This notice requests comments on whether debit cards may be used to provide qualified transportation fringes described under section 132(f) of the Code.

This notice relieves health insurance providers from preparing IRS Form 1099-H, “Health Coverage Tax Credit (HCTC) Advance Payments,” unless they affirmatively retain that obligation. A contractor of the IRS will prepare the form and file it with the Service and furnish copies to taxpayers.

Relative value regulations; effective dates; notices; qualified joint and survivor annuities. This announcement postpones, in certain circumstances, the effective date of the relative value regulations. In addition, it responds to questions that have been raised in connection with the regulations. Finally, the announcement states the intention of the Treasury and the Service to clarify the interaction between the QJSA requirements and the requirements of section 417(e)(3).

This announcement publishes an advance notice of proposed rulemaking requesting comments and information about current technologies, services, and methods for transmitting voice and data communications for purposes of section 4251 of the Code.

Guidance on effective dates under Japan treaty. A copy of the news release issued by the Director, International (U.S. Competent Authority), on June 23, 2004, is set forth.

This notice relieves health insurance providers from preparing IRS Form 1099-H, “Health Coverage Tax Credit (HCTC) Advance Payments,” unless they affirmatively retain that obligation. A contractor of the IRS will prepare the form and file it with the Service and furnish copies to taxpayers.

This document sets forth procedures for determining whether a qualified residential rental project is in compliance with the applicable set-aside requirements contained in section 142(d) of the Code during the qualified project period (as defined in section 142(d)(2)(A)).

This procedure explains the manner in which taxpayers may request an advance pricing agreement (APA) from the APA Program within the Office of the Associate Chief Counsel (International), the manner in which such a request will be processed by the APA Program, and the effect and administration of APAs. Rev. Proc. 96-53 and Notice 98-65 superseded.

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

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

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

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

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

The Commissioner ACQUIESCES in result only in the following decision:

Tax Analysts v. Internal Revenue Service,^[1]

215 F. Supp.2d 192 (D.D.C. 2002),
reversed,

350 F.3d 100 (D.C. Cir. 2003)

Following is a copy of the News Release issued by the Director, International (U.S. Competent Authority), on June 23, 2004 (IR-2004-82).

IR-2004-82, June 23, 2004

WASHINGTON — Today, the Internal Revenue Service and the Japanese National Tax Agency respectively have issued guidance regarding the commencement of application of the new income tax treaty between the United States and Japan in each country.

The United States-Japan tax treaty, which was signed on November 6, 2003, entered into force on March 30, 2004. Pursuant to Article 30, the treaty generally is applicable with respect to withholding taxes on July 1, 2004. In the case of U.S. withholding taxes, the treaty is applicable for amounts paid or credited on or after July 1st. In the case of Japanese withholding taxes, the treaty is applicable for amounts taxable on or after July 1st.

The guidance issued today by the IRS provides illustrative examples regarding the application of the new treaty in the case of U.S. withholding taxes on dividends, interest, and royalties. Incorporated in the guidance is an attachment prepared by the Japanese National Tax Agency providing similar illustrative examples regarding the application of the new treaty in the case of Japanese withholding taxes on dividends, interest, and royalties. The Japanese National Tax Agency also has issued guidance providing these illustrative examples and incorporating the U.S. illustrative examples as an attachment.

The text of the Guidance is as follows:

Commencement of Application of the New U.S.-Japan Income Tax Convention in the United States (With respect to Taxes Withheld at Source regarding Investment Income)

Commencement of Application of the New Japan-U.S. Income Tax Convention in Japan (With respect to Taxes Withheld at Source regarding Investment Income)

Employers and others have asked for clarification of their ability to use debit cards to provide their employees with qualified transportation fringes described under § 132(f). Qualified transportation fringes include transportation in a commuter highway vehicle (vanpooling), any transit pass, and qualified parking (collectively referred to herein as “transit benefits”) meeting the requirements of § 132(f). Qualified transportation fringes are excluded from the employee’s gross income and from wages for purposes of employment tax.

A qualified transportation fringe includes cash reimbursement for transportation in a commuter highway vehicle and qualified parking. However, under § 132(f)(3), a qualified transportation fringe does not include cash reimbursement for a transit pass if a voucher or similar item that may be exchanged only for a transit pass is readily available for direct distribution by the employer to the employer’s employees. Thus, in circumstances where vouchers are readily available, an employer must provide vouchers to its employees in order for a transit pass benefit to be excludable from gross income and wages under § 132(f). If a qualified transportation fringe can be provided through cash reimbursement, the employer must use a bona fide reimbursement arrangement. To meet the requirements for such an arrangement, first the payment must be a reimbursement, and not an advance. See § 1.132-9(b) Q/A-16(a). Second, the employee must substantiate to the employer that an expense for a transit benefit was actually incurred. See § 1.132-9(b) Q/A-16(c). There are monthly limits on the dollar value of qualified transportation fringe benefits that an employer may provide to an employee and exclude from the employee’s income and wages. The monthly limits vary depending upon the type of benefit, and are currently $195 per month for qualified parking and $100 per month for transit passes.

Treasury and the Service are seeking information about how debit card technology works. The operation of the technology is directly relevant to answering a number of questions that arise when applying the qualified transportation fringe benefit regulations. For example, should a debit card be considered a voucher that may be exchanged exclusively for a transit pass? If so, should employers be barred from using cash reimbursement to provide transit passes to their employees as qualified transportation fringe benefits, even if vouchers are not otherwise readily available? If a debit card can be used to purchase more than one kind of fringe benefit, does an employer provide an advance or a reimbursement when it provides a debit card for use in purchasing various transportation benefits? Can a debit card system be established to keep amounts designated for different types of transit benefits separate to ensure that the statutory monthly limits applicable to the different types of benefits are not exceeded?

The Service and Treasury request comments on the issues described below, and any other comments on the use of a debit card to provide transit benefits, from all persons affected by this issue, including employers, employees, transit operators, voucher providers, debit card providers, and third party administrators.

Section 132(a)(5) provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income.

Section 132(f)(1) provides that the term “qualified transportation fringe” means (1) transportation in a commuter highway vehicle between home and work, (2) any transit pass, and (3) qualified parking. The amount of the fringe benefit which may be excluded from gross income and wages is currently limited to $100 per month for the aggregate of transportation in a commuter highway vehicle and transit passes, and $195 per month for qualified parking. See § 132(f)(2); Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.

Section 132(f)(5)(A) provides that a transit pass means any pass, token, farecard, voucher or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is on mass transit facilities or is provided by any person in the business of transporting persons for compensation or hire in a commuter highway vehicle. See § 132(f)(5)(B) for the definition of a commuter highway vehicle.

Section 132(f)(3) provides that a qualified transportation fringe includes a cash reimbursement by an employer to an employee for transit benefits. However, a qualified transportation fringe includes cash reimbursement by an employer to an employee for a transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.

Income Tax Regulations § 1.132-9(b) Q/A-16(b)(2) provides that a transit system voucher is an instrument that may be purchased by employers from a voucher provider that is accepted by one or more mass transit operators in an area as fare media or in exchange for fare media. Under § 1.132-9(b) Q/A-16(b)(3), a voucher provider is any person in the trade or business of selling transit system vouchers to employers, or any transit system operator that sells vouchers to employers for the purpose of direct distribution to employees.

