Sale of seized real property by IRS; federal tax delinquency. The Supreme Court holds that the national interest in providing a federal forum for federal tax litigation is sufficiently substantial to support the exercise of federal-question jurisdiction over the disputed issue on removal. Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing.

Joint and several liability; relief under section 6015. This ruling discusses the issue of whether a taxpayer is precluded from raising a request for relief from joint and several liability under section 6015 by virtue of a previous Chapter 7 bankruptcy case in which the Service filed a proof of claim, but the bankruptcy court did not make an actual determination of tax liability.

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

Final regulations under section 6103(j) of the Code incorporate and clarify the phrase “return information reflected on returns” in conformance with the terms of section 6103(j)(5), which provides for limited disclosures of returns and return information in connection with the census of agriculture.

The Treasury Department and the IRS issued comprehensive withholding and reporting regulations (T.D. 8734 and T.D. 8881) that became effective on January 1, 2001. In Notice 2001-4, 2001-1 C.B. 267; Notice 2001-11, 2001-1 C.B. 464; and Notice 2001-43, 2001-2 C.B. 72; the Treasury Department and the IRS announced the intention to amend the final regulations. These final regulations implement certain changes announced in those notices and other changes. In addition, these final regulations provide guidance under section 411 of the American Jobs Act of 2004. Notice 2001-11 and certain sections of Notices 2001-4 and 2001-43 superseded.

The Treasury Department and the Service request information that will be considered in formulating guidance on the income tax treatment of cross licensing arrangements.

This notice modifies Announcement 2000-48, 2000-1 C.B. 1243, and Notice 2001-43, 2001-2 C.B. 72, by providing that, generally, a branch of a financial institution may not act as a qualified intermediary (QI) after December 31, 2006, in a country that does not have approved know-your-customer (KYC) rules. Announcement 2000-48 and Notice 2001-43 modified.

This announcement sets forth a copy of the mutual agreement entered into on February 15, 2006, by the Competent Authorities of the United States and Spain, regarding the treatment of limited liability companies (LLCs), S corporations, and other business entities treated as partnerships or disregarded entities for U.S. tax purposes under the U.S.-Spain income tax treaty and protocol.

Joint and several liability; relief under section 6015. This ruling discusses the issue of whether a taxpayer is precluded from raising a request for relief from joint and several liability under section 6015 by virtue of a previous Chapter 7 bankruptcy case in which the Service filed a proof of claim, but the bankruptcy court did not make an actual determination of tax liability.

This procedure provides issuers of qualified mortgage bonds (QMBs) and qualified mortgage credit certificates (MCCs) with average area purchase price safe-harbors for statistical areas in the United States and with a nationwide average purchase price for residences in the United States for purposes of the QMB rules under section 143 of the Code and the MCC rules under section 25. Rev. Proc. 2005-15 obsoleted in part.

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

Internal Revenue Service (IRS), Treasury.

Final regulations and removal of temporary regulations.

This document contains final regulations relating to the withholding of tax under sections 1441 and 1442 on certain U.S. source income paid to foreign persons and related requirements governing collection, deposit, refunds, and credits of withheld amounts under sections 1461 through 1463. Additionally, this document contains final regulations under sections 6049 and 6114. These regulations affect persons making payments of U.S. source income to foreign persons and foreign persons claiming benefits under a U.S. income tax treaty.

Effective Date: These regulations are effective March 14, 2006. The removal of §1.1441-1(e)(4)(vii)(G) is effective as of January 1, 2001.

Ethan Atticks, (202) 622-3840 (not a toll-free number).

Accordingly, 26 CFR parts 1 and 301 are amended as follows:

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

* * * * *

Whether the taxpayer is precluded from raising a request for relief from joint and several liability under section 6015 by virtue of a previous Chapter 7 bankruptcy case in which the Internal Revenue Service (Service) filed a proof of claim, but the bankruptcy court did not make an actual determination of tax liability.

