LIFO; price indexes; department stores. The June 2006 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, June 30, 2006.

Levy on bank account. This ruling explains that a superpriority lien argument is not a defense to a levy. If a bank has such an argument, it must file a wrongful levy suit within nine months of the levy. Otherwise, the statute of limitations bars such a suit.

Final, temporary, and proposed regulations under section 860G of the Code relate to income that is associated with a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) and that is allocated through certain entities to foreign persons who have invested in those entities. The regulations accelerate the time when income is recognized for withholding tax purposes to conform to the timing of income recognition for general income tax purposes.

Final, temporary, and proposed regulations under section 860G of the Code relate to income that is associated with a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) and that is allocated through certain entities to foreign persons who have invested in those entities. The regulations accelerate the time when income is recognized for withholding tax purposes to conform to the timing of income recognition for general income tax purposes.

Final regulations under section 410 of the Code implement a statutory directive of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to amend section 1.410(b)-6(g) of the regulations. The final regulations permit, in certain circumstances, employees of a tax-exempt organization described in section 501(c)(3) to be excluded for the purpose of testing whether a section 401(k) plan (or a section 401(m) plan that is provided under the same general arrangement as the section 401(k) plan of the employer) meets the requirements for minimum coverage specified in section 410(b). The regulations affect tax-exempt employers described in section 501(c)(3), retirement plans sponsored by these employers, and participants in these plans.

Government pick-up plans; employer contributions; income tax; prospective application. This ruling describes the actions required for a state or its political subdivisions, etc., to “pick-up” or treat certain contributions as employer contributions to a plan qualified under section 401(a) of the Code. If certain criteria are met, this ruling will be applied prospectively. Rev. Ruls. 81-35, 81-36, and 87-10 amplified and modified.

Final regulations under section 410 of the Code implement a statutory directive of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to amend section 1.410(b)-6(g) of the regulations. The final regulations permit, in certain circumstances, employees of a tax-exempt organization described in section 501(c)(3) to be excluded for the purpose of testing whether a section 401(k) plan (or a section 401(m) plan that is provided under the same general arrangement as the section 401(k) plan of the employer) meets the requirements for minimum coverage specified in section 410(b). The regulations affect tax-exempt employers described in section 501(c)(3), retirement plans sponsored by these employers, and participants in these plans.

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

Aviation Safety Council, Inc., of Pasadena, CA; Budget and Credit Counseling Services, Inc., of New York, NY; and Mason Credit Counseling, Inc., of Hauppauge, NY, no longer qualify as organizations to which contributions are deductible under section 170 of the Code.

Levy on bank account. This ruling explains that a superpriority lien argument is not a defense to a levy. If a bank has such an argument, it must file a wrongful levy suit within nine months of the levy. Otherwise, the statute of limitations bars such a suit.

This notice effects interim revisions to Forms 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, and 8840, Closer Connection Exception Statement for Aliens. Taxpayers required to file these forms should disregard certain line items. However, filers are reminded that they must retain the information elicited on those line items, as well as the rest of the form, in their books and records.

This document contains corrections to temporary regulations (T.D. 9262, 2006-24 I.R.B. 1040) concerning the application of section 199 of the Code, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software.

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations under section 410(b) of the Internal Revenue Code. The final regulations permit, in certain circumstances, employees of a tax-exempt organization described in section 501(c)(3) to be excluded for the purpose of testing whether a section 401(k) plan (or a section 401(m) plan that is provided under the same general arrangement as the section 401(k) plan of the employer) meets the requirements for minimum coverage specified in section 410(b). These regulations affect tax-exempt employers described in section 501(c)(3), retirement plans sponsored by these employers, and participants in these plans.

Effective Date: July 21, 2006.

Applicability Date: These regulations apply to plan years beginning after December 31, 1996.

Linda L. Conway, 202-622-6060, or Michael P. Brewer, 202-622-6090 (not toll-free numbers).

Accordingly, 26 CFR part 1 is amended as follows:

The principal authors of these regulations are Linda L. Conway and Michael P. Brewer of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in the development of these regulations.

