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Bulletin No. 1996–13

March 25, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EXEMPT ORGANIZATIONS

Rev. Rul. 96–17, page 5.

Interest rates; underpayments and overpayments. The rate

of interest determined under section 6621 of the Code

for the calendar quarter beginning April 1, 1996, is 7

percent for overpayments, 8 percent for underpayments, and 10 percent for large corporate underpayments. The rate of interest paid on the portion of a

corporate overpayment exceeding $10,000 is 5.5

percent.

Announcement 96–17, page 22.

A list is provided of organizations that no longer qualify

as organizations to which contributions are deductible

under section 170 of the Code.

EXCISE TAX

Announcement 96–15, page 22.

If the criteria described in a proposed class exemption

issued by the Department of Labor are met, the Service

will not impose the excise taxes on prohibited

transactions described in section 4975 of the Code.

Rev. Rul. 96–18, page 4.

LIFO; price indexes; department stores. The January

1996 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, January 31, 1996.

ADMINISTRATIVE

Notice 96–15, page 19.

The ‘‘differential earnings rate’’ under section 809 is

tentatively determined for 1995 together with the

‘‘recomputed differential earnings rate’’ for 1994.

T.D. 8656, page 9.

Final and temporary regulations under section 6662(e)

of the Code provide guidance on the imposition of the

accuracy-related penalty for net section 482 transfer

price adjustments.

Notice 96–17, page 20.

T.D. 8642, 1996–7 I.R.B. 4, relating to the recognition

of gain or loss on certain distributions of contributed

property by a partnership, and to the recognition of gain

on certain distributions to a contributing partner, is

corrected.

EMPLOYEE PLANS

Notice 96–16, page 20.

Guidelines are set forth for determining for March 1996,

the weighted average interest rate and the resulting

permissible range of interest rates used to calculate

current liability for purposes of the full funding

limitation of section 412(c)(7) of the Code as amended

by the Omnibus Budget Reconciliation Act of 1987 and

by the Uruguay Round Agreements Act (GATT).

Announcement 96–16, page 22.

This announcement clarifies the purposes and functions

of the Transfer Pricing Penalty Oversight Committee,

established to monitor and gather information on the

application of transfer pricing penalties under section

6662(e) of the Internal Revenue Code.

Finding Lists begin on page 27.

Announcement of Disbarments and Suspensions begin on page 24.

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Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of

view.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining officers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great courtesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

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Introduction

The Internal Revenue Bulletin is the authoritative

instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the

Internal Revenue Service and for publishing Treasury

Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general

interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription basis. Bulletin contents of a permanent nature are

consolidated semiannually into Cumulative Bulletins,

which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin

all substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published

rulings apply retroactively unless otherwise indicated.

Procedures relating solely to matters of internal

management are not published; however, statements of

internal practices and procedures that affect the rights

and duties of taxpayers are published.

Revenue rulings represent the conclusions of the

Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on

positions taken in rulings to taxpayers or technical

advice to Service field offices, identifying details and

information of a confidential nature are deleted to

prevent unwarranted invasions of privacy and to comply

with statutory requirements.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be

considered, and Service personnel and others concerned are cautioned against reaching the same

conclusions in other cases unless the facts and

circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary

(Enforcement).

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly

and semiannual basis, and are published in the first

Bulletin of the succeeding quarterly and semi-annual

period, respectively.

The Bulletin Index-Digest System, a research and

reference service supplementing the Bulletin, may be

obtained from the Superintendent of Documents on a

subscription basis. It consists of four Services: Service

No. 1, Income Tax; Service No. 2, Estate and Gift

Taxes; Service No. 3, Employment Taxes; Service No.

4, Excise Taxes. Each Service consists of a basic

volume and a cumulative supplement that provides (1)

finding lists of items published in the Bulletin, (2)

digests of revenue rulings, revenue procedures, and

other published items, and (3) indexes of Public Laws,

Treasury Decisions, and Tax Conventions.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The January 1996 Bureau of

Labor Statistics price indexes are accepted for use by department stores

employing the retail inventory and lastin, first-out inventory methods for valuing inventories for tax years ended on,

or with reference to January 31, 1996.

Rev. Rul. 96–18

The following Department Store Inventory Price Indexes for January 1996

were issued by the Bureau of Labor

Statistics on February 28, 1996. 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 inven-

tory methods for tax years ended on, or

with reference to, January 31, 1996.

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, foods, liquor,

tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Jan 1995

Jan 1996

Percent Change from

Jan 1995 to Jan 19961

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . .

Domestics and Draperies . . . . . . . . . . . . . . . .

Women’s and Children’s Shoes . . . . . . . . . .

Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . .

Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s Underwear. . . . . . . . . . . . . . . . . . . .

Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . .

Women’s and Girls’ Accessories . . . . . . . . .

Women’s Outerwear and Girls’ Wear . . . . .

Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . .

Men’s Furnishings. . . . . . . . . . . . . . . . . . . . . .

Boys’ Clothing and Furnishings . . . . . . . . . .

Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Toilet Articles and Drugs . . . . . . . . . . . . . . .

Furniture and Bedding . . . . . . . . . . . . . . . . . .

Floor Coverings. . . . . . . . . . . . . . . . . . . . . . . .

Housewares. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Major Appliances . . . . . . . . . . . . . . . . . . . . . .

Radio and Television . . . . . . . . . . . . . . . . . . .

Recreation and Education2 . . . . . . . . . . . . . . .

Home Improvements2 . . . . . . . . . . . . . . . . . . .

Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . .

480.1

632.3

627.4

917.6

613.6

528.0

282.3

542.2

398.4

595.7

553.7

480.5

1005.9

746.3

842.6

646.7

571.8

775.9

248.5

84.2

114.6

122.0

106.4

519.0

648.4

628.8

887.6

641.1

519.1

289.4

554.2

400.3

602.7

560.6

478.5

994.5

802.7

875.4

668.9

563.6

800.5

247.6

78.9

112.6

123.1

107.7

8.1

2.5

0.2

–3.3

4.5

–1.7

2.5

2.2

0.5

1.2

–0.4

–1.1

7.6

3.9

3.4

–1.4

3.2

–0.4

–6.3

–1.7

0.9

1.2

Groups 1–15: Soft Goods. . . . . . . . . . . . . . . . . . . .

579.3

585.2

1.0

Groups 16 –20: Durable Goods . . . . . . . . . . . . . . .

464.5

467.0

0.5

Groups 21–23: Misc. Goods2 . . . . . . . . . . . . . . . . .

114.1

113.2

–0.8

Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

541.2

544.9

0.7

Groups

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

Store

1Absence

of a minus sign before percentage change in this column signifies price increase.

on a January 1986=100 base.

3The store total index covers all departments, including some not listed separately, except for the following: candy, foods,

liquor, tobacco, and contract departments.

2Indexes

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DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax

and Accounting). For further information regarding this revenue ruling,

contact Mr. Michaels on (202)

622-4970 (not a toll-free call).

Section 6621.— Determination of

Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and

overpayments. The rate of interest

determined under section 6621 of the

Code for the calendar quarter beginning

April 1, 1996, is 7 percent for overpayments, 8 percent for underpayments,

and 10 percent for large corporate

underpayments. The rate of interest

paid on the portion of a corporate

overpayment exceeding $10,000 is 5.5

percent.

Rev. Rul. 96–17

Section 6621 of the Internal Revenue

Code establishes different rates for

interest on tax overpayments and interest on tax underpayments. Under

§ 6621(a)(1), the overpayment rate is

the sum of the federal short-term rate

plus 2 percentage points, except the

rate for the portion of a corporate

overpayment of tax exceeding $10,000

for a taxable period is the sum of the

federal short-term rate plus 0.5 of a

percentage point for interest computations made after December 31, 1994.

Under § 6621(a)(2), the underpayment

rate is the sum of the federal short-term

rate plus 3 percentage points.

Section 6621(c) provides that for

purposes of interest payable under

§ 6601 on any large corporate underpayment, the underpayment rate under

§ 6621(a)(2) is determined by substituting ‘‘5 percentage points’’ for ‘‘3

percentage points.’’ See § 6621(c) and

§ 301.6621–3 of the Regulations on

Procedure and Administration for the

definition of a large corporate underpayment and for the rules for determining

the applicable rate. Section 6621(c) and

§ 301.6621–3 are generally effective for

periods after December 31, 1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal

short-term rate for the first month in

each calendar quarter.

Section 6621(b)(2)(A) provides that

the federal short-term rate determined

under § 6621(b)(1) for any month applies during the first calendar quarter

beginning after such month.

Section 6621(b)(2)(B) provides that

in determining the addition to tax under

§ 6654 for failure to pay individual

estimated tax for any taxable year, the

federal short-term rate that applies

during the third month following such

taxable year also applies during the

first 15 days of the fourth month

following such taxable year.

Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

during such month by the Secretary in

accordance with § 1274(d), rounded to

the nearest full percent (or, if a

multiple of 1⁄2 of 1 percent, the rate is

increased to the next highest full

percent).

Notice 88–59, 1988–1 C.B. 546, announced that in determining the quarterly interest rates to be used for

overpayments and underpayments of

tax under § 6621, the Internal Revenue

Service will use the federal short-term

rate based on daily compounding be-

cause that rate is most consistent with

§ 6621 which, pursuant to § 6622, is

subject to daily compounding.

Rounded to the nearest full percent,

the federal short-term rate based on

daily compounding determined during

the month of January 1996 is 5 percent.

Accordingly, an overpayment rate of 7

percent and an underpayment rate of 8

percent are established for the calendar

quarter beginning April 1, 1996. The

overpayment rate for the portion of

corporate overpayments exceeding

$10,000 for the calendar quarter beginning April 1, 1996, is 5.5 percent. The

underpayment rate for large corporate

underpayments for the calendar quarter

beginning April 1, 1996, is 10 percent.

These rates apply to amounts bearing

interest during that calendar quarter.

Under § 6621(b)(2)(B), the 9 percent

rate that applies to individual estimated

tax underpayments for the first calendar

quarter in 1996, as provided in Rev.

Rul. 95–78, 1995–49 I.R.B. 6, also

applies to such underpayments for the

first 15 days in April 1996.

Interest factors for daily compound

interest for annual rates of 5.5 percent,

7 percent, 8 percent, and 10 percent are

published in Tables 64, 67, 69, and 73

of Rev. Proc. 95–17, 1995–1 C.B. 556,

618, 621, 623, and 627.

Annual interest rates to be compounded daily pursuant to § 6622 that

apply for prior periods are set forth in

the accompanying tables.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Marcia Rachy of the Office of

Assistant Chief Counsel (Income Tax

and Accounting). For further information regarding this revenue ruling,

contact Ms. Rachy on (202) 622-4940

(not a toll-free call).

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TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

RATE

12%

20%

16%

11%

13%

11%

10%

DAILY RATE TABLE

IN 1995–1 C.B.

Table 2, pg. 557

Table 4, pg. 559

Table 3, pg. 558

Table 2, pg. 557

Table 5, pg. 560

Table 6, pg. 560

Table 37, pg. 591

Table 27, pg. 581

Table 75, pg. 629

Table 31, pg. 585

Table 27, pg. 581

Table 25 pg. 579

Table 23, pg. 577

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TABLE OF INTEREST RATES

FROM JAN. 1, 1987 — PRESENT

OVERPAYMENTS

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

UNDERPAYMENTS

RATE

TABLE

1995–1 C.B.

RATE

TABLE

1995–1 C.B.

10%

11%

10%

575

577

627

625

627

579

581

579

577

623

621

619

571

573

575

577

575

623

621

10%

11%

10%

11%

12%

11%

10%

577

579

629

627

629

581

583

581

579

625

623

621

573

575

577

579

577

625

623

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TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 — PRESENT

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

RATE

TABLE

1995–1 C.B.

13%

12%

11%

10%

11%

12%

11%

10%

585

583

629

627

625

577

579

581

583

581

629

627

RATE

TABLE

1995–1 C.B.

