Employee relocation costs. This ruling addresses the tax treatment of costs an employer incurs in connection with three different home purchase programs the employer may offer to employees who are being relocated. Transactions under the three programs are analyzed to determine whether, based on the benefits and burdens of ownership of an employee's home, the transactions are treated for tax purposes as a sale of the home by the employee to the employer followed by a separate sale by the employer to a third party buyer, or as one sale by the employee to the third party buyer facilitated by the employer.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning January 1, 2006, will be 7 percent for overpayments (6 percent in the case of a corporation), 7 percent for underpayments, and 9 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 4.5 percent.

This notice announces that Treasury and the Service intend to exercise regulatory authority under section 901(1)(3) of the Code not to apply the credit disallowance rules of section 901(1) to foreign withholding taxes on royalties received in “ordinary course” back-to-back computer software licensing arrangements. The notice solicits comments on the exception as well as related issues under sections 901(1) and 901(k).

This notice informs taxpayers that guidance will be issued regarding the election to treat members of a family as a single S corporation shareholder provided in section 1361(c)(1) of the Code, which was created by the American Jobs Creation Act of 2004. Taxpayers may rely on guidance described in the notice until actual guidance is issued.

Proposed regulations under section 412 of the Code provide guidance regarding mortality tables to be used in determining the current liability of a qualified defined benefit plan under section 412(l)(7). A public hearing is scheduled for April 19, 2006.

Distributions; recontributions; loans; Katrina Emergency Tax Relief Act of 2005 (KETRA). This notice describes various aspects of sections 101 and 103 of KETRA. The notice addresses distributions, recontributions, 3-year ratable inclusions, 1-year inclusions and loans. The notice contains numerous examples of how these provisions work in the context of eligible retirement plans.

Plan amendments; retroactive annuity starting date; elective deferrals. This notice clarifies the interaction of the amendment timing deadlines for plans qualified under section 401(a) of the Code as set forth in Rev. Proc. 2005-66 with the deadlines set forth in various other published guidance. This notice also provides transitional relief from certain deadlines, thus giving sponsors, practitioners, and employers additional time to adopt those required amendments. Notices 2004-84 and 2005-5 modified.

This procedure amends the final withholding foreign partnership and withholding foreign trust agreements contained in Rev. Proc. 2003-64 by expanding the availability of simplified documentation, reporting and withholding procedures, which are currently available only if the withholding foreign partnership is a general partner of the partnership or the withholding foreign trust is a trustee of the trust. This procedure removes this relatedness requirement thus expanding the availability of the simplified procedures. This procedure also makes a conforming change to the portion of the Qualified Intermediary agreement contained in Rev. Proc. 2003-64. Rev. Proc. 2003-64 modified.

Optional standard mileage rates. This procedure announces 44.5 cents as the optional rate for deducting or accounting for expenses for business use of an automobile, 14 cents as the optional rate for use of an automobile as a charitable contribution, and 18 cents as the optional rate for use of an automobile as a medical or moving expense for 2006. Special rates apply to the charitable use of an automobile for the provision of relief related to Hurricane Katrina. The procedure also provides rules for substantiating the deductible expenses of using an automobile for business, moving, medical, or charitable purposes. Rev. Proc. 2004-64, as modified by Announcement 2005-71, superseded.

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

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

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

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

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

The Commissioner ACQUIESCES in the following decision:

Montgomery v. Commissioner,^[1]

122 T.C. 1 (2004)

Whether the transactions in the following situations are, for federal tax purposes, a sale of a home by an employee to an employer through the employer’s agent, a relocation management company, followed by a separate sale of that home by the employer to a third party buyer, or one sale of the home from the employee to the third party buyer facilitated by the employer through the relocation management company.

Section 61(a) of the Internal Revenue Code provides that except as otherwise provided in Subtitle A, gross income means all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, fringe benefits, and similar items, and gains derived from dealings in property. See generally §§ 1.61-1, 1.61-2, and 1.61-6 of the Income Tax Regulations.

Section 82 provides that except as provided in § 132(a)(6), gross income includes (as compensation for services) any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence that is attributable to employment or self-employment. See generally § 1.82-1.

Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized.

The examples in § 1.6045-4(r) illustrate the information reporting rules in § 1.6045-4 for real estate transactions. Example (2) in § 1.6045-4(r) describes a transaction in which an employee, C, who is being transferred by his employer, accepts an offer to purchase C’s home from Y, a corporation acting on behalf of the employer to facilitate the relocation of transferred employees. C transfers the home to Y for $250,000 by executing a deed to the property in blank and giving Y a power of attorney to dispose of the home. C also immediately vacates the home, whereupon Y duly pays all costs associated with the home and is entitled to all income from the home, including sales proceeds. Shortly thereafter, Y sells the residence to D and inserts D’s name in the deed previously executed by C. Thus, neither Y nor the employer ever becomes a record owner of the residence. C’s transfer of the residence to Y is a sale of reportable real estate as defined in § 1.6045-4(b)(2) and is subject to information reporting under § 1.6045-4. However, information reporting of the subsequent sale to D is not required because Y, as a corporation, is a transferor that is exempt from information reporting under § 1.6045-4(d)(1).

The issue is whether the transactions described in Situation 1, Situation 2, and Situation 3 involve two separate sales of the home, a first sale from the employee to the employer and a second sale from the employer to a third party buyer, or only one sale from the employee to the third party buyer. A sale occurs for federal tax purposes upon the transfer of the benefits and burdens of ownership. Whether the benefits and burdens of ownership have been transferred is a question of fact that must be ascertained from the intention of the parties as evidenced by their written agreements read in the light of attending facts and circumstances. See Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237 (1981); see also Major Realty v. Commissioner, 749 F.2d 1483, 1486 (11th Cir. 1985).

Courts consider the following factors in determining whether the benefits and burdens of ownership are transferred: (1) whether legal title passes; (2) how the parties treat the transaction; (3) whether an equity was acquired in the property; (4) whether the contract creates a present obligation on the seller to execute and deliver a deed and a present obligation on the purchaser to make payments; (5) whether the right of possession is vested in the purchaser; (6) which party pays the property taxes; (7) which party bears the risk of loss or damage to the property; and (8) which party receives the profits from the operation and sale of the property. Grodt and McKay, 77 T.C. at 1237-1238.

Although the passage of legal title is a significant factor, it is not determinative. Yelencsics v. Commissioner, 74 T.C. 1513, 1527 (1980); Deyoe v. Commissioner, 66 T.C. 904, 910 (1976). Thus, for federal tax purposes a sale occurs upon the transfer of the benefits and burdens of ownership rather than upon the satisfaction of the technical requirements for passage of legal title under state law. Derr v. Commissioner, 77 T.C. 708, 723 (1981); Yelencsics, 74 T.C. at 1527. See also Rev. Rul. 72-252, 1972-1 C.B. 193 (sale occurs when the purchaser executes an unconditional contract to purchase property, acquires possession, and assumes other burdens and privileges of ownership, even if the deed to the property is delivered later). Consequently, the execution of a contract to purchase real estate in the future generally is not a realization event. See Rev. Rul. 69-93, 1969-1 C.B. 139.

In Amdahl Corp. v. Commissioner, 108 T.C. 507 (1997), the court considered whether payments made by the taxpayer to relocation service companies to assist in the disposition of homes of relocated employees were deductible as ordinary expenses or as capital losses. The Internal Revenue Service contended that the taxpayer acquired ownership of the employees’ homes, that the homes were capital assets when resold by the taxpayer, and that the payments were deductible only as capital losses. The taxpayer argued that the payments were a form of employee benefits deductible as ordinary and necessary business expenses.

On the facts presented in Amdahl, the court agreed with the taxpayer that it did not acquire ownership of the employees’ homes, and that the payments were deductible as ordinary expenses. The court found that the most significant factors of the taxpayer’s relocation service programs demonstrated that the employees retained the benefits and burdens of ownership of the homes. In particular, the court emphasized that the relocating employees retained legal title to their homes through the use of blank deeds; that it was not the intent of the parties to transfer ownership of the homes, as evidenced by the fact the taxpayer did not generally hold itself out to the public as the purchaser or owner of the homes; that the contracts of sale did not create present obligations on the relocation service companies and the employees to effect a transfer of ownership of the homes; and that the employees received the profits from the subsequent sales of the homes by the taxpayer to third parties.

Pursuant to a benefits and burdens analysis of the transactions in Situation 1, there are two separate sales of the home. Under the contract of sale between A and Y, A is obligated to, and does, deliver a deed to the home to Y. This delivery is accomplished whether A delivers to Y at closing a deed with Y’s name inserted as grantee or a blank deed. See § 1.6045-4(r), Example (2).

In Situation 1, the delivery of the deed by A to convey ownership of the home to Y is accompanied by Y’s corresponding obligation to pay the purchase price of the home to A. On the settlement date, Y acquires all of A’s interest and equity in the home.

A and Y treat the transaction as a sale of the home from A to Y. In this regard, the contract provides that A is selling, and Y is buying, the home. After purchasing the home, Y deals with mortgage holders, insurance companies, home maintenance companies, taxing jurisdictions, utility companies, real estate brokers, and other members of the public in its own name and as if it were the owner of the home. If any sales agreement subsequently entered into by Y with a third party buyer does not close, Y remains responsible for all costs and risks attributable to ownership.

After settlement, Y has the sole right to possession of the home. Y also agrees to pay real property and other taxes with respect to the home. Y will sustain any loss or benefit from any gain if the consideration to A (payments and any assumed liabilities) is greater or less than the amount received by Y from a sale to a third party buyer. Y has the risk of loss due to casualty and is responsible for insuring the home and making any and all necessary repairs to the home.

By virtue of the agreement between X and Y, Y is acting as X’s agent. The application of the above factors establishes that the benefits and burdens of ownership of the home transfer from A to X, whether or not a blank deed is sufficient under local law to transfer legal title to the home to X. While the reason X acquires the benefits and burdens of ownership of the home is to facilitate A’s relocation, this motivation is not incompatible with concluding that X acquired the property. See Rev. Ruls. 72-339, 1972-2 C.B. 31, and 82-204, 1982-2 C.B. 192; § 1.6045-4(r), Example (2).

Thus, in Situation 1, A sells the home to X for $500x. Any gain on the sale of the home is realized by A under § 1001 and § 61(a)(3), and none of this amount constitutes taxable compensation to A under § 61(a)(1). X, acting through Y, separately sells the home to B for $490x.

Applying the benefits and burdens analysis to the transactions in Situation 2, the fact that C exercises the amended value option does not alter the conclusion that there are two separate sales of the home. For the reasons discussed with respect to the sale of the home from A to X in Situation 1, the benefits and burdens of ownership also transfer from C to X in the sale of the home in Situation 2. Furthermore, the sale of C’s home to X is not contingent in any respect on X’s sale of the home to D or any other third party buyer. X’s agent, Y, is identified as the seller in the sales agreement with D, and under no circumstances is C entitled to any part of any gain realized if the consideration received by X on the sale of the home to D exceeds the consideration paid to C by X on the purchase of the home.

Thus, in Situation 2, C sells the home to X for $520x. Any gain on the sale of the home is realized by C under § 1001 and § 61(a)(3), and none of this amount constitutes taxable compensation to C under § 61(a)(1). X separately sells the home to D for $520x.

However, applying the benefits and burdens analysis to the transactions in Situation 3 yields a different result. In Situation 3 the amended value option offered under the contract between X and Z, the relocation company acting as X’s agent, differs significantly from the option described in Situation 2. The sale of E’s home to Z, acting for X, at the higher amended price is contingent on Z entering into a contract at that price with F, the third party buyer located by E. In addition, E retains the right to approve any offer or counter-offer in any negotiations between Z and F. Therefore, although X, through its agent Z, is burdened with some costs in connection with the transaction, E effectively retains the rights to negotiate the final contract and obtain the benefit of a higher price for the property. See Amdahl, 108 T.C. at 523 (employer “did not acquire beneficial ownership of the residences of its relocating employees”).

Thus, in Situation 3 the transaction is, for federal tax purposes, one sale of the home from E to F for $510x, facilitated by X through its agent Z. Any gain on the sale of the home is realized by E under § 1001 and § 61(a)(3). Any expenses paid by X, directly or through its agent Z, with respect to the home, including maintenance costs, taxes, insurance, losses, and other costs associated with the home would be considered paid on behalf of E by virtue of E’s employment with X. Consequently, any such amounts paid by X constitute taxable compensation to E under § 61(a)(1).

The conclusions in this revenue ruling with respect to Situation 1 and Situation 2 apply to circumstances involving substantially similar relocation service programs. The Service will follow the Amdahl opinion in circumstances involving relocation service programs that are substantially similar to the programs described in that opinion, and in other circumstances, such as those described in Situation 3, which indicate that the benefits and burdens of ownership of the employees’ homes are not transferred to the employer. Consistent with the holdings in Situation 1 and Situation 2, the use of a blank deed will not, by itself, cause a program to be treated as substantially similar to the programs described in Amdahl.

The transactions in Situation 1 and Situation 2 are, for federal tax purposes, sales of a home by an employee to an employer through the employer’s agent, a relocation management company, followed by a separate sale of that home by the employer to a third party buyer. The transaction in Situation 3 is, for federal tax purposes, one sale of a home by an employee to a third party buyer facilitated by the employer through the relocation management company.

The principal author of this revenue ruling is Edward C. Schwartz of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Schwartz at (202) 622-4960 (not a toll-free call).

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(2)(B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹/₂ of 1 percent, the rate is increased to the next highest full percent).

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of October 2005 is 4 percent. Accordingly, an overpayment rate of 7 percent (6 percent in the case of a corporation) and an underpayment rate of 7 percent are established for the calendar quarter beginning January 1, 2006. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning January 1, 2006, is 4.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning January 1, 2006, is 9 percent. These rates apply to amounts bearing interest during that calendar quarter.

The 7 percent rate also applies to estimated tax underpayments for the first calendar quarter in 2006 and for the first 15 days in April 2006.

Interest factors for daily compound interest for annual rates of 4.5 percent, 6 percent, 7 percent, and 9 percent are published in Tables 14, 17, 19, and 23 of Rev. Proc. 95-17, 1995-1 C.B. 556, 568, 571, 573, and 577.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

The principal author of this revenue ruling is Crystal Foster of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Foster at (202) 622-7198 (not a toll-free call).

This notice provides guidance regarding the application of section 901(l) of the Internal Revenue Code (Code). In particular, it addresses section 901(l)(1)(B), which disallows a foreign tax credit for certain withholding taxes on items of income or gain to the extent the recipient of the item is under an obligation to make related payments with respect to positions in substantially similar or related property. The Treasury Department and the Internal Revenue Service (IRS) expect to issue regulations that incorporate the guidance provided in this notice.

Section 832 of the American Jobs Creation Act of 2004 (P.L. 108-357) (the Act) added new subsection (l) to section 901 of the Code. Section 901(l) generally disallows a foreign tax credit for foreign withholding tax on any item of income (other than dividends) or gain with respect to property if (a) the recipient of the item has not held the property for more than 15 days (within a 31-day testing period), exclusive of periods during which the recipient is protected from risk of loss, or (b) the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Section 901(l)(3) provides that the Secretary may by regulation provide that section 901(l)(1) does not apply to property where such application is not necessary to carry out the purposes of section 901(l). Section 901(l) is effective for amounts that are paid or accrued after November 21, 2004, the date which is 30 days after the date of enactment of the Act. Section 901(l) provides a rule similar to section 901(k), enacted in 1997, which disallows a foreign tax credit for certain foreign taxes paid with respect to certain dividends.

The Treasury Department and the IRS remain concerned about transactions that involve inappropriate foreign tax credit results. In this regard, the Treasury Department and the IRS believe that the credit disallowance rules of section 901(l) are important tools in preventing transactions designed for tax purposes to separate foreign taxes from the related foreign income. The language of section 901(l) and its legislative history, however, make clear that the Treasury Department and the IRS are authorized to exercise regulatory authority to prevent application of the general rule of section 901(l) in appropriate cases.

The Treasury Department and the IRS have become aware of certain business arrangements involving computer software licensing in which application of the credit disallowance rules of section 901(l) is not necessary to carry out the purposes of section 901(l). Under a typical business arrangement, a domestic corporation (X) licenses rights to a computer program (the master license agreement) to another domestic corporation (Y) for use in computers and similar and related equipment that Y employs in connection with its business or that it manufactures and markets to customers. Y conducts its business operations through various domestic and foreign subsidiaries, sublicensing rights to X’s computer program to the subsidiaries as permitted under the terms and conditions of the master license agreement. X licenses the computer program to Y rather than directly to each of Y’s subsidiaries because X wishes to centralize its customer relationship with Y and minimize administrative burdens, minimize its exposure to the credit risk and local risk of Y’s foreign subsidiaries, and protect its rights in the computer program. Pursuant to the master license agreement, Y makes payments to X when (a) Y or Y’s subsidiaries reproduce the licensed computer program on computers and other equipment used by Y or Y’s subsidiaries or (b) Y or Y’s subsidiaries reproduce and distribute X’s computer program on computers and other equipment manufactured and marketed to customers by Y or Y’s subsidiaries. Pursuant to the sublicense agreements, Y’s subsidiaries make payments to Y when they reproduce X’s computer program on computers and other equipment that they use or when they reproduce and distribute X’s computer program on computers and other equipment that they manufacture and market to customers. Foreign gross-basis withholding taxes may be imposed with respect to the payments by Y’s foreign subsidiaries to Y.

As noted, section 901(l) generally disallows a foreign tax credit for foreign withholding tax on any item of income (other than dividends) or gain with respect to property if the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, and section 901(l)(3) provides that the Secretary may by regulation provide that section 901(l)(1) does not apply to property where such application is not necessary to carry out the purposes of section 901(l).