* * * * *

What actions are required in order for a State or political subdivision thereof, or an agency or instrumentality of any of the foregoing, to “pick up” employee contributions to a plan qualified under § 401(a) of the Internal Revenue Code so that the contributions are treated as employer contributions pursuant to § 414(h)(2)?

Employer M is a political subdivision of State N. Employer M participates in Plan A, a defined benefit pension plan qualified under § 401(a) and established by State N to provide retirement benefits to eligible employees of State N and any political subdivision of State N. Plan A requires each participating employee to make employee contributions to Plan A equal to a specified percentage of the participant’s salary. These amounts, designated as employee contributions under § 414(h)(1), are deducted from the participant’s salary. State N statutes governing Plan A permit any political subdivision to provide that the employee contributions will be paid by the employer in order to be picked up and treated as employer contributions under § 414(h)(2). On March 1, 2006, Employer M amends its governing laws to provide that the amounts designated as employee contributions under Plan A will be paid by Employer M for all of Employer M’s employees in order to be treated as employer contributions under § 414(h)(2), as permitted under the statutes governing Plan A. The amendment is in writing, was adopted by persons authorized to amend Employer M’s governing laws, and is effective for periods on or after April 1, 2006. Employer M, thereafter, treats the amounts as employer contributions, instead of as being employee contributions, for federal income tax purposes and does not include these amounts in the participating employees’ gross income.

Section 414(h)(1) provides that any amount contributed to a qualified plan is not treated as having been made by the employer if it is designated as an employee contribution.

Section 414(h)(2) provides a special rule for qualified plans established by a State government or political subdivision thereof, or by any agency or instrumentality of the foregoing. Under this rule, contributions, although designated as employee contributions, are nevertheless treated as employer contributions if the contributions are picked up by the employing unit.

Section 401(k) provides the rules relating to cash or deferred elections. Section 1.401(k)-1(a)(1) of the Income Tax Regulations provides that a plan, other than a profit-sharing, stock bonus, pre-ERISA money purchase pension or rural cooperative plan, does not satisfy the requirements of § 401(a) if the plan includes a cash or deferred arrangement. Thus, a qualified defined benefit plan is not permitted to include a cash or deferred arrangement.

Section 1.401(k)-1(a)(3) generally defines a cash or deferred election as any direct or indirect election (or modification of an earlier election) by an employee to have the employer (i) provide an amount that is not currently available to the employee in the form of cash or some other taxable benefit, or (ii) contribute an amount to a trust or provide an accrual for a plan deferring the receipt of compensation.

Rev. Rul. 77-462, 1977-2 C.B. 358, addresses the income tax treatment of contributions picked up by the employer within the meaning of § 414(h)(2). In Rev. Rul. 77-462, the employer school district agreed to “pick up” and pay the required contributions of the eligible employees under the plan. The revenue ruling holds that the contributions picked up by the school district are excluded from the gross income of employees until such time as they are distributed to the employees.

Rev. Rul. 81-35, 1981-1 C.B. 255, and Rev. Rul. 81-36, 1981-1 C.B. 255, address certain requirements for contributions to be picked up by an employer within the meaning of § 414(h)(2). These revenue rulings establish that the following criteria must be satisfied: (i) the employer must specify that the contributions, although designated as employee contributions, are being paid by the employer in lieu of contributions by the employee; and (ii) the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid by the employer to the plan.Rev. Rul. 81-35 and Rev. Rul. 81-36 apply even if the employer picks up the contributions through either a reduction in salary or an offset against future salary increases.

Rev. Rul. 87-10, 1987-1 C.B. 136, addresses when contributions designated as employee contributions (designated employee contributions) under § 414(h)(1) to a qualified plan established by a State government (including a political subdivision thereof, or any agency or instrumentality of the foregoing) are excludable from the gross income of the employee. The ruling concludes that, to satisfy the criteria set forth in Rev. Rul. 81-35 and Rev. Rul. 81-36, the governmental action necessary to effectuate the “pick-up” must be completed before the period to which such contributions relate. Thus, designated employee contributions to a qualified plan established by a State government are excluded from gross income as “pick-up” contributions that are treated as employer contributions only to the extent the contributions relate to compensation for services rendered after the date of the last governmental action necessary to effectuate the “pick-up.”