Married taxpayers, H and W, sign and timely file a joint return for Year 1. During an audit, the Service determines that the joint return substantially understates the income attributable to taxpayer W. The Service issues a notice of deficiency, on which taxpayers default. In January of Year 3, the Service assesses against taxpayers income tax deficiencies, for which they are jointly and severally liable. Neither taxpayer pays the deficiency assessment. In October of Year 3, taxpayers file a voluntary joint petition for bankruptcy under Chapter 7 of Title 11 of the United States Code (Bankruptcy Code). In November of Year 3, the Service files a proof of claim asserting an unsecured priority claim for the deficiency. Neither taxpayer, nor any other party in interest, objects to the proof of claim, which is not discharged and is deemed allowed under section 502(a) of the Bankruptcy Code. Neither taxpayer requests relief from joint and several liability under section 6015 during the bankruptcy case. Neither taxpayer requests the bankruptcy court to adjudicate the merits of the tax liability under section 505 of the Bankruptcy Code.

After the bankruptcy case is closed, taxpayers H and W separate. Thereafter, H (requesting spouse) files a request for relief from joint and several liability under section 6015. No party in interest files a dischargeability proceeding.

The Bankruptcy Code provides rules for debtors to consolidate and resolve their debts to various creditors, including the Service, in various ways. Section 301 of the Bankruptcy Code allows debtors to commence a bankruptcy case by filing a voluntary petition with the bankruptcy court. Once a petition is filed, creditors have an opportunity to file proofs of claim. 11 U.S.C. § 501. A proof of claim asserts the right of a creditor to payment and can include rights that are fixed, contingent, liquidated, or unliquidated. See 11 U.S.C. § 101(5). A properly filed proof of claim is prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). The proof of claim is deemed allowed, unless a party in interest objects. 11 U.S.C. § 502(a). If a party in interest objects, the bankruptcy court, after notice and a hearing, determines the validity and amount of the claim as of the date of the petition and allows the claim in the proper amount. 11 U.S.C. § 502(b).

Generally, the bankruptcy court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed and whether or not paid. 11 U.S.C. § 505(a)(1). This includes the determination of the eligibility of a debtor for relief from joint and several liability under section 6015 in appropriate cases. See In re French, 242 B.R. 369 (Bankr. N.D. Ohio 1999). The determination of the bankruptcy court on the merits of a claim is a final judgment and, unless appealed, is binding on the parties to a contested matter. See Freytag v. Commissioner, 110 T.C. 35 (1998). The determination also precludes subsequent litigation by a debtor over the merits of the liability under principles of res judicata. See id. at 40. The Supreme Court in Commissioner v. Sunnen explained the rule of res judicata:

333 U.S. 591, 597 (1948) (quoting Cromwell v. County of Sac, 94 U.S. 351, 352 (1876)).

Although filing a bankruptcy petition commences a case, “a bankruptcy case is simply an aggregation of controversies.” See In re Martin Bros. Toolmakers, Inc., 796 F.2d 1435, 1437 (11th Cir. 1986). In order to bring a controversy before the bankruptcy court, a party generally moves for relief in a contested matter under Federal Rule of Bankruptcy Procedure 9014 or initiates an adversary proceeding under Rule 7001. The merits of a tax liability are generally raised in one of two ways. Either the debtor or the Service can seek a determination of a tax liability under section 505 of the Bankruptcy Code, or a party in interest can object to a proof of claim listing tax liabilities under section 502(a). See In re Taylor, 132 F.3d 256, 262 (5th Cir. 1998). Unless a party in interest moves for relief or initiates a proceeding, the merits of a tax liability are not before the bankruptcy court, and the bankruptcy court does not inquire into the merits of the tax liability or enter a final judgment fixing the tax liability.

Certain taxes are excepted from discharge in a Chapter 7 bankruptcy case. See 11 U.S.C. § 523(a)(1), 727(b). For example, income tax liabilities for tax years ending within three years of the bankruptcy petition are entitled to priority status and are excepted from the bankruptcy discharge under sections 523(a)(1)(A) and 507(a)(8)(A)(i). These tax liabilities are excepted from discharge under section 523(a)(1)(A) whether or not a claim was filed or allowed, and the principles of res judicata do not apply unless the merits of the tax liabilities were actually determined. Hambrick v. Commissioner, 118 T.C. 348 (2002).

A debtor or creditor may request the bankruptcy court to determine the dischargeability of a debt by initiating an adversary proceeding under Federal Rule of Bankruptcy Procedure 7001. A dischargeability proceeding is a proceeding to determine whether a bankruptcy discharge includes the discharge of liability for certain debts. A determination of the bankruptcy court in a discharge proceeding that is a final judgment on the merits bars relitigation of dischargeability. See Florida Peach Corp. v. Commissioner, 90 T.C. 678, 682 (1988). However, a discharge determination generally does not include consideration of the merits of the debt. In re Doerge, 181 B.R. 358, 364 (Bankr. S.D. Ill. 1995). There are cases in which bankruptcy courts consider the merits of a tax liability, including relief from joint and several liability, during the course of determining whether the tax liability is dischargeable. See, e.g., In re Brackin, 148 B.R. 953 (Bankr. N.D. Ala. 1992). If the bankruptcy court were to make a determination on the merits of the tax liability, that determination generally would preclude the requesting spouse from later raising a request for relief under section 6015 if the requesting spouse was a debtor in the bankruptcy case and meaningfully participated in the dischargeability proceeding. See section 6015(g)(2).

Under the facts of this revenue ruling, the Service filed a proof of claim in the bankruptcy case and neither taxpayer, and no other party in interest, filed an objection to the proof of claim under 11 U.S.C § 502(a) or moved for the bankruptcy court to determine the liability under 11 U.S.C. § 505(a). Thus, the merits of the tax liability were not determined by the bankruptcy court and the requesting spouse is not precluded from raising a request for relief under section 6015 after the bankruptcy case is closed.

The taxpayer, H, is not precluded from raising a subsequent request for relief from joint and several liability under section 6015 by virtue of the prior bankruptcy case filed by H and W in which the Service filed a proof of claim, but the bankruptcy court did not make an actual determination of the liability.

The principal author of this revenue ruling is G. William Beard of the Office of the Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division. For further information regarding this revenue ruling, contact Branch 2 of Collection, Bankruptcy & Summonses at (202) 622-3620 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations that incorporate and clarify the phrase “return information reflected on returns” in conformance with the terms of section 6103(j)(5) of the Internal Revenue Code (Code), which provides for limited disclosures of returns and return information in connection with the census of agriculture. These final regulations also remove certain items of return information that the Department of Agriculture no longer needs for conducting the census of agriculture.

Effective Date: These regulations are effective on February 22, 2006.

Deborah Lambert-Dean at (202) 622-4570 (not a toll-free number).

Accordingly, 26 CFR part 301 is amended as follows:

The principal author of these regulations is Deborah Lambert-Dean, Office of the Associate Chief Counsel, Procedure & Administration (Disclosure & Privacy Law Division).

* * * * *

The following is a copy of the Mutual Agreement entered into on February 15, 2006, by the Competent Authorities of the United States and Spain, regarding the treatment of limited liability companies (“LLCs”), S corporations, and other business entities treated as partnerships or disregarded entities for U.S. tax purposes under the U.S.-Spain income tax treaty and protocol.

The text of the agreement is as follows:

This notice requests information regarding certain transactions commonly referred to as cross licenses in connection with the consideration by the Treasury Department and the Internal Revenue Service (IRS) of requests for specific guidance on the tax treatment of such transactions.

A cross license is a contract between two parties that own intellectual property, typically patents, under which each party grants to the other a license with respect to specified property. These rights in the respective patents are often licensed on a nonexclusive and nontransferable basis. One party may make to the other party one or more cash payments representing the difference in value, in the parties’ estimation, between the parties’ respective rights covered by the cross license. As in one-way patent licenses, other intellectual property related to the exploitation of the patented invention such as know how, trademarks, and copyrights, may also be licensed between the parties.

A company typically will have a number of options available to maximize its patents’ contribution to its profitability, including exploiting its own patents in its own business, one-way licensing, and cross licensing. The Treasury Department and the IRS are aware that cross licenses may arise in a range of commercial contexts. In some cases, each of the parties may intend to exploit the cross licensed patents by making, selling, or otherwise using the patented inventions in its own business. In other cases, the parties may operate their businesses with their own patents, but seek to avoid the risk of patent infringement claims that each might make against the other as a result of the exploitation of their own patents. In between, there may be cases of varying degrees of interdependency on each other’s intellectual property in which the parties may seek both to gain access to each other’s technology as well as to mutually avoid infringement claims. In this notice, the Treasury Department and IRS solicit information on the business circumstances in which cross licenses arise, the relative frequency of different circumstances, and trends.

The Treasury Department and the IRS recognize the importance of the rights involved in cross licenses and the significance of the issues raised by these transactions. As a result, the Treasury Department and the IRS believe that cross licenses deserve careful study so that appropriate guidance can be issued on the tax treatment of such transactions.

The Treasury Department and the IRS have received requests for guidance on the tax treatment of cross licenses. Among the questions received is whether a U.S. person’s grant to a foreign person of the right to use specified intellectual property pursuant to a cross license gives rise to income that may be subject to withholding tax. In response to these requests for guidance, the Treasury Department and the IRS are analyzing, and expect to issue guidance regarding, certain tax issues related to cross licenses.

The tax treatment of cross licenses depends on the characterization of the cross licensing transactions for tax purposes. Different theories have been suggested by taxpayers and their representatives concerning the proper characterization of cross licensing transactions and the associated tax consequences. To provide a context for the request for information in the next section, a brief summary is provided below of three major theories that have been considered. Other characterizations may also be possible. The description provided below is merely background and is not intended either to be an exhaustive analysis or to be an endorsement of any particular theory or treatment.

The three theories would characterize a cross license as, alternatively, (1) a two-way license of intellectual property rights; (2) a reciprocal agreement not to assert any claims of infringement; or (3) a sale or exchange of property. The Treasury Department and the IRS are considering the most appropriate characterization for cross licensing (e.g., in light of intellectual property law, business realities, or the particular facts of the cross licensing transaction), and the income tax consequences of each theory including the amount, source, and timing of any income, expense, gain or loss from the transaction. The Treasury Department and the IRS are also considering the potential withholding tax consequences if a foreign party is involved.

The Treasury Department and the IRS request comments, information, and documents (including samples of cross license agreements as well as of technology transfer policy documents relating to the negotiation of cross licenses) for consideration in providing specific guidance regarding the appropriate tax treatment of cross licenses between U.S. persons and foreign persons. These submissions are critical to providing the Treasury Department and the IRS with the proper information from which to formulate appropriate guidance dealing with cross licensing agreements taking into account practical issues of administrability. In particular, submissions are requested addressing some or all of the following areas:

Written comments, information, and documents may be submitted to the Office of Associate Chief Counsel (International), Attention: John E. Hinding (Notice 2006-34), CC:INTL:6, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically to notice.comments@irscounsel.treas.gov. Comments will be available for public inspection and copying. Please include: Notice 2006-34 in the subject line of any electronic communications.

The deadline for submission of comments is May 31, 2006.

The principal author of this notice is John E. Hinding of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact John E. Hinding at 202-435-5156 (not a toll-free call).

This notice modifies Announcement 2000-48, 2000-1 C.B.1243, and Notice 2001-43, 2001-2 C.B. 72, by providing that, generally, a branch of a financial institution may not act as a qualified intermediary (QI) after December 31, 2006, in a country that does not have approved know-your-customer (KYC) rules.

Treasury regulation §1.1441-1(e)(5) permits a QI, as defined therein, to furnish a withholding certificate to a withholding agent on behalf of other persons for purposes of claiming and verifying reduced rates of withholding under section 1441 or 1442. To qualify as a QI, the intermediary must enter into a withholding agreement with the IRS, pursuant to §1.1441-1(e)(5)(iii), the terms of which are contained in Rev. Proc. 2000-12, 2000-1 C.B. 387 (QI Agreement). Rev. Proc. 2000-12 states that the IRS will not enter into a QI agreement that provides for the use of documentary evidence obtained under a country’s KYC rules unless it has received certain information that allows it to determine whether those KYC rules are acceptable. Once the IRS determines that a country’s KYC rules are acceptable, it lists such country as an approved jurisdiction on the IRS website. KYC rules relate to the capacity of a financial institution to determine whether their customers are U.S. persons and, if their customers are non-U.S. persons claiming the benefits of an income tax treaty, whether those customers are residents of the applicable treaty country. See Notice 2001-4, 2001-1 C.B. 267.

Announcement 2000-48 limits eligibility for QI status to financial entities organized in jurisdictions with approved KYC rules. However, Announcement 2000-48 (as modified by Notice 2001-43) permits a branch of a financial institution (but not a separate juridical entity affiliated with the financial institution) to act as a QI in a jurisdiction that does not have KYC rules, has unacceptable KYC rules, or has KYC rules awaiting IRS approval, if the branch is part of an entity organized in a country that does have acceptable KYC rules and the entity agrees to apply its home country KYC rules to the branch.

When the QI system was implemented, only a small number of jurisdictions had KYC rules that had been reviewed and approved by the IRS. In an effort to implement the QI system as quickly and broadly as possible, branches of financial entities were allowed to participate in the QI system under the standards of Announcement 2000-48 and Notice 2001-43.

Now that Treasury and the IRS have reviewed the KYC rules for all of the countries that submitted their KYC rules for review, and have approved the KYC rules of 57 countries, Treasury and the IRS believe that it is no longer prudent to permit branches of financial entities to operate as QIs in countries that do not have approved KYC rules. KYC rules are most effective when applied to the countries for which they were drafted. Further, because the QI system is largely self-regulated, it is appropriate to limit participation in the system to circumstances in which Treasury and the IRS have the greatest confidence that such self-regulation will be effective. A country’s continuing lack of an acceptable set of KYC rules raises concerns about the effectiveness of self-regulation in that country.

Branches of financial institutions will not be permitted to operate as QIs after December 31, 2006, if they are located outside of countries listed as having approved KYC rules on the IRS website at www.irs.ustreas.gov. However, branches of a financial institution that are operating as QIs under Announcement 2000-48 (as modified by Notice 2001-43) on April 3, 2006, may continue to operate as QIs through December 31, 2007, provided that (1) the financial institution mails a written request for an extension, on or before June 30, 2006, to: KYC Coordinator, Internal Revenue Service, 290 Broadway, 12^th Floor, New York, New York 10007; (2) the request identifies the jurisdictions in which such branches are located and briefly describes what steps those jurisdictions have taken to implement KYC rules; and (3) the request is approved, in writing, by the KYC Coordinator.

Branches of financial institutions that operate in non-KYC approved jurisdictions will be required to act as non-qualified intermediaries after December 31, 2006, or after December 31, 2007, as applicable.

This notice modifies Announcement 2000-48 and Notice 2001-43.

The principle authors of this notice are Jason Kleinman and Ethan Atticks of the Office of the Associate Chief Counsel (International). For further information regarding this notice, contact Jason Kleinman or Ethan Atticks at (202) 622-3840 (not a toll-free call).

This revenue procedure provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with (1) the nationwide average purchase price for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.

.01 Section 103(a) provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that section 103(a) shall not apply to any private activity bond that is not a “qualified bond” within the meaning of section 141. Section 141(e) provides, in part, that the term “qualified bond” means any private activity bond if such bond (1) is a qualified mortgage bond under section 143, (2) meets the volume cap requirements under section 146, and (3) meets the applicable requirements under section 147.

.02 Section 143(a)(1) provides that the term “qualified mortgage bond” means a bond that is issued as part of a qualified mortgage issue. Section 143(a)(2)(A) provides that the term “qualified mortgage issue” means an issue of one or more bonds by a state or political subdivision thereof, but only if: (i) all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7) of section 143; (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on mortgage financing provided by the issue are used by the close of the first semiannual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

.03 Section 143(e)(1) provides that an issue of bonds meets the purchase price requirements of section 143(e) if the acquisition cost of each residence financed by the issue does not exceed 90 percent of the average area purchase price applicable to such residence. Section 143(e)(5) provides that, in the case of a targeted area residence (as defined in section 143(j)), section 143(e)(1) shall be applied by substituting 110 percent for 90 percent.

.04 Section 143(e)(2) provides that the term “average area purchase price” means, with respect to any residence, the average purchase price of single-family residences (in the statistical area in which the residence is located) that were purchased during the most recent 12-month period for which sufficient statistical information is available. Under sections 143(e)(3) and (4), respectively, separate determinations are to be made for new and existing residences, and for two-, three-, and four-family residences.

.05 Section 143(e)(2) provides that the determination of the average area purchase price for a statistical area shall be made as of the date on which the commitment to provide the financing is made or, if earlier, the date of the purchase of the residence.

.06 Section 143(k)(2)(A) provides that the term “statistical area” means (i) a metropolitan statistical area (MSA), and (ii) any county (or the portion thereof) that is not within an MSA. Section 143(k)(2)(C) further provides that if sufficient recent statistical information with respect to a county (or portion thereof) is unavailable, the Secretary may substitute another area for which there is sufficient recent statistical information for such county (or portion thereof). In the case of any portion of a State which is not within a county, section 143(k)(2)(D) provides that the Secretary may designate as a county any area that is the equivalent of a county. Section 6a.103A-1(b)(4)(i) of the Temporary Income Tax Regulations (issued under section 103A of the Internal Revenue Code of 1954, the predecessor of section 143) provides that the term “State” includes a possession of the United States and the District of Columbia.

.07 Section 6a.103A-2(f)(5)(i) provides that an issuer may rely upon the average area purchase price safe harbors published by the Department of the Treasury for the statistical area in which a residence is located. Section 6a.103A-2(f)(5)(i) further provides that an issuer may use an average area purchase price limitation different from the published safe harbor if the issuer has more accurate and comprehensive data for the statistical area.

.08 Section 25(c) permits a state or political subdivision to establish a qualified mortgage credit certificate program. In general, a qualified mortgage credit certificate program is a program under which the issuing authority elects not to issue an amount of private activity bonds that it may otherwise issue during the calendar year under section 146, and in their place, issues mortgage credit certificates to taxpayers in connection with the acquisition of their principal residences. Section 25(a)(1) provides, in general, that the holder of a mortgage credit certificate may claim a federal income tax credit equal to the product of the credit rate specified in the certificate and the interest paid or accrued during the tax year on the remaining principal of the indebtedness incurred to acquire the residence. Section 25(c)(2)(A)(iii)(III) generally provides that residences acquired in connection with the issuance of mortgage credit certificates must meet the purchase price requirements of section 143(e).

.09 Section 143(f) imposes limitations on the income of mortgagors for whom financing may be provided by qualified mortgage bonds. In addition, section 25(c)(2)(A)(iii)(IV) provides that holders of mortgage credit certificates must meet the income requirement of section 143(f). Generally, under sections 143(f)(1) and 25(c)(2)(A)(iii)(IV), the income requirement is met only if all owner-financing under a qualified mortgage bond and all mortgage credit certificates issued under a qualified mortgage credit certificate program are provided to mortgagors whose family income is 115 percent or less of the applicable median family income. Section 143(f)(5), however, generally provides for an upward adjustment to the percentage limitation in high housing cost areas. High housing cost areas are defined in section 143(f)(5)(C) as any statistical area for which the housing cost/income ratio is greater than 1.2.

.10 Under section 143(f)(5)(D), the housing cost/income ratio with respect to any statistical area is determined by dividing (a) the applicable housing price ratio for such area by (b) the ratio that the area median gross income for such area bears to the median gross income for the United States. The applicable housing price ratio is the new housing price ratio (new housing average area purchase price divided by the new housing average purchase price for the United States) or the existing housing price ratio (existing housing average area purchase price divided by the existing housing average purchase price for the United States), whichever results in the housing cost/income ratio being closer to 1.

.11 Average area purchase price safe harbors for each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam were last published in Rev. Proc. 2005-15, 2005-9 I.R.B. 638.

.12 The nationwide average purchase price limitation was last published in section 4.02 of Rev. Proc. 2005-15. Guidance with respect to the United States and area median gross income figures that are to be used in computing the housing cost/income ratio described in section 143(f)(5) was last published in Rev. Proc. 2005-22, 2005-15 I.R.B. 886.

.13 This revenue procedure uses FHA loan limits for a given statistical area to calculate the average area purchase price safe harbor for that area. FHA sets limits on the dollar value of loans it will insure based on median home prices and conforming loan limits established by the Federal Home Loan Mortgage Corporation. In particular, FHA sets an area’s loan limit at 95 percent of the median home sales price for the area, subject to certain floors and caps measured against conforming loan limits.

.14 To calculate the average area purchase price safe harbors in this revenue procedure, the FHA loan limits are adjusted to take into account the differences between average and median purchase prices. Because FHA loan limits do not differentiate between new and existing residences, this revenue procedure contains a single average area purchase price safe harbor for both new and existing residences in a statistical area. The Treasury Department and the Internal Revenue Service have determined that FHA loan limits provide a reasonable basis for determining average area purchase price safe harbors. If the Treasury Department and the Internal Revenue Service become aware of other sources of average purchase price data, including data that differentiate between new and existing residences, consideration will be given as to whether such data provide a more accurate method for calculating average area purchase price safe harbors.

.15 The average area purchase price safe harbors listed in section 4.01 of this revenue procedure are based on FHA loan limits released January 3, 2006. FHA loan limits are available for statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. See section 3.03 of this revenue procedure with respect to FHA loan limits revised after January 3, 2006.

.16 OMB Bulletin No. 03-04, dated and effective June 6, 2003, revised the definitions of the nation’s metropolitan areas and recognized 49 new metropolitan statistical areas. The OMB bulletin no longer includes primary metropolitan statistical areas.

.01 Average area purchase price safe harbors for statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam are set forth in section 4.01 of this revenue procedure. Average area purchase price safe harbors are provided for single-family and two to four-family residences. For each type of residence, section 4.01 of this revenue procedure contains a single safe harbor that may be used for both new and existing residences. Issuers of qualified mortgage bonds and issuers of mortgage credit certificates may rely on these safe harbors to satisfy the requirements of sections 143(e) and (f). Section 4.01 of this revenue procedure provides safe harbors for MSAs and for certain counties and county equivalents. If no purchase price safe harbor is available for a statistical area, the safe harbor for “ALL OTHER AREAS” may be used for that statistical area (except for Alaska, for which a separate safe harbor is provided for statistical areas not listed).

.02 If a residence is in an MSA, the safe harbor applicable to it is the limitation of that MSA. If an MSA falls in more than one state, the MSA is listed in section 4.01 of this revenue procedure under each state.

.03 If the FHA revises the FHA loan limit for any statistical area after January 3, 2006, an issuer of qualified mortgage bonds or mortgage credit certificates may use the revised FHA loan limit for that statistical area to compute (as provided in the next sentence) a revised average area purchase price safe harbor for the statistical area provided that the issuer maintains records evidencing the revised FHA loan limit. The revised average area purchase price safe harbor for that statistical area is computed by dividing the revised FHA loan limit by .76.

.04 If, pursuant to section 6a.103A-2(f)(5)(i), an issuer uses more accurate and comprehensive data to determine the average area purchase price for a statistical area, the issuer must make separate average area purchase price determinations for new and existing residences. Moreover, when computing the average area purchase price for a statistical area that is an MSA, as defined in OMB Bulletin No. 03-04, the issuer must make the computation for the entire applicable MSA. When computing the average area purchase price for a statistical area that is not an MSA, the issuer must make the computation for the entire statistical area and may not combine statistical areas. Thus, for example, the issuer may not combine two or more counties.

.05 If an issuer receives a ruling permitting it to rely on an average area purchase price limitation that is higher than the applicable safe harbor in this revenue procedure, the issuer may rely on that higher limitation for the purpose of satisfying the requirements of section 143(e) and (f) for bonds sold, and mortgage credit certificates issued, not more than 30 months following the termination date of the 12-month period used by the issuer to compute the limitation.

.06 Section 4.02 of this revenue procedure sets forth a single nationwide average purchase price for purposes of computing the housing cost/income ratio under section 143(f)(5).

.07 Issuers must use the nationwide average purchase price set forth in section 4.02 of this revenue procedure when computing the housing cost/income ratio under section 143(f)(5) regardless of whether they are relying on the average area purchase price safe harbors contained in this revenue procedure or using more accurate and comprehensive data to determine average area purchase prices for new and existing residences for a statistical area that are different from the published safe harbors in this revenue procedure.

.08 If, pursuant to section 6.02 of this revenue procedure, an issuer relies on the average area purchase price safe harbors contained in Rev. Proc. 2005-15, the issuer must use the nationwide average purchase price set forth in section 4.02 of Rev. Proc. 2005-15 in computing the housing cost/income ratio under section 143(f)(5). Likewise, if, pursuant to section 6.05 of this revenue procedure, an issuer relies on the nationwide average purchase price published in Rev. Proc. 2005-15, the issuer may not rely on the average area purchase price safe harbors published in this revenue procedure.

.01 Average area purchase prices for single-family and two to four-family residences in MSAs, and for certain counties and county equivalents are set forth below. The safe harbor for “ALL OTHER AREAS” (found at the end of the table below) may be used for a statistical area that is not listed below.

.02 The nationwide average purchase price (for use in the housing cost/income ratio for new and existing residences) is $258,700.

Rev. Proc. 2005-15 is obsolete except as provided in section 6 of this revenue procedure.

.01 Issuers may rely on this revenue procedure to determine average area purchase price safe harbors for commitments to provide financing or issue mortgage credit certificates that are made, or (if the purchase precedes the commitment) for residences that are purchased, in the period that begins on March 17, 2006, and ends on the date as of which the safe harbors contained in section 4.01 of this revenue procedure are rendered obsolete by a new revenue procedure.

.02 Notwithstanding section 5 of this revenue procedure, issuers may continue to rely on the average area purchase price safe harbors contained in Rev. Proc. 2005-15, with respect to bonds sold, or for mortgage credit certificates issued with respect to bond authority exchanged, before April 16, 2006, if the commitments to provide financing or issue mortgage credit certificates are made on or before May 16, 2006.

.03 Except as provided in section 6.04, issuers must use the nationwide average purchase price limitation contained in this revenue procedure for commitments to provide financing or issue mortgage credit certificates that are made, or (if the purchase precedes the commitment) for residences that are purchased, in the period that begins on March 17, 2006, and ends on the date when the nationwide average purchase price limitation is rendered obsolete by a new revenue procedure.

.04 Notwithstanding sections 5 and 6.03 of this revenue procedure, issuers may continue to rely on the nationwide average purchase price set forth in Rev. Proc. 2005-15 with respect to bonds sold, or for mortgage credit certificates issued with respect to bond authority exchanged, before April 16, 2006, if the commitments to provide financing or issue mortgage credit certificates are made on or before May 16, 2006.

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1877.

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

This revenue procedure contains a collection of information requirement in section 3.03. The purpose of the collection of information is to verify the applicable FHA loan limit that issuers of qualified mortgage bonds and qualified mortgage certificates have used to calculate the average area purchase price for a given metropolitan statistical area for purposes of section 143(e) and 25(c). The collection of information is required to obtain the benefit of using revisions to FHA loan limits to determine average area purchase prices. The likely respondents are state and local governments.

The estimated total annual reporting and/or recordkeeping burden is: 15 hours.

The estimated annual burden per respondent and/or recordkeeper: 15 minutes.

The estimated number of respondents and/or recordkeepers: 60.

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

The principal authors of this revenue procedure are David E. White and Timothy L. Jones of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue procedure, contact David E. White at (202) 622-3980 (not a toll-free call).

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid the institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, the Director, Office of Professional Responsibility, is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause or (2) has been convicted of certain crimes.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions:

Under Title 31, Code of Federal Regulations, Part 10, after notice and an opportunity for a proceeding before an administrative law judge, the following individuals have been placed under suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, after notice and an opportunity for a proceeding before an administrative law judge, the following individuals have been disbarred from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, in lieu of a proceeding being instituted or continued, an attorney, certified public accountant, enrolled agent, or enrolled actuary, may offer his or her consent to the issuance of a censure. Censure is a public reprimand.

The following individuals have consented to the issuance of a Censure:

Under Title 31, Code of Federal Regulations, Part 10, an enrolled agent, in order to avoid the institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her resignation as an enrolled agent. The Director, Office of Professional Responsibility, in his discretion, may accept the offered resignation.

The Director, Office of Professional Responsibility, has accepted offers of resignation as an enrolled agent from the following individuals: