Bulletin No. 2004-22June 1, 2004

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

Ct. D. 2079, page 978.Tax assessment; partnership. The Supreme Court holdsthat the proper assessment against the partnership suffices toextend the statute of limitations to collect the tax in a judicialproceeding from the general partners who are liable for thepayment of the partnership’s debts. United States v. Gallettiet al.

Rev. Rul. 2004–45, page 971.Health Savings Account (HSA) – interaction with otherhealth arrangements. This ruling addresses the interactionbetween Health Savings Accounts (HSAs), health flexible spend-ing arrangements (health FSAs), and health reimbursement ar-rangements (HRAs).

Rev. Rul. 2004–52, page 973.Credit card annual fees. This ruling holds that credit cardannual fees are not interest for federal income tax purposes.Moreover, the ruling holds that credit card annual fees are in-cludible in the gross income by the card issuer when they be-come due and payable by cardholders under the terms of thecredit card agreements.

Notice 2004–39, page 982.This notice explains how the changes to section 1(h) of theCode made by the Jobs and Growth Tax Relief ReconciliationAct of 2003 (JGTRRA) apply to capital gain dividends paid (oraccounted for as if paid) by regulated investment companies(RICs) and real estate investment trusts (REITs) in taxable yearsthat end on or after May 6, 2003.

Rev. Proc. 2004–31, page 986.Changes in method of accounting for transfers to trustsunder section 461(f). This document provides proceduresfor taxpayers to change their method of accounting for deduct-ing under section 461(f) of the Code amounts transferred totrusts in transactions described in Notice 2003–77, 2003–49I.R.B. 1182.

Rev. Proc. 2004–32, page 988.This document provides automatic consent procedures for tax-payers to change their method of accounting to a method thatcomplies with Rev. Rul. 2004–52, in this Bulletin, or to the Rat-able Inclusion Method for Credit Card Annual Fees described inthis revenue procedure. Rev. Proc. 2002–9 modified and am-plified.

Rev. Proc. 2004–33, page 989.This procedure describes conditions under which the Commis-sioner will allow a taxpayer to treat its income from credit cardlate fees as interest income on a pool of credit card loans. Thisdocument also provides automatic consent procedures for ataxpayer to change its method of accounting for credit cardlate fee income to a method that treats these fees as interestthat creates or increases the amount of OID on a pool of creditcard loans to which the fees relate. Rev. Proc. 2002–9 modi-fied and amplified.

EXEMPT ORGANIZATIONS

Rev. Rul. 2004–51, page 974.Joint ventures. This ruling illustrates the tax consequencesfor a section 501(c)(3) organization that enters into a joint ven-ture with a for-profit organization as an insubstantial part of itsactivities.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 1001.Finding Lists begin on page ii.

Announcement 2004–50, page 1005.A list is provided of organizations now classified as private foun-dations.

ADMINISTRATIVE

Rev. Rul. 2004–50, page 977.Indian tribal government. This ruling provides clarificationwith regard to an Indian tribal government’s ability to qualifyas an eligible shareholder under section 1361 of the Code.Specifically, the ruling explains that a federally recognized In-dian tribal government does not qualify as a permissible S cor-poration shareholder under section 1361(b)(1)(B) because it isnot treated as an individual subject to individual income taxesunder section 1 of the Code. The ruling also explains that a fed-erally recognized Indian Tribe cannot qualify as a permissible Scorporation shareholder under section 1361(c)(6) because it isneither a section 501(c)(3) organization, nor a section 401(a)qualified plan, profit-sharing, or stock bonus plan organization.

Rev. Proc. 2004–28, page 984.This procedure provides guidance to regulated investmentcompanies (RICs) who must comply with the asset diversifi-cation rules of section 851(b)(3) of the Code. The proceduredescribes conditions under which a RIC may look througha repurchase agreement (repo) to government securitiesserving as the underlying collateral to treat itself as the ownerof the government securities for purposes of these rules.The procedure is effective for repos held by a RIC on or afterAugust 15, 2001.

Rev. Proc. 2004–34, page 991.This procedure provides a method of accounting under whichtaxpayers using an accrual method of accounting may defer in-cluding all or part of certain advance payments in gross incomeuntil the year after the year the payment is received. Rev. Proc.71–21 modified and superseded and Rev. Proc. 2002–9 mod-ified and amplified.

Announcement 2004–48, page 998.This announcement provides background information relatingto Rev. Proc. 2004–34 in this Bulletin. Rev. Proc. 2004–34provides a method of accounting under which taxpayers usingan accrual method of accounting may defer including all or partof certain advance payments in gross income until the yearafter the year the payment is received.

June 1, 2004 2004-22 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.

2004-22 I.R.B. June 1, 2004

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 61.—Gross IncomeDefined

Rev. Rul. 2004-52 holds that credit card annualfees are not interest for federal income tax purposes.Moreover, the ruling holds that credit card annual feesare includible in the gross income by the card issuerwhen they become due and payable by cardholdersunder the terms of the credit card agreements. SeeRev. Rul. 2004-52, page 973.

Section 223.—HealthSavings Accounts

Health Savings Account (HSA) –interaction with other health arrange-ments. This ruling addresses the inter-action between Health Savings Accounts(HSAs), health flexible spending arrange-ments (health FSAs), and health reim-bursement arrangements (HRAs).

Rev. Rul. 2004–45

ISSUE

In the situations described below, mayan individual make contributions to aHealth Savings Account (HSA) under sec-tion 223 of the Internal Revenue Code ifthe individual is covered by a high de-ductible health plan (HDHP) and alsocovered by a health flexible spendingarrangement (health FSA) or a health re-imbursement arrangement (HRA)?

FACTS

Situation 1. An individual is coveredby an HDHP (as defined under section223(c)(2)(A)). The HDHP has an 80/20percent coinsurance feature above thedeductible. The individual is also cov-ered by a health FSA under a section 125cafeteria plan and an HRA that meets therequirements of Notice 2002–45, 2002–2C.B. 93. The health FSA and HRA pay orreimburse all section 213(d) medical ex-penses that are not covered by the HDHP(such as co-payments, coinsurance, ex-penses not covered due to the deductibleand other medical expenses not coveredby the HDHP). The health FSA and HRAcoordinate the payment of benefits underthe ordering rules of Notice 2002–45. The

individual is not entitled to benefits underMedicare and may not be claimed as adependent on another person’s tax return.

Situation 2. Same facts as Situation1, except that the health FSA and HRAare limited-purpose arrangements that payor reimburse, pursuant to the written plandocument, only vision and dental expenses(whether or not the minimum annual de-ductible of the HDHP has been satisfied).In addition, the health FSA and HRA payor reimburse preventive care benefits asdescribed in Notice 2004–23, 2004–15I.R.B. 725.

Situation 3. Same facts as Situation 1,except that the individual is not coveredby a health FSA. Under the employer’sHRA, the individual elects, before the be-ginning of the HRA coverage period, toforgo the payment or reimbursement ofmedical expenses incurred during that cov-erage period. The decision to forgo thepayment or reimbursement of medical ex-penses does not apply to permitted insur-ance, permitted coverage and preventivecare (“excepted medical expenses”). Seesection 223(c)(1)(B) and Notice 2004–23.Medical expenses incurred during the sus-pended HRA coverage period (other thanthe excepted medical expenses if other-wise allowed to be paid or reimbursed byan HRA), cannot be paid or reimbursedby the HRA currently or later (i.e., afterthe HRA suspension ends). However, theemployer decides to continue to make em-ployer contributions to the HRA during thesuspension period and thus the maximumavailable amount under the HRA is not af-fected by the suspension but is availablefor the payment or reimbursement of theexcepted medical expenses incurred dur-ing the suspension period as well as medi-cal expenses incurred in later HRA cover-age periods.

Situation 4. Same facts as Situation1, except that the health FSA and HRAare post-deductible arrangements that onlypay or reimburse medical expenses (in-cluding the individual’s 20 percent coin-surance responsibility for expenses abovethe deductible) after the minimum annualdeductible of the HDHP has been satisfied.

Situation 5. Same facts as Situation 1,except that the individual is not covered

by a health FSA. The employer’s HRAis a retirement HRA that only reimbursesthose medical expenses incurred after theindividual retires.

LAW AND ANALYSIS

Section 223(a) allows a deduction forcontributions to an HSA for an “eligibleindividual” for any month during the tax-able year. Section 223(c)(1)(A) providesthat an “eligible individual” means, withrespect to any month, any individual whois covered under an HDHP on the first dayof such month and is not, while coveredunder an HDHP, “covered under any healthplan which is not a high deductible healthplan, and which provides coverage for anybenefit which is covered under the high de-ductible health plan.”

Section 223(b) provides a limit onamounts that can be contributed to anHSA. The maximum annual contribu-tion limit for an eligible individual withself-only coverage is the amount requiredby section 223(b)(2)(A). The maximumannual contribution limit for an eligibleindividual with family coverage is theamount required by section 223(b)(2)(B).

Section 223(c)(2)(A) defines an HDHPas a health plan that satisfies certain re-quirements with respect to minimumannual deductibles and maximum annualout-of-pocket expenses. Generally, if sub-stantially all of the coverage in a healthplan that is intended to be an HDHP isprovided through a health FSA or HRA,the health plan is not an HDHP.

In addition to coverage under an HDHP,section 223(c)(1)(B) provides that an eligi-ble individual may have specifically enu-merated coverage that is disregarded forpurposes of the deductible. Coverage thatmay be disregarded includes “permittedinsurance” and other specified coverage(“permitted coverage”). “Permitted insur-ance” is coverage under which substan-tially all of the coverage provided relatesto liabilities incurred under workers’ com-pensation laws, tort liabilities, liabilitiesrelating to ownership or use of property, in-surance for a specified disease or illness,and insurance that pays a fixed amountper day (or other period) of hospitalization.

2004-22 I.R.B. 971 June 1, 2004

“Permitted coverage” (whether through in-surance or otherwise) is coverage for acci-dents, disability, dental care, vision care orlong-term care. Section 223(c)(2)(C) alsoprovides a safe harbor for the absence ofa preventive care deductible. See Notice2004–23.

The legislative history of section 223explains these provisions by stating that“eligible individuals for HSAs are individ-uals who are covered by a high deductiblehealth plan and no other health plan thatis not a high deductible health plan.” Thelegislative history also explains that, “[a]nindividual with other coverage in additionto a high deductible health plan is still el-igible for an HSA if such other coverageis certain permitted insurance or permit-ted coverage.” H.R. Conf. Rep. No. 391,108th Cong., 1st Sess. 841 (2003).

Section 125(a) states that no amountwill be included in the gross income of aparticipant in a cafeteria plan solely be-cause, under the plan, the participant maychoose among the benefits of the plan.Section 125(d) defines a cafeteria plan as awritten plan under which participants maychoose among two or more benefits con-sisting of cash and qualified benefits.

Section 125(f) defines qualified bene-fits as any benefit not included in the grossincome of the employee by reason of anexpress provision in the Code. Qualifiedbenefits include employer-provided acci-dent and health coverage under section106, including health FSAs.

Notice 2002–45, 2002–2 C.B. 93, de-scribes the tax treatment of HRAs. Thenotice explains that an HRA that receivestax-favored treatment is an arrangementthat is paid for solely by the employer andnot pursuant to a salary reduction elec-tion under section 125, reimburses the em-ployee for medical care expenses incurredby the employee and by the employee’sspouse and dependents, and provides reim-bursement up to a maximum dollar amountwith any unused portion of that amount atthe end of the coverage period carried for-ward to subsequent coverage periods.

Notice 2002–45, Part IV, states that if anemployer provides an HRA in conjunctionwith another accident or health plan andthat other plan is provided pursuant to asalary reduction election under a cafeteriaplan, then all the facts and circumstancesare considered in determining whether thesalary reduction is attributable to the HRA.

An accident or health plan funded pursuantto salary reduction is not an HRA and issubject to the rules under section 125.

Under section 223, an eligible individ-ual cannot be covered by a health plan thatis not an HDHP unless that health planprovides permitted insurance, permittedcoverage or preventive care. A healthFSA and an HRA are health plans andconstitute other coverage under section223(c)(1)(A)(ii). Consequently, an indi-vidual who is covered by an HDHP anda health FSA or HRA that pays or reim-burses section 213(d) medical expensesis generally not an eligible individual forthe purpose of making contributions to anHSA. See Rev. Rul. 2004–38, 2004–15I.R.B. 717, which holds that an individualwho is covered by an HDHP that does notprovide prescription drug coverage anda separate prescription drug plan or riderthat provides benefits before the minimumannual deductible of the HDHP has beensatisfied is not an eligible individual forHSA purposes.

However, an individual is an eligible in-dividual for the purpose of making contri-butions to an HSA for periods the individ-ual is covered under the following arrange-ments:

Limited-Purpose Health FSA or HRA.A limited-purpose health FSA that paysor reimburses benefits for “permitted cov-erage” (but not through insurance or forlong-term care services) and a limited-pur-pose HRA that pays or reimburses bene-fits for “permitted insurance” (for a spe-cific disease or illness or that provides afixed amount per day (or other period) ofhospitalization) or “permitted coverage”(but not for long-term care services). Inaddition, the limited-purpose health FSAor HRA may pay or reimburse preventivecare benefits. The individual is an eligibleindividual for the purpose of making con-tributions to an HSA because these ben-efits may be provided whether or not theHDHP deductible has been satisfied.

Suspended HRA. A suspended HRA,pursuant to an election made before thebeginning of the HRA coverage period,that does not pay or reimburse, at anytime, any medical expense incurred dur-ing the suspension period except preven-tive care, permitted insurance and permit-ted coverage (if otherwise allowed to bepaid or reimbursed by the HRA). The indi-vidual is an eligible individual for the pur-

pose of making contributions to an HSA.When the suspension period ends, the in-dividual is no longer an eligible individ-ual because the individual is again entitledto receive payment or reimbursement ofsection 213(d) medical expenses from theHRA. An individual who does not forgothe payment or reimbursement of medicalexpenses incurred during an HRA cover-age period, is not an eligible individual forHSA purposes during that HRA coverageperiod.

If an HSA is funded through salary re-duction under a cafeteria plan during thesuspension period, the terms of the salaryreduction election must indicate that thesalary reduction is used only to pay for theHSA offered in conjunction with the HRAand not to pay for the HRA itself. Thus,the mere fact that an individual participatesin an HSA funded pursuant to a salary re-duction election does not necessarily re-sult in attributing the salary reduction tothe HRA.