6.5%

7.5%

6.5%

5.5%

572

574

572

620

618

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 — PRESENT

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

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Section 6662—Imposition of

Accuracy-Related Penalty

26 CFR 1.6662–5T: Substantial and gross

valuation misstatements under Chapter I

(Temporary).

T.D. 8656

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final

regulations.

and

temporary

SUMMARY: These regulations provide

guidance on the imposition of the

accuracy related penalty under Internal

Revenue Code section 6662(e) for net

section 482 transfer price adjustments.

This action implements changes to the

applicable tax laws made by the Omnibus Budget Reconciliation Act of 1993.

DATES: These regulations are effective

February 9, 1996.

Applicability: At the election of the

taxpayer, these regulations may be

applied to all open taxable years

beginning after December 31, 1993.

FOR FURTHER INFORMATION

CONTACT: Carolyn D. Fanaroff of the

Office of Associate Chief Counsel

(International), IRS (202) 622-3880

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations 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 1545–1426. Responses

to this collection of information are

required by section 6662(e) of the

Internal Revenue Code in order to

administer the transfer pricing penalty

under that section.

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 estimated average annual burden

per recordkeeper varies from 5 to 15

hours, depending on individual circumstances, with an estimated average of

10 hours per recordkeeper.

Comments concerning the accuracy

of this burden estimate and suggestions

for reducing this burden should be sent

to the Internal Revenue Service, Attn:

IRS Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget,

Attn: Desk Officer for the Department

of the Treasury, Office of Information

and Regulatory Affairs, Washington,

DC 20503.

Books and records relating to this

collection of information must be retained as long as their contents may

become material in the administration

of any Internal Revenue law. Generally, tax returns and tax return information are confidential, as required by 26

U.S.C. 6103.

with the arm’s length standard at the

time that a tax return is filed. These

commenters primarily addressed particular aspects of the specified method

rule in §1.6662–6(d)(2)(ii) of the temporary regulations that they believed

imposed an unnecessary burden.

In response to these comments, the

IRS and Treasury have attempted to

simplify the requirements set forth in

the proposed and temporary regulations

without departing from the basic objective of section 6662(e): to improve

compliance with the arm’s length

standard by encouraging taxpayers to

make reasonable efforts to determine

and document arm’s length prices for

their intercompany transactions. The

regulations are adopted as revised by

this Treasury decision, and the corresponding proposed and temporary regulations are removed. Set forth below

is a discussion of the most significant

comments and the changes made in response to them.

Background

Sections 6662(e) and (h) of the

Internal Revenue Code reflect amendments made by Section 13236 of the

Omnibus Budget Reconciliation Act of

1993 (OBRA ’93, Public Law 103–66,

107 Stat. 312). On February 2, 1994,

the IRS and Treasury published temporary regulations (59 FR 4791 [TD

8519, 1994–1 298]) and a notice of

proposed rulemaking (58 FR 5263)

setting forth rules for imposing a

substantial valuation misstatement

penalty in connection with transactions

between persons described in section

482 (the transactional penalty) and net

section 482 transfer price adjustments

(the net adjustment penalty) and withdrawing previously proposed regulations issued on January 21, 1993 (58

FR 5304). On July 8, 1994, the IRS

and Treasury issued new temporary

regulations (59 FR 35030) under section 6662(e) conforming the previously

issued regulations to the final 482

regulations published on the same day.

A cross-referenced notice of proposed

rulemaking accompanied the temporary

regulations (59 FR 35066).

The IRS and Treasury received numerous comments on the proposed and

temporary regulations from taxpayers,

practitioners, tax treaty partners, industry representatives, and professional

associations. In general, most commenters recognized the government’s interest in encouraging timely compliance

Discussion of Major Comments and

Changes to the Regulations

The Reasonableness Standard

Commenters expressed concern that

the standard for assertion of the transactional penalty and the net adjustment

penalty (together, the penalty) under

the proposed and temporary regulations

effectively makes the penalty a ‘‘no

fault’’ penalty to be imposed in any

case in which the statutory thresholds

for imposition are met. Commenters

suggested that, in all cases, a taxpayer

could not have used the most reliable

measure of an arm’s length result if it

subsequently is determined that the

taxpayer’s analysis was incorrect. Some

of these commenters urged the IRS to

impose the penalty only where a taxpayer deliberately attempts to shift

income.

The IRS and Treasury have determined that it is not necessary to revise

the proposed and temporary regulations

in response to these comments. The

proposed and temporary regulations do

not adopt a ‘‘no-fault’’ approach. Like

other penalty statutes, the provisions of

section 6662(e) incorporate standards

of reasonable cause and good faith. See

section 6662(e)(3)(D) and section

6664(c). Accordingly, under both the

temporary and final regulations, the

penalty is excused if the taxpayer,

based upon the data that was reason-

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ably available to it, reasonably concluded that its analysis was the most

reliable and satisfied the documentation

requirement of the regulations. In such

a case, the taxpayer may be subject to

an adjustment if the IRS later employs

a different analysis or uses different

data leading to a different result, but an

adjustment does not necessarily trigger

the imposition of the penalty. The

regulations provide guidance on the

interpretation of the reasonableness

standard. See §1.6662–6(d).

Reported Results

In response to comments, the final

regulations clarify the method of determining reported results, and what will

be considered amended returns for

taxpayers electing Accelerated Issue

Resolution or similar procedures.

Evaluation of Methods Other Than

the Method Actually Applied

Under §1.6662–6T(d)(2)(ii) of the

temporary regulations, taxpayers may

satisfy the specified method requirement by selecting and applying a

specified method in a reasonable manner. In order to meet this requirement,

taxpayers must make a reasonable effort to evaluate the potential applicability of the other specified

methods in a manner consistent with

the principles of the best method rule

of §1.482–1(c). Some commenters argued that this requirement would be

overly burdensome because it could

mean that the taxpayer effectively must

disprove all other methods in order to

avoid imposition of the penalty. Others

asserted that the requirement in

§1.6662–6T(d)(2)(ii) that taxpayers

make a reasonable effort to evaluate

other methods in a manner consistent

with the principles of the best method

rule was inconsistent with language

contained in §1.482–1(c)(1).

The notion of a comparison of

methods is inherent in the best method

rule of §1.482–1(c)(1). In order to be

judged the ‘‘best’’ method, the method

to some extent must be compared to

other methods. The examples set forth

under §1.482–8 illustrate an appropriate

application of a comparative analysis.

In introducing these examples, §1.482–

8 states that ‘‘a method may be applied

in a particular case only if the comparability, quality of data, and reliability of assumptions under that

method make it more reliable than any

other available measure of the arm’s

length result.’’

The comparison to be done under the

best method rule will not necessarily

entail a thorough analysis under every

potentially applicable method. The nature of the available data will often

indicate either that a particular method

should be the most reliable or that

certain other specified methods would

be clearly unreliable. Indeed, in some

cases, it might be reasonable to conclude that a particular method is likely

to be the most reliable with virtually no

consideration of other potentially applicable methods. For example, if the

comparable uncontrolled price method

can be applied based upon a closely

comparable uncontrolled transaction, it

normally would be unnecessary to give

any serious consideration to the other

methods. Whether more extensive consideration could be needed in other

cases will depend on the facts and

circumstances.

Accordingly, the final regulations

retain the notion that comparisons to

other specified methods may have to be

made and the extent of such comparisons may vary depending upon the

data available and other factors.

Most Current Data Requirement

One of the factors taken into account

in determining whether a taxpayer

reasonably selected and applied a specified method is whether the taxpayer

made a reasonable search for data. The

proposed and temporary regulations

provided that this factor would not be

met unless the taxpayer used the most

current data that was available prior to

filing the tax return. Section 1.6662–

6T(d)(2)(iii)(B).

Commenters expressed concern that

this requirement would be unduly

burdensome because it would require a

taxpayer to continually update its transfer pricing analysis until the filing of

its tax return. Commenters also argued

that this rule could lead to an increased

incidence of double taxation if particular foreign jurisdictions did not permit

alterations to transactional prices either

after the transaction or after the close

of a taxable year.

In response to these comments, the

requirement to consider the most current available data has been modified.

Under the final regulations, taxpayers

are expected to use only data available

before the end of the taxable year and

consequently have no obligation to

continue to search for data after the

close of the taxable year to avoid the

penalty. However, when a taxpayer

obtains additional relevant data between the close of the year and the date

on which the tax return is filed (for

example, in connection with transfer

pricing analyses conducted with respect

to the subsequent taxable year), the

final regulations require the taxpayer to

include such data in its principal

documents as provided in §1.6662–6(d)(2)(iii)(B)(9). These documents must

be provided to the IRS upon request.

These changes are intended to relieve

much of the burden on taxpayers and at

the same time to ensure that, upon

examination, the taxpayer provides the

IRS with all relevant information in its

possession.

Reasonably Thorough Search for

Data

Commenters requested additional

guidance regarding the scope of the

term reasonably thorough search for

data under §1.6662–6(d)(2)(ii)(B). The

proposed and temporary regulations

provide that, in determining whether a

search for data was reasonably thorough, the expense of acquiring additional data may be weighed against the

dollar amount of the transactions.

The IRS and Treasury have determined that more specific guidelines

that would be applicable to all situations cannot be provided because the

determination of whether a taxpayer

engaged in a reasonable search for data

depends on the facts and circumstances

of each case. Therefore, the final

regulations adhere to the general approach of the proposed and temporary

regulations.

However, the final regulations provide a more precise statement of the

rule that governs the determination of

whether the taxpayer made a reasonable search for data. Section 1.6662–6(d)(2)(ii)(B) of the final regulations

provides that taxpayers may weigh the

expense a search for data against (i) the

likelihood that they will find additional

data that will improve the reliability of

the results and (ii) the amount by

which any new data would change the

taxpayer’s taxable income. Thus, a

taxpayer that has located reliable data

leading to an analysis that is unlikely

to become more reliable if additional

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data were located would not need to

continue a search. In addition, as the

amount of taxable income potentially at

stake declines (either because of low

dollar amounts of the controlled transactions or because of low variability in

results that are expected under the facts

and circumstances), the need to continue to search for data also decreases.

ified method. Accordingly, the fact that

a proposed adjustment is small in relation to the dollar amount of the controlled transaction to which it relates is

relevant in determining if a taxpayer

made a reasonable effort to apply a

specified or unspecified method.

Experience and Knowledge

Citing the preamble to the temporary

regulations and the 1993 legislative

history, some commenters requested

that a pricing methodology that was

approved by the IRS on audit or in

connection with an Advanced Pricing

Agreement (APA) be considered to

satisfy the specified method requirement of the regulations. In response to

this comment, §1.6662–6(d)(2)(ii)(F) of

the final regulations has been added to

provide that whether a taxpayer relied

on a methodology developed in connection with an APA or approved by the

IRS pursuant to an audit is relevant to

determining whether the taxpayer made

a reasonable effort to apply a specified

or unspecified method, as long as the

taxpayer applied the agreed method

reasonably and consistently with its

prior application, and adjustments have

been made for any material changes in

the facts and circumstances since the

original application of that method.

Pursuant to §1.6662–6(d)(3)(ii)(B) and

(C), this factor is also relevant if the

taxpayer employed an unspecified

method.

Section 1.6662–6(d)(2)(ii)(A) provides that one of the factors taken into

account in determining whether a taxpayer reasonably applied a specified

method is the experience and knowledge of the taxpayer, including all

members of the taxpayer’s controlled

group. Commenters objected to this

factor because it is not limited to

consideration of the experience and

knowledge of the taxpayer. The purpose of this factor is to consider the

experience and knowledge of all the

parties that are likely to be involved in

the pricing of the controlled transactions. If the scope of this factor were

limited to the taxpayer participating in

the controlled transaction, the experience and knowledge of related persons who may have had a role in

determining intercompany prices of the

taxpayer might not be taken into account. Accordingly, this factor has not

been changed in the final regulations.

Thresholds for Application

Reliance on Prior Analyses

Principal Documents

The net adjustment penalty under

section 6662(e)(1)(B)(ii) potentially applies if the net section 482 adjustment

exceeds the lesser of $5 million or 10

percent of the taxpayer’s gross receipts.