Based on the foregoing, a contribution to a qualified plan established by a State government will not be treated as picked up by the employing unit under § 414(h)(2) unless the employing unit:

(1) Specifies that the contributions, although designated as employee contributions, are being paid by the employer. For this purpose, the employing unit must take formal action to provide that the contributions on behalf of a specific class of employees of the employing unit, although designated as employee contributions, will be paid by the employing unit in lieu of employee contributions. A person duly authorized to take such action with respect to the employing unit must take such action. The action must apply only prospectively and be evidenced by a contemporaneous written document (e.g., minutes of a meeting, a resolution, or an ordinance).

(2) Does not permit a participating employee from and after the date of the “pick-up” to have a cash or deferred election right (within the meaning of § 1.401(k)-1(a)(3)) with respect to designated employee contributions. Thus, for example, participating employees must not be permitted to opt out of the “pick-up”, or to receive the contributed amounts directly instead of having them paid by the employing unit to the plan.

Employer M has taken formal action which was memorialized in a contemporaneous writing that provides that it will “pick up” all prospective contributions for the Employer M employees who are required to contribute to Plan A. Further, employees are required to participate in Plan A, do not have the option of choosing to receive the contributed amounts directly, and may not make a cash or deferred election with respect to such amounts. Employer M has met the requirements to have the designated employee contributions under Plan A picked up and treated as employer contributions pursuant to § 414(h)(2). Thus, contributions made to Plan A are not includible in a participant’s gross income until distributed under § 402.

This revenue ruling applies only for federal income tax purposes. See §§ 3121(a)(5)(A) and 3121(v)(1)(B) of the Federal Insurance Contributions Act (FICA) for the treatment of amounts treated as an employer contributions under § 414(h)(2).

Because an authorized person has taken formal action in writing prospectively to have the employing unit pay previously designated employee contributions to a § 401(a) qualified plan, appropriate actions have been taken for the contributions to be picked up by the employing unit and treated as employer contributions pursuant to § 414(h)(2).

Under the authority of § 7805(b)(8), the Service will not treat any plan that on or before August 28, 2006, includes designated employee contributions that were intended to be picked up as employer contributions pursuant to § 414(h)(2) as failing to meet the requirements of such section prior to January 1, 2009, solely on account of the failure to satisfy the requirement that the “pick-up” be pursuant to a formal action, by a person duly authorized to take such action with respect to the employing unit, that is evidenced by contemporaneous writing, but only if the following conditions are satisfied: (1) the employing unit has taken contemporaneous action evidencing an intent to establish a “pick-up” (e.g., provided information to employees relating to the establishment of the “pick-up”) and has operated the plan accordingly; and (2) the employing unit takes formal action in writing prior to January 1, 2009, with respect to future contributions to meet the requirements set forth above in paragraph (1) of Law and Analysis in this revenue ruling.

The relief provided above for “pick-ups” implemented prior to August 28, 2006, applies only if the actions taken otherwise complied with Rev. Rul. 81-35, Rev. Rul. 81-36, and Rev. Rul. 87-10, and only if the employing unit has not reported the contributions as wages subject to federal income tax withholding from and after the date of implementation of the intended “pick-up”.

In addition, under the authority of § 7805(b)(8), this revenue ruling does not modify or revoke any private letter ruling issued to any taxpayer prior to August 28, 2006. See § 601.201(l)(4).

Rev. Rul. 81-35, Rev. Rul. 81-36, and Rev. Rul. 87-10 are amplified and modified.

The principal drafter of this revenue ruling is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday through Friday. Ms. Herrmann may be reached at (202) 283-9888 (not a toll-free number).

The following Department Store Inventory Price Indexes for June 2006 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, June 30, 2006.

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).

Internal Revenue Service (IRS), Treasury.

Final and temporary regulations.

This document contains temporary regulations relating to income that is associated with a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) and that is allocated through certain entities to foreign persons who have invested in those entities. The regulations accelerate the time when income is recognized for withholding tax purposes to conform to the timing of income recognition for general income tax purposes. The foreign persons covered by these regulations include partners in domestic partnerships, shareholders of real estate investment trusts, shareholders of regulated investment companies, participants in common trust funds, and patrons of subchapter T cooperatives. These regulations are necessary to prevent inappropriate avoidance of current income tax liability by foreign persons to whom income from REMIC residual interests is allocated. The regulations clarify the timing of income under section 860G for purposes of determining a domestic partnership’s responsibility under sections 1441 and 1442 for withholding tax with respect to a foreign partner’s share of REMIC net income as a result of indirectly holding a residual interest. The regulations also provide that an excess inclusion is treated as income from sources within the United States. The text of the temporary regulations also serves as the text of the proposed regulations (REG-159929-02) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

Effective Date: These regulations are effective August 1, 2006.

Applicability Dates: For dates of applicability, see §§1.860A-1T(b)(5), 1.863-1T(f) and 1.1441-2T(f).

Dale Collinson, (202) 622-3900 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

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

* * * * *

After receiving a levy, does either a bank’s setoff of a taxpayer’s deposit account or a bank’s claim of a security interest that has priority over the federal tax lien under section 6323(b)(10) of the Internal Revenue Code relieve the bank of its obligation to honor the levy?

Situation 1. T, a construction company, has a business deposit account with Bank A in State Z. Under the laws of State Z, Bank A owes a debt to T for the funds deposited into the account. On January 5, 2004, the Service filed a Notice of Federal Tax Lien (NFTL), providing public notice of T’s unpaid Federal tax liability and of the statutory lien arising under section 6321. On April 1, 2004, Bank A loaned $50,000 to T. As part of the transaction, T gave Bank A a promissory note payable on demand. Prior to making the loan to T, Bank A did not have actual notice or knowledge of the existence of the federal tax lien.

As security for the loan, on April 1, 2004, Bank A perfected a security interest in T’s deposit account under the laws of State Z, which adopt revised Article 9 of the Uniform Commercial Code (U.C.C.). Revised Article 9 allows a bank to create a security interest in a deposit account as the original collateral for a business loan. U.C.C. 9-109(a)(1) (1999).

On June 1, 2004, after providing T with notice and an opportunity for hearing, the Service issued a notice of levy in the amount of $100,000 to Bank A; at that time, T’s deposit account in Bank A totaled $15,000. After receiving the notice of levy, on June 1, 2004, Bank A made demand for full payment of the loan ($50,000) and, after not receiving payment, set off all of T’s account against T’s liability for the loan. Under the laws of State Z, when two parties have mutual indebtedness, either of them may cancel or extinguish one debt with the other. Bank A did not send any funds to the Service in response to the notice of levy. On July 1, 2004, Bank A contacted the Service and provided proof that it met all of the requirements for claiming a superpriority interest under section 6323(b)(10) and requested that the levy be released.

Situation 2. The facts are the same as in Situation 1, except that Bank A did not prove its superpriority interest under section 6323(b)(10) to the Service and, on May 1, 2005, the government filed suit against Bank A pursuant to section 6332(d) to enforce the levy.

Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay after demand, the amount shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

Section 6323(a) provides that the lien imposed by section 6321 generally shall not be valid against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until the Service files its NFTL. Section 6323(b) affords protection for certain interests even if a NFTL has been filed. Section 6323(b)(10) provides that the federal tax lien shall not be valid with respect to a savings deposit, share, or other account, with an institution described in section 581 or 591 of the Internal Revenue Code, to the extent of any loan made by such institution without actual notice or knowledge of the existence of such lien, as against such institution, if such loan is secured by such account. Sections 581 and 591 describe the following institutions: banks, trust companies, mutual savings banks, cooperative banks, domestic building and loan associations, and similar saving and loans associations.

Subject to the notice and opportunity for hearing provisions of section 6330, section 6331(a) provides that if any person liable to pay any tax neglects or refuses to pay within 10 days after notice and demand, the Service may levy upon all property and rights to property belonging to such person or on which there is a federal tax lien. The levy does not determine whether the government’s claim is superior to the claims of other parties. Rather, levy authority is designed to enable the government “promptly to secure its revenues” while competing claims are resolved. United States v. National Bank of Commerce, 472 U.S. 713, 721 (1985).

Section 6332(a) provides that any levied-upon person in possession of, or obligated with respect to, the taxpayer’s property or rights to property must surrender such property or rights to property, or discharge such obligation, except such part of the property or rights to property subject to an attachment or execution under any judicial process.

Section 6332(d) provides that any person who fails or refuses to surrender property or rights to property subject to levy upon demand shall be liable to the United States in a sum equal to the value of property or rights not surrendered and, absent reasonable cause, provides for a penalty equal to 50 percent of that sum.

Section 7426(a)(1) provides that any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on the levied upon property may file a wrongful levy suit against the government. An administrative request for return of property under section 6343(b) is not a prerequisite to filing suit for wrongful levy under section 7426.

Section 6532(c)(1) states the general rule that no wrongful levy suit shall be begun after the expiration of 9 months from the date of the levy. Section 6532(c)(2) sets forth a limited exception to this general rule and provides that if an administrative request is made for the return of property described in section 6343(b), the 9-month period prescribed in section 6532(c)(1) shall be extended for a period of 12 months from the date of filing of such request or for a period of 6 months from the date of mailing by registered or certified mail by the Secretary to the person making such request of a notice of disallowance of the part of the request to which the action relates, whichever is shorter.

There are only two defenses to an action brought by the United States to enforce a levy pursuant to section 6332(d). The first is that the levied-upon party is neither in possession of nor obligated with respect to the taxpayer’s property or rights to property. The second is that the taxpayer’s property is subject to a prior judicial attachment or execution. National Bank of Commerce, 472 U.S. at 721-22. Lien priority is not one of the two defenses to a levy recognized by National Bank of Commerce. E.g., Virgin Islands Bureau of Internal Revenue v. Chase Manhattan Bank, 312 F.3d 131, 139 (3rd Cir. 2002); United States v. Citizens and Southern National Bank, 538 F.2d 1101, 1106 (5th Cir. 1976); United States v. Sterling National Bank & Trust Co., 494 F.2d 919, 921 (2d Cir. 1974); United States v. AmSouth Bank, 947 F. Supp. 459, 461 (M.D. Fl. 1996).

After receiving a levy, a bank’s setoff of a taxpayer’s account does not excuse the bank from honoring the levy; a bank’s liability for honoring a levy is determined as of the time that it receives the notice of levy. E.g., State Bank of Fraser v. United States, 861 F.2d 954, 961 (6th Cir. 1988).

Situation 1. Bank A’s setoff does not relieve the bank of its obligation to honor the levy. When the IRS served the levy on June 1, 2004, Bank A owed a debt of $15,000 to T, which the notice of levy seized. State Bank of Fraser, 861 F.2d at 961. At that point in time, Bank A was liable to the IRS for the amount of the debt. IRC § 6332(d)(1). The subsequent setoff does not eliminate Bank A’s liability to the Service. Additionally, Bank A’s priority interest under section 6323(b)(10) does not relieve the bank of its obligation to honor the levy.

Bank A, however, prudently contacted the Service in a timely manner to resolve its dispute informally. In this situation, Bank A was able to prove its section 6323(b)(10) priority claim to the Service. In the exercise of its administrative discretion, the Service may release a levy when a bank proves its superpriority interest under section 6323(b)(10). Since it would serve no purpose to require Bank A to surrender T’s funds to the Service when Bank A and the Service agree that Bank A has a priority interest under section 6323(b)(10), the Service will generally release the levy. If Bank A had not contacted the Service informally, it could have timely filed a wrongful levy suit in federal district court pursuant to section 7426(a)(1).

Situation 2. Bank A has no defense to the notice of levy for the reasons discussed in Situation 1. Here, Bank A did not contact the Service to pursue informal resolution of its section 6323(b)(10) priority claim, nor did Bank A timely file a wrongful levy suit pursuant to section 7426(a)(1) to challenge the levy. Bank A’s failure to act in a timely manner has left it in a position where it cannot assert its superpriority claim, as a court does not have jurisdiction to hear an untimely wrongful levy suit. E.g., LaBonte v. United States, 233 F.3d 1049, 1051 (7th Cir. 2000).

A bank’s setoff of a taxpayer’s deposit account after receiving a levy or a bank’s claim of a priority security interest under section 6323(b)(10) of the Internal Revenue Code does not relieve the bank of its obligation to honor the levy. In Situation 1, however, the Service exercised it administrative discretion and released the levy after Bank A timely established that it had a superpriority interest under section 6323(b)(10). In contrast, in Situation 2, Bank A failed to take any action to protect its security interest, and it is barred from asserting superpriority as a defense against the government’s suit to enforce the levy.

The principal author of this revenue ruling is Walter Ryan of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Walter Ryan at (202) 622-3610 (not a toll-free call).

This notice effects interim revisions to Forms 8898 and 8840. Taxpayers required to file these forms should disregard certain line items. The Treasury Department (Treasury) and Internal Revenue Service (IRS) plan to revise Forms 8898 and 8840 and the corresponding instructions in accordance with this notice. Until revised forms are issued, taxpayers may rely on this notice when completing these forms.

Section 937(a) requires that, except as provided in regulations, to be a bona fide resident of American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the United States Virgin Islands, an individual must be present in the relevant U.S. possession for at least 183 days during the taxable year, must not have a tax home outside the possession during the taxable year, and must not have a closer connection to the United States or a foreign country than to the possession. The principles of section 7701(b)(3)(B)(ii) and Treas. Reg. § 301.7701(b)-2(d) apply to determine whether an individual has such a closer connection. See § 937(a)(2); Treas. Reg. § 1.937-1(e)(1)(i).

Section 937(c) generally requires individuals who take the position for U.S. income tax reporting purposes that they became, or ceased to be, a bona fide resident of one of the specified possessions to file notice of such position. On April 18, 2006, the IRS released Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, on which the notice required by § 937(c) is to be made. Taxpayers who changed their residence to or from a U.S. possession during any of the tax years 2001, 2002, 2003, 2004, or 2005 generally must file Form 8898 by October 16, 2006, for any such tax year. See Notice 2006-57, 2006-27 I.R.B. 13.

Section 7701(b) generally provides that an alien is treated as a resident of the United States for U.S. income tax purposes if the individual (1) has entered the United States as a lawful permanent resident and is such a resident at any time during the calendar year; (2) is present in the United States for a substantial period of time (the “substantial presence test”); or (3) makes an election to be treated as a resident of the United States. An exception to the substantial presence test under section 7701(b)(3)(B) provides that an alien may still be treated as a nonresident alien if the individual (1) is present in the United States for fewer than 183 days during the current year; (2) has a tax home in a foreign country during the year; and (3) has a closer connection to that country than to the United States. Treas. Reg. § 301.7701(b)-2(d) provides a facts-and-circumstances test to determine whether an individual has such a closer connection. This facts-and-circumstances test provides a non-exclusive list of factors to be taken into consideration when making this determination. See Treas. Reg. § 301.7701(b)-2(d)(1)(i) through (x).

An alien individual who otherwise meets the substantial presence test must file a statement for each tax year for which the alien claims a closer connection to a foreign country to explain the basis of the individual’s claim. See Treas. Reg. § 301.7701(b)-8(a)(1). For this purpose, the Commissioner has prescribed the use of Form 8840, Closer Connection Exception Statement for Aliens.

Part III of Form 8898 elicits information relevant to determining whether an individual has closer connections to the United States or a foreign country than to the relevant possession for purposes of the closer connection test of § 937(a). Part IV of Form 8840 elicits substantially the same information for determining whether an individual has a closer connection to a foreign country for purposes of the closer connection test of § 7701(b). Much of the information elicited reflects the facts and circumstances specifically set forth in the regulations. See Treas. Reg. §§ 1.937-1(e)(1)(i); 301.7701(b)-2(d).

Since the release of Form 8898, Treasury and the IRS have received comments concerning the reporting burden with respect to some of the information that individuals are required to provide on the form. In light of these comments, Treasury and the IRS intend to revise Forms 8898 and 8840, and the corresponding instructions, to modify the information required on lines 17 and 29 of Form 8898 and lines 20 and 31 of Form 8840. Until such time, taxpayers required to file Form 8898 or Form 8840 should disregard those line items.

Because the closer connection tests of §§ 937(a) and 7701(b) are facts-and-circumstances tests, all of the factors described in Forms 8898 and 8840 are material in the determination of whether an individual is considered, respectively, a bona fide resident of a U.S. possession or a resident of the United States. Therefore, filers are required to retain the information previously elicited on lines 17 and 29 of Form 8898 or on lines 20 and 31 of Form 8840 in their books and records along with any other relevant information so that the information may be readily available for inspection in the event of an examination. See Treas. Reg. § 1.6001-1.

The principal author of this notice is J. David Varley of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Varley at (202) 435-5262 (not a toll-free call).

Sections 412(b)(5)(B) and 412(l)(7)(C)(i) of the Internal Revenue Code generally provide that the interest rates used to calculate current liability for purposes of determining the full funding limitation under § 412(c)(7) and the required contribution under § 412(l) must be within a permissible range around the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year.

Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Code.

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

The rate of interest on 30-year Treasury securities for July 2006 is 5.13 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2036.

The following 30-year Treasury rates were determined for the plan years beginning in the month shown below.

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 202-283-9703. Mr. Montanaro may be reached at 202-283-9714. The telephone numbers in the preceding sentences are not toll-free.

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking by cross-reference to temporary regulations.

In this issue of the Bulletin, the IRS is issuing temporary regulations, (T.D. 9272) relating to the income that is associated with a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) and that is allocated through certain entities to foreign persons who have invested in those entities. The regulations accelerate the time when income is recognized for withholding tax purposes to conform to the timing of income recognition for general tax purposes. The foreign persons covered by these regulations include partners in domestic partnerships, shareholders of real estate investment trusts, shareholders of regulated investment companies, participants in common trust funds, and patrons of subchapter T cooperatives. These regulations are necessary to prevent inappropriate avoidance of current income tax liability by foreign persons to whom income from REMIC residual interests is allocated. The regulations clarify the timing of income under section 860G for purposes of determining a domestic partnership’s responsibility under sections 1441 and 1442 for withholding tax with respect to a foreign partner’s share of REMIC net income as a result of indirectly holding a residual interest. The regulations also provide that an excess inclusion is treated as income from sources within the United States. The text of those temporary regulations also serves as the text of these proposed regulations.

Written or electronic comments and requests for a public hearing must be received by October 30, 2006.

Send submissions to: CC:PA:LPD:PR (REG-159929-02), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.Alternatively, taxpayers may submit electronic comments directly to the IRS Internet site at www.irs.gov/regs or the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-159929-02).

Concerning the proposed regulations, Dale Collinson, (202) 622-3900 (not a toll-free number); concerning the submission of comments, or a request for a public hearing, Kelly Banks (Kelly.D.Banks@irscounsel.treas.gov).

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

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

* * * * *

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on August 28, 2006, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Internal Revenue Service (IRS), Treasury.

Correcting amendments.

This document contains a correction to temporary regulations (T.D. 9262, 2006-24 I.R.B. 1040) that were published in the Federal Register on Thursday, June 1, 2006 (71 FR 31074) concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software.

These corrections are effective June 1, 2006.

Paul Handleman or Lauren Ross Taylor, (202) 622-3040 (not a toll-free number).

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.199-3T is amended by revising paragraphs (i)(6)(iii) introductory text and Example 5 to read as follows:

Par. 3. Section 1.199-8T is amended by revising paragraph (i)(4) to read as follows:

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

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

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

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

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

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

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

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