Post-Deductible Health FSA or HRA. Apost-deductible health FSA or HRA thatdoes not pay or reimburse any medical ex-pense incurred before the minimum annualdeductible under section 223(c)(2)(A)(i) issatisfied. The individual is an eligible in-dividual for the purpose of making con-tributions to the HSA. The deductible forthe HRA or health FSA (“other coverage”)need not be the same as the deductible forthe HDHP, but in no event may the HDHPor other coverage provide benefits beforethe minimum annual deductible under sec-tion 223(c)(2)(A)(i) is satisfied. Where theHDHP and the other coverage do not haveidentical deductibles, contributions to theHSA are limited to the lower of the de-ductibles. In addition, although the de-ductibles of the HDHP and the other cover-age may be satisfied independently by sep-arate expenses, no benefits may be paid be-fore the minimum annual deductible undersection 223(c)(2)(A)(i) has been satisfied.

Retirement HRA. A retirement HRAthat pays or reimburses only those medicalexpenses incurred after retirement (andno expenses incurred before retirement).In this case, the individual is an eligibleindividual for the purpose of making con-tributions to the HSA before retirementbut loses eligibility for coverage periodswhen the retirement HRA may pay or re-imburse section 213(d) medical expenses.Thus, after retirement, the individual is

June 1, 2004 972 2004-22 I.R.B.

no longer an eligible individual for thepurpose of the HSA.

In the arrangements described, the in-dividual does not fail to be an eligible in-dividual under section 223 and may con-tribute to an HSA. In addition, combina-tions of these arrangements which are con-sistent with these requirements would notdisqualify an individual from being an el-igible individual. For example, if an em-ployer offers a combined post-deductiblehealth FSA and a limited-purpose healthFSA, this would not disqualify an other-wise eligible individual from contributingto an HSA.

An individual may not be reimbursedfor the same medical expense by more thanone plan or arrangement. However, if theindividual has available an HSA, a healthFSA and an HRA that pay or reimburse thesame medical expense, the health FSA orthe HRA may pay or reimburse the med-ical expense, subject to the ordering rulesin Notice 2002–45, Part V, so long as theindividual certifies to the employer that theexpense has not been reimbursed and thatthe individual will not seek reimbursementunder any other plan or arrangement cov-ering that expense (including the HSA).

HOLDINGS

In Situation 1, the individual is cov-ered by an HDHP and by a health FSAand HRA that pay or reimburse medi-cal expenses incurred before the min-imum annual deductible under section223(c)(2)(A)(i) has been satisfied. Thehealth FSA and HRA pay or reimbursemedical expenses that are not limited tothe exceptions for permitted insurance,permitted coverage or preventive care.As a result, the individual is not an eligi-ble individual for the purpose of makingcontributions to an HSA. This result isthe same if the individual is covered bya health FSA or HRA sponsored by theemployer of the individual’s spouse. See,Rev. Rul. 2004–38.

In Situation 2, the individual is cov-ered by an HDHP and by a health FSAand HRA that pay or reimburse medi-cal expenses incurred before the min-imum annual deductible under section223(c)(2)(A)(i) has been satisfied. How-ever, the medical expenses paid or reim-bursed by the health FSA and HRA includeonly vision and dental benefits (which are

permitted coverage) and preventive care.All of these benefits may be covered asa separate health plan, as a separate oroptional rider, or as part of the HDHP andwhether or not the minimum annual de-ductible under section 223(c)(2)(A)(i) hasbeen satisfied. The individual is an eligi-ble individual for the purpose of makingcontributions to an HSA.

In Situation 3, the individual elects toforgo the payment or reimbursement ofmedical expenses incurred during an HRAcoverage period. The suspension of pay-ments and reimbursements by the HRAdoes not apply to permitted insurance, per-mitted coverage and preventive care (ifotherwise allowed to be paid or reimbursedby the HRA). The individual is an eligibleindividual for the purpose of making con-tributions to an HSA until the suspensionperiod ends and the individual is again en-titled to receive, from the HRA, paymentsor reimbursements of section 213(d) med-ical expenses incurred after the suspensionperiod.

In Situation 4, the health FSA and HRApay or reimburse medical expenses (in-cluding the 20 percent coinsurance not oth-erwise covered by the HDHP) only afterthe HDHP’s minimum annual deductiblehas been satisfied. The individual is an el-igible individual for the purpose of makingcontributions to an HSA.

In Situation 5, the HRA is a retirementHRA that only pays or reimburses medi-cal expenses incurred after the individualretires. The individual is an eligible indi-vidual for the purpose of making contribu-tions to an HSA before retirement becausethe HRA will pay or reimburse only med-ical expenses incurred after retirement.

Drafting Information

The principal author of this noticeis Shoshanna Tanner of the Office ofDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). For further information regardingthis notice, contact Ms. Tanner at (202)622–6080 (not a toll-free call).

Section 446.—General Rulefor Methods of Accounting26 CFR 1.446-2: Method of accounting for interest.

Rev. Rul. 2004-52 holds that credit card annualfees are not interest for federal income tax purposes.Moreover, the ruling holds that credit card annual feesare includible in the gross income by the card issuerwhen they become due and payable by card holdersunder the terms of the credit card agreements. SeeRev. Rul. 2004-52, page 973.

Rev. Proc. 2004–32 provides automatic proce-dures for taxpayers to change their method of ac-counting to a method that complies with Rev. Rul.2004–52, 2004–22 I.R.B. dated June 1, 2004, or tothe Ratable Inclusion Method for Credit Card Annualfees described in this revenue procedure. See Rev.Proc. 2004-32, page 988.

Rev. Proc. 2004-33 provides automatic proce-dures for taxpayers to change their method of ac-counting for credit card late fee income to treat thesefees as interest that creates or increases the amount ofOID on a pool of credit card loans to which the feesrelate. This revenue procedure also sets forth the con-ditions under which the Commissioner will not chal-lenge a taxpayer’s treatment of these fees as interestor as OID on a pool of credit card loans to which thefees relate. See Rev. Proc. 2004-33, page 989.

Section 451.—General Rulefor Taxable Year of Inclusion

Rev. Proc. 2004–32 provides automatic proce-dures for taxpayers to change their method of ac-counting to a method that complies with Rev. Rul.2004–52, 2004–22 I.R.B. dated June 1, 2004, or tothe Ratable Inclusion Method for Credit Card Annualfees described in this revenue procedure. See Rev.Proc. 2004-32, page 988.

26 CFR 1.451–1: Taxable year of inclusion.(Also: §§ 61, 446.)

Credit card annual fees. This rulingholds that credit card annual fees are notinterest for federal income tax purposes.Moreover, the ruling holds that credit cardannual fees are includible in the gross in-come by the card issuer when they becomedue and payable by cardholders under theterms of the credit card agreements.

Rev. Rul. 2004–52

ISSUES

(1) Are credit card annual fees interestfor federal income tax purposes?

2004-22 I.R.B. 973 June 1, 2004

(2) When are credit card annual fees in-cludible in gross income by the card is-suer?

FACTS

X, a taxpayer that uses an overall ac-crual method of accounting for federalincome tax purposes, issues credit cards.Each card allows the cardholder to ac-cess a revolving line of credit to makepurchases of goods and services and, ifotherwise provided for under the applica-ble cardholder agreement, to obtain cashadvances.

