This announcement is a settlement initiative for taxpayers to resolve transactions described in Notice 2000-44, 2000-2 C.B. 255, and substantially similar transactions (Son of Boss transactions).

Section 265(a)(2); expenses and interest relating to tax-exempt income. This ruling deals with the application of section 265 of the Code to affiliated corporate groups when one member of the group borrows from outside the group and makes funds available to another member of the group that is a dealer in tax-exempt securities.

LIFO; price indexes; department stores. The March 2004 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, March 31, 2004.

Final regulations under sections 446, 860G, and 863 of the Code set out rules relating to the proper timing and source of income from fees received to induce taxpayers to become the holders of noneconomic residual interests in Real Estate Mortgage Investment Conduits (REMICs).

Proposed regulations under section 265 of the Code provide guidance regarding the consolidated return treatment of intercompany obligations that are treated as financing tax-exempt obligations. These regulations provide that, if a member of a consolidated group incurs or continues debt to a nonmember that is directly traceable to an intercompany obligation extended to a member of the group (the borrowing member) by another member of the group (the lending member), and section 265(a)(2) applies to disallow a deduction for the borrowing member’s interest expense incurred with respect to the intercompany obligation, then the lending member’s corresponding interest income will not be excluded under the intercompany transaction regulations.

This notice announces that the Service and the Treasury Department will issue temporary and proposed regulations that will modify the definition of “qualified amended return” in regulations section 1.6664-2(c)(3).

This procedure provides automatic consent procedures for taxpayers to change their method of accounting for income from REMIC inducement fees to a safe harbor method set forth in T.D. 9128. Rev. Proc. 2002-9 modified and amplified.

This announcement solicits comments and suggestions regarding the scope and details of regulations that may be proposed under section 7701(f) of the Code that will address the application of sections 265(a)(2) and 246A in transactions involving related parties, pass-through entities, or other intermediaries.

This announcement is a settlement initiative for taxpayers to resolve transactions described in Notice 2000-44, 2000-2 C.B. 255, and substantially similar transactions (Son of Boss transactions).

Alternative deficit reduction election; notice to Pension Benefit Guaranty Corporation (PBGC) and plan participants and beneficiaries. This announcement describes how notice must be given to the Pension Benefit Guaranty Corporation and to plan participants and their beneficiaries under section 302(d)(12) of the Employee Retirement Income Security Act of 1974 when an employer elects to make an alternative deficit reduction contribution under section 412(1) of the Code. This announcement also provides special timing and transitional rules. Announcement 2004-38 modified.

A list is provided of organizations now classified as private foundations.

Partnerships; amortization of intangibles. This ruling provides that if a section 197(f)(9) intangible is amortizable in the hands of a partnership, the anti-churning rules under section 1.197-2(h)(12)(vii)(A) of the regulations do not apply to curative or remedial reverse section 704(c) allocations of amortization. It also provides that if a section 197(f)(9) intangible was not amortizable in the hands of the partnership, then remedial, not curative, reverse section 704(c) allocations of amortization are permitted.

Section 1504. This notice announces circumstances in which the failure to satisfy the value requirement of section 1504(a)(2)(B) of the Code will be disregarded under section 1504(a)(5)(C) and (D) in determining whether a corporation is treated as a member of an affiliated group. The notice also announces that regulations will be proposed and invites comments.

This notice announces that the Service and the Treasury Department will issue temporary and proposed regulations that will modify the definition of “qualified amended return” in regulations section 1.6664-2(c)(3).

This announcement is a settlement initiative for taxpayers to resolve transactions described in Notice 2000-44, 2000-2 C.B. 255, and substantially similar transactions (Son of Boss transactions).

This document contains corrections to temporary regulations (T.D. 9118, 2004-15 I.R.B. 718) under section 337 of the Code that clarify that in computing the amount of stock loss attributable to the recognition of built-in gain, gain recognized on the disposition of an asset may be reduced by expenses directly attributable to the recognition of that gain.

If, pursuant to § 1.704-1(b)(2)(iv)(f) of the Income Tax Regulations, a partnership revalues a section 197 intangible, may the partnership allocate amortization with respect to the section 197 intangible so as to take into account the built-in gain or loss from the revaluation?

Situation 1. A and B are partners in the AB partnership. C contributes money (more than a de minimis amount) to the partnership in exchange for a partnership interest. The partnership revalues the assets of the partnership under § 1.704-1(b)(2)(iv)(f). The AB partnership owns several assets, including Asset 1, a section 197 intangible. Asset 1 is amortizable in the hands of the partnership. A, B, and C are not related.

Situation 2. Situation 2 is the same as Situation 1 except that Asset 1 is not amortizable in the hands of the partnership.

Section 197(a) provides that a taxpayer is entitled to an amortization deduction with respect to any amortizable section 197 intangible. The amount of the deduction is determined by amortizing the adjusted basis (for purposes of determining gain) of the intangible ratably over the 15-year period beginning with the month in which the intangible was acquired.

Section 197(c)(1) provides that, with certain exceptions, the term “amortizable section 197 intangible” means any section 197 intangible, (A) that is acquired by the taxpayer after the date of the enactment of § 197, and (B) that is held in connection with the conduct of a trade or business or an activity described in § 212.

Section 197(d)(1) provides that the term “section 197 intangible” means (A) goodwill; (B) going concern value; (C) any of the following intangible items: (i) workforce in place including its composition and terms and conditions (contractual or otherwise) of its employment, (ii) business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers), (iii) any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar items, (iv) any customer-based intangible, (v) any supplier-based intangible, and (vi) any other similar item; (D) any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof; (E) ) any covenant not to compete (or other arrangement to the extent the arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof; and (F) any franchise, trademark, or trade name.

Under § 197(f)(9)(A), the term “amortizable section 197 intangible” does not include any section 197 intangible that is goodwill or going concern value (or for which depreciation or amortization would not have been allowable but for § 197) and that is acquired by the taxpayer after the date of the enactment of § 197, if (i) the intangible was held or used at any time on or after July 25, 1991, and on or before such date of enactment by the taxpayer or a related person, (ii) the intangible was acquired from a person who held such intangible at any time on or after July 25, 1991, and on or before such date of enactment, and, as part of the transaction, the user of such intangible does not change, or (iii) the taxpayer grants the right to use such intangible to a person (or a person related to such person) who held or used such intangible at any time on or after July 25, 1991, and on or before such date of enactment.

An intangible described in § 197(f)(9) (a section 197(f)(9) intangible) is treated as an amortizable section 197 intangible only to the extent permitted under § 1.197-2(h). The purpose of the anti-churning rules of § 197(f)(9) and § 1.197-2(h) is to prevent the amortization of section 197(f)(9) intangibles unless they are transferred after the applicable effective date in a transaction giving rise to a significant change in ownership or use. Section 1.197-2(h)(1)(ii). Section 1.197-2(h)(12) provides special rules that apply for purposes of determining whether transactions involving partnerships give rise to a significant change in ownership or use.