Some commenters objected to the

statutory $5 million threshold, pointing

out that a relatively insignificant error

could easily lead to a $5 million adjustment with respect to very large

intercompany transactions. As a result,

taxpayers that made reasonable efforts

to determine an arm’s length result

might nonetheless be subject to

penalty.

The $5 million threshold for imposition of the penalty is fixed by statute.

However, §1.6662–6(d)(2)(ii)(G) of the

final regulations has been added to provide that the size of an adjustment in

relation to the size of the controlled

transaction is relevant to determining

whether a taxpayer made a reasonable

effort to apply a specified or unspec-

Section 1.6662–6(d)(2)(iii)(B) of the

final regulations provides a list of

principal documents that must be provided to the IRS within 30 days of a

request. The proposed and temporary

regulations set forth a contemporaneous

documentation requirement pursuant to

which all of these documents must

have been in existence at the time that

the taxpayer filed its tax return. In

response to comments, several changes

have been made to these provisions.

Under the final regulations, the contemporaneous documentation requirement does not apply to the summary of

data acquired after the close of the

taxable year or the general index of

principal and background documents.

Thus, these documents do not have to

be prepared at the time the return is

filed.

Several commenters argued that the

requirement that the principal docu-

ments generally be provided within 30

days of a request is too short, but this

requirement has not been changed in

the final regulations because the statute

mandates this 30-day disclosure period.

Moreover, except for the two principal

documents excluded from the contemporaneous documentation requirement,

as described above, all principal documents are required to be prepared by

the time the tax return is filed. The IRS

and Treasury believe that 30 days

should be adequate to provide documents that already exist and that were

prepared with the intention of being

provided to the IRS.

Other commenters suggested that the

list of documents in §1.6662–6(d)(2)(iii)(B) is too specific and that, in some

cases, it should not be necessary to

provide all of the documents listed.

Some of these commenters suggested

that the list of documents be replaced

with a more flexible approach under

which the documents required would

depend on the facts and circumstances.

The final regulations have not been

changed in response to this comment.

The list of principal documents is

intended to provide the IRS with the

documents necessary to conduct a

complete examination of a taxpayer’s

transfer pricing. It is anticipated that all

of the principal documents listed would

be needed in connection with all

transfer pricing audits. In addition, the

suggested flexible approach would deprive taxpayers and the IRS of muchneeded certainty. In the absence of the

specific guidance provided by the

regulations, most taxpayers would face

uncertainty as to the appropriate scope

of the documentation requirement.

Disclosure of Profit Split, Lump Sum,

and Unspecified Methods

The proposed and temporary regulations require that the taxpayer disclose

on its tax return if the taxpayer used a

profit split method, an unspecified

method, or transferred an intangible in

exchange for a lump sum payment.

Commenters expressed concern about

this requirement, particularly with respect to the profit split method. They

asserted that it is inappropriate to

impose a penalty on a taxpayer that

used a profit split method, solely

because it failed to comply with

disclosure requirements, if the taxpayer

otherwise fully complied with the

regulations under section 6662(e). In

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response to this comment, the final

regulations eliminate the disclosure

requirement with respect to the profit

split method, lump sum payments, and

unspecified methods. The IRS and

Treasury believe that these matters are

more appropriately addressed under

section 6038 and section 6038A of the

Internal Revenue Code governing, in

part, information returns on Forms

5471 and 5472. The IRS intends to

review these forms to determine

whether they should be revised.

Effective Date

These regulations are effective February 9, 1996. However, taxpayers may

elect to apply these regulations to all

open taxable years beginning after

December 31, 1993.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to the regulations and, therefore,

a Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of

the Internal Revenue Code, the notice

of proposed rulemaking and temporary

regulations preceding these regulations

were sent to the Small Business Administration for comment on their

impact on small business.

Drafting Information

The principal author of these regulations is Carolyn D. Fanaroff of the

Office of the Associate Chief Counsel

(International), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

is amended by removing the entry

‘‘Sections 1.6662–0 and 1.6662–6T’’

and adding an entry in numerical order

to read as follows:

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

Section 1.6662–6 also issued under

26 U.S.C. 6662. * * *

Par. 2. Section 1.6662–0 is amended

by:

1. Revising the entry for §1.6662–

5T.

2. Adding an entry for §1.6662–6.

3. Removing the entry for §1.6662–

6T.

The revisions and additions read as

follows:

§1.6662–0 Table of contents.

§1.6662–5T Substantial and gross

valuation misstatements under chapter

1 (Temporary).

(a) through (e)(3) [Reserved].

(e)(4) Tests related to section 481.

(i)

Substantial valuation

statement.

(ii) Gross valuation

misstatement.

(iii) Property.

(f) through (i) [Reserved].

(j) Transactions between persons described in section 482 and net

section 482 transfer price adjustments.

§1.6662–6 Transactions between

persons described in section 482 and

net section 482 transfer price

adjustments.

(a) In general.

(1) Purpose and scope.

(2) Reported results.

(3) Identical terms used in

the section 482 regulations.

(b) The transactional penalty.

(1) Substantial valuation

misstatement.

(2) Gross valuation misstatement.

(3) Reasonable cause and

good faith.

(1) Net section 482 adjustment.

(2) Substantial valuation

misstatement.

(3) Gross valuation misstatement.

(4) Setoff allocation rule.

(5) Gross receipts.

(6) Coordination with reasonable cause exception under section

6664(c).

(7) Examples.

(d) Amounts excluded from net section 482 adjustments.

(1) In general.

(2) Application of a specified section 482

method.

(i)

In general.

(ii) Specified method requirement.

(iii) Documentation requirement.

(A) In general.

(B) Principal documents.

(3) Application of an unspecified method.

(i)

In general.

(ii) Unspecified method requirement.

(A) In general.

(B) Specified method

potentially applicable.

method applicable.

(iii) Documentation requirement.

(A) In general.

(B) P r i n c i p a l a n d

background documents.

(4) Certain foreign to foreign transactions.

(5) Special rule.

(6) Examples.

(e) Special rules in the case of carrybacks and carryovers.

(f) Rules for coordinating between

the transactional penalty and the

net adjustment penalty.

(1) Coordination of a net

section 482 adjustment

subject to the net adjustment penalty and a

gross valuation misstatement subject to

the transactional

penalty.

(2) Coordination of net

section 482 adjustment

subject to the net adjustment penalty and

substantial valuation

misstatements subject

to the transactional

penalty.

(3) Examples.

(g) Effective date.

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Par. 3. Section 1.6662–5T is revised

to read as follows:

§1.6662–5T Substantial and gross

valuation misstatements under chapter

1 (Temporary).

(a) through (e)(3) [Reserved]. For

further information, see §1.6662–5(a)

through (e)(3).

(e)(4) Tests related to section 482—

(i) Substantial valuation misstatement.

There is a substantial valuation misstatement if there is a misstatement

described in §1.6662–6(b)(1) or (c)(1)

(concerning substantial valuation misstatements pertaining to transactions

between related persons).

(ii) Gross valuation misstatement.

There is a gross valuation misstatement

if there is a misstatement described in

§1.6662–6(b)(2) or (c)(2) (concerning

gross valuation misstatements pertaining to transactions between related

persons).

(iii) Property. For purposes of this

section, the term property refers to

both tangible and intangible property.

Tangible property includes property

such as land, buildings, fixtures and

inventory. Intangible property includes

property such as goodwill, covenants

not to compete, leaseholds, patents,

contract rights, debts and choses in

action, and any other item of intangible

property described in §1.482–4(b).

(f) through (h) [Reserved] For further information, see §1.6662–5(f)

through (h).

(i) [Reserved].

(j) Transactions between persons described in section 482 and net section

482 transfer price adjustments. For

rules relating to the penalty imposed

with respect to a substantial or gross

valuation misstatement arising from a

section 482 allocation, see §1.6662–6.

Par. 4. Section 1.6662–6 is added to

read as follows:

§1.6662–6 Transactions between

persons described in section 482 and

net section 482 transfer price

adjustments.

(a) In general—(1) Purpose and

scope. Pursuant to section 6662(e) a

penalty is imposed on any underpayment attributable to a substantial valuation misstatement pertaining to either a

transaction between persons described

in section 482 (the transactional

penalty) or a net section 482 transfer

price adjustment (the net adjustment

penalty). The penalty is equal to 20

percent of the underpayment of tax

attributable to that substantial valuation

misstatement. Pursuant to section

6662(h) the penalty is increased to 40

percent of the underpayment in the

case of a gross valuation misstatement

with respect to either penalty. Paragraph (b) of this section provides

specific rules related to the transactional penalty. Paragraph (c) of this

section provides specific rules related

to the net adjustment penalty, and

paragraph (d) of this section describes

amounts that will be excluded for

purposes of calculating the net adjustment penalty. Paragraph (e) of this

section sets forth special rules in the

case of carrybacks and carryovers.

Paragraph (f) of this section provides

coordination rules between penalties.

Paragraph (g) of this section provides

the effective date of this section.

(2) Reported results. Whether an

underpayment is attributable to a substantial or gross valuation misstatement

must be determined from the results of

controlled transactions that are reported

on an income tax return, regardless of

whether the amount reported differs

from the transaction price initially

reflected in the taxpayer’s books and

records. The results of controlled transactions that are reported on an

amended return will be used only if the

amended return is filed before the

Internal Revenue Service has contacted

the taxpayer regarding the corresponding original return. A written statement

furnished by a taxpayer subject to the

Coordinated Examination Program or a

written statement furnished by the

taxpayer when electing Accelerated

Issue Resolution or similar procedures

will be considered an amended return

for purposes of this section if it

satisfies either the requirements of a

qualified amended return for purposes

of §1.6664–2(c)(3) or such requirements as the Commissioner may prescribe by revenue procedure. In the

case of a taxpayer that is a member of

a consolidated group, the rules of this

paragraph (a)(2) apply to the consolidated income tax return of the group.

(3) Identical terms used in the section 482 regulations. For purposes of

this section, the terms used in this

section shall have the same meaning as

identical terms used in regulations

under section 482.

(b) The transactional penalty—(1)

Substantial valuation misstatement. In

the case of any transaction between

related persons, there is a substantial

valuation misstatement if the price for

any property or services (or for the use

of property) claimed on any return is

200 percent or more (or 50 percent or

less) of the amount determined under

section 482 to be the correct price.

(2) Gross valuation misstatement. In

the case of any transaction between

related persons, there is a gross valuation misstatement if the price for any

property or services (or for the use of

property) claimed on any return is 400

percent or more (or 25 percent or less)

of the amount determined under section

482 to be the correct price.

(3) Reasonable cause and good

faith. Pursuant to section 6664(c), the

transactional penalty will not be imposed on any portion of an underpayment with respect to which the requirements of §1.6664–4 are met. In

applying the provisions of §1.6664–4 in

a case in which the taxpayer has relied

on professional analysis in determining

its transfer pricing, whether the professional is an employee of, or related to,

the taxpayer is not determinative in

evaluating whether the taxpayer reasonably relied in good faith on advice. A

taxpayer that meets the requirements of

paragraph (d) of this section with

respect to an allocation under section

482 will be treated as having established that there was reasonable cause

and good faith with respect to that item

for purposes of §1.6664–4. If a substantial or gross valuation misstatement

under the transactional penalty also

constitutes (or is part of) a substantial

or gross valuation misstatement under

the net adjustment penalty, then the

rules of paragraph (d) of this section

(and not the rules of §1.6664–4) will

be applied to determine whether the

adjustment is excluded from calculation

of the net section 482 adjustment.

section 482 adjustment. For purposes of

this section, the term net section 482

adjustment means the sum of all increases in the taxable income of a

taxpayer for a taxable year resulting

from allocations under section 482

(determined without regard to any

amount carried to such taxable year

from another taxable year) less any

decreases in taxable income attributable

to collateral adjustments as described in

§1.482–1(g). For purposes of this section, amounts that meet the require-

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ments of paragraph (d) of this section

will be excluded from the calculation

of the net section 482 adjustment.