Section 1.132-9(b) Q/A-16(b)(4) provides that a voucher or similar item is readily available for direct distribution by an employer to employees if and only if the employer can obtain it from a voucher provider who does not impose fare media charges greater than 1 percent of the average annual value of the voucher for a transit system, or does not impose other restrictions causing the voucher not to be considered readily available. See § 1.132-9(b) Q/A-16(b)(5) and (b)(6).

Section 1.132-9(b) Q/A-16(a) provides that the term qualified transportation fringe includes cash reimbursement for transportation in a commuter highway vehicle, transit passes (if permitted), and qualified parking, provided the reimbursement is made under a bona fide reimbursement arrangement. A payment made before the date an expense has been incurred or paid is not a reimbursement, even if the employee certifies in advance that the employee will incur expenses at some future date. Under § 1.132-9(b) Q/A-16(c), a bona fide reimbursement arrangement is an arrangement under which the employee must substantiate to the employer within a reasonable period of time that an expense for transit benefits has been paid.

Section 1.132-9(b) Q/A-18 provides that no substantiation is required if the employer distributes a transit pass (including a voucher) in-kind to the employer’s employees.

In Rev. Rul. 2003-43, 2003-1 C.B. 935, the Service held that under certain circumstances employer-provided expense reimbursements may be made through a debit or credit card, or certain other electronic media, and be excludable from gross income under § 105. The use of a debit card, by itself, generally was not found to be sufficient to meet the substantiation requirement under § 105(b). Instead, in addition to requiring that the Merchant Codes for the debit cards be restricted, the employee is required to substantiate the expense incurred, albeit after the initial transaction. In addition, under certain circumstances the substantiation requirement can be met without additional substantiation. First, a payment made at a doctor’s office in the amount of a copayment is deemed to satisfy the substantiation requirement. Second, recurring expenses that have been previously actually substantiated are deemed to meet the substantiation requirement. Third, real-time verification at the point of sale is deemed to meet the substantiation requirement. Other than copayments, recurring expenses, and real-time substantiation, the revenue ruling requires that expenses paid through a debit card be treated as conditional pending confirmation of the charge.

1. Given existing technology, under what circumstances, if any, should a debit card be considered the equivalent of a voucher or similar item described in § 132(f)(5)(A)? We understand that a debit card may be restricted for use only at merchants with certain Merchant Codes or specific merchant card terminals. Would a rule that required use of a debit card to be limited to merchants with certain Merchant Codes or merchant card terminals be administrable? Would such a rule provide adequate controls consistent with the statutory objective of ensuring that amounts are only used to provide transit pass benefits within the meaning of § 132(f)(5)(A)? For example, under what circumstances could a debit card with Merchant Code restrictions be used to purchase something other than a transit pass within the meaning of § 132(f)(5)(A)? In addition, under what circumstances should a debit card be restricted for use only at a particular merchant card terminal in order to be considered a voucher or similar item for purposes of § 132(f)(3)?

2. If a debit card is a voucher or similar item, should the availability of the debit card in an area in which a voucher or similar item is otherwise not readily available preclude cash reimbursement for a transit pass in that area? For example, in Metropolitan Area A, a voucher or similar item is not considered readily available because fare media charges imposed by voucher providers in A exceed 1 percent of the average annual value of vouchers for a transit system. However, the charges associated with using a debit card in A that is the equivalent of a voucher or similar item are less than 1 percent of the annual value of the debit card for the transit system. Should the debit card be considered a readily available voucher in A for purposes of § 132(f)(3), and thus preclude cash reimbursement for a transit pass in A?

3. Is it appropriate to allow the use of recurring transaction substantiation such as that described in Rev. Rul. 2003-43 to meet the requirement under § 132(f)(3) that a transit pass benefit be provided through distribution of a voucher or similar item instead of cash reimbursement? For example, in circumstances in which fare media may be purchased from a merchant who is not in the trade or business of providing transportation services, and thus does not have a Merchant Category Code indicating that the merchant sells only transit passes, e.g., a convenience store, under what circumstances, if any, should recurring transaction substantiation be deemed to satisfy the requirement that a voucher or similar item be distributed?

4. Under what circumstances should an expense related to transportation in a commuter highway vehicle, a transit pass (assuming cash reimbursement is permitted), or qualified parking paid with a debit card be considered to be a bona fide reimbursement (i.e., not an advance), and considered adequately substantiated within the meaning of § 1.132-9(b) Q/A-16(c)?

5. Under what circumstances, if any, could a debit card be used to provide multiple qualified transportation fringes (e.g., qualified parking and a transit pass), and adequately ensure that the respective applicable statutory monthly limits for qualified transportation fringes are not exceeded? Given existing technology (such as multiple purses on a debit card, and Merchant Code technology), is it possible, and, if so, how is it possible, to ensure that amounts designated for a particular benefit are used for the intended benefit, and thus that the separate applicable statutory monthly limits for transportation in a commuter highway vehicle and transit passes, and qualified parking are not exceeded? For example, if an employer provides through the use of a debit card a $150 monthly benefit for parking and a $100 monthly benefit for transit passes, how may use of the debit card be restricted to ensure that the respective applicable statutory monthly limits for qualified parking and other qualified transportation fringes are not exceeded?

Written and electronic comments must be submitted by October 19, 2004.

Send submissions to: CC:PA:LPD:PR (Notice 2004-46), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR (Notice 2004-46), Room 5203. Alternatively, taxpayers may send submissions electronically directly to the Service at: Notice.comments@irscounsel.treas.gov. All materials submitted will be available for public inspection and copying.

Concerning submissions, Guy Traynor at (202) 622-7180. Concerning this notice, John Richards of the Office of the Associate Chief Counsel (Tax Exempt & Government Entities) at (202) 622-6040 (not toll-free calls).

This notice provides that the HCTC Transaction Center (Transaction Center), as an administrator of the Health Coverage Tax Credit (HCTC), will file and furnish the information returns and statements required by § 6050T of the Internal Revenue Code, unless the health insurance provider notifies the Transaction Center that the provider will file and furnish information returns and statements.

The Treasury Department is administering the HCTC program by using a HCTC Customer Contact Center and a HCTC Transaction Center to perform various administrative duties relating to the program. The Transaction Center will, among other things, collect the insured’s portion of the premium and forward the total premium, which includes the advance payment, to health insurance providers through health plan administrators.

Under the program developed to administer the HCTC advance payment program, the Transaction Center will know the amount of those advance payments, and the identity of the individuals who benefit from the payments. Accordingly, the Transaction Center will have the information that the health insurance provider would otherwise have to file with the Service (and furnish to the insureds) pursuant to § 6050T.The Treasury Department and the Service believe that it is in the interest of sound tax administration to allow health insurance providers to use the Transaction Center to satisfy their information reporting obligations under § 6050T and not require the providers to file information returns with the Service or furnish information statements to the insureds. A health insurance provider receiving advance payments from the Transaction Center will be deemed to have elected to have the Transaction Center file these information returns and furnish these statements unless the provider notifies the Transaction Center that the provider will file Forms 1099-H with the Service and furnish those forms to insured individuals. Therefore, unless the health insurance provider notifies the Transaction Center that the provider will file and furnish information returns and statements under § 6050T, the Transaction Center will take those actions instead. The Transaction Center may be contacted for this purpose by calling 1-866-628-4282.

