bulletin no. 2005-14 highlights of this issuethe weight-based exclusion provided in section...

Bulletin No. 2005-14April 4, 2005

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2005–11, page 816.Alternative minimum tax; refinanced mortgage interest.Interest paid on a home mortgage that has been refinancedmore than one time is deductible as qualified housing interestfor purposes of the alternative minimum tax to the extent theinterest on the mortgage that was refinanced is qualified hous-ing interest and the amount of the mortgage indebtedness isnot increased.

Rev. Rul. 2005–17, page 823.Frivolous tax returns; Social Security refund. This rulingemphasizes to taxpayers and to promoters and return prepar-ers that there is no right to a refund of, or a deduction for,Social Security taxes paid based on arguments that a taxpayerhas waived the right to receive Social Security benefits or hasdonated Social Security taxes or benefits to the government.These arguments have no merit and are frivolous.

Rev. Rul. 2005–18, page 817.Frivolous tax returns; altering the jurat. This ruling dealswith taxpayers who attempt to reduce their federal tax liabilityby striking or altering the written declaration (the jurat) that ver-ifies that a return, declaration, statement or other document ismade under penalties of perjury. The ruling emphasizes to tax-payers and to promoters and return preparers that striking oraltering the jurat in a manner that negates its validity invalidatesthe return.

Rev. Rul. 2005–19, page 819.Frivolous tax returns; constitutionally based arguments.This ruling emphasizes to taxpayers and to promoters and re-turn preparers that a taxpayer cannot avoid income tax by mak-ing frivolous constitutionally based arguments.

Rev. Rul. 2005–20, page 821.Frivolous tax returns; protesting government programsor policies. This ruling emphasizes to taxpayers and to pro-moters and return preparers that liability for federal taxes doesnot depend on whether the taxpayer agrees with the govern-ment programs or policies that are funded with tax receipts.Any argument that taxpayers may refuse to report income orclaim deductions because they oppose particular governmentprograms or policies is frivolous and has no merit.

Rev. Rul. 2005–21, page 822.Frivolous tax returns; use of “straw man” to avoid tax.This ruling emphasizes to taxpayers and to promoters and re-turn preparers that a taxpayer cannot avoid income tax on theerroneous theory that the government has created a separateand distinct entity or “straw man,” in place of the taxpayer andthat the taxpayer is not responsible for the tax obligations ofthe “straw man”. This argument has no merit and is frivolous.

REG–163314–03, page 835.Proposed regulations provide that a transaction will qualify fornonrecognition treatment under sections 332, 351, or 368of the Code only if there is a transfer and a receipt of netvalue. The proposed regulations also provide guidance on thecircumstances in which and the extent to which a creditor of aninsolvent corporation may be treated as owning a proprietaryinterest in the target corporation for the purpose of satisfyingthe continuity of interest requirement. With respect to section332, the regulations clarify that this section applies only tothose cases in which the recipient corporation receives at leastpartial payment with respect to each class of stock which itowns in the liquidating corporation.

(Continued on the next page)

Finding Lists begin on page ii.

Notice 2005–30, page 827.This notice sets out some of the most common frivolous argu-ments and schemes that taxpayers use to avoid their tax obli-gations. It also identifies civil and criminal penalties that theService may impose against taxpayers who engage in abusivetax-avoidance schemes. Notice 2004–22 modified and super-seded.

Notice 2005–31, page 830.State and local general sales tax deduction. This noticeprovides guidance to taxpayers who elect to deduct state andlocal general sales taxes in lieu of state and local income taxesunder section 164(b)(5) of the Code.

EXEMPT ORGANIZATIONS

Announcement 2005–23, page 845.A list is provided of organizations now classified as private foun-dations.

EMPLOYMENT TAX

REG–160315–03, page 833.Proposed regulations under section 3121 of the Code provideguidance regarding the treatment of payments made on ac-count of sickness or accident disability under a workers’ com-pensation law for purposes of the Federal Insurance Contribu-tions Act (FICA).

EXCISE TAX

Rev. Proc. 2005–19, page 832.The Service, as a matter of administrative convenience, hasestablished that certain truck body type classifications satisfythe weight-based exclusion provided in section 4051(a)(2) ofthe Code.

TAX CONVENTIONS

Announcement 2005–22, page 826.This agreement describes taxation of certain scholarships un-der the U.S.–Austria Income Tax Treaty. A copy of the NewsRelease issued by the Director, International (U.S. CompetentAuthority), on March 1, 2005 (IR–2005–20), is set forth.

ADMINISTRATIVE

Rev. Rul. 2005–17, page 823.Frivolous tax returns; Social Security refund. This rulingemphasizes to taxpayers and to promoters and return prepar-

ers that there is no right to a refund of, or a deduction for,Social Security taxes paid based on arguments that a taxpayerhas waived the right to receive Social Security benefits or hasdonated Social Security taxes or benefits to the government.These arguments have no merit and are frivolous.

Rev. Rul. 2005–18, page 817.Frivolous tax returns; altering the jurat. This ruling dealswith taxpayers who attempt to reduce their federal tax liabilityby striking or altering the written declaration (the jurat) that ver-ifies that a return, declaration, statement or other document ismade under penalties of perjury. The ruling emphasizes to tax-payers and to promoters and return preparers that striking oraltering the jurat in a manner that negates its validity invalidatesthe return.

Rev. Rul. 2005–19, page 819.Frivolous tax returns; constitutionally based arguments.This ruling emphasizes to taxpayers and to promoters and re-turn preparers that a taxpayer cannot avoid income tax by mak-ing frivolous constitutionally based arguments.

Rev. Rul. 2005–20, page 821.Frivolous tax returns; protesting government programsor policies. This ruling emphasizes to taxpayers and to pro-moters and return preparers that liability for federal taxes doesnot depend on whether the taxpayer agrees with the govern-ment programs or policies that are funded with tax receipts.Any argument that taxpayers may refuse to report income orclaim deductions because they oppose particular governmentprograms or policies is frivolous and has no merit.

Rev. Rul. 2005–21, page 822.Frivolous tax returns; use of “straw man” to avoid tax.This ruling emphasizes to taxpayers and to promoters and re-turn preparers that a taxpayer cannot avoid income tax on theerroneous theory that the government has created a separateand distinct entity or “straw man,” in place of the taxpayer andthat the taxpayer is not responsible for the tax obligations ofthe “straw man”. This argument has no merit and is frivolous.

Notice 2005–25, page 827.Public comments are requested on recommendations for itemsthat should be included on the 2005–2006 Guidance PriorityList. Taxpayers may submit recommendations for guidanceat any time during the year. Recommendations submitted byApril 30, 2005, will be reviewed for possible inclusion on theoriginal 2005–2006 Guidance Priority List. Recommendationsreceived after April 30, 2005, will be reviewed for inclusion inthe next periodic update.

Notice 2005–30, page 827.This notice sets out some of the most common frivolous argu-ments and schemes that taxpayers use to avoid their tax obli-gations. It also identifies civil and criminal penalties that theService may impose against taxpayers who engage in abusivetax-avoidance schemes. Notice 2004–22 modified and super-seded.

April 4, 2005 2005–14 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled 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 sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe 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 ofthe 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 Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

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, DC 20402.

2005–14 I.R.B. April 4, 2005

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 55.—AlternativeMinimum Tax Imposed26 CFR 1.55–1: Alternative minimum taxable in-come.

Is interest paid on a home mortgage that has beenrefinanced more than one time deductible as qualifiedhousing interest for purposes of the alternative mini-mum tax? See Rev. Rul. 2005-11, page 816.

Section 56.—Adjustmentsin Computing AlternativeMinimum Taxable Income(Also §§ 55, 163.)

Alternative minimum tax; refinancedmortgage interest. Interest paid on ahome mortgage that has been refinancedmore than one time is deductible as qual-ified housing interest for purposes of thealternative minimum tax to the extent theinterest on the mortgage that was refi-nanced is qualified housing interest andthe amount of the mortgage indebtednessis not increased.

Rev. Rul. 2005–11

ISSUE

Is interest paid on a home mortgage thathas been refinanced more than one timedeductible as qualified housing interest forpurposes of the alternative minimum tax?

FACTS

In 1990, A borrowed $100x to purchasea principal residence (the 1990 mortgage).In 2000, the outstanding principal balanceon the 1990 mortgage was $90x, and Arefinanced the $90x balance of the 1990mortgage (the 2000 mortgage). In 2004,the outstanding principal balance on the2000 mortgage was $80x. A refinancedthe $80x balance of the 2000 mortgage andborrowed an additional $30x. Thus, the to-tal amount of A’s mortgage in 2004 was$110x (the 2004 mortgage). A did not usethe $30x to acquire, construct, or substan-tially improve any property that was a prin-cipal residence or a qualified residence. Atno time did A’s indebtedness to acquire hisprincipal residence or a qualified residence

exceed $1,000,000. A is not a married in-dividual filing a separate return.

LAW AND ANALYSIS

Section 55 of the Internal RevenueCode provides that the alternative mini-mum tax is a tax equal to the excess (ifany) of the tentative minimum tax for thetaxable year over the regular tax (definedin § 55(c)) for the taxable year.

Tentative minimum tax is defined in§ 55(b)(1)(A) for noncorporate taxpay-ers as the sum of 26 percent of so muchof the taxable excess as does not exceed$175,000, plus 28 percent of so much ofthe taxable excess as exceeds $175,000.

The term “taxable excess” is defined in§ 55(b)(1)(ii) as so much of the alternativeminimum taxable income for the taxableyear as exceeds the exemption amount pro-vided for in § 55(d).

Alternative minimum taxable income isdefined in § 55(b)(2) as the taxable incomeof the taxpayer for the taxable year de-termined with the adjustments provided in§§ 56 and 58, and increased by the amountof the items of tax preference described in§ 57.

Section 56(b) contains the adjust-ments applicable to individuals, whichinclude the adjustment for interest in§ 56(b)(1)(C). Section 56(b)(1)(C) pro-vides that, in determining the amountallowable as a deduction for interest,§ 163(d), which provides limitations oninvestment interest, and § 163(h), whichdisallows deductions for personal inter-est, shall apply, except that in lieu of theexception under § 163(h)(2)(D) for quali-fied residence interest, the term “personalinterest” shall not include any qualifiedhousing interest.

Qualified housing interest is defined in§ 56(e)(1) as interest that is qualified res-idence interest (as defined in § 163(h)(3))and is paid or accrued during the taxableyear on indebtedness that is incurred in ac-quiring, constructing, or substantially im-proving any property that is the principalresidence (within the meaning of § 121) ofthe taxpayer at the time such interest ac-crues, or is a qualified dwelling that is aqualified residence (within the meaning of

§ 163(h)(4)). In addition, the last sentenceof § 56(e)(1) provides that qualified hous-ing interest includes interest on any in-debtedness resulting from the refinancingof indebtedness meeting the requirementsof qualified housing interest, but only tothe extent that the amount of the indebted-ness resulting from such refinancing doesnot exceed the amount of the refinancedindebtedness immediately before the refi-nancing.

The legislative history to the enactmentof § 56 as part of the Tax Reform Act of1986 states “It is clarified that, for mini-mum tax purposes, upon a refinancing ofa loan that gives rise to qualified housinginterest, interest paid on the loan is treatedas qualified housing interest to the extentthat (1) it so qualified under the prior loan,and (2) the amount of the loan was not in-creased.” H.R. Conf. Rep. No. 841, 99th

Cong., 2d Sess., vol. II, at 259 (1986).Section 163(h) of the Code provides

that, in the case of a taxpayer other than acorporation, no deduction shall be allowedfor personal interest paid or accrued duringthe taxable year. Under § 163(h)(2)(D),personal interest does not include qualifiedresidence interest.

Qualified residence interest is definedin § 163(h)(3) as any interest that is paidor accrued during the taxable year onacquisition indebtedness or home equityindebtedness with respect to any quali-fied residence of the taxpayer. Section163(h)(3)(B) defines acquisition indebted-ness as any indebtedness that is incurredin acquiring, constructing, or substan-tially improving any qualified residence ofthe taxpayer and is secured by such resi-dence. Section 163(h)(3)(B) also providesthat acquisition indebtedness includesany indebtedness secured by such resi-dence resulting from the refinancing ofindebtedness meeting the requirements ofacquisition indebtedness, or refinancingof acquisition indebtedness, but only tothe extent the amount of the indebted-ness resulting from such refinancing doesnot exceed the amount of the refinancedindebtedness. Under § 163(h)(3)(B)(ii),the aggregate amount of acquisition in-debtedness for any period cannot exceed$1,000,000 (or $500,000 in the case of

2005–14 I.R.B. 816 April 4, 2005

a married individual filing a separate re-turn).

The term “qualified residence” is de-fined in § 163(h)(4)(A) as the principal res-idence (within the meaning of § 121) ofthe taxpayer and one other residence of thetaxpayer that is selected by the taxpayer forthe taxable year and that is used by the tax-payer as a residence (within the meaning of§ 280A(d)(1)).

The 1990 mortgage is indebtedness in-curred in acquiring A’s principal residence.The interest paid or accrued on the 1990mortgage meets the requirements of qual-ified residence interest under § 163(h)(3).Thus, the interest paid or accrued by A onthe 1990 mortgage is qualified housing in-terest for purposes of the alternative mini-mum tax.

The last sentence of § 56(e)(1), as clar-ified by the legislative history, indicatesthat when § 56(b)(1)(C) was enacted aspart of the alternative minimum tax provi-sions, Congress intended that interest withrespect to a refinancing of a loan that givesrise to qualified housing interest wouldbe deductible for alternative minimum taxpurposes to the extent the amount of theloan was not increased. When A refi-nanced the 1990 mortgage in 2000, therefinanced amount equaled the amount ofthe outstanding principal. Thus, the inter-est paid or accrued on the 2000 mortgageis deductible as qualified housing interestfor purposes of the alternative minimumtax because the interest on the 1990 mort-gage is qualified housing interest and theamount of the loan is not increased.

Similarly, when A refinanced the 2000mortgage in 2004, the interest on the 2004mortgage is qualified housing interest tothe extent of the outstanding principal bal-ance of the 2000 mortgage at the time ofthe refinancing because the interest on the2000 mortgage is qualified housing inter-est. However, as part of the 2004 refinanc-ing A borrowed an additional $30x, and Adid not use the $30x to acquire, construct,or substantially improve any property thatwas a principal residence or a qualified res-idence. Accordingly, for alternative mini-mum tax purposes A may deduct only theinterest paid or incurred on $80x and notthe interest attributable to the additional$30x of the $110x of the 2004 mortgage.

HOLDING

Interest paid on a home mortgage thathas been refinanced more than one time isdeductible as qualified housing interest forpurposes of the alternative minimum taxto the extent the interest on the mortgagethat was refinanced is qualified housinginterest and the amount of the mortgageindebtedness is not increased.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Martin Scully, Jr. of the Office of As-sociate Chief Counsel (Income Tax & Ac-counting). For further information regard-ing this revenue ruling, contact Mr. Scullyat (202) 622–4960 (not a toll-free call).

Section 163.—Interest

26 CFR 1.163–10T: Qualified residence interest(temporary).

Is interest paid on a home mortgage that has beenrefinanced more than one time deductible as qualifiedhousing interest for purposes of the alternative mini-mum tax? See Rev. Rul. 2005-11, page 816.

Section 6065.—Verificationof Returns(Also Section 6702.)

Frivolous tax returns; altering the ju-rat. This ruling deals with taxpayers whoattempt to reduce their federal tax liabilityby striking or altering the written declara-tion (the jurat) that verifies that a return,declaration, statement or other documentis made under penalties of perjury. Theruling emphasizes to taxpayers and to pro-moters and return preparers that striking oraltering the jurat in a manner that negatesits validity invalidates the return.

Rev. Rul. 2005–18

PURPOSE

The Service is aware that some taxpay-ers are attempting to reduce their federaltax liability by striking or otherwise in-validating the written declaration (the ju-rat) that verifies that a return, declaration,

statement, or other document is made un-der penalties of perjury as required by sec-tion 6065. The Service also is aware thatsome promoters, including return prepar-ers, are advising or recommending thattaxpayers take frivolous positions, whichinclude striking or otherwise invalidatingthe jurat. Some promoters market a pack-age, kit, or other materials that claim toshow taxpayers how they can avoid pay-ing income taxes based on these and othermeritless arguments.

This revenue ruling emphasizes to tax-payers and to promoters and return pre-parers that striking or otherwise alteringthe jurat in a manner that negates or castsdoubt on its validity invalidates the return.Any argument that the law does not requirewritten verification of the accuracy of thereturn has no merit and is frivolous.

The Service is committed to identi-fying taxpayers who attempt to avoidtheir federal tax obligations by takingfrivolous positions, including frivolouspositions based on arguments relating toan altered or amended jurat. The Servicewill take vigorous enforcement actionagainst these taxpayers and against pro-moters and return preparers who assisttaxpayers in taking these frivolous posi-tions. Frivolous returns and other similardocuments submitted to the Service areprocessed through the Service’s FrivolousReturn Program. As part of this program,the Service confirms whether taxpayerswho take frivolous positions have filedall of their required tax returns, computesthe correct amount of tax and interest due,and determines whether civil and crimi-nal penalties should apply. The Servicealso determines whether civil or criminalpenalties should apply to return prepar-ers, promoters, and others who assisttaxpayers in taking frivolous positions,and recommends whether an injunctionshould be sought to halt these activities.Other information about frivolous tax po-sitions is available on the Service websiteat www.irs.gov.

ISSUE

Whether a document, declaration, orstatement that is required to be verified un-der penalties of perjury, pursuant to sec-tion 6065, is valid if the jurat has beenstricken or otherwise altered in a manner

April 4, 2005 817 2005–14 I.R.B.

that negates or casts doubt on validity ofthe return?

FACTS

Situation 1. Individual taxpayer A fileda Form 1040A individual income tax re-turn for the 2004 taxable year. TaxpayerA signed the form but crossed out the juraton the return, and wrote the word “void”across it.

Situation 2. Individual taxpayer B fileda Form 1040A individual income tax re-turn for the 2004 taxable year. Taxpayer Bsigned the Form 1040A without deleting oraltering the jurat, but wrote across the topof the Form 1040A that “I deny that I owethe tax shown on this return.”

LAW AND ANALYSIS

Section 6011(a) requires any person li-able for taxes to file a return that includes“the information required by [the] formsor regulations” issued by the Service. Seealso Treas. Reg. sec. 1.6012–1(a)(6)(prescribing Form 1040 for making an in-come tax return). Section 6065 mandatesthat any return, declaration, statement, orother document required under the inter-nal revenue laws and regulations “containor be verified by a written declaration thatit is made under the penalties of perjury.”For taxpayer convenience, paper returnsall contain a pre-printed written declara-tion or jurat.

It is well settled that if a taxpayer strikesor obliterates the jurat on a tax return orother document, the jurat is void, as isthe underlying return, because the returnno longer meets the requirements of sec-tion 6011(a) and section 6065. See Lucasv. Pilliod Lumber Co., 281 U.S. 245, 248(1930) (a return that was not properly ver-ified under oath by the corporate officersdid not meet the requirements of 6011(a)and section 6065); Borgeson v. UnitedStates, 757 F.2d 1071, 1072–73 (10th Cir.1985) (the plain wording of section 6065requires the jurat on any return); UnitedStates v. Moore, 627 F.2d 830, 834 (7thCir. 1980) (the forms submitted by the tax-payer were not returns because the juratwas obliterated); Cupp v. Commissioner,65 T.C. 68, 78–79 (1975) (documents sub-mitted by the taxpayer that were not signedunder penalty of perjury were not returns),aff’d without published opinion, 559 F.2d1207 (3d Cir. 1977).

If the taxpayer adds language to the ju-rat, or adds language to the return thatcasts doubt on the validity of the jurat,courts look to the intent and effect of thechange in order to determine the valid-ity of the underlying return. A changethat negates or casts doubt on the valid-ity of the jurat, or the taxpayer’s intentto affirm the contents of the return underpenalty of perjury, will void the jurat. SeeWilliams v. Commissioner, 114 T.C. 136,140–41 (2000) (language added by the tax-payer above the jurat box that denied lia-bility for the tax reported on the return stillhad the effect of vitiating the verification);Sloan v. Commissioner, 102 T.C. 137,141–47 (1994) (language added within thejurat box that “[raised] serious questionsabout whether petitioner [was] ‘denying’the accuracy of the information containedin the return, ‘disclaiming’ the jurat alto-gether, or simply protesting the tax laws,”ultimately acted to invalidate the return),aff’d, 53 F.3d 799 (7th Cir. 1995). If thereis any doubt whether an addition or alter-ation to the jurat is intended to negate ordeny the jurat, the Service is “entitled toconstrue alterations of the jurat against thetaxpayer... .” Sloan v. Commissioner, 53F.3d 799, 800 (7th Cir. 1995).

There is no authority under any U.S.law that supports the position that individ-uals may avoid their income tax obliga-tions by striking or otherwise modifyingthe jurat in a manner that casts doubt onits validity. Moreover, tampering with theform of a tax return, including the jurat,substantially impedes the Service’s abilityto process and verify the return. Beardv. Commissioner, 82 T.C. 766, 776–777(1984), aff’d, 793 F.2d 139 (6th Cir. 1986).Courts routinely impose monetary penal-ties on taxpayers who cite constitutionaland other frivolous arguments as a basisfor striking or modifying the jurat. SeeBorgeson, 757 F.2d at 1073 (upholding im-position of frivolous return penalty undersection 6702); Trowbridge v. Commis-sioner, T.C. Memo. 2003–165, aff’d, 378F.3d 432 (5th Cir. 2004).

In Situation 1, taxpayer A rendered theForm 1040A void by crossing out the juratand writing “void” across it. In Situation 2,taxpayer B rendered the Form 1040A voidby adding language to the Form 1040Athat casts doubt on the validity of the jurat.This action represents a failure on the part

of taxpayer B to verify the accuracy andtruthfulness of the Form 1040A.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims ofindividuals who attempt to avoid or evadetheir federal tax liability. In addition to li-ability for the tax due plus statutory inter-est, taxpayers who fail to file valid returnsor pay tax based on an argument that theycan alter or amend the jurat on a returnface substantial civil and criminal penal-ties. Potentially applicable civil penaltiesinclude: (1) a $500 penalty imposed undersection 6702 when the taxpayer files a doc-ument that purports to be a return but thatcontains a frivolous position or suggests adesire by the taxpayer to delay or impedethe administration of Federal income taxlaws; (2) the section 6651 additions to taxfor failure to file a return, failure to pay thetax owed, and fraudulent failure to file areturn; and (3) a penalty of up to $25,000under section 6673 if the taxpayer makesfrivolous arguments in the United StatesTax Court.

Taxpayers relying on these frivolouspositions also may face criminal pros-ecution for: (1) attempting to evade ordefeat tax under section 7201, for whichthe penalty is a significant fine and impris-onment for up to 5 years; and (2) willfulfailure to file a return under section 7203,for which the penalty is a significant fineand imprisonment for up to a year.

Persons, including return preparers,who promote these frivolous positions andthose who assist taxpayers in claiming taxbenefits based on these frivolous positionsmay face civil and criminal penalties andalso may be enjoined by a court pursuant tosections 7407 and 7408. Potential penal-ties include: (1) a penalty under section6700 for promoting abusive tax shelters;(2) a $1,000 penalty under section 6701for aiding and abetting the understatementof tax; and (3) criminal prosecution undersection 7206, for which the penalty is afine of up to $100,000 and imprisonmentfor up to 3 years, for assisting or advisingabout the preparation of a false return orother document under the internal revenuelaws.

HOLDING

The law mandates that any return, dec-laration, statement, or other document re-

2005–14 I.R.B. 818 April 4, 2005

quired under the internal revenue laws andregulations contain a valid jurat. The claimthat taxpayers can reduce their federal taxliability by striking or amending the juraton a return, declaration, statement, or otherdocument is frivolous.


The principal author of this revenueruling is the Office of the Associate ChiefCounsel (Procedure and Administration),Administrative Provisions and JudicialPractice Division. For further informationregarding this revenue ruling, contact thatoffice at (202) 622–7950 (not a toll-freecall).

Section 6651.—Failure toFile Tax Return or to Pay Tax(Also Sections 6662, 6663, 6673, 6702, 7201, 7203,7206, and 7408.)

Frivolous tax returns; constitution-ally based arguments. This ruling em-phasizes to taxpayers and to promotersand return preparers that a taxpayer can-not avoid income tax by making frivolousconstitutionally based arguments.

Rev. Rul. 2005–19

PURPOSE

The Service is aware that some taxpay-ers are attempting to reduce their federaltax liability by claiming that the federal in-come tax is unlawful because it violatesone or more provisions of the United StatesConstitution, or that they have a constitu-tional right not to comply with the federaltax laws. The Service is also aware thatpromoters, including return preparers, areadvising or recommending that taxpayerstake frivolous positions based on these ar-guments. Some promoters market a pack-age, kit, or other materials that claim toshow taxpayers how they can avoid pay-ing income taxes based on these and othermeritless arguments.

This revenue ruling emphasizes to tax-payers and to promoters and return prepar-ers that a taxpayer cannot avoid income taxby making frivolous constitutionally basedarguments.

The Service is committed to identi-fying individuals who attempt to avoid

or evade their federal tax obligationsby taking frivolous positions, includingfrivolous constitutional positions. TheService will take vigorous enforcementaction against these taxpayers and againstpromoters and return preparers who assisttaxpayers in taking these frivolous posi-tions. Frivolous returns and other similardocuments submitted to the Service areprocessed through its Frivolous ReturnProgram. As part of this program, theService confirms whether taxpayers whotake frivolous positions have filed all oftheir required tax returns, computes thecorrect amount of tax and interest due,and determines whether civil and crimi-nal penalties should apply. The Servicealso determines whether civil or criminalpenalties should apply to return preparers,promoters, and others who assist tax-payers in taking frivolous positions, andrecommends whether a court injunctionshould be sought to halt these activities.Other information about frivolous tax po-sitions is available on the Service websiteat www.irs.gov.

ISSUES

1. Whether a taxpayer may refuse tofile a federal income tax return, or to payfederal income tax, based on claims thatthe federal income tax is unconstitutional?

2. Whether a taxpayer may refuse to filea federal income tax return based on theclaim that the requirement to do so violatesthe prohibition against self-incriminationcontained in the Fifth Amendment to theU.S. Constitution?

FACTS

1. Taxpayer A is a United States cit-izen who resides in state X. A attendedseminars on the federal tax system spon-sored by S, an attorney. S made claimsat these seminars that the federal incometax is unconstitutional because: (a) theSixteenth Amendment to the U.S. Consti-tution, which authorizes a federal incometax, was not properly ratified by the states;(b) the federal income tax violates thedue process clause of the Fifth Amend-ment to the U.S. Constitution; and (c)the payment of taxes is a form of invol-untary servitude or slavery prohibited bythe Thirteenth Amendment to the U.S.Constitution. Based on these constitu-

tionally-based positions promoted by S,A filed a Form W–4, Employee’s With-holding Allowance Certificate, with A’semployer that claimed excess exemp-tions so that little or no federal incometax would be withheld from A’s wagesin 2004. Taxpayer A earned $40,000 oftaxable income in 2004. Relying on theseconstitutionally-based positions promotedby S, A did not file a federal income taxreturn for 2004.

2. Taxpayer B is a United States citi-zen who earned $40,000 in taxable incomein 2004. On B’s 2004 Form 1040, federalincome tax return, B wrote “Fifth Amend-ment privilege” on each line and did notreport any taxable income for the year.

LAW AND ANALYSIS

The Sixteenth Amendment providesthat Congress shall have the power tolay and collect taxes on income, fromwhatever source derived, without appor-tionment among the several states andwithout regard to any census or enumer-ation. U.S. CONST. amend. XVI. TheUnited States Supreme Court has upheldthe constitutionality of the income taxlaws enacted subsequent to ratificationof the Sixteenth Amendment. See, e.g.,Brushaber v. Union Pac. R.R. Co., 240U.S. 1 (1916) (relying on the SixteenthAmendment in holding that the incometax provisions of the Tariff Act of 1913were not unconstitutional).

Promoters who claim that the federalincome tax is unconstitutional often makefrivolous arguments that there were de-fects in the ratification of the SixteenthAmendment by the states. There are anumber of variations on these frivolousarguments: (i) versions of the Amendmentratified by the states contained defects inspelling, punctuation, wording, or cap-italization; (ii) state legislatures did notfollow proper procedures in ratifying theamendment; (iii) state governors did notsign the amendment; (iv) one or moreof the states that ratified the Amend-ment was not legally a state; and (v) theAmendment does not contain an enablingclause. These arguments have no merit,and courts have consistently rejected allchallenges to the constitutionality of thefederal income tax following enactment ofthe Sixteenth Amendment. See Knoblauchv. Commissioner, 749 F.2d 200, 201 (5th

April 4, 2005 819 2005–14 I.R.B.

Cir. 1984) (“Every court that has con-sidered this argument has rejected it.”).Arguments to the contrary are frivolous.

The Fifth Amendment prevents thefederal government from taking propertywithout due process of law. U.S. CONST.amend. V. Due process generally includesa right to notice and an opportunity tobe heard. The Supreme Court has heldthat the procedures contained in the In-ternal Revenue Code fully satisfy the dueprocess rights of taxpayers. See Phillipsv. Commissioner, 283 U.S. 589, 595–99(1931) (“The right of the United Statesto collect its internal revenue by sum-mary administrative proceedings has longbeen settled. Where, as here, adequateopportunity is afforded for a later judicialdetermination of the legal rights, summaryproceedings to secure prompt performanceof pecuniary obligations to the governmenthave been consistently sustained.”). Theargument that due process requires a hear-ing before tax has to be paid or can bewithheld from wages is frivolous.

The federal income tax only requirespayment of taxes on a person’s income.It does not force a person to labor invol-untarily, or to labor at all. The ThirteenthAmendment prohibits slavery and invol-untary servitude, except as punishmentwhen convicted of a crime. U.S. CONST.amend. XIII. The Thirteenth Amendmentdoes not proscribe taxation. See Abneyv. Campbell, 206 F.2d 836, 841 (5thCir. 1953) (The specification, that the actviolates the Thirteenth Amendment byimposing involuntary servitude upon anemployer of domestic servants, seems tous far-fetched, indeed frivolous.”). More-over, a prison sentence for failing to file afederal income tax return is not prohibitedby the Thirteenth Amendment. See UnitedStates v. Drefke, 707 F.2d 978, 983 (8thCir. 1983) (“The Thirteenth Amendment,however, is inapplicable where involun-tary servitude is imposed as punishmentfor a crime.”). Failing to file a federalincome tax return or to pay federal in-come tax based on the argument that itwould constitute involuntary servitude isfrivolous.

The Fifth Amendment provides that ina criminal case a person may not be com-pelled to be a witness against himself. U.S.CONST. amend. V. This generally meansthat a person cannot be forced to answer aquestion if the answer will be used against

that person in a criminal prosecution.Courts have routinely held, however, thatthe Fifth Amendment provides no basisfor failing or refusing to file a tax return.United States v. Stillhammer, 706 F.2d1072, 1076–77 (10th Cir.1983) (“[T]heFifth Amendment does not serve as a de-fense for failing to make any tax return,and a return containing no informationbut a general objection based on the FifthAmendment does not constitute a returnas required by the Code.”). The remotepossibility that a taxpayer’s statement ona tax return might be used as evidence in afuture criminal prosecution will not relievea taxpayer from the obligation to file a taxreturn and properly report income and paytax due. See California v. Byers, 402 U.S.424, 427–29 (1971) (“[T]he remote pos-sibility of incrimination is insufficient todefeat strong policies of disclosure calledfor by” government regulatory scheme.).Additionally, involvement in illegal ac-tivities will not relieve a person of theduty to file a federal income tax returnbecause income earned from illegal activ-ities is subject to the federal income tax.United States v. Sullivan, 274 U.S. 259,263–64 (1927) (“It would be an extreme ifnot an extravagant application of the FifthAmendment to say that it authorized a manto refuse to state the amount of his incomebecause it had been made in crime.”).


In determining the correct amount oftax due, the Service will include incomethat taxpayers attempt to exclude based onfrivolous constitutional arguments. In ad-dition to liability for tax due plus statutoryinterest, individuals who claim tax benefitson their returns based on these and otherfrivolous arguments face substantial civiland criminal penalties. Potentially appli-cable civil penalties include: (1) the sec-tion 6651 additions to tax for failure tofile a return, failure to pay the tax owed,and fraudulent failure to file a return; (2)the section 6662 accuracy-related penalty,which is equal to 20 percent of the amountof taxes the taxpayer should have paid; (3)the section 6663 penalty for civil fraud,which is equal to 75 percent of the amountof taxes the taxpayer should have paid; (4)a $500 penalty under section 6702 for fil-ing a frivolous return; and (5) a penaltyof up to $25,000 under section 6673 if the

taxpayer makes frivolous arguments in theUnited States Tax Court.

Taxpayers relying on these positionsalso may face criminal prosecution for:(1) attempting to evade or defeat tax un-der section 7201, for which the penaltyis a significant fine and imprisonment forup to 5 years; (2) willful failure to makea return or pay tax under section 7203,for which the penalty is a significant fineand imprisonment of up to 1 year; or (3)making false statements on a return undersection 7206, for which the penalty is asignificant fine and imprisonment for upto 3 years.

Persons, including return preparers,who promote these frivolous positions andthose who assist taxpayers in claimingtax benefits based on these frivolous ar-guments may face penalties and may beenjoined by a court pursuant to sections7407 and 7408. Potential penalties in-clude: (1) a $250 penalty under section6694 for each return prepared by an in-come tax preparer who knew or shouldhave known that the taxpayer’s argumentwas frivolous (or $1,000 for each returnif the return preparer’s actions were will-ful, intentional or reckless); (2) a penaltyunder section 6700 for promoting abusivetax shelters; (3) a $1,000 penalty undersection 6701 for aiding and abetting theunderstatement of tax; and (4) criminalprosecution under section 7206, for whichthe penalty is a significant fine and impris-onment for up to 3 years for assisting oradvising about the preparation of a falsereturn or other document under the inter-nal revenue laws.

HOLDINGS

1. The Sixteenth Amendment to theU.S. Constitution was properly ratified andauthorizes the federal income tax. Filing afederal income tax return and paying fed-eral income tax does not constitute the tak-ing of property without due process of lawunder the Fifth Amendment to the U.S.Constitution. Filing a federal income taxreturn, paying federal income tax, and in-carceration for failure to comply with fed-eral income tax obligations is not involun-tary servitude or slavery prohibited by theThirteenth Amendment to the U.S. Con-stitution. Arguments to the contrary arefrivolous.

2005–14 I.R.B. 820 April 4, 2005

2. A taxpayer may not properly refuseto file a federal income tax return based onthe claim that the requirement to do so vi-olates the prohibition against self-incrimi-nation of the Fifth Amendment to the U.S.Constitution. Arguments to the contraryare frivolous.


This revenue ruling was drafted by theOffice of Associate Chief Counsel (Proce-dure and Administration), AdministrativeProvisions and Judicial Practice Division.For further information regarding this rev-enue ruling, contact that office at (202)622–7950 (not a toll-free call).

(Also Sections 6662–6664, 6702.)

Frivolous tax returns; protestinggovernment programs or policies. Thisruling emphasizes to taxpayers and topromoters and return preparers that lia-bility for federal taxes does not dependon whether the taxpayer agrees with thegovernment programs or policies that arefunded with tax receipts. Any argumentthat taxpayers may refuse to report incomeor claim deductions because they opposeparticular government programs or poli-cies is frivolous and has no merit.

Rev. Rul. 2005–20

PURPOSE

The Service is aware that some taxpay-ers are attempting to reduce or eliminatetheir federal tax liability by taking the po-sition that they are not required to paytaxes if those taxes might be used to sup-port government programs or policies withwhich they disagree. Common examplesinclude moral, ethical, or religious opposi-tion to government spending for weaponsprograms, military operations, or medicalresearch. The Service is also aware thatpromoters, including return preparers, areadvising or recommending that taxpayerstake frivolous positions based on these ar-guments. Some promoters market a pack-age, kit, or other materials that claim toshow taxpayers how they can avoid payingtaxes based on these and other meritless ar-guments.

This revenue ruling emphasizes to tax-payers and to promoters and return pre-

parers that liability for federal taxes doesnot depend on whether the taxpayer agreeswith the government programs or policiesthat are funded with tax receipts. Any ar-gument that taxpayers may refuse to reportincome or claim deductions because theyoppose particular government programs orpolicies is frivolous and has no merit.

The Service is committed to identify-ing taxpayers who attempt to avoid theirtax obligations by taking frivolous posi-tions, including frivolous positions basedon opposition to government programs orpolicies. The Service will take vigorousenforcement action against these taxpayersand against promoters and return prepar-ers who assist taxpayers in taking thesefrivolous positions. Frivolous returnsand other similar documents submittedto the Service are processed through itsFrivolous Return Program. As part of thisprogram, the Service confirms whethertaxpayers who take frivolous positionshave filed all of their required tax re-turns, computes the correct amount of taxand interest due, and determines whethercivil and criminal penalties should ap-ply. The Service also determines whethercivil or criminal penalties should applyto return preparers, promoters, and otherswho assist taxpayers in taking frivolouspositions, and recommends whether acourt injunction should be sought to haltthese activities. Other information aboutfrivolous tax positions is available on theService website at www.irs.gov.

ISSUE

Whether a taxpayer’s disagreementwith government programs or policies onmoral, ethical, religious or other groundsallows the taxpayer to refuse to file federaltax returns or to refuse to pay part or all ofthe taxpayer’s federal tax liability?

LAW AND ANALYSIS

Section 1 of the Internal Revenue Codeimposes a tax on all taxable income. Thereis no authority under the Internal RevenueCode or any other applicable law that al-lows taxpayers to refuse to file tax returnsbecause they do not agree with govern-ment programs or policies. Further, it iswell settled that deductions and credits area matter of legislative grace and are not al-lowed unless specifically provided for in

the Internal Revenue Code. INDOPCO,Inc. v. Commissioner, 503 U.S. 79, 84(1992). There is no provision in the Inter-nal Revenue Code that permits taxpayersto file returns claiming deductions or cred-its that reduce their taxable income by thepercentage they estimate the governmentspends on programs or policies with whichthey disagree.

These frivolous positions are variationsof arguments taxpayers have made aboutreligion and taxation that have been re-peatedly rejected by the courts. In UnitedStates v. Lee, 455 U.S. 252 (1982), a mem-ber of a religious denomination claimedthat the payment of social security taxesviolated his First Amendment right to freeexercise of religion. The United StatesSupreme Court rejected this argument,stating that “the tax system could notfunction if denominations were allowedto challenge the tax system because taxpayments were spent in a manner that vi-olates their religious belief.” Id. at 260.The Court held that religious or moral be-liefs that conflict with the payment of taxprovide no basis for resisting the tax. Id.

Courts repeatedly have rejected theseand similar arguments that a taxpayer’sreligious or moral beliefs permit theavoidance of federal taxes, and haveimposed penalties against taxpayers whomake these arguments. See Schehl v.Commissioner, 855 F.2d 364, 367 (6th

Cir. 1988) (“Alleged vocal opposition totaxes for a particular reason, and refusalto pay taxes, even if all assertions weretaken as true . . . are simply not a basisto challenge an assessment of taxes.”);Nelson v. United States, 796 F.2d 164 (6th

Cir. 1986) (upholding the applicabilityand constitutionality of a frivolous returnpenalty imposed against a taxpayer whoclaimed a deduction based on religiousobjection to war expenditures); Randallv. Commissioner, 733 F.2d 1565, 1567(11th Cir. 1984) (“[A]rguments involvingobjections to the Government’s militaryexpenditures as a basis for non-payment oftaxes have been raised by taxpayers manytimes, and in each instance the courts haverejected them.”).


The Service will disallow deductions orother claimed tax benefits, including theexclusion of income, based on frivolous ar-

April 4, 2005 821 2005–14 I.R.B.

guments regarding opposition to govern-ment programs or expenditures. In addi-tion to liability for tax due plus statutoryinterest, individuals who claim tax ben-efits on their returns based on these andother frivolous arguments may face sub-stantial civil and criminal penalties. Poten-tially applicable civil penalties include: (1)the section 6662 accuracy-related penalty,which is equal to 20 percent of the amountof taxes the taxpayer should have paid; (2)the section 6663 penalty for civil fraud,which is equal to 75 percent of the amountof taxes the taxpayer should have paid; (3)a $500 penalty under section 6702 for fil-ing a frivolous return; and (4) a penaltyof up to $25,000 under section 6673 if thetaxpayer makes frivolous arguments in theUnited States Tax Court.

Taxpayers relying on these frivolouspositions also may face criminal prosecu-tion for: (1) attempting to evade or defeattax under section 7201, for which thepenalty is a significant fine and imprison-ment for up to 5 years; or (2) making falsestatements on a return under section 7206,for which the penalty is a significant fineand imprisonment for up to 3 years.

Persons who promote these frivolouspositions and those who assist taxpayers inclaiming tax benefits based on these posi-tions may be enjoined by a court pursuantto sections 7407 and 7408 and also mayface potential civil and criminal penalties.Potential penalties include: (1) a $250penalty under section 6694 for each returnprepared by an income tax return preparerwho knew or should have known that thetaxpayer’s argument was frivolous (or$1,000 for each return if the return pre-parer’s actions were willful, intentional,or reckless); (2) a penalty under section6700 for promoting abusive tax shelters;(3) a $1,000 penalty under section 6701for aiding and abetting the understatementof tax; and (4) criminal prosecution undersection 7206, for which the penalty is asignificant fine and imprisonment for upto 3 years, for assisting or advising aboutthe preparation of a false return or otherdocument under the internal revenue laws.

HOLDING

Taxpayers may not refuse to file taxreturns and may not claim deductions orcredits on their tax returns based on theiropposition to government programs or

policies. Any claim that individuals mayreduce their federal tax liability based onobjections to the use of the taxes to sup-port government programs or policies isfrivolous and has no merit.


The principal author of this revenueruling is the Office of the Associate ChiefCounsel (Procedure & Administration)Administrative Provisions and JudicialPractice Division. For further informationregarding this revenue ruling, contact thatoffice at (202) 622–7950 (not a toll-freecall).

Section 6662.—Impositionof Accuracy-RelatedPenalty on Underpayments(Also Section 6664.)

Frivolous tax returns; use of “strawman” to avoid tax. This ruling empha-sizes to taxpayers and to promoters and re-turn preparers that a taxpayer cannot avoidincome tax on the erroneous theory thatthe government has created a separate anddistinct entity or “straw man,” in place ofthe taxpayer and that the taxpayer is notresponsible for the tax obligations of the“straw man”. This argument has no meritand is frivolous.

Rev. Rul. 2005–21

PURPOSE

The Service is aware that some taxpay-ers are attempting to reduce their federaltax liability by taking the incorrect posi-tion that their incomes are not subject totax based on a theory that the governmenthas created a separate and distinct entity, or“straw man,” in place of the taxpayer andthat the taxpayer is not responsible for thetax obligations of the “straw man.” Somepromoters market a package, kit, or othermaterials that claim to show taxpayers howthey can avoid paying income taxes basedon these and other meritless arguments.

This revenue ruling emphasizes to tax-payers and to promoters and return prepar-ers that a taxpayer cannot avoid income taxon the erroneous theory that the govern-ment has created a “straw man.” This ar-gument has no merit and is frivolous.

The Service is committed to identify-ing taxpayers who attempt to avoid theirtax obligations by taking frivolous posi-tions, including frivolous positions basedon meritless “straw man” or similar ar-guments. The Service will take vigorousenforcement action against these taxpayersand against promoters and return prepar-ers who assist taxpayers in taking thesefrivolous positions. Frivolous returnsand other similar documents submittedto the Service are processed through itsFrivolous Return Program. As part of thisprogram, the Service confirms whethertaxpayers who take frivolous positionshave filed all of their required tax re-turns, computes the correct amount of taxand interest due, and determines whethercivil and criminal penalties should ap-ply. The Service also determines whethercivil or criminal penalties should applyto return preparers, promoters, and otherswho assist taxpayers in taking frivolouspositions, and recommends whether acourt injunction should be sought to haltthese activities. Other information aboutfrivolous tax positions is available on theService website at www.irs.gov.

ISSUE

Whether the government’s use of dif-ferent forms of a taxpayer’s name (e.g.,different capitalization formats, spellings)creates a “straw man,” which is a separateand distinct legal entity from the taxpayerto allow the taxpayer to avoid federal taxobligations?

DISCUSSION OF THE “STRAW MAN”CLAIM

The “straw man” claim is premised onthe erroneous theory that most governmentdocuments do not actually refer to indi-viduals. Users of the “straw man” the-ory falsely claim that only documents us-ing an individual’s name with “standard”capitalization, i.e., lower-case with onlythe beginning letters of each name cap-italized, are legitimate. These individu-als erroneously argue that the use of theindividual’s name in all upper-case let-ters, which is common in some govern-ment documents, refers to a separate le-gal entity, called a “straw man.” These in-dividuals also erroneously argue that, asa result of the creation of a “straw man,”

2005–14 I.R.B. 822 April 4, 2005

they are not liable for the debts, includ-ing the tax debts, of their “straw man,”that taxing the “straw man” is illegal be-cause the “straw man” is a debt instrumentbased upon the labor of a real person andis, therefore, a form of slavery, or that notax is owed by the real individual becauseit can be satisfied, or offset, by money ina “Treasury Direct Account” held in thename of the “straw man.”

All individuals are subject to the provi-sions of the Internal Revenue Code. Sec-tion 1 imposes a tax on all taxable income.Section 61 provides that gross income in-cludes all income from whatever sourcederived, including compensation for ser-vices. Adjustments to income, deductions,and credits must be claimed in accordancewith the provisions of the Internal RevenueCode, the accompanying Treasury regu-lations, and other applicable federal law.Section 6011 provides that any person li-able for any tax imposed by the InternalRevenue Code shall make a return whenrequired by Treasury regulations, and thatreturns must be filed in accordance withTreasury regulations and IRS forms. Sec-tion 6012 identifies the persons who are re-quired to file income tax returns. Section6151 requires that taxpayers pay their taxwhen the return is due. Section 6311 re-quires payment of taxes by commerciallyacceptable means as prescribed by Trea-sury regulations.

There is no authority under the Inter-nal Revenue Code or any other applica-ble law that supports the claim that taxpay-ers may avoid their federal tax obligationsbased on “straw man” arguments, as de-scribed in this revenue ruling, or on similararguments. The formatting of a taxpayer’sname in all upper-case letters on govern-ment documents or elsewhere has no sig-nificance whatsoever for federal tax pur-poses. Courts have rejected as frivolous“straw man” arguments. United Statesv. Furman, 168 F.Supp.2d 609 (E.D. La.2001) (rejecting criminal defendant’s con-tention that he was not properly identi-fied in federal government documents thatmisspelled his name or used his properlyspelled name in all capital letters). In addi-tion, courts repeatedly have rejected sim-ilar arguments based on frivolous claimsthat purport to provide a basis for avoid-ing taxes, and have penalized taxpayerswho have made these arguments. See, e.g.,Lovell v. United States, 755 F.2d 517, 519

(7th Cir. 1984) (“[A]ll individuals, natu-ral or unnatural, must pay federal incometax on their wages . . ..”); United Statesv. Romero, 640 F.2d 1014, 1017 (9th Cir.1981) (“[I]n our system of government,one is free to speak out in open oppositionto the provisions of the tax laws, but suchopposition does not relieve a citizen of hisobligation to pay taxes.”).


The Service will challenge the claims ofindividuals who attempt to avoid or evadetheir federal tax liability by refusing to filereturns and pay tax, and will disallow de-ductions or other claimed tax benefits, in-cluding the exclusion of income, based onfrivolous “straw man” arguments. In addi-tion to liability for the tax due plus statu-tory interest, individuals who claim taxbenefits on their returns, or fail to file re-turns, based on these and other frivolousarguments face substantial civil and crim-inal penalties. Potentially applicable civilpenalties include: (1) the section 6651 ad-ditions to tax for failure to file a return,failure to pay the tax owed, and fraudu-lent failure to file a return; (2) the sec-tion 6662 accuracy-related penalty, whichis equal to 20 percent of the amount oftaxes the taxpayer should have paid; (3) thesection 6663 penalty for civil fraud, whichis equal to 75 percent of the amount oftaxes the taxpayer should have paid; (4) a$500 penalty under section 6702 for filinga frivolous return; and (5) a penalty of up to$25,000 under section 6673 if the taxpayermakes frivolous arguments in the UnitedStates Tax Court.

Taxpayers relying on these theories alsomay face criminal prosecution for: (1) at-tempting to evade or defeat tax under sec-tion 7201, for which there is a significantfine and imprisonment for up to 5 years;(2) willful failure to file a return under sec-tion 7203, for which there is a significantfine and imprisonment for up to one year;or (3) making false statements on a return,statement, or other document under section7206, for which there is a significant fineand imprisonment for up to 3 years.

Persons, including return preparers,who promote these theories and those whoassist taxpayers in claiming tax benefitsbased on these frivolous arguments mayface penalties and also may be enjoinedby courts pursuant to sections 7407 and

7408. Potential penalties include: (1) a$250 penalty under section 6694 for eachreturn or claim for refund prepared by anincome tax return preparer who knew orshould have known that the taxpayer’s ar-gument was frivolous (or $1,000 for eachreturn or claim for refund if the return pre-parer’s actions were willful, intentionalor reckless); (2) a penalty under section6700 for promoting abusive tax shelters;(3) a $1,000 penalty under section 6701for aiding and abetting the understatementof tax; and (4) criminal prosecution undersection 7206, for which there is a signif-icant fine and imprisonment for up to 3years for assisting or advising about thepreparation of a false return, statement orother document under the internal revenuelaws.

HOLDING

The use of different forms of a tax-payer’s name (different spellings, capital-ization, etc.) does not create a “strawman” that allows taxpayers to avoid theirfederal tax obligations. Claims based on“straw man” arguments or on similar argu-ments, to avoid federal tax obligations, arefrivolous and have no merit.


The author of this ruling is the Officeof Associate Chief Counsel (Procedureand Administration), Administrative Pro-visions and Judicial Practice Division. Forfurther information regarding this ruling,contact that office at (202) 622–7950 (nota toll-free call).

Section 6673.—Sanctionsand Costs Awarded byCourts

(Also Sections 6662, 6663, and 6702.)

Frivolous tax returns; Social Securityrefund. This ruling emphasizes to taxpay-ers and to promoters and return preparersthat there is no right to a refund of, or adeduction for, Social Security taxes paidbased on arguments that a taxpayer haswaived the right to receive Social Secu-rity benefits or has donated Social Securitytaxes or benefits to the government. Thesearguments have no merit and are frivolous.

April 4, 2005 823 2005–14 I.R.B.

Rev. Rul. 2005–17

PURPOSE

The Service is aware that some taxpay-ers are filing claims for refund of the So-cial Security taxes paid on wages pursuantto the Federal Insurance Contributions Act(FICA) on the basis that they have waivedtheir right to receive Social Security ben-efits. The Service also is aware that sometaxpayers are attempting to reduce or elim-inate their federal tax liability by takingsimilar frivolous return positions, includ-ing reporting as a charitable contributiondeduction the amount of Social Securitytaxes paid, on the basis that they are do-nating these amounts to the government.Some promoters market a package, kit, orother materials, that claim to show taxpay-ers how they can obtain a refund or avoidpaying income taxes based on these andother meritless arguments. This revenueruling does not apply to individuals whohave satisfied the requirements of the re-ligious exemption from FICA provided insection 3127 of the Internal Revenue Code.

This revenue ruling emphasizes to tax-payers and to promoters and return prepar-ers that there is no right to a refund of, ora deduction for, Social Security taxes paidbased on arguments that a taxpayer haswaived the right to receive Social Secu-rity benefits or has donated Social Securitytaxes or benefits to the government. Thesearguments have no merit and are frivolous.

The Service is committed to identi-fying taxpayers who attempt to avoidtheir tax obligations by taking frivolouspositions, including frivolous positionsbased on arguments regarding waiver ofSocial Security benefits. The Servicewill take vigorous enforcement actionagainst these taxpayers and against pro-moters and return preparers who assisttaxpayers in taking these frivolous posi-tions. Frivolous returns and other similardocuments submitted to the Service areprocessed through its Frivolous ReturnProgram. As part of this program, theService confirms whether taxpayers whotake frivolous positions have filed all oftheir required tax returns, computes thecorrect amount of tax and interest due,and determines whether civil and crimi-nal penalties should apply. The Servicealso determines whether civil or criminalpenalties should apply to return preparers,

promoters, and others who assist taxpayersin taking frivolous positions, and recom-mends whether a court injunction shouldbe sought to halt these activities. Otherinformation about frivolous tax positionsis available on the Service’s website atwww.irs.gov.

ISSUES

1. Whether taxpayers are entitled to arefund of Social Security taxes paid on thetheory that they have waived the right toreceive Social Security benefits?

2. Whether taxpayers are entitled to acharitable contribution deduction for So-cial Security taxes paid on the theory thatthose amounts have been donated by themto the government?

FACTS

This plan includes claims for refund ofSocial Security taxes paid on wages underFICA, on the theory that the taxpayer haswaived the right to receive Social Secu-rity benefits. Additionally, some taxpayersclaim a charitable contribution deductionon the theory that they have donated theirSocial Security taxes, or their right to re-ceive Social Security benefits, to the gov-ernment.

LAW AND ANALYSIS

Social Security taxes are imposed onwages as defined in section 3121. Thereis no authority under the Internal RevenueCode (other than the narrow exception tothe application of FICA tax provided in thereligious exemption under section 3127)or any other applicable law that supportsthe claim that taxpayers may waive theirright to receive Social Security benefitsand thereby receive a refund of Social Se-curity taxes paid. Similarly, there is noprovision of law that would allow a tax-payer to claim a charitable contribution de-duction as a result of the donation or gift tothe government of the taxpayer’s right toreceive Social Security benefits or of So-cial Security taxes paid.

In Crouch v. Commissioner, T.C.Memo. 1990–309, the taxpayers did notpay self-employment tax based on a claimthat they had withdrawn from the So-cial Security system. The taxpayers alsoclaimed a charitable contribution deduc-tion based on a purported lump-sum gift

to the government of Social Security ben-efits. The Tax Court rejected these posi-tions, characterizing the taxpayers’ failureto pay self-employment tax as negligentand sustaining the Service’s disallowanceof the charitable contribution deduction.See also Derksen v. Commissioner, 84T.C. 355, 360 (1985) (“There are somespecific exemptions from the [social secu-rity] tax but the desire not to be a part ofthe social security system, standing alone,is not one of them.”)

A refund claim must be based on a validargument that the taxpayer has overpaidthe tax that is lawfully due and owing. See,e.g., Lewis v. Reynolds, 284 U.S. 281, 283(1932) (“[T]he taxpayer is not entitled toa refund unless he has overpaid his tax.”).Further, it is a well settled principle of lawthat deductions and credits are a matterof legislative grace. See INDOPCO, Inc.v. Commissioner, 503 U.S. 79, 84 (1992);New Colonial Ice Co. v. Helvering, 292U.S. 435, 440 (1934). Unless specificallyprovided for in the Internal Revenue Code,no deduction or credit is allowed. Nei-ther section 3121, nor any other provisionof the Internal Revenue Code, allows fora refund of Social Security taxes paid onthe grounds that a taxpayer has purportedlywaived all rights to receive Social Secu-rity benefits. Similarly, no provision of theInternal Revenue Code allows for a chari-table contribution deduction based on thepurported gift or donation of Social Secu-rity taxes or benefits to the government.


The Service will disallow any claim forrefund of Social Security taxes based onthe frivolous argument that a taxpayer haswaived the right to receive Social Securitybenefits. The Service will also disallowany deduction that is based on the theorythat a taxpayer has given or donated thetaxpayer’s Social Security taxes or SocialSecurity benefits to the government. In ad-dition to liability for tax due plus statutoryinterest, individuals who claim tax benefitson their returns based on these and sim-ilar frivolous arguments face substantialcivil and criminal penalties. Potentiallyapplicable civil penalties include, but arenot limited to the following: (1) the sec-tion 6662 accuracy-related penalty, whichis equal to 20 percent of the amount oftaxes the taxpayer should have paid; (2)

2005–14 I.R.B. 824 April 4, 2005

the section 6663 penalty for civil fraud,which is equal to 75 percent of the amountof taxes the taxpayer should have paid; (3)a $500 penalty under section 6702 for fil-ing a frivolous income tax return; and (4)a penalty of up to $25,000 under section6673 if the taxpayer makes frivolous argu-ments in the United States Tax Court.

Taxpayers relying on these frivolouspositions also may face criminal pros-ecution for: (1) attempting to evade ordefeat tax under section 7201, for whichthe penalty is a significant fine and impris-onment for up to 5 years; or (2) makingfalse statements on a return, statement, orother document under section 7206, forwhich the penalty is a significant fine andimprisonment for up to 3 years.

Persons, including return preparers,who promote these frivolous positions andthose who assist taxpayers in claiming taxbenefits based on these frivolous positionsalso may face penalties and may be en-joined by a court pursuant to sections 7407

and 7408. Potential penalties include: (1)a $250 penalty under section 6694 for eachreturn or claim for refund prepared by anincome tax return preparer who knew orshould have known that the taxpayer’sposition was frivolous (or $1,000 for eachreturn or claim for refund if the return pre-parer’s actions were willful, intentionalor reckless); (2) a penalty under section6700 for promoting abusive tax shelters;(3) a $1,000 penalty under section 6701for aiding and abetting the understatementof tax; and (4) criminal prosecution undersection 7206, for which the penalty is asignificant fine and imprisonment for up to3 years for assisting or advising about thepreparation of a false return, statement, orother document under the internal revenuelaws.

HOLDING

Taxpayers are not entitled to a refundof the Social Security taxes paid based on

the position that they have waived the rightto receive Social Security benefits. More-over, a taxpayer is not entitled to a chari-table contribution deduction based on thepurported gift or donation of Social Secu-rity taxes or benefits to the government.Claims or deductions based on these posi-tions are frivolous and have no merit.


This revenue ruling was authored by theOffice of Associate Chief Counsel (Proce-dure and Administration), AdministrativeProvisions and Judicial Practice Division.For further information regarding this rev-enue ruling, contact that office at (202)622–7950 (not a toll-free call).

April 4, 2005 825 2005–14 I.R.B.

Part II. Treaties and Tax LegislationSubpart A.—Tax Conventions and Other Related Items

Austrian Scholarship MAPAgreement

Announcement 2005–22

Following is a copy of the News Re-lease issued by the Director, International(U.S. Competent Authority) on March 1,2005 (IR–2005–20).

U.S. and Austria Agree on TaxTreatment of Certain Scholarships

IR–2005–20, March 1, 2005WASHINGTON — The Competent Au-thorities of Austria and the United Stateshave reached a mutual agreement on thetaxation of certain scholarships under Arti-cle 20 (Students and Trainees) and Article

21 (Other Income) of the U.S.-Austria in-come tax treaty.

The agreement constitutes a MutualAgreement in accordance with the In-come Tax Treaty Between Austria and theUnited States. The Treaty entered intoforce on Feb. 1, 1998.

The text of the Agreement is as follows:

COMPETENT AUTHORITY AGREEMENT

The Competent Authorities of Austria and the United States enter into the following agreement (“Agreement”) concerning theinterpretation of Articles 20, 21 and 23 of the Convention Between the Republic of Austria and the United States of America forthe Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income Taxes, signed May 31, 1996. TheAgreement is entered into under Article 24 (Mutual Agreement Procedure). For the purposes of this Agreement, “Article” refersto an Article of the Treaty.

It is agreed that the exemption described in Article 20 (Students and Trainees) does not apply to payments for maintenance,education or training received by a student who is, or was immediately before visiting the United States, a resident of Austria, andwho is present in the United States for the purpose of full-time education at a recognized education institution, if such scholarshipis paid out of U.S. sources, e.g. in the case where the payer of income is a U.S. foundation. Accordingly, such a scholarshippayment is taxable according to the domestic tax laws of the United States and Austria.

In any case, pursuant to Article 23 (Non-Discrimination), Austrian students shall not be subjected in the United States toany taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connectedrequirements to which U.S. nationals in the same circumstances are or may be subjected. This principle would mutatis mutandisapply in the reciprocal situation of a U.S. student subject to tax in Austria according to the general rules of Articles 20 and 23.

Furthermore it is understood that a scholarship granted for the purposes of postgraduate research derived by a student, who ispresent in the other Contracting State only for research purposes, and not for the purposes of full-time education at a recognizededucational institution nor for full-time training, is not covered by Article 20 (Students and Trainees). The taxable treatment ofsuch payments would be governed by the rules of Article 21 (Other Income) and thus taxable solely by the State of residence.

Robert H. GreenDirector, International (LMSB)Internal Revenue ServiceU.S. Department of the Treasury

Dr. Heinz JirousekDeputy Head, International Tax Affairs DivisionFederal Ministry of Finance

Date Date

2005–14 I.R.B. 826 April 4, 2005

Part III. Administrative, Procedural, and MiscellaneousPublic Comment Invitedon Recommendations for2005–2006 Guidance PriorityList

Notice 2005–25

The Department of Treasury and Inter-nal Revenue Service invite public com-ment on recommendations for items thatshould be included on the 2005–2006Guidance Priority List.

Treasury’s Office of Tax Policy and theService use the Guidance Priority List eachyear to identify and prioritize the tax is-sues that should be addressed through reg-ulations, revenue rulings, revenue proce-dures, notices, and other published admin-istrative guidance. The 2005–2006 Guid-ance Priority List will establish the guid-ance that the Treasury Department and theService intend to issue from July 1, 2005,through June 30, 2006. The Treasury De-partment and the Service recognize theimportance of public input to formulatea Guidance Priority List that focuses re-sources on guidance items that are mostimportant to taxpayers and tax administra-tion.

As is the case whenever significant leg-islation is enacted, the Treasury Depart-ment and the Service have dedicated sub-stantial resources to published guidanceprojects necessary to implement the provi-sions in the American Jobs Creation Actof 2004, Pub. L. No. 108–357, 118 Stat.1418 (“AJCA”), enacted on October 22,2004. As a consequence, new guidanceprojects were added to the Guidance Pri-ority List, as updated on December 21,2004. The Treasury Department and theService will continue to evaluate the prior-ity of each guidance project in light of theAJCA and other developments during the2005–2006 plan year.

In reviewing recommendations andselecting projects for inclusion on the2005–2006 Guidance Priority List, theTreasury Department and the Service willconsider the following:

1. Whether the recommended guid-ance resolves significant issues relevant tomany taxpayers;

2. Whether the recommended guidancepromotes sound tax administration;

3. Whether the recommended guidancecan be drafted in a manner so that tax-payers can easily understand and apply theguidance;

4. Whether the Service can administerthe recommended guidance on a uniformbasis; and

5. Whether the recommended guidancereduces controversy and lessens the bur-den on taxpayers or the Service.

Taxpayers may submit recommenda-tions for guidance at any time during theyear. Please submit recommendations byApril 30, 2005, for possible inclusion onthe original 2005–2006 Guidance Prior-ity List. The Service plans to update the2005–2006 Guidance Priority List period-ically to reflect additional guidance thatthe Treasury Department and the Serviceintend to publish during the plan year.The periodic updates allow the TreasuryDepartment and the Service to respond tothe need for additional guidance that mayarise during the plan year. Recommenda-tions for guidance received after April 30,2005, will be reviewed for inclusion in thenext periodic update.

Taxpayers are not required to submitrecommendations for guidance in any par-ticular format. Taxpayers should, how-ever, briefly describe the recommendedguidance and explain the need for the guid-ance. In addition, taxpayers may includean analysis of how the issue should be re-solved. It would be helpful if taxpayerssuggesting more than one guidance projectwould prioritize the projects by order ofimportance. If a large number of projectsare being suggested, it would be helpful ifthe projects were grouped in terms of high,medium or low priority.

Taxpayers should send written com-ments to:

Internal Revenue ServiceAttn: CC:PA:LPD:PR(Notice 2005–25)Room 5203P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

or hand deliver comments Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to:

Courier’s DeskInternal Revenue ServiceAttn: CC:PA:LPD:PR(Notice 2005–25)1111 Constitution Avenue, N.W.Washington, D.C. 20224

Alternatively, taxpayers may sub-mit comments electronically viae-mail to the following address:[email protected] should include “Notice2005–25” in the subject line. All com-ments will be available for public inspec-tion and copying in their entirety.

For further information regarding thisnotice, contact Crystal Foster of the Officeof Associate Chief Counsel (Procedureand Administration) at (202) 622–7326(not a toll-free call).

Frivolous Arguments to AvoidWhen Filing a Return or Claimfor Refund

Notice 2005–30

SECTION 1. INTRODUCTION.

As April 15 approaches, taxpayers arereminded to steer clear of abusive tax-avoidance schemes that purportedly allowthem to reduce or eliminate taxes. If anidea to save on taxes seems too good to betrue, it probably is.

Many abusive tax-avoidance schemesare based on frivolous arguments that theService and the courts have repeatedlyrejected. These schemes are often sold bypromoters for a substantial fee, and maybe sold over the Internet, through adver-tisements in newspapers and magazines,at conferences and seminars (includingconferences for professional groups suchas doctors or dentists), and through rec-ommendations of friends or acquaintanceswho have learned about these schemes.

Section 2 of this notice sets out some ofthe most common frivolous argumentsused by these abusive tax-avoidanceschemes. The Service is committed toidentifying taxpayers who attempt to avoidtheir tax obligations by using schemesbased on these and other frivolous ar-guments. Frivolous returns and other

April 4, 2005 827 2005–14 I.R.B.

documents submitted to the Service areprocessed through its Frivolous ReturnProgram. The Service also reviews otherdocuments that make frivolous argumentsto determine whether the individuals whosubmit these documents have filed re-quired tax returns and paid all taxes duefor previous years.

Section 3 of this notice identifies poten-tial civil and criminal penalties. Taxpay-ers who engage in abusive tax-avoidanceschemes will be liable for unpaid taxes andinterest. In addition, the Service will im-pose civil and criminal penalties againsttaxpayers where appropriate. The Servicealso will determine appropriate penaltiesand consider taking other appropriate ac-tion against persons who promote theseschemes and who prepare frivolous returnsbased on those schemes.

SECTION 2. COMMON FRIVOLOUSARGUMENTS.

This section sets out some of the mostcommon frivolous arguments used by tax-payers to avoid or evade tax.

• “A taxpayer can avoid tax by filinga return that reports zero income andzero tax liability.” All taxpayers whoreceive more than the statutory min-imum amount of gross income, fromwhatever source derived, must file re-turns and pay tax. No law, includingthe Internal Revenue Code, permits ataxpayer who has received wages orother income to file a return with zeroincome and zero tax liability. If a tax-payer has received income subject tofederal tax, a return showing only ze-roes for income and tax liability is nota valid return. Further, inclusion of thephrase “nunc pro tunc” or other legaljargon on an income tax return doesnot serve to validate an otherwise im-proper return.

• “A taxpayer may avoid income taxby referring to a separate ‘straw man’entity created by the use of the tax-payer’s name in all capital letters ingovernment documents.” No author-ity supports the claim that individu-als may avoid their federal income taxobligations based on “straw man” ar-guments. The use of all uppercaseletters when including an individual’s

name in government documents has nosignificance whatsoever.

• “Wages are not taxable income, pur-suant to section 1001, because tax-payers have basis in their labor equalto the fair market value of the wagesthey receive; thus, there is no gain tobe taxed.” All compensation received,no matter what the form of payment,must be included in gross income un-der section 61. This includes salary orwages paid in cash, as well as the valueof property and other economic bene-fits received from services performedor to be performed in the future. Sec-tion 1001 governs gain or loss on thedisposition of property, and has no ap-plication to compensation for services.

• “The 16th Amendment is invalidbecause it contradicts the originalConstitution, was not properly rati-fied, and lacks an enabling clause.”The Sixteenth Amendment to the U.S.Constitution, which authorizes the in-come tax, was properly ratified by thestates and is valid. Further, the argu-ment that the Sixteenth Amendment isinvalid due to the lack of an enablingclause is without merit because Con-gress has the power to lay and collecttaxes pursuant to Article 1, Section 8,Clause 18 of the Constitution.

• “A taxpayer can make a ‘claim ofright’ to exclude the cost of his laborfrom income.” There is no “claim ofright” doctrine under any federal law,including the Internal Revenue Code,that permits a taxpayer to deduct orexclude from gross income the value ofhis labor.

• “Only income from a foreign sourceis taxable under section 861.” Sec-tions 861 through 865 do not excludeincome from taxable income. In par-ticular, nothing in these sections orthe Treasury regulations provides thatonly income earned from certain for-eign sources is subject to U.S. tax.

• “I am not a ‘citizen’ or a ‘person’within the meaning of the InternalRevenue Code.” A citizen of any oneof the 50 States (e.g., New York, Cal-ifornia) of the United States or of the

District of Columbia is also a citizen ofthe United States and is subject to fed-eral tax.

• “Residents of States, such as NewYork or California, are residents ofa foreign country and therefore notsubject to U.S. income tax.” Underits specific conditions and limitations,section 911 permits a taxpayer to electto exclude income from U.S. taxableincome only when the taxpayer earnsincome abroad and resides outside thegeographic boundaries of the UnitedStates. For purposes of section 911,States (e.g., New York or Califor-nia), the District of Columbia, andCommonwealths and Territories of theUnited States (e.g., Johnston Atoll) arenot foreign countries.

• “A taxpayer can escape income taxby putting assets in an offshore bankaccount.” A citizen or resident of theUnited States cannot use an offshore fi-nancial arrangement (such as a foreignbank or brokerage account, or a creditcard issued by a foreign bank) to avoidhis federal tax obligations. Taxpayersare required to disclose foreign finan-cial accounts to the Treasury Depart-ment and may face civil and criminalpenalties if they fail to do so.

• “A taxpayer can eliminate tax byestablishing a ‘corporation sole.’” Ataxpayer cannot avoid income tax byestablishing a “corporation sole.” Acorporation sole may be used only bya legitimate religious leader for spe-cific, limited purposes relating to thereligious leader’s office.

• “A taxpayer can place all of his as-sets in a trust to escape income taxwhile still retaining control over thoseassets.” A taxpayer who places assetsin a trust but retains certain powers orinterests over the assets, including thepower to control the beneficial enjoy-ment of the assets, is treated as theowner of the assets for federal tax pur-poses and is subject to tax on the in-come from those assets.

• “A taxpayer can deduct amountspaid to maintain his household by es-tablishing a home business.” Business

2005–14 I.R.B. 828 April 4, 2005

expenses, including expenses relatedto a home-based business, are not de-ductible unless the expenses relate to alegitimate profit-seeking trade or busi-ness. Promoters of home-based busi-ness schemes improperly encouragetaxpayers to claim household expensesas business expense deductions whenthe purported home-based business isnot a legitimate trade or business.

• “Nothing in the Internal RevenueCode imposes a requirement to filea return.” Section 6011 expressly au-thorizes the Service to require, byTreasury regulation, the filing of taxreturns. Section 6012 identifies per-sons who are required to file incometax returns. Under Treasury regula-tions, taxpayers who receive morethan the statutory minimum amountof gross income must file income taxreturns. Taxpayers also are required topay any tax owed.

• “Filing a tax return is ‘voluntary.’”Some people mistake the word “vol-untary” for “optional” — but filing atax return is not optional for those whomeet the law’s minimum gross incomerequirements. The word “voluntary,”as used in IRS publications and else-where, refers to the fact that the U.S.tax system is a voluntary compliancesystem. This means only that taxpay-ers themselves determine the correctamount of tax and complete the appro-priate returns, rather than have the gov-ernment do this for them as is done insome other countries. This system ofself-reporting does not make the filingof tax returns or the payment of taxvoluntary. For those who do not com-ply with this system and fail to self-re-port their tax liability, the tax law au-thorizes various enforced compliancemeasures.

• “Because taxes are voluntary, as anemployer, I don’t have to withhold in-come or employment taxes from myemployees.” Every taxpayer is respon-sible for completing and filing requiredreturns and paying the correct amountof tax. An employer is required bylaw to withhold income and employ-ment taxes from salary and wages paidto employees. Employers also must

deposit the amounts withheld with theService.

• “A taxpayer can refuse to pay taxesif the taxpayer disagrees with the gov-ernment’s use of the taxes it collects.”No law, including the Internal RevenueCode, permits a taxpayer to avoid orevade tax obligations on the groundsthat the taxpayer does not agree withthe Government’s past or possible fu-ture use of the taxes collected.

• “A taxpayer can escape income taxesor the tax system by submitting a setof documents in lieu of a tax return.”Taxpayers must file income tax returnsusing the forms prescribed by the Ser-vice. No law, including the InternalRevenue Code, permits taxpayers tosubmit a document or series of docu-ments to remove themselves from theincome tax system.

• “A taxpayer can avoid tax by filinga return with an attachment that dis-claims tax liability.” A return with anattached disclaimer of tax liability isnot a valid tax return under the law.

• “A taxpayer can avoid tax by filinga return with an altered penalties ofperjury statement.” Alterations to anincome tax return or to the penalties ofperjury statement may nullify a return.

• “Certain taxpayers can claim a ‘repa-rations tax credit’ to right wrongsdone in the past.” No law, includingthe Internal Revenue Code, permits a“reparations tax credit.”

• “By purchasing equipment and ser-vices for an inflated price, a taxpayercan use the Disabled Access Credit toreduce tax or generate a refund.” Thesection 44 Disabled Access Credit,which is limited to expenses for spe-cific medical equipment needed tomake a business accessible to disabledindividuals, may only be claimed foramounts actually paid by a taxpayerrunning a legitimate business. Promot-ers of this scheme improperly offer tosell equipment or services at inflatedprices in order to generate a largecredit. Taxpayers participating in thisscheme, however, ultimately are not

required to pay, and do not pay, theentire price stated in the sales contract.

• “Under section 3121 taxpayers candeduct the amount of Social Securitytaxes paid or get a refund of thosetaxes.” The Internal Revenue Code im-poses Social Security tax on wages asdefined in section 3121. Aside fromthe narrow exception for a religious ex-emption under section 3127, a taxpayermay not exclude wages from SocialSecurity taxation on the basis that thetaxpayer is waiving the right to receiveSocial Security benefits, and the Codedoes not authorize a deduction for, orrefund of, Social Security taxes paid.

• “A taxpayer may sell (or purchase)the right to claim a child as a quali-fying child for purposes of the EIC.”A taxpayer may not purchase or sellthe right to claim a child as a qualify-ing child for purposes of the earned in-come credit (EIC). In order to claim achild as a qualifying child for purposesof the EIC, the child must meet spe-cific relationship, residency and age re-quirements.

The Service and the courts have repeat-edly rejected these arguments and varia-tions on them, and have rejected numerousother tax avoidance schemes and frivolousarguments used by taxpayers to avoid orevade taxes.

SECTION 3. CIVIL AND CRIMINALPENALTIES.

Civil and criminal penalties may ap-ply to taxpayers who make frivolous argu-ments. Potentially applicable civil penal-ties include: (1) the section 6651 additionsto tax for failure to file a return, failure topay the tax owed, and fraudulent failureto file a return; (2) the section 6662 accu-racy-related penalty, which is equal to 20percent of the amount of taxes the taxpayershould have paid; (3) the section 6663penalty for civil fraud, which is equal to75 percent of the amount of taxes the tax-payer should have paid; (4) a $500 penaltyunder section 6702 for filing a frivolous in-come tax return; and (5) a penalty of up to$25,000 under section 6673 if the taxpayermakes frivolous arguments in the UnitedStates Tax Court.

April 4, 2005 829 2005–14 I.R.B.

Taxpayers who take frivolous positionsalso may face criminal prosecution for: (1)attempting to evade or defeat tax undersection 7201, for which the penalty is a sig-nificant fine and imprisonment for up to 5years; (2) willful failure to file a return un-der section 7203, for which the penalty is afine of up to $25,000 and imprisonment forup to one year; and (3) making false state-ments on a return, statement, or other doc-ument under section 7206, for which thepenalty is a significant fine and imprison-ment for up to 3 years.

Persons, including return preparers,who promote frivolous positions and thosewho assist taxpayers in claiming tax ben-efits based on frivolous positions mayface penalties and may be enjoined by acourt pursuant to sections 7407 and 7408.Potential penalties include: (1) a $250penalty under section 6694 for each returnor claim for refund prepared by an incometax return preparer who knew or shouldhave known that the taxpayer’s positionwas frivolous (or $1,000 for each returnor claim for refund if the return preparer’sactions were willful, intentional or reck-less); (2) a penalty under section 6700for promoting abusive tax shelters; (3)a $1,000 penalty under section 6701 foraiding and abetting the understatement oftax; and (4) criminal prosecution undersection 7206, for which the penalty is asignificant fine and imprisonment for up to3 years for assisting or advising about thepreparation of a false return, statement orother document under the internal revenuelaws.

SECTION 4. EFFECT ON OTHERDOCUMENTS.

Notice 2004–22 is modified and super-seded.

SECTION 5. ADDITIONALINFORMATION.

Other information about frivolous taxpositions is available on the Service web-site at www.irs.gov.

The principal author of this notice is theOffice of Associate Chief Counsel (Proce-dure & Administration). For further infor-mation regarding this notice, contact thatoffice at (202) 622–7800 (not a toll-freecall).

State and Local General SalesTax Deduction

Notice 2005–31

This notice provides guidance to tax-payers regarding the election to deductstate and local general sales taxes in lieuof state and local income taxes under§ 164(b)(5) of the Internal Revenue Codefor taxpayers who elect to itemize deduc-tions under § 63(e). Section 164(b)(5) wasadded by § 501 of the American Jobs Cre-ation Act of 2004, Pub. L. No. 108–357,and applies for taxable years beginningafter December 31, 2003, and before Jan-uary 1, 2006.

BACKGROUND

Section 164(a)(3) provides, in part, thattaxpayers may deduct state and local in-come taxes in the taxable year the taxes arepaid or incurred. Under § 164(b)(5), tax-payers may elect to deduct state and localgeneral sales taxes in lieu of state and localincome taxes.

A general sales tax is a tax imposed atone rate with respect to the retail sale ofa broad range of classes of items. Section164(b)(5)(B). In determining whether thetax is imposed on a broad range of classesof items, the fact that sales taxes do notapply to some or all food, clothing, med-ical supplies, and motor vehicles is disre-garded. Section 164(b)(5)(C)(i). In deter-mining whether the tax is imposed at onerate, the fact that the tax rate that applies tofood, clothing, medical supplies, or motorvehicles is lower than the general tax rateis disregarded. Section 164(b)(5)(C)(ii).

In general, sales taxes that are imposedat a rate other than the general rate of taxare not deductible. However, sales taxesimposed on (1) food, clothing, medicalsupplies, or motor vehicles at a rate lowerthan the general rate of tax may be de-ducted, and (2) motor vehicles at a rate inexcess of the general sales tax rate may bededucted only at the general sales tax rate.Section 164(b)(5)(D) and (F).

If the amount of a sales tax is separatelystated and paid by the consumer (otherthan in connection with a trade or busi-ness), the amount of the tax is treated as atax imposed on and paid by the consumerrather than the seller. Therefore, the con-sumer may deduct sales taxes that are im-

posed on the seller if the tax is separatelystated (as on a contract or receipt) and paidby the consumer. Section 164(b)(5)(G).

A compensating use tax is treated as asales tax if the tax (1) is imposed on theuse, storage, or consumption of an item,and (2) is complementary to a general salestax that would be deductible with respectto similar items. Section 164(b)(5)(E).

Taxpayers who elect to deduct state andlocal sales taxes may deduct either actualsales taxes paid or incurred, as evidencedby appropriate records, or an amount de-termined under tables provided by the Ser-vice. For 2004, tables are provided in Pub-lication 600, Optional State Sales Tax Ta-bles. A taxpayer who elects to use theoptional sales tax tables may deduct (1)the amount determined under the tables, asprovided in the instructions, plus (2) theactual amount of state and local generalsales taxes paid on motor vehicles, boats,and certain other specified items. Section164(b)(5)(H).

APPLICATION

Manner of making election to deduct salestaxes

Taxpayers elect to deduct state and localgeneral sales taxes in lieu of state and localincome taxes on Form 1040, Schedule A,in accordance with the instructions. A tax-payer may elect to deduct state and localgeneral sales taxes in one taxable year andstate and local income taxes in another tax-able year. The election for a taxable yearfor which the period of limitation for filinga claim for refund or credit under § 6511has not expired may be revoked by filingan amended return for that taxable year.

Definition of motor vehicle

For purposes of deducting state and lo-cal general sales taxes, a “motor vehicle”includes an automobile, motorcycle, mo-tor home, recreational vehicle, sport util-ity vehicle, off-road vehicle, van, or truck(any of which may be either purchased orleased). For these items, if sales taxes areimposed at rates that exceed the generalsales tax rate, sales tax may be deductedonly at the general sales tax rate.

2005–14 I.R.B. 830 April 4, 2005

Determination of amount of sales taxespaid by using the optional sales tax tables

The optional sales tax tables provide anamount of sales taxes paid based on a tax-payer’s state of residence, total availableincome, and number of exemptions.

The state of residence is the state wherethe taxpayer physically resides. A tax-payer who lives in different states duringthe taxable year who elects to use the op-tional sales tax tables must multiply theamount determined under the tables foreach state of residence by a fraction, thenumerator of which is the number of daysphysically resident in the state and the de-nominator of which is the number of daysin the year.

Example. Taxpayer S lives in State A fromJanuary 1 through August 31, 2004 (244 days), andin State B from September 1 through December31, 2004 (122 days). The amount of S’s deductionfor state and local sales taxes determined under theoptional sales tax tables would be $500 if S had livedin State A for the entire year and $400 if S had livedin State B for the entire year. S’s deduction for stateand local sales taxes is $466 calculated as follows:

State A: $500 X 244/366 = $333

State B: $400 X 122/366 = $133

Total $466

Total available income is adjusted grossincome (AGI) plus amounts not reflectedin AGI that increase spendable income,such as worker’s compensation, public as-sistance payments, military compensationearned in a combat zone, tax-exempt in-terest, the refundable portion of refundabletax credits, and the nontaxable part of so-cial security, veterans’ or railroad retire-ment benefits and of IRA, pension or an-nuity distributions.

The number of exemptions is the num-ber included on the taxpayer’s tax return.See special rule, below, for taxpayers filinga joint return and living in different states.

Deductions for local general sales taxesunder the optional sales tax tables

For 2004, the amounts provided in theoptional sales tax tables do not includeamounts paid for local general sales taxes.For 2004, taxpayers may add amounts paidfor local general sales taxes to the amountdetermined under the tables. For 2004, theamount of local general sales taxes paid

may be determined by multiplying the tax-payer’s state table amount by the ratio ofthe local sales tax rate to the state sales taxrate.

Example. State A imposes a 5.0% general salestax in 2004. City B in State A imposes an addi-tional 1.0% general sales tax in 2004. Taxpayer Clives in City B. Taxpayer C’s deduction for state salestaxes determined under the optional sales tax tablesis $1,000. To calculate the additional amount for theCity B local sales tax, divide 1.0 (the local City Btax rate) by 5.0 (the State A tax rate). The result is0.2. Multiply Taxpayer C’s deduction for state salestaxes determined under the optional sales tax tablesby 0.2. The additional City B local sales tax is $200.Taxpayer C’s deductible State A and local sales taxis $1,000 + $200, or $1,200 (before adding the tax onany specified items).

For 2005, it is expected that the op-tional sales tax tables will include localsales taxes if local sales taxes are imposedat a uniform rate throughout the state. It isalso expected that for 2005, taxpayers willbe allowed to determine the deduction forlocal sales taxes in the manner discussedabove if local sales taxes not included inthe optional sales tax tables are imposed onthe same items taxed by the state. In stateswhere state sales taxes and local sales taxesare not imposed on the same items, instruc-tions accompanying the optional sales taxtables for 2005 may provide specific infor-mation for determining the amount of lo-cal sales taxes from the optional sales taxtables. If none of the preceding options isavailable to a taxpayer for 2005, the tax-payer may deduct only actual local salestaxes paid or incurred, as evidenced by ap-propriate records.

Specified items on which sales taxesmay be deducted by taxpayers using theoptional sales tax tables

In addition to the amount determinedunder the optional sales tax tables andamounts added for local general salestaxes, taxpayers may deduct allowable ac-tual state and local general sales taxes paidon the purchase of the following items:motor vehicles (including automobiles,motorcycles, motor homes, recreationalvehicles, sport utility vehicles, off-roadvehicles, vans, and trucks), boats, aircraft,homes (including mobile and prefabri-cated homes), and materials to build ahome.

Use of the optional sales tax tables bytaxpayers filing a joint tax return andliving in different states

Taxpayers who file a joint return, livein different states, and use the optionalsales tax tables must calculate the amountof the deduction for state and local salestaxes by applying their separate incomesto the table for each state of residence, tak-ing into account the exemptions for depen-dents who resided with each taxpayer, andadding the total. Either spouse (but notboth) may take into account dependentswho did not reside with either taxpayer.

Deduction of state and local sales taxesby taxpayers filing tax returns as marriedfiling separately

A married taxpayer filing a separate taxreturn who elects to deduct state and localsales taxes must use the optional sales taxtables if the taxpayer’s spouse elects todeduct sales taxes and uses the optionalsales tax tables.

In using the optional sales tax tables,a married taxpayer filing a separate returnmust apply the taxpayer’s separate incomeand the number of exemptions included onthe taxpayer’s return.

Example. Taxpayers W and H are married, havethree children, and file their tax returns as marriedfiling separately. W’s total available income is$40,000, and W includes exemptions for herself andone child on her tax return. H’s total available incomeis $60,000, and H includes exemptions for himselfand two children on his tax return. W determinesthe amount of her deduction for state and local salestaxes under the optional sales tax tables based on$40,000 income and two exemptions. Thus, H mustdetermine the amount of his deduction for state andlocal sales taxes under the optional sales tax tablesbased on $60,000 income and three exemptions.


The principal author of this notice isDavid M. Christensen of the Office ofthe Associate Chief Counsel (IncomeTax and Accounting). For further in-formation regarding this notice, contactMr. Christensen at (202) 622–7900 (not atoll-free call).

April 4, 2005 831 2005–14 I.R.B.

26 CFR 145.4051–1: Imposition of tax on heavytrucks and trailers sold at retail.(Also Part I, § 4051.)

Rev. Proc. 2005–19

SECTION 1. PURPOSE

To minimize disputes regarding the de-termination of whether a truck body satis-fies the weight-based exclusion providedin § 4051(a)(2) of the Internal RevenueCode, the Service, as a matter of admin-istrative convenience, has established cer-tain body type classification safe harbors.

SECTION 2. BACKGROUND

.01 In General. Section 4051(a)(1) im-poses a tax on the first retail sale of cer-tain enumerated articles including automo-bile truck chassis and bodies and trucktrailer and semitrailer chassis and bodies.Section 4051(a)(2) provides an exclusionfrom the tax imposed by § 4051(a)(1) fortruck chassis and bodies suitable for usewith a vehicle that has a gross vehicleweight (GVW) of 33,000 pounds or less.Similarly, § 4051(a)(3) provides an exclu-sion for truck trailer and semitrailer chas-sis and bodies suitable for use with a traileror semitrailer that has a GVW of 26,000pounds or less.

Section 145.4051–1(a)(4) of the Tem-porary Excise Tax Regulations Underthe Highway Revenue Act of 1982(Pub. L. 97–424) provides the followingrules for determining whether automobiletruck chassis and bodies are suitable foruse with a vehicle which has a gross ve-hicle weight of 33,000 pounds or less andwhether truck trailer or semitrailer chas-sis and bodies are suitable for use with atrailer or semitrailer which has a gross ve-hicle weight of 26,000 pounds or less. Theterm “suitable for use” is defined as prac-tical and commercial fitness for such use.In addition, a chassis or body possessespractical fitness for use with a vehicle if itperforms its intended function up to a gen-erally acceptable standard of efficiencywith the vehicle, and a chassis or bodypossesses commercial fitness for use with

a vehicle if it is generally available for usewith the vehicle at a price that is reason-ably competitive with other articles thatmay be used for the same purpose. Thus, atruck chassis which is suitable for use witha vehicle having a gross vehicle weight of33,000 pounds or less, is not subject to thetax imposed by § 4051(a)(1) regardlessof the body actually mounted thereon. Ifan exempt body is mounted on a taxablechassis (or a taxable body is mounted onan exempt chassis) and the resulting ve-hicle is a highway vehicle as defined in§ 48.4061(a)–1 of the Manufacturers andRetailers Excise Tax Regulations, the tax-able chassis or body, as the case may be,nevertheless remains subject to such tax.

Under § 145.4051–1(e)(3)(ii), a sellerof a completed chassis, body, or vehiclemust establish a weight rating for each ar-ticle sold. Since the weight rating of thechassis and the GVW of a completed ve-hicle would normally be the same, a truckchassis seller is aided in establishing aweight rating for a chassis by the guide-lines set forth in § 145.4051–1(e)(3)(v).Section 145.4051–1(e)(3)(v) generally de-fines GVW as the maximum total weightof a loaded vehicle.

.02 Reason for Revenue Procedure.Section 145.4051–1(e)(3)(v) simplifiessellers’ determinations of whether chassismeet the “suitable for use” standard for aweight-based exclusion. However, sincethere are no federal excise tax guidelinesto establish a weight rating for a truckbody, and because many truck bodies arespecialized in nature, sellers do not rou-tinely ascribe GVW ratings to the bodiesthey sell. In some cases, sellers do notknow the GVW of the vehicle on whichthe body (or similar bodies sold by others)will be mounted. Thus, it may be difficultfor a seller of a truck body to determinewhether the body meets the “suitable foruse” standard for a weight-based exclu-sion.

SECTION 3. APPLICATION

.01 Classifications of Truck Body Types.The Service will not challenge a seller’sdetermination that any of the following

classifications of truck body types meetthe “suitable for use” standard and salesthereof are excluded from the retail excisetax by virtue of § 4051(a)(2):

(1) Platform truck bodies 21 feet or lessin length;

(2) Dry freight and refrigerated truckvan bodies 24 feet or less in length;

(3) Dump truck bodies with load capac-ities of 8 cubic yards or less; or

(4) Refuse packer truck bodies withload capacities of 20 cubic yards or less.

.02 Bodies Not Within a Classification.The Service has established the classifi-cations set forth in section 3.01 after areview of manufacturers’ and retailers’data for certain truck body types. A bodytype described above that does not fallwithin the classification parameters of itsbody type (for example, a platform truckbody longer than 21 feet), or a body typenot described above, may neverthelessstill satisfy the “suitable for use” standardif the seller can establish that, pursuantto § 145.4051–1(a)(4), the truck body haspractical and commercial fitness for usewith a vehicle having a GVW of 33,000pounds or less.

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective forsales on or after April 4, 2005. In the caseof sales before April 4, 2005, the Servicewill not challenge sellers who take posi-tions consistent with this revenue proce-dure with respect to sales of truck bodiesdescribed in section 3.01.


The principal author of this revenueprocedure is Theodore N. Margopulos ofthe Office of Associate Chief Counsel(Passthroughs & Special Industries). Forfurther information regarding this revenueprocedure, contact Barbara Franklin at(202) 622–3130 (not a toll-free call).

2005–14 I.R.B. 832 April 4, 2005

Part IV. Items of General InterestNotice of ProposedRulemaking

Sickness or Accident DisabilityPayments

REG–160315–03

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations that provide guidanceregarding the treatment of payments madeon account of sickness or accident disabil-ity under a workers’ compensation law forpurposes of the Federal Insurance Contri-butions Act (FICA).

DATES: Written and electronic commentsmust be received by June 9, 2005.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–160315–03), room5203, Internal Revenue Service, POB7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–160315–03),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, tax-payer may submit comments elec-tronically, via the IRS Internet site atwww.irs.gov/regs or via Federal Rulemak-ing Portal at www.regulations.gov (IRSand REG–160315–03).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, David Ford of the Office of Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities),(202) 622–6040; concerning submissionsof comments, the hearing and/or to beplaced on the building access list to at-tend the hearing, LaNita Van Dyke (202)622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 31 undersection 3121 of the Internal Revenue Code(the Code.) Section 3121(a)(2)(A) of theCode excepts from “wages” for FICA taxpurposes payments to an employee or anyof his dependents on account of sicknessor accident disability only if the paymentsare received under a “workmen’s compen-sation law”, hereinafter referred to as aworkers’ compensation law. The amend-ment to the regulations provides that forpurposes of section 3121(a)(2)(A) a work-ers’ compensation law includes a statutein the nature of a workers’ compensationact.

Explanation of Provisions

Current Law

Section 3121(a) defines wages forFICA purposes as all remuneration foremployment unless specifically excepted.Section 3121(a)(2)(A) excepts from wagesthe amount of any payment (including anyamount paid by an employer for insuranceor annuities, or into a fund, to provide forany such payment) made to or on behalfof, an employee or any of his dependentsunder a plan or system established by anemployer which makes provision for hisemployees generally (or for his employeesgenerally and their dependents) or for aclass or classes of his employees (or for aclass or classes of his employees and theirdependents), on account of sickness or ac-cident disability, but only if the employeereceives the payments under a workers’compensation law. Section 3121(a)(4)provides that wages does not include anypayment on account of sickness or acci-dent disability made by an employer toor on behalf of an employee after the ex-piration of 6 calendar months followingthe last calendar month in which the em-ployee worked for the employer. Thus,unless made under a workers’ compensa-tion law, payments received on account of

sickness or accident disability are wagessubject to FICA during the first 6 monthsthe employee is out of work.

Prior to its amendment by section3(b)(1) of Public Law 97–123, (95 Stat.1659, 1982–6 I.R.B. 7) (the 1981 Act),section 3121(a)(2)(B), the predecessorto section 3121(a)(2)(A), excluded fromwages any payments made under a planor system established by an employer onaccount of sickness or accident disability.There was no requirement that paymentsbe made under a workers’ compensationlaw. Thus, the 1981 Act narrowed thesick pay exclusion by limiting the exclu-sion from FICA to payments made undera workers’ compensation law. Section3(e) of the 1981 Act did not amend theCode, but specifies for purposes of section3121(a) of the Code that a payment undera workers’ compensation law does not in-clude a payment made pursuant to a Statetemporary disability insurance law.

On July 6, 1982, the IRS issued Tempo-rary regulations (T.D. 7823, 1982–2 C.B.223 [47 FR 29225] July 6, 1982). Section32.1(a)(1) of the Temporary EmploymentTax Regulations follows the amendmentsmade by the 1981 Act providing thatpayments on account of sickness or acci-dent disability are excluded from wagesfor FICA purposes only if paid undera workers’ compensation law. Section32.1(a)(1). Further, Section 32.1(c) pro-vides that a payment under a workers’compensation law does not include a pay-ment made pursuant to a State temporarydisability insurance law. Thus, such pay-ments are wages for FICA purposes. Thetemporary regulations do not address theFICA tax treatment of payments madeunder a statute in the nature of a workers’compensation act.1

For income tax purposes, section104(a)(1) provides that gross income doesnot include amounts received under work-ers’ compensation acts as compensationfor personal injuries or sickness. Section1.104–1(b) of the Income Tax Regulationsstates that section 104(a)(1) of the Codeexcludes from gross income amounts re-ceived by an employee under a workers’

1 To provide guidance relating to changes made by the Act, the IRS published Revenue Procedure 82–20, 1982–1 C.B. 466, which provided in Q&A 1 that payments under a statute inthe nature of a workers’ compensation act were excluded from FICA. Rev. Proc. 82–20 was obsoleted by Revenue Procedure 95–43, 1995–2 C.B. 412, which provides that the temporaryregulations generally restate the guidance in Q&A–1 through Q&A–9 of Rev. Proc. 82–20.

April 4, 2005 833 2005–14 I.R.B.

compensation act or under a statute in thenature of a workers’ compensation act thatprovides compensation to the employeefor personal injury or sickness incurred inthe course of employment.

The IRS takes the position that gross in-come for income tax purposes is a separateconcept from wages for purposes of FICA.Furthermore, exclusions from wages forFICA purposes are to be construed nar-rowly. Thus, amounts that are excludedfrom gross income, in the absence of a spe-cific statutory or regulatory exclusion fromwages, constitute wages for FICA.

Pursuant to the income tax regulations,payments made under a statute in the na-ture of a workers’ compensation act areexcluded from gross income under section104. However, there is no regulation atpresent addressing whether such paymentsare excluded from wages for FICA pur-poses.

Through 1989, the IRS issued severalprivate letter rulings concluding that pay-ments made under a statute in the natureof a workers’ compensation act were ex-cluded from gross income and exemptfrom FICA. In 1990, based on the Ser-vice’s position that the exclusion fromgross income did not necessarily resultin an exclusion from wages, and the ab-sence of a regulation on point, the IRSreversed its ruling position with respect toFICA, holding that payments made undera statute in the nature of a workers’ com-pensation act are included in wages, untilthe employee has been absent from workin excess of six months; once the employeehas been absent from work for more thansix months, the payments are excludedfrom FICA by section 3121(a)(4).

Questions have arisen concerning theFICA tax treatment of payments made un-der a statute in the nature of a workers’compensation act to employees of statesand local governments who are not eligi-ble to receive payments under a workers’compensation law. Accordingly, the IRSand Treasury are seeking to provide rulesto clarify the treatment of such paymentsduring the first six months the employee isout of work.

Under the proposed regulations, pay-ments made under a statute in the natureof a workers’ compensation act will betreated as having been made under a work-ers’ compensation law and, therefore, willbe excluded from wages for FICA pur-

poses. Thus, the regulations adopt thesame position that was published in Rev.Proc. 82–20, the most contemporaneousguidance to the legislation that created thecurrent statutory scheme. The proposedregulations thus align the interpretation ofwhat constitutes payments received undera workers’ compensation law for purposesof section 3121(a)(2)(A) with the interpre-tation of amounts received under a work-ers’ compensation law for purposes of sec-tion 104(a)(1).

These proposed regulations are in-tended to address only the treatment ofpayments under a statute in the nature ofa workers’ compensation act for FICApurposes. The existing temporary regu-lations under section 31.1 which addressthe FICA treatment of payments under aworkers’ compensation law also provideguidance to third parties making paymentson account of sickness or accident disabil-ity. Treasury and the IRS are not proposingany changes to the regulations with respectto the FICA treatment of third-party sickpay. To the extent it is necessary to mod-ify the temporary regulations to harmonizethem with these proposed regulations, thethird-party sick pay provisions will bepreserved. To the extent necessary, futureguidance will also address the treatment ofpayments on account of sickness or acci-dent disability for Federal UnemploymentTax Act and Railroad Retirement Tax Actpurposes.

Proposed Effective Date

It is proposed that these regulations ap-ply to payments made on or after the datethe proposed regulation is published as Fi-nal in the Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. In addition, because no collectionof information is imposed on small enti-ties, the provisions of the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do not ap-ply, and, therefore, a Regulatory Flexibil-ity Analysis is not required. Pursuant to

section 7805(f) of the Code, this noticeof proposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on the impact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written or electroniccomments that are submitted timely to theIRS. The IRS and Treasury Department re-quest comments on all aspects of the pro-posed regulations and how they can bemade easier to understand. All commentswill be available for public inspection andcopying. A public hearing may be sched-uled if requested in writing by any personthat timely submits written comments. Ifa public hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.

Drafting Information

The principal author of these regula-tions is David Ford of the Office of Di-vision Counsel/Associate Chief Counsel(Tax Exempt/Government Entities). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 31 is pro-posed to be amended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT THE SOURCE

Paragraph 1. The authority section forpart 31 continues to read, in part, as fol-lows:

Authority 26 U.S.C. 7805 * * *Par. 2. Section 31.3121(a)(2)–1 is

amended by:1. Revising the section heading.2. Removing paragraph (a)(1).3. Redesignating paragraphs (a)(2)

through (a)(4) as (a)(1) through (a)(3),respectively.

4. Revising paragraph (a)(1).

2005–14 I.R.B. 834 April 4, 2005

5. Redesignating paragraph (d) as para-graph (f).

6. Adding paragraphs (d) and (e).The revisions and additions are as fol-

lows:

§31.3121(a)(2)–1 Payments on account ofsickness or accident disability, medical orhospitalization expenses, or death.

(a) * * *(1) Sickness or accident disability of an

employee or any of his dependents, onlyif payment is received under a workers’compensation law;

(2) Medical or hospitalization expensesin connection with sickness or accidentdisability of an employee or any of his de-pendents, or

(3) Death of an employee or any of hisdependents.

* * * * *(d) Workers’ compensation law. (1) Forpurposes of paragraph (a)(1) of this sec-tion, a payment made under a workers’compensation law includes a paymentmade pursuant to a statute in the nature ofa workers’ compensation act.

(2) For purposes of paragraph (a)(1) ofthis section, a payment made under a work-ers’ compensation law does not include apayment made pursuant to a State tempo-rary disability insurance law.

(3) If an employee receives a paymenton account of sickness or accident disabil-ity that is not made under a workers’ com-pensation law or a statute in the nature ofa workers’ compensation act, the paymentis not excluded from wages as defined bysection 3121(a)(2)(A) even if the paymentmust be repaid if the employee receives aworkers’ compensation award or an awardunder a statute in the nature of a workers’compensation act with respect to the sameperiod of absence from work.

(4) If an employee receives a paymenton account of non-occupational injurysickness or accident disability such pay-ment is not excluded from wages, asdefined by section 3121(a)(2)(A).

(e) Examples. The following examplesillustrate the principles of paragraph (d) ofthis section:

Example 1. A local government employee is in-jured while performing work-related activities. Theemployee is not covered by the State workers’ com-pensation law, but is covered by a local governmentordinance that requires the local government to paythe employee’s full salary when the employee is out

of work as a result of an injury incurred while per-forming services for the local government. The ordi-nance does not limit or otherwise affect the local gov-ernment’s liability to the employee for the work-re-lated injury. The local ordinance is not a workers’compensation law, but it is in the nature of a workers’compensation act. Therefore, the salary the employeereceives while out of work as a result of the work-re-lated injury is excluded from wages under section3121(a)(2)(A).

Example 2. The facts are the same as in Exam-ple 1 except that the local ordinance requires the em-ployer to continue to pay the employee’s full salarywhile the employee is unable to work due to an injurywhether or not the injury is work-related. Thus, thelocal ordinance does not limit benefits to instancesof work-related disability. A benefit paid under anordinance that does not limit benefits to instances ofwork-related injuries is not a statute in the nature of aworkers’ compensation act. Therefore, the salary theinjured employee receives from the employer whileout of work is wages subject to FICA even thoughthe employee’s injury is work-related.

Example 3. The facts are the same as in Example1 except that the local ordinance includes a rebuttablepresumption that certain injuries, including any heartattack incurred by a firefighter or other law enforce-ment personnel is work-related. The presumption inthe ordinance does not eliminate the requirement thatthe injury be work-related in order to entitle the in-jured worker to full salary.

Therefore, the ordinance is a statute in the natureof a workers’ compensation act, and the salary theinjured employee receives pursuant to the ordinanceis excluded from wages under section 3121(a)(2)(A).

* * * * *

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on March 10,2005, 8:45 a.m., and published in the issue of the FederalRegister for March 11, 2005, 70 F.R. 12164)

Notice of ProposedRulemaking

Transactions Involving theTransfer of No Net Value

REG–163314–03

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations providing guidance re-garding corporate formations, reorganiza-tions, and liquidations of insolvent corpo-

rations. These regulations provide rulesrequiring the exchange (or, in the case ofsection 332, a distribution) of net value forthe nonrecognition rules of subchapter Cto apply to the transaction. The regula-tions also provide guidance on determin-ing when and to what extent creditors ofa corporation will be treated as proprietorsof the corporation in determining whethercontinuity of interest is preserved in a po-tential reorganization. Finally, the regula-tions provide guidance on whether a dis-tribution in cancellation or redemption ofless than all of the shares one corpora-tion owns in another corporation satisfiesthe requirements of section 332. The pro-posed regulations affect corporations andtheir shareholders.

DATES: Written and electronic commentsand requests for a public hearing must bereceived by June 8, 2005.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–163314–03), room5203, Internal Revenue Service, POB7604, Ben Franklin Station, Washing-ton DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. to 4 p.m.to CC:PA:LPD:PR (REG–163314–03),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Wash-ington, DC or sent electronically, viathe IRS internet site at www.irs.gov/regsor via the Federal eRulemaking Por-tal at www.regulations.gov (IRS andREG–163314–03).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations on the reorganization pro-visions and regarding issues raised bythe proposed regulations with respectto provisions other than those relatedto corporate liquidations and subchapterK, Jean Brenner, (202) 622–7790; con-cerning the proposed regulations on cor-porate liquidations, Sean McKeever, (202)622–7750; concerning the application ofthe principles of the proposed regulationsto transfers of property to partnershipsunder subchapter K, Jeanne Sullivanor Michael Goldman, (202) 622–3070;concerning submissions of commentsand/or requests for a public hearing,Treena Garrett, (202) 622–7180 (nottoll-free numbers).

April 4, 2005 835 2005–14 I.R.B.

SUPPLEMENTARY INFORMATION:

General Background

The IRS and the Treasury Departmentbelieve that there is a need to provide acomprehensive set of rules addressing theapplication of the nonrecognition rules ofsubchapter C of the Internal Revenue Code(Code) to transactions involving insolventcorporations and to other transactions thatraise similar issues. The proposed regula-tions provide three sets of rules, the princi-pal one of which is that the nonrecognitionrules of subchapter C do not apply unlessthere is an exchange (or, in the case of sec-tion 332, a distribution) of net value (the“net value requirement”). The proposedregulations also provide guidance on thecircumstances in which (and the extent towhich) creditors of a corporation will betreated as proprietors of the corporation indetermining whether continuity of interestis preserved in a potential reorganization.The proposed regulations further provideguidance on whether a distribution in can-cellation or redemption of less than all ofthe shares one corporation owns in anothercorporation satisfies the requirements ofsection 332. Each of these rules is dis-cussed separately in this preamble.

Explanation of Provisions

Exchange of Net Value Requirement

Background

In subchapter C, each of the rules de-scribed below that provides for the generalnonrecognition of gain or loss refers to adistribution in cancellation or redemptionof stock or an exchange for stock. Sec-tion 332 provides, in part, that “[n]o gainor loss shall be recognized on the receiptby a corporation of property distributed incomplete liquidation of another corpora-tion . . . only if . . . the distribu-tion is by such other corporation in com-plete cancellation or redemption of all itsstock.” Section 351 provides, in part, that“[n]o gain or loss shall be recognized ifproperty is transferred to a corporation byone or more persons solely in exchangefor stock in such corporation.” Section 354provides, in part, that “[n]o gain or lossshall be recognized if stock or securitiesin a corporation a party to a reorganizationare . . . exchanged solely for stock or se-

curities . . . in another corporation a partyto the reorganization.” Finally, section 361provides that “[n]o gain or loss shall berecognized to a corporation if such corpo-ration is a party to a reorganization and ex-changes property . . . solely for stock orsecurities in another corporation a party tothe reorganization.”

The authorities interpreting section 332have consistently concluded that the lan-guage of the statute referring to a distribu-tion in complete cancellation or redemp-tion of stock requires a distribution of netvalue. Section 1.332–2(b) provides thatsection 332 applies only if a parent re-ceives at least partial payment for the stockthat it owns in the liquidating corporation.Such payment could not occur unless therewere a distribution of net value. The courtshave focused in numerous cases on theeffect of liabilities on the distribution re-quirement of section 332. In H. G. HillStores, Inc. v. Commissioner, 44 B.T.A.1182 (1941), a subsidiary liquidated anddistributed its assets and liabilities to itsparent in cancellation of its indebtedness toits parent. The court interpreted the phrase“in complete cancellation or redemption ofall its stock” as requiring that a distributionbe made to the parent in its capacity as astockholder in order for section 112(b)(6)(the predecessor of section 332) to applyand, thus, held that section 112(b)(6) didnot apply because the parent corporationreceived payment in its capacity as a credi-tor and not in its capacity as a stockholder.See also Rev. Ruls. 2003–125, 2003–2C.B. 1243, 70–489, 1970–2 C.B. 53, and59–296, 1959–2 C.B. 87.

Rev. Rul. 59–296 holds that the prin-ciples relevant to liquidations under sec-tion 332 also apply to reorganizations un-der section 368. However, other author-ities are not consistent with the approachof Rev. Rul. 59–296. Most notably, inNorman Scott, Inc. v. Commissioner, 48T.C. 598 (1967), the Tax Court held thata transaction involving an insolvent targetcorporation qualified as a reorganizationunder section 368(a)(1)(A).

The IRS and the Treasury Departmenthave decided to resolve the uncertaintiesby generally adopting a net value require-ment for each of the described nonrecog-nition rules in subchapter C. The net valuerequirement generally requires that therebe an exchange of property for stock, orin the case of section 332, a distribution

of property in cancellation or redemptionof stock. The IRS and the Treasury De-partment believe that the net value require-ment is the appropriate unifying standardbecause it is more consistent with the statu-tory framework of subchapter C, case law,and published guidance than any other ap-proach considered. In addition, the IRSand the Treasury Department believe thatthe net value requirement is the appropri-ate standard because transactions that failthe requirement, that is, transfers of prop-erty in exchange for the assumption of li-abilities or in satisfaction of liabilities, re-semble sales and should not receive non-recognition treatment.

The IRS and the Treasury Departmentconsidered several other approaches tounify and rationalize the nonrecognitionrules of subchapter C as they applied totransactions involving insolvent corpo-rations. The IRS and the Treasury De-partment considered whether there shouldbe special rules for potential nonrecog-nition transactions between members ofa consolidated group. Such rules mightdisregard the various exchange require-ments in the statute because of the singleentity principles generally applicable tocorporations joining in the filing of aconsolidated return. This approach wasrejected because there is no consolidatedreturn policy that compels a differentset of rules for potential nonrecognitiontransactions between members of a con-solidated group. Cf. §1.1502–35T(f)(1);Notice 94–49, 1994–1 C.B. 358. Thecurrent intercompany transaction rules (inparticular those regarding successors in§1.1502–13(j)) could be modified to ex-tend deferral of gain and loss to additionalsituations as long as the assets remainedin the consolidated group pending lateracceleration events that befall the assetsor successor entities. However, no suchrules are being proposed because the casefor treating the transferor and transfereemembers as a single entity seems weakestwhen the group’s equity investment in thetransferor has been eliminated.

The IRS and the Treasury Departmentalso considered whether satisfying thewords of the relevant statutory provisionsthat describe the relationship of the par-ties to a transaction should be sufficientfor applying the nonrecognition rules to atransaction between the parties. This ap-proach would essentially take the position

2005–14 I.R.B. 836 April 4, 2005

that the words of distribution or exchangein the statute do not state a separate re-quirement but merely describe the mostcommon form of the transaction to whichthe provision is intended to apply. Forexample, under this approach, it would besufficient for a transaction to qualify as adistribution in complete liquidation undersection 332 if the corporation to whichassets are transferred owned stock meet-ing the requirements of section 1504(a)(2)at the time of the transfer. Also, underthis approach, it would be sufficient for atransaction to qualify as a transfer undersection 351 if a transferor of assets werein control (as defined in section 368(c)) ofthe corporation to which assets are trans-ferred immediately after the transaction.However, this approach would requiredistinguishing, when the structure of thestatute does not, between parts of a statutethat impose requirements and other partsthat do not.

Explanation of rules

Net Value Requirement

For potential liquidations under section332, the net value requirement is effectedby the partial payment rule in §1.332–2(b)of the current regulations. The proposedregulations make no modifications to thisrule, except, as discussed below, for trans-actions in which the recipient corporationowns shares of multiple classes of stock inthe dissolving corporation. The proposedregulations also make minor changes toother sections of the regulations under sec-tion 332 to conform those regulations tochanges in the statute.

For potential transactions under sec-tion 351, the proposed regulations add§1.351–1(a)(1)(iii)(A), which requires asurrender of net value and, in paragraph(a)(1)(iii)(B), a receipt of net value. Thisrule is similar to that for potential assetreorganizations, discussed below. Theproposed regulations make minor changesto other sections of the regulations undersection 351 to conform those regulationsto changes in the statute.

For potential reorganizations under sec-tion 368, the proposed regulations mod-ify §1.368–1(b)(1) to add the requirementthat there be an exchange of net value.Section 1.368–1(f) of the proposed regu-lations sets forth the rules for determin-

ing whether there is an exchange of netvalue. These rules require, in paragraph(f)(2)(i) for potential asset reorganizationsand paragraph (f)(3)(i) for potential stockreorganizations, a surrender of net valueand, in paragraph (f)(2)(ii) for potential as-set reorganizations and paragraph (f)(3)(ii)for potential stock reorganizations, a re-ceipt of net value. In a potential asset reor-ganization (one in which the target corpo-ration would not recognize gain or loss un-der section 361), the target corporation sur-renders net value if the fair market valueof the property transferred by it to the ac-quiring corporation exceeds the sum of theamount of liabilities of the target corpora-tion that are assumed by the acquiring cor-poration and the amount of any money andthe fair market value of any property (otherthan stock permitted to be received undersection 361(a) without the recognition ofgain) received by the target corporation.This rule ensures that a target corporationtransfers property in exchange for stock.The IRS and the Treasury Department be-lieve that the proposed rule better identi-fies whether a target corporation transfersproperty in exchange for stock than a rulethat looks to the issuance or failure to issuestock because, when the parties are related,the issuance or failure to issue stock mightbe meaningless.

In a potential stock reorganization(one which would be described in sec-tion 368(a)(1)(B) or section 368(a)(1)(A)by reason of section 368(a)(2)(E)), therules are modified to reflect the fact thatthe target corporation remains in exis-tence. A potential reorganization undersection 368(a)(1)(A) by reason of sec-tion 368(a)(2)(E) must satisfy the assetreorganization test for the merger of thecontrolled corporation into the target cor-poration (for which test the controlledcorporation is treated as the target corpo-ration) and the stock reorganization test forthe acquisition of the target corporation.

In a potential asset reorganization, thetarget corporation receives net value if thefair market value of the assets of the issu-ing corporation exceeds the amount of itsliabilities immediately after the exchange.This rule ensures that the target corpora-tion receives stock (or is deemed to re-ceive stock under the “meaningless ges-ture” doctrine) having value. This rule isnecessary because the IRS and the Trea-sury Department believe that the receipt of

worthless stock in exchange for assets can-not be part of an exchange for stock.

Scope of Net Value Requirement

The proposed regulations provide in§1.368–1(b)(1) that the net value require-ment does not apply to reorganizations un-der section 368(a)(1)(E) and 368(a)(1)(F).The IRS and the Treasury Department re-cently issued final regulations (T.D. 9182,2005–11 I.R.B. 713 [70 FR 9219] (Feb.25, 2005)) stating that a continuity ofbusiness enterprise and a continuity of in-terest are not required for a transaction toqualify as a reorganization under section368(a)(1)(E) or (F) because applying therequirements in those contexts is not nec-essary to protect the policies underlyingthe reorganization provisions. Becausethe purpose underlying the net value re-quirement is the same as that underlyingthe continuity of interest requirement, theIRS and the Treasury Department havesimilarly concluded that applying the netvalue requirement to transactions undersection 368(a)(1)(E) or (F) is not neces-sary to protect the policies underlying thereorganization provisions.

The proposed regulations also pro-vide in §1.368–1(b)(1) and §1.368–1(f)(4)that the net value requirement does notapply to a limited class of transactionsthat qualify as reorganizations under sec-tion 368(a)(1)(D). That class of transac-tions are the transactions exemplified byJames Armour, Inc. v. Commissioner, 43T.C. 295 (1964), and Rev. Rul. 70–240,1970–1 C.B. 81. The IRS and the Trea-sury Department acknowledge that theconclusions of the described authoritiesare inconsistent with the principles ofthe net value requirement. Nevertheless,the IRS and the Treasury Department cur-rently desire to preserve the conclusions ofthese authorities while they more broadlystudy issues relating to acquisitive re-organizations under section 368(a)(1)(D),including the continuing vitality of variousliquidation-reincorporation authorities af-ter the enactment of the Tax Reform Act of1986, Public Law 99–514 (100 Stat. 2085(1986)). Consistent with the describedauthorities, the exception is limited to ac-quisitive reorganizations of solvent targetcorporations. The proposed regulationsprovide no specific guidance (other thanin an example incorporating the facts of

April 4, 2005 837 2005–14 I.R.B.

Rev. Rul. 70–240, 1970–1 C.B. 81), otherthan with regard to the application of thenet value requirement, on when a transac-tion will qualify as a reorganization undersection 368(a)(1)(D). In this regard, com-pare Armour with Warsaw PhotographicAssociates, Inc. v. Commissioner, 84 T.C.21 (1985).

Definition of Liabilities

In applying the proposed regulations,taxpayers must determine the amount ofliabilities of the target corporation thatare assumed by the acquiring corporation.Although the proposed regulations do notdefine the term liability, the IRS and theTreasury Department intend that the termbe interpreted broadly. Thus, for purposesof the proposed regulations, a liabilityshould include any obligation of a tax-payer, whether the obligation is debt forfederal income tax purposes or whetherthe obligation is taken into account forthe purpose of any other Code section.Generally, an obligation is something thatreduces the net worth of the obligor. TheIRS and the Treasury Department haveproposed adopting a similar definitionof liability for purposes of implementingsection 358(h) in subchapter K. See Prop.Reg. §1.752–1(a)(1)(ii) and Prop. Reg.§1.752–7(b)(2)(ii) (REG–106736–00,2003–2 C.B. 60 [68 FR 37434]) (June 24,2003).

Amount of Liabilities

The proposed regulations provide nospecific guidance on determining theamount of a liability. The IRS and theTreasury Department are currently consid-ering various approaches to determiningthe amount of a liability. One approachwould be to treat the amount of a liabil-ity represented by a debt instrument asits adjusted issue price determined undersections 1271 through 1275 of the Code(the OID rules) (perhaps with exceptionsfor certain contingent payment debt in-struments) while treating the amount ofother liabilities as the value of such lia-bilities. Another approach would be totreat the amount of all liabilities as thevalue of such liabilities. Other approachescould borrow in whole or in part fromother authorities such as those relevantto the determination of insolvency under

section 108(d)(3). One method for valuingliabilities is to determine the amount ofcash that a willing assignor would pay toa willing assignee to assume the liabilityin an arm’s-length transaction. Cf. Prop.Reg. §1.752–7(b)(2)(ii).

In the course of developing these regu-lations, the IRS and the Treasury Depart-ment considered special issues related tothe assumption of nonrecourse liabilities inthe context of a transaction to which sec-tion 332, 351, or 368 might apply. The IRSand the Treasury Department are consider-ing a rule similar to the one in Rev. Rul.92–53, 1992–2 C.B. 48, that would disre-gard the amount by which a nonrecourseliability exceeds the fair market value ofthe property securing the liability whendetermining the amount of liabilities thatare assumed. For example, under such arule, if an individual transfers an apart-ment building with a fair market value of$175x subject to a nonrecourse obligationof $190x and an adjacent lot of land witha fair market value of $10x to a corpora-tion, the transferor will have surrenderednet value because the fair market valueof the assets transferred ($175x + $10x)exceeds the amount of the liabilities as-sumed ($190x - $15x, the amount of theexcess nonrecourse indebtedness). Anyrule disregarding excess nonrecourse in-debtedness would be limited to the appli-cation of the net value requirement andwould have no relevance for other federalincome tax purposes, such as the determi-nation of the amount realized under section1001. Comments are requested regardingthe treatment of nonrecourse indebtednessand the effect of such treatment when bothproperty subject to the nonrecourse indebt-edness and other property are transferred.

Assumption of Liabilities

In general, the IRS and the Treasury De-partment believe that the principles of sec-tion 357(d) should be applied to determinewhether a liability is assumed when morethan one person might bear responsibilityfor the liability. Comments are requestedregarding whether and to what extent theprinciples of section 357(d) should be in-corporated into the regulations.

The IRS and the Treasury Departmentbelieve that transfers of assets in satis-faction of liabilities should be treated the

same as transfers of assets in exchange forthe assumption of liabilities. Accordingly,in determining whether there is a surren-der of net value, the proposed regulationstreat any obligation of the target corpora-tion for which the acquiring corporation isthe obligee as a liability assumed by the ac-quiring corporation.

In Connection With

The proposed regulations take into ac-count not only liabilities assumed in theexchange, but also liabilities assumed “inconnection with” the exchange. The pro-posed regulations include this rule so thatthe timing of an acquiring corporation’sassumption of a target corporation’s liabil-ity (or a creditor’s discharge of a target cor-poration’s indebtedness), whether beforean exchange, in the exchange, or after theexchange, will have the same effect in de-termining whether there is a surrender ofnet value in the exchange. The proposedregulations also take into account, in deter-mining whether there is a surrender of netvalue, money and other nonstock consid-eration received by the target corporationin connection with the exchange.

The IRS and the Treasury Departmentintend that the substance-over-form doc-trine and other nonstatutory doctrines beused in addition to the “in connectionwith” rule in determining whether the pur-poses and requirements of the net valuerequirement are satisfied. Cf. Rev. Rul.68–602, 1968–2 C.B. 135 (holding thata parent corporation’s cancellation of awholly-owned subsidiary’s indebtednessto it that is an integral part of a liquidationis transitory and, therefore, disregarded).

Section 368(a)(1)(C)

The proposed regulations remove thestatement in §1.368–2(d)(1) that the as-sumption of liabilities may so alter thecharacter of a transaction as to placethe transaction outside the purposes andassumptions of the reorganization provi-sions. Because the proposed regulationsprovide more specific guidance regardingwhen the assumption of liabilities willprevent a transaction from qualifying as areorganization under section 368(a)(1)(C),the IRS and the Treasury Department be-lieve the statement is unnecessary.

2005–14 I.R.B. 838 April 4, 2005

Section 721

The IRS and the Treasury Departmentrecognize that the principles in the pro-posed rules under section 351 may be ap-plied by analogy to other Code sectionsthat are somewhat parallel in scope and ef-fect, such as section 721, dealing with thecontribution of property to a partnership inexchange for a partnership interest. TheIRS and the Treasury Department requestcomments on whether rules similar to therules of the proposed regulations shouldbe proposed in the context of subchapterK and the considerations that might jus-tify distinguishing the relevant provisionsin subchapter K from those provisions thatare the subject of these proposed regula-tions.

Continuity of Interest

Background

The Code provides general nonrecog-nition treatment for reorganizations de-scribed in section 368. A transaction mustcomply with both the statutory require-ments of the reorganization provisionsand various nonstatutory requirements,including the continuity of interest re-quirement, to qualify as a reorganization.See §1.368–1(b). The purpose of the con-tinuity of interest requirement is to ensurethat reorganizations are limited to readjust-ments of continuing interests in propertyunder modified corporate form and to pre-vent transactions that resemble sales fromqualifying for nonrecognition of gain orloss available to corporate reorganizations.See §§1.368–1(b), 1.368–1(e)(1). Conti-nuity of interest requires that a substantialpart of the value of the proprietary inter-ests in the target corporation be preservedin the reorganization. See §1.368–1(e)(1);see also LeTulle v. Scofield, 308 U.S.415 (1940); Helvering v. Minnesota TeaCo., 296 U.S. 378 (1935); Pinellas Ice &Cold Storage Co. v. Commissioner, 287U.S. 462 (1933); Cortland Specialty Co.v. Commissioner, 60 F.2d 937 (2d Cir.1932), cert. denied, 288 U.S. 599 (1933).

Generally, it is the shareholders whohold the proprietary interests in a corpo-ration. However, when a corporation isin bankruptcy, the corporation’s stock maybe worthless and eliminated in the restruc-turing. In this case, when the corpora-tion engages in a potential reorganization,

its creditors may receive acquiring corpo-ration stock in exchange for their claimsand its shareholders may receive nothing.Thus, without special rules, most potentialreorganizations of corporations in bank-ruptcy would fail the continuity of inter-est requirement. The Supreme Court ad-dressed this problem in Helvering v. Al-abama Asphaltic Limestone Co., 315 U.S.179 (1942), in which it held that, for practi-cal purposes, the old continuity of interestin the shareholders shifted to the creditorsnot later than the time “when the creditorstook steps to enforce their demands againstthe insolvent debtor. In this case, that wasthe date of the institution of bankruptcyproceedings. From that time on, they hadeffective command over the property.” Seealso Palm Springs Holding Corp. v. Com-missioner, 315 U.S. 185 (1942) (holdingthat the legal procedure employed by thecreditors to obtain effective command overa corporation’s property was not materialwhen the corporation was insolvent). Not-withstanding Palm Springs, it is not clearwhen creditors of an insolvent corporationnot in a title 11 or similar case may be con-sidered proprietors for purposes of satisfy-ing the continuity of interest requirement.

In Atlas Oil & Refining Corp. v. Com-missioner, 36 T.C. 675 (1961), the courtheld that only creditors who in fact receivestock in the acquiring corporation, by rela-tion back, can be deemed to have been eq-uity owners at the time of the transfer. Thecourt stated that the fact that a more seniorclass of creditors may have had “effectivecommand” over the assets in the case willnot make them proprietors if they do not infact exercise their right to receive stock inthe acquiring corporation.

In the Bankruptcy Tax Act of 1980,Public Law 96–589 (94 Stat. 3389 (1980)),Congress added section 368(a)(1)(G), pro-viding for a new type of reorganization ap-plicable to corporations in title 11 or sim-ilar cases. In the legislative history tothat statute, Congress stated its expectationthat the courts and the Treasury Depart-ment would determine whether the con-tinuity of interest requirement is satisfiedin a potential reorganization under sec-tion 368(a)(1)(G) by treating as proprietorsthe most senior class of creditors who re-ceived stock, together with all interestsequal and junior to them, including share-holders. See S. Rep. No. 1035, 96thCong., 2d Sess. 36–37 (1980). This for-

mulation is similar to the relation backanalysis that the Tax Court used in AtlasOil.

Explanation of provisions

The proposed regulations add new§1.368–1(e)(6), which describes the cir-cumstances in which creditors of a cor-poration generally, and which creditorsin particular, will be treated as holding aproprietary interest in a target corporationimmediately before a potential reorga-nization. In general, the proposed rulesadopt the standard for reorganizations un-der section 368(a)(1)(G) recommendedin the Senate Finance Committee Reportto the Bankruptcy Tax Act of 1980. Theproposed regulations also provide thatcreditors of an insolvent target corporationnot in a title 11 or similar case may betreated as holding a proprietary interest inthe corporation even though they take nosteps to obtain effective command overthe corporation’s property, other than theiragreement to receive stock in the potentialreorganization. The proposed regulations,at §1.368–1(e)(6)(ii), provide specificguidance on how to quantify the propri-etary interest of the target corporation sothat taxpayers may determine whether asubstantial part of the value of the pro-prietary interests in the target corporationis preserved in the potential reorganiza-tion. Because a creditor of a corporationmay hold claims in more than one class,the proposed regulations generally referto claims of a particular class of creditorsrather than to creditors in a particular class.

The proposed regulations treat claimsof the most senior class of creditors to re-ceive a proprietary interest in the issuingcorporation and claims of all equal classesof creditors (together, the senior claims)differently from the claims of classes ofcreditors junior to the senior claims (thejunior claims). The proposed regulationstreat senior claims as representing, in part,a creditor claim against the corporation,and, in part, a proprietary interest in thecorporation. This rule mitigates the ad-verse effect on continuity of interest of se-nior creditors seeking payment primarilyin nonstock consideration while still tak-ing some payment in shares of stock of theacquiring corporation. The determinationof what part of a senior claim is a propri-etary interest in the target corporation is

April 4, 2005 839 2005–14 I.R.B.

made by calculating the average treatmentfor all senior claims. Thus, the proposedregulations, at §1.368–1(e)(2)(ii)(B), pro-vide that the value of a proprietary inter-est in the target corporation represented bya senior claim is determined by multiply-ing the fair market value of the creditor’sclaim by a fraction, the numerator of whichis the fair market value of the proprietaryinterests in the issuing corporation that arereceived in the aggregate in exchange forthe senior claims, and the denominator ofwhich is the sum of the amount of moneyand the fair market value of all other con-sideration (including the proprietary inter-ests in the issuing corporation) received inthe aggregate in exchange for such claims.The effect of this rule is that there is 100percent continuity of interest if each se-nior claim is satisfied with the same ratioof stock to nonstock consideration and nojunior claim is satisfied with nonstock con-sideration.

The proposed regulations, at§1.368–1(e)(6)(ii)(A), provide that theentire amount of a junior claim representsa proprietary interest in the target corpo-ration immediately before the potentialreorganization. Thus, the value of the pro-prietary interest represented by that claimis the fair market value of the claim (whichvalue is generally determined by referenceto the amount of money and the fair mar-ket value of the consideration received inexchange therefor).

The rules in the proposed regulationsare intended to work in conjunction withthe current continuity of interest rules. Ac-cordingly, the proposed regulations mod-ify §1.368–1(e)(1)(ii), relating to the ef-fect on continuity of interest of distribu-tions or redemptions before a potential re-organization, and §1.368–1(e)(2), relatingto the effect on continuity of interest of ac-quisitions of proprietary interests by per-sons related to the issuing corporation, toensure that the purpose of these rules is ef-fected when creditors’ claims represent theproprietary interests in the target corpora-tion.

Section 332

Background

Section 332 requires that a subsidiary’sliquidating distribution to its parent corpo-ration be in complete cancellation or re-

demption of all its stock. In SpauldingBakeries, Inc. v. Commissioner, 252 F.2d693 (2d Cir. 1958), aff’g 27 T.C. 684(1957), the Second Circuit concluded thatfor a distribution to be made in cancella-tion or redemption of “all the stock,” pay-ment must be made on each class of stock.See also H. K. Porter Co. v. Commissioner,87 T.C. 689 (1986).

Explanation of provisions

The current regulations provide thatsection 332 applies only to those cases inwhich the recipient corporation receives atleast partial payment for the stock that itowns in the liquidating corporation. Theproposed regulations clarify that section332 applies only to those cases in whichthe recipient corporation receives at leastpartial payment for each class of stockthat it owns in the liquidating corpora-tion, an interpretation consistent with theSecond Circuit’s holding in SpauldingBakeries and the Tax Court’s holding inH. K. Porter. The IRS and the TreasuryDepartment have adopted this approachbecause they believe that it is appropriatefor a taxpayer to recognize loss when itfails to receive a distribution on a class ofstock in liquidation of its subsidiary. Therecipient corporation would recognizesuch a loss if the distribution qualified asa reorganization.

The proposed regulations also confirmthat when the liquidation fails to qualifyunder section 332 because the recipientcorporation did not receive at least partialpayment for each class of stock but did re-ceive at least partial payment for at leastone class of stock, the transaction mayqualify as a corporate reorganization undersection 368.

Proposed Effective Date

These proposed regulations will applyto transactions that occur after the datethey are published as final regulations inthe Federal Register.

Special Analyses

It has been determined that this no-tice of proposed rulemaking is not asignificant regulatory action as definedin Executive Order 12866. Therefore,a regulatory assessment is not required.

It has also been determined that section553(b) of the Administrative ProceduresAct (5 U.S.C. chapter 5) does not apply tothese proposed regulations and, becausethe regulation does not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, this noticeof proposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and 8 copies) or commentstransmitted via Internet that are submittedtimely to the IRS. The IRS and the Trea-sury Department request comments on theclarity of the proposed rules and how theycan be made easier to understand. Allcomments will be available for public in-spection and copying. A public hearingwill be scheduled if requested in writingby any person that timely submits writtencomments. If a public hearing is sched-uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.

Drafting Information

The principal authors of these pro-posed regulations are Jean Brenner andSean McKeever of the Office of AssociateChief Counsel (Corporate). However,other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *

Proposed Amendments to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the entryfor “Section 1.351–1” to read, in part, asfollows:

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

2005–14 I.R.B. 840 April 4, 2005

Section 1.351–1 also issued under 26U.S.C. 351. * * *

Par. 2. Section 1.332–2 is amended by:1. Revising the first sentence of para-

graph (a).2. Revising paragraph (b).3. Revising the heading of the Example

in paragraph (e).4. Adding Example 2 to paragraph (e).The revisions and addition read as fol-

lows:

§1.332–2 Requirements fornonrecognition of gain or loss.

(a) The nonrecognition of gain or lossis limited to the receipt of property bya corporation that is the actual owner ofstock (in the liquidating corporation) meet-ing the requirements of section 1504(a)(2).* * *

(b) Section 332 applies only when therecipient corporation receives at least par-tial payment for each class of stock thatit owns in the liquidating corporation. Ifsection 332 does not apply, see section165(g) regarding the allowance of lossesfor worthless securities for a class of stockfor which no payment is received. Further,if section 332 does not apply and the recip-ient corporation receives partial paymentfor at least one class of stock that it ownsin the liquidating corporation, see section368(a)(1) regarding potential qualificationof the distribution as a reorganization. Ifsection 332 does not apply and the distri-bution does not qualify as a reorganization,see section 331 for those classes of stockfor which partial payment is received.

* * * * *(e) * * *Example 1. * * *Example 2. P Corporation owns all of the out-

standing preferred and common stock of Q Corpora-tion. The preferred stock is not stock described insection 1504(a)(4). The fair market value of Q Cor-poration’s assets exceeds the amount of its liabilitiesbut does not exceed the liquidation preference on theQ Corporation’s preferred stock. Q Corporation liq-uidates and distributes all of its assets to P Corpora-tion. P Corporation receives partial payment for itsQ Corporation preferred stock but receives nothingfor its Q Corporation common stock. The receipt byP Corporation of the properties of Q Corporation isnot a distribution received by P Corporation in com-plete liquidation of Q Corporation within the mean-ing of section 332. Thus, under section 165(g), PCorporation is entitled to a worthless security deduc-tion for its Q Corporation common stock. The trans-action may qualify as a reorganization under section368(a)(1)(C). If the transaction does not qualify as a

reorganization, P Corporation will recognize gain orloss on its Q Corporation preferred stock under sec-tion 331.

Par. 3. Section 1.351–1 is amended by:1. Revising the first sentence of para-

graph (a)(1) introductory text.2. Adding a sentence after the last sen-

tence in paragraph (a)(1) introductory textand revising the phrase “For purposes ofthis section” at the end of paragraph (a)(1)introductory text to read “In addition, forpurposes of this section”.

3. Revising paragraphs (a)(1)(i) and(a)(1)(ii).

4. Removing the concluding text imme-diately following paragraph (a)(1)(ii).

5. Adding paragraphs (a)(1)(iii) and(a)(1)(iv).

6. Adding Example 4 at the end of para-graph (a)(2).

7. Revising paragraph (b)(1).The revisions, removal, and additions

read as follows:

§1.351–1 Transfer to corporationcontrolled by transferor.

(a)(1) Section 351(a) provides, in gen-eral, for the nonrecognition of gain or lossupon the transfer by one or more personsof property to a corporation solely in ex-change for stock of such corporation if, im-mediately after the exchange, such personor persons are in control of the corpora-tion to which the property was transferred.* * * For purposes of this section, stockrights and stock warrants are not includedin the term stock. In addition, for purposesof this section —

(i) Stock will not be treated as issued forproperty if it is issued for services renderedor to be rendered to or for the benefit of theissuing corporation;

(ii) Stock will not be treated as issuedfor property if it is issued for propertywhich is of relatively small value in com-parison to the value of the stock alreadyowned (or to be received for services) bythe person who transferred such propertyand the primary purpose of the transfer isto qualify under this section the exchangesof property by other persons transferringproperty; and

(iii) Stock will not be treated as issuedfor property if either —

(A) The fair market value of the trans-ferred property does not exceed the sum ofthe amount of liabilities of the transferor

that are assumed by the transferee in con-nection with the transfer and the amount ofany money and the fair market value of anyother property (other than stock permittedto be received under section 351(a) with-out the recognition of gain) received bythe transferor in connection with the trans-fer. For this purpose, any obligation of thetransferor for which the transferee is theobligee that is extinguished for federal in-come tax purposes in connection with thetransfer is treated as a liability assumed bythe transferee; or

(B) The fair market value of the as-sets of the transferee does not exceed theamount of its liabilities immediately afterthe transfer;

(iv) Paragraph (a)(1)(iii) of this sectionapplies to transfers occurring after the datethese proposed regulations are publishedas final regulations in the Federal Regis-ter.

(2) * * *

* * * * *Example 4. A, an individual, transfers an apart-

ment building with a fair market value of $175x toCorporation X. The building is subject to a nonre-course obligation of $190x and no other asset is sub-ject to that liability. A receives 10 shares of Cor-poration X stock in the exchange. Immediately af-ter the exchange, Corporation X is solvent and Aowns 100% of its outstanding stock. Under paragraph(a)(1)(iii) of this section, the 10 shares of CorporationX stock received by A will not be treated as issued forproperty because the fair market value of the apart-ment building does not exceed the amount of A’s lia-bilities assumed by Corporation X. Therefore, section351 does not apply to the exchange.

* * * * *(b)(1) When property is transferred to

a corporation by two or more persons inexchange for stock, as described in para-graph (a) of this section, and the stock re-ceived is received in disproportion to thetransferor’s prior interest in such property,the entire transaction will be given tax ef-fect in accordance with its true nature, andthe transaction may be treated as if thestock had first been received in propor-tion and then some of such stock had beenused to make gifts (section 2501 et seq.), topay compensation (sections 61(a)(1) and83(a)), or to satisfy obligations of the trans-feror of any kind.

* * * * *Par. 4. Section 1.368–1 is amended by:1. Removing the last sentence of para-

graph (a).

April 4, 2005 841 2005–14 I.R.B.

2. Redesignating paragraph (b) as para-graph (b)(1).

3. Removing the third sentence of para-graph (b)(1) and adding two sentences inits place.

4. Removing the seventh sentence ofparagraph (b)(1).

5. Adding paragraph (b)(2).6. Adding a sentence after the fifth sen-

tence of paragraph (e)(1)(i).7. Adding a sentence at the end of para-

graph (e)(1)(ii).8. Revising the text of paragraph (e)(2).9. Redesignating paragraphs (e)(6) and

(e)(7) as paragraphs (e)(7) and (e)(8), re-spectively, and adding a new paragraph(e)(6).

10. Adding Example 10 to the end ofparagraph (e)(7).

11. Adding a sentence at the end ofparagraph (e)(8).

12. Adding paragraph (f).The additions and revisions read as fol-

lows:

§1.368–1 Purpose and scope of exceptionto reorganization exchanges.

* * * * *(b)(1) * * * Requisite to a reorganiza-

tion under the Internal Revenue Code area continuity of business enterprise throughthe issuing corporation under the modi-fied corporate form as described in para-graph (d) of this section, a continuity ofinterest as described in paragraph (e) ofthis section (except as provided in sec-tion 368(a)(1)(D)), and an exchange of netvalue as described in paragraph (f) of thissection. Notwithstanding the requirementsof this paragraph (b)(1), an exchange of netvalue is not required for a transaction toqualify as a reorganization under section368(a)(1)(E) or (F) and, to the extent pro-vided in paragraph (f)(4), for a transactionto qualify as a reorganization under section368(a)(1)(D). * * *

(2) Effective dates. The third and fourthsentences of paragraph (b)(1) of this sec-tion apply to transactions occurring af-ter the date these proposed regulationsare published as final regulations in theFederal Register. The fifth and sixthsentences apply to transactions occurringafter January 28, 1998, except that theydo not apply to any transaction occurringpursuant to a written agreement which is

binding on January 28, 1998, and at alltimes thereafter.

* * * * *(e) * * *(1) * * *(i) * * * See paragraph (e)(6) of this sec-

tion for rules related to when a creditor’sclaim against a target corporation is a pro-prietary interest in the corporation. * * *

(ii) * * * A proprietary interest in thetarget corporation is not preserved to theextent that creditors (or former creditors)of the target corporation that own a pro-prietary interest in the corporation underparagraph (e)(6) of this section (or wouldbe so treated if they had received the con-sideration in the potential reorganization)receive payment for the claim prior to thepotential reorganization.

(2) * * * A proprietary interest in thetarget corporation is not preserved if, inconnection with a potential reorganization,a person related (as defined in paragraph(e)(3) of this section) to the issuing corpo-ration acquires either a proprietary inter-est in the target corporation or stock of theissuing corporation that was furnished inexchange for a proprietary interest in thetarget corporation for consideration otherthan stock of the issuing corporation. Thepreceding sentence does not apply to theextent those persons who were the director indirect owners of the target corporationprior to the potential reorganization main-tain a direct or indirect proprietary interestin the issuing corporation.

* * * * *(6) Creditors’ claims as proprietary in-

terests—(i) In general. A creditor’s claimagainst a target corporation may be a pro-prietary interest in the target corporation ifthe target corporation is in a title 11 or sim-ilar case (as defined in section 368(a)(3))or the amount of the target corporation’sliabilities exceeds the fair market value ofits assets immediately prior to the poten-tial reorganization. In such cases, if anycreditor receives a proprietary interest inthe issuing corporation in exchange for itsclaim, every claim of that class of credi-tors and every claim of all equal and ju-nior classes of creditors (in addition to theclaims of shareholders) is a proprietary in-terest in the target corporation immediatelyprior to the potential reorganization.

(ii) Value of proprietary interest—(A)In general. Generally, if a creditor’s claim

is a proprietary interest in the target cor-poration, the value of the proprietary inter-est is the fair market value of the creditor’sclaim.

(B) Claims of creditors of most seniorclasses. For a claim of the most seniorclass of creditors receiving a proprietaryinterest in the issuing corporation and aclaim of any equal class of creditors, thevalue of the proprietary interest in the tar-get corporation represented by the claim isdetermined by multiplying the fair marketvalue of the claim by a fraction, the numer-ator of which is the fair market value of theproprietary interests in the issuing corpo-ration that are received in the aggregate inexchange for the claims of those classes ofcreditors, and the denominator of which isthe sum of the amount of money and thefair market value of all other consideration(including the proprietary interests in theissuing corporation) received in the aggre-gate in exchange for such claims.

(iii) Bifurcated claims. If a creditor’sclaim is bifurcated into a secured claim andan unsecured claim pursuant to an orderin a title 11 or similar case (as defined insection 368(a)(3)) or pursuant to an agree-ment between the creditor and the debtor,the bifurcation of the claim and the alloca-tion of consideration to each of the result-ing claims will be respected in applying therules of this paragraph (e)(6).

(iv) Effect of treating creditors as pro-prietors. The treatment of a creditor’sclaim as a proprietary interest in the tar-get corporation shall not preclude treatingshares of the target corporation as propri-etary interests in the target corporation.

(7) * * *

* * * * *Example 10. Creditors treated as owning a pro-

prietary interest. T has assets with a fair market valueof $150x and liabilities of $200x. T has two classesof creditors, the senior creditors with claims of $50x,and the junior creditors with claims of $150x. T trans-fers all of its assets to P in exchange for $95x andshares of P stock with a fair market value of $55x.The T senior creditors receive in the aggregate $40xand P stock with a fair market value of $10x in ex-change for their claims. Each T senior creditor re-ceives stock and nonstock consideration in the sameproportion. The T junior creditors receive $55x andP stock with a fair market value of $45x in exchangefor their claims. The T shareholders receive no con-sideration in exchange for their T stock. Under para-graph (e)(6) of this section, because the amount of T’sliabilities exceeds the fair market value of its assetsimmediately prior to the potential reorganization, theclaims of the creditors of T may be proprietary inter-ests in T. Because the senior creditors receive propri-

2005–14 I.R.B. 842 April 4, 2005

etary interests in P in the transaction in exchange fortheir claims, their claims and the claims of the juniorcreditors and the T shareholders are treated as propri-etary interests in T immediately prior to the transac-tion. Under paragraph (e)(6)(ii) of this section, thevalue of the senior creditors’ proprietary interests inT is $10x, the value of the proprietary interests in Pthat they received in exchange for their claims. In ad-dition, the value of the junior creditors’ proprietaryinterests in T immediately prior to the transaction is$100x, the value of their claims. Because P is treatedas acquiring 50 percent of the value of the proprietaryinterests in T in exchange for P stock ($55x/$110x),a substantial part of the value of the proprietary in-terests in T is preserved. Therefore, the continuity ofinterest requirement is satisfied.

(8) * * * The sixth sentence of para-graph (e)(1)(i) of this section, the last sen-tence of paragraph (e)(1)(ii) of this section,paragraph (e)(2) of this section, paragraph(e)(6) of this section, and Example 10 ofparagraph (e)(7) of this section apply totransactions occurring after the date theseproposed regulations are published as finalregulations in the Federal Register.

(f) Exchanges of net value—(1) Gen-eral rule. An exchange of net value re-quires that there be both a surrender of netvalue and a receipt of net value. Whetherthere is a surrender of net value is deter-mined by reference to the assets and lia-bilities of the target corporation. Whetherthere is a receipt of net value is determinedby reference to the assets and liabilities ofthe issuing corporation (as defined in para-graph (b) of this section). The purpose ofthe exchange of net value requirement isto prevent transactions that resemble sales(including transfers of assets in satisfac-tion of liabilities) from qualifying for non-recognition of gain or loss available to cor-porate reorganizations.

(2) Asset transactions. There is an ex-change of net value in a potential reorga-nization to which section 361 would applyonly if —

(i) Surrender of net value. The fairmarket value of the property transferredby the target corporation to the acquir-ing corporation exceeds the sum of theamount of liabilities of the target corpora-tion that are assumed by the acquiring cor-poration in connection with the exchangeand the amount of any money and the fairmarket value of any other property (otherthan stock permitted to be received undersection 361(a) without the recognition ofgain) received by the target corporation inconnection with the exchange. For thispurpose, any obligation of the target cor-

poration for which the acquiring corpora-tion is the obligee that is extinguished forfederal income tax purposes in connectionwith the exchange is treated as a liabilityassumed by the acquiring corporation; and

(ii) Receipt of net value. The fair mar-ket value of the assets of the issuing corpo-ration exceeds the amount of its liabilitiesimmediately after the exchange.

(3) Stock transactions. There is an ex-change of net value in a potential reor-ganization under section 368(a)(1)(B) orsection 368(a)(1)(A) by reason of section368(a)(2)(E) only if —

(i) Surrender of net value. The fairmarket value of the assets of the targetcorporation exceeds the sum of the amountof the liabilities of the target corporationimmediately prior to the exchange and theamount of any money and the fair marketvalue of any other property (other thanstock permitted to be received under sec-tion 354 without the recognition of gainand nonqualified preferred stock withinthe meaning of section 351(g)) received bythe shareholders of the target corporationin connection with the exchange. For thispurpose, assets of the target corporationthat are not held immediately after theexchange and liabilities of the target cor-poration that are extinguished for federalincome tax purposes in the exchange otherthan ones, if any, to the corporation intowhich the target corporation merges in thecase of a potential reorganization undersection 368(a)(1)(A) by reason of section368(a)(2)(E) are disregarded; and

(ii) Receipt of net value. The fair mar-ket value of the assets of the issuing corpo-ration exceeds the amount of its liabilitiesimmediately after the exchange.

(4) Exception. The requirement thatthere be an exchange of net value doesnot apply to a transaction that would oth-erwise qualify as a reorganization undersection 368(a)(1)(D) by reason of section354 or so much of section 356 as relatesto section 354, provided that the fair mar-ket value of the property transferred to theacquiring corporation by the target corpo-ration exceeds the amount of liabilities ofthe target corporation immediately beforethe exchange (including any liabilities can-celled, extinguished, or assumed in con-nection with the exchange), and the fairmarket value of the assets of the acquiringcorporation equals or exceeds the amount

of its liabilities immediately after the ex-change.

(5) Examples. For purposes of the ex-amples in this paragraph (f)(5), each ofP, S, and T is a corporation; all corpo-rations have only one class of stock out-standing; A, B, C, and D are individuals;and the transaction is not otherwise sub-ject to recharacterization. Except as other-wise provided, no person is related to anyother person and the fair market value ofthe assets of each corporation exceeds theamount of its liabilities immediately priorto the transaction described in the exam-ple. The following examples illustrate theapplication of this paragraph (f).

Example 1. T has assets with a fair market valueof $50x and liabilities of $75x, all of which are owedto A. T transfers all of its assets to S in exchange for Sstock with a fair market value of $50x. T distributesthe S stock to A in exchange for the T debt owed toA. T dissolves. T’s shareholders receive nothing inexchange for their T stock. Under paragraph (f)(2)(i)of this section, T surrenders net value because the fairmarket value of the property transferred by T ($50x)exceeds the sum of the amount of liabilities that areassumed by S in connection with the exchange ($0x)and the amount of any money and the fair marketvalue of any other property (other than stock per-mitted to be received under section 361(a) withoutthe recognition of gain) received by T in connectionwith the exchange ($0x). In addition, under para-graph (f)(2)(ii) of this section, T receives net valuebecause the fair market value of the assets of S ex-ceeds the amount of its liabilities immediately afterthe exchange. Therefore, under paragraph (f) of thissection, there is an exchange of net value.

Example 2. P owns all of the stock of both Sand T. T has assets with a fair market value of $100xand liabilities of $160x, all of which are owed to P. Ttransfers all of its assets to S in exchange for S stockwith a fair market value of $100x. T distributes theS stock to P in exchange for the T debt owed to P.T dissolves. P receives nothing in exchange for its Tstock. Under paragraph (f)(2)(i) of this section, T sur-renders net value because the fair market value of theproperty transferred by T ($100x) exceeds the sum ofthe amount of liabilities of T assumed by S in connec-tion with the exchange ($0x) and the amount of anymoney and the fair market value of any other property(other than stock permitted to be received under sec-tion 361(a) without the recognition of gain) receivedby T in connection with the exchange ($0x). In addi-tion, under paragraph (f)(2)(ii) of this section, T re-ceives net value because the fair market value of theassets of S exceeds the amount of its liabilities im-mediately after the exchange. Therefore, under para-graph (f) of this section, there is an exchange of netvalue. The result would be the same if no S stockwere issued.

Example 3. The facts are the same as in Exam-ple 2, except that T’s debt is owed to B. T transfersall of its assets to S in exchange for the assumptionof T’s liabilities. T dissolves. The obligation to B isoutstanding immediately after the transfer. P receivesnothing in exchange for its T stock. Under paragraph

April 4, 2005 843 2005–14 I.R.B.

(f)(2)(i) of this section, T does not surrender net valuebecause the fair market value of the property trans-ferred by T ($100x) does not exceed the sum of theamount of liabilities of T assumed by S in connectionwith the exchange ($160x). Therefore, under para-graph (f) of this section, there is no exchange of netvalue. The result would be the same if S stock wereissued.

Example 4. The facts are the same as in Exam-ple 3, except that S first assumes the T debt owed toB and subsequently T transfers all of its assets to Sin exchange for S stock with a fair market value of$100x. If S’s assumption of the T debt is made inconnection with the subsequent transfer of T assets toS, under paragraph (f)(2)(i) of this section, T does notsurrender net value because the fair market value ofthe property transferred by T ($100x) does not exceedthe sum of the amount of liabilities of T assumed byS in connection with the exchange ($160x). There-fore, under paragraph (f) of this section, there is noexchange of net value.

Example 5. P owns 70% of the stock of T. A ownsthe remaining 30% of the stock of T. T has assetswith a fair market value of $100x and liabilities of$160x, all of which are owed to P. T merges into P. Areceives nothing in exchange for its T stock. Under(f)(2)(i) of this section, even though T’s obligation toP is extinguished in the transaction, it is treated as aliability assumed by P. Thus, under paragraph (f)(2)(i)of this section, T does not surrender net value becausethe fair market value of the property transferred by T($100x) does not exceed the sum of the amount ofliabilities of T assumed by P in connection with theexchange ($160x). Therefore, under paragraph (f) ofthis section, there is no exchange of net value.

Example 6. A owns all of the stock of S. S hasassets with a fair market value of $200x and liabili-ties of $500x, all of which are owed to T. The S debthas a fair market value of $200x. In addition to the Sdebt, T has other assets that have a fair market valueof $700x. T has no liabilities. T transfers all of itsassets to S in exchange for S stock with a fair marketvalue of $900x. T distributes the S stock to its share-holders in exchange for their T stock. T dissolves. Scancels all of its stock held by its shareholders im-mediately prior to the exchange. Under paragraph(f)(2)(i) of this section, T surrenders net value be-cause the fair market value of the property transferredby T ($900x) exceeds the sum of the amount of lia-bilities of T assumed by S in connection with the ex-change ($0x) and the amount of any money and thefair market value of any other property (other thanstock permitted to be received under section 361(a)without the recognition of gain) received by T in con-nection with the exchange ($0x). In addition, un-der paragraph (f)(2)(ii) of this section, T receives netvalue because the fair market value of the assets ofS ($900x) exceeds the amount of the liabilities of S($0x) immediately after the exchange. Therefore, un-der paragraph (f) of this section, there is an exchangeof net value.

Example 7. P owns all of the stock of S. T hasassets with a fair market value of $300x and liabil-ities of $650x, $500x of which are owed to P and$150x of which are owed to A. T merges into S. Inthe merger, P stock is issued to A in satisfaction of thedebt owed to A by T. Also in the merger, P contributesto the capital of T the debt P is owed. Assume themerger would qualify as a reorganization under sec-

tion 368(a)(1)(A) by reason of section 368(a)(2)(D)if the exchange of net value requirement in paragraph(f)(1) of this section did not apply. Whether there isa surrender of net value is determined by referenceto the actual merger of T into S. Thus, T surrendersnet value because the fair market value of the prop-erty transferred by T ($300x) exceeds the sum of theamount of liabilities of T assumed by S in connec-tion with the exchange ($0x) and the amount of anymoney and the fair market value of any other property(other than stock permitted to be received under sec-tion 361(a) without the recognition of gain) receivedby T in connection with the exchange ($0x). Whetherthere is a receipt of net value is determined by ref-erence to the issuing corporation, in this case, P. Treceives net value because the fair market value ofthe assets of P exceeds the amount of the liabilities ofP immediately after the exchange. Therefore, underparagraph (f) of this section, there is an exchange ofnet value.

Example 8. P owns all of the stock of both S andT. T transfers all of its assets to S in exchange for$34x, the assets’ fair market value. Following thistransfer, T pays its debts of $2x and dissolves, dis-tributing the remaining $32x to P. Assume the trans-action would qualify as a reorganization under section368(a)(1)(D) by reason of section 354 or so much ofsection 356 as relates to section 354 if the net valuerequirement in paragraph (f)(1) of this section did notapply. Under paragraph (f)(2) of this section, thereis no exchange of net value because the fair marketvalue of the property transferred by T ($34x) does notexceed the amount of money received by T in con-nection with the exchange ($34x). However, underparagraph (f)(4) of this section, because the transac-tion would otherwise qualify as a reorganization un-der section 368(a)(1)(D) and the other requirementsof paragraph (f)(4) of this section are satisfied, theexchange of net value requirement does not apply.Accordingly, the transaction qualifies as a reorgani-zation under section 368(a)(1)(D).

Example 9. A and B own all of the stock of T. Thas assets with a fair market value of $500x and lia-bilities of $900x, all of which are owed to C and D,security holders of T. P acquires all of the stock andsecurities of T in exchange for P voting stock. In thetransaction, A and B receive nothing in exchange fortheir stock of T. C and D exchange all of their secu-rities of T for stock of P. Under paragraph (f)(3)(i) ofthis section, there is a surrender of net value becausethe fair market value of the assets of T held imme-diately prior to the exchange that are held immedi-ately after the exchange ($500x) exceeds the sum ofthe amount of liabilities of T immediately prior to theexchange ($0x, disregarding the liabilities of $900xextinguished in the exchange) and the amount of anymoney and the fair market value of any other prop-erty (other than stock permitted to be received undersection 354 without the recognition of gain and non-qualified preferred stock within the meaning of sec-tion 351(g)) received by the shareholders of T ($0x).In addition, under paragraph (f)(3)(ii) of this section,there is a receipt of net value because the fair marketvalue of the assets of P exceeds the amount of the li-abilities of P immediately after the exchange. There-fore, under paragraph (f) of this section, there is anexchange of net value.

Example 10. A and B own all of the stock of P, andC and D own all of the stock of T. P has assets with

a fair market value of $400x and liabilities of $500x,and T has assets with a fair market value of $1000xand liabilities of $600x. P acquires all of the stock ofT. C and D exchange all of their T stock, with a fairmarket value of $400x, for P stock with a fair marketvalue of $300x immediately after the transaction. Pcancels all of the stock held by A and B immediatelyprior to the exchange. Under paragraph (f)(3)(i) ofthis section, there is a surrender of net value becausethe fair market value of the assets of T held immedi-ately prior to the exchange that are held immediatelyafter the exchange ($1000x) exceeds the amount ofliabilities of T ($600x) immediately prior to the ex-change and the amount of any money and the fair mar-ket value of any other property (other than stock per-mitted to be received under section 354 without therecognition of gain and nonqualified preferred stockwithin the meaning of section 351(g)) received bythe shareholders of T ($0x). In addition, under para-graph (f)(3)(ii) of this section, there is a receipt ofnet value because the fair market value of the assetsof P ($800x), which includes the fair market valueof the stock of T, exceeds the amount of its liabili-ties ($500x) immediately after the exchange. There-fore, under paragraph (f) of this section, there is anexchange of net value. To the extent that C and Dsurrender T stock with a value in excess of the valueof the P stock they receive, the tax consequences ofthe surrender of the additional stock are determinedbased on the facts and circumstances.

(6) Effective date. This paragraph (f)applies to transactions occurring after thedate these proposed regulations are pub-lished as final regulations in the FederalRegister.

Par. 5. Section 1.368–2 is amendedby revising paragraph (d)(1) to read as fol-lows:

§1.368–2 Definition of terms.

* * * * *(d) * * *(1)(i) One corporation must acquire

substantially all the properties of anothercorporation solely in exchange for all orpart of its own voting stock, or solely inexchange for all or a part of the votingstock of a corporation which is in controlof the acquiring corporation. For example,Corporation P owns all the stock of Corpo-ration A. All the properties of CorporationW are transferred to Corporation A eithersolely in exchange for voting stock ofCorporation P or solely in exchange forless than 80 percent of the voting stock ofCorporation A. Either of such transactionsconstitutes a reorganization under section368(a)(1)(C). However, if the properties ofCorporation W are acquired in exchangefor voting stock of both Corporation Pand Corporation A, the transaction willnot constitute a reorganization under sec-

2005–14 I.R.B. 844 April 4, 2005

tion 368(a)(1)(C). In determining whetherthe exchange meets the requirement of“solely for voting stock,” the assumptionby the acquiring corporation of liabilitiesof the transferor corporation, or the factthat property acquired from the transferorcorporation is subject to a liability, shallbe disregarded. Section 368(a)(1)(C) doesnot prevent consideration of the effect ofan assumption of liabilities on the generalcharacter of the transaction but merelyprovides that the requirement that theexchange be solely for voting stock is sat-isfied if the only additional considerationis an assumption of liabilities.

(ii) Paragraph (d)(1)(i) of this sectionapplies to transactions occurring after thedate these proposed regulations are pub-lished as final regulations in the FederalRegister.

* * * * *

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on March 9, 2005,8:45 a.m., and published in the issue of the Federal Registerfor March 10, 2005, 70 F.R. 11903)

Foundations Status of CertainOrganizations

Announcement 2005–23

The following organizations have failedto establish or have been unable to main-tain their status as public charities or as op-erating foundations. Accordingly, grantorsand contributors may not, after this date,rely on previous rulings or designationsin the Cumulative List of Organizations(Publication 78), or on the presumptionarising from the filing of notices under sec-tion 508(b) of the Code. This listing doesnot indicate that the organizations have losttheir status as organizations described insection 501(c)(3), eligible to receive de-ductible contributions.

Former Public Charities. The follow-ing organizations (which have been treatedas organizations that are not private foun-dations described in section 509(a) of theCode) are now classified as private foun-dations:

2nd Street Family Center, Allentown, PA

A C Dysart Park Association,Banning, CA

ACAB Corporation and Affiliates,New York, NY

Ace It Education, Inc., Revere, MAACERRP Corporation, New Hartford, NYAddie Talbott-H L Neblett Community

Foundation, Inc., Owensboro, KYAdele Organization, Bronx, NYAfrican-American Builders & Associates,

Philadelphia, PAAfrican American Law Enforcement

Community Center, Philadelphia, PAAgnes Center for Education, Inc.,

Brooklyn, NYAll the Way Home, Inc., Mt. Pocono, PAAllied Workers for the Blind of Kansas

City Missouri, Kansas City, MOAlmira Stephan Memorial Playhouse,

Inc., Meriden, CTAmerican Friends of YCTV, Inc.,

Washington, DCAmerican National Opera, Denver, COAmicus for Children, Inc.,

Douglasville, PAAmistad Institute, Inc., Brooklyn, NYAngels Reside Here, Inc., New York, NYAngels Wings, Inc., Trenton, NJA N N A Foundation, Inc., Rimrock, AZAquinas Institute of Rochester Scholarship

Foundation, Inc., Rochester, NYArlington High School Golf Booster Club,

Arlington, TXArt of Living, Inc., Philadelphia, PAAsociacion De Puertorriiguenos En Mai

of NJ, Camden, NJAssembly Productions, Inc.,

New York, NYAssociation for Homeless American

Veterans, Inc., Las Vegas, NVAssociation for Retarded Citizens of Pike

County, Hawley, PAAssociation of Young Christians

International, Victorville, CAAteret Seminary of Queens, Inc.,

Flushing, NYBaldwinsville Rotary Club Foundation,

Inc., Baldwinsville, NYBallet Education Parent Partnership, Inc.,

Phoenix, AZBarre 2000 and Beyond, Inc., Barre, VTBea Institute for Educational Success,

Inc., Boston, MABeauty for Ashes Outreach, Inc.,

Atlanta, GABeith Matityahu, Brooklyn, NYBennett Academy of Music, Inc.,

Oakland Park, FL

Berkshire Interfaith CommunityInvestment Fund, Incorporated,Lenox, MA

Bethel-Laurel Hill CommunityPreservation, Inc., Setauket, NY

Bethel Park Athletic Office,Bethel Park, PA

BGRASS, Inc., Cincinnati, OHBloomfield Education Foundation, Inc.,

Bloomfield, CTBlue Nile Passage, Inc., New York, NYBogey Bear Foundation,

Mercer Island, WABolton Senior Housing Corporation,

Bolton, MABrasarte the Damaceno Brazilian Cultural

Exchange, Oakland, CABrevard County 4H Youth Foundation,

Inc., Cocoa, FLBrian P. Stack Civic Association, Inc.,

Union City, NJBridge Center for Autism, Inc.,

Cincinnatus, NYBridges Football Club, Inc.,

New York, NYBristol Bandits, Inc., Avon, CTBrookville High School Athletic Booster

Club, Lynchburg, VABryon Chamberlain Foundation,

Parker, COBTWS Cheerleading Booster Association,

Inc., Pensacola, FLBulldog Conditioning Club, Inc.,

Silver Spring, MDBWH Anethesia Research and Education

Foundation, Inc., Boston, MACalifornia Area School District,

California, PACalifornia Sportfishing Protection

Alliance, Woodland, CACalifornia Youth Expeditions,

Petaluma, CACameron County Junior Olympic Archery

Development Club, San Benito, TXCandlelight Ministries, Chicago, ILCanine Causes, Mountain View, CACaranet, Inc., Cincinnati, OHCarbonaro Childrens Playground

Foundation, Inc., Valley Stream, NYCared Foundation, Newport Beach, CACaring Community Association,

Philadelphia, PACaring for Loved Ones, Inc.,

Long Beach, CACarpe Diem Equine Rescue, Inc.,

Staten Island, NYCatholic Youth in Action, Inc.,

Lawrence, MA

April 4, 2005 845 2005–14 I.R.B.

Cato-Meridian Community RecreationCenter Foundation, Inc., Cato, NY

Center for Education and Human Services,Brooklyn, NY

Center for International Development,Half Moon Bay, CA

Center for Sacred Partnership, Inc.,Pittsburgh, PA

Central Texas Coyotes Inline HockeyClub, Copperas Cove, TX

Charitable Quest Gift Fund,Philadelphia, PA

Cherubim, Sierra Vista, AZChess Education Association Foundation,

Scottsdale, AZChichester Education Foundation, Inc.,

Boothwyn, PAChild Esteem Theatre Foundation,

Redwood City, CAChimes PA, Inc., Exton, PAChinese Culture Foundation, Denville, NJChisholm Trail Convention,

Round Rock, TXChristian Charitable Childrens Fund

of Kazakhstan Titiana Corporation,Bolton, MA

Christian East African and EquitorialDevelopment Trust, Grove City, PA

Christian Evangelistic Ministries,San Antonio, TX

Christmas Wish Org., Brooklyn, NYChrysalis Residential and Community

Support, Inc., Brewer, MEChurch of Jesus Christ Itnaelc,

Folsom, AZCithara Women’s Chorale, Camp Hill, PACitizens Council on Affordable Higher

Education, Inc., Holmdel, NJCitizens for Life, Saugus, MACoalition Against Negligent Absentee

Parents International, Niagara Falls, NYCoexistence Initiative, Inc.,

New York, NYCoghill Foundation, Inc., Littleton, COColonade Ministries, Cincinnati, OHColorado School Parent Teacher

Organization, Muscatine, IACommon Sense Foundation,

Richmond, VACommonwealth Cyber School,

Lancaster, PACommunity & Neighborhood Fund of

Greater Richmond, Richmond, VACommunity Christian School,

Westfield, MACommunity Health Access Project, Inc.,

Hawthorne, CA

Community Playhouse Corporation,Ewing, NJ

Complementary and Alternative,Colorado Springs, CO

Composers Group International, Inc.,New York, NY

Comprehensive Family Counseling, Inc.,Baltimore, MD

Concord Center, Omaha, NEConductive Education of the Greater

Philadelphia Area, Strafford, PAConnextion, Inc., Iron River, MICorpus Christi A & WMA,

Corpus Christi, TXCountryside High School Cheerleading

Booster Club, Clearwater, FLCounty Ventura Irish-American Cultural

Foundation, Ventura, CACreating Entrepreneur Opportunities,

San Diego, CACrisis Alcohol & Drug Abuse Center of

Scotland Co., Inc., Laurinburg, NCDaley Foundation, Jamaica, NYDarlenes Support Group & Animal

Rescue, Vancouver, WADavison Business Professional Womens

Service Club, Davison, MIDBMS Drill Team Booster Club,

Wildomar, CADelta Regional Foundation,

Cleveland, MSDesigns for Living Ministries,

Danville, PADevine Intervention in America,

Woodland Hills, CADFW Tejanos Soccer Club, Arlington, TXDiman Alumni Association, Incorporated,

Fall River, MADimitri House, Inc., Rochester, NYDisabled Veterans Helping Veterans,

Elephant Butte, NMDuxbury Recreation Foundation, Inc.,

Duxbury, MAEarlville Community Center, Inc.,

Earlville, NYEast River Sailing Camp, North, VAEatontown Foundation for Excellence in

Education, Inc., Eatontown, NJEducational Funding Services, Inc.,

Mission Viejo, CAErasmus Foundation, Inc., Potomac, MDEric Fund, Inc., Huntington, NYETA TAU Chapter of Sigma Alpha

Sorority, Long Beach, CAEVCAP, Lake Elsinore, CAEvelyn Douglin Center for Childrens

Services, Inc., Brooklyn, NYEvery Life Counts, Inc., Brooklyn, NY

FAAAS, Inc., Centerville, MAFaces Project, Stafford, VAF A I R Fairness Advocates

for Intergenerational Rights,Philadelphia, PA

Fall River Group Homes, Inc.,Kingston, MA

Family Assistance Ministries,San Clemente, CA

Family Health Alliance, Inc.,Philadelphia, PA

Field Band Foundation, Inc.,Johannesburg, South Africa

Filmaid, Seattle, WAFindley Lake Nature Center,

Findley Lake, NYFish and Chips, Fairfield, OHFive Acre School Parent Service

Organization, Inc., Carlsborg, WAFor the Love of Health Education and

Humanity, Washington, DCFort Hill Avenue, Inc., Lynn, MAFort Irwin Middle School Booster Club,

Fort Irwin, CAFoster-King Dance Collection,

San Diego, CAFoundation for Local Churches and

Charities, Little Valley, NYFoundation for West Virginia, Inc.,

Shenandoah Junction, WVFountain Youth Ministries, Inc.,

Tucson, AZFree Foundation, Inc., Durham, NCFreire Center a Popular Education

Center for Democratic Change,Minneapolis, MN

Friends of Anna, Inc., Staten Island, NYFriends of Lakeway, Littleton, NHFriends of Lock One Conestoga

Navigation Co. 1826, Lancaster, PAFriends of Massapequa Preserve, Inc.,

Massapequa, NYFriends of Plymouth Bay House, Inc.,

Plymouth, MAFriends of Santa Ana Parks Recreation &

Community Services, Santa Ana, CAFriends of the Burn Center, Inc.,

Miami, FLFriends of the Camden Library, Inc.,

Camden, NJFriends of the Clock Tower,

Biddeford, MEFriends of the Francis A. Gregory

Regional Library, Washington, DCFull Cry Husky Rescue, Inc.,

Kings Park, NYFuture Partners, San Francisco, CA

2005–14 I.R.B. 846 April 4, 2005

Galveston Brain Injury Association,Galveston, TX

George Koonce, Sr. Foundation,New Bern, NC

Georgia Injured Workers Union, Inc.,Atlanta, GA

Germantown House DevelopmentCorporation, Inc., Philadelphia, PA

Girls Adults Boys Seniors Organization,Cula Vista, CA

Glacial Lakes Pheasant Restoration,Roslyn, SD

Go Venture, Inc., Anthony, NMGold View Health Center Corp.,

Roswell, GAGood Company, Inc., Atlanta, GAGovenor Livingston High School

Hockey Boosters Association, Inc.,Berkeley Heights, NJ

Greater New Bedford Career EducatorPartnership, Inc., New Bedford, MA

Greater Smithtown EducationalFoundation, Smithtown, NY

GSN Foundation, Reno, NVHabonim Dror Camp Na Aleh, Inc.,

New York, NYHackettstown Rotary Foundation, Inc.,

Hackettstown, NJHancock Creek Elementary School PTO,

Inc., N. Fort Myers, FLHancock Park Garden Club,

Los Angeles, CAHanover Senior Community, Inc.,

Washington, DCHarambee Community Development

Corporation, Lilburn, GAHatboro Fire and Rescue Company,

Horsham, PAHaverhill Affordable Residence Trust,

Inc., Haverhill, MAHawaii Kai Educational Foundation,

Honolulu, HIHealthy Parenting Program, Bronx, NYHealthy Solutions, Inc., Mount Holly, NJHeart of Texas-Hico, Dallas, TXHeart of Texas-Kilgore, Inc., Dallas, TXHeartfelt Enterprises, Inc.,

Huntington Beach, CAHelix Choral Booster, La Mesa, CAHelping Hands Recovery Ministries,

Atascadero, CAHer Hearts Wish, Encinitas, CAHermandad En San Miguel, Bronx, NYHighland House, Inc., New Castle, PAHoliday Wish, Wrentham, MAHolyoke Neighborhood Networks Center,

Inc., Holyoke, MAHome That Works, Inc., Clayton, NJ

Homeowner Education Collaborative ofOregon, Portland, OR

House of Hope, Inc., New Haven, CTHummingbird Cafe, Jamul, CAImago Foundation, Ltd., New York, NYImperial Band Boosters, Imperial, CAImperial Valley Community Health

Organization, Imperial, CAIncrease the Peace, Inc., Short Hills, NJIndependent Baptist Church Planters of

America, Jacksonville, FLIndian Orchard Main Street Partnership,

Incorporated, Indian Orchard, MAIndiana Chapter of the American

Academy of Medical Acupuncture, Inc.,Carmel, IN

Innovative Treatment Alternative, Inc.,Philadelphia, PA

Insight for New Housing, Inc., Bronx, NYInstitute for the Advancement of Farming,

Kansas City, MOIntentional Intervention Program

of Horizon Community Church,Port St. Lucie, FL

Interlude Ministries, Inc.,Birmingham, AL

International Organization for the Blind,Inc., Mount Dora, FL

International Partnership for Health NFP,Chicago, IL

International Society for HyperbaricOxygenation U Cerebral,Laud By Sea, FL

International Voice of Health Science,Inc., Denver, CO

Islamic Family and Community Services,Philadelphia, PA

J. Frank Dobie Band Parents Organization,Houston, TX

Jackie Robinson Park Conservancy,New York, NY

Jasper Childrens Theater, Inc., Jasper, ALJasper Endowment for Growth in

Academics, Inc., Jasper, TNJeffrey M. Shumake Memorial

Scholarship Fund, Inc., Strafford, PAJewish Identity Project of NY, Inc.,

Brooklyn, NYJourneys in Educational Travel,

Copperas Cove, TXJupiter Corale, Ltd., New York, NYJust Say Yes, Inc., Memphis, TNKahal Yisreal International,

New York, NYKappel Film Production Association,

Wonder Lake, ILKatie B. Jackson Resident Council, Inc.,

Philadelphia, PA

Kenton Conservancy, Inc., Covington, KYKids 2000, Dayton, OHKids Company, Inc., New Richmond, WIKidsters, Inc., Reading, PAKingdom of Allah, Minneapolis, MNKingsborough Community College

Alumni Association, Inc., Mineola, NYKonocti Music Foundation,

Lower Lake, CAKorean-American Family Love

Counseling Center, Inc., Flushing, NYLake Region Community Concert

Association, Devils Lake, NDLaunch, Inc., Atlanta, GALifeline Community Christian Center,

Inc., Clearwater, FLLions Clubs Diabetes Education Center,

Inc., Mineola, NYLittle Peoples Music, Inc., Oreland, PALiving Stone Foundation, Inc.,

Leominster, MALoading Zone Theatre, Inc.,

New York, NYLord Jesus Christ Out Reach Ministries,

Deltona, FLLove Faith 3 Hope Ministries,

Decatur, GALowcountry Region of the South

Carolina National Heritage Corridor,Charleston, SC

Lower West Side Community EnrichmentCenter, Inc., Buffalo, NY

Lowndes Interagency CoordinatingCouncil, Inc., Valdosta, GA

MAARS Musicians and Artists AgainstRape, Winston-Salem, NC

Madrigal Wellness & Study Center, Inc.,Perkinsville, VT

Mahelona Medical Center CharitableFoundation, Kapaa, HI

Marine Cadet Corps, Attleboro, MAMarlboro Educational Foundation,

Incorporated, Marlboro, NJMary Jane Combemale Memorial

Foundation, Inc., Warrenton, VAMass Community Health Services, Inc.,

Brockton, MAMass211, Inc., Worcester, MAMassachusetts First Vote Corporation,

Boston, MAMasterworks Center, San Diego, CAMax Field Center, Inc., Brooklyn, NYMcHenry Police Officers Charitable

Association, Inc., McHenry, ILMemphis Hope Center Healthcare, Inc.,

Memphis, TNMentoring Coalition of San Diego County,

Encinitas, CA

April 4, 2005 847 2005–14 I.R.B.

Meor Yitzchak, Brooklyn, NYMetropolitan Child Services, Inc.,

Brooklyn, NYMets All Stars, Garland, TXMiama Foundation, Millwood, NYMiami City Mission Youth Center, Inc.,

Miami, FLMiddle School of the Arts Foundation,

Inc., West Palm Beach, FLMinnesota Section of the Optical Society

of America, Stillwater, MNMinority Artist Association, Syracuse, NYMiss Willies Where Childhood Never

Ends, Inc., Atlanta, GAMohau Childrens Charities for South

Africa, Inc., Sandy Hook, CTM O R E Foundation, Inc.,

Ridgefield Park, NJMorristown Community Development

Corporation, Morristown, NJMosaic Communities, Evanston, ILMotivational Movement, Inc.,

New York, NYMountain Area Youth Organization,

Oakhurst, CAMt. Lebanon Baptist Church Early

Learning Center, Inc., Brooklyn, NYMushroom Genome & Mycodiversity

Preservation Project, Olympia, WAMX-99, Bloomington, INNaramake Family Resource Center,

Norwalk, CTNatalies Wish, Inc., Crestline, CANational Charitable Trust From Advent,

Hartford, CTNational Council of Theotokos

Communities, Inc., Mahwah, NJNational Hispanic Business Association,

Austin, TXNational Institute for Driver Behavior,

Inc., Cheshire, CTNC Association of Personal & Business

Coaches, Inc., Cary, NCNCCCAEA, Inc., Morehead City, NCNear North Civic Association,

Newark, OHNeighborhood Connections, Inc.,

Brandon, VTNetwork of Sisters & Friends, Bowie, MDNew Century Center, Martinez, CANew Jersey Spirit, Marlton, NJNew Millenium Cultural and Art

Foundation, Inc., N. Brunswick, NYNew York Korean-American Lions Club

Charities, Inc., New York, NYNew York State School Age Care

Coalition, Inc., Albany, NY

New York Surgical Society, Inc.,New York, NY

Newman Foundation, Inc.,Solana Beach, CA

North American Friends of Elkabetz,Worcester, MA

North Coast Digital Cinema Forum, Inc.,Lyndhurst, OH

North Country Coordinated Transport,Inc., Saranac Lake, NY

North Escambia Swim Booster Club,Bratt, FL

Okaloosa County Readiness Coalition,Inc., Ft. Walton, FL

On the Road to Recovery, Inc.,Manchester, NH

Open the World, Incorporated, Wilton, CTOperation K I D, Tempe, AZOptimum Resource Institute, Inc.,

Orange, CAOrange After School Program, Inc.,

E. Barre, VTOsho Foundation America, Inc.,

New York, NYOtumfuo Fund, Inc., Bronx, NYOur Lady of Victory Educational

Foundation, Inc., Gainesville, FLOxford Academy Foundation,

Cypress, CAPace Charter School of Hamilton Parent

Teacher Organization, Hamilton, NJPacific Rehabilitation Industries,

Honolulu, HIPacific Semmba Systems, Inc.,

Alameda, CAPakistan Literacy Fund, New York, NYPancho Villa Historical Cemetery,

Ocala, FLParent-Child Bible Institute & Seminary,

Inc., Brooklyn, NYParent Mentor & Family Foundation,

Waukegan, ILParent Teacher Association of the Earth

School, Inc., New York, NYParents of Children With Food Allergies,

Inc., Natick, MAParents-Teachers Association of

Manhattan Center for Science and,New York, NY

Parsippany Trackers Booster Club,Parsippany, NJ

Passavant Memorial Homes Foundation,Pittsburgh, PA

Peace of Mind Battered Center,Antioch, CA

Pegram Elementary Parent-TeacherOrganization, Pegram, TN

People First of Arizona, Phoenix, AZ

Peoples Childrens Project Haiti,Hiawatha, KS

Pettit Foundation, Inc., New York, NYPhenix Foundation, San Bernardino, CAPhiladelphia Workforce Investment

Board, Inc., Philadelphia, PAPhoenix Project of Northwest Ohio, Inc.,

Perrysburg, OHPiedra Vista Football Booster Club,

Farmington, NMPorter-Fields Empowerment Zone,

San Bernardino, CAPortland Area Youth Center, Portland, MIPower Cheer Panthers Association,

Louisville, KYPowerlink, Pittsburgh, PAPreparing for a Degree, Los Alamitos, CAProfessional People of Color Network,

State College, PAProgress Trust, Inc., Philadelphia, PAProject Heal, Inc., Marlton, NJProject Hope Mission, Asbury Park, NJProject New Covenant, Philadelphia, PAProject Salud, Inc., Kennet Square, PAPromethea Theatre Company,

Pittsburgh, PAPrometheus Foundation, Seattle, WAPSI Educational Foundation,

Fayetteville, ARP-W-C Exchange Foundation for

the Prevention of Child Abuse,Ft. Washington, PA

Qadosh Project, Chicago, ILQuad Cities Railroad Educational

Association, East Molene, ILQueenship of Mary Radio Corporation,

Milltown, NJRamona Ag Boosters, Ramona, CARebuilding Our Community, Inc.,

New Orleans, LAReid Christian Enrichment Center, Inc.,

Lanham Seabrook, MDReredos Male Vocal Ensemble,

Somerville, MARichmond County Enrichment

Corporation, Rockingham, NCRight Choice Communications

International, Inc., Holly, MIRiley House, Boston, MARiverside National Cemetery Memorial

Honor Detail, Riverside, CARocky Point Alumni Foundation, Inc.,

Rocky Point, NYRose Brigade, Rosebud, TXRural Elders, Inc., Weed, CARuth Larkey Foundation for Children

With Digestive & Nutritional Diseases,New York, NY

2005–14 I.R.B. 848 April 4, 2005

Sachem Alumni Community Foundation,Ronkonkoma, NY

Samaritan Housing Foundation II, Inc.,Atlanta, GA

Samaritan Housing Foundation III, Inc.,Atlanta, GA

Samaritan Housing Foundation V, Inc.,Waban, MA

San Luis Police Activities AthleticsLeague, Inc., San Luis, AZ

San Luis Valley Welfare Advocates,Alamosa, CO

Saraswati Worship Foundation, Inc.,Jamaica, NY

Second Chance Parrot Rescue,Robertsville, MO

Shared Perspectives on Therapies,San Francisco, CA

Shirat Moshe, Brooklyn, NYSindhi Association of Florida, Miami, FLSkaneateles Splash, Inc., Skaneateles, NYSoar 21st Century Support Organization

for the Advancement, New Orleans, LASocial Cultural Academic and Life

Enrichment, Tempe, AZSolomons House, Inc., Swansea, MASongs Unlimited, Inc., Conway, ARSoul Noodle Soup Foundation,

Stone Mountain, GASouth Bronx Rhythm Revue, Inc.,

Bronxville, NYSouth Central Region of National Council

of State Garden Clubs, Inc., Alva, OKSouth Hill Neighborhood Association,

Grand Rapids, MISouth Tampa Softball Club, Tampa, FLSoutheast Community Business

and Education Partnership,Canal Winchester, OH

Southeast Missouri RegionalCommunity Development Corporation,Lilbourn, MO

Southern New Jersey StandardsConsortium, Inc., Cherry Hill, NJ

Southern West Virginia Action for Youth,Inc., Williamson, WV

Southside Christian Charities, Inc.,Jacksonville, FL

Southwest Phila Youth and CommunityEducational Service Center,Philadelphia, PA

Sparkling Dancers Drill Dance Team,Warren, MI

Spencer Cable Access Corporation,Spencer, MA

Sports Legacy Foundation, Pittsburgh, PASt. Clair-Sanilac County Nurse Examiner

Program, Marysville, MISt. Peters Athletic Foundation, Inc.,

Jersey City, NJStart-A-Heart, Inc., Redondo Beach, CAStudent Volunteer Optometric Services

to Humanity of Southern California,Los Angeles, CA

Suncook Soccer Club, Pembroke, NHSupporters of the Golden Door Charter

School, Inc., Jersey City, NJSusquehanna County Interfaith,

Montrose, PATeaneck Charter School Community

Organization, Inc., Teaneck, NJTelethon Italy US Foundation,

New York, NYTennis Dream Fund, Inc., Cambridge, MAThomas McCarthy Foundation,

Manford, CATimothy Mark Capers Foundation,

White Plains, NYToken Creek Watershed Association,

Windsor, WIT O P S, Inc., Memphis, TNToshas Gift of Love, Atlanta, GAToys for Girls and Boys, Inc.,

Cleveland, OHTraci Hall & Company, Philadelphia, PATreasure Valley Youth Alliance, Inc.,

Boise, IDTrinity Park Ministry, Inc.,

Orchard Park, NYTrue Life Community Resource Center,

Inc., Ocala, FLTWM Foundation, Pittsburgh, PAUIC Athletic Alumni Corp., Chicago, ILUMA Foundation, Inc., Dorchester, MAUnderstanding Manic Depression, Inc.,

New York, NYUniting Americas Children,

Moreno Valley, CAUniversal Friends, Lombard, ILUpper Arlington Community Orchestra,

Inc., Columbus, OHVermont Liturgical & Music Association,

Inc., Woodstock, VTVine Street Community Center Council,

Inc., Roxbury, MAVista Botanical Gardens, Vista, CA

Warren Yacht Restoration Society,Warren, RI

Washburn Traveling Boys Basketball,Minneapolis, MN

Washington Park Foundation, Inc.,Providence, RI

Washington State Association of the Deaf,Lakewood, WA

West Boca Travel Baseball Club,Boca Raton, FL

Winchendon Community EnrichmentFoundation, Inc., Winchendon, MA

WMRC, Inc., Meadville, PAWoman to Woman, Camdenton, MOWomen of Rejuvenate Spirit, Inc.,

Burlington, VTWomens Bobsleigh Foundation,

Westerville, OHWomens Business Closet, Charlton, MAWomen’s Multimedia Center,

Claremont, CAWomens New Media Alliance, Inc.,

Los Angeles, CAWork 101 Development Corp.,

Brooklyn, NYWorkforce Partners, Inc., New Britain, CTWorld for Humanity, Inc., Brooklyn, NYWyandanch Economic and Cultural

Council, Inc., Wyandanch, NYYork County Youth Network, York, PAYork Mothers Center, Mount Wolf, PAYoung Friends of the Environment, Inc.,

Miami, FLYouth 20–20 A La Palma Community

Project, La Palma, CAYouth Performing Arts Group, Inc.,

Richmond, VA

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

April 4, 2005 849 2005–14 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished 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.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions 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.—Statement 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.

2005–14 I.R.B. i April 4, 2005

Numerical Finding List1

Bulletins 2005–1 through 2005–14

Announcements:

2005-1, 2005-1 I.R.B. 257

2005-2, 2005-2 I.R.B. 319

2005-3, 2005-2 I.R.B. 270

2005-4, 2005-2 I.R.B. 319

2005-5, 2005-3 I.R.B. 353

2005-6, 2005-4 I.R.B. 377

2005-7, 2005-4 I.R.B. 377

2005-8, 2005-4 I.R.B. 380

2005-9, 2005-4 I.R.B. 380

2005-10, 2005-5 I.R.B. 450

2005-11, 2005-5 I.R.B. 451

2005-12, 2005-7 I.R.B. 555

2005-13, 2005-8 I.R.B. 627

2005-14, 2005-9 I.R.B. 653

2005-15, 2005-9 I.R.B. 654

2005-16, 2005-10 I.R.B. 702

2005-17, 2005-10 I.R.B. 673

2005-18, 2005-9 I.R.B. 660

2005-19, 2005-11 I.R.B. 744

2005-20, 2005-12 I.R.B. 772

2005-21, 2005-12 I.R.B. 776

2005-22, 2005-14 I.R.B. 826

2005-23, 2005-14 I.R.B. 845

Notices:

2005-1, 2005-2 I.R.B. 274

2005-2, 2005-3 I.R.B. 337

2005-3, 2005-5 I.R.B. 447

2005-4, 2005-2 I.R.B. 289

2005-5, 2005-3 I.R.B. 337

2005-6, 2005-5 I.R.B. 448

2005-7, 2005-3 I.R.B. 340

2005-8, 2005-4 I.R.B. 368

2005-9, 2005-4 I.R.B. 369

2005-10, 2005-6 I.R.B. 474

2005-11, 2005-7 I.R.B. 493

2005-12, 2005-7 I.R.B. 494

2005-13, 2005-9 I.R.B. 630

2005-14, 2005-7 I.R.B. 498

2005-15, 2005-7 I.R.B. 527

2005-16, 2005-8 I.R.B. 605

2005-17, 2005-8 I.R.B. 606

2005-18, 2005-9 I.R.B. 634

2005-19, 2005-9 I.R.B. 634

2005-20, 2005-9 I.R.B. 635

2005-21, 2005-11 I.R.B. 727

2005-22, 2005-12 I.R.B. 756

2005-23, 2005-11 I.R.B. 732

2005-24, 2005-12 I.R.B. 757

2005-25, 2005-14 I.R.B. 827

2005-26, 2005-12 I.R.B. 758

Notices— Continued:

2005-27, 2005-13 I.R.B. 795

2005-28, 2005-13 I.R.B. 796

2005-29, 2005-13 I.R.B. 796

2005-30, 2005-14 I.R.B. 827

2005-31, 2005-14 I.R.B. 830

Proposed Regulations:

REG-117969-00, 2005-7 I.R.B. 533

REG-125628-01, 2005-7 I.R.B. 536

REG-129709-03, 2005-3 I.R.B. 351

REG-148701-03, 2005-13 I.R.B. 802

REG-148867-03, 2005-9 I.R.B. 646

REG-160315-03, 2005-14 I.R.B. 833

REG-163314-03, 2005-14 I.R.B. 835

REG-122847-04, 2005-13 I.R.B. 804

REG-130370-04, 2005-8 I.R.B. 608

REG-130671-04, 2005-10 I.R.B. 694

REG-131128-04, 2005-11 I.R.B. 733

REG-139683-04, 2005-4 I.R.B. 371

REG-152354-04, 2005-13 I.R.B. 805

REG-152914-04, 2005-9 I.R.B. 650

REG-152945-04, 2005-6 I.R.B. 484

REG-159824-04, 2005-4 I.R.B. 372

Revenue Procedures:

2005-1, 2005-1 I.R.B. 1

2005-2, 2005-1 I.R.B. 86

2005-3, 2005-1 I.R.B. 118

2005-4, 2005-1 I.R.B. 128

2005-5, 2005-1 I.R.B. 170

2005-6, 2005-1 I.R.B. 200

2005-7, 2005-1 I.R.B. 240

2005-8, 2005-1 I.R.B. 243

2005-9, 2005-2 I.R.B. 303

2005-10, 2005-3 I.R.B. 341

2005-11, 2005-2 I.R.B. 307

2005-12, 2005-2 I.R.B. 311

2005-13, 2005-12 I.R.B. 759

2005-14, 2005-7 I.R.B. 528

2005-15, 2005-9 I.R.B. 638

2005-16, 2005-10 I.R.B. 674

2005-17, 2005-13 I.R.B. 797

2005-18, 2005-13 I.R.B. 798

2005-19, 2005-14 I.R.B. 832

Revenue Rulings:

2005-1, 2005-2 I.R.B. 258

2005-2, 2005-2 I.R.B. 259

2005-3, 2005-3 I.R.B. 334

2005-4, 2005-4 I.R.B. 366

2005-5, 2005-5 I.R.B. 445

2005-6, 2005-6 I.R.B. 471

2005-7, 2005-6 I.R.B. 464

2005-8, 2005-6 I.R.B. 466

2005-9, 2005-6 I.R.B. 470

Revenue Rulings— Continued:

2005-10, 2005-7 I.R.B. 492

2005-11, 2005-14 I.R.B. 816

2005-12, 2005-9 I.R.B. 628

2005-13, 2005-10 I.R.B. 664

2005-14, 2005-12 I.R.B. 749

2005-15, 2005-11 I.R.B. 720

2005-16, 2005-13 I.R.B. 777

2005-17, 2005-14 I.R.B. 823

2005-18, 2005-14 I.R.B. 817

2005-19, 2005-14 I.R.B. 819

2005-20, 2005-14 I.R.B. 821

2005-21, 2005-14 I.R.B. 822

2005-22, 2005-13 I.R.B. 787

Tax Conventions:

2005-3, 2005-2 I.R.B. 270

2005-17, 2005-10 I.R.B. 673

2005-22, 2005-14 I.R.B. 826

Treasury Decisions:

9164, 2005-3 I.R.B. 320

9165, 2005-4 I.R.B. 357

9166, 2005-8 I.R.B. 558

9167, 2005-2 I.R.B. 261

9168, 2005-4 I.R.B. 354

9169, 2005-5 I.R.B. 381

9170, 2005-4 I.R.B. 363

9171, 2005-6 I.R.B. 452

9172, 2005-6 I.R.B. 468

9173, 2005-8 I.R.B. 557

9174, 2005-9 I.R.B. 629

9175, 2005-10 I.R.B. 665

9176, 2005-10 I.R.B. 661

9177, 2005-10 I.R.B. 671

9178, 2005-11 I.R.B. 708

9179, 2005-11 I.R.B. 707

9180, 2005-11 I.R.B. 714

9181, 2005-11 I.R.B. 717

9182, 2005-11 I.R.B. 713

9183, 2005-12 I.R.B. 754

9184, 2005-12 I.R.B. 753

9185, 2005-12 I.R.B. 749

9186, 2005-13 I.R.B. 790

9187, 2005-13 I.R.B. 778

9189, 2005-13 I.R.B. 788

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin2004–52, dated December 27, 2004.

April 4, 2005 ii 2005–14 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2005–1 through 2005–14

Announcements:

2001-77

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

Notices:

88-30

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

88-132

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

89-29

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

89-38

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

2004-22

Modified and superseded by

Notice 2005-30, 2005-14 I.R.B. 827

2004-38

Obsoleted by

T.D. 9186, 2005-13 I.R.B. 790

2004-80

Clarified and modified by

Notice 2005-22, 2005-12 I.R.B. 756

Updated by

Notice 2005-17, 2005-8 I.R.B. 606

2005-4

Modified by

Notice 2005-24, 2005-12 I.R.B. 757

2005-17

Clarified and modified by

Notice 2005-22, 2005-12 I.R.B. 756

Proposed Regulations:

REG-149519-03

Corrected by

Ann. 2005-11, 2005-5 I.R.B. 451

REG-114726-04

Corrected by

Ann. 2005-10, 2005-5 I.R.B. 450

Revenue Procedures:

84-58

Superseded by

Rev. Proc. 2005-18, 2005-13 I.R.B. 798

Revenue Procedures— Continued:

98-16


Rev. Proc. 2005-11, 2005-2 I.R.B. 307

2000-20


Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2001-22

Superseded by

Rev. Proc. 2005-12, 2005-2 I.R.B. 311

2002-9

Modified and amplified by

Rev. Proc. 2005-9, 2005-2 I.R.B. 303

2004-1

Superseded by

Rev. Proc. 2005-1, 2005-1 I.R.B. 1

2004-2

Superseded by

Rev. Proc. 2005-2, 2005-1 I.R.B. 86

2004-3

Superseded by

Rev. Proc. 2005-3, 2005-1 I.R.B. 118

2004-4

Superseded by

Rev. Proc. 2005-4, 2005-1 I.R.B. 128

2004-5

Superseded by

Rev. Proc. 2005-5, 2005-1 I.R.B. 170

2004-6

Superseded by

Rev. Proc. 2005-6, 2005-1 I.R.B. 200

2004-7

Superseded by

Rev. Proc. 2005-7, 2005-1 I.R.B. 240

2004-8

Superseded by

Rev. Proc. 2005-8, 2005-1 I.R.B. 243

2004-18

Obsoleted in part by

Rev. Proc. 2005-15, 2005-9 I.R.B. 638

2004-35

Corrected by

Ann. 2005-4, 2005-2 I.R.B. 319

2004-60

Superseded by

Rev. Proc. 2005-10, 2005-3 I.R.B. 341

2005-6

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

Revenue Procedures— Continued:

2005-8

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2005-9

Modified by

Rev. Proc. 2005-17, 2005-13 I.R.B. 797

Revenue Rulings:

69-516

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

77-415

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

77-479

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

82-34

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

92-63


Rev. Rul. 2005-3, 2005-3 I.R.B. 334

95-63


Rev. Rul. 2005-3, 2005-3 I.R.B. 334

2004-43

Revoked by

Rev. Rul. 2005-10, 2005-7 I.R.B. 492

2004-103

Superseded by

Rev. Rul. 2005-3, 2005-3 I.R.B. 334

Treasury Decisions:

9170

Corrected by

Ann. 2005-13, 2005-8 I.R.B. 627

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,2004.

2005–14 I.R.B. iii April 4, 2005*U.S. Government Printing Office: 2005—310–365/70009