Under § 1.197-2(h)(5), a section 197(f)(9) intangible may be amortized by the acquirer of the intangible if the intangible was an amortizable section 197 intangible in the hands of the seller (or transferor), but only if the acquisition transaction and the transaction in which the seller (or transferor) acquired the intangible or interest therein are not part of a series of related transactions.

Under § 704(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partnership agreement provided that those allocations have substantial economic effect. If the allocations under the partnership agreement do not have substantial economic effect or the partnership agreement does not provide as to a partner’s distributive shares of partnership items, then the partner’s distributive share of such items is determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances).

Section 1.704-1(b) describes various requirements that must be met for partnership allocations to have substantial economic effect. Among these requirements is that (except as otherwise provided in § 1.704-1(b)) the partnership agreement must provide for the determination and maintenance of capital accounts in accordance with the rules of § 1.704-1(b)(2)(iv).

Section 1.704-1(b)(2)(iv)(f) provides that, if certain criteria are met, the capital account maintenance rules of § 1.704-1(b)(2)(iv) will not be violated if a partnership agreement, upon the occurrence of certain events, increases or decreases the capital accounts of the partners to reflect a revaluation of partnership property (including intangibles such as goodwill) on the partnership’s books.

Section 704(c)(1)(A) provides that, under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution.

Section 1.704-3 provides rules applicable to partnership allocations under § 704(c)(1)(A). Section 1.704-3(a)(1) provides that allocations under § 704(c)(1)(A) must be made using a reasonable method that is consistent with the purpose of § 704(c). Section 1.704-3 describes three allocation methods that are generally reasonable: the traditional method, the traditional method with curative allocations, and the remedial allocation method.

Section 1.704-3(a)(6)(i) provides that the principles of § 1.704-3 apply to allocations with respect to property for which differences between book value and adjusted tax basis are created when a partnership revalues partnership property pursuant to § 1.704-1(b)(2)(iv)(f) (reverse § 704(c) allocations). Partnerships are not required to use the same allocation method for reverse § 704(c) allocations as for contributed property, even if at the time of revaluation the property is already subject to §§ 704(c)(1)(A) and 1.704-3.

Section 1.197-2(g)(4)(i) provides that, to the extent that an intangible was an amortizable section 197 intangible in the hands of the contributing partner, a partnership may make allocations of amortization deductions with respect to the intangible to all of its partners under any of the permissible methods described in the regulations under § 704(c).

Section 1.197-2(g)(4)(ii) provides that, to the extent that an intangible was not an amortizable section 197 intangible in the hands of the contributing partner, the intangible is not amortizable by the partnership. However, if a partner contributes a section 197 intangible to a partnership and the partnership adopts the remedial allocation method for making § 704(c) allocations of amortization deductions, the partnership generally may make remedial allocations of amortization deductions with respect to the contributed section 197 intangible in accordance with § 1.704-3(d).

Section 1.197-2(h)(12)(vii)(A) provides that the anti-churning rules do not apply to curative or remedial allocations of amortization with respect to a section 197(f)(9) intangible if the intangible was an amortizable section 197 intangible in the hands of the contributing partner (unless § 1.197-2(h)(10) causes the intangible to cease to be an amortizable section 197 intangible in the hands of the partnership).

Section 1.197-2(h)(12)(vii)(B) provides that, if a section 197(f)(9) intangible was not amortizable in the hands of the contributing partner, a non-contributing partner generally may receive remedial allocations of amortization under § 704(c) that are deductible for federal income tax purposes. However, such a partner may not receive remedial allocations of amortization under § 704(c) if that partner is related to the partner that contributed the intangible or if, as part of a series of related transactions that includes the contribution of the section 197(f)(9) intangible to the partnership, the contributing partner or related person (other than the partnership) becomes (or remains) a direct user of the contributed intangible. Under § 1.197-2(h)(12)(vii)(B), taxpayers may use any reasonable method to determine amortization of the asset for book purposes, provided that the method used does not contravene the purposes of the anti-churning rules.

If, under § 1.704-1(b)(2)(iv)(f), a partnership revalues a section 197 intangible that is amortizable in the hands of the partnership, then the partnership may make allocations of amortization deductions with respect to the built-in gain or loss from the revaluation (i.e., the increase or decrease, respectively, in the book value of the intangible as a result of the revaluation) to all of its partners under any of the permissible methods described in § 1.704-3. If the revalued section 197 intangible is not amortizable in the hands of the partnership, then §§ 1.197-2(g)(4)(ii) and 1.197-2(h)(12)(vii) generally prevent the partnership from allocating amortization with respect to the intangible under § 1.704-3(a)(6)(i), but do not prevent the partnership from making remedial allocations of amortization with respect to the intangible. However, remedial allocations of amortization with respect to built-in gain or loss from the revaluation of a section 197(f)(9) intangible are not allowed to the extent that such allocations are, in substance, the equivalent of a remedial allocation of amortization to a partner that is related to the “contributing partner” (with respect to the revaluation). Also, under § 1.197-2(h)(12)(vii)(B), remedial allocations of amortization with respect to the built-in gain or loss from the revaluation of a section 197(f)(9) intangible are not allowed if, as part of a series of related transactions that includes the revaluation, the “contributing partners” (with respect to the revaluation) or related persons (other than the partnership) become (or remain) direct users of the intangible.

In Situation 1, the partnership may make traditional, curative, or remedial allocations of amortization under § 1.704-3 to take into account the built-in gain or loss from the revaluation of Asset 1. Section 1.197-2(g)(4)(i). Because Asset 1 is amortizable in the hands of the AB partnership, the anti-churning rules do not apply to reverse § 704(c) allocations of amortization from Asset 1.

In Situation 2, because Asset 1 is not amortizable in the hands of AB, the anti-churning rules apply. Under §197-2(g)(4)(ii) and (h)(12)(vii)(B), the partnership may make deductible remedial, but not traditional or curative, allocations of amortization to take into account the built-in gain or loss from the revaluation of Asset 1, provided that such allocations are not limited by § 1.197-2(h)(12)(vii)(B).

If, pursuant to § 1.704-1(b)(2)(iv)(f), a partnership revalues a section 197 intangible that was amortizable in the hands of the partnership, then the § 197 anti-churning rules do not apply and the partnership may make reverse § 704(c) allocations (including curative and remedial allocations) of amortization to take into account the built-in gain or loss from the revaluation of the intangible. If the revalued section 197 intangible was not amortizable in the hands of the partnership, then the partnership may make remedial, but not traditional or curative, allocations of amortization to take into account the built-in gain or loss from the revaluation of the intangible, provided that such allocations are not limited by § 1.197-2(h)(12)(vii)(B).

The principal author of this revenue ruling is Laura C. Nash of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Nash at (202) 622-3050 (not a toll-free call).

If a member of an affiliated group borrows money and transfers the money to another member of the group that is a dealer in tax-exempt obligations, does § 265(a)(2) of the Internal Revenue Code apply to disallow the interest expense of the borrowing corporation?

Situation 1. — P and S are corporations that are members of the same affiliated group, but file separate tax returns. P and S use the calendar year as their taxable year. S is a dealer in tax-exempt obligations, whose general business includes purchasing and carrying tax-exempt securities.

On January 1, 2004, L, a bank unrelated to the affiliated group that includes P and S, lends $40x to P for 5 years. L’s loan to P provides for payments of interest on December 31 of each year at a rate higher than the appropriate applicable Federal rate. P contributes the $40x borrowed from L to the capital of S, and S uses the contributed funds in its business. Although the borrowed funds are directly traceable from P to S, they are not directly traceable to the purchase or carry of specific tax-exempt obligations by S. During its taxable year 2004, S holds an average of $500x of tax-exempt obligations (valued at their adjusted bases), and an average of $1,000x of total assets (valued at their adjusted bases). During its taxable year 2004, P holds an average of $10,000x of total assets (valued at their adjusted bases) and no tax-exempt obligations in the active conduct of its trade or business, and incurs $2x of interest expense on its $40x loan from L.

Situation 2. — The facts are the same as in Situation 1, except that P and S file a consolidated return.

Situation 3. — The facts are the same as in Situation 1, except that the funds that P borrowed from L are not directly traceable to any funds transferred from P to S and there is no other direct evidence linking the borrowed funds to any funds transferred from P to S.

Situation 4. — The facts are the same as in Situation 1, except that P loans to S the $40x borrowed from L on the same terms and conditions as the loan from L to P. During its taxable year 2004, S incurs $2x of interest expense on its $40x loan from P.

In general, a deduction is allowed under § 163 of the Code for all interest paid or accrued on indebtedness. Under § 265(a)(2), however, no deduction is allowed for interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from Federal income taxes.

Rev. Proc. 72-18, 1972-1 C.B. 740, sets forth guidelines for the application of § 265(a)(2). Section 3.01, which applies to all taxpayers, states that the application of § 265(a)(2) requires a determination of the taxpayer’s purpose in incurring or continuing each item of indebtedness, based on all the facts and circumstances. That section further states that the taxpayer’s purpose may be established by either direct or circumstantial evidence.

Section 3.02 of Rev. Proc. 72-18 provides that direct evidence of a purpose to purchase tax-exempt obligations exists when the proceeds of indebtedness are used for, and are directly traceable to, the purchase of tax-exempt obligations. Wynn v. United States, 411 F.2d 614 (3d Cir. 1969), cert. denied, 396 U.S. 1008 (1970). Section 265(a)(2) does not apply, however, when proceeds of a bona fide business indebtedness are temporarily invested in tax-exempt obligations under circumstances similar to those set forth in Rev. Rul. 55-389, 1955-1 C.B. 276.

Section 3.03 of Rev. Proc. 72-18 provides that direct evidence of a purpose to carry tax-exempt obligations exists when tax-exempt obligations are used as collateral for indebtedness. “[One] who borrows to buy tax-exempts and one who borrows against tax-exempts already owned are in virtually the same economic position. Section 265(2) [the predecessor of § 265(a)(2)] makes no distinction between them.” Wisconsin Cheeseman v. United States, 388 F.2d 420 (7^th Cir. 1968), at 422. Section 3.04 of Rev. Proc. 72-18 states that in the absence of direct evidence linking indebtedness with the purchase or carrying of tax-exempt obligations as illustrated in paragraphs 3.02 and 3.03 of Rev. Proc. 72-18, section 265(a)(2) of the Code will apply only if the totality of facts and circumstances supports a reasonable inference that the purpose to purchase or carry tax-exempt obligations exists. Stated alternatively, section 265(a)(2) will apply only when the totality of facts and circumstances establishes a “sufficiently direct relationship” between the borrowing and the investment in tax-exempt obligations. See Wisconsin Cheeseman, 388 F.2d at 422. The guidelines set forth in sections 4, 5, and 6 of Rev. Proc. 72-18 are used to determine whether such a relationship exists.

Section 3.05 of Rev. Proc. 72-18 provides that generally, when a taxpayer’s investment in tax-exempt obligations is insubstantial, the purpose to purchase or carry tax-exempt obligations will ordinarily not be inferred in the absence of direct evidence as set forth in sections 3.02 and 3.03 of that revenue procedure. Section 3.05 provides further that in the case of a corporation, an investment in tax-exempt obligations shall be presumed insubstantial only when during the taxable year the average amount of the tax-exempt obligations (valued at their adjusted bases) does not exceed 2 percent of the average total assets (valued at their adjusted bases) held in the active conduct of the trade or business. The de minimis rule of paragraph 3.05 does not apply to dealers in tax-exempt obligations.

Section 5 of Rev. Proc. 72-18 provides special rules for dealers in tax-exempt obligations. Specifically, section 5.03 states that if debt is incurred or continued for the general purpose of carrying on a brokerage business that includes the purchase of both taxable and tax-exempt obligations, and the use of the borrowed funds cannot be directly traced, it is reasonable to infer that the borrowed funds were used for all the activities of the business, including the purchase of tax-exempt obligations. Section 5 of Rev. Proc. 72-18 refers to a specific allocation formula in section 7 of Rev. Proc. 72-18, derived from the formula in Commissioner v. Leslie, 413 F.2d 636 (2d. Cir. 1969), cert. denied, 396 U.S. 1007 (1970). The formula is applied to interest on borrowed funds that are not directly traceable to tax-exempt obligations. The formula consists of a fraction, whose numerator is the average amount during the taxable year of the taxpayer’s tax-exempt obligations (valued at their adjusted bases), and whose denominator is the average amount during the taxable year of the taxpayer’s total assets (valued at their adjusted bases) minus the amount of any indebtedness the interest on which is not subject to disallowance to any extent under Rev. Proc. 72-18.

In H Enterprises International v. Commissioner, 75 T.C.M. 1948 (1998), aff’d, 183 F.3d 907 (8^th Cir. 1999), a parent and a subsidiary were members of the same consolidated group of corporations. The subsidiary declared a dividend and, a few days later, borrowed funds and immediately used part of those funds to make the dividend distribution to the parent. A portion of the distributed funds was disbursed to two investment divisions of the parent, which used the funds to acquire investments including tax-exempt obligations.

The court held that a portion of the subsidiary’s indebtedness was incurred for the purpose of purchasing or carrying tax-exempt obligations (held in the parent’s investment divisions) and, therefore, no deduction was allowed for the interest on this portion of the indebtedness under § 265(a)(2). To establish the required purposive connection under § 265(a)(2), the court reasoned that the activities of the parent corporation were relevant in determining the subsidiary’s purpose for borrowing the funds. If the analysis only focused on the borrower and not the transferee, then the purpose of the borrower corporation would always be acceptable, frustrating the legislative intent of § 265(a)(2).