Substantial and gross valuation misstatements that are subject to the

transactional penalty under paragraph

(b)(1) or (2) of this section are

included in determining the amount of

the net section 482 adjustment. See

paragraph (f) of this section for coordination rules between penalties.

(2) Substantial valuation misstatement. There is a substantial valuation

misstatement if a net section 482

adjustment is greater than the lesser of

5 million dollars or ten percent of gross

receipts.

(3) Gross valuation misstatement.

There is a gross valuation misstatement

if a net section 482 adjustment is

greater than the lesser of 20 million

dollars or twenty percent of gross

receipts.

(4) Setoff allocation rule. If a taxpayer meets the requirements of paragraph (d) of this section with respect to

some, but not all of the allocations

made under section 482, then for purposes of determining the net section

482 adjustment, setoffs, as taken into

account under §1.482–1(g)(4), must be

applied ratably against all such allocations. The following example illustrates

the principle of this paragraph (c)(4):

Example. (i) The Internal Revenue Service

makes the following section 482 adjustments for

the taxable year:

(1) Attributable to an increase in

gross income because of an

increase in royalty payments

$9,000,000

(2) Attributable to an increase in

sales proceeds due to a decrease in the profit margin of a

related buyer

6,000,000

(3) Because of a setoff under

§1.482–1(g)(4)

(5,000,000)

Total section 482 adjustments 10,000,000

(ii) The taxpayer meets the requirements of

paragraph (d) with respect to adjustment number

one, but not with respect to adjustment number

two. The five million dollar setoff will be

allocated ratably against the nine million dollar

adjustment ($9,000,000/$15,000,000 3

$5,000,000 = $3,000,000) and the six million

dollar adjustment ($6,000,000/$15,000,000 3

$5,000,000 = $2,000,000). Accordingly, in determining the net section 482 adjustment, the nine

million dollar adjustment is reduced to six

million dollars ($9,000,000 – $3,000,000) and

the six million dollar adjustment is reduced to

four million dollars ($6,000,000 –$2,000,000).

Therefore, the net section 482 adjustment equals

four million dollars.

(5) Gross receipts. For purposes of

this section, gross receipts must be

computed pursuant to the rules contained in §1.448–1T(f)(2)(iv), as adjusted to reflect allocations under

section 482.

(6) Coordination with reasonable

cause exception under section 6664(c).

Pursuant to section 6662(e)(3)(D), a

taxpayer will be treated as having

reasonable cause under section 6664(c)

for any portion of an underpayment

attributable to a net section 482 adjustment only if the taxpayer meets the

requirements of paragraph (d) of this

section with respect to that portion.

(7) Examples. The principles of this

paragraph (c) are illustrated by the

following examples:

Example 1. (i) The Internal Revenue Service

makes the following section 482 adjustments for

the taxable year:

(1) Attributable to an increase in

gross income because of an

increase in royalty payments

$2,000,000

(2) Attributable to an increase in

sales proceeds due to a decrease

in the profit margin of a related

buyer

2,500,000

(3) Attributable to a decrease in the

cost of goods sold because of a

decrease in the cost plus markup of a related seller

2,000,000

Total section 482 adjustments

6,500,000

(ii) None of the adjustments are excluded

under paragraph (d) of this section. The net

section 482 adjustment ($6.5 million) is greater

than five million dollars. Therefore, there is a

substantial valuation misstatement.

Example 2. (i) The Internal Revenue Service

makes the following section 482 adjustments for

the taxable year:

(1) Attributable to an increase in

gross income because of an

increase in royalty payments $11,000,000

(2) Attributable to an increase in

sales proceeds due to a decrease in the profit margin of

a related buyer

2,000,000

(3) Because of a setoff under

§1.482–1(g)(4)

(9,000,000)

Total section 482 adjustments

4,000,000

(ii) The taxpayer has gross receipts of sixty

million dollars after taking into account all

section 482 adjustments. None of the adjustments

are excluded under paragraph (d) of this section.

The net section 482 adjustment ($4 million) is

less than the lesser of five million dollars or ten

percent of gross receipts ($60 million 3 10% =

$6 million). Therefore, there is no substantial

valuation misstatement.

Example 3. (i) The Internal Revenue Service

makes the following section 482 adjustments to

the income of an affiliated group that files a

consolidated return for the taxable year:

(1)

(2)

(3)

Attributable to Member A

$1,500,000

Attributable to Member B

1,000,000

Attributable to Member C

2,000,000

Total section 482 adjustments 4,500,000

(ii) Members A, B, and C have gross receipts

of 20 million dollars, 12 million dollars, and 11

million dollars, respectively. Thus, the total gross

receipts are 43 million dollars. None of the

adjustments are excluded under paragraph (d) of

this section. The net section 482 adjustment

($4.5 million) is greater than the lesser of five

million dollars or ten percent of gross receipts

($43 million 3 10% = $4.3 million). Therefore,

there is a substantial valuation misstatement.

Example 4. (i) The Internal Revenue Service

makes the following section 482 adjustments to

the income of an affiliated group that files a

consolidated return for the taxable year:

(1)

(2)

(3)

Attributable to Member A

$1,500,000

Attributable to Member B

3,000,000

Attributable to Member C

2,500,000

Total section 482 adjustments 7,000,000

(ii) Members A, B, and C have gross receipts

of 20 million dollars, 35 million dollars, and 40

million dollars, respectively. Thus, the total gross

receipts are 95 million dollars. None of the

adjustments are excluded under paragraph (d) of

this section. The net section 482 adjustment (7

million dollars) is greater than the lesser of five

million dollars or ten percent of gross receipts

($95 million 3 10% = $9.5 million). Therefore,

there is a substantial valuation misstatement.

Example 5. (i) The Internal Revenue Service

makes the following section 482 adjustments to

the income of an affiliated group that files a

consolidated return for the taxable year:

(1)

(2)

(3)

Attributable to Member A

$2,000,000

Attributable to Member B

1,000,000

Attributable to Member C

1,500,000

Total section 482 adjustments 4,500,000

(ii) Members A, B, and C have gross receipts

of 10 million dollars, 35 million dollars, and 40

million dollars, respectively. Thus, the total gross

receipts are 85 million dollars. None of the

adjustments are excluded under paragraph (d) of

this section. The net section 482 adjustment

($4.5 million) is less than the lesser of five

million dollars or ten percent of gross receipts

($85 million 3 10% = $8.5 million). Therefore,

there is no substantial valuation misstatement

even though individual member A’s adjustment

($2 million) is greater than ten percent of its

individual gross receipts ($10 million 3 10% =

$1 million).

(d) Amounts excluded from net section 482 adjustments—(1) In general.

An amount is excluded from the calculation of a net section 482 adjustment if the requirements of paragraph

(d)(2), (3), or (4) of this section are

met with respect to that amount.

(2) Application of a specified section

482 method—(i) In general. An amount

is excluded from the calculation of a

net section 482 adjustment if the taxpayer establishes that both the specified

method and documentation requirements of this paragraph (d)(2) are met

with respect to that amount. For

purposes of this paragraph (d), a

method will be considered a specified

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method if it is described in the

regulations under section 482 and the

method applies to transactions of the

type under review. A qualified cost

sharing arrangement is considered a

specified method. See §1.482–7. An

unspecified method is not considered a

specified method. See §§1.482–3(e)

and 1.482–4(d).

(ii) Specified method requirement.

The specified method requirement is

met if the taxpayer selects and applies

a specified method in a reasonable

manner. The taxpayer’s selection and

application of a specified method is

reasonable only if, given the available

data and the applicable pricing

methods, the taxpayer reasonably concluded that the method (and its application of that method) provided the most

reliable measure of an arm’s length

result under the principles of the best

method rule of §1.482–1(c). A taxpayer

can reasonably conclude that a specified method provided the most reliable

measure of an arm’s length result only

if it has made a reasonable effort to

evaluate the potential applicability of

the other specified methods in a

manner consistent with the principles

of the best method rule. The extent of

this evaluation generally will depend

on the nature of the available data, and

it may vary from case to case and from

method to method. This evaluation may

not entail an exhaustive analysis or

detailed application of each method.

Rather, after a reasonably thorough

search for relevant data, the taxpayer

should consider which method would

provide the most reliable measure of an

arm’s length result given that data. The

nature of the available data may enable

the taxpayer to conclude reasonably

that a particular specified method

provides a more reliable measure of an

arm’s length result than one or more of

the other specified methods, and accordingly no further consideration of

such other specified methods is needed.

Further, it is not necessary for a taxpayer to conclude that the selected

specified method provides a more

reliable measure of an arm’s length

result than any unspecified method. For

examples illustrating the selection of a

specified method consistent with this

paragraph (d)(2)(ii), see §1.482–8.

Whether the taxpayer’s conclusion was

reasonable must be determined from all

the facts and circumstances. The factors relevant to this determination

include the following:

(A) The experience and knowledge

of the taxpayer, including all members

of the taxpayer’s controlled group.

(B) The extent to which reliable data

was available and the data was analyzed in a reasonable manner. A taxpayer must engage in a reasonably

thorough search for the data necessary

to determine which method should be

selected and how it should be applied.

In determining the scope of a reasonably thorough search for data, the

expense of additional efforts to locate

new data may be weighed against the

likelihood of finding additional data

that would improve the reliability of

the results and the amount by which

any new data would change the taxpayer’s taxable income. Furthermore, a

taxpayer must use the most current

reliable data that is available before the

end of the taxable year in question.

Although the taxpayer is not required

to search for relevant data after the end

of the taxable year, the taxpayer must

maintain as a principal document described in paragraph (d)(2)(iii)(B)(9) of

this section any relevant data it obtains

after the end of the taxable year but

before the return is filed, if that data

would help determine whether the taxpayer has reported its true taxable

income.

followed the relevant requirements set

forth in regulations under section 482

with respect to the application of the

method.

(D) The extent to which the taxpayer

reasonably relied on a study or other

analysis performed by a professional

qualified to conduct such a study or

analysis, including an attorney, accountant, or economist. Whether the

professional is an employee of, or

related to, the taxpayer is not determinative in evaluating the reliability of

that study or analysis, as long as the

study or analysis is objective, thorough,

and well reasoned. Such reliance is

reasonable only if the taxpayer disclosed to the professional all relevant

information regarding the controlled

transactions at issue. A study or analysis that was reasonably relied upon in

a prior year may reasonably be relied

upon in the current year if the relevant

facts and circumstances have not

changed or if the study or analysis has

been appropriately modified to reflect

any change in facts and circumstances.

(E) If the taxpayer attempted to

determine an arm’s length result by

using more than one uncontrolled comparable, whether the taxpayer arbitrarily selected a result that

corresponds to an extreme point in the

range of results derived from the

uncontrolled comparables. Such a result

generally would not likely be closest to

an arm’s length result. If the uncontrolled comparables that the taxpayer

uses to determine an arm’s length

result are described in §1.482–1(e)(2)(ii)(B), one reasonable method of selecting a point in the range would be

that provided in §1.482–1(e)(3).

(F) The extent to which the taxpayer

relied on a transfer pricing methodology developed and applied pursuant to

an Advance Pricing Agreement for a

prior taxable year, or specifically approved by the Internal Revenue Service

pursuant to a transfer pricing audit of

the transactions at issue for a prior

taxable year, provided that the taxpayer

applied the approved method reasonably and consistently with its prior

application, and the facts and circumstances surrounding the use of the

method have not materially changed

since the time of the IRS’s action, or if

the facts and circumstances have

changed in a way that materially

affects the reliability of the results, the

taxpayer makes appropriate adjustments

to reflect such changes.

(G) The size of a net transfer pricing

adjustment in relation to the size of the

controlled transaction out of which the

adjustment arose.