Section 6724(a) authorizes the Service to waive any penalties for failures to comply with § 6050T if such failures resulted from reasonable cause and not willful neglect. The Service will not assert the penalties imposed by §§ 6721 and 6722 for information returns and statements required to be filed and furnished regarding advance payments made to health insurance providers against providers that elect to allow the Transaction Center to file and furnish Forms 1099-H. If a health insurance provider does not elect to allow the Transaction Center to file and furnish Forms 1099-H, the normal rules for seeking a penalty waiver under §6724(a) will apply. (See § 301.6724-1 of the Regulations on Procedure and Administration.)

The principal author of this notice is Nathan Rosen of the Office of the Associate Chief Counsel (Procedure & Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this notice, contact Nathan Rosen at (202) 622-4910 (not a toll-free call).

This revenue procedure provides guidance to States and local governments that issue bonds to which section 142(d) of the Internal Revenue Code applies. It sets forth procedures for determining whether a residential rental project is in compliance with the applicable set-aside requirements contained in section 142(d) during the qualified project period (as defined in section 142(d)(2)(A)).

.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.

.02 Section 103(b)(1) provides that section 103(a) does not apply to any private activity bond that is not a qualified bond (within the meaning of section 141).

.03 Section 141(e)(1)(A) and (G) provides that an exempt facility bond or a qualified 501(c)(3) bond may be a qualified bond.

.04 Section 142(a)(7) provides that the term “exempt facility bond” includes any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide qualified residential rental projects.

.05 Section 142(d)(1) provides that the term “qualified residential rental project” means any project for residential rental property if, at all times during the qualified project period, such project meets the requirements under section 142(d)(1)(A) or (B) (the “set-aside requirements”), whichever is elected by the issuer at the time of the issuance of the issue with respect to such project.

.06 A project meets the requirements of section 142(d)(1)(A) if 20 percent or more of the residential units in the project are occupied by individuals whose income is 50 percent or less of area median gross income.

.07 A project meets the requirements of section 142(d)(1)(B) if 40 percent or more of the residential units in the project are occupied by individuals whose income is 60 percent or less of area median gross income. Under section 142(d)(6), in the case of a project located in a city having 5 boroughs and a population in excess of 5,000,000, section 142(d)(1)(B) is applied by substituting “25 percent” for “40 percent”.

.08 Section 142(d)(2)(A) provides that the term “qualified project period” means the period beginning on the first day on which 10 percent of the residential units in the project are occupied and ending on the latest of (i) the date that is 15 years after the date on which 50 percent of the residential units in the project are occupied, (ii) the first day on which no tax-exempt private activity bond issued with respect to the project is outstanding, or (iii) the date on which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates.

.09 Section 142(d)(3) contains rules for purposes of determining whether an increase in the income of individuals that occupy a residential unit will cause the individuals to no longer qualify as low-income tenants. For this purpose, section 142(d)(4) contains special rules for deep rent skewed projects. Section 142(d)(4)(B)(i) defines the term deep rent skewed project as a project in which, among other requirements, 15 percent or more of the low-income units in the project are occupied by individuals whose income is 40 percent or less of area median gross income.

.10 In the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 519-575 (the “1986 Act”), Congress reorganized sections 103 and 103A of the Internal Revenue Code of 1954 (the “1954 Code”) regarding tax-exempt bonds into sections 103 and 141 through 150 of the Internal Revenue Code of 1986. Congress intended that to the extent not amended by the 1986 Act, all principles of pre-1986 Act law would continue to apply to the reorganized provisions. 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-686 (1986), 1986-3 (Vol. 4) C.B. 686. The regulations promulgated pursuant to section 103(b)(4)(A) of the 1954 Code (the predecessor to section 142(d)) continue to apply for purposes of section 142(d) except as otherwise modified by the 1986 Act or subsequent law.

.11 Under § 1.103-8(b)(7)(ii) of the Income Tax Regulations, if the issue date of the bonds occurs after the first day on which at least 10 percent of the residential units in the project are occupied, then the qualified project period begins on the issue date of the bonds.

.12 Under § 1.103-8(b)(6)(i), if a project does not comply with the set-aside requirements continuously during the qualified project period, the project will not be a qualified residential rental project (as of the issue date of the bonds that financed the project), unless the noncompliance is corrected within a reasonable period. Under § 1.103-8(b)(6)(ii), a reasonable period is at least 60 days after the noncompliance is first discovered or would have been discovered by the exercise of reasonable diligence. Section 1.103-8(b)(6)(i) provides that if noncompliance is not corrected within a reasonable period, subsequent compliance does not alter the taxable status of the bonds that financed the project.

.13 Section 145(a) provides, in general, that the term “qualified 501(c)(3) bond” means any private activity bond issued as part of an issue if (1) all property that is to be provided by the net proceeds of the issue is to be owned by a 501(c)(3) organization or a governmental unit, and (2) such bond would not be a private activity bond if (A) 501(c)(3) organizations were treated as governmental units with respect to their activities that do not constitute unrelated trades or businesses, determined by applying section 513(a), and (B) sections 141(b)(1) and (2) were applied by substituting “5 percent” for “10 percent” each place it appears and by substituting “net proceeds” for “proceeds” each place it appears.

.14 Section 145(d)(1) provides, in general, that a bond that is part of an issue is not a qualified 501(c)(3) bond if any portion of the net proceeds of the issue are to be used directly or indirectly to provide residential rental property for family units. Section 145(d)(2) provides, in part, that section 145(d)(1) shall not apply to any bond issued as part of an issue if the portion of such issue that is to be used directly or indirectly to provide residential rental property for family units is to be used to provide qualified residential rental projects (as defined in section 142(d)).

.15 The IRS and Treasury Department have received comments requesting guidance regarding the application of the set-aside requirements during the qualified project period. For example, guidance has been requested regarding whether residential units in a newly-constructed project may only be leased to low-income tenants until low-income tenants occupy the required percentage of all residential units in the project, or whether a project complies with the set-aside requirements if low-income tenants occupy the required percentage of occupied residential units. Moreover, guidance also has been requested regarding whether the set-aside requirements apply when an existing project is acquired, or whether there is a transition period before the project must comply with the set-aside requirements. The comments indicate that the lack of guidance on these questions and the resulting uncertainty may be limiting the development of low-income rental housing.

.01 Available units means residential units in a residential rental project that are actually occupied and residential units in the project that are unoccupied and have been leased at least once after becoming available for occupancy, provided that (a) in the case of an acquisition of an existing residential rental project, a residential unit that is unoccupied on the later of (i) the date the project is acquired or (ii) the issue date of the first bonds is not an available unit and does not become an available unit until it has been leased for the first time after such date, and (b) a residential unit that is not available for occupancy due to renovations is not an available unit and does not become an available unit until it has been leased for the first time after the renovations are completed.

.02 First bonds means the first issue of bonds to which section 142(d) applies issued to finance the acquisition of an existing residential rental project.

.03 Low-income tenants means individuals occupying a residential unit whose income satisfies the applicable income limit under section 142(d)(1)(A) or (B) and, if applicable, section 142(d)(4)(B)(i).

.04 Set-aside requirements is defined in section 2.05 of this revenue procedure.

This revenue procedure provides guidance to States and local governments that issue bonds to which section 142(d) of the Internal Revenue Code applies. It sets forth procedures for determining whether a residential rental project is in compliance with the applicable set-aside requirements during the qualified project period.

.01 General rule for set-aside requirements. Beginning on the first day of the qualified project period (i.e., the later of the first day on which at least 10 percent of all of the residential units in the project are occupied or the issue date of the bonds), the set-aside requirements apply to the total number of available units.

.02 Special rule for certain existing projects. This section 5.02 applies to the acquisition of an existing residential rental project unless more than 90 percent of the residential units in the project are not available units (for example, because residential units are not available for occupancy due to renovations) at any time within 60 days after the later of (1) the date the project is acquired or (2) the issue date of the first bonds. For a period of 12 months beginning on the issue date of the first bonds (the “transition period”), the failure to satisfy the set-aside requirements as described in section 5.01 will not cause the project to not be a qualified residential rental project. If the set-aside requirements are not satisfied on the last date of the transition period, such failure will cause the project to not be a qualified residential rental project as of the issue date(s) of the bonds issued to finance the project unless all bonds issued to finance the project are redeemed as soon as possible, but in no event later than 18 months after the issue date of the first bonds.

This revenue procedure is applicable to bonds sold on or after July 19, 2004, that are subject to section 142(d). In addition, subject to the applicable effective dates for the corresponding statutory provisions, an issuer may apply this revenue procedure to any bonds (1) sold before July 19, 2004, that are subject to section 142(d), or (2) subject to section 103(b)(4)(A) of the 1954 Code.

The principal author of this revenue procedure is Rose M. Weber, Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in the development of this revenue procedure. For further information regarding this revenue procedure, contact Ms. Weber at (202) 622-3980 (not a toll-free call).

.01 This revenue procedure explains the manner in which taxpayers may request an advance pricing agreement (“APA”) from the APA Program within the Office of the Associate Chief Counsel (International), the manner in which such a request will be processed by the APA Program, and the effect and administration of APAs. This revenue procedure updates and supersedes Revenue Procedure 96-53, 1996-2 C.B. 375, and Notice 98-65, 1998-2 C.B. 803.

.01 The APA Program provides a voluntary process whereby the Internal Revenue Service (“Service”) and taxpayers may resolve transfer pricing issues under § 482 of the Internal Revenue Code (“Code”), the Income Tax Regulations (“the regulations”) thereunder, and relevant income tax treaties to which the United States is a party in a principled and cooperative manner on a prospective basis. The APA process increases the efficiency of tax administration by encouraging taxpayers to come forward and present to the Service all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement in a spirit of openness and cooperation. The prospective nature of APAs lessens the burden of compliance by giving taxpayers greater certainty regarding their transfer pricing methods, and promotes the principled resolution of these issues by allowing for their discussion and resolution in advance before the consequences of such resolution are fully known to taxpayers and the Service.

.02 The APA Program’s central goal is the prompt, proper, and fair resolution of APA requests and renewals consistent with the principles of sound tax administration.

.03 The APA Program reserves the right not to accept an APA request or to terminate consideration of an APA request if the request or the continued development of the case is contrary to the principles of sound tax administration.

.04 An APA is an agreement between a taxpayer and the Service in which the parties set forth, in advance of controlled transactions, the best transfer pricing method (“TPM”) within the meaning of § 482 of the Code and the regulations. The agreement specifies the controlled transactions or transfers (“covered transactions”), TPM, APA term, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, required APA records, and annual reporting responsibilities.

.05 The taxpayer’s participation in the APA process is entirely voluntary. In some cases, the Service may approach a taxpayer to discuss the advantages of an APA.

.06 The APA Program is under the immediate supervision of a Director (the “APA Director”) within the Office of the Associate Chief Counsel (International). The APA Director reports to the Associate Chief Counsel (International) who exercises general oversight over the APA Program. The APA Director, directly or by delegation, may take any action — not contrary to statute, regulation, or treaty — necessary to carry out the provisions of this revenue procedure. The APA Director may modify the provisions contained in this revenue procedure (for example, time limits, or content of an APA request), if that modification would be consistent with sound tax administration.

.07 Under the APA request procedure, the taxpayer proposes a TPM and provides data intended to show that the TPM constitutes the appropriate application of the best method rule under the § 482 regulations. The Service through an APA Team evaluates the APA request by analyzing all relevant data and information submitted with the initial request and at any time thereafter.

.08 Taxpayers may request a bilateral, multilateral, or, if appropriate, a unilateral APA. A bilateral or multilateral APA involves a request for an APA between the taxpayer and the Service, accompanied by a request for a mutual agreement between relevant competent authorities. A unilateral APA involves only an agreement between the taxpayer and the Service. Where possible, in the interest of sound tax administration and to ensure that no potential for double taxation results from an APA, an APA should be concluded on a bilateral or multilateral basis between the competent authorities through the mutual agreement procedure of the relevant treaty.

.09 In a bilateral or multilateral case, the APA Program prepares a recommended negotiating position for the U.S. Competent Authority. The negotiating position serves as a basis for discussions with the relevant foreign competent authority or authorities under the mutual agreement article of the applicable income tax treaty or treaties. Prior to finalizing its recommendation, the APA Program through the Team Leader (see section 5.03) conveys the substance of the APA Team’s position to the taxpayer to provide an opportunity for the taxpayer to comment. The Team Leader, in coordination with other members of the APA Team, considers the merits of the taxpayer’s timely received comments in finalizing the recommended position.

.10 If the U.S. Competent Authority and the relevant foreign competent authority or authorities reach a mutual agreement, the taxpayer and the Service may execute one or more APAs consistent with that mutual agreement.

.11 The APA Policy Board establishes policy on matters of substantial general importance pertaining to the APA Program. It consists of the Associate Chief Counsel (International), the APA Director, the Director, International (Large and Mid-Size Business (LMSB) Operating Division), Treasury’s International Tax Counsel, and other senior officials.

.12 In appropriate cases, the TPM may be applied to tax years prior to those covered by the APA (“rollback” of the TPM, see section 7). The Service’s policy is to use rollbacks whenever feasible based on the consistency of the facts, law, and available records for the prior years. This policy does not apply to unilateral APA requests in which a rollback would decrease taxable income on a return filed for a taxable year not covered by the APA (see § 1.482-1(a)(3)).

.13 Filing an APA request does not suspend any examination or other enforcement proceedings. The APA Program will coordinate its activities with those of other Service proceedings to avoid duplicative information requests to the taxpayer, enhance the efficiency of Service operations, and reduce overall taxpayer compliance burdens.

.01 General Principles

A taxpayer may request a prefiling conference (“PFC”) with the APA Program to discuss informally the suitability of an APA.

.02 Discussion Topics

The taxpayer may use a PFC to clarify what information, documentation, and analyses are likely to be necessary for the Service to consider an APA request. Among the areas of discussion are the covered transactions, the potentially applicable TPMs, the probability of agreement among the competent authorities, and the APA Program’s schedule and method for coordinating and evaluating the request. To provide for the efficient use of taxpayer resources, PFCs are recommended in order to ensure that the APA request is appropriate and focuses on relevant issues.

.03 Scheduling

A taxpayer or its representative may contact the APA Program Office in Washington, D.C. or California to schedule a PFC. The taxpayer or its representative should propose three alternative dates, and should generally allow two weeks before the first proposed date. The telephone and facsimile numbers are:

.04 PFC May be Named or Anonymous

The taxpayer may request a PFC either on an identified or anonymous basis.

.05 Participation

If a taxpayer identifies itself, representatives of the Service Operating Division with responsibility for the taxpayer’s return normally will participate in the PFC. Representatives from Appeals and the Division Counsel field offices may also attend. In the case of a PFC regarding a bilateral APA request, a Competent Authority analyst may attend. If a taxpayer initially requests a PFC on an anonymous basis but prior to the meeting chooses to identify itself, the meeting may be rescheduled to permit necessary personnel to attend. When requesting a PFC on an identified basis, the taxpayer must inform the APA Program whether transactions similar or related to those to be covered by the proposed APA are currently under consideration by a Service Operating Division, Appeals, Division Counsel, or Associate Chief Counsel.

.06 Prefiling Submission

A taxpayer must send a brief prefiling submission to the relevant APA Program Office in Washington, D.C. or California that lists the persons attending the PFC for the taxpayer (first names only, pseudonyms, or job titles are sufficient if on an anonymous basis) and that outlines and describes the issues to be discussed. This brief submission should be provided at least one week in advance of the PFC. If the document is twenty pages or less, it may be sent by facsimile; but if it exceeds twenty pages, eight copies (or if anonymous, only three copies) and one original should be delivered.

.01 General Principles

.02 Explanation of the Proposed TPM

.03 Factual and Legal Items for All Proposed APAs

The detailed information supporting the APA request should be tailored to the specific facts relating to the taxpayer, the proposed covered transactions, and relevant legal authority. It should also take into account discussions with the APA Program in a PFC. Unless otherwise agreed, each request must include, in addition to any other items specified in this revenue procedure, the following items:

.04 Specific Items for a Cost Sharing Arrangement

In addition to the items in section 4.03, an APA request related to a cost sharing arrangement (“CSA”) must include:

.05 Critical Assumptions

The taxpayer should propose and describe any relevant critical assumptions. A critical assumption is any fact the continued existence of which is material to the taxpayer’s proposed TPM whether related to the taxpayer, a third party, an industry, or business and economic conditions. Critical assumptions might include, for example, a particular mode of conducting business operations, a particular corporate or business structure, a range of expected business volume, or the relative value of foreign currencies.

.06 Contents of Annual Report

Section 10.01 provides that the taxpayer must file an annual report for each taxable year covered by the APA. The taxpayer should propose in the request a list of items to be included in each report. Consideration should be given to all items listed in Appendix C to the APA Program’s current Model APA (see Announcement 2004-26, 2004-15 I.R.B. 743, 768).

.07 Term

.08 Request for Competent Authority Consideration

[Name of taxpayer(s)] consents to the disclosure to the competent authority of [name of foreign country] and the competent authority’s staff of any or all of the items of information set forth or enclosed in the [bilateral/multilateral] APA request for the taxable year(s) [and accompanying rollback request for relief from economic double taxation of income for the taxable years], and any further submissions, within the limits contained in the [name of treaty].

.09 Perjury Statement

.10 Signatures

The taxpayer or the taxpayer’s authorized representative must sign the APA request. If an authorized representative is to sign, the taxpayer and representative must satisfy the relevant instructions on signatures in Rev. Proc. 2004-1, 2004-1 I.R.B. 1 (or its successor).

.11 Mailing, Deliveries, Copies, and Office Location

.12 User Fees

.01 General

The time for processing an APA request follows one of two paths, depending on whether the request is for a bilateral or multilateral APA, or for a unilateral APA. The scheduling of due diligence, analysis, discussion, agreement, and drafting is designed to complete the recommended U.S. negotiating position (bilateral or multilateral APA request), or a unilateral APA, within 12 months from the date the full request was filed. The filing of a full APA request includes not only the payment of a user fee, but also the receipt by the APA Program of the materials specified in sections 4.01 through 4.10. Significant factual analysis of the APA request will not begin until a full request has been filed.

.03 Designation of Team Leader

Shortly after receiving the taxpayer’s APA request and any required user fees, the APA Director will appoint a Team Leader to review the request. If a prefiling conference was held with the taxpayer, the Team Leader generally will be appointed from among the APA Program staff attending the prefiling conference. The Team Leader will oversee the APA Team’s activities in processing the APA request.

.02 Initial Contact

After receiving an APA request, a representative of the APA Program will contact the taxpayer or representative to discuss any preliminary questions the APA Program may have, or to ask for any additional information or documents necessary in order to initiate processing of the request. Additional information and documents must be supplied by the date specified by the APA Program, as extended for good cause, accompanied by the perjury statement as set forth in section 4.09.

.04 Formation of APA Team

The Team Leader will organize the APA Team, which normally consists of the following personnel: the Team Leader, an APA Program economist and/or a Service Operating Division economist, an LMSB international examiner, a Division Counsel attorney, and a competent authority analyst in bilateral cases. In appropriate cases, the international examiner’s manager and other Service Operating Division personnel familiar with the taxpayer may participate in the APA Team. If the APA may affect taxable years in Appeals, the appropriate Appeals Officer will be invited to participate. The APA Team Leader will assure that copies of the APA request are distributed to all Team members for review.

.05 Function of APA Team

The function of the APA Team is the following: (1) for a bilateral or multilateral APA, to develop, in consultation with the taxpayer and consistent with sound tax administration, a competent authority negotiating position that it can recommend for approval, and (2) for a unilateral APA, to make best efforts, consistent with sound tax administration, to develop an APA that it can recommend for approval by the Associate Chief Counsel (International). The Service Operating Division field office responsible for the taxpayer’s income tax return will be provided an opportunity to review and comment on the recommended U.S. competent authority negotiating position in the case of a bilateral or multilateral APA, and the proposed APA in the case of a unilateral APA.

.06 Due Diligence and Analysis

The APA Team will evaluate the taxpayer’s APA request by discussing it with the taxpayer, verifying the data supplied, and requesting additional supporting data if necessary. The evaluation of the request will not constitute an examination or inspection of the taxpayer’s books and records under § 7605(b) or other provisions of the Code.

.07 Schedule for Discussion and Drafting

.08 Execution

Signature of an APA by the APA Director and the taxpayer will constitute agreement to the APA. For purposes of executing the APA, each taxpayer that is a member of a consolidated group (as defined in § 1.1502-1) must comply with the provisions of § 1.1502-77. The person signing the APA request on behalf of the taxpayer must satisfy the requirements of section 4.09(2).

.09 Withdrawing the Request

The taxpayer may withdraw the request at any time before the execution of the APA. The user fee generally will not be refunded if the taxpayer withdraws its APA request after the due diligence process has been initiated.

.10 Rejecting the Request

The APA Program may decline either to accept any APA request or to execute any APA after a request has been accepted. If the APA Program declines to execute an APA after the due diligence process has been initiated, the Service normally will retain the user fee, although the fee may be returned if the APA Program determines that such action would be appropriate under the circumstances. If the APA Program proposes to reject an APA request, the taxpayer will be granted one conference of right with the APA Director. Other conferences may be granted at the APA Director’s discretion.

.01 When any of the parties to a request are entitled to obtain assistance under the mutual agreement provision of a tax treaty between a foreign country and the United States, or under Rev. Proc. 89-8, the competent authorities may enter into agreements concerning the APA. Requests similar to APA requests that are initiated through treaty partners or possession tax agencies and submitted to the U.S. competent authority will be processed under this revenue procedure and Rev. Proc. 2002-52, as appropriate. In order to provide timely clarification of factual issues, minimize the potential for miscommunication, and assist in development of a multiple party agreement on a timely basis, the Service will generally initiate coordination among the taxpayer, the Service, and the competent authorities of treaty partners at the earliest possible stage of consideration of an APA request including, where possible, the prefiling stage. In this manner, the U.S. and foreign competent authorities can develop a joint understanding of the case, which should facilitate negotiation and resolution of competent authority issues. The taxpayer should remain available throughout consideration of the request to assist the Service in reaching agreement with the foreign competent authority. Final agreement to the negotiated APA will be sought among the taxpayer, the Service, and the foreign competent authority. As a general matter, the taxpayer should submit APA requests and related correspondence simultaneously to the Service and to foreign competent authorities involved in the requests.

.02 The purpose of a competent authority agreement is to avoid double taxation or taxation not in accordance with the relevant income tax treaty. If such an agreement is not acceptable to the taxpayer, the taxpayer may withdraw the APA request (see section 5.09). If the competent authorities are unable to reach an agreement, the taxpayer may withdraw its request or, at its discretion, the Service may negotiate and enter into a unilateral APA with the taxpayer (see section 6.06).

.03 The taxpayer must cooperate with the Service and the U.S. competent authority, pursuant to the standards set forth in Rev. Proc. 2002-52 and any other applicable revenue procedures.

.04 Taxpayers have an affirmative obligation to identify relevant concerns that may impact competent authority negotiation of an APA request. For example, it may be necessary for the Service to request sensitive confidential data (including material that may constitute a trade secret), which if disclosed, could harm the taxpayer’s competitive position. If the taxpayer identifies such sensitive information, the Service will work with the taxpayer in developing a mechanism to permit consideration or verification by the treaty partner of the information while still preserving its confidentiality.

.05 When the competent authorities enter into an agreement covering an APA, the Service will, to the extent appropriate, agree to a mutual exchange of information with the foreign competent authority concerning any subsequent modifications, cancellation, revocation, requests to renew, evaluation of annual reports, or examination of the taxpayer’s compliance with the terms and conditions of the APA. Bilateral APAs may provide for simultaneous filing of the annual report with the Service and with the foreign tax administration.

.06 To minimize taxpayer and governmental uncertainty and administrative cost, bilateral or multilateral APAs generally are preferable to unilateral APAs when competent authority procedures are available with respect to the foreign country or countries involved. In appropriate circumstances, however, the Service may execute an APA with a taxpayer without reaching a competent authority agreement. The taxpayer must show sufficient justification for a unilateral APA. In some circumstances, procedures agreed upon with particular foreign competent authorities, or the requirements of proper relations with treaty partners, may preclude unilateral APAs.

.07 Section 7.05 of Rev. Proc. 2002-52 provides in part that, if a taxpayer reaches a settlement on an issue pursuant to a written agreement, the U.S. competent authority will endeavor only to obtain a correlative adjustment from a treaty country and will not undertake any actions that would otherwise change such agreement. The restrictions imposed under section 7.05 of Rev. Proc. 2002-52 with respect to the discretion of the U.S. competent authority to negotiate correlative relief will not apply to a unilateral APA. However, a unilateral APA may hinder the ability of the U.S. competent authority to reach a mutual agreement which will provide relief from double taxation, particularly when a contemporaneous bilateral or multilateral APA request would have been both effective and practical (within the meaning of § 1.901-2(e)(5)(i)) to obtain consistent treatment of the APA matters in a treaty country. If there is a settlement with respect to taxable years prior to the first year subject to a unilateral APA based on rollback of the APA’s TPM (as discussed in sections 2.12 and 7 of this revenue procedure), section 7.05 of Rev. Proc. 2002-52 will apply to the rollback years in the regular manner.

.01 Application of the TPM to tax years prior to those covered by the APA (“rollback” of the TPM) may be an effective means of enhancing voluntary compliance and of using available resources to address unresolved transfer pricing issues. The taxpayer may request that the Service consider a rollback (a “rollback request”) in connection with a particular APA request. Under regularly applicable procedures, the Service may determine that the same or a similar TPM as that agreed to in an APA should be applied to prior years even in the absence of a rollback request. When applying the TPM to prior years, adjustments may be made to reflect differences in facts, economic conditions, and applicable legal rules. Those adjustments may be made regardless of whether the taxpayer or the Service initiated the rollback request.

.02 The taxpayer may make a rollback request in its APA request or at any time prior to the execution of the APA. The principles set forth in section 2.12 generally will govern the Service’s consideration of the request. The balance of prospectivity and retroactivity of the total number of years covered by the proposed overall agreement, and the status of any on-going examination, will also be given consideration in the Service’s decision to entertain a rollback request. Rollbacks requested after submission of the APA request must be in writing and addressed to the APA Director.

.03 If a rollback request is submitted in connection with a bilateral or multilateral APA, the rollback request will be deemed to constitute an application for accelerated competent authority consideration as described in section 7.06 of Rev. Proc. 2002-52 (or its successor). The Office of Associate Chief Counsel (International), the Service Operating Division field office involved, and the U.S. Competent Authority will coordinate consideration of the request. The taxpayer’s request must include all information required for accelerated competent authority consideration under Rev. Proc. 2002-52 (or its successor), subject to the rules set forth therein. The taxpayer’s request can pertain to any years prior to the first year to be covered under the requested APA. As necessary to reach a competent authority agreement, the Service may require that the rollback be applied to one or more specified years if accelerated competent authority is to be granted. In exercising its discretion over the conduct of accelerated competent authority consideration, the U.S. Competent Authority will seek to implement the policy concerning APA rollbacks stated in section 2.12.

.04 Rollback requests submitted in connection with a bilateral or multilateral APA and involving a taxable year under the jurisdiction of Appeals will be deemed to constitute an application for simultaneous Appeals and competent authority consideration. That application is described in section 8 of Rev. Proc. 2002-52 and is subject to the rules of that section. The Office of Associate Chief Counsel (International), Appeals, and the U.S. Competent Authority will coordinate consideration of the request. In exercising its discretion in a simultaneous Competent Authority-Appeals proceeding, the U.S. Competent Authority will seek to implement the policy concerning APA rollbacks stated in section 2.12. Taxpayers are encouraged to request accelerated competent authority consideration under section 7.03 above, in conjunction with an application for the simultaneous Appeals and competent authority process.

.05 Subject to the policy stated in section 2.12, the Service official with jurisdiction over the taxable year subject to the rollback has discretion as to whether the rollback is applied. That official may be either the Service Operating Division executive responsible for the taxpayer’s income tax return, the National Chief of Appeals, the U.S. Competent Authority (for matters subject to competent authority negotiations), or the Division Counsel (for matters pending litigation). Except to the extent inconsistent with this revenue procedure, APA rollbacks will be implemented using regularly applicable procedures for resolving tax issues. Such procedures include but are not limited to closing agreements and other settlement documents and Forms 870 and 870AD.

.01 Special Provisions Available to Small Business Taxpayers

At the request of a small business taxpayer (“SBT”), the APA Program may apply any or all of the following provisions in this section. A SBT is any U.S. taxpayer with total gross income of $200 million or less, as determined under section 4.12(1)(g). In addition, SBT procedures will be available for APAs that cover small transactions described in section 4.12(2)(d). Although transactions involving valuable intangible property or CSAs would not ordinarily be amenable to these SBT procedures due to the complexity of valuing such intangibles, the APA Program will consider employing special procedures for such transactions on a case-by-case basis.

.02 PFC Procedures

.03 Items Required for an SBT APA Request

Before an SBT submits an APA request, the APA Program and the SBT may agree to reduce or eliminate specific items that would otherwise be required by section 4.

.04 Locale and Number of Meetings for SBT APA Requests

The APA Program will endeavor to hold meetings with the SBT at a location convenient to the SBT. To minimize the number of meetings, teleconferences will be employed whenever feasible.

.05 Assistance in Economic Analysis

At the SBT’s request, the APA Program will assist the SBT in the selection and evaluation of comparables, as well as the computation of any appropriate adjustments to comparables.

.06 APA

For unilateral APA requests, a SBT should submit a proposed draft APA in a form substantially similar to the APA Program’s current Model APA (see Announcement 2004-26, 2004-15 I.R.B. 743, 765). The electronic component of the APA request should include a “redline” version showing the differences between the Model APA and the SBT’s proposed draft (see section 4.01(7)).

.07 APA Program’s Consideration of Other Alternative Procedures

The APA Program may consider other procedures suggested by the SBT to reduce the SBT’s administrative and financial burden, consistent with the objectives of the APA Program and the requirements of § 482.

.01 An APA is a binding agreement between the taxpayer and the Service. See sections 2.01 - 2.04.

.02 If the taxpayer complies with the terms and conditions of the APA, the Service will not contest the application of the TPM to the subject matter of the APA except as provided in this revenue procedure. The taxpayer remains otherwise subject to U.S. income tax laws and applicable income tax conventions.

.03 An APA shall have no legal effect except with respect to the taxpayer, taxable years, and transactions to which the APA specifically relates.

.04 Unless provided otherwise by written agreement or regulations, the Service and the taxpayer may not introduce the APA or non-factual oral and written representations made in conjunction with the APA request as evidence in any judicial or administrative proceeding regarding any tax year, transaction, or person not covered by the APA. This paragraph does not preclude the Service and the taxpayer from agreeing to roll back the APA TPM, or the Service’s use of any non-factual material otherwise discoverable or obtained other than in the APA process merely because the parties considered the same or similar material in the APA process.

.05 Unless provided otherwise by written agreement or regulations, the Service and the taxpayer may not introduce a proposed, cancelled, or revoked APA, or any non-factual oral or written representations or submissions made during the APA process, as an admission by the other party in any judicial or administrative proceeding regarding any taxable year of the requested APA term. This paragraph does not preclude the Service’s use of any non-factual material otherwise discoverable or obtained other than in the APA process merely because the APA Program and the taxpayer considered the same or similar material in the APA process.

.01 Annual Reports

.02 APA Primary Adjustments, Secondary Adjustments, and Revenue Procedure Treatment

.03 Examination

.04 Record Retention

.05 Revising the APA

.06 Canceling the APA

.07 Revoking the APA

.08 Change in Case Law, Statute, Regulation, or Treaty

If applicable U.S. case law, statutes, regulations, or treaties change the federal income tax treatment of any matter covered by the APA, the new case law, statute, regulation, or treaty provision supersedes inconsistent terms and conditions of the APA. The APA Director and the taxpayer may revise the APA under section 10.05 to reconcile it with the new law or treaty provision, or agree to cancel the APA.

.01 A taxpayer may request renewal of an APA using the procedures for initial APA requests. The taxpayer must submit the user fee required under section 4.12 and appropriate supporting documentation. In general, the principles in section 11.02 govern the APA Program’s consideration of the renewal request. The renewal request must address changed or anticipated changes in facts and circumstances the APA Team should consider. Taxpayers are encouraged to file the renewal request nine months before the expiration of the APA term.

.02 The APA Program will expedite the processing of a renewal APA if the following conditions exist: (a) substantially the same law and policy applied to the existing APA; (b) no substantial differences exist between the taxpayer’s proposed TPM and the TPM under the existing APA; (c) no material changes occurred in the taxpayer’s facts or circumstances since the parties entered into the existing APA; and (d) for a bilateral APA, a rollback or closed year considerations did not influence the TPM in the existing APA.

.03 If the conditions in the prior paragraph exist, the APA Team begins its evaluation of the renewal APA by considering the continuing applicability of the existing APA, using updated comparables as appropriate. The APA Team will focus on any changed facts and circumstances. While the APA Team will endeavor to streamline the renewal process, certain cases may require additional analysis. That is, experience and insight gained from applying the TPM to actual data (for example, APA annual reports) may provide insight that indicates the need to modify the TPM.

.01 An APA, any background information related to the APA, and the taxpayer’s APA request for that APA, are return information and are confidential. See §§ 6103, 6105, 894, and 7852(d).

.02 An APA, any background information related to the APA, and the taxpayer’s APA request, are not “written determinations,” and they are not open to public inspection. See § 6110.

.03 The Secretary must prepare an annual report for public disclosure. See § 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. 106-170, 113 Stat. 1860, 1925. That report includes specifically designated information concerning all APAs, but in a form that does not identify taxpayers or their trade secrets or proprietary or confidential business or financial information.

.04 An APA, any annual reports, and any factual information contained in the background files is subject to exchange of information under income tax treaties or tax information exchange agreements in accordance with the terms of such treaties and agreements (including terms regarding relevancy, confidentiality and the protection of trade secrets). In cases where the exchange of information would be discretionary, information may be exchanged to the extent consistent with sound tax administration and the practices of the relevant foreign competent authority, including where relevant the existence and application by the foreign competent authority of rules similar to those described in sections 9.04 and 9.05.

Rev. Proc. 96-53, 1996-2 C.B. 375, and Notice 98-65, 1998-2 C.B. 803, are superseded.

This revenue procedure will apply to all APA requests, including requests for renewal, received on or after 30 days after publication. By agreement, this revenue procedure may apply to any APA resulting from an APA request pending on such date.

The collections of information contained in this revenue procedure have 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 1545-1503.

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 collections of information are in sections 3.06, 4, 7.03, 10.01, 10.02(1), 10.04, 10.05 and 11.01. This information is required to provide the Service sufficient information to evaluate and process the APA request or request for renewal of an existing APA, or to determine whether the taxpayer is in compliance with the terms and conditions of an APA. This information will be used to evaluate the proposed TPM, and the taxpayer’s compliance with the terms and conditions of any APA to which it is a party. The collections of information are required to obtain an APA. The likely respondents are business or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 8200 hours.

The estimated average burden for an APA prefiling conference is 10 hours; the estimated average burden for an APA request is 50 hours; and the estimated average burden for preparation of an annual report by a party to an APA is 15 hours. The estimated number of respondents and/or recordkeepers is 230.

The estimated annual frequency of responses is one request or report per year per applicant or party to an APA, except that a taxpayer requesting an APA may also request a prefiling conference.

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 § 6103.

The principal authors of this document are various members of the Advance Pricing Agreement Program of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure, please contact Mr. Peyton Robinson at (202) 435-5220, or Mr. Matthew Kramer at (415) 848-4846 (not toll-free numbers).

The Department of the Treasury and the Internal Revenue Service announce a delay in the effective date of § 1.417(a)(3)-1 of the Income Tax Regulations with respect to qualified joint and survivor (QJSA) explanations relating to certain optional forms of benefit. However, the current effective date of the regulations is retained with respect to QJSA explanations relating to single sum or other optional forms of benefit subject to § 417(e)(3) of the Internal Revenue Code that are less valuable than the QJSA.

Section 1.417(a)(3)-1 requires the disclosure, as part of a QJSA explanation, of the relative value and financial effect of optional forms of benefit available to participants in retirement plans qualified under § 401(a) of the Internal Revenue Code. This announcement also addresses certain questions that have arisen under these regulations.

Final regulations (T.D. 9099, 2004-2 I.R.B. 255) under § 417(a)(3) of the Code regarding disclosure of the relative value and financial effect of optional forms of benefit as part of QJSA explanations provided to participants receiving qualified retirement plan distributions were published in the Federal Register on December 17, 2003. See § 1.417(a)(3)-1 of the regulations, 68 FR 70141. The final regulations are generally effective for QJSA explanations provided with respect to annuity starting dates beginning on or after October 1, 2004.

The regulations were issued in response to concerns that, in certain cases, the information provided to participants under § 417(a)(3) regarding available distribution forms does not adequately enable them to compare those distribution forms without professional advice. In particular, participants who are eligible for both subsidized annuity distributions and unsubsidized single-sum distributions may be receiving explanations that do not adequately explain the value of the subsidy that is foregone if the single-sum distribution is elected. In such a case, merely disclosing the amount of the single-sum distribution and the amount of the annuity payments would not adequately enable a participant to make an informed comparison of the relative values of those distribution forms.The regulations address this problem, as well as the problem of disclosure in other cases where there are significant differences in value among optional forms, and also clarify the rules regarding the disclosure of the financial effect of benefit payments.

A number of commentators have requested that the effective date of the regulations be postponed. Among the reasons cited is the need in some plans for sponsors to complete an extensive review and analysis of optional forms of benefit in order to prepare proper comparisons of the relative values of those optional forms to the QJSA. They have noted that recently proposed regulations (REG-128309-03, 2004-16 I.R.B. 800) under § 411(d)(6) would permit elimination of certain optional forms of benefit and that many plan sponsors can be expected to engage in a thorough review of all of the optional forms of benefit under their plans following publication of those regulations in final form. See § 1.411(d)-3 of the regulations, 69 FR 13769 (March 24, 2004). These commentators have argued that it would be inefficient for plans to be required to incur the costs of two such extensive analyses in succession, rather than a single analysis of optional forms that might serve to some extent for purposes of both the relative value regulations and the § 411(d)(6) regulations.

After careful consideration of these comments, Treasury and the IRS are postponing the effective date of the final regulations under § 1.417(a)(3)-1 for certain QJSA explanations. The regulations will generally be effective for QJSA explanations provided with respect to annuity starting dates beginning on or after February 1, 2006. In the interim, plans that do not comply with § 1.417(a)(3)-1 will be required to comply with prior guidance regarding disclosure of relative value and financial effect. See §§ 1.401(a)-11(c)(3) and 1.401(a)-20, Q&A-36 as they appeared in the April 1, 2003, edition of the Code of Federal Regulations.

Notwithstanding this extension, the existing effective date under § 1.417(a)(3)-1 of the regulations is retained for explanations with respect to any optional form of benefit that is subject to the requirements of § 417(e)(3) of the Code (e.g., single sums, distributions in the form of partial single sums in combination with annuities, or installment payment options) if the actuarial present value of that optional form is less than the actuarial present value (as determined under § 417(e)(3)) of the QJSA. Thus, for example, a QJSA explanation provided with respect to an annuity starting date beginning on or after October 1, 2004, must comply with § 1.417(a)(3)-1 to the extent that the plan provides for payment to that participant in the form of a single sum that is less valuable than the QJSA.

The final regulations provide two methods for disclosing the relative value and financial effect of the optional forms of benefit presently available to a participant: the “participant-specific” method of § 1.417(a)(3)-1(c) and the “generalized notice” method of § 1.417(a)(3)-1(d). Under the participant-specific method, a plan must provide information on the relative value and financial effect of each optional form of benefit and is permitted to use reasonable estimates for this purpose (e.g., estimates based on data as of an earlier date, a reasonable assumption of the spouse’s age, or reasonable estimates of the applicable interest rate under § 417(e)(3)).

Under the generalized notice method, a plan discloses the amount of the participant’s benefit payable in the normal form of benefit and provides additional information that is not participant-specific (although participant-specific information must be provided upon request). The additional information may be disclosed in the form of a chart based on computations for hypothetical participants that shows the financial effect of generally available optional forms of benefit in units such as dollars per thousand, and the relative value of those optional forms. The disclosure of the amount of the individual participant’s benefit in combination with the chart allows the individual to estimate the financial effect and relative value of the optional forms of benefit available to that individual.

In response to questions raised, this announcement clarifies that reasonable estimates may be used in determining the amount of the normal form of benefit available to a participant under the generalized notice method of disclosure. In addition, a plan may choose to base the chart or additional information described above in part on participant-specific data so long as the requirements of the generalized notice method are otherwise satisfied.

Section 1.401(a)-20, Q&A-16, provides that, in the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Section 417(e)(3) provides that specified mortality and interest rate assumptions apply in determining the minimum present value of certain optional forms of benefit, such as a single sum. Some commentators have expressed concern that, solely as a result of the use of the actuarial assumptions specified in § 417(e)(3), the value of a single-sum distribution may exceed the actuarial present value of a QJSA, especially at younger ages.

The Treasury and the Service intend to issue regulations, effective retroactively, clarifying the interaction between the QJSA requirements and the requirements of § 417(e)(3) to use specified actuarial assumptions. The regulations are expected to provide that a plan will not fail to satisfy the requirements of § 417 merely because the application of § 417(e)(3) causes an optional form of benefit to be more valuable than the QJSA.

For further information regarding this announcement, please contact Diane Bloom at (202) 283-9888, or Linda Marshall at (202) 622-6090. These numbers are not toll-free.

Internal Revenue Service (IRS), Treasury.

Advance notice of proposed rulemaking.

This document requests information from the public on issues that the IRS may address in proposed regulations (REG-137076-02) relating to the tax on amounts paid for communications services. All materials submitted will be available for public inspection and copying.

Written and electronic comments must be received by September 29, 2004.

Send submissions to: CC:PA:LPD:PR (REG-137076-02), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-137076-02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., 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 (indicate IRS and REG-137076-02).

Concerning submissions generally, the Regulations Unit, (202) 622-3628; concerning the proposals, Cynthia McGreevy (202) 622-3130 (not toll-free numbers).