In both Situations 1 and 2, following the rationale of H Enterprises, the activities of S must be taken into account to determine P’s purpose under § 265(a)(2) for borrowing the $40x of funds that are directly traceable to P’s contribution to the capital of S. In order to determine the activities of S, however, Rev. Proc. 72-18 must be applied. Because S’s brokerage business includes the purchase of both taxable and tax-exempt obligations, it is reasonable to infer under section 5.03 of Rev. Proc. 72-18 that part of P’s debt was incurred for the purpose of purchasing or carrying tax-exempt obligations. Applying the allocation formula in section 7 of Rev. Proc. 72-18, the interest expense incurred by P on the $40x borrowed is subject to partial disallowance. The ratio of S’s average tax-exempt obligations to S’s total assets is $500x/$1,000x. Therefore, one-half of the $2x interest expense incurred by P (i.e., $1x) is disallowed as a deduction to P under § 265(a)(2). P is not entitled to the 2 percent de minimis rule provided by section 3.05 of Rev. Proc. 72-18 because S is a dealer in tax-exempt obligations.

In Situation 3, there is no direct evidence that P transferred to S any portion of the $40X P borrowed from L. Without such direct evidence, the activities of S will not be taken into account to determine P’s purpose under § 265(a)(2) for borrowing the $40x and it is not reasonable to infer that part of P’s debt was incurred for the purpose of purchasing or carrying tax-exempt obligations. Therefore, none of the $2x interest expense incurred by P is disallowed as a deduction under § 265(a)(2).

In Situation 4, the $40x that P borrowed from L is directly traceable to P’s loan to S. Accordingly, the two separate back-to-back loans (i.e., the loan from L to P, followed by the loan from P to S) must each be examined for the potential application of § 265(a)(2). With regard to the loan from L to P, P uses the borrowed funds to make a loan to S, and separately accounts for the taxable interest income from this loan. P does not have a purpose of using the borrowed funds to purchase or carry tax-exempt obligations within the meaning of § 265(a)(2). With regard to the loan from P to S, although the borrowed funds are not directly traceable to S’s purchase or carry of tax-exempt obligations, § 265(a)(2) applies to S, a dealer in tax-exempt obligations, to disallow a portion of its interest expense. The portion of S’s interest deduction that is disallowed is computed by applying the allocation formula in section 7 of Rev. Proc. 72-18. The ratio of S’s average tax-exempt obligations to S’s total assets is $500x/$1,000x. Accordingly, one-half of the $2x interest expense incurred by S (i.e., $1x) is disallowed to S as a deduction under § 265(a)(2). S is not entitled to the 2 percent de minimis rule provided by section 3.05 of Rev. Proc. 72-18 because S is a dealer in tax-exempt obligations.

If a member of an affiliated group borrows money and contributes the borrowed funds to another member that is a dealer in tax-exempt obligations such that the funds contributed to the dealer are directly traceable to the contributor’s borrowing, but are not directly traceable to the dealer’s purchase or carry of tax-exempt obligations, § 265(a)(2) applies to disallow a portion of the interest expense of the contributor. The portion of the contributor’s interest deduction to be disallowed is determined by applying the allocation formula in section 7 of Rev. Proc. 72-18 to the dealer that uses the borrowed funds in its business.

If a member of an affiliated group borrows money and there is no direct evidence linking the borrowed funds to any funds transferred to another member who is a dealer in tax-exempt obligations, § 265(a)(2) does not apply to disallow any portion of the interest expense of the borrowing member based on the dealer member’s investment in tax-exempt obligations.

If the funds borrowed by a member of an affiliated group are directly traceable to a loan to another member that is a dealer in tax-exempt obligations, § 265(a)(2) does not apply to disallow the interest expense of the lending member, but does apply to disallow a portion of the interest expense of the dealer. The portion of the dealer’s interest deduction to be disallowed is determined by applying the allocation formula in section 7 of Rev. Proc. 72-18.

The principal authors of this revenue ruling are David B. Silber and Avital Grunhaus of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Silber or Ms. Grunhaus at (202) 622-3930 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final regulation.

This document contains final regulations relating to the proper timing and source of income from fees received to induce taxpayers to become the holders of noneconomic residual interests in Real Estate Mortgage Investment Conduits (REMICs).

Effective Date: These regulations are effective May 11, 2004.

Applicability Dates: For dates of applicability of the final regulations, see §§1.446-6(g) and 1.863-1(f).

For information concerning accounting for inducement fees relating to noneconomic REMIC residual interests, contact John W. Rogers III at (202) 622-3950 (not a toll-free number). For information concerning the source of REMIC inducement fee income, contact Bethany Ingwalson at (202) 622-3850 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

The principal author of these regulations is John W. Rogers III, Office of Associate Chief Counsel (Financial Institutions & Products). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

The following Department Store Inventory Price Indexes for March 2004 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, March 31, 2004.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622-7924 (not a toll-free call).

This notice announces those circumstances under which a consolidated group that owns stock of an includible corporation will be treated as satisfying the value requirement of § 1504(a)(2)(B) of the Internal Revenue Code for certain purposes. It also announces the intention of the Internal Revenue Service and the Treasury Department to propose regulations pursuant to § 1504(a)(5)(C) providing that the value requirement will be treated as satisfied if the affiliated group, in reliance on a good faith determination of value, treated such requirement as satisfied. In addition, pursuant to § 1504(a)(5)(D), the proposed regulations will disregard an inadvertent ceasing to satisfy the value requirement by reason of changes in relative values of different classes of stock. This notice describes the issues that the Service and the Treasury Department are studying and invites comments on those issues.

Section 1504(a)(1) provides that an affiliated group means one or more chains of includible corporations connected through stock ownership with a common parent which is an includible corporation, but only if (A) the common parent owns directly stock meeting the requirements of § 1504(a)(2) in at least one of the includible corporations and (B) stock meeting the requirements of § 1504(a)(2) in each of the includible corporations (other than the common parent) is owned directly by one or more of the other includible corporations. Section 1504(a)(2) imposes two requirements. First, pursuant to § 1504(a)(2)(A), the stock must possess at least 80 percent of the total voting power of the stock of the corporation. Second, pursuant to § 1504(a)(2)(B), the stock must have a value equal to at least 80 percent of the total value of the stock of the corporation (the value requirement).

Section 1504(a)(5)(C) directs the Secretary to prescribe regulations that provide that the value requirement will be treated as met if the affiliated group, in reliance on a good faith determination of value, treated it as met (the good faith exception). Section 1504(a)(5)(D) directs the Secretary to prescribe regulations that disregard an inadvertent ceasing to meet the value requirement by reason of changes in relative values of different classes of stock (the inadvertence exception). The legislative history of § 1504 reflects that the inadvertence exception should be available only if the changes in relative value are “not large” and are not “intentionally generated.” H.R. Rep. No. 98-861 at 834, 1984-3 C.B. (vol. 2) 87 (1984). Section 1504(a)(5)(C) and (D), therefore, contemplate that affiliation could be treated as continuing, notwithstanding that the value requirement is not satisfied.

The Service and Treasury Department intend to promulgate regulations implementing the provisions of § 1504(a)(5)(C) and (D). This document outlines those circumstances under which the Service will provide relief from the failure to satisfy the value requirement until temporary or final regulations are promulgated or until this notice is revised. It is possible that the standards adopted in such regulations will vary from and, in certain circumstances, be narrower than the interim relief provided in this document.

.01 Scope. Until temporary or final regulations implementing § 1504(a)(5)(C) and (D) are promulgated, or until this notice is revised, the Service will not challenge a consolidated group’s position on a consolidated return that the stock ownership of a “qualifying corporation” satisfies the value requirement for purposes of applying any “value provision” if the consolidated group (including a consolidated group that arises or continues to exist by reason of the relief provided in this notice) satisfies the requirements of either section 3.02 or section 3.03. For purposes of the preceding sentence, a “qualifying corporation” is an includible corporation (within the meaning of § 1504(b) or (c)). In addition, a “value provision” is any provision of the Code and the regulations promulgated thereunder for which ownership of stock, as defined in § 1504, representing 80 percent (or any lesser threshold percentage) of the total value of the stock of the qualifying corporation is relevant. A “value provision” is also any provision of the Code and the regulations promulgated that refers to “affiliated group” as such term is defined in § 1504.

This notice does not require a taxpayer to treat the value requirement as satisfied with respect to a corporation for purposes of any value provision if the requirements of the value provision are not in fact satisfied. This notice does not permit a taxpayer to treat the value requirement as satisfied with respect to a corporation for purposes of some but not all value provisions (see section 3.04(7)).

Finally, the relief provided in this notice extends only to the taxpayer that satisfies the requirements of section 3.02 or section 3.03. For example, assume a consolidated group’s ownership of the stock of a qualifying corporation does not satisfy the value requirement and, consistent with the terms of this notice (because it is entitled to either the good faith or inadvertence exception), the consolidated group takes the position on its consolidated return that its ownership of the stock of the qualifying corporation satisfies the value requirement. If the group sells all of its stock of the qualifying corporation, unless the purchaser of the stock independently satisfies the requirements of section 3.02, an election under § 338(h)(10) may not be made in respect of the stock of the qualifying corporation.

.02 Good Faith Exception. The requirement of this section 3.02 will be satisfied if the consolidated group made a good faith determination that the value requirement was satisfied. The requirement of this section 3.02 will cease to be treated as satisfied immediately before the occurrence of a designated event described in section 3.04, unless the consolidated group makes a good faith determination that, immediately after such designated event, the value requirement is satisfied. If, at any time prior to the occurrence of a designated event, the consolidated group knows or should know that the good faith determination that the value requirement was satisfied was incorrect, the requirement of this section 3.02 nonetheless will continue to be treated as satisfied until immediately before the occurrence of a designated event described in section 3.04.

.03 Inadvertence exception. The requirement of this section 3.03 will be satisfied if (a) the consolidated group’s ownership of stock of the corporation does not satisfy the value requirement as a result of a change in the relative values of different classes of stock and such change is not attributable to the occurrence of a designated event described in section 3.04, and (b) immediately before such change in relative values, the consolidated group’s ownership of stock of the corporation satisfied the value requirement. The requirement of this section 3.03 will cease to be treated as satisfied immediately before the occurrence of a designated event described in section 3.04.

.04 Designated Events. The following events are designated events:

(1) The corporation issues stock to a person that is not a member of the consolidated group.

(2) The corporation redeems stock owned by a member of the consolidated group, other than in complete liquidation of the corporation.

(3) A member of the consolidated group (directly or indirectly) transfers stock of the corporation to a person that is not a member of the consolidated group.

(4) The corporation after May 6, 2004, distributes with respect to its stock money or other property to a member of the consolidated group or a person related (within the meaning of § 267(b) or § 707(b)) to a member of the consolidated group. However, a transaction that is not in form a distribution with respect to a corporation’s stock (for example, a distribution deemed to occur by reason of the application of § 482) is a designated event only if (a) the corporation accounts for it on its books and records as a transaction with respect to its stock, (b) it involves the transfer of money or other property (including stock of the corporation) by the corporation to a person in satisfaction of the indebtedness of another member of the consolidated group or a person related thereto, or (c) it involves the forgiveness by the corporation of indebtedness of a member of the consolidated group or a person related (within the meaning of § 267(b) or § 707(b)) to a member of the consolidated group.

(5) The consolidated group claims a worthless stock deduction with respect to any of the stock of the corporation. In this case, the designated event shall be treated as occurring on the later of the last date on which members of the group own stock that actually satisfies the value requirement or the first day of the taxable year for which the deduction is claimed.

(6) The corporation engages in a recapitalization described in § 368(a)(1)(E).

(7) The consolidated group takes a position on its consolidated Federal income tax return that the value requirement is not satisfied for purposes of applying any value provision. In this case, unless the position taken reflects the occurrence of another designated event, the designated event shall be treated as occurring on the later of the last date on which members of the group own stock that actually satisfies the value requirement or the first day of the taxable year for which the position is taken. However, if a consolidated group took such a position before May 6, 2004, and the group would otherwise be eligible for relief under this notice, a designated event will not result from taking such inconsistent position if the group amends the relevant return or returns to take a position consistent with satisfaction of the value requirement for purposes of applying every applicable value provision.

The following paragraphs describe the issues the Service and Treasury Department are considering in connection with promulgating regulations implementing the good faith and inadvertence exceptions. The Service and Treasury Department request comments on these issues as well as any other issues that are relevant to regulations implementing these exceptions.

.01 Scope. The interim relief set forth in this notice applies only to corporations that are members of a consolidated group (including corporations that are members of a consolidated group by virtue of being entitled to the interim relief set forth in this notice). The Service and Treasury Department request comments regarding whether the good faith and inadvertence exceptions should, by regulation, permit a corporation that is not a member of a consolidated group to treat its ownership of the stock of another corporation as satisfying the value requirement. The Service and Treasury Department also request comments identifying any special issues that may arise if the good faith and inadvertence exceptions were to apply not only in the consolidated group context, but more broadly in the affiliated group context, and the manner in which those issues should be addressed.

.02 The Good Faith Exception. The Service and Treasury Department believe that, in order to establish that the affiliated group, in reliance on a good faith determination of value, treated the value requirement as satisfied, members of the affiliated group must have filed Federal income tax returns in a manner that is consistent with satisfaction of the value requirement. Consideration is being given to whether evidence, such as a third party appraisal, should be required to establish reliance on a good faith determination of value.