Credit card issuers, including X, chargecertain cardholders an annual fee. Thesecredit card issuers make various benefitsand services available to their cardholdersduring the year, regardless of whether thecardholder actually utilizes them. Further,although they provide these benefits andservices to cardholders, no part of the an-nual fee that is charged to any cardholderis for a specific benefit or service providedby a credit card issuer to that cardholder.

Each cardholder’s credit card agree-ment sets forth the applicable terms andconditions under which X may charge thatcardholder an annual fee. X charges somecardholders a nonrefundable annual fee.X charges other cardholders an annual feethat is refundable on a pro rata basis if thecardholder closes the account during theperiod covered by the fee.

Under the applicable cardholder agree-ment, no annual fee becomes due andpayable until X posts an annual fee chargeto the cardholder’s credit card account.X reflects this posting in the cardholder’scredit card statement. X generally poststhe full amount of the annual fee in a singlecharge unless the terms of the agreementrequire X to post the annual fee charge ininstallments.

LAW AND ANALYSIS

For federal income tax purposes, in-terest is an amount that is paid in com-pensation for the use or forbearance ofmoney. Deputy v. DuPont, 308 U.S. 488(1940), 1940–1 C.B. 118; Old ColonyRailroad Co. v. Commissioner, 284 U.S.552 (1932), 1932–1 C.B. 274. Neitherthe label used for the fee nor a taxpayer’streatment of the fee for financial or regu-latory reporting purposes is determinativeof the proper federal income tax charac-

terization of that fee. See Thor PowerTool Co. v. Commissioner, 439 U.S. 522,542–43 (1979), 1979–1 C.B. 167, 174–75;Rev. Rul. 72–315, 1972–1 C.B. 49.

The annual fee that credit card issuers,including X, charge any cardholder isnot for any specific benefit provided bythe credit card issuer to that cardholder.Rather, it is charged for all of the benefitsand services that are available to the card-holder under the applicable cardholderagreement. Because cardholders pay an-nual fees to credit card issuers, includingX, in return for all of the benefits andservices available under the applicablecredit card agreement, annual fees are notcompensation for the use or forbearanceof money. Thus, X’s annual fee income isnot interest income for federal income taxpurposes.

Under § 451(a) of the Internal RevenueCode, the amount of any item of gross in-come is includible in gross income for thetaxable year in which it is received by thetaxpayer, unless that amount is to be prop-erly accounted for in a different period un-der the method of accounting used by thetaxpayer in computing taxable income.

Under § 1.451–1(a) of the Income TaxRegulations, income is includible in grossincome by a taxpayer that uses an accrualmethod of accounting when all events haveoccurred that fix the taxpayer’s right to re-ceive that income and the amount of thatincome can be determined with reasonableaccuracy. See also § 1.446–1(c)(1)(ii)(A).Generally, all the events that fix the right toreceive income occur when either the re-quired performance takes place, paymentis due, or payment is made, whichever oc-curs first (the all events test). See Rev.Rul. 2003–10, 2003–1 C.B. 288; Rev. Rul.80–308, 1980–2 C.B. 162.

X is required to include these annualfees in gross income under § 1.451–1(a)when the fee income becomes due andpayable under its agreements, because X’sright to the income is fixed at that pointand the amount of the income can be deter-mined with reasonable accuracy. Thus, theall events test is satisfied when X posts anannual fee charge to a cardholder’s creditcard account even if X later is requiredto refund a portion of a previously postedrefundable annual fee charge because thecardholder closes the account during theperiod covered by that fee.

Notwithstanding the holding of this rev-enue ruling, Rev. Proc. 2004–32, 2004–22I.R.B. 988, dated June 1, 2004, this Bul-letin, allows card issuers to account for an-nual fee income using the Ratable Inclu-sion Method for Credit Card Annual Fees,which is described in section 4 of that rev-enue procedure. Rev. Proc. 2004–32 alsoprovides automatic consent for a taxpayerdescribed in this revenue ruling to changeits method of accounting for annual fee in-come.

HOLDINGS

(1) Credit card annual fees are not inter-est for federal income tax purposes.

(2) Credit card annual fees are includi-ble in gross income by the card issuer whenthey become due and payable by cardhold-ers under the terms of the credit card agree-ments.

DRAFTING INFORMATION

The principal authors of this revenueruling are Rebecca E. Asta, Alexa Dubert,and Tina Jannotta of the Office of ChiefCounsel (Financial Institutions and Prod-ucts). For further information regardingthis revenue ruling, contact the principalauthors at (202) 622–3930 (not a toll-freecall).

Section 481.—AdjustmentsRequired by Changes inMethod of Accounting

Taxpayers changing a method of accounting forcertain transfers to trusts to satisfy contested liabili-ties under section 461(f) may be required to take intoaccount a positive adjustment under section 481(a)entirely in one year. See Rev. Proc. 2004-31, page986.

Section 501.—ExemptionFrom Tax on Corporations,Certain Trusts, etc.26 CFR 1.501(c)(3)–1: Organizations organized andoperated for religious, charitable, scientific, testingfor public safety, literary, or educational purposes, orfor the prevention of cruelty to children or animals.(Also sections 511–513.)

Joint ventures. This ruling illus-trates the tax consequences for a section501(c)(3) organization that enters into ajoint venture with a for-profit organizationas an insubstantial part of its activities.

June 1, 2004 974 2004-22 I.R.B.

Rev. Rul. 2004–51

ISSUES

1. Whether, under the facts describedbelow, an organization continues to qual-ify for exemption from federal income taxas an organization described in § 501(c)(3)of the Internal Revenue Code when it con-tributes a portion of its assets to and con-ducts a portion of its activities through alimited liability company (LLC) formedwith a for-profit corporation.

2. Whether, under the same facts, theorganization is subject to unrelated busi-ness income tax under § 511 on its distribu-tive share of the LLC’s income.

FACTS

M is a university that has been rec-ognized as exempt from federal incometax under § 501(a) as an organization de-scribed in § 501(c)(3). As a part of its edu-cational programs, M offers summer sem-inars to enhance the skill level of elemen-tary and secondary school teachers.

To expand the reach of its teacher train-ing seminars, M forms a domestic LLC,L, with O, a company that specializes inconducting interactive video training pro-grams. L’s Articles of Organization andOperating Agreement (“governing docu-ments”) provide that the sole purpose of Lis to offer teacher training seminars at off-campus locations using interactive videotechnology. M and O each hold a 50 per-cent ownership interest in L, which is pro-portionate to the value of their respectivecapital contributions to L. The governingdocuments provide that all returns of cap-ital, allocations and distributions shall bemade in proportion to the members’ re-spective ownership interests.

The governing documents provide thatL will be managed by a governing boardcomprised of three directors chosen by Mand three directors chosen by O. Under thegoverning documents, L will arrange andconduct all aspects of the video teachertraining seminars, including advertising,enrolling participants, arranging for thenecessary facilities, distributing the coursematerials and broadcasting the seminarsto various locations. L’s teacher trainingseminars will cover the same content cov-ered in the seminars M conducts on M’scampus. However, school teachers willparticipate through an interactive video

link at various locations rather than in per-son. The governing documents grant Mthe exclusive right to approve the curricu-lum, training materials, and instructors,and to determine the standards for suc-cessful completion of the seminars. Thegoverning documents grant O the exclu-sive right to select the locations whereparticipants can receive a video link to theseminars and to approve other personnel(such as camera operators) necessary toconduct the video teacher training semi-nars. All other actions require the mutualconsent of M and O.

The governing documents require thatthe terms of all contracts and transactionsentered into by L with M, O and any otherparties be at arm’s length and that all con-tract and transaction prices be at fair mar-ket value determined by reference to theprices for comparable goods or services.The governing documents limit L’s activi-ties to conducting the teacher training sem-inars and also require that L not engagein any activities that would jeopardize M’sexemption under § 501(c)(3). L does infact operate in accordance with the govern-ing documents in all respects.

M’s participation in L will be aninsubstantial part of M’s activitieswithin the meaning of § 501(c)(3) and§ 1.501(c)(3)–1(c)(1) of the Income TaxRegulations.

Because L does not elect under§ 301.7701–3(c) of the Procedure andAdministration Regulations to be classi-fied as an association, L is classified as apartnership for federal tax purposes pur-suant to § 301.7701–3(b).

LAW

Exemption under § 501(c)(3)

Section 501(c)(3) provides, in part, forthe exemption from federal income tax ofcorporations organized and operated ex-clusively for charitable, scientific, or edu-cational purposes, provided no part of theorganization’s net earnings inures to thebenefit of any private shareholder or indi-vidual.

Section 1.501(c)(3)–1(c)(1) providesthat an organization will be regarded as op-erated exclusively for one or more exemptpurposes only if it engages primarily in ac-tivities that accomplish one or more of theexempt purposes specified in § 501(c)(3).

Activities that do not further exempt pur-poses must be an insubstantial part ofthe organization’s activities. In BetterBusiness Bureau of Washington, D.C. v.United States, 326 U.S. 279, 283 (1945),the Supreme Court held that “the presenceof a single . . . [non-exempt] purpose,if substantial in nature, will destroy theexemption regardless of the number or im-portance of truly . . . [exempt] purposes.”

Section 1.501(c)(3)–1(d)(1)(ii) pro-vides that an organization is not organizedor operated exclusively for exempt pur-poses unless it serves a public rather than aprivate interest. To meet this requirement,an organization must “establish that it isnot organized or operated for the benefitof private interests....”

Section 1.501(c)(3)–1(d)(2) defines theterm “charitable” as used in § 501(c)(3) asincluding the advancement of education.

Section 1.501(c)(3)–1(d)(3)(i) pro-vides, in part, that the term “educational”as used in § 501(c)(3) relates to the in-struction or training of the individual forthe purpose of improving or developinghis capabilities.

Section 1.501(c)(3)–1(d)(3)(ii) pro-vides examples of educational organi-zations including a college that has aregularly scheduled curriculum, a regularfaculty, and a regularly enrolled body ofstudents in attendance at a place wherethe educational activities are regularly car-ried on and an organization that presentsa course of instruction by means of cor-respondence or through the utilization oftelevision or radio.

Joint Ventures

Rev. Rul. 98–15, 1998–1 C.B. 718,provides that for purposes of determiningexemption under § 501(c)(3), the activitiesof a partnership, including an LLC treatedas a partnership for federal tax purposes,are considered to be the activities of thepartners. A § 501(c)(3) organization mayform and participate in a partnership andmeet the operational test if 1) participationin the partnership furthers a charitable pur-pose, and 2) the partnership arrangementpermits the exempt organization to act ex-clusively in furtherance of its exempt pur-pose and only incidentally for the benefitof the for-profit partners.

Redlands Surgical Services, 113 T.C.47, 92–93 (1999), aff’d 242 F.3d 904 (9th

2004-22 I.R.B. 975 June 1, 2004

Cir. 2001), provides that a nonprofit or-ganization may form partnerships, or en-ter into contracts, with private parties tofurther its charitable purposes on mutu-ally beneficial terms, “so long as the non-profit organization does not thereby imper-missibly serve private interests.” The TaxCourt held that the operational standard isnot satisfied merely by establishing “what-ever charitable benefits [the partnership]may produce,” finding that the nonprofitpartner lacked “formal or informal controlsufficient to ensure furtherance of chari-table purposes.” Affirming the Tax Court,the Ninth Circuit held that ceding “effec-tive control” of partnership activities im-permissibly serves private interests. 242F.3d at 904.

St. David’s Health Care System v.United States, 349 F.3d 232, 236–237 (5thCir. 2003), held that the determinationof whether a nonprofit organization thatenters into a partnership operates exclu-sively for exempt purposes is not limitedto “whether the partnership provides some(or even an extensive amount of) charita-ble services.” The nonprofit partner alsomust have the “capacity to ensure that thepartnership’s operations further charitablepurposes.” Id. at 243. “[T]he non-profitshould lose its tax-exempt status if it cedescontrol to the for-profit entity.” Id. at 239.

Tax on Unrelated Business Income

Section 511(a), in part, provides for theimposition of tax on the unrelated businesstaxable income (as defined in § 512) oforganizations described in § 501(c)(3).

Section 512(a)(1) defines “unrelatedbusiness taxable income” as the gross in-come derived by any organization fromany unrelated trade or business (as definedin § 513) regularly carried on by it less thedeductions allowed, both computed withthe modifications provided in § 512(b).

Section 512(c) provides that, if a tradeor business regularly carried on by a part-nership of which an organization is a mem-ber is an unrelated trade or business withrespect to the organization, in computingits unrelated business taxable income, theorganization shall, subject to the excep-tions, additions, and limitations containedin § 512(b), include its share (whether ornot distributed) of the gross income ofthe partnership from the unrelated tradeor business and its share of the partner-

ship deductions directly connected withthe gross income.

Section 513(a) defines the term “unre-lated trade or business” as any trade orbusiness the conduct of which is not sub-stantially related (aside from the need ofthe organization for income or funds or theuse it makes of the profits derived) to theexercise or performance by the organiza-tion of its charitable, educational, or otherpurpose or function constituting the basisfor its exemption under § 501.

Section 1.513–1(d)(2) provides that atrade or business is “related” to an or-ganization’s exempt purposes only if theconduct of the business activities has acausal relationship to the achievement ofexempt purposes (other than through theproduction of income). A trade or busi-ness is “substantially related” for purposesof § 513, only if the causal relationshipis a substantial one. Thus, to be substan-tially related, the activity “must contributeimportantly to the accomplishment of [ex-empt] purposes.” Section 1.513–1(d)(2).Section 513, therefore, focuses on “themanner in which the exempt organiza-tion operates its business” to determinewhether it contributes importantly to theorganization’s charitable or educationalfunction. United States v. American Col-lege of Physicians, 475 U.S. 834, 849(1986).

ANALYSIS

L is a partnership for federal tax pur-poses. Therefore, L’s activities are at-tributed to M for purposes of determiningboth whether M operates exclusively foreducational purposes and therefore con-tinues to qualify for exemption under§ 501(c)(3) and whether M has engagedin an unrelated trade or business andtherefore may be subject to the unrelatedbusiness income tax on its distributiveshare of L’s income.

The activities M is treated as conduct-ing through L are not a substantial partof M’s activities within the meaning of§ 501(c)(3) and § 1.501(c)(3)–1(c)(1).Therefore, based on all the facts and cir-cumstances, M’s participation in L, takenalone, will not affect M’s continued qual-ification for exemption as an organizationdescribed in § 501(c)(3).

Although M continues to qualify asan exempt organization described in

§ 501(c)(3), M may be subject to unre-lated business income tax under § 511if L conducts a trade or business that isnot substantially related to the exercise orperformance of M’s exempt purposes orfunctions.

The facts establish that M’s activitiesconducted through L constitute a tradeor business that is substantially relatedto the exercise and performance of M’sexempt purposes and functions. Eventhough L arranges and conducts all aspectsof the teacher training seminars, M aloneapproves the curriculum, training mate-rials and instructors, and determines thestandards for successfully completing theseminars. All contracts and transactionsentered into by L are at arm’s length andfor fair market value, M’s and O’s owner-ship interests in L are proportional to theirrespective capital contributions, and allreturns of capital, allocations and distribu-tions by L are proportional to M’s and O’sownership interests. The fact that O se-lects the locations and approves the otherpersonnel necessary to conduct the semi-nars does not affect whether the seminarsare substantially related to M’s educa-tional purposes. Moreover, the teachertraining seminars L conducts using inter-active video technology cover the samecontent as the seminars M conducts onM’s campus. Finally, L’s activities haveexpanded the reach of M’s teacher trainingseminars, for example, to individuals whootherwise could not be accommodatedat, or conveniently travel to, M’s campus.Therefore, the manner in which L conductsthe teacher training seminars contributesimportantly to the accomplishment of M’seducational purposes, and the activities ofL are substantially related to M’s educa-tional purposes. Section 1.513–1(d)(2).Accordingly, based on all the facts andcircumstances, M is not subject to unre-lated business income tax under § 511 onits distributive share of L’s income.

HOLDINGS

1. M continues to qualify for exemp-tion under § 501(c)(3) when it contributesa portion of its assets to and conducts a por-tion of its activities through L.

2. M is not subject to unrelated businessincome tax under § 511 on its distributiveshare of L’s income.

June 1, 2004 976 2004-22 I.R.B.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Virginia G. Richardson of ExemptOrganizations, Tax Exempt and Govern-ment Entities Division. For further in-formation regarding this revenue ruling,contact Virginia G. Richardson at (202)283–8938 (not a toll-free call).

Section 511.—Imposition ofTax on Unrelated BusinessIncome of Charitable, etc.,Organizations

Unrelated business income tax consequences for asection 501(c)(3) organization that enters into a jointventure with a for-profit organization as an insubstan-tial part of its activities. See Rev. Rul. 2004-51, page974.

Section 512.—UnrelatedBusiness Taxable Income

Unrelated business income tax consequences for asection 501(c)(3) organization that enters into a jointventure with a for-profit organization as an insubstan-tial part of its activities. See Rev. Rul. 2004-51, page974.

Section 513.—UnrelatedTrade or Business

Unrelated business income tax consequences for asection 501(c)(3) organization that enters into a jointventure with a for-profit organization as an insubstan-tial part of its activities. See Rev. Rul. 2004-51, page974.

Section 1272.—CurrentInclusion in Income ofOriginal Issue Discount

Rev. Proc. 2004-33 provides automatic proce-dures for taxpayers to change their method of ac-counting for credit card late fee income to treat thesefees as interest that creates or increases the amount ofOID on a pool of credit card loans to which the feesrelate. This revenue procedure also sets forth the con-ditions under which the Commissioner will not chal-lenge a taxpayer’s treatment of these fees as interestor as OID on a pool of credit card loans to which thefees relate. See Rev. Proc. 2004-33, page 989.

Section 1361.—S Corpo-ration Defined26 CFR 1.1361(b): Small business corporation de-fined.(Also: §§ 401, 501, 1362, 7701, 7871, 305.7871–1.)

Indian tribal government. This rul-ing provides clarification with regard to anIndian tribal government’s ability to qual-ify as an eligible shareholder under sec-tion 1361 of the Code. Specifically, theruling explains that a federally recognizedIndian tribal government does not qualifyas a permissible S corporation shareholderunder section 1361(b)(1)(B) because it isnot treated as an individual subject to indi-vidual income taxes under section 1 of theCode. The ruling also explains that a feder-ally recognized Indian Tribe cannot qual-ify as a permissible S corporation share-holder under section 1361(c)(6) becauseit is neither a section 501(c)(3) organiza-tion, nor a section 401(a) qualified plan,profit-sharing, or stock bonus plan organi-zation.

Rev. Rul. 2004–50

ISSUE

Is a federally recognized Indiantribal government, as described in§ 7701(a)(40)(A) of the Internal RevenueCode, an eligible S corporation share-holder under § 1361?

FACTS

X is a federally recognized Indian tribalgovernment (Indian tribal government)and a shareholder in Corporation, a do-mestic entity, formed in accordance withthe laws of State. Corporation wants tomake an election to be an S corporation.

LAW AND ANALYSIS

Section 1361(a) provides that for pur-poses of this title, the term “S corporation”means, with respect to any taxable year,a small business corporation for which anelection under § 1362(a) is in effect for theyear.

Section 1361(b)(1) provides that forpurposes of this subchapter, the term“small business corporation” means adomestic corporation which is not an inel-igible corporation and which does not (A)have more than 75 shareholders, (B) have

as a shareholder a person (other than an es-tate, a trust described in subsection (c)(2),or an organization described in subsection(c)(6)) who is not an individual, (C) havea nonresident alien as a shareholder, and(D) have more than one class of stock.

Section 1361(c)(6) provides that forpurposes of subsection (b)(1)(B), anorganization which is (A) described in§§ 401(a) or 501(c)(3), and (B) exemptfrom taxation under § 501(a), may be ashareholder in an S corporation.

Section 401(a) provides the definitionof a qualified pension, profit-sharing, andstock bonus plans that qualifies under§ 1361(b) as an eligible S corporationshareholder.

Section 501(a) provides that an organ-ization described in subsection (c) or (d)or § 401(a) shall be exempt from taxationunder this subtitle unless that exemption isdenied under § 502 or § 503.

Section 501(c)(3) describes corpora-tions, and any community chest, fund, orfoundation, organized and operated exclu-sively for religious, charitable, scientific,testing for public safety, literacy, or edu-cational purposes, or to foster national orinternational amateur sports competition(but only if no part of its activities involvethe provision of athletic facilities or equip-ment), or for the prevention of crueltyto children or animals, no part of the netearnings of which inures to the benefit ofany private shareholder or individual, nosubstantial part of the activities of which iscarrying on propaganda, or otherwise at-tempting, to influence legislation (exceptas otherwise provided in section (h)), andwhich does not participate in, or intervenein (including the publishing or distributionof statements), any political campaign onbehalf of (or in opposition to) any candi-date for public office.

Section 7701(a)(40)(A) states that theterm “Indian tribal government” refers tothe governing body of any tribe, band,community, village, or group of Indians,or (if applicable) Alaska Natives, which isdetermined by the Secretary of the Trea-sury, after consultation with the Secretaryof the Interior, to exercise governmentalfunctions.

Section 7871(a) and § 305.7871–1 ofthe Income Tax Regulations provide thatIndian tribal governments will be treatedas states for certain enumerated federal taxpurposes.

2004-22 I.R.B. 977 June 1, 2004

Section 7871(d) states that, for pur-poses of § 7871(a), a subdivision of anIndian tribal government shall be treatedas a political subdivision of a state if (andonly if) the Secretary of the Treasury de-termines (after consultation with the Sec-retary of the Interior) that the subdivisionhas been delegated the right to exercise oneor more of the substantial governmentalfunctions of the Indian tribal government.

Rev. Proc. 2002–64, 2002–2 C.B. 717,provides the most recent list of federallyrecognized tribal governments. In the sit-uation described in this ruling, X is a feder-ally recognized Indian tribal government.

Generally, federal income tax statutesdo not tax Indian tribes. See Rev. Rul.67–284, 1967–2 C.B. 55. An Indian tribeis not subject to federal income tax as anindividual under § 1 or as a corporation un-der § 11. However, colleges and universi-ties formed by Indian tribes are subject to§ 511(a)(2)(B) (relating to the taxation ofcolleges and universities which are agen-cies or instrumentalities of governmentsor their political subdivisions) pursuant to§ 7871(a)(5). Indian tribes also are subjectto certain excise taxes.

Rev. Rul. 60–384, 1960–2 C.B. 172,provides circumstances under which agovernmental agency is prohibited fromqualifying as a § 501(c)(3) organization. Astate or municipality itself will not qualifyas an organization described in § 501(c)(3)since its purposes are clearly not exclu-sively those described in § 501(c)(3).Where a particular branch or departmentunder whose jurisdiction the activity inquestion is being coordinated is an integralpart of a state or municipal government,the provisions of § 501(c)(3) would alsonot be applicable.

Based on the above law and publishedguidance, X, an Indian tribal government,is not subject to federal income tax as anindividual under § 1. Because an Indiantribal government is not subject to tax as anindividual for § 1 purposes, it is not consid-ered an individual under § 1361(b)(1)(B).

In addition, X, an Indian tribal gov-ernment, does not qualify under the§ 1362(c)(6) exception for certain exemptorganizations described in § 501(c)(3) or§ 401(a). X is not a § 401(a) organiza-tion because it is not a qualified pension,profit-sharing, or stock bonus plan. Fur-thermore, X is not a § 501(c)(3) organ-ization because it is a government and

its purposes are not exclusively those de-scribed in § 501(c)(3). Consequently, X isnot an eligible S corporation shareholder,and Corporation cannot make an electionto be an S corporation.

HOLDING

A federally recognized Indian tribalgovernment is not an eligible S corpora-tion shareholder for purposes of § 1361.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Laura C. Nash of the Office of As-sociate Chief Counsel (Passthroughs andSpecial Industries). For further informa-tion regarding this revenue ruling, con-tact Ms. Nash at (202) 622–3050 (not atoll-free call).

Section 6501.—Limitationson Assessment andCollection

Ct. D. 2079

SUPREME COURT OF THEUNITED STATES

No. 02-1389

UNITED STATES v. GALLETTI ET AL.

CERTIORARI TO THE UNITEDSTATES COURT

OF APPEALS FOR THE NINTHCIRCUIT

March 23, 2004

Syllabus

“[T]he amount of any tax imposed [bythe Internal Revenue Code] shall be as-sessed within three years after the returnwas filed.” 26 U.S.C. Sec. 6501(a). If atax is properly so assessed, the statute oflimitations for collecting it is extended by10 years from the assessment date. Sec.6502(a). Respondents were general part-ners of a partnership (hereinafter Partner-ship) that failed to pay significant federalemployment taxes from 1992 to 1995. TheInternal Revenue Service (IRS) timely as-sessed the Partnership, but the taxes werenever paid. Respondents later filed forChapter 13 bankruptcy protection, and the

IRS then filed proof of claims against themfor the Partnership’s unpaid employmenttaxes. Respondents objected, arguing thatthe timely assessment of the Partnershipdid not extend the 3-year limitations periodagainst the general partners, who had notbeen separately assessed within that pe-riod. The Bankruptcy Court and the Dis-trict Court agreed and sustained respon-dents’ objections. The Ninth Circuit af-firmed, holding that since respondents are“taxpayers” under Sec. 7701, which de-fines “taxpayer” to mean “any person sub-ject to any internal revenue tax,” they arealso “taxpayers” under Secs. 6203 and6501. As such, the court held that the as-sessment against the Partnership extendedthe limitations period only with respect tothe Partnership.

Held: The proper tax assessmentagainst the Partnership suffices to extendthe statute of limitations to collect the taxin a judicial proceeding from the generalpartners who are liable for the payment ofthe Partnership’s debts. Pp. 4–9.

(a) Respondents argue that a valid as-sessment triggering the 10-year increasein the limitations period must name themindividually, as they are primarily liablefor the tax debt. They claim, first, thatthey are the relevant taxpayers under Sec.6203, which requires the assessment tobe made by “recording the liability ofthe taxpayer.” Although the Ninth Cir-cuit correctly concluded that an individualpartner can be a “taxpayer,” Sec. 6203speaks of the taxpayer’s “liability,” whichindicates that the relevant taxpayer mustbe determined. Here, the liability arosefrom the Partnership’s failure to complywith Sec. 3402(a)(1)’s requirement thatan “employer [paying] wages” deduct andwithhold employment taxes. And Sec.3403 makes clear that the “employer” thatfails to withhold and submit the requisiteemployment taxes is the “liable” taxpayer.In this case, the Partnership is the “em-ployer.” Second, respondents claim thatthey are primarily liable for the tax debtbecause California law makes them jointlyand severally liable for the Partnership’sdebts. However, to be primarily liablefor this debt, respondents must show thatthey are the “employer.” And, under Cal-ifornia law, a partnership and its generalpartners are separate entities. Thus re-spondents cannot argue that, for all intentsand purposes, imposing a tax directly on

June 1, 2004 978 2004-22 I.R.B.

the Partnership is equivalent to imposinga tax directly on the general partners, butmust instead prove that the tax liabilitywas imposed both on the Partnership andon respondents as separate “employers.”That respondents are jointly and severallyliable for the Partnership’s debts is irrele-vant to this determination. Pp. 4–7.

(b) The Code does not require the Gov-ernment to make separate assessments ofa single tax debt against persons or enti-ties secondarily liable for that debt in orderfor Sec. 6502’s extended limitations pe-riod to apply to judicial collection actionsagainst those persons or entities. It is clearthat “assessment” refers to little more thanthe calculation or recording of a tax liabil-ity, see, e.g., Sec. 6201, and that it is thetax that is assessed, not the taxpayer, see,e.g., Sec. 6501. The limitations period re-sulting from a proper assessment governsthe time extension for enforcing the tax li-ability. United States v. Updike, 281 U.S.489, 495. Once a tax has been properlyassessed, nothing in the Code requires theIRS to duplicate its efforts by separatelyassessing the same tax against individualsor entities who are not the actual taxpay-ers but are, by reason of state law, liablefor the taxpayer’s debt. The assessment’sconsequences—the extension of the limi-tations period for collecting the debt—at-tach to the debt without reference to thespecial circumstances of the secondarily li-able parties. Here, the tax was properly as-sessed against the Partnership, thereby ex-tending the limitations period for collect-ing the debt. The United States now timelyseeks to collect that debt in judicial pro-ceedings against respondents. Pp. 7–9.

314 F.3d 336 reversed and remanded.THOMAS, J., delivered the opinion for

a unanimous Court.

SUPREME COURT OF THEUNITED STATES

No. 02-1389

UNITED STATES, PETITIONER v.ABEL COSMO GALLETTI ET AL.

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT

OF APPEALS FOR THE NINTHCIRCUIT

March 23, 2004

JUSTICE THOMAS delivered theopinion of the Court.

Section 6501(a) of the Internal RevenueCode states that, except as otherwise pro-vided, “the amount of any tax imposed bythis title shall be assessed within 3 yearsafter the return was filed . . . and no pro-ceeding in court without assessment for thecollection of such tax shall be begun afterthe expiration of such period.” 26 U.S.C.Sec. 6501(a). If a tax is properly assessedwithin three years, however, the statute oflimitations for the collection of the tax isextended by 10 years from the date of as-sessment. Sec. 6502(a). We must decidein this case whether, in order for the UnitedStates to avail itself of the 10-year increasein the statute of limitations for collectionof a tax debt, it must assess the taxes notonly against a partnership that is directlyliable for the debt, but also against each in-dividual partner who might be jointly andseverally liable for the debts of the part-nership. Under California law a partner-ship maintains a separate identity from itsgeneral partners, and the partners are onlysecondarily liable for the tax debts of thepartnership, as they are for any debt of thepartnership. Because, in this case, the onlyrelevant “taxpayer” for purposes of Secs.6501–6502 is the partnership, we hold thatthe proper assessment of the tax against thepartnership suffices to extend the statute oflimitations for collection of the tax fromthe general partners who are liable for thepayment of the partnership’s debts. TheGovernment’s timely assessment of the taxagainst the partnership was sufficient toextend the statute of limitations to collectthe tax in a judicial proceeding, whetherfrom the partnership itself or from those li-able for its debts.

I

Respondents, Abel Cosmo Galletti,Sarah Galletti, Francesco Briguglio, andAngela Briguglio, were general partnersof Marina Cabrillo Company (Partner-ship). From 1992 to 1995, the Partnershipfailed to pay significant federal employ-ment tax liabilities that it had incurred.Although the Internal Revenue Service(IRS) timely assessed those taxes againstthe Partnership in 1994, 1995, and 1996,the Partnership never satisfied the debt.

Respondents Abel and Sarah Gallettiand respondents Francesco and Angela

Briguglio filed joint petitions for reliefunder Chapter 13 of the Bankruptcy Codeon October 20, 1999, and February 4,2000, respectively. In the Gallettis’ pro-ceedings, the IRS filed a proof of claim inthe amount of $395,179.89 for unpaid em-ployment taxes assessed between January1994 and July 1995 against the Partner-ship. In the Briguglios’ proceedings, theIRS filed a proof of claim in the amount of$427,402.74. The proof of claim includedsecured claims totaling $403,264.06 forunpaid employment taxes assessed be-tween January 1994 and November 1996against the Partnership.

Respondents objected to the claimson the ground that they were not provenagainst the estates. Respondents did notdispute that under California law they arejointly and severally liable for the debts ofthe Partnership. Nor did they dispute thatthe IRS had properly assessed the taxesagainst the Partnership within the 3-yearstatute of limitations, thereby extendingthe limitations period for collection of thetaxes by 10 years. Rather, respondentsargued that the timely assessment of thePartnership extended the statute of limi-tations only against the Partnership. Toextend the 3-year statute of limitationsagainst the general partners, respondentsargued, the IRS had to separately assessthe general partners within the 3-yearlimitations period. Because it did not,and because the 3-year limitations pe-riod had expired, respondents argued thatthe IRS could no longer collect the debtfrom them. The Bankruptcy Court andthe District Court agreed and sustainedrespondents’ objections to the claims.

The Court of Appeals for the NinthCircuit affirmed. The Government arguedthat the Code does not require that theindividual partners be assessed within the3-year period prescribed by Sec. 6501 andthat the IRS made a valid assessment ofthe taxpayer here because the Partnershipis the only relevant “taxpayer.” The Courtof Appeals held that since respondentsare “taxpayers” under Sec. 7701(a)(14),which defines “taxpayer” to mean “anyperson subject to any internal revenuetax,” they are also “taxpayers” under Secs.6203 and 6501. As such, the Court of Ap-peals held that “[t]he assessment againstthe Partnership extended the statute oflimitations only with respect to the Part-nership.” 314 F.3d 336, 340 (2002).

2004-22 I.R.B. 979 June 1, 2004

The Government argued in the alter-native that because respondents concededthat they were liable for the Partnership’semployment tax debts as a matter of Cali-fornia law, the Government had a right topayment, which suffices to prove a validclaim in bankruptcy. See 11 U.S.C. Sec.101(5)(A) (defining “claim” as includinga “right to payment, whether or not suchright is reduced to judgment, liquidated,unliquidated, fixed, contingent, matured,unmatured, disputed, undisputed, legal,equitable, secured, or unsecured”). TheCourt of Appeals rejected this argumentbecause, under California law, a creditormust obtain a judgment against a part-ner before holding that partner liable forthe partnership’s debt. Cal. Corp. CodeAnn. Sec. 16307(c) (Supp. 2004). At thetime the United States filed its proof ofclaim, it had not obtained a separate judg-ment against respondents, and the time forobtaining a judgment under the InternalRevenue Code against respondents hadexpired.

We granted certiorari, 539 U.S.(2003), and now reverse.

II

Section 6501(a) of the Internal RevenueCode provides that “the amount of any taximposed [by the Code] shall be assessedwithin 3 years after the return was filed.”26 U.S.C. Sec. 6501(a). “The assess-ment shall be made by recording the lia-bility of the taxpayer in the office of theSecretary [of the Treasury] in accordancewith rules or regulations prescribed by theSecretary.” Sec. 6203. Within 60 days ofthe assessment, the Secretary is requiredto “give notice to each person liable forthe unpaid tax, stating the amount and de-manding payment thereof.” Sec. 6303(a).If the tax is properly assessed within 3years, the limitations period for collectionof the tax is extended by 10 years from thedate of the assessment. Sec. 6502.

The dispute in this case centers onwhether the United States can collect thePartnership’s unpaid employment taxesfrom respondents in a judicial proceedingoccurring more than three years after thetax return was filed but within the 10-yearextension to the 3-year limitations periodthat attached when the tax was timelyassessed against the Partnership.1 Respon-dents insist that a valid assessment (that is,one that would trigger the 10-year increasein the statute of limitations) must namethem individually. This is so, accordingto respondents, because they are primar-ily liable for the tax debt, both becausethey are “the [relevant] taxpayer[s]” underSec. 6203 and because they are jointlyand severally liable for the tax debts of thepartnership.2 We reject both arguments inturn.

A

Respondents argue, and the Court ofAppeals agreed, that each partner is pri-marily liable for the debt and must be in-dividually assessed because each partneris a separate “taxpayer” under 26 U.S.C.Sec. 6203. The statutory definition of“taxpayer” includes “any person subject toany internal revenue tax,” and “person” in-cludes both “an individual” and a “part-nership,” Secs. 7701(a)(14), (a)(1). TheCourt of Appeals observed that althoughthe Partnership is a “taxpayer,” each indi-vidual partner is