Pursuant to section 901(l)(3), the Treasury Department and the IRS have determined that the application of section 901(l) to foreign withholding taxes imposed on payments in a back-to-back computer program licensing arrangement in the ordinary course of the licensor’s and licensee’s respective trades or businesses is not necessary to carry out the purposes of section 901(l). For this purpose, a “back-to-back computer program licensing arrangement” is a transaction or series of transactions in which (a) a domestic corporation (the master licensor) transfers a copyright right in a computer program or a copy of the computer program (as those terms are defined in Treas. Reg. §1.861-18(c) and (f)) to a domestic corporation (the head licensee), and (b) the head licensee transfers a copyright right in the computer program or a copy of the computer program to one or more of its affiliates, as permitted under the terms and conditions of the master license agreement, for use in computers and similar and related equipment manufactured and marketed by the affiliate (in the case of a transfer of a copyright right) or for the affiliate’s own use (in the case of a transfer of a copy of the computer program). For this purpose, an affiliate is any member of the head licensee’s affiliated group as defined in section 1504(a), except that foreign corporations and section 936 corporations meeting the ownership requirements of section 1504(a) are also included in the affiliated group.

For purposes of this notice, a back-to-back computer program licensing arrangement will be in the ordinary course of the licensor’s and licensee’s respective trades or businesses if (1) the arrangement is consistent with normal business practices of the master licensor, independent of tax considerations, such as maintaining a centralized customer relationship with its licensee and minimizing administrative burdens and commercial risks; (2) the master licensor or one or more members of its affiliated group (as defined in section 1504(a)) is regularly engaged in the business of selling, leasing, or licensing computer programs; and (3) in the case of each transfer of a copyright right in the computer program or a copy of the computer program to an affiliate of the head licensee, where the payments with respect to such transfer are subject to foreign withholding taxes, the affiliate uses the copyright rights or the copy of the computer program in a trade or business within the meaning of Treas. Reg. §1.367(a)-2T(b)(2) and (b)(5).

Pursuant to section 901(l)(3), the Treasury Department and the IRS expect to issue regulations providing that section 901(l)(1)(B) will not apply to disallow a credit for foreign gross-basis withholding taxes imposed on income or gain with respect to back-to-back computer program licensing arrangements described in the preceding two paragraphs. In addition, the Treasury Department and the IRS are considering issuing regulations providing that section 901(l)(1)(B) generally will not apply to payments between members of the same consolidated group. The Treasury Department and the IRS also contemplate issuing regulations under section 901(k) and (l) addressing issues on which comments are solicited below.

The exception from the application of section 901(l)(1)(B) described in this notice is effective for amounts that are paid or accrued after November 21, 2004 (the effective date of section 901(l)). Until regulations incorporating the guidance set forth in this notice are issued, taxpayers may rely on the guidance contained in this notice.

The Treasury Department and the IRS request comments concerning the exception to section 901(l)(1)(B) described in this notice and any additional issues that should be addressed by regulations. In particular, comments are requested on (a) whether the licensing exception should apply in the case of sublicenses to related parties that are not corporations (and which test of “relatedness” should apply), (b) the extent to which the licensing exception should apply if the master licensor or head licensee is a foreign corporation, (c) other types of licensing arrangements and types of property that should be covered by the licensing exception, (d) what restrictions should apply as part of the ordinary course of a trade or business requirement, and (e) other types of transactions that are not within the purposes of section 901(l) and the reasons for excluding such transactions from the application of section 901(l).

In addition, comments are requested on the definitions of “related payments” and “positions in substantially similar or related property” for purposes of section 901(k) and (l). In particular, comments are requested on the application of section 901(k) where the recipient of a dividend is obligated to make payments under an arrangement where such payments reflect not only the amount of the dividend but also other factors, such as changes in the value of the dividend-paying stock, dividend performance or changes in the value of a portfolio of stocks, or obligations under a debt instrument, annuity, or insurance contract. Finally, comments are requested on how regulations should address the effect of hedging transactions (including hedges of risk with respect to interest rate or currency fluctuations and credit risk) on the holding period and related payment rules of section 901(k) and (l).

Written comments may be submitted to the Office of Associate Chief Counsel (International), Attention: Ginny Chung (Notice 2005-90), CC:INTL:3, Internal Revenue Service, 1111 Constitution Avenue, NW, IR-4555, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov. Comments will be available for public inspection and copying. For further information regarding this notice, contact Ms. Chung of the Office of Associate Chief Counsel (International) at (202) 622-3850 (not a toll-free call).

The purpose of this notice is to inform taxpayers that Treasury and the Internal Revenue Service intend to issue future guidance regarding the election under § 1361(c)(1)(D) of the Internal Revenue Code, which allows members of a family to be treated as a single S corporation shareholder (hereinafter, the election). The election was created by § 231 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (the Act), which was enacted on October 22, 2004. The guidance will provide that the election is made in a manner similar to that described in this notice. Until such guidance is issued, taxpayers may rely on this notice.

Section 231 of the Act allows any family member to make an election under new § 1361(c)(1)(D) of the Internal Revenue Code to treat all members of the family as one shareholder of an S corporation for purposes of determining the number of shareholders of the corporation. The election is relevant only to the determination of whether the corporation has no more than 100 shareholders as required under §1361(b)(1)(A) and has no impact on any other existing requirement for qualification as an S corporation.

The term “members of the family” is defined in §1361(c)(1)(B) to include (i) the common ancestor, (ii) the lineal descendants of the common ancestor, and (iii) the spouses (or former spouses) of the lineal descendants or of the common ancestor. The common ancestor may not be more than six generations removed from the youngest generation of shareholders who would be members of the common ancestor’s family (but for the six-generation limit for identifying the common ancestor). This test is applied as of the later of the effective date of § 1361(c)(1), as amended by the Act, or the time the S corporation election under § 1362(a) (the S corporation election) is made. The election may be made (except as provided in Treasury regulations) by any member of the family. The election does not affect the requirement under § 1362(a)(2) that an S corporation election must be consented to by all shareholders, whether or not "members of the family,” who are shareholders at the time of the S corporation election.

The election may be made for taxable years of the S corporation beginning after December 31, 2004. The election will be effective as of the first day of the S corporation’s taxable year identified in the election as the first taxable year of the corporation for which the election is effective, and shall remain in effect until terminated as provided in regulations prescribed by the Secretary.

A member of the family who is (or is treated under § 1361 and the regulations thereunder as) a shareholder of the S corporation may make the election. The election is made by notifying the corporation to which the election applies. The notification shall identify by name the member of the family making the election, the “common ancestor” of the family to which the election applies, and the first taxable year of the corporation for which the election is to be effective.

For purposes of identifying the common ancestor (who does not have to be alive at the time the election is made) any spouse or former spouse of the common ancestor will be treated as being in the same generation as the common ancestor, and any spouse or former spouse of a lineal descendant of the common ancestor will be treated as being in the same generation as the lineal descendant to whom that spouse is or was married.

For purposes of the election, the estate of a deceased member of the family will be considered to be a member of the family during the period in which the estate, or a trust described in § 1361(c)(2)(A)(iii), holds stock in the S corporation.

Additionally, for purposes of the election, the members of the family will include:

(1) Each potential current beneficiary of an electing small business trust (ESBT) who is a member of the family,

(2) The income beneficiary of a qualified subchapter S trust (QSST) who makes the QSST election, if that income beneficiary is a member of the family,

(3) Each beneficiary of a trust who is a member of the family, if the trust was created primarily to exercise the voting power of stock transferred to it,

(4) The member of the family for whose benefit a trust described in § 1361(c)(2)(A)(vi) was created,

(5) The deemed owner of a trust treated as wholly owned under subpart E of Part I of subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, if that deemed owner is a member of the family, and

(6) The owner of an entity disregarded as an entity separate from its owner under § 301.7701-3 of the Procedure and Administration Regulations, if that owner is a member of the family.

If a corporation has two or more elections in effect and the members of one family for which the election has been made (the inclusive family) include all the members of another family for which the election was also made (the subsumed family), then the members of the inclusive family will be counted as one shareholder for purposes of § 1361(b)(1)(A) as long as the inclusive family’s election is in effect, and the members of the subsumed family will not be counted as a separate and additional shareholder.

The election will be effective as of the first day of the corporation’s taxable year designated by the shareholder making the election. Any election will remain in effect until terminated as provided in regulations.

Taxpayers may have already taken certain actions in order to make this election by various forms of notification to the corporation or to the IRS. In order for the election to be effective for taxable years beginning after December 31, 2004, taxpayers will need to provide the information described in this guidance to the corporation (to the extent not already provided to the corporation).

The corporation is required to keep records in accordance with § 6001 and the regulations thereunder.

The principal author of this notice is Bradford R. Poston of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Bradford R. Poston at (202) 622-3060 (not a toll-free call).

This notice provides guidance relating to the application of sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005, P.L. 109-73 (KETRA) for qualified individuals and eligible retirement plans. KETRA was enacted on September 23, 2005. Under section 101 of KETRA, qualified individuals receive favorable tax treatment with respect to distributions from eligible retirement plans that are qualified Hurricane Katrina distributions ( Katrina distributions). A Katrina distribution is not subject to the 10% additional tax under § 72(t) of the Code (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs), is generally includible in income over a 3-year period, and, to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan (recontributed) within a 3-year period, will not be includible in income. Section 103 of KETRA increases the allowable plan loan amount under § 72(p) of the Code and permits a suspension of payments for plan loans outstanding on or after August 25, 2005, that are made to qualified individuals.

Under § 402(c)(8) of the Code, an eligible retirement plan includes an individual retirement arrangement (IRA) under § 408(a) or (b), a qualified plan under § 401(a), an annuity plan under § 403(a), a section 403(b) plan, and a governmental deferred compensation plan under § 457(b). Distributions from these plans are generally includible in the distributee’s gross income in the year of the distribution. For example, for qualified plans, § 402(a) provides that any amount actually distributed to a distributee is taxable to the distributee in the taxable year of the distribution under § 72. Similar rules exist for section 403(b) plans under § 403(b)(1), for governmental section 457(b) plans under § 457(a), and for IRAs under § 408(d)(1).

Section 402(f) provides that a plan is required to provide a distributee, within a reasonable period of time before an eligible rollover distribution is made, with a written explanation of the distributee’s rollover rights and the tax and other potential consequences of the distribution or rollover.

Section 402(c)(4) provides that any distribution of all or a portion of the balance to the credit of an employee under a qualified plan is an eligible rollover distribution with certain exceptions. These exceptions include substantially equal periodic payments over a specified period of at least 10 years, or for the life or the life expectancy of the employee (or the employee and the employee’s designated beneficiary); minimum distributions required under § 401(a)(9); and any distribution that is made upon the hardship of an employee. This same definition of eligible rollover distributions applies to distributions from section 403(b) plans under § 403(b)(8) and governmental section 457(b) plans under § 457(e)(16). Generally, any distribution from an IRA is eligible for rollover except a required minimum distribution or certain distributions from inherited IRAs.

Under § 401(a)(31), if a distributee elects to have an eligible rollover distribution paid directly to an eligible retirement plan and specifies the eligible retirement plan to receive the distribution, a qualified plan must pay the distribution to that eligible retirement plan in a direct rollover. Similar rules apply to section 403(b) plans under § 403(b)(10) and governmental section 457(b) plans under § 457(d)(1).

Q&A-14 of §1.401(a)(31)-1 of the Income Tax Regulations provides that if a plan accepts an invalid rollover contribution, the contribution will be treated, for purposes of applying the qualification requirements to the receiving plan, as if it were a valid rollover contribution, if two conditions are satisfied. First, when accepting the amount from the employee as a rollover contribution, the plan administrator of the receiving plan reasonably concludes that the contribution is a valid rollover contribution. Second, if the plan administrator later determines that the rollover contribution was an invalid rollover contribution, any amount attributable to the invalid rollover contribution (including earnings) must be distributed to the employee within a reasonable amount of time after the determination.

Under § 402, if an eligible rollover distribution is contributed to an eligible retirement plan in a direct rollover or within 60 days from the date of distribution as a rollover contribution, the amount rolled over is not includible in the distributee’s gross income.

Section 72(t)(1) imposes an additional tax on early distributions from eligible retirement plans. In general, this additional tax is equal to 10% of the portion of the distribution that is includible in income. For any amount distributed from a SIMPLE IRA during the 2-year period described in § 72(t)(6), the rate of the additional tax is increased from 10% to 25%. Section 72(t)(2) provides a number of exceptions to this additional tax, including, for example, exceptions for distributions made on or after the employee attains age 59¹/₂, distributions made to a beneficiary on or after the employee’s death, distributions made because of the employee’s disability, and distributions that are a part of substantially equal periodic payments made over the employee’s life or life expectancy.

Section 401(k)(2)(B)(i) generally provides that amounts attributable to elective contributions under a qualified cash or deferred arrangement may not be distributable to participants or beneficiaries earlier than severance from employment, death or disability, plan termination, or attainment of age 59¹/₂. This same restriction applies to any amount attributable to qualified nonelective contributions and qualified matching contributions under qualified cash or deferred arrangements. An amount equal to the dollar amount of elective contributions can generally be distributed upon hardship of the employee. Parallel rules apply to custodial accounts under § 403(b)(7)(A)(ii), to annuity contracts under § 403(b)(11), and to governmental section 457(b) plans under § 457(d)(1)(A).

Section 72(p) imposes certain requirements relating to plan loans. Unless these requirements are satisfied, an amount received by a participant as a loan is treated as having been received as a distribution from the plan (deemed distribution). Deemed distributions are includible in income and are subject to the 10% additional tax under § 72(t), unless an exception applies.

Under § 72(p)(2)(A), a plan loan (when added to the outstanding balance of all other loans outstanding) must not exceed the lesser of (1) $50,000 reduced by the excess of the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which the loan is made over the outstanding balance of loans from the plan on the date that the loan is made or (2) the greater of $10,000 or one-half of the present value of the participant’s nonforfeitable accrued benefit under the plan. Section 72(p)(2)(B) provides that a loan must be repaid within 5 years. However, an exception to the 5-year repayment rule applies for loans used to acquire any dwelling unit that will be used (determined at the time the loan is made) as the participant’s principal residence. Section 72(p)(2)(C) requires substantially level amortization of a plan loan (with payments not less frequently than quarterly) over the term of the loan.

Q&A-10(a) of § 1.72(p)-1 of the regulations provides that the failure to make any installment payment when due, in accordance with the terms of a loan, violates § 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and § 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due. If there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under Q&A-10(a)), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure.

This section provides guidance for eligible retirement plans (i.e., employer retirement plans and IRAs) making, or accepting recontribution of, Katrina distributions.

This section provides guidance for qualified individuals requesting and receiving Katrina distributions. A qualified individual receiving a Katrina distribution is entitled to favorable tax treatment with respect to the distribution. First, the 10% additional tax under § 72(t) of the Code (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs) does not apply to any Katrina distribution. Second, a Katrina distribution is permitted to be included in income ratably over 3 years. Third, a qualified individual is permitted to recontribute any portion of a Katrina distribution that is eligible for tax-free rollover treatment to an eligible retirement plan within 3 years from the day after the date of the distribution, and the recontribution will be treated as if it were paid in a direct rollover to an eligible retirement plan. See section 1.D of this notice for rules relating to which Katrina distributions are permitted to be recontributed. Qualified individuals will use Form 8915^[3], Qualified Hurricane Katrina Retirement Plan Distributions and Repayments, to report any recontribution made during the taxable year and to determine the amount of the Katrina distribution includible in income for the taxable year.

This section provides guidance regarding the application of section 103 of KETRA to plan loans, including a safe harbor that is treated as satisfying section 103(b) of KETRA.

The principal authors of this notice are Pamela R. Kinard and Vernon Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). 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 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday.

This notice clarifies the interaction of the amendment timing deadlines for plans qualified under § 401(a) as set forth in Rev. Proc. 2005-66, 2005-37 I.R.B. 509, with the deadlines set forth in various other published guidance. This notice also provides transitional relief from certain of those deadlines, thus giving sponsors, practitioners, and employers additional time to adopt required amendments. Pursuant to this relief, sponsors, practitioners, and employers maintaining plans qualified under § 401(a) will have an extension of the otherwise applicable deadline for adopting certain plan amendments reflecting the final retroactive annuity starting date regulations, the automatic rollover requirements under § 401(a)(31)(B) of the Internal Revenue Code, and the final §§ 401(k) and 401(m) regulations.

This notice also provides relief with respect to the satisfaction of the safe harbor notice requirement of § 401(k)(12) for plan years beginning before 2007. In addition, this notice provides relief, under the heading “Required Minimum Distributions for Defined Benefit Plans,” to sponsors of prototype individual retirement arrangements.

The Service has received inquiries with respect to the impact, if any, that Rev. Proc. 2005-66 has on the deadline for plan sponsors maintaining qualified plans to adopt plan amendments reflecting certain published guidance. Section 5.05 of Rev. Proc. 2005-66 provides a general rule for the deadline for the timely adoption of an interim or discretionary amendment. When there are statutory or regulatory changes with respect to plan qualification requirements that will impact provisions of the written plan document, the adoption of an interim amendment will generally be required by the deadline under Rev. Proc. 2005-66, as described below.

Under Rev. Proc. 2005-66, the deadline is different for a discretionary amendment than for an amendment with respect to a disqualifying provision. For a disqualifying provision^[5] or a provision that is integral to a disqualifying provision, an interim amendment must be adopted by the later of (1) the due date (including extensions) for filing the income tax return for the employer’s taxable year that includes the date on which the remedial amendment period begins^[6] or (2) the last day of the plan year that includes the date on which the remedial amendment period begins. A plan maintained by more than one employer need not be amended for a disqualifying provision until the last day of the tenth month following the last day of the plan year in which the remedial amendment period begins. A discretionary amendment must be adopted by the end of the plan year in which the plan amendment is effective.

The deadlines set forth by Rev. Proc. 2005-66 have generated concern among the practitioner community as to when plan amendments must be adopted to reflect changes in various qualification requirements. This notice re-affirms the applicability of the timing rules under Rev. Proc. 2005-66, while giving transitional relief to plan sponsors and employers that will, in some cases, provide additional time to adopt plan amendments related to the final retroactive annuity starting date regulations, automatic rollover guidance under Notice 2005-5, and final §§ 401(k) and 401(m) regulations as set forth in section IV and summarized in the Appendix to this notice.

In general, the deadlines set forth under section 5.05 of Rev. Proc. 2005-66 apply except in the following circumstances:

(1) A statutory provision or guidance issued by the Service sets forth an earlier deadline to timely adopt an amendment. For example, an amendment generally cannot be adopted retroactively when to do so would violate the anti-cutback rules of § 411(d)(6). Also, an amendment to add a qualified cash or deferred arrangement to a profit sharing plan or to change a § 401(k) plan to become a safe harbor plan cannot be adopted retroactively.

(2) A statutory provision or guidance issued by the Service sets forth a specific deadline for the adoption of an amendment that is earlier or later than the deadlines set forth under section 5.05 of Rev. Proc. 2005-66. See section V for a list of those deadlines.

In the situations set forth in this section V, the deadlines for plan amendments described below apply in lieu of the deadlines set forth in Rev. Proc. 2005-66.

Notice 2004-84 and Notice 2005-5 are modified.

The principal author of this notice is Dana Barry of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday (a toll-free call). Ms. Barry may be reached at (202) 283-9888 (not a toll-free call).

This revenue procedure modifies the final withholding foreign partnership (“WP”) and withholding foreign trust (“WT”) agreements, contained in Rev. Proc. 2003-64, 2003-2 C.B. 306, by expanding the availability of certain documentation, reporting, and withholding procedures. This revenue procedure also makes a conforming change to the portion of the Qualified Intermediary (“QI”) withholding agreement (the “QI agreement”) contained in Rev. Proc. 2003-64.

Rev. Proc. 2003-64 contains the WP and WT agreements described in Treasury Regulation § 1.1441-5(c)(2)(ii) and (e)(5)(v) and sets forth the application procedures for entering into such agreements. Rev. Proc. 2003-64 also amended the QI agreement, contained in Rev. Proc. 2000-12, 2000-1 C.B. 387, to add new Section 4A. In Rev. Proc. 2004-21, 2004-1 C.B. 702, the Internal Revenue Service (IRS) and the Treasury Department amended Section 10.01 of the WP and WT agreements and new Section 4A.01 of the QI agreement to eliminate a $200,000 cap that restricted the application of those provisions.

Section 10.02 of the WP and WT agreements and new Section 4A.02 of the QI agreement provide generally that a QI, WP, or WT may apply simplified documentation, reporting, and withholding procedures to a foreign trust or foreign partnership if certain conditions are met (the “Agency Provision”). Currently a QI, WP, or WT may apply the Agency Provision only if, among other things, the QI (or an affiliate), WP or WT is a general partner of the partnership or a trustee of the trust (the “relatedness requirement”). Upon consideration of comments received, the IRS and the Treasury Department have concluded that the relatedness requirement is unnecessary and that its elimination will facilitate compliance consistent with the objectives of the underlying reporting and withholding regimes.

Appendices 1, 2, and 3 of Rev. Proc. 2003-64, containing the WP and WT agreements and new Section 4A of the QI agreement, respectively, are amended as follows. In Appendices 1 and 2, the first paragraph of Section 10.02 of the WP and WT agreements is amended by inserting “and” before “(2)”, by replacing the semicolon before “(3)” with a period, and by deleting “and (3) the [WP/WT] is a general partner of the partnership or a trustee of the trust.” In Appendix 3, the first paragraph of Section 4A.02 of the QI agreement is amended by inserting “and” before “(2)”, by replacing the semicolon before “(3)” with a period, and by deleting “and (3) the QI, or an affiliate of the QI, is a general partner of the partnership or a trustee of the trust.”

The modifications to Rev. Proc 2003-64 made by this revenue procedure are effective as of July 10, 2003, the effective date of Rev. Proc. 2003-64. Pursuant to Section 12.02 of the QI agreement, and Section 11.02 of the WP and WT agreements, these amendments apply to all existing QI, WP, and WT agreements. These amendments will be incorporated into the text of all QI, WP, and WT agreements entered into on or after the date this revenue procedure is released.

Rev. Proc. 2003-64, 2003-2 C.B. 306, is modified.

For further information regarding this revenue procedure, contact Kathryn T. Holman at (202) 622-3840 (not a toll-free call).

This revenue procedure updates Rev. Proc. 2004-64, 2004-2 C.B. 898, as modified by Announcement 2005-71, 2005-41 I.R.B. 714, and provides optional standard mileage rates for employees, self-employed individuals, or other taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes. In addition, this revenue procedure provides optional standard mileage rates for computing the deductible costs of operating an automobile in providing donated services to charity for the provision of relief related to Hurricane Katrina and for determining the amount that may be excluded from income by taxpayers who are reimbursed for such use. This revenue procedure also provides rules under which the amount of ordinary and necessary expenses of local travel or transportation away from home that are paid or incurred by an employee will be deemed substantiated under § 1.274-5 of the Income Tax Regulations if a payor (the employer, its agent, or a third party) provides a mileage allowance under a reimbursement or other expense allowance arrangement to pay for the expenses. Use of a method of substantiation 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. The Internal Revenue Service prospectively adjusts the business, medical, and moving standard mileage rates annually (to the extent warranted).

.01 Standard mileage rates

.02 Determination of standard mileage rates. The business, medical, and moving standard mileage rates reflected in this revenue procedure are based on an annual study of the fixed and variable costs of operating an automobile conducted on behalf of the Service by an independent contractor. The charitable contribution standard mileage rate is provided in § 170(i) of the Internal Revenue Code. The Hurricane Katrina charitable contribution deduction standard mileage rate is established by § 303 of the Katrina Emergency Tax Relief Act of 2005, Pub. L. No. 109-73, 119 Stat. 2016 (KETRA). The Hurricane Katrina charitable contribution reimbursement standard mileage rate is established by § 304 of KETRA.

.01 Section 162(a) 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 the cost of operating an automobile to the extent that it is used in a trade or business. However, under § 262, no portion of the cost of operating an automobile that is attributable to personal use is deductible.

.02 Section 274(d) provides, in part, that no deduction is allowed under § 162 with respect to any listed property (as defined in § 280F(d)(4) to include passenger automobiles and any other property used as a means of transportation) 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.

.03 Section 1.274-5(j), in part, grants the Commissioner of Internal Revenue the authority to establish a method under which a taxpayer may use mileage rates to substantiate, for purposes of § 274(d), the amount of the ordinary and necessary expenses of using a vehicle for local transportation and transportation to, from, and at the destination while traveling away from home.

.04 Section 1.274-5(g), in part, grants the Commissioner the authority to prescribe rules relating to mileage allowances for ordinary and necessary expenses of using a vehicle for local transportation and transportation to, from, and at the destination while traveling away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which the allowances, if in accordance with reasonable business practice, will be regarded as (1) equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of the travel and transportation expenses for purposes of § 1.274-5(c), and (2) satisfying the requirements of an adequate accounting to the employer of the amount of the expenses for purposes of § 1.274-5(f).

.05 Section 62(a)(2)(A) allows an employee, in determining adjusted gross income, a deduction for the 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 will not be 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 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) will be 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 mileage allowances will be 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 miles 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 any portion of the allowance that relates to miles of travel not substantiated.

.08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a mileage allowance under an arrangement that meets the requirements of § 1.62-2(c)(1), the portion, if any, of the allowance that relates to miles 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), 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 excess portion.

.09 Under § 1.62-2(h)(2)(i)(B)(4), the Commissioner may provide special rules regarding the timing of withholding and payment of employment taxes on mileage allowances.

.10 Section 303 of KETRA provides that the standard mileage rate for purposes of computing the amount allowable as a charitable contribution deduction for the cost of operating an automobile for the provision of relief related to Hurricane Katrina during the period beginning on August 25, 2005, and ending on December 31, 2006, shall be 70 percent of the business standard mileage rate in effect. Section 304 of KETRA provides that taxpayers may exclude from income an amount computed at the business standard mileage rate received from a charity as reimbursement for the cost of operating an automobile for the provision of relief related to Hurricane Katrina during the period beginning on August 25, 2005, and ending on December 31, 2006. Sections 2.01 and 7.01 of this revenue procedure are revised to include these special charitable contribution standard mileage rates for 2006. For the period beginning on August 25, 2005, and ending on August 31, 2005, the charitable contribution standard mileage rate is 29 cents for deduction purposes and 40.5 cents for reimbursement purposes. For the period beginning on September 1, 2005, and ending on December 31, 2005, the charitable contribution standard mileage rate is 34 cents for deduction purposes and 48.5 cents for reimbursement purposes.

.11 Section 5.06(3) of this revenue procedure clarifies the limitation on use of the business standard mileage rate by a taxpayer that has claimed the special depreciation allowance under § 168(k). Section 8.04(1) clarifies the limitation on use of a fixed and variable rate (FAVR) allowance with respect to an automobile for which an employee has claimed the special depreciation allowance under § 168(k). Section 8.05(4) clarifies the requirement that an employer’s FAVR allowance or allowances must cover at least five or more employees. Section 8.05(5) clarifies the requirement that an employee may not participate in a FAVR allowance unless the cost of the employee’s automobile was at least 90 percent of the standard automobile cost.

.01 Standard mileage rate. The term “standard mileage rate” means the applicable amount provided by the Service for optional use by employees or self-employed individuals in computing the deductible costs of operating automobiles (including vans, pickups, or panel trucks) they own or lease for business purposes, or by taxpayers in computing the deductible costs of operating automobiles for charitable, medical, or moving expense purposes.

.02 Transportation expenses. The term “transportation expenses” means the expenses of operating an automobile for local travel or transportation away from home.

.03 Mileage allowance. The term “mileage allowance” means a payment under a reimbursement or other expense allowance arrangement that meets the requirements specified in § 1.62-2(c)(1) and that is:

(1) paid with respect to the ordinary and necessary business expenses incurred, or that the payor reasonably anticipates will be incurred, by an employee for transportation expenses 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 the applicable standard mileage rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.

.04 Flat rate or stated schedule. A mileage 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 4.03 of this revenue procedure. The allowance may be paid periodically at a fixed rate, at a cents-per-mile rate, at a variable rate based on a stated schedule, at a rate that combines any of these rates, or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, a periodic payment at a fixed rate to cover the fixed costs (including depreciation (or lease payments), insurance, registration and license fees, and personal property taxes) of driving an automobile in connection with the performance of services as an employee of the employer, coupled with a periodic payment at a cents-per-mile rate to cover the operating costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of using an automobile for those purposes, is an allowance paid at a flat rate or stated schedule. Likewise, a periodic payment at a variable rate based on a stated schedule for different locales to cover the costs of driving an automobile in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule.

.01 In general. The standard mileage rate for transportation expenses is 44.5 cents per mile for all miles of use for business purposes.

.02 Use of the business standard mileage rate. A taxpayer may use the business standard mileage rate with respect to an automobile that is either owned or leased by the taxpayer. A taxpayer generally may deduct an amount equal to either the business standard mileage rate times the number of business miles traveled or the actual costs (both operating and fixed) paid or incurred by the taxpayer that are allocable to traveling those business miles.

.03 Business standard mileage rate in lieu of operating and fixed costs. A deduction using the standard mileage rate for business miles is computed on a yearly basis and is in lieu of all operating and fixed costs of the automobile allocable to business purposes (except as provided in section 9.06 of this revenue procedure). Items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees are included in operating and fixed costs for this purpose.

.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to use of the automobile for business purposes may be deducted as separate items. Likewise, interest relating to the purchase of the automobile as well as state and local personal property taxes may be deducted as separate items, but only to the extent allowable under § 163 or § 164, respectively. Section 163(h)(2)(A) expressly provides that interest is nondeductible personal interest if it is paid or accrued on indebtedness properly allocable to the trade or business of performing services as an employee. Section 164 expressly provides that state and local taxes that are paid or accrued by a taxpayer in connection with an acquisition or disposition of property will be treated as part of the cost of the acquired property or as a reduction in the amount realized on the disposition of the property. If the automobile is operated less than 100 percent for business purposes, an allocation is required to determine the business and nonbusiness portion of the taxes and interest deduction allowable.

.05 Depreciation. For owned automobiles placed in service for business purposes, and for which the business standard mileage rate has been used for any year, depreciation will be considered to have been allowed at the rate of 15 cents per mile for 2002, 16 cents per mile for 2003 and 2004, and 17 cents per mile for 2005 and 2006, for those years in which the business standard mileage rate was used. If actual costs were used for one or more of those years, the rates above do not apply to any year in which actual costs were used. The depreciation described above will reduce the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016.

.06 Limitations.

(1) The business standard mileage rate may not be used to compute the deductible expenses of (a) automobiles used for hire, such as taxicabs, or (b) five or more automobiles owned or leased by a taxpayer and used simultaneously (such as in fleet operations).

(2) The business standard mileage rate may not be used to compute the deductible business expenses of an automobile leased by a taxpayer unless the taxpayer uses either the business standard mileage rate or a FAVR allowance (as provided in section 8 of this revenue procedure) to compute the deductible business expenses of the automobile for the entire lease period (including renewals). For a lease commencing on or before December 31, 1997, the “entire lease period” means the portion of the lease period (including renewals) remaining after that date.

(3) The business standard mileage rate may not be used to compute the deductible expenses of an automobile for which the taxpayer has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed the special depreciation allowance under § 168(k), or (d) used the Accelerated Cost Recovery System (ACRS) under former § 168 or the Modified Accelerated Cost Recovery System (MACRS) under current § 168. By using the business standard mileage rate, the taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant to § 168(f)(1). If, after using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the automobile’s remaining estimated useful life (subject to the applicable depreciation deduction limitations under § 280F).

(4) The business standard mileage rate and this revenue procedure may not be used to compute the amount of the deductible automobile expenses of an employee of the United States Postal Service incurred in performing services involving the collection and delivery of mail on a rural route if the employee receives qualified reimbursements (as defined in § 162(o)) for the expenses. See § 162(o) for the rules that apply to these qualified reimbursements.

.01 Charitable. Section 170(i) provides a standard mileage rate of 14 cents per mile for purposes of computing the charitable contribution deduction for use of an automobile in connection with rendering gratuitous services to a charitable organization under § 170. The standard mileage rate is 32 cents per mile for purposes of computing the charitable contribution deduction for use of an automobile in providing donated services to charity for the provision of relief related to Hurricane Katrina. The standard mileage rate is 44.5 cents per mile for purposes of determining the amount that may be excluded from income by taxpayers who are reimbursed for the use of an automobile in providing donated services to charity for the provision of relief related to Hurricane Katrina.

.02 Medical and moving. The standard mileage rate is 18 cents per mile for use of an automobile (a) to obtain medical care described in § 213, or (b) as part of a move for which the expenses are deductible under § 217.

.03 Charitable, medical, or moving expense standard mileage rates in lieu of operating expenses. A deduction computed using the applicable standard mileage rate for charitable, medical, or moving expense miles is in lieu of all operating expenses (including gasoline and oil) of the automobile allocable to those purposes. Costs for items such as depreciation (or lease payments), insurance, and license and registration fees are not deductible, and are not included in the standard mileage rates.

.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes may be deducted as separate items. Interest relating to the purchase of the automobile and state and local personal property taxes are not deductible as charitable, medical, or moving expenses, but they may be deducted as separate items to the extent allowable under § 163 or § 164, respectively.

.01 In general.

(1) The ordinary and necessary expenses paid or incurred by an employee in driving an automobile owned or leased by the employee in connection with the performance of services as an employee of the employer will be deemed substantiated (in an amount determined under section 9 of this revenue procedure) when a payor reimburses those expenses with a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable rate payments that meet all the requirements of section 8 of this revenue procedure (a FAVR allowance).

(2) The amount of a FAVR allowance must be based on data that (a) is derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is reasonable and statistically defensible in approximating the actual expenses employees receiving the allowance would incur as owners of the standard automobile.

.02 Computation of FAVR allowance.

(1) FAVR allowance. A FAVR allowance includes periodic fixed payments and periodic variable payments. A payor may maintain more than one FAVR allowance. A FAVR allowance that uses the same payor, standard automobile (or an automobile of the same make and model that is comparably equipped), retention period, and business use percentage is considered one FAVR allowance, even though other features of the allowance may vary. A FAVR allowance also includes any optional high mileage payments; however, optional high mileage 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 when paid. See section 9.05 of this revenue procedure. An optional high mileage payment covers the additional depreciation for a standard automobile attributable to business miles driven and substantiated by the employee for a calendar year in excess of the annual business mileage for that year. If an employee is covered by the FAVR allowance for less than the entire calendar year, the annual business mileage may be prorated on a monthly basis for purposes of the preceding sentence.

(2) Periodic fixed payment. A periodic fixed payment covers the projected fixed costs (including depreciation (or lease payments), insurance, registration and license fees, and personal property taxes) of driving the standard automobile in connection with the performance of services as an employee of the employer in a base locality, and must be paid at least quarterly. A periodic fixed payment may be computed by (a) dividing the total projected fixed costs of the standard automobile for all years of the retention period, determined at the beginning of the retention period, by the number of periodic fixed payments in the retention period, and (b) multiplying the resulting amount by the business use percentage.

(3) Periodic variable payment. A periodic variable payment covers the projected operating costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a standard automobile in connection with the performance of services as an employee of the employer in a base locality, and must be paid at least quarterly. The rate of a periodic variable payment for a computation period may be computed by dividing the total projected operating costs for the standard automobile for the computation period, determined at the beginning of the computation period, by the computation period mileage. A computation period can be any period of a year or less. Computation period mileage is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a computation period and equals the retention mileage divided by the number of computation periods in the retention period. For each business mile substantiated by the employee for the computation period, the periodic variable payment must be paid at a rate that does not exceed the rate for that computation period.

(4) Base locality. A base locality is the particular geographic locality or region of the United States in which the costs of driving an automobile in connection with the performance of services as an employee of the employer are generally paid or incurred by the employee. Thus, for purposes of determining the amount of fixed costs, the base locality is generally the geographic locality or region in which the employee resides. For purposes of determining the amount of operating costs, the base locality is generally the geographic locality or region in which the employee drives the automobile in connection with the performance of services as an employee of the employer.

(5) Standard automobile. A standard automobile is the automobile selected by the payor on which a specific FAVR allowance is based.

(6) Standard automobile cost. The standard automobile cost for a calendar year may not exceed 95 percent of the sum of (a) the retail dealer invoice cost of the standard automobile in the base locality, and (b) state and local sales or use taxes applicable on the purchase of the automobile. Further, the standard automobile cost may not exceed $27,400.

(7) Annual mileage. Annual mileage is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a calendar year. Annual mileage equals the annual business mileage divided by the business use percentage.

(8) Annual business mileage. Annual business mileage is the mileage a payor reasonably projects a standard automobile will be driven by an employee in connection with the performance of services as an employee of the employer during the calendar year, but may not be less than 6,250 miles for a calendar year. Annual business mileage equals the annual mileage multiplied by the business use percentage.

(9) Business use percentage. A business use percentage is determined by dividing the annual business mileage by the annual mileage. The business use percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of the business use percentage based on records of total mileage and business mileage driven by the employees annually, a payor may use a business use percentage that is less than or equal to the following percentages for a FAVR allowance that is paid for the following annual business mileage:

(10) Retention period. A retention period is the period in calendar years selected by the payor during which the payor expects an employee to drive a standard automobile in connection with the performance of services as an employee of the employer before the automobile is replaced. The period may not be less than two calendar years.

(11) Retention mileage. Retention mileage is the annual mileage multiplied by the number of calendar years in the retention period.

(12) Residual value. The residual value of a standard automobile is the projected amount for which it could be sold at the end of the retention period after being driven the retention mileage. The Service will accept the following safe harbor residual values for a standard automobile computed as a percentage of the standard automobile cost:

.03 FAVR allowance in lieu of operating and fixed costs.

(1) A reimbursement computed using a FAVR allowance is in lieu of the employee’s deduction of all the operating and fixed costs paid or incurred by an employee in driving the automobile in connection with the performance of services as an employee of the employer, except as provided in section 9.06 of this revenue procedure. Items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, license and registration fees, and personal property taxes are included in operating and fixed costs for this purpose.

(2) Parking fees and tolls attributable to an employee driving the standard automobile in connection with the performance of services as an employee of the employer are not included in fixed and operating costs and may be deducted as separate items. Similarly, interest relating to the purchase of the standard automobile may be deducted as a separate item, but only to the extent that the interest is an allowable deduction under § 163.

.04 Depreciation.

(1) A FAVR allowance may not be paid with respect to an automobile for which the employee has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed the special depreciation allowance under § 168(k), or (d) used ACRS under former § 168 or MACRS under current § 168. If an employee uses actual costs for an owned automobile that has been covered by a FAVR allowance, the employee must use straight-line depreciation for the automobile’s remaining estimated useful life (subject to the applicable depreciation deduction limitations under § 280F).

(2) Except as provided in section 8.04(3) of this revenue procedure, the total amount of the depreciation component for the retention period taken into account in computing the periodic fixed payments for that retention period may not exceed the excess of the standard automobile cost over the residual value of the standard automobile. In addition, the total amount of the depreciation component may not exceed the sum of the annual § 280F limitations on depreciation (in effect at the beginning of the retention period) that apply to the standard automobile during the retention period.

(3) If the depreciation component of periodic fixed payments exceeds the limitations in section 8.04(2) of this revenue procedure, that section will be treated as satisfied in any year during which the total annual amount of the periodic fixed payments and the periodic variable payments made to an employee driving 80 percent of the annual business mileage of the standard automobile does not exceed the amount obtained by multiplying 80 percent of the annual business mileage of the standard automobile by the business standard mileage rate for that year (under section 5.01 of the applicable revenue procedure).

(4) The depreciation included in each periodic fixed payment portion of a FAVR allowance paid with respect to an automobile will reduce the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016. See section 8.07(2) of this revenue procedure for the requirement that the employer report the depreciation component of a periodic fixed payment to the employee.

.05 FAVR allowance limitations.

(1) A FAVR allowance may be paid only to an employee who substantiates to the payor for a calendar year at least 5,000 miles driven in connection with the performance of services as an employee of the employer or, if greater, 80 percent of the annual business mileage of that FAVR allowance. If the employee is covered by the FAVR allowance for less than the entire calendar year, these limits may be prorated on a monthly basis.

(2) A FAVR allowance may not be paid to a control employee (as defined in § 1.61-21(f)(5) and (6), excluding the $100,000 limitation in paragraph (f)(5)(iii)).

(3) An employer may not pay a FAVR allowance if at any time during a calendar year a majority of the employees covered by the FAVR allowance are management employees.

(4) An employer may not pay a FAVR allowance to any employee unless at all times during a calendar year at least five employees in total are covered by FAVR allowances provided by the employer.

(5) A FAVR allowance may be paid only with respect to an automobile (a) owned or leased by the employee receiving the payment, (b) the cost of which, as a new vehicle (whether or not purchased new by the employee), was at least 90 percent of the standard automobile cost taken into account for purposes of determining the FAVR allowance for the first calendar year the employee receives the allowance with respect to that automobile, and (c) the model year of which does not differ from the current calendar year by more than the number of years in the retention period.

(6) A FAVR allowance may not be paid with respect to an automobile leased by an employee for which the employee has used actual expenses to compute the deductible business expenses of the automobile for any year during the entire lease period. For a lease commencing on or before December 31, 1997, the “entire lease period” means the portion of the lease period (including renewals) remaining after that date.

(7) The insurance cost component of a FAVR allowance must be based on the rates charged in the base locality for insurance coverage on the standard automobile during the current calendar year without taking into account rate-increasing factors such as poor driving records or young drivers.

(8) A FAVR allowance may be paid only to an employee whose insurance coverage limits on the automobile with respect to which the FAVR allowance is paid are at least equal to the insurance coverage limits used to compute the periodic fixed payment under that FAVR allowance.

.06 Employee reporting. Within 30 days after an employee’s automobile is initially covered by a FAVR allowance, or is again covered by a FAVR allowance if coverage has lapsed, the employee by written declaration must provide the payor with the following information: (a) the make, model, and year of the employee’s automobile, (b) written proof of the insurance coverage limits on the automobile, (c) the odometer reading of the automobile, (d) if owned, the purchase price of the automobile or, if leased, the price at which the automobile is ordinarily sold by retailers (the gross capitalized cost of the automobile), and (e) if owned, whether the employee has claimed depreciation with respect to the automobile using any of the depreciation methods prohibited by section 8.04(1) of this revenue procedure or, if leased, whether the employee has computed deductible business expenses with respect to the automobile using actual expenses. The information described in (a), (b), and (c) of the preceding sentence also must be supplied by the employee to the payor within 30 days after the beginning of each calendar year that the employee’s automobile is covered by a FAVR allowance.

.07 Payor recordkeeping and reporting.

(1) The payor or its agent must maintain written records setting forth (a) the statistical data and projections on which the FAVR allowance payments are based, and (b) the information provided by the employees pursuant to section 8.06 of this revenue procedure.

(2) Within 30 days of the end of each calendar year, the employer must provide each employee covered by a FAVR allowance during that year with a statement that, for automobile owners, lists the amount of depreciation included in each periodic fixed payment portion of the FAVR allowance paid during that calendar year and explains that by receiving a FAVR allowance the employee has elected to exclude the automobile from the Modified Accelerated Cost Recovery System pursuant to § 168(f)(1). For automobile lessees, the statement must explain that by receiving the FAVR allowance the employee may not compute the deductible business expenses of the automobile using actual expenses for the entire lease period (including renewals). For a lease commencing on or before December 31, 1997, the “entire lease period” means the portion of the lease period (including renewals) remaining after that date.