(iii) Documentation requirement—

(A) In general. The documentation

requirement of this paragraph (d)(2)(iii)

is met if the taxpayer maintains sufficient documentation to establish that

the taxpayer reasonably concluded that,

given the available data and the applicable pricing methods, the method (and

its application of that method) provided

the most accurate measure of an arm’s

length result under the principles of the

best method rule in §1.482–1(c), and

provides that documentation to the

Internal Revenue Service within 30

days of a request for it in connection

with an examination of the taxable year

to which the documentation relates.

With the exception of the documentation described in paragraphs (d)(2)(iii)(B)(9) and (10) of this section, that

documentation must be in existence

when the return is filed. The district

director may, in his discretion, excuse a

minor or inadvertent failure to provide

required documents, but only if the

taxpayer has made a good faith effort

to comply, and the taxpayer promptly

remedies the failure when it becomes

known. The required documentation is

divided into two categories, principal

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documents and background documents

as described in paragraphs (d)(2)(iii)(B)

and (C) of this section.

(B) Principal documents. The principal documents should accurately and

completely describe the basic transfer

pricing analysis conducted by the taxpayer. The documentation must include

the following—

(1) An overview of the taxpayer’s

business, including an analysis of the

economic and legal factors that affect

the pricing of its property or services;

(2) A description of the taxpayer’s

organizational structure (including an

organization chart) covering all related

parties engaged in transactions potentially relevant under section 482, including foreign affiliates whose

transactions directly or indirectly affect

the pricing of property or services in

the United States;

(3) Any documentation explicitly required by the regulations under section

482;

(4) A description of the method

selected and an explanation of why that

method was selected;

(5) A description of the alternative

methods that were considered and an

explanation of why they were not

selected;

(6) A description of the controlled

transactions (including the terms of

sale) and any internal data used to

analyze those transactions. For example, if a profit split method is applied,

the documentation must include a

schedule providing the total income,

costs, and assets (with adjustments for

different accounting practices and currencies) for each controlled taxpayer

participating in the relevant business

activity and detailing the allocations of

such items to that activity;

(7) A description of the comparables

that were used, how comparability was

evaluated, and what (if any) adjustments were made;

(8) An explanation of the economic

analysis and projections relied upon in

developing the method. For example, if

a profit split method is applied, the

taxpayer must provide an explanation

of the analysis undertaken to determine

how the profits would be split;

(9) A description or summary of any

relevant data that the taxpayer obtains

after the end of the tax year and before

filing a tax return, which would help

determine if a taxpayer selected and

applied a specified method in a reasonable manner; and

(10) A general index of the principal

and background documents and a description of the recordkeeping system

used for cataloging and accessing those

documents.

contained in principal documents ordinarily will be based on, and supported by, additional background

documents. Documents that support the

principal documentation may include

the documents listed in §1.6038A–3(c)

that are not otherwise described in

paragraph (d)(2)(iii)(B) of this section.

Every document listed in those regulations may not be relevant to pricing

determinations under the taxpayer’s

specific facts and circumstances and,

therefore, each of those documents

need not be maintained in all circumstances. Moreover, other documents not

listed in those regulations may be

necessary to establish that the taxpayer’s method was selected and applied in the way that provided the most

accurate measure of an arm’s length

result under the principles of the best

method rule in §1.482–1(c). Background documents need not be provided to the Internal Revenue Service

in response to a request for principal

documents. If the Internal Revenue

Service subsequently requests background documents, a taxpayer must

provide that documentation to the

Internal Revenue Service within 30

days of the request. However, the

district director may, in his discretion,

extend the period for producing the

background documentation.

(3) Application of an unspecified

method—(i) In general. An adjustment

is excluded from the calculation of a

net section 482 adjustment if the taxpayer establishes that both the unspecified method and documentation

requirements of this paragraph (d)(3)

are met with respect to that amount.

(ii) Unspecified method requirement—(A) In general. If a method

other than a specified method was

applied, the unspecified method requirement is met if the requirements of

paragraph (d)(3)(ii)(B) or (C) of this

section, as appropriate, are met.

(B) Specified method potentially applicable. If the transaction is of a type

for which methods are specified in the

regulations under section 482, then a

taxpayer will be considered to have

met the unspecified method requirement if the taxpayer reasonably con-

cludes, given the available data, that

none of the specified methods was

likely to provide a reliable measure of

an arm’s length result, and that it

selected and applied an unspecified

method in a way that would likely

provide a reliable measure of an arm’s

length result. A taxpayer can reasonably conclude that no specified method

was likely to provide a reliable measure of an arm’s length result only if it

has made a reasonable effort to evaluate the potential applicability of the

specified methods in a manner consistent with the principles of the best

method rule. However, it is not necessary for a taxpayer to conclude that the

selected method provides a more reliable measure of an arm’s length result

than any other unspecified method.

Whether the taxpayer’s conclusion was

reasonable must be determined from all

the facts and circumstances. The factors relevant to this conclusion include

those set forth in paragraph (d)(2)(ii) of

this section.

If the transaction is of a type for which

no methods are specified in the regulations under section 482, then a taxpayer

will be considered to have met the unspecified method requirement if it

selected and applied an unspecified

method in a reasonable manner. For

purposes of this paragraph (d)(3)(ii)(C),

a taxpayer’s selection and application is

reasonable if the taxpayer reasonably

concludes that the method (and its

application of that method) provided

the most reliable measure of an arm’s

length result under the principles of the

best method rule in §1.482–1(c). However, it is not necessary for a taxpayer

to conclude that the selected method

provides a more reliable measure of an

arm’s length result than any other

unspecified method. Whether the taxpayer’s conclusion was reasonable must

be determined from all the facts and

circumstances. The factors relevant to

this conclusion include those set forth

in paragraph (d)(2)(ii) of this section.

(iii) Documentation requirement—

(A) In general. The documentation

requirement of this paragraph (d)(3) is

met if the taxpayer maintains sufficient

documentation to establish that the

unspecified method requirement of

paragraph (d)(3)(ii) of this section is

met and provides that documentation to

the Internal Revenue Service within 30

days of a request for it. That documentation must be in existence when the

return is filed. The district director

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may, in his discretion, excuse a minor

or inadvertent failure to provide required documents, but only if the taxpayer has made a good faith effort to

comply, and the taxpayer promptly

remedies the failure when it becomes

known.

(B) Principal and background documents. See paragraphs (d)(2)(iii)(B) and

these two categories of required

documentation.

(4) Certain foreign to foreign transactions. For purposes of calculating a

net section 482 adjustment, any increase in taxable income resulting from

an allocation under section 482 that is

attributable to any controlled transaction solely between foreign corporations will be excluded unless the treatment of that transaction affects the

determination of either corporation’s

income from sources within the United

States or taxable income effectively

connected with the conduct of a trade

or business within the United States.

(5) Special rule. If the regular tax

(as defined in section 55(c)) imposed

on the taxpayer is determined by

reference to an amount other than

taxable income, that amount shall be

treated as the taxable income of the

taxpayer for purposes of section

6662(e)(3). Accordingly, for taxpayers

whose regular tax is determined by

reference to an amount other than

taxable income, the increase in that

amount resulting from section 482

allocations is the taxpayer’s net section

482 adjustment.

(6) Examples. The principles of this

paragraph (d) are illustrated by the

following examples:

Example 1. (i) The Internal Revenue Service

makes the following section 482 adjustments for

the taxable year:

(1) Attributable to an increase in

gross income because of an

increase in royalty payments

$9,000,000

(2) Not a 200 percent or 400 percent adjustment

2,000,000

(3) Attributable to a decrease in the

cost of goods sold because of a

decrease in the cost plus markup of a related seller

9,000,000

Total section 482 adjustments 20,000,000

(ii) The taxpayer has gross receipts of 75

million dollars after all section 482 adjustments.

The taxpayer establishes that for adjustments

number one and three, it applied a transfer

pricing method specified in section 482, the

selection and application of the method was

reasonable, it documented the pricing analysis,

and turned that documentation over to the IRS

within 30 days of a request. Accordingly,

eighteen million dollars is excluded from the

calculation of the net section 482 adjustment.

Because the net section 482 adjustment is two

million dollars, there is no substantial valuation

misstatement.

Example 2. (i) The Internal Revenue Service

makes the following section 482 adjustments for

the taxable year:

(1) Attributable to an increase in

gross income because of an

increase in royalty payments

$9,000,000

(2) Attributable to an adjustment

that is 200 percent or more of

the correct section 482 price

2,000,000

(3) Attributable to a decrease in the

cost of goods sold because of a

decrease in the cost plus markup of a related seller

9,000,000

Total section 482 adjustments 20,000,000

(ii) The taxpayer has gross receipts of 75

million dollars after all section 482 adjustments.

The taxpayer establishes that for adjustments

number one and three it applied a transfer

pricing method specified in section 482, the

selection and application of the method was

reasonable, it documented that analysis, and

turned the documentation over to the IRS within

30 days. Accordingly, eighteen million dollars is

excluded from the calculation of the section 482

transfer pricing adjustments for purposes of

applying the five million dollar or 10% of gross

receipts test. Because the net section 482

adjustment is only two million dollars, the

taxpayer is not subject to the net adjustment

penalty. However, the taxpayer may be subject to

the transactional penalty on the underpayment of

tax attributable to the two million dollar

adjustment.

Example 3. CFC1 and CFC2 are controlled

foreign corporations within the meaning of

section 957. Applying section 482, the IRS

disallows a deduction for 25 million dollars of

the interest that CFC1 paid to CFC2, which

results in CFC1’s U.S. shareholder having a

subpart F inclusion in excess of five million

dollars. No other adjustments under section 482

are made with respect to the controlled taxpayers. However, the increase has no effect upon

the determination of CFC1’s or CFC2’s income

from sources within the United States or taxable

income effectively connected with the conduct of

a trade or business within the United States.

Accordingly, there is no substantial valuation

misstatement.

(e) Special rules in the case of

carrybacks and carryovers. If there is a

substantial or gross valuation misstatement for a taxable year that gives rise

to a loss, deduction or credit that is

carried to another taxable year, the

transactional penalty and the net adjustment penalty will be imposed on any

resulting underpayment of tax in that

other taxable year. In determining

whether there is a substantial or gross

valuation misstatement for a taxable

year, no amount carried from another

taxable year shall be included. The

following example illustrates the principle of this paragraph (e):

Example. The Internal Revenue Service makes

a section 482 adjustment of six million dollars in

taxable year 1, no portion of which is excluded

under paragraph (d) of this section. The taxpayer’s income tax return for year 1 reported a

loss of three million dollars, which was carried

to taxpayer’s year 2 year income tax return and

used to reduce income taxes otherwise due with

respect to year 2. A determination is made that

the six million dollar allocation constitutes a

substantial valuation misstatement, and a penalty

is imposed on the underpayment of tax in year 1

attributable to the substantial valuation misstatement and on the underpayment of tax in year 2

attributable to the disallowance of the net

operating loss in year 2. For purposes of

determining whether there is a substantial or

gross valuation misstatement for year 2, the three

million dollar reduction of the net operating loss

will not be added to any section 482 adjustments

made with respect to year 2.

(f) Rules for coordinating between

the transactional penalty and the net

adjustment penalty—(1) Coordination

of a net section 482 adjustment subject

to the net adjustment penalty and a

gross valuation misstatement subject to

the transactional penalty. In determining whether a net section 482 adjustment exceeds five million dollars or 10

percent of gross receipts, an adjustment

attributable to a substantial or gross

valuation misstatement that is subject

to the transactional penalty will be

taken into account. If the net section

482 adjustment exceeds five million

dollars or ten percent of gross receipts,

any portion of such amount that is

attributable to a gross valuation misstatement will be subject to the transactional penalty at the forty percent rate,

but will not also be subject to net

adjustment penalty at a twenty percent

rate. The remaining amount is subject

to the net adjustment penalty at the

twenty percent rate, even if such

amount is less than the lesser of five

million dollars or ten percent of gross

receipts.

(2) Coordination of net section 482

adjustment subject to the net adjustment penalty and substantial valuation

misstatements subject to the transactional penalty. If the net section 482

adjustment exceeds twenty million dollars or 20 percent of gross receipts, the

entire amount of the adjustment is

subject to the net adjustment penalty at

a forty percent rate. No portion of the

adjustment is subject to the transactional penalty at a twenty percent rate.

(3) Examples. The following examples illustrate the principles of this

paragraph (f):

Example 1. (i) Applying section 482, the

Internal Revenue Service makes the following

adjustments for the taxable year:

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(1) Attributable to an adjustment

that is 400 percent or more of

the correct section 482 arm’s

length result

$2,000,000

(2) Not a 200 or 400 percent

adjustment

2,500,000

Total

4,500,000

(ii) The taxpayer has gross receipts of 75

million dollars after all section 482 adjustments.

None of the adjustments is excluded under

paragraph (d) (Amounts excluded from net

section 482 adjustments) of this section, in

determining the five million dollar or 10% of

gross receipts test under section 6662(e)(1)(B)(ii). The net section 482 adjustment (4.5

million dollars) is less than the lesser of five

million dollars or ten percent of gross receipts

($75 million 3 10% = $7.5 million). Thus, there

is no substantial valuation misstatement. However, the two million dollar adjustment is

attributable to a gross valuation misstatement.

Accordingly, the taxpayer may be subject to a

penalty, under section 6662(h), equal to 40

percent of the underpayment of tax attributable

to the gross valuation misstatement of two

million dollars. The 2.5 million dollar adjustment

is not subject to a penalty under section

6662(b)(3).

Example 2. The facts are the same as in

Example 1, except the taxpayer has gross receipts

of 40 million dollars. The net section 482

adjustment ($4.5 million) is greater than the

lesser of five million dollars or ten percent of

gross receipts ($40 million 3 10% = $4 million).

Thus, the five million dollar or 10% of gross

receipts test has been met. The two million dollar

adjustment is attributable to a gross valuation

misstatement. Accordingly, the taxpayer is subject to a penalty, under section 6662(h), equal to

40 percent of the underpayment of tax attributable to the gross valuation misstatement of two

million dollars. The 2.5 million dollar adjustment

is subject to a penalty under sections 6662(a) and

6662(b)(3), equal to 20 percent of the underpayment of tax attributable to the substantial

valuation misstatement.

Example 3. (i) Applying section 482, the

Internal Revenue Service makes the following

transfer pricing adjustments for the taxable year:

(1) Attributable to an adjustment

that is 400 percent or more of

the correct section 482 arm’s

length result

$6,000,000

(2) Not a 200 or 400 percent

adjustment

15,000,000

Total

21,000,000

(ii) None of the adjustments are excluded under

paragraph (d) (Amounts excluded from net section

482 adjustments) in determining the twenty

million dollar or 20% of gross receipts test under

section 6662(h). The net section 482 adjustment

(21 million dollars) is greater than twenty million

dollars and thus constitutes a gross valuation

misstatement. Accordingly, the total adjustment is

subject to the net adjustment penalty equal to 40

percent of the underpayment of tax attributable to

the 21 million dollar gross valuation misstatement.

The six million dollar adjustment will not be

separately included for purposes of any additional

penalty under section 6662.

(g) Effective date. This section is

effective February 9, 1996. However,

taxpayers may elect to apply this

section to all open taxable years

beginning after December 31, 1993.

§1.6662-6T [Removed]

Par. 5. Section 1.6662–6T is

removed.

Par. 6a. In §1.6664–0, the introductory text is amended by removing the

reference ‘‘1.6664–4’’ and adding

‘‘1.6664–4T’’ in its place.

Par. 6b. Section 1.6664–4T is revised

to read as follows:

§1.6664–4T Reasonable cause and

good faith exception to section 6662

penalties.

(a) through (e) [Reserved].

(f) Transactions between persons described in section 482 and net section

482 transfer price adjustments. For

purposes of applying the reasonable

cause and good faith exception of

section 6664(c) to net section 482 adjustments, the rules of §1.6662–6(d)

apply. A taxpayer that does not satisfy

the rules of §1.6662–6(d) for a net

section 482 adjustment cannot satisfy

the reasonable cause and good faith

exception under section 6664(c). The

rules of this section apply to underpayments subject to the transactional

penalty in §1.6662–6(b). If the standards of the net section 482 penalty

exclusion provisions under §1.6662–

6(d) are met with respect to such

underpayments, then the taxpayer will

be considered to have acted with

reasonable cause and good faith for

purposes of this section.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 7. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. In §602.101, paragraph (c) is

amended by removing the entry for

§1.6662–6T from the table and adding

an entry in numerical order to the table

to read ‘‘1.6662–6. . . . 1545–1426’’.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved January 19, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

February 8, 1996, 8:45 a.m., and published in

the issue of the Federal Register for February

9, 1996, 61 F.R. 4876)

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Part III. Administrative, Procedural, and Miscellaneous

Differential Earnings Rate for Mutual

Life Insurance Companies

Notice 96–15

This notice publishes a tentative

determination under § 809 of the Internal Revenue Code of the ‘‘differential

earnings rate’’ for 1995 and the rate

that is used to calculate the ‘‘recomputed differential earnings amount’’ for

1994. (The latter rate is referred to in

this notice as the ‘‘recomputed differential earnings rate’’ for 1994.)

These rates are used by mutual life

insurance companies to calculate their

federal income tax liability for taxable

years beginning in 1995.

BACKGROUND

Section 809(a) provides that, in the

case of any mutual life insurance

company, the amount of the deduction

allowable under § 808 for policyholder

dividends is reduced (but not below

zero) by the ‘‘differential earnings

amount.’’ Any excess of the differential earnings amount over the amount

of the deduction allowable under § 808

is taken into account as a reduction in

the closing balance of reserves under

subsections (a) and (b) of § 807. The

‘‘differential earnings amount’’ for any

taxable year is the amount equal to the

product of (a) the life insurance company’s average equity base for the

taxable year multiplied by (b) the

‘‘differential earnings rate’’ for that

taxable year. The ‘‘differential earnings

rate’’ for the taxable year is the excess

of (a) the ‘‘imputed earnings rate’’ for

the taxable year over (b) the ‘‘average

mutual earnings rate’’ for the second

calendar year preceding the calendar

year in which the taxable year begins.

The ‘‘imputed earnings rate’’ for any

taxable year is the amount that bears

the same ratio to 16.5 percent as the

‘‘current stock earnings rate’’ for the

taxable year bears to the ‘‘base period

stock earnings rate.’’

Section 809(f) provides that, in the

case of any mutual life insurance

company, if the ‘‘recomputed differential earnings amount’’ for any taxable

year exceeds the differential earnings

amount for that taxable year, the excess

is included in life insurance gross

income for the succeeding taxable year.

If the differential earnings amount for

any taxable year exceeds the recomputed differential earnings amount for

that taxable year, the excess is allowed

as a life insurance deduction for the

succeeding taxable year. The ‘‘recomputed differential earnings amount’’ for

any taxable year is an amount calculated in the same manner as the

differential earnings amount for that

taxable year, except that the average

mutual earnings rate for the calendar

year in which the taxable year begins is

substituted for the average mutual

earnings rate for the second calendar

year preceding the calendar year in

which the taxable year begins.

The stock earnings rates and mutual

earnings rates taken into account under

§ 809 generally are determined by

dividing statement gain from operations

by the average equity base. For this

purpose, the term ‘‘statement gain from

operations’’ means ‘‘the net gain or

loss from operations required to be set

forth in the annual statement, determined without regard to Federal income taxes, and . . . properly adjusted

for realized capital gains and

losses. . . .’’ See § 809(g)(1). The term

‘‘equity base’’ is defined as an amount

determined in the manner prescribed by

regulations equal to surplus and capital

increased by the amount of nonadmitted financial assets, the excess of

statutory reserves over the amount of

tax reserves, the sum of certain other

reserves, and 50 percent of any policyholder dividends (or other similar liability) payable in the following taxable

year. See § 809(b)(2), (3), (4), (5) and

(6). Section 1.809–10 of the Income

Tax Regulations provides that the

equity base includes both the asset

valuation reserve and the interest maintenance reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations

provides that neither the differential

earnings rate under § 809(c) nor the

recomputed differential earnings rate

that is used in computing the recomputed differential earnings amount under § 809(f)(3) may be less than zero.

As described above, the differential

earnings rate for 1995 and the recomputed differential earnings rate for 1994

affect the income and deductions reported by mutual life insurance com-

panies on their federal income tax

returns for the 1995 taxable year.

Data necessary to determine the

tentative differential earnings rate for

1995 and the tentative recomputed

differential earnings rate for 1994 have

been compiled from returns filed by

mutual life insurance companies and

certain stock life insurance companies.

The Internal Revenue Service is currently examining these returns. This

examination will not be completed

before the March 15, 1996, due date

for filing 1995 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative

determination of the differential earnings rate for 1995 and of the recomputed differential earnings rate for

1994. This notice also publishes a

tentative determination of the rates on

which the calculation of the differential

earnings rate for 1995 and the recomputed differential earnings rate for 1994

are based. The final determination of

these rates is expected to be published

before September 1, 1996.

The tentative determination of the

differential earnings rate for 1995 and

the tentative determination of the recomputed differential earnings rate for

1994 that are published in this notice

should be used by mutual life insurance

companies to calculate the amount of

tax liability for taxable years beginning

in 1995 (in the case of companies that

file returns before publication of the

final determination of these rates) or to

calculate the amount of estimated unpaid tax liability for taxable years

beginning in 1995 (in the case of

companies that are allowed an extension of time to file returns). Companies

that file returns before publication of

the final determination of these rates

should file amended returns after the

final determination of these rates is

published. If there is a failure to pay

tax for a taxable year beginning in

1995 and the failure is attributable to a

difference between (a) the tentative

determination of the differential earnings rate for 1995 and recomputed

differential earnings rate for 1994 and

(b) the final determination of these

rates, then any such failure through

September 16, 1996, will be treated as

due to reasonable cause and will not

give rise to any addition to tax under

§ 6651.

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The tentative determination of the rates is set forth in Table 1.

Notice 96–15 Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 1995

Differential earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recomputed differential earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imputed earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imputed earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock earnings rate for 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock earnings rate for 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average mutual earnings rate for 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average mutual earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted Average Interest Rate

Update

Notice 96–16

Notice 88–73 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 Internal Revenue Code as amended

by the Omnibus Budget Reconciliation

Act of 1987 and as further amended by

the Uruguay Round Agreements Act,

Pub. L. 103–465 (GATT).

Month

Year

Weighted

Average

March

1996

6.98

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans

Division. For further information regarding this notice, call (202) 622-6076

between 2:30 and 4:00 p.m. Eastern

time (not a toll-free number). Ms.

Prestia’s number is (202) 622-7377

(also not a toll-free number).

Recognition of Gain or Loss by

Contributing Partner on Distribution

of Contributed Property or Other

Property; Correction

Notice 96–17

AGENCY: Internal Revenue Service,

Treasury.

5.887

15.109

12.589

18.221

13.902

7.004

23.385

11.317

18.406

9.222

The average yield on the 30-year

Treasury Constant Maturities for February 1996 is 6.24 percent.

The following rates were determined

for the plan years beginning in the

month shown below.

90% to 108%

Permissible

Range

90% to 110%

Permissible

Range

6.28 to 7.53

6.28 to 7.67

ACTION: Correction to final regulations.

SUMMARY: This document contains

corrections to final regulations (TD

8642), which were published in the

Federal Register on Tuesday, December

26, 1995, (60 FR 66727) relating to the

recognition of gain or loss on certain

distributions of contributed property by

a partnership, and to the recognition of

gain on certain distributions to a

contributing partner.

SUPPLEMENTARY

INFORMATION:

Background

The final regulations that are the

subject of these corrections are under

sections 704 and 737 of the Internal

Revenue Code.

Need for Correction

As published, the final regulations

contain errors which may prove to be

misleading and are in need of

clarification.

EFFECTIVE DATE: January 9, 1995.

Correction of Publication

FOR FURTHER INFORMATION

CONTACT: Stephen J. Coleman at

(202) 622-3060 (not a toll-free

number).

Accordingly, the publication of the

final regulations (TD 8642), which are

the subject of FR Doc. 95–30870, is

corrected as follows:

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§ 1.737–3 [Corrected]

1. On page 66737, column 2,

§ 1.737–3 (e), second paragraph from

the bottom of the column, the paragraph designated ‘‘(e) Example 1.’’ is

correctly designated ‘‘Example 1.’’

2. On page 66737, column 3,

§ 1.737–3 (e), paragraph (i) of Example

2, line 4, the language ‘‘nondepreciable

real property to the’’ is corrected to

read ‘‘nondepreciable real property located in the United States to the’’.

3. On page 66737, column 3,

§ 1.737–3 (e), paragraph (ii) of Example 2, line 2, the language ‘‘Property B,

nondepreciable real property,’’ is corrected to read ‘‘Property B, nondepreciable real property located outside the

United States,’’.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

February 26, 1996, 8:45 a.m., and published in

the issue of the Federal Register for February

27, 1996, 61 F.R. 7213)

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Part IV. Items of General Interest

Nonenforcement Policy—Proposed

Class Exemption

Announcement 96–15

The Department of Labor (‘‘DOL’’)

today announced a Pension Payback

Program (‘‘Program’’). As part of the

Program, DOL also today published a

notice of proposed class exemption

(Application No. D–10218) for prohibited transactions that may have

arisen under section 4975 of the

Internal Revenue Code (the ‘‘Code’’)

as a result of an employer’s failure to

transfer certain employee benefit contributions to its employee benefit plan

within the time frames mandated by

section 2510.3–102 of DOL’s

regulations.

The proposed class exemption will

exempt from the Code section 4975

excise taxes corrective payments

restored to the plan between the date of

DOL’s announcement and September 7,

1996. Accordingly, the Internal Revenue Service will not seek to impose the

Code section 4975(a) and (b) sanctions

with respect to any prohibited transaction that is covered by the proposed

class exemption, notwithstanding any

subsequent changes to the proposed

class exemption when it is finalized,

provided that all requirements specified

in the proposed class exemption with

respect to the prohibited transaction

have been met. For example, DOL

must receive, in accordance with condition (6) of the Program, the required

certification of compliance with all

terms and conditions of the Program

not later than September 7, 1996.

A corrective payment made to restore a delinquent contribution to which

the Program applies will not be considered an annual addition with respect to

the limitation year in which the corrective payment is made. To the extent the

corrective payment restores a delinquent contribution, the payment will be

considered an annual addition for the

limitation year in which the contribution was required to have been transferred to the plan.

The principal author of this announcement is Cathy Vohs of the

Employee Plans Division. For further

information regarding this announcement, please contact the Employee

Plans Division’s taxpayer assistance

1996– 28 I.R.B.

telephone service between the hours of

1:30 and 4:00 p.m. Eastern time,

Monday through Thursday, on (202)

622-6074/6075 or Cathy Vohs on (202)

622-6214 (These telephone numbers

are not toll-free numbers).

Transfer Pricing Penalty Oversight

Committee

Announcement 96–16

Following issuance on February 9,

1996 of final regulations under section

6662(e) of the Internal Revenue Code

dealing with the imposition of penalties

in the case of certain reallocations of

income under section 482 of the Code

(‘‘transfer pricing penalties’’), taxpayers have requested clarification of

the purposes and functions of the

Transfer Pricing Penalty Oversight

Committee (the ‘‘Committee’’). This

announcement clarifies the purposes

and functions of the Committee.

Background

Congress enacted the transfer pricing

penalties of section 6662(e) as part of

the Omnibus Budget Reconciliation Act

of 1990. The transfer pricing penalties

are generally applicable to taxable

years ending after November 5, 1990.

Proposed regulations interpreting section 6662(e) were issued in January

1993, and temporary regulations were

issued in February 1994. The temporary regulations were amended in July

1994 and are effective for taxable years

ending after December 31, 1993. Revenue Procedure 94–33, issued on April

18, 1994, provided that contemporaneous documentation would be required for taxable years beginning after

April 21, 1993 and before January 1,

1994. Final regulations issued on February 9, 1996 are effective as of that

date. Taxpayers may elect to apply the

final regulations to all open taxable

years beginning after December 31,

1993.

pricing penalty. The Committee consists of personnel from International,

Examination, Appeals and Chief Counsel. The goal of the Committee is to

ensure uniform application of the reasonableness standard and the documentation requirements on a nationwide

basis. For that purpose, the Committee

will review all cases in which a district

director is considering the assertion of

the penalty. The Committee also will

collect data from district offices relating to cases in which the statutory

thresholds for imposition of the penalty

were met but the penalty was not

recommended. This monitoring function will enable the Committee to

evaluate the application of transfer

pricing penalties by the districts and to

share information within the Service

regarding the administration of section

6662(e).

The Committee will not provide an

administrative forum for taxpayers to

appeal a preliminary recommendation

by the field that the transfer pricing

penalty should be imposed. Rather, the

review function performed by the Committee is an internal procedure related

to the uniform administration of section

6662(e) by the Service. If transfer

pricing penalties are asserted, the taxpayer may use regular administrative

and judicial procedures for appeal.

The principal authors of this announcement are Joy DeGrosky of the

International Field Assistance Specialization Program of the Office of the

Assistant Commissioner (International)

and Carolyn Fanaroff of the Office of

Associate Chief Counsel (International). For further information regarding this announcement, contact Ms.

DeGrosky at (202) 874-1894 (not a

toll-free call) or Ms. Fanaroff at (202)

622-3880 (not a toll-free call).

Deletions from Cumulative List of

Organizations, Contributions to Which

Are Deductible Under Section 170 of

the Code

Announcement 96–17

Penalty Oversight Committee

Several months ago, the Internal

Revenue Service established the Committee to monitor and gather information on the application of the transfer

The names of organizations that no

longer qualify as organizations described in section 170(c)(2) of the

Internal Revenue Code of 1986 are

listed below.

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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 determina-

tion 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 March 25, 1996, 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 who was

responsible, in whole or in part, for the

acts or omissions of the organization

that were the basis for revocation.

America’s Missing Children, Inc.

Jacksonville, FL

White Harvest Mission, Inc.

Chandler, AZ

1996– 28 I.R.B.

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Announcement of the Disbarment, Suspension, or Consent to Voluntary

Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and

Enrolled Actuaries From Practice Before the Internal Revenue Service

Under 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 disbarment or suspension from

practice before the Internal Revenue

Service, may offer his consent to

suspension from such practice. The

Director of Practice, in his discretion,

may suspend an attorney, certified

public accountant, enrolled agent or

enrolled actuary in accordance with the

consent offered.

Attorneys, certified public accountants, enrolled agents and enrolled actuaries are prohibited in any Internal

Revenue Service matter from directly

or indirectly employing, accepting

assistance from, being employed by,

or sharing fees with, any practitioner disbarred or suspended from

practice before the Internal Revenue

Service.

To enable attorneys, certified public

accountants, enrolled agents and enrolled actuaries to identify practitioners

under consent suspension from practice

before the Internal Revenue Service,

the Director of Practice will announce

in the Internal Revenue Bulletin the

names and addresses of practitioners

who have been suspended from such

practice, their designation as attor-

ney, certified public accountant, enrolled agent or enrolled actuary and

date or period of suspension. This announcement will appear in the weekly

Bulletin at the earliest practicable date

after such action and will continue to

appear in the weekly Bulletins for five

successive weeks or for as many weeks

as is practicable for each attorney,

certified public accountant, enrolled

agent or enrolled actuary so suspended

and will be consolidated and published

in the Cumulative Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue

Service:

Name

Address

Designation

Date of Suspension

Miller, Gorden A.

Barnes, Charles E.

Mineral Wells, WV

Louisville, KY

February 1, 1996 to April 30, 1996

Indefinite from February 1, 1996

Polizzi, Angelo J.

Pegler, Charles R.

Foster, David M.

Smith, Jerry A.

Penn, Michael J.

Mueller, E. Laird

Zezima, Paul P.

Van Houten, Robert R.

Grosse Point, MI

Islandia, NY

Birmingham, MI

Evansville, IN

Dearborn, MI

Seal Beach, CA

Norwalk, CT

Danbury, CT

CPA

Enrolled

Agent

Attorney

CPA

Attorney

CPA

Under Section 330, Title 31 of the

United States Code, the Secretary of

the Treasury, after due notice and

opportunity for hearing, is authorized

to suspend or disbar from practice

before the Internal Revenue Service

any person who has violated the rules

and regulations governing the recognition of attorneys, certified public accountants, enrolled agents or enrolled

actuaries to practice before the Internal

Revenue Service.

Attorneys, certified public accountants, enrolled agents, and enrolled

actuaries are prohibited in any Internal

Revenue Service matter from directly

Indefinite from February 6, 1996

Indefinite from February 7, 1996

Indefinite from February 9, 1996

February 9, 1996 to November 8, 1996

February 9, 1996 to February 8, 1997

February 12, 1996 to June 11, 1996

April 1, 1996 to May 31, 1996

May 1, 1996 to April 30, 1997

or indirectly employing, accepting assistance from, being employed by or

sharing fees with, any practitioner

disbarred or under suspension from

practice before the Internal Revenue

Service.

To enable attorneys, certified public

accountants, enrolled agents and

enrolled actuaries to identify such

disbarred or suspended practitioners,

the Director of Practice will announce

in the Internal Revenue Bulletin the

names and addresses of practitioners

who have been suspended from such

practice, their designation as attorney,

certified public accountant, enrolled

agent or enrolled actuary, and the date

of disbarment or period of suspension.

This announcement will appear in the

weekly Bulletin for five successive

weeks or as long as it is practicable for

each attorney, certified public accountant, enrolled agent or enrolled actuary

so suspended or disbarred and will be

consolidated and published in the

Cumulative Bulletin.

After due notice and opportunity

for hearing before an administrative

law judge, the following individuals

have been disbarred from further practice before the Internal Revenue

Service:

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Name

Address

Designation

Effective Date

Gimbel, Stephen

Tropsa, Donna C.

Seifert, Frank J.

Hansen, Joe B.

Columbia, SC

Stamford, CT

Birmingham, AL

Lubbock, TX

CPA

Attorney

CPA

January 20, 1996

March 2, 1996

Announcement of the Expedited Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the

Internal Revenue Service

Under title 31 of the Code of Federal

Regulations, section 10.76, the Director

of Practice 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 any

crime under title 26 of the United

States Code or, of a felony under title

18 of the United States Code involving

dishonesty or breach of trust.

Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are prohibited in any Internal

Revenue Service matter from directly

or indirectly employing, accepting assistance from, being employed by, or

sharing fees with, any practitioner

disbarred or suspended from practice

before the Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents, and enrolled actuaries to identify practitioners

under expedited suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Revenue Bulletin

the names and addresses of practitioners who have been suspended from such

practice, their designation as attorney,

certified public accountant, enrolled

agent, or enrolled actuary, and date or

period of suspension. This announcement will appear in the weekly Bulletin

at the earliest practicable date after

such action and will continue to appear

in the weekly Bulletins for five successive weeks or for as many weeks as is

practicable for each attorney, certified

public accountant, enrolled agent, or

enrolled actuary so suspended and will

be consolidated and published in the

Cumulative Bulletin.

The following individuals have been

placed under suspension from practice

before the Internal Revenue Service by

virtue of the expedited proceeding

provisions of the applicable regulations:

Name

Address

Designation

Date of Suspension

Ginsberg, Melvin R.

Lahey, Charles W.

DePiano, Robert

Kraig, Jerry B.

Brown, David M.

Hanke Jr., Dale L.

Guillory, Patrick R.

Miller, Brian R.

McLeod, Timothy R.

Simone, Robert F.

Bowen, David Lee

Lindley, Clarkson

Univ. Heights, OH

South Bend, IN

Venice, CA

Shaker Hgts, OH

Los Angeles, CA

Duluth, MN

San Francisco, CA

Grove, OK

Saginaw, MI

Philadelphia, PA

Frisco City, AL

Wayazata, MN

Attorney

CPA

Attorney

CPA

Attorney

Indefinite from January 24, 1996

Indefinite from January 29, 1996

Indefinite from February 1, 1996

Indefinite from February 23, 1996

Indefinite from February 26, 1996

Indefinite from February 27, 1996

SEQ 0029 JOB C15-051-003 PAGE-0026 TERMS

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Definition of Terms

Revenue rulings and revenue procedures (hereinafter referred to as ‘‘rulings’’) that have an effect on previous

rulings use the following defined terms

to describe the effect:

Amplified describes a situation where

no change is being made in a prior

published position, but the prior position is being extended to apply to a

variation of the fact situation set forth

therein. Thus, if an earlier ruling held

that a principle applied to A, and the

new ruling holds that the same principle also applies to B, the earlier ruling

is amplified. (Compare with modified,

below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in

a prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an

essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but

not to B, and the new ruling holds that

it applies to both A and B, the prior

ruling is modified because it corrects a

published position. (Compare with amplified and clarified, above).

Obsoleted describes a previously

published ruling that is not considered

determinative with respect to future

transactions. This term is most commonly used in a ruling that lists

previously published rulings that are

obsoleted because of changes in law or

regulations. A ruling may also be

obsoleted because the substance has

been included in regulations subsequently adopted.

Revoked describes situations where

the position in the previously published

ruling is not correct and the correct

position is being stated in the new

ruling.

Superseded describes a situation

where the new ruling does nothing

more than restate the substance and

situation of a previously published

ruling (or rulings). Thus, the term is

used to republish under the 1986 Code

and regulations the same position published under the 1939 Code and regulations. The term is also used when it is

desired to republish in a single ruling a

series of situations, names, etc., that

were previously published over a

period of time in separate rulings.

If the new ruling does more than

restate the substance of a prior ruling, a

combination of terms is used. For

example, modified and superseded describes a situation where the substance

of a previously published ruling is

being changed in part and is continued

without change in part and it is desired

to restate the valid portion of the

previously published ruling in a new

ruling that is self contained. In this

case the previously published ruling is

first modified and then, as modified, is

superseded.

Supplemented is used in situations in

which a list, such as a list of the names

of countries, is published in a ruling

and that list is expanded by adding

further names in subsequent rulings.

After the original ruling has been

supplemented several times, a new

ruling may be published that includes

the list in the original ruling and the

additions, and supersedes all prior

rulings in the series.

Suspended is used in rare situations

to show that the previous published

rulings will not be applied pending

some future action such as the issuance

of new or amended regulations, the

outcome of cases in litigation, or the

outcome of a Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and

formerly used will appear in material published

in the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

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Numerical Finding List1

Bulletins 1996–1 through 1996–12

Announcements:

96–1, 1996–2 I.R.B. 57

96–2, 1996–2 I.R.B. 57

96–3, 1996–2 I.R.B. 57

96–4, 1996–3 I.R.B. 50

96–5, 1996–4 I.R.B. 99

96–6, 1996–5 I.R.B. 43

96–7, 1996–5 I.R.B. 44

96–8, 1996–7 I.R.B. 56

96–9, 1996–8 I.R.B. 30

96–10, 1996–8 I.R.B. 30

96–11, 1996–9 I.R.B. 11

96–12, 1996–11 I.R.B. 30

96–13, 1996–12 I.R.B. 33

96–14, 1996–12 I.R.B. 35

Delegations Orders:

232 (Rev. 2), 1996–7 I.R.B. 49

239 (Rev. 1), 1996–7 I.R.B. 49

Notices:

96–2, 1996–2 I.R.B. 15

96–1, 1996–3 I.R.B. 30

96–4, 1996–4 I.R.B. 69

96–5, 1996–6 I.R.B. 22

96–6, 1996–5 I.R.B. 27

96–7, 1996–6 I.R.B. 22

96–8, 1996–6 I.R.B. 23

96–9, 1996–6 I.R.B. 26

96–10, 1996–7 I.R.B. 47

96–11, 1996–8 I.R.B. 19

96–12, 1996–10 I.R.B. 29

96–13, 1996–10 I.R.B. 29

96–14, 1996–12 I.R.B. 11

Proposed Regulations:

DL–1–95, 1996–6 I.R.B. 28

EE–20–95, 1996–5 I.R.B. 15

EE–34–95, 1996–3 I.R.B. 49

EE–35–95, 1996–5 I.R.B. 19

EE–53–95, 1996–5 I.R.B. 23

EE–55–95, 1996–12 I.R.B. 12

EE–106–82, 1996–10 I.R.B. 31

EE–142–87, 1996–12 I.R.B. 13

EE–148–81, 1996–11 I.R.B. 29

IA–41–93, 1996–11 I.R.B. 29

IA–33–95, 1996–4 I.R.B. 99

INTL–3–95, 1996–6 I.R.B. 29

INTL–9–95, 1996–5 I.R.B. 25

PS–2–95, 1996–7 I.R.B. 50

Revenue Procedures:

96–1, 1996–1 I.R.B. 8

Revenue Procedures—Continued

Treasury Decisions—Continued

96–2, 1996–1 I.R.B. 60

96–3, 1996–1 I.R.B. 82

96–4, 1996–1 I.R.B. 94

96–5, 1996–1 I.R.B. 129

96–6, 1996–1 I.R.B. 151

96–7, 1996–1 I.R.B. 185

96–8, 1996–1 I.R.B. 187

96–8A, 1996–9 I.R.B. 10

96–9, 1996–2 I.R.B. 15

96–10, 1996–2 I.R.B. 17

96–11, 1996–2 I.R.B. 18

96–12, 1996–3 I.R.B. 30

96–13, 1996–3 I.R.B. 31

96–14, 1996–3 I.R.B. 41

96–15, 1996–3 I.R.B. 41

96–16, 1996–3 I.R.B. 45

96–17, 1996–4 I.R.B. 69

96–18, 1996–4 I.R.B. 73

96–19, 1996–4 I.R.B. 80

96–20, 1996–4 I.R.B. 88

96–21, 1996–4 I.R.B. 96

96–22, 1996–5 I.R.B. 27

96–23, 1996–5 I.R.B. 27

96–24, 1996–5 I.R.B. 28

96–25, 1996–8 I.R.B. 19

96–26, 1996–8 I.R.B. 22

96–27, 1996–11 I.R.B. 27

8639, 1996–5 I.R.B. 12

8640, 1996–2 I.R.B. 10

8641, 1996–6 I.R.B. 4

8642, 1996–7 I.R.B. 4

8643, 1996–11 I.R.B. 4

8644, 1996–7 I.R.B. 16

8645, 1996–8 I.R.B. 4

8646, 1996–8 I.R.B. 10

8647, 1996–9 I.R.B. 7

8648, 1996–10 I.R.B. 23

8649, 1996–9 I.R.B. 5

8650, 1996–10 I.R.B. 5

8651, 1996–11 I.R.B. 24

8652, 1996–11 I.R.B. 11

8653, 1996–12 I.R.B. 4

8654, 1996–11 I.R.B. 14

8655, 1996–12 I.R.B. 9

Revenue Rulings:

96–1, 1996–1 I.R.B. 7

96–2, 1996–2 I.R.B. 5

96–3, 1996–2 I.R.B. 14

96–6, 1996–2 I.R.B. 8

96–4, 1996–3 I.R.B. 16

96–5, 1996–3 I.R.B. 29

96–7, 1996–3 I.R.B. 12

96–8, 1996–4 I.R.B. 62

96–9, 1996–4 I.R.B. 5

96–10, 1996–4 I.R.B. 27

96–11, 1996–4 I.R.B. 28

96–12, 1996–9 I.R.B. 4

96–13, 1996–10 I.R.B. 19

96–14, 1996–6 I.R.B. 20

96–15, 1996–11 I.R.B. 9

96–16, 1996–11 I.R.B. 4

Treasury Decisions:

8630, 1996–3 I.R.B. 19

8631, 1996–3 I.R.B. 7

8632, 1996–4 I.R.B. 6

8633, 1996–4 I.R.B. 20

8634, 1996–3 I.R.B. 17

8635, 1996–3 I.R.B. 5

8636, 1996–4 I.R.B. 64

8637, 1996–4 I.R.B. 29

8638, 1996–5 I.R.B. 5

cumulative list of all Revenue Rulings,

Revenue Procedures, Treasury Decisions, etc.,

published in Internal Revenue Bulletins 1995–27

through 1995–52 will be found in Internal

Revenue Bulletin 1996–1, dated January 2, 1996.

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Finding List of Current Action on

Previously Published Items1

Bulletins 1996–1 through 1996–12

*Denotes entry since last publication

Delegation Orders:

232 (Rev. 1)

Superseded by

232 (Rev. 2), 1996–7 I.R.B. 49

239

Amended by

239 (Rev. 1), 1996–7 I.R.B. 49

Revenue Procedures:

65–17

Modified by

96–14, 1996–3 I.R.B. 41

66–49

Modified by

96–15, 1996–3 I.R.B. 41

Revenue Procedures—Continued

92–85

Modified by

96–1, 1996–1 I.R.B. 8

93–16

Superseded by

96–11, 1996–2 I.R.B. 18

93–46

Superseded in part by

96–17, 1996–4 I.R.B. 69

Superseded by

96–18, 1996–4 I.R.B. 73

Revenue Procedures—Continued

95–20

Superseded by

96–24, 1996–5 I.R.B. 28

95–50

Superseded by

96–3, 1996–1 I.R.B. 82

96–3

Amplified by

96–12, 1996–3 I.R.B. 30

Revenue Rulings:

94–18

Superseded in part by

96–17, 1996–4 I.R.B. 69

66–307

Obsoleted by

96–3, 1996–2 I.R.B. 14

Superseded by

96–18, 1996–4 I.R.B. 73

72–437

Modified by

96–13, 1996–3 I.R.B. 31

94–59

Superseded in part by

96–17, 1996–4 I.R.B. 69

88–32

Obsoleted by

96–15, 1996–3 I.R.B. 41

Superseded by

96–18, 1996–4 I.R.B. 73

88–33

Obsoleted by

96–15, 1996–3 I.R.B. 41

95–1

Superseded by

96–1, 1996–1 I.R.B. 8

89–19

Superseded by

96–17, 1996–4 I.R.B. 69

95–2

Superseded by

96–2, 1996–1 I.R.B. 60

89–48

Superseded in part by

96–17, 1996–4 I.R.B. 69

95–3

Superseded by

96–3, 1996–1 I.R.B. 82

91–22

Modified by

96–1, 1996–1 I.R.B. 8

95–4

Superseded by

96–4, 1996–1 I.R.B. 94

91–22

Amplified by

96–13, 1996–3 I.R.B. 31

95–5

Superseded by

96–5, 1996–1 I.R.B. 129

91–23

Superseded by

96–13, 1996–3 I.R.B. 31

95–6

Superseded by

96–6, 1996–1 I.R.B. 151

91–24

Superseded by

96–14, 1996–3 I.R.B. 41

95–7

Superseded by

96–7, 1996–1 I.R.B. 185

91–26

Superseded by

96–13, 1996–3 I.R.B. 31

95–8

Superseded by

96–8, 1996–1 I.R.B. 187

92–20

Modified by

96–1, 1996–1 I.R.B. 8

95–13

Superseded by

96–20, 1996–4 I.R.B. 88

1A cumulative finding list for previously

published items mentioned in Internal Revenue

Bulletins 1995–27 through 1995–52 will be

found in Internal Revenue Bulletin 1996–1, dated

January 2, 1996.

80–80

Obsoleted by

96–3, 1996–2 I.R.B. 14

82–80

Modified by

96–14, 1996–3 I.R.B. 41

92–19

Supplemented in part

96–2, 1996–2 I.R.B. 5

92–75

Clarified by

96–13, 1996–3 I.R.B. 31

95–10

Supplemented and superseded by

96–4, 1996–3 I.R.B. 16

95–11

Supplemented and superseded by

96–5, 1996–3 I.R.B. 29

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.