The Service and Treasury Department are also considering whether the good faith exception should be presumptively available if the value of the affiliated group’s ownership of the stock of the corporation does not fall below a requisite percentage that is relatively small. In addition, the Service and Treasury are considering whether to adopt a rule providing that, if the value of the affiliated group’s ownership of stock of the corporation falls below a requisite percentage, the affiliated group’s treatment of the value requirement as satisfied is not based in reliance on a good faith determination of value.

Finally, the Service and Treasury Department are considering whether the good faith exception should be available only if the affiliated group cures the value deficiency within a specified period of time after the deficiency arose, or, alternatively, after becoming aware of the deficiency.

.03 The Inadvertence Exception. The Service and Treasury Department are considering what evidence an affiliated group must produce to establish that the failure to satisfy the value requirement was inadvertent by reason of a change in the relative values of different classes of stock. The Service and Treasury Department are also considering whether the inadvertence exception should be available only if the value deficiency does not exceed a certain percentage.

The Service and Treasury Department are considering whether the inadvertence exception should be available only if the affiliated group cures the value deficiency within a certain period of time after the deficiency arose or the affiliated group became aware of it. In that regard, the Service and Treasury Department are considering whether the inadvertence exception should be available only if the value deficiency is cured by the end of the taxable year in which the affiliated group became aware of the value deficiency, by the date the original return (without extensions) for the taxable year in which the affiliated group became aware of the value deficiency, or by the end of the taxable year following the taxable year in which the group became aware of the value deficiency.

Finally, the Service and Treasury Department are considering what events, such as the designated events, should terminate the availability of the inadvertence exception.

The Service and Treasury Department are considering whether, in cases in which the inadvertence exception applies, the failure to satisfy the value requirement should not be disregarded for certain purposes. In particular, in the consolidated group context, the failure to satisfy the value requirement should not be disregarded to the extent treating that requirement as satisfied permits the group to obtain excess tax benefits. One possible approach to prevent a consolidated group from obtaining excess tax benefits would be to limit the use of losses (for example, to prevent creating or increasing an excess loss account in the stock of the corporation) and credits of the corporation to offset income of other members of the consolidated group or to reduce the tax liability of the consolidated group for a taxable year during which the value requirement is not satisfied. Comments are requested regarding whether such an approach is appropriate and what the terms of such an approach should be.

.04 Application To Different Provisions. The Service and Treasury Department request comments regarding whether the parameters of the good faith and inadvertence exceptions should vary for purposes of determining whether corporations are affiliated for different provisions of the Internal Revenue Code. That is, the Service and Treasury Department request comments regarding whether the policies underlying the various provisions of the Code for which affiliated status is relevant suggests that the good faith and inadvertence exceptions should be interpreted differently for these various provisions.

.05 Comments. Comments should refer to Notice 2004-37, and should be submitted by July 31, 2004, to:

or electronically via the Service internet site at: Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.

For further information regarding this notice, contact Mr. David Kessler of the Office of Associate Chief Counsel (Corporate) at (202) 622-7770 (not a toll-free call).

The purpose of this notice is to announce that the Internal Revenue Service and the Treasury Department will issue temporary and proposed regulations that will modify the definition of “qualified amended return” in Treasury Regulations § 1.6664-2(c)(3). The temporary regulations will provide that the period for filing a qualified amended return is terminated when the Service serves a John Doe summons under section 7609(f) of the Internal Revenue Code with respect to the taxpayer’s tax liability. The temporary regulations also will provide that the period for filing a qualified amended return is terminated when the Service contacts a promoter, organizer or material advisor concerning a listed transaction for which the taxpayer has claimed a tax benefit.

The temporary regulations will be effective for amended returns or requests for administrative adjustment filed on or after April 30, 2004.

Section 1.6664-2(c)(3) of the Treasury Regulations requires a taxpayer to file a qualified amended return before the earliest of: (1) the date on which the taxpayer is first contacted by the Service concerning an examination of the return; (2) the date on which a person described in section 6700(a) is first contacted by the Service concerning the examination of an activity described in section 6700(a) with respect to which the taxpayer claimed any tax benefit on the return directly or indirectly through the entity, plan or arrangement described in section 6700(a)(1)(A); or (3) for certain pass-through items, the date on which the pass-through entity is first contacted by the Service in connection with an examination to which the pass-through item relates.

The Service may serve a John Doe summons pursuant to section 7609(f) after a court proceeding in which the Service establishes that: (1) the summons relates to the investigation of a particular person or ascertainable group or class of persons; (2) there is a reasonable basis for believing that the person, group, or class may fail or may have failed to comply with any internal revenue provision; and (3) the information sought from the examination of records and testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

In February 2000, the Treasury Department and the Service issued temporary and proposed regulations requiring certain corporations to disclose “reportable transactions” that were reflected on their federal income tax returns. A reportable transaction included a transaction that is the same as or substantially similar to one of the types of transactions that the Service determined to be a tax avoidance transaction and identified by published guidance as a “listed transaction,” if the transaction also gave rise to federal income tax savings above a certain dollar threshold. In June 2002, the Treasury Department and the Service extended the disclosure requirement for listed transactions to individuals, partnerships, S corporations, and other noncorporate persons. This change was effective for transactions entered into on or after January 1, 2001, that had not been reported on a return filed on or before June 14, 2002. (T.D. 9000, 2002-2 C.B. 87, 6/14/2002). The June 2002 modifications also removed the dollar thresholds related to tax savings for all taxpayers engaging in listed transactions. The regulations under section 6011 requiring disclosure of reportable transactions were modified substantially in October 2002 (T.D. 9017, 2002-2 C.B. 815, 10/17/2002) and finalized in February 2003 (T.D. 9046, 2003-1 C.B. 614, 2/27/2003). The February 2003 final regulations also amended the regulations under sections 6111 and 6112 relating to the registration of and list maintenance for certain transactions.

In early 2002, the Treasury Department and the Service gave taxpayers the opportunity to avoid the imposition of certain penalties by disclosing their participation in any transaction for which the imposition of the accuracy-related penalty under section 6662 may be appropriate. In Announcement 2002-2, 2002-1 C.B. 304, the Service agreed to waive certain components of the accuracy-related penalty under section 6662 for taxpayers who disclosed any item in accordance with the terms of Announcement 2002-2 by April 23, 2002.

The principal author of this notice is Nancy M. Galib of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this notice, contact Ms. Galib at (202) 622-4940 (not a toll-free call).

This revenue procedure provides the procedures for taxpayers described in section 3 to change their methods of accounting for inducement fees received in connection with becoming holders of noneconomic residual interests in Real Estate Mortgage Investment Conduits (REMICs) to a safe harbor method provided under § 1.446-6(e)(1)-(2) of the Income Tax Regulations.

.01 Under § 1.446-6, if a taxpayer receives an inducement fee in connection with becoming the holder of a noneconomic residual interest in a REMIC, the inducement fee must be taken into account over the remaining expected life of the applicable REMIC in a manner that reasonably reflects, without regard to § 1.446-6(c), the after-tax costs and benefits of holding that noneconomic residual interest. See § 1.446-6(c) and (d). Section 1.446-6 provides two safe harbor methods of accounting for these inducement fees, the book method in § 1.446-6(e)(1) and the modified REMIC regulatory method in § 1.446-6(e)(2). Section 1.446-6(e)(3) authorizes the Commissioner to provide one or more additional safe harbor methods by publishing a revenue ruling or revenue procedure.

.02 If a method of accounting for inducement fees received with respect to becoming the holder of noneconomic REMIC residual interests does not comply with § 1.446-6, that method of accounting is impermissible. Any change in a taxpayer’s treatment of these inducement fees, including a change to conform to § 1.446-6, is a change in method of accounting to which the provisions of §§ 446 and 481 of the Internal Revenue Code and the regulations thereunder apply.

.03 Under § 446(e) and § 1.446-1(e)(2)(i), a taxpayer generally must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the terms and conditions necessary to obtain consent to change a method of accounting. Except as provided in sections 3 and 4 of this revenue procedure, a taxpayer seeking to change the taxpayer’s method of accounting for inducement fees must follow the advance consent procedures of Rev. Proc. 97-27, 1997-1 C.B. 680 (or successor), as modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-2 C.B. 432.

.04 Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), provides procedures by which taxpayers may obtain automatic consent to change to the methods of accounting described in the Appendix of the revenue procedure. Section 5.03 of Rev. Proc. 2002-9 provides that, unless otherwise provided, a taxpayer making a change in method of accounting under the revenue procedure must take into account a § 481(a) adjustment in the manner provided in section 5.04 of the revenue procedure.

This revenue procedure applies to a taxpayer that seeks to change from any method of accounting for inducement fees received with respect to becoming the holder of noneconomic REMIC residual interests (including one of the safe harbor methods provided under § 1.446-6(e)) to one of the safe harbor methods provided under § 1.446-6(e)(1)-(2).

A taxpayer within the scope of this revenue procedure must follow the automatic change in method of accounting provisions of Rev. Proc. 2002-9 (or successor), with all of the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply to a taxpayer that wants to make the change for the taxpayer’s first taxable year ending on or after May 11, 2004.

(2) The taxpayer prepares and files the newest version of the Form 3115 in accordance with section 6 of Rev. Proc. 2002-9, and the taxpayer enters the designated number for the automatic change in method in Line 1a of the Form 3115. The designated number for the automatic accounting method change authorized by this revenue procedure is “79”.

(3) The taxpayer identifies the specific safe harbor method under § 1.446-6(e) to which the taxpayer is changing.

This revenue procedure is effective on May 11, 2004.

Rev. Proc. 2002-9 is modified and amplified to include this automatic change in section 4.01 of the APPENDIX.

The principal authors of this revenue procedure are John W. Rogers III and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure, contact Mr. Rogers at (202) 622-3950 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking.

This document contains proposed regulations under section 265(a)(2) that affect corporations filing consolidated returns. These regulations provide special rules for the treatment of certain intercompany transactions involving interest on intercompany obligations.

Written or electronic comments and requests for a public hearing must be received by August 5, 2004.

Send submissions to: CC:PA:LPD:PR (REG-128590-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-128590-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-128590-03).

Concerning the proposed regulations, Frances L. Kelly, (202) 622-7770; concerning submissions of comments and/or requests for a public hearing, Guy Traynor, (202) 622-7180 (not toll-free numbers).

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

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

* * * * *

This announcement provides guidance on the notices that must be given by an employer to plan participants and their beneficiaries and to the Pension Benefit Guaranty Corporation (the “PBGC”) if the employer elects the alternative deficit reduction contribution under § 412(l)(12) of the Internal Revenue Code (the “Code”) and section 302(d)(12) of the Employee Retirement Income Security Act of 1974 (“ERISA”), as added by section 102 of the Pension Funding Equity Act of 2004, Pub. L. 108-218 (“PFEA’04”). This announcement also sets forth timing requirements for the election.

Section 102 of PFEA’04, which was enacted on April 10, 2004, added § 412(l)(12) to the Code and section 302(d)(12) to ERISA. Section 412(l)(12) of the Code permits certain employers who are required to make additional contributions under § 412(l) to elect a reduced amount of those contributions (“alternative deficit reduction contributions”) for certain plan years. An employer is eligible to make such an election if it is (1) a commercial passenger airline, (2) primarily engaged in the production or manufacture of a steel mill product or the processing of iron ore pellets, or (3) an organization described in § 501(c)(5) that established a plan on June 30, 1955, to which § 412 now applies. On April 12, 2004, the Internal Revenue Service (the “Service”) issued Announcement 2004-38, 2004-18 I.R.B. 878, which provides guidance for making the election for an alternative deficit reduction contribution.

Section 302 of ERISA contains minimum funding standard requirements that are parallel to those under § 412 of the Code, and section 302(d)(12) of ERISA provides an election that is identical to the election under § 412(l)(12) of the Code. Moreover, section 302(d)(12)(E) of ERISA requires an employer that elects an alternative deficit reduction contribution under section 302(d)(12) of ERISA and § 412(l)(12) of the Code for any year to provide certain notices to the participants and beneficiaries under the plan and to the PBGC. The notices must be provided within 30 days of the filing of the election for such year, and the written notices of the election must specify various information.

Section 302(d)(12)(F) of ERISA as added by section 102(a) of PFEA’04 authorizes the Secretary of the Treasury to prescribe the time and manner of making an alternative deficit reduction contribution election. In addition, under section 101 of Reorganization Plan No. 4 of 1978, 1979-1 C.B. 480, the Secretary of the Treasury has sole interpretive authority (except for certain matters not relevant here) over the subject matter addressed in this announcement.

Section 102(d) of PFEA’04 amended section 502(c)(3) of ERISA to provide that if an employer fails to provide the required notices on a timely basis to a participant or beneficiary, or to the PBGC, that employer may be liable to such participant or beneficiary or to the PBGC, in the discretion of the court, for a penalty of up to $100 a day from the date of the failure, or such other relief as the court deems proper.

A. Explanation of Context—Pursuant to section 302(d)(12)(E)(i) of ERISA, an employer that elects an alternative deficit reduction contribution must provide written notice of the election to each participant and to each beneficiary under the plan (“the participant notice”) and must explain the context in which the information set forth in section II.B. of this announcement is being provided. This requirement to explain the context is satisfied if the notice includes the following information:

B. Information Required in Notice to Participants and Beneficiaries—Pursuant to section 302(d)(12)(E)(i) of ERISA, the participant notice must also include the information described in this Section II.B.

Pursuant to section 302(d)(12)(E)(iii) of ERISA an employer electing an alternative deficit reduction contribution must provide the information described in this section.

Pursuant to the authority contained in section 302(d)(12)(F) of ERISA, and subject to the transition rule in Section V of this announcement, an election to make the alternative deficit reduction contribution for any plan year must be made by the end of the first quarter of that plan year.

Notwithstanding the requirement to make an election by the end of the first quarter of the plan year, the following transitional rules are applicable. If an employer makes an alternative deficit reduction contribution election on or before June 30, 2004, that election will be deemed timely for the plan year that begins during calendar 2004. In addition, if an employer issues a PBGC notice for a plan on or before June 5, 2004, the PBGC will treat the PBGC notice as timely issued.

The collection of information contained in this announcement 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 1545-1884.

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 control number.

The collection of information in this announcement is in sections II and III. This information is required to meet the requirements of section 102 of the Pension Funding Equity Act of 2004 to monitor and make valid determinations with respect to employers that elect an alternative deficit reduction contribution for certain plans. As a result of such elections, an employer’s deficit reduction contribution for certain plans will be based on amounts specified under § 412(l)(12) of the Code. If an employer does not give timely notice of an election to make a deficit reduction contribution (including all of the requirements described above), a court may in its discretion impose a penalty. The likely respondents are businesses or other for-profit institutions, and nonprofit institutions.

The estimated total annual reporting and/or recordkeeping burden is 12,000 hours.

The estimated annual burden per respondent/recordkeeper varies from 20 to 100 hours, depending on individual circumstances, with an estimated average of 60 hours. The estimated number of respondents and/or recordkeepers is 200.

The estimated frequency of responses is occasional.

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.

Announcement 2004-38, 2004-18 I.R.B. 878, is modified.

The principal authors of this announcement are James E. Holland and Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. Mr. Holland may be reached at 1-202-283-9699 and Mr. Rubin may be reached at 1-202-283-9888 (not toll-free numbers).

Internal Revenue Service (IRS), Treasury.

Advance notice of proposed rulemaking.

The IRS and Treasury Department are soliciting comments and suggestions regarding the scope and details of regulations (REG-128572-03) that may be proposed under section 7701(f) of the Internal Revenue Code to address the application of sections 265(a)(2) and 246A in transactions involving related parties, pass-through entities, or other intermediaries.

Written or electronic comments must be submitted by August 5, 2004.

Send submissions to CC:PA:LPD:PR (REG-128572-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-128572-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC or sent electronically, via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS and REG-128572-03).

Concerning submissions, LaNita Van Dyke, (202) 622-7180; concerning the notice, Avital Grunhaus, (202) 622-3930 (not toll-free numbers).

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

The Internal Revenue Service announces a settlement initiative for taxpayers to resolve transactions described in Notice 2000-44, 2000-2 C.B. 255, and substantially similar transactions (Son of Boss transactions).

The Service has determined that Son of Boss transactions are abusive and were designed, marketed, and undertaken solely to create tax benefits unintended by any reasonable interpretation of the tax laws. The Service believes that it will prevail in litigation on the merits of these transactions and that the imposition of penalties will be upheld. For efficient tax administration reasons, however, the Service offers taxpayers an opportunity to resolve their civil tax liabilities under this initiative and avoid litigation.

All taxpayers that claimed tax benefits in a manner described in Notice 2000-44 are eligible to participate in this initiative except:

(1) Persons who (i) organized or participated directly or indirectly in the sale or promotion of any Son of Boss transaction, (ii) received fees for organizing, selling or promoting one, (iii) were partners in a partnership, or employees of a person, that engaged in activities described in (i) or (ii) of this paragraph at the time they participated in the Son of Boss transaction, or (iv) were related to a person described in this paragraph within the meaning of section 267(b), other than section 267(b)(1), at the time they participated in the Son of Boss transaction.

(2) All partners in entities subject to the unified partnership audit and litigation provisions of sections 6221 through 6234, as enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA partnerships), that include a partner described in paragraph (1) of this section who directly or indirectly claimed tax benefits in a manner described in Notice 2000-44 with respect to those TEFRA partnerships.

(3) Taxpayers who, individually or as a partner in a TEFRA partnership, are a party in a court proceeding to determine the tax treatment of the Son of Boss transaction.

(4) Taxpayers where the Service has informed the taxpayer, or the tax matters partner of a TEFRA partnership in which the taxpayer was a partner, that the Service has designated, or is considering designating, the Son of Boss transaction for litigation.

Appeals Office consideration will not be available for Son of Boss transactions. For all taxpayers ineligible or not participating in this initiative, the Service will (a) develop the cases, (b) disallow all tax benefits and attributes claimed from the Son of Boss transaction, including out-of-pocket costs and fees, (c) determine appropriate penalties, including those under section 6662 or section 6663, and (d) issue a Notice of Deficiency or Notice of Final Partnership Administrative Adjustment, as appropriate.

The Office of Chief Counsel will closely coordinate Son of Boss cases by treating them as if they were designated for litigation under Chief Counsel procedures for designating cases for litigation. Likewise, in refund and TEFRA partnership suits handled by the Department of Justice, Chief Counsel expects to recommend against any settlement more favorable to the taxpayer than is provided in this initiative. Department of Justice regulations require Assistant Attorney General approval of any settlement contrary to the Chief Counsel’s recommendation. Consequently, taxpayers should not expect to settle their cases on better terms if they proceed to litigation, whether in the Tax Court or in other forums.

The collection of information contained in this announcement 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 1545-1885. 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 number. The collection of information in this announcement is in section 4 entitled REQUIRED PROCEDURES FOR ELECTING PARTICIPANTS. This information is required to apply the terms of the settlement set forth in this announcement. The information will be used to determine whether the taxpayer has reported the disclosed item properly for income tax purposes. The collection of information is required to obtain the benefit described in this announcement. The likely respondents are businesses or other for-profit institutions, small businesses or organizations, and individuals.

The estimated total annual reporting burden is 5000 hours.

The estimated annual burden per respondent varies from 3 hours to 7 hours, depending on individual circumstances, with an estimated average of 5 hours. The estimated number of respondents is 1000.

The estimated frequency of responses is one time per respondent.

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.

For additional information regarding this announcement, including answers to frequently asked questions, see www.irs.gov, or contact Paul Zamolo of the Office of Division Counsel (SB/SE) at (415) 744-9217 (not a toll-free number) or James Fee of the Office of Division Counsel (LMSB) at (215) 597-3442 (not a toll-free number).

Internal Revenue Service (IRS), Treasury.

Correcting amendment.

This document contains corrections to T.D. 9118, 2004-15 I.R.B. 718 [69 FR 12799], which was published in the Federal Register on Thursday, March 18, 2004, relating to certain aspects of the temporary regulations addressing the deductibility of losses recognized on dispositions of subsidiary stock by members of a consolidated group and to the consequences of treating subsidiary stock as worthless.

This correction is effective on March 18, 2004.

Mark Weiss (202) 622-7790 or Lola Johnson (202) 622-7550 (not a toll-free number).

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid 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 disbarment from such practice. The Director, Office of Professional Responsibility, in his discretion, may disbar an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

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

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid 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, 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: