the first plan year beginning on or after January 1, 2011. This relief applies only if the amendment is effective as of the related PPA ’06 effective date and the plan has been operated in accordance with the amendment.

The IRS and the Department of the Treasury request public comments on issues relating to the amendment made by section 906(a)(1) of PPA ’06, including transitional issues not addressed in this notice (such as issues for ITG plans with a cash or deferred arrangement under § 401(k)). Written comments should be submitted by January 22, 2007. Send submissions to: CC:PA:LPD:PR (Notice 2006-89), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8:30 a.m. and 4:30 p.m. to: Crystal Mall 4 Building, 1901 S. Bell St., room 108, Arlington, VA 22202. Alternatively, taxpayers may submit comments electronically to notice.comments@irscounsel.treas.gov (Notice 2006-89).

The principal author of this notice is Ingrid Grinde of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:30 am and 4:30 pm Eastern Time, Monday through Friday . Ms. Grinde may be reached at (202) 283-9888 (not a toll-free number).

This notice provides guidance on: (1) the credit and payment provisions for alternative fuel and alternative fuel mixtures under §§ 34, 6426(d), 6426(e), and 6427(e) of the Internal Revenue Code; and (2) the imposition of tax on alternative fuel and alternative fuel mixtures under §§ 4041(a)(2), 4041(a)(3), and 4081(b). These provisions were added by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (Pub. L. 109-59) and are effective October 1, 2006. This notice also provides guidance on the excise tax exemption for blood collector organizations added by the Pension Protection Act of 2006 (Pub. L. 109-280). References to regulations in this notice are to the Manufacturers and Retailers Excise Tax Regulations.

(a) Alternative fuel has the meaning given to the term by § 6426(d)(2). Section 6426(d)(2) provides that alternative fuel means liquefied petroleum gas, P Series Fuels (as defined by the Secretary of Energy under 42 U.S.C. 13211(2)), compressed or liquefied natural gas, liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, and liquid hydrocarbons derived from biomass (as defined in § 45K(c)(3)). The term does not include ethanol, methanol, biodiesel, or renewable diesel. (For the definition of biodiesel, see § 40A(d)(1). For the definition of renewable diesel and treatment of renewable diesel in the same manner as biodiesel, see § 40A(f).)

(b) Alternative fuel mixture means a mixture of alternative fuel and taxable fuel that contains at least 0.1 percent (by volume) of taxable fuel (as defined in § 4083(a)(1)).

(c) Alternative fueler means a person that—

(1) Is an alternative fueler (unmixed fuel); or

(2) Produces alternative fuel mixtures for sale or use in its trade or business.

(d) The alternative fueler (unmixed fuel) with respect to any alternative fuel is the person that—

(1) Is liable for tax on the alternative fuel imposed by § 4041(a)(2) or (3) (determined in the case of compressed natural gas after the application of § 48.4041-21 and in the case of any other alternative fuel after the application of rules similar to the rules of §§ 48.4041-3 and 48.4041-5); or

(2) Would be so liable for such tax but for the application of an exemption provided by § 4041(a)(3)(B), (b), (f), (g), or (h).

(e) Motor vehicle has the meaning given to the term by § 48.4041-8(c).

(f) Use as a fuel. The following definitions apply for purposes of section 4 of this notice (relating to alternative fuel mixtures):

(1) A mixture is used as a fuel when it is consumed in the production of energy. Thus, for example, a mixture is used as a fuel when it is consumed in an internal combustion engine to power a vehicle or in a furnace to produce heat. A mixture that is destroyed in a fire or other casualty loss is not used as a fuel.

(2) A mixture producer sells a mixture for use as a fuel if the producer has reason to believe that the mixture will be used as a fuel either by the person buying the mixture from the producer or by any later buyer of the mixture.

(a) Overview. This section provides rules under which a credit or payment may be obtained under § 6426 (the alternative fuel excise tax credit), §§ 34 and 6427 (the alternative fuel income tax credit), or § 6427 (the alternative fuel payment) for alternative fuel that is sold for use or used as a fuel in a motor vehicle or motorboat. The amount of the credit or payment allowed with respect to alternative fuel is based on the amount of alternative fuel sold or used.

(b) Conditions to allowance—(1) Excise tax credit. A claim for the alternative fuel excise tax credit with respect to alternative fuel sold for use or used as a fuel in a motor vehicle or motorboat is allowed under § 6426 only if the claimant—

(i) Is the alternative fueler (unmixed fuel) with respect to the fuel;

(ii)(A) Is registered under § 4101 as an alternative fueler; or

(B) In the case of a claim made before July 1, 2007, is registered under § 4101 for any purpose;

(iii) Has made no other claim with respect to the alternative fuel;

(iv) Has filed a timely claim on Form 720, Quarterly Federal Excise Tax Return, and the claim contains all the information required by the claim form described in paragraph (c) of this section; and

(v) Has § 4041 liability for the period of the claim and the total amount of the alternative fuel excise tax credit claimed under § 6426 for the period of the claim does not exceed such liability.

(2) Refundable income tax credit—(i) In general. A claim for the alternative fuel income tax credit with respect to alternative fuel sold for use or used as a fuel in a motor vehicle or motorboat is allowed under §§ 34 and 6427(e)(2) only if—

(A) The conditions of paragraphs (b)(1)(i) and (ii) of this section are met;

(B) The sale or use of the alternative fuel is in the claimant’s trade or business;

(C) The claimant has filed a timely claim for credit on Form 4136, Credit for Federal Tax Paid on Fuels, and the claim contains all the information required by the claim form described in paragraph (c) of this section; and

(D) The amount claimed under §§ 34 and 6427(e)(2) as an alternative fuel income tax credit is the amount that exceeds the claimant’s § 4041 liability for the period of the claim.

(ii) Estimated tax reduction. For purposes of determining the amount of required estimated tax payments, the alternative fuel income tax credit claimed on Form 4136 is subtracted from total tax and reduces estimated tax payments. Thus, a taxpayer may benefit from the credit before filing an income tax return. See, for example, Form 1120-W, Estimated Tax for Corporations.