.08 Failure to meet section 8 requirements. If an employee receives a mileage allowance that fails to meet one or more of the requirements of section 8 of this revenue procedure, the employee may not be treated as covered by any FAVR allowance of the payor during the period of the failure. Nevertheless, the expenses to which that mileage allowance relates may be deemed substantiated using the method described in sections 5, 9.01(1), and 9.02 of this revenue procedure to the extent the requirements of those sections are met

.01 If a payor pays a mileage allowance in lieu of reimbursing actual transportation expenses incurred or to be incurred by an employee, the amount of the expenses that is deemed substantiated to the payor is either:

(1) for any mileage allowance other than a FAVR allowance, the lesser of the amount paid under the mileage allowance or the applicable standard mileage rate in section 5.01 of this revenue procedure multiplied by the number of business miles substantiated by the employee; or

(2) for a FAVR allowance, the amount paid under the FAVR allowance less the sum of (a) any periodic variable rate payment that relates to miles in excess of the business miles substantiated by the employee and that the employee fails to return to the payor although required to do so, (b) any portion of a periodic fixed payment that relates to a period during which the employee is treated as not covered by the FAVR allowance and that the employee fails to return to the payor although required to do so, and (c) any optional high mileage payments.

.02 If the amount of transportation expenses is deemed substantiated under the rules provided in section 9.01 of this revenue procedure, and the employee actually substantiates to the payor the elements of time, place (or use), and business purpose of the transportation expenses in accordance with paragraphs (b)(2) (travel away from home) and (b)(6) (listed property, which includes passenger automobiles and any other property used as a means of transportation) of § 1.274-5T, and paragraph (c) 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.

.03 An arrangement providing mileage allowances will be treated as satisfying the requirement of § 1.62-2(f)(2) with respect to returning amounts in excess of expenses as follows:

(1) For a mileage allowance other than a FAVR allowance, the requirement to return excess amounts will be treated as satisfied 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 miles of travel not substantiated by the employee, even though the arrangement does not require the employee to return the portion of the allowance that relates to the miles 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 mileage allowance of $97 based on an anticipated 200 business miles at 48.5 cents per mile (at a time when the business standard mileage rate is 44.5 cents per mile), and the employee substantiates 120 business miles. The requirement to return excess amounts will be treated as satisfied if the employee is required to return the portion of the allowance that relates to the 80 unsubstantiated business miles ($38.80) even though the employee is not required to return the portion of the allowance ($4.80) that exceeds the amount of the employee’s expenses deemed substantiated under section 9.01 of this revenue procedure ($53.40) for the 120 substantiated business miles. However, the $4.80 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed in section 9.05.

(2) For a FAVR allowance, the requirement to return excess amounts will be treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)), (a) the portion (if any) of the periodic variable payment received that relates to miles in excess of the business miles substantiated by the employee, and (b) the portion (if any) of a periodic fixed payment that relates to a period during which the employee was not covered by the FAVR allowance.

.04 An employee is not required to include in gross income the portion of a mileage allowance received from a payor that is less than or equal to the amount deemed substantiated under section 9.01 of this revenue procedure, provided the employee substantiates in accordance with section 9.02. See § 1.274-5T(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 withholding and payment of employment taxes. See § 1.62-2(c)(2) and (c)(4).

.05 An employee is required to include in gross income the portion of a mileage allowance received from a payor that exceeds the amount deemed substantiated under section 9.01 of this revenue procedure, provided the employee substantiates in accordance with section 9.02 of this revenue procedure. See § 1.274-5T(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).

.06 If an employee’s substantiated expenses are less than the employee’s actual expenses, the following rules apply:

(1) Except as otherwise provided in section 9.06(2) of this revenue procedure with respect to leased automobiles, if the amount of the expenses deemed substantiated under the rules provided in section 9.01 of this revenue procedure is less than the amount of the employee’s business transportation expenses, the employee may claim an itemized deduction for the amount by which the business transportation expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business transportation expenses, includes on Form 2106, Employee Business Expenses, the deemed substantiated portion of the mileage allowance received from the payor, and includes in gross income the portion (if any) of the mileage allowance received from the payor that exceeds the amount deemed substantiated. See § 1.274-5T(f)(2)(iii). However, for purposes of claiming this itemized deduction, 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 applicable standard mileage rate multiplied by the number of business miles substantiated by the employee minus the amount deemed substantiated under section 9.01 of this revenue procedure. The itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions provided in § 67.

(2) An employee whose business transportation expenses with respect to a leased automobile are deemed substantiated under section 9.01(1) of this revenue procedure (relating to an allowance other than a FAVR allowance) may not claim a deduction based on actual expenses under section 9.06(1) unless the employee does so consistently beginning with the first business use of the automobile after December 31, 1997. An employee whose business transportation expenses with respect to a leased automobile are deemed substantiated under section 9.01(2) of this revenue procedure (relating to a FAVR allowance) may not claim a deduction based on actual expenses.

.07 An employee may deduct an amount computed pursuant to section 5.01 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.

.08 A self-employed individual may deduct an amount computed pursuant to section 5.01 of this revenue procedure in determining adjusted gross income under § 62(a)(1).

.09 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. Thus, the 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 mileage allowance (other than a FAVR allowance), if any, that relates to the miles of business travel substantiated and that exceeds the amount deemed substantiated for those miles under section 9.01(1) of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B).

(1) In the case of a mileage allowance paid as a reimbursement, the excess described in section 10.01 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 business miles substantiated. See § 1.62-2(h)(2)(i)(B)(2).

(2) In the case of a mileage allowance paid as an advance, the excess described in section 10.01 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 business miles 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 business miles 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 miles within a reasonable period of time, the portion of the allowance that relates to those miles 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).

(3) In the case of a mileage allowance that is not computed on the basis of a fixed amount per mile of travel (for example, a mileage allowance that combines periodic fixed and variable rate payments, but that does not satisfy the requirements of section 8 of this revenue procedure), the payor must compute periodically (no less frequently than quarterly) the amount, if any, that exceeds the amount deemed substantiated under section 9.01(1) of this revenue procedure by comparing the total mileage allowance paid for the period to the standard mileage rate in section 5.01 of this revenue procedure multiplied by the number of business miles substantiated by the employee for the period. Any excess 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).

(4) For example, assume an employer pays its employees a mileage allowance at a rate of 48.5 cents per mile (when the business standard mileage rate is 44.5 cents per mile). The employer does not require the return of the portion of the allowance that exceeds the business standard mileage rate for the business miles substantiated (4 cents). In June, the employer advances an employee $242.50 for 500 miles to be traveled during the month. In July, the employee substantiates to the employer 400 business miles traveled in June and returns $48.50 to the employer for the 100 business miles not traveled. The amount deemed substantiated for the 400 miles traveled is $178 and the employee is not required to return $16. No later than the first payroll period following the payroll period in which the 400 business miles traveled are substantiated, the employer must withhold and pay employment taxes on $16.

.02 The portion of a FAVR allowance, if any, that exceeds the amount deemed substantiated for those miles under section 9.01(2) of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B).

(1) Any periodic variable rate payment that relates to miles in excess of the business miles substantiated by the employee and that the employee fails to return within a reasonable period, or any portion of a periodic fixed payment that relates to a period during which the employee is treated as not covered by the FAVR allowance and that the employee fails to return within a reasonable period, 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).

(2) Any optional high mileage payment is subject to withholding and payment of employment taxes when paid.

This revenue procedure is effective for (1) deductible transportation expenses paid or incurred on or after January 1, 2006, and (2) mileage allowances or reimbursements paid to an employee or to a charitable volunteer (a) on or after January 1, 2006, and (b) with respect to transportation expenses paid or incurred by the employee or charitable volunteer on or after January 1, 2006.

Rev. Proc. 2004-64, as modified by Announcement 2005-71, is superseded.

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

Internal Revenue Service (IRS), Treasury

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations under section 412(l)(7)(C)(ii) of the Internal Revenue Code (Code) and section 302(d)(7)(C)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA) (Public Law 93-406, 88 Stat. 829). These regulations provide the public with guidance regarding mortality tables to be used in determining current liability under section 412(l)(7) of the Code and section 302(d)(7) of ERISA. These regulations affect plan sponsors and administrators, and participants in and beneficiaries of, certain retirement plans.

Written or electronic comments and requests to speak and outlines of topics to be discussed at the public hearing scheduled for April 19, 2006, at 10 a.m., must be received by March 29, 2006.

Send submissions to: CC:PA:LPD:PR (REG-124988-05), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-124988-05), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the regulations, Bruce Perlin or Linda Marshall at (202) 622-6090 (not a toll-free number); concerning submissions and the hearing and/or to be placed on the building access list to attend the hearing, Treena Garrett at (202) 622-7180 (not a toll-free number).

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

The principal authors of these regulations are Bruce Perlin and Linda S. F. Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in the development of these regulations.

* * * * *