(3) Payments. A claim for the alternative fuel payment with respect to alternative fuel sold for use or used as a fuel in a motor vehicle or motorboat is allowed under § 6427(e)(2) only if—

(i) The claimant is—

(A) The United States;

(B) A State (as defined in § 48.4081-1(b)); or

(C) A § 501(a) exempt organization (other than an organization required to file a Form 990-T, Exempt Organization Business Income Tax Return);

(ii) The conditions of paragraphs (b)(1)(i) and (ii) of this section are met;

(iii) The sale or use of the alternative fuel is in the claimant’s trade or business;

(iv) The claimant has filed a timely claim for payment on Form 8849, Claim for Refund of Excise Taxes, and the claim contains all of the information required by the claim form described in paragraph (c) of this section; and

(v) The amount claimed under § 6427(e)(2) as an alternative fuel payment is the amount that exceeds the claimant’s § 4041 liability for the period of the claim.

(c) Content of claim. The claim form will provide that each claim for an alternative fuel credit or payment must contain the following information with respect to the alternative fuel covered by the claim:

(1) The amount of alternative fuel sold or used.

(2) A statement that the conditions to allowance described in paragraph (b) of this section have been met.

(3) A statement that the claimant either—

(i) Produced the alternative fuel it sold or used; or

(ii) Has in its possession the name, address, and employer identification number of the person(s) that sold the alternative fuel to the claimant, the date of purchase, and an invoice or other documentation identifying the alternative fuel.

(d) Amount of the credit. The amount of credit for any alternative fuel other than compressed natural gas is the product of $0.50 and the number of gallons of alternative fuel. The amount of the credit for compressed natural gas is $0.50 per 121 cubic feet.

(a) Overview. This section provides rules under which a credit or payment may be obtained under § 6426 (the alternative fuel mixture excise tax credit), §§ 34 and 6427 (the alternative fuel mixture income tax credit), or § 6427 (the alternative fuel mixture payment) for an alternative fuel mixture that is sold for use or used as a fuel by the person producing the mixture. The amount of the credit or payment allowed with respect to an alternative fuel mixture is based on the amount of alternative fuel used to produce the mixture.

(b) Conditions to allowance—(1) Excise tax credit. A claim for the alternative fuel mixture excise tax credit with respect to an alternative fuel mixture is allowed under § 6426 only if the claimant—

(i) Produced the alternative fuel mixture for sale or use in the trade or business of the claimant;

(ii)(A) Sold the alternative fuel mixture for use as a fuel; or

(B) Used the alternative fuel mixture as a fuel;

(iii)(A) Is registered under § 4101 as an alternative fueler; or

(B) In the case of claims made before July 1, 2007, is registered under § 4101 for any purpose;

(iv) Has made no other claim with respect to the amount of alternative fuel in the mixture or, if a payment with respect to the amount of alternative fuel was erroneously claimed under § 6427 and received, claimant has repaid the government with interest;

(v) Has filed a timely claim on Form 720 and the claim contains all the information required by the claim form described in paragraph (c) of this section; and

(vi) Has § 4081 liability for the period of the claim and the total amount of the alternative fuel mixture excise tax credit claimed under § 6426 for the period of the claim does not exceed such liability.

(2) Payment or income tax credit. A claim for an alternative fuel mixture payment under § 6427 or an alternative fuel mixture income tax credit under §§ 34 and 6427 is allowed only if—

(i) The conditions of paragraphs (b)(1)(i), (ii), and (iii) of this section are met;

(ii) The claimant has filed a timely claim for payment on Form 8849 or Form 720 or for credit on Form 4136 and the claim contains all the information required by the claim form described in paragraph (c) of this section; and

(iii) The amount claimed under § 6427 as an alternative fuel mixture payment or under §§ 34 and 6427 as an alternative fuel mixture income tax credit is the amount that exceeds the claimant’s § 4081 liability for the period of the claim.

(c) Content of claim. The claim form will provide that each claim for an alternative fuel mixture credit or payment must contain the following information with respect to the mixture covered by the claim:

(1) The amount of alternative fuel in the alternative fuel mixture.

(2) A statement that the conditions to allowance described in paragraph (b) of this section have been met.

(3) A statement that the claimant either—

(i) Produced the alternative fuel it used in the mixture; or

(ii) Has in its possession the name, address, and employer identification number of the person(s) that sold the alternative fuel to the claimant, the date of purchase, and an invoice or other documentation identifying the alternative fuel.

(d) Amount of the credit or payment. The amount of credit or payment for any alternative fuel mixture is the product of $0.50 and the number of gallons of alternative fuel used to produce the mixture.

(a) Application for registration. Application for registration as an alternative fueler is made on Form 637, Application for Registration (For Certain Excise Tax Activities), in accordance with the instructions for that form. As provided in § 48.4101-1(a)(2), a person is registered under § 4101 only if the Service has issued a registration letter to the person.

(b) Requirements. The Service will register an applicant as an alternative fueler only if the Service—

(1) Determines that the applicant is an alternative fueler or is likely to become an alternative fueler within a reasonable time after being registered under § 4101; and

(2) Is satisfied with the filing, deposit, payment, reporting, and claim history for federal taxes of the applicant and any related person (as defined in § 48.4101-1(b)(5)).

(a) Alternative fuels—(1) Liquids. A liquid alternative fuel (that is, any alternative fuel other than compressed natural gas) is a liquid other than gas oil, fuel oil, or taxable fuel and is subject to the tax imposed by § 4041(a)(2) when it is sold for use or used as a fuel in a motor vehicle or motorboat. Rules similar to the rules of §§ 48.4041-3 and 48.4041-5 (relating to the application of the tax on sales of special motor fuels) apply. For exemptions from tax, see §§ 4041(b), (f), (g), and (h).

(2) Compressed natural gas. Compressed natural gas is subject to the tax imposed by § 4041(a)(3) when it is sold for use or used as a fuel in a motor vehicle or motorboat. The rules of § 48.4041-21 apply. For exemptions from tax, see §§ 4041(a)(3)(B), (b), (f), (g), and (h).

(b) Alternative fuel mixtures—(1) If an alternative fuel mixture is taxable fuel, the mixture is subject to tax imposed by § 4081 when it is removed, entered, or sold and the rules of §§ 48.4081-1 through 48.4081-8 apply.

(2) If an alternative fuel mixture is not a taxable fuel and is sold for use or used as a fuel in a diesel-powered highway vehicle or diesel-powered train, the mixture is subject to the tax imposed by § 4041(a)(1) at the time of such sale or use and the rules of § 48.4082-4 apply.

(3) If an alternative fuel mixture is not a taxable fuel and is sold for use or used as a fuel in a motor vehicle (other than a diesel-powered highway vehicle) or motorboat, the mixture is subject to the tax imposed by § 4041(a)(2) at the time of such sale or use and rules similar to the rules of §§ 48.4041-3 and 48.4041-5 (relating to the application of the tax on sales of special motor fuels) apply. For exemptions from tax, see §§ 4041(b), (f), (g), and (h).

(c) Rate of tax. For the rate of tax generally, see §§ 4041 and 4081. The rate of tax for compressed natural gas is $0.183 per 126.67 cubic feet.

(a) Overview. Under the Pension Protection Act of 2006 (Pub. L. 109-280), qualified blood collector organizations are exempt from many federal excise taxes (or a credit or payment relating to the tax is available). These taxes include the taxes on fuel, tires, communications services, and heavy vehicles. This provision is effective after December 31, 2006, except that the exemption from the highway use tax applies after June 30, 2007.

(b) Definition. Qualified blood collector organization has the meaning given to the term by § 7701(a)(49). Section 7701(a)(49) provides that a qualified blood collector organization means an organization that is described in § 501(c)(3) and is exempt from tax under § 501(a), primarily engaged in the activity of the collection of human blood, registered with the Service for purposes of excise tax exemptions, and registered by the Food and Drug Administration to collect blood.

(c) Registration—(1) In general. Each blood collector organization must be registered by the Service as a condition for applying for the exemptions (or credit or payments) under the Code as a blood collector organization. Application for registration is made on Form 637, Application for Registration (For Certain Excise Tax Activities), in accordance with the instructions for that form. As provided in § 48.4101-1(a)(2), a person is registered under § 4101 only if the Service has issued a registration letter to the person.

(2) Requirements. The Service will register an applicant as a blood collector organization only if the Service—

(i) Determines that the applicant is a person described in § 7701(a)(49)(A), (B), and (D); and

(ii) Is satisfied with the filing, deposit, payment, reporting, and claim history for all federal taxes of the applicant and any related person (as defined in § 48.4101-1(b)(5)).

This notice is effective after September 30, 2006, except that section 7 of this notice is effective after December 31, 2006.

The principal authors of this notice are Susan Athy and Deborah Karet of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, please contact Ms. Athy (concerning alternative fuel and alternative fuel mixtures) and Ms. Karet (concerning qualified blood collector organizations) at (202) 622-3130 (not a toll-free call).

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

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004-34 continues to apply in determining that rate. See Notice 2006-75, 2006-36 I.R.B. 366.

The composite corporate bond rate for September 2006 is 5.95 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

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

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

The rate of interest on 30-year Treasury securities for September 2006 is 4.85 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2036.

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 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. Stern may be reached at 202-283-9703. Mr. Montanaro may be reached at 202-283-9714. The telephone numbers in the preceding sentences are not toll-free.

This revenue procedure updates Rev. Proc. 2005-67, 2005-42 I.R.B. 729, and provides rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses, incurred while traveling away from home are deemed substantiated under § 1.274-5 of the Income Tax Regulations when a payor (the employer, its agent, or a third party) provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for the expenses. In addition, this revenue procedure provides an optional method for employees and self-employed individuals who are not reimbursed to use in computing the deductible costs paid or incurred for business meal and incidental expenses, or for incidental expenses only if no meal costs are paid or incurred, while traveling away from home. Use of a method described in this revenue procedure is not mandatory, and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation. This revenue procedure does not provide rules under which the amount of an employee’s lodging expenses will be deemed substantiated when a payor provides an allowance to pay for those expenses but not meal and incidental expenses.

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Under that provision, an employee or self-employed individual may deduct expenses paid or incurred while traveling away from home in pursuit of a trade or business. However, under § 262, no portion of the travel expenses that is attributable to personal, living, or family expenses is deductible.

.02 Section 274(n) generally limits the amount allowable as a deduction under § 162 for any expense for food, beverages, or entertainment to 50 percent of the amount of the expense that otherwise would be allowable as a deduction. In the case of any expenses for food or beverages consumed while away from home (within the meaning of § 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, § 274(n)(3) gradually increases the deductible percentage to 80 percent for taxable years beginning in 2008. For taxable years beginning in 2006 or 2007, the deductible percentage for these expenses is 75 percent.

.03 Section 274(d) provides, in part, that no deduction is allowed under § 162 for any travel expense (including meals and lodging while away from home) unless the taxpayer complies with certain substantiation requirements. Section 274(d) further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by the regulations.

.04 Section 1.274-5(g), in part, grants the Commissioner the authority to prescribe rules relating to reimbursement arrangements or per diem allowances for ordinary and necessary expenses paid or incurred while traveling away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which these arrangements or allowances, if in accordance with reasonable business practice, are regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of travel expenses for purposes of § 1.274-5(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of travel expenses for purposes of § 1.274-5(f).

.05 For purposes of determining adjusted gross income, § 62(a)(2)(A) allows an employee a deduction for expenses allowed by Part VI (§ 161 and following), subchapter B, chapter 1 of the Code, paid or incurred by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement with a payor.

.06 Section 62(c) provides that an arrangement is not treated as a reimbursement or other expense allowance arrangement for purposes of § 62(a)(2)(A) if it—

(1) does not require the employee to substantiate the expenses covered by the arrangement to the payor, or

(2) provides the employee with the right to retain any amount in excess of the substantiated expenses covered under the arrangement.

Section 62(c) further provides that the substantiation requirements described therein do not apply to any expense to the extent that, under the grant of regulatory authority prescribed in § 274(d), the Commissioner has provided that substantiation is not required for the expense.

.07 Under § 1.62-2(c)(1), a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c) if it meets the requirements of business connection, substantiation, and returning amounts in excess of expenses as specified in the regulations. Section 1.62-2(e)(2) specifically provides that substantiation of certain business expenses in accordance with rules prescribed under the authority of §§ 1.274-5(g) or 1.274-5(j) is treated as substantiation of the amount of the expenses for purposes of § 1.62-2. Under § 1.62-2(f)(2), the Commissioner may prescribe rules under which an arrangement providing per diem allowances is treated as satisfying the requirement of returning amounts in excess of expenses, even though the arrangement does not require the employee to return the portion of the allowance that relates to days of travel substantiated and that exceeds the amount of the employee’s expenses deemed substantiated pursuant to rules prescribed under § 274(d), provided the allowance is reasonably calculated not to exceed the amount of the employee’s expenses or anticipated expenses and the employee is required to return within a reasonable period of time any portion of the allowance that relates to days of travel not substantiated.

.08 Section 1.62-2(h)(2)(i)(B) provides that, if a payor pays a per diem allowance that meets the requirements of § 1.62-2(c)(1), the portion, if any, of the allowance that relates to days of travel substantiated in accordance with § 1.62-2(e), that exceeds the amount of the employee’s expenses deemed substantiated for the travel pursuant to rules prescribed under § 274(d) and § 1.274-5(g) or § 1.274-5(j), and that the employee is not required to return, is subject to withholding and payment of employment taxes. See §§ 31.3121(a)-3, 31.3231(e)-1(a)(5), 31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations. Because the employee is not required to return this excess portion, the reasonable period of time provisions of § 1.62-2(g) (relating to the return of excess amounts) do not apply to this portion.

.09 Under § 1.62-2(h)(2)(i)(B)(4), the Commissioner has the discretion to prescribe special rules regarding the timing of withholding and payment of employment taxes on per diem allowances.

.10 Section 1.274-5(j)(1) grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount for meals paid or incurred while traveling away from home in lieu of substantiating the actual cost of meals.

.11 Section 1.274-5(j)(3) grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount for incidental expenses paid or incurred while traveling away from home in lieu of substantiating the actual cost of incidental expenses.

.12 Sections 3.02(1)(a), 4.04(6), and 5.06 of this revenue procedure provide transition rules for the last 3 months of calendar year 2006.

.13 Section 5.02 of this revenue procedure contains revisions to the per diem rates for high-cost localities and for other localities for purposes of section 5.

.14 Section 5.03 of this revenue procedure contains the list of high-cost localities and section 5.04 of this revenue procedure describes changes to the list of high-cost localities for purposes of section 5.

.01 Per diem allowance. The term “per diem allowance” means a payment under a reimbursement or other expense allowance arrangement that is—

(1) paid with respect to ordinary and necessary business expenses incurred, or that the payor reasonably anticipates will be incurred, by an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses, for travel away from home in connection with the performance of services as an employee of the employer,

(2) reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and

(3) paid at or below the applicable federal per diem rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.

.02 Federal per diem rate and federal M&IE rate.

(1) In general. The federal per diem rate is equal to the sum of the applicable federal lodging expense rate and the applicable federal meal and incidental expense (M&IE) rate for the day and locality of travel.

(a) CONUS rates. The rates for localities in the continental United States (“CONUS”) are set forth in Appendix A to 41 C.F.R. ch. 301. However, in applying section 4.01, 4.02, or 4.03 of this revenue procedure, taxpayers may continue to use the CONUS rates in effect for the first 9 months of 2006 for expenses of all CONUS travel away from home that are paid or incurred during calendar year 2006 in lieu of the updated GSA rates. A taxpayer must consistently use either these rates or the updated rates for the period October 1, 2006, through December 31, 2006.

(b) OCONUS rates. The rates for localities outside the continental United States (“OCONUS”) are established by the Secretary of Defense (rates for non-foreign localities, including Alaska, Hawaii, Puerto Rico, the Northern Mariana Islands, and the possessions of the United States) and by the Secretary of State (rates for foreign localities), and are published in the Per Diem Supplement to the Standardized Regulations (Government Civilians, Foreign Areas) (updated on a monthly basis).

(c) Internet access to the rates. The CONUS and OCONUS rates may be found on the Internet at www.gsa.gov.

(2) Locality of travel. The term “locality of travel” means the locality where an employee traveling away from home in connection with the performance of services as an employee of the employer stops for sleep or rest.

(3) Incidental expenses. The term “incidental expenses” has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1 (2006). Thus, based on the current definition of “incidental expenses” in the Federal Travel Regulations, “incidental expenses” means fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries; transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at the temporary duty site; and the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings.

.03 Flat rate or stated schedule.

(1) In general. Except as provided in section 3.03(2) of this revenue procedure, an allowance is paid at a flat rate or stated schedule if it is provided on a uniform and objective basis with respect to the expenses described in section 3.01 of this revenue procedure. The allowance may be paid with respect to the number of days away from home in connection with the performance of services as an employee or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, an hourly payment to cover meal and incidental expenses paid to a pilot or flight attendant who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule. Likewise, a payment based on the number of miles traveled (such as cents per mile) to cover meal and incidental expenses paid to an over-the-road truck driver who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule.

(2) Limitation. For purposes of this revenue procedure, an allowance that is computed on a basis similar to that used in computing the employee’s wages or other compensation (such as the number of hours worked, miles traveled, or pieces produced) does not meet the business connection requirement of § 1.62-2(d), is not a per diem allowance, and is not paid at a flat rate or stated schedule, unless, as of December 12, 1989, (a) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (b) an allowance computed on that basis was commonly used in the industry in which the employee is employed. See § 1.62-2(d)(3)(ii).

.01 Per diem allowance. If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate (see section 3.02 of this revenue procedure) for the locality of travel for that day (or partial day, see section 6.04 of this revenue procedure).

.02 Meal and incidental expenses only per diem allowance. If a payor pays a per diem allowance only for meal and incidental expenses in lieu of reimbursing actual meal and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal M&IE rate for the locality of travel for that day (or partial day). A per diem allowance is treated as paid only for meal and incidental expenses if (1) the payor pays the employee for actual expenses for lodging based on receipts submitted to the payor, (2) the payor provides the lodging in kind, (3) the payor pays the actual expenses for lodging directly to the provider of the lodging, (4) the payor does not have a reasonable belief that lodging expenses were or will be incurred by the employee, or (5) the allowance is computed on a basis similar to that used in computing the employee’s wages or other compensation (such as the number of hours worked, miles traveled, or pieces produced).

.03 Optional method for meal and incidental expenses only deduction. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary meal and incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who pay or incur meal expenses may use an amount computed at the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee or self-employed individual is away from home. This amount will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of § 1.274-5, provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with those regulations. See section 6.05(1) of this revenue procedure for rules related to the application of the limitation under § 274(n) to amounts determined under this section 4.03. See section 4.05 of this revenue procedure for a method for substantiating incidental expenses that may be used by employees or self-employed individuals who do not pay or incur meal expenses.

.04 Special rules for transportation industry.

(1) In general. This section 4.04 applies to (a) a payor that pays a per diem allowance only for meal and incidental expenses for travel away from home as described in section 4.02 of this revenue procedure to an employee in the transportation industry, or (b) an employee or self-employed individual in the transportation industry who computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 of this revenue procedure.

(2) Transportation industry defined. For purposes of this section 4.04, an employee or self-employed individual is in the transportation industry only if the employee’s or individual’s work (a) is of the type that directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and (b) regularly requires travel away from home which, during any single trip away from home, usually involves travel to localities with differing federal M&IE rates. For purposes of the preceding sentence, a payor must determine that an employee or a group of employees is in the transportation industry by using a method that is consistently applied and in accordance with reasonable business practice.

(3) Rates. A taxpayer described in section 4.04(1) of this revenue procedure may treat $52 as the federal M&IE rate for any CONUS locality of travel, and $58 as the federal M&IE rate for any OCONUS locality of travel. A payor that uses either (or both) of these special rates with respect to an employee must use the special rate(s) for all amounts subject to section 4.02 of this revenue procedure paid to that employee for travel away from home within CONUS and/or OCONUS, as the case may be, during the calendar year. Similarly, an employee or self-employed individual that uses either (or both) of these special rates must use the special rate(s) for all amounts computed pursuant to section 4.03 of this revenue procedure for travel away from home within CONUS and/or OCONUS, as the case may be, during the calendar year. See section 4.04(6) of this revenue procedure for transition rules.

(4) Periodic rule. A payor described in section 4.04(1) of this revenue procedure may compute the amount of the employee’s expenses that is deemed substantiated under section 4.02 of this revenue procedure periodically (not less frequently than monthly), rather than daily, by comparing the total per diem allowance paid for the period to the sum of the amounts computed either at the federal M&IE rate(s) for the localities of travel, or at the special rate described in section 4.04(3), for the days (or partial days) the employee is away from home during the period.

(5) Examples.

(a) Example 1. Taxpayer, an employee in the transportation industry, travels away from home on business within CONUS on 17 days (including partial days) during a calendar month and receives a per diem allowance only for meal and incidental expenses from a payor that uses the special rule under section 4.04(3) of this revenue procedure. The amount deemed substantiated under section 4.02 of this revenue procedure is equal to the lesser of the total per diem allowance paid for the month or $884 (17 days at $52 per day).

(b) Example 2. Taxpayer, a truck driver employee in the transportation industry, is paid a “cents-per-mile” allowance that qualifies as an allowance paid under a flat rate or stated schedule as defined in section 3.03 of this revenue procedure. Taxpayer travels away from home on business for 10 days. Based on the number of miles driven by Taxpayer, Taxpayer’s employer pays an allowance of $500 for the 10 days of business travel. Taxpayer actually drives for 8 days, and does not drive for the other 2 days Taxpayer is away from home. Taxpayer is paid under the periodic rule used for transportation industry employers and employees in accordance with section 4.04(4) of this revenue procedure. The amount deemed substantiated and excludable from Taxpayer’s income is the full $500 because that amount does not exceed $520 (ten days away from home at $52 per day).

(6) Transition rules. Under the calendar-year convention provided in section 4.04(3), a taxpayer who used the federal M&IE rates during the first 9 months of calendar year 2006 to substantiate the amount of an individual’s travel expenses under sections 4.02 or 4.03 of Rev. Proc. 2005-67 may not use, for that individual, the special transportation industry rates provided in this section 4.04 until January 1, 2007. Similarly, a taxpayer who used the special transportation industry rates during the first 9 months of calendar year 2006 to substantiate the amount of an individual’s travel expenses may not use, for that individual, the federal M&IE rates until January 1, 2007.

.05 Optional method for incidental expenses only deduction. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who do not pay or incur meal expenses for a calendar day (or partial day) of travel away from home may use, for each calendar day (or partial day) the employee or self-employed individual is away from home, an amount computed at the rate of $3 per day for any CONUS or OCONUS locality of travel. This amount will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of § 1.274-5, provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with those regulations. See section 4.03 of this revenue procedure for a method that may be used by employees or self-employed individuals who pay or incur meal expenses. The method authorized by this section 4.05 may not be used by payors that use section 4.01, 4.02, or 5.01 of this revenue procedure, or by employees or self-employed individuals who use the method described in section 4.03 of this revenue procedure. See section 6.05(4) of this revenue procedure for rules related to the application of the limitation under § 274(n) to amounts determined under this section 4.05.

.01 In general. If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method described in this section 5 for travel within CONUS, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate set forth in section 5.02 of this revenue procedure for the locality of travel for that day (or partial day, see section 6.04 of this revenue procedure). Except as provided in section 5.06 of this revenue procedure, this high-low substantiation method may be used in lieu of the per diem substantiation method provided in section 4.01 of this revenue procedure, but may not be used in lieu of the meal and incidental expenses only per diem substantiation method provided in section 4.02 of this revenue procedure.

.02 Specific high-low rates. Except as provided in section 5.06 of this revenue procedure, the per diem rate set forth in this section 5.02 is $246 for travel to any “high-cost locality” specified in section 5.03 of this revenue procedure, or $148 for travel to any other locality within CONUS. The high or low rate, as appropriate, applies as if it were the federal per diem rate for the locality of travel. For purposes of applying the high-low substantiation method and the § 274(n) limitation on meal expenses (see section 6.05(3) of this revenue procedure), the amount of the high and low rates that is treated as paid for meals is $58 for a high-cost locality and $45 for any other locality within CONUS.

.03 High-cost localities. The following localities have a federal per diem rate of $197 or more, and are high-cost localities for all of the calendar year or the portion of the calendar year specified in parentheses under the key city name:

.04 Changes in high-cost localities. The list of high-cost localities in section 5.03 of this revenue procedure differs from the list of high-cost localities in section 5.03 of Rev. Proc. 2005-67 (changes listed by key cities).

(1) The following localities have been added to the list of high-cost localities: Santa Barbara, California; South Lake Tahoe, California; Fort Lauderdale, Florida; Fort Walton Beach/DeFuniak Springs, Florida; and Stuart, Florida.

(2) The portion of the year for which the following are high-cost localities has been changed: Aspen, Colorado; Miami, Florida; Chicago, Illinois; Cambridge/St. Michaels, Maryland; Nantucket, Massachusetts; and Jamestown/Middletown/Newport, Rhode Island.

(3) The following localities have been removed from the list of high-cost localities: Napa, California; San Diego, California; Silverthorne/Breckenridge, Colorado; Bar Harbor, Maine; Conway, New Hampshire; Cape May/Ocean City, New Jersey; Riverhead/Ronkonkoma/Melville/Smithtown/Huntington Station/Amagansett/East Hampton/Montauk/Southampton/Islandia/Commack/Medford/Stony Brook/Hauppauge/Centereach, New York; and Tarrytown/White Plains/New Rochelle/Yonkers, New York.

(4) The following localities have been redefined: Baltimore no longer includes Baltimore County; Manhattan, New York no longer includes Queens; and Washington, D.C. no longer includes Loudoun County, Virginia.

.05 Specific limitation.

(1) Except as provided in section 5.05(2) of this revenue procedure, a payor that uses the high-low substantiation method with respect to an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. See section 5.06 of this revenue procedure for transition rules.

(2) With respect to an employee described in section 5.05(1) of this revenue procedure, the payor may reimburse actual expenses or use the meal and incidental expenses only per diem substantiation method described in section 4.02 of this revenue procedure for any travel away from home, and may use the per diem substantiation method described in section 4.01 of this revenue procedure for any OCONUS travel away from home.

.06 Transition rules. A payor who used the substantiation method of section 4.01 of Rev. Proc. 2005-67 for an employee during the first 9 months of calendar year 2006 may not use the high-low substantiation method in section 5 of this revenue procedure for that employee until January 1, 2007. A payor who used the high-low substantiation method of section 5 of Rev. Proc. 2005-67 for an employee during the first 9 months of calendar year 2006 must continue to use the high-low substantiation method for the remainder of calendar year 2006 for that employee. A payor described in the previous sentence may use the rates and high-cost localities published in section 5 of Rev. Proc. 2005-67, in lieu of the updated rates and high-cost localities provided in section 5 of this revenue procedure, for travel on or after October 1, 2006, and before January 1, 2007, if those rates and localities are used consistently during this period for all employees reimbursed under this method.

.01 In general. The federal per diem rate and the federal M&IE rate described in section 3.02 of this revenue procedure for the locality of travel will be applied in the same manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301-11 (2006), except as provided in sections 6.02 through 6.04 of this revenue procedure.

.02 Federal per diem rate. A receipt for lodging expenses is not required in determining the amount of expenses deemed substantiated under section 4.01 or 5.01 of this revenue procedure. See section 7.01 of this revenue procedure for the requirement that the employee substantiate the time, place, and business purpose of the expense.

.03 Federal per diem or M&IE rate. A payor is not required to reduce the federal per diem rate or the federal M&IE rate for the locality of travel for meals provided in kind, provided the payor has a reasonable belief that meal and incidental expenses were or will be incurred by the employee during each day of travel.

.04 Proration of the federal per diem or M&IE rate. Pursuant to the Federal Travel Regulations, in determining the federal per diem rate or the federal M&IE rate for the locality of travel, the full applicable federal M&IE rate is available for a full day of travel from 12:01 a.m. to 12:00 midnight. The method described in section 6.04(1) of this revenue procedure must be used for purposes of determining the amount deemed substantiated under section 4.03 or 4.05 of this revenue procedure for partial days of travel away from home. For purposes of determining the amount deemed substantiated under section 4.01, 4.02, 4.04, or 5 of this revenue procedure for partial days of travel away from home, either of the following methods may be used to prorate the federal M&IE rate to determine the federal per diem rate or the federal M&IE rate for the partial days of travel:

(1) The rate may be prorated using the method prescribed by the Federal Travel Regulations. Currently the Federal Travel Regulations allow three-fourths of the applicable federal M&IE rate for each partial day during which the employee or self-employed individual is traveling away from home in connection with the performance of services as an employee or self-employed individual. The same ratio may be applied to prorate the allowance for incidental expenses described in section 4.05 of this revenue procedure; or

(2) The rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels away from home from 9 a.m. one day to 5 p.m. the next day, a method of proration that results in an amount equal to two times the federal M&IE rate will be treated as being in accordance with reasonable business practice (even though only one and a half times the federal M&IE rate would be allowed under the Federal Travel Regulations).

.05 Application of the appropriate § 274(n) limitation on meal expenses. Except as provided in section 6.05(4), all or part of the amount of an expense deemed substantiated under this revenue procedure is subject to the appropriate limitation under § 274(n) (see section 2.02 of this revenue procedure) on the deductibility of food and beverage expenses.

(1) If an amount for meal and incidental expenses is computed pursuant to section 4.03 of this revenue procedure, the taxpayer must treat that amount as an expense for food and beverages.

(2) If a per diem allowance is paid only for meal and incidental expenses, the payor must treat an amount equal to the lesser of the allowance or the federal M&IE rate for the locality of travel for each day (or partial day, see section 6.04 of this revenue procedure) as an expense for food and beverages.

(3) If a per diem allowance is paid for lodging, meal, and incidental expenses, the payor must treat an amount equal to the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee is away from home as an expense for food and beverages. For purposes of the preceding sentence, if a per diem allowance for lodging, meal, and incidental expenses is paid at a rate that is less than the federal per diem rate for the locality of travel for each day (or partial day), the payor may treat an amount equal to 40 percent of the allowance as the federal M&IE rate for the locality of travel for each day (or partial day).

(4) If an amount for incidental expenses is computed under section 4.05 of this revenue procedure, none of the amount so computed is subject to limitation under § 274(n) on the deductibility of food and beverage expenses.

.06 No double reimbursement or deduction. If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses, or meal and incidental expenses, in accordance with section 4 or 5 of this revenue procedure, any additional payment with respect to those expenses is treated as paid under a nonaccountable plan, is included in the employee’s gross income, is reported as wages or other compensation on the employee’s Form W-2, “Wage and Tax Statement,” and is subject to withholding and payment of employment taxes. Similarly, if an employee or self-employed individual computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 or 4.04 of this revenue procedure, no other deduction is allowed to the employee or self-employed individual with respect to those expenses. For example, assume an employee receives a per diem allowance from a payor for lodging, meal, and incidental expenses, or for meal and incidental expenses, incurred while traveling away from home. During that trip, the employee pays for dinner for the employee and two business associates. The payor reimburses as a business entertainment meal expense the meal expense for the employee and the two business associates. Because the payor also pays a per diem allowance to cover the cost of the employee’s meals, the amount paid by the payor for the employee’s portion of the business entertainment meal expense is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee’s Form W-2, and is subject to withholding and payment of employment taxes.

.07 Related parties. Sections 4.01 and 5 of this revenue procedure do not apply if a payor and an employee are related within the meaning of § 267(b), but for this purpose the percentage of ownership interest referred to in § 267(b)(2) is 10 percent.

.01 If the amount of travel expenses is deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure, and the employee substantiates to the payor the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with paragraphs (b)(2) and (c) (other than subparagraph (2)(iii)(A) thereof) of § 1.274-5, the employee is deemed to satisfy the adequate accounting requirements of § 1.274-5(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of § 1.274-5(c). See § 1.62-2(e)(1) for the rule that an arrangement must require business expenses to be substantiated to the payor within a reasonable period of time.

.02 An arrangement providing per diem allowances will be treated as satisfying the requirement of § 1.62-2(f)(2) of returning amounts in excess of expenses if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) any portion of the allowance that relates to days of travel not substantiated, even though the arrangement does not require the employee to return the portion of the allowance that relates to days of travel substantiated and that exceeds the amount of the employee’s expenses deemed substantiated. For example, assume a payor provides an employee an advance per diem allowance for meal and incidental expenses of $250, based on an anticipated 5 days of business travel at $50 per day to a locality for which the federal M&IE rate is $39, and the employee substantiates 3 full days of business travel. The requirement to return excess amounts is treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) the portion of the allowance that is attributable to the 2 unsubstantiated days of travel ($100), even though the employee is not required to return the portion of the allowance ($33) that exceeds the amount of the employee’s expenses deemed substantiated under section 4.02 of this revenue procedure ($117) for the 3 substantiated days of travel. However, the $33 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed in section 7.04 of this revenue procedure.

.03 An employee is not required to include in gross income the portion of a per diem allowance received from a payor that is less than or equal to the amount deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 of this revenue procedure. See § 1.274-5(f)(2)(i). In addition, that portion of the allowance is treated as paid under an accountable plan, is not reported as wages or other compensation on the employee’s Form W-2, and is exempt from the withholding and payment of employment taxes. See § 1.62-2(c)(2) and (c)(4).

.04 An employee is required to include in gross income only the portion of the per diem allowance received from a payor that exceeds the amount deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 of this revenue procedure. See § 1.274-5(f)(2)(ii). In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee’s Form W-2, and is subject to withholding and payment of employment taxes. See § 1.62-2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).

.05 If the amount of the expenses that is deemed substantiated under the rules provided in section 4.01, 4.02, or 5 of this revenue procedure is less than the amount of the employee’s business expenses for travel away from home, the employee may claim an itemized deduction for the amount by which the business travel expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business travel expenses, includes on Form 2106, “Employee Business Expenses,” the deemed substantiated portion of the per diem allowance received from the payor, and includes in gross income the portion (if any) of the per diem allowance received from the payor that exceeds the amount deemed substantiated. See § 1.274-5(f)(2)(iii). However, for purposes of claiming this itemized deduction with respect to meal and incidental expenses, substantiation of the amount of the expenses is not required if the employee is claiming a deduction that is equal to or less than the amount computed under section 4.03 of this revenue procedure minus the amount deemed substantiated under sections 4.02 and 7.01 of this revenue procedure. The itemized deduction is subject to the appropriate limitation (see section 2.02 of this revenue procedure) on meal and entertainment expenses provided in § 274(n) and the 2-percent floor on miscellaneous itemized deductions provided in § 67.

.06 An employee who pays or incurs amounts for meal expenses and does not receive a per diem allowance for meal and incidental expenses may deduct an amount computed pursuant to section 4.03 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the appropriate limitation on meal and entertainment expenses provided in § 274(n) and the 2-percent floor on miscellaneous itemized deductions provided in § 67. See section 7.07 of this revenue procedure for the treatment of an employee who does not pay or incur amounts for meal expenses and does not receive a per diem allowance for incidental expenses.

.07 An employee who does not pay or incur amounts for meal expenses and does not receive a per diem allowance for incidental expenses may deduct an amount computed pursuant to section 4.05 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions provided in § 67. See section 7.06 of this revenue procedure for the treatment of an employee who pays or incurs amounts for meal expenses and does not receive a per diem allowance for meal and incidental expenses.

.08 A self-employed individual who pays or incurs meal expenses for a calendar day (or partial day) of travel away from home may deduct an amount computed pursuant to section 4.03 of this revenue procedure in determining adjusted gross income under § 62(a)(1). This deduction is subject to the appropriate limitation on meal and entertainment expenses provided in § 274(n).

.09 A self-employed individual who does not pay or incur meal expenses for a calendar day (or partial day) of travel away from home may deduct an amount computed pursuant to section 4.05 of this revenue procedure in determining adjusted gross income under § 62(a)(1).

.10 If a payor’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of § 62(c) and the regulations thereunder, all payments under the arrangement will be treated as made under a nonaccountable plan. See § 1.62-2(k). Thus, these payments are included in the employee’s gross income, are reported as wages or other compensation on the employee’s Form W-2, and are subject to withholding and payment of employment taxes. See § 1.62-2(c)(3), (c)(5), and (h)(2).

.01 The portion of a per diem allowance, if any, that relates to the days of business travel substantiated and that exceeds the amount deemed substantiated for those days under section 4.01, 4.02, or 5 of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B).

.02 In the case of a per diem allowance paid as a reimbursement, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes in the payroll period in which the payor reimburses the expenses for the days of travel substantiated. See § 1.62-2(h)(2)(i)(B)(2).

.03 In the case of a per diem allowance paid as an advance, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the days of travel with respect to which the advance was paid are substantiated. See § 1.62-2(h)(2)(i)(B)(3). If some or all of the days of travel with respect to which the advance was paid are not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those days within a reasonable period of time, the portion of the allowance that relates to those days is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period. See § 1.62-2(h)(2)(i)(A).

.04 In the case of a per diem allowance only for meal and incidental expenses for travel away from home paid to an employee in the transportation industry by a payor that uses the rule in section 4.04(4) of this revenue procedure, the excess of the per diem allowance paid for the period over the amount deemed substantiated for the period under section 4.02 of this revenue procedure (after applying section 4.04(4) of this revenue procedure), is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the excess is computed. See § 1.62-2(h)(2)(i)(B)(4).

.05 For example, assume that an employer pays an employee a per diem allowance to cover business expenses for meals and lodging for travel away from home at a rate of 120 percent of the federal per diem rate for the localities to which the employee travels. The employer does not require the employee to return the 20 percent by which the reimbursement for those expenses exceeds the federal per diem rate. The employee substantiates 6 days of travel away from home: 2 days in a locality in which the federal per diem rate is $160 and 4 days in a locality in which the federal per diem rate is $120. The employer reimburses the employee $960 for the 6 days of travel away from home (2 x (120% x $160) + 4 x (120% x $120)), and does not require the employee to return the excess payment of $160 (2 days x $32 ($192-$160) + 4 days x $24 ($144-$120)). For the payroll period in which the employer reimburses the expenses, the employer must withhold and pay employment taxes on $160. See section 8.02 of this revenue procedure.

This revenue procedure is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to an employee on or after October 1, 2006, with respect to travel away from home on or after October 1, 2006. For purposes of computing the amount allowable as a deduction for travel away from home, this revenue procedure is effective for meal and incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2006.

Rev. Proc. 2005-67 is superseded.

The principal author of this revenue procedure is Jeffrey T. Rodrick of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Rodrick at (202) 622-4930 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking.

This document contains proposed regulations that would generally eliminate country-by-country reporting by a regulated investment company (RIC) to its shareholders of foreign source income that the RIC takes into account and foreign taxes that it pays. RICs will continue to report this information directly to the IRS. The regulations will affect certain RICs that pay foreign taxes and the shareholders of those RICs.

Written or electronic comments and requests for a public hearing must be received by December 18, 2006.

Send submissions to: CC:PA:LPD:PR (REG-105248-04), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be sent electronically via the IRS Internet site at: www.irs.gov/regs or Federal eRulemaking Portal at www.regulations.gov (IRS REG-105248-04).

Concerning the proposed regulations, Susan Thompson Baker, (202) 622-3930; concerning submissions of comments and requests for a public hearing, Kelly Banks, (202) 622-7180 (not toll-free numbers).

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

The principal author of this regulation is Susan Thompson Baker of the Office of Associate Chief Counsel (Financial Institutions and Products).

* * * * *

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9286) under section 45G of the Internal Revenue Code relating to the railroad track maintenance credit determined for qualified railroad track maintenance expenditures paid or incurred by a Class II or Class III railroad and other eligible taxpayers during the taxable year. The temporary regulations reflect changes to the law made by the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

Written or electronic comments must be received by December 7, 2006.Outlines of topics to be discussed at the public hearing scheduled for Tuesday, January 9, 2007, at 10 a.m. must be received by December 8, 2006.

Send submissions to: CC:PA:LPD:PR (REG-142270-05), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be sent electronically, via the IRS Internet site at http://www.irs.gov.regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-142270-05). The public hearing will be held in the auditorium of the New Carrollton Federal Building, 5000 Ellin Road, Lanham, MD 20706.

Concerning the proposed regulations, Winston H. Douglas, (202) 622-3110; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly D. Banks, (202) 622-7180 (not toll-free numbers).

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

The principal author of these regulations is Winston H. Douglas, Office of the Associate Chief Counsel (Passthroughs and Special Industries).

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Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing; correction.

This document contains corrections to notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing (REG-112994-06, 2006-27 I.R.B. 47) that was published in the Federal Register on Tuesday, June 6, 2006 (71 FR 32495) relating to the determination of whether a foreign entity shall be treated as a surrogate foreign corporation under section 7874(a)(2)(B).

Milton Cahn at (202) 622-3918 (not a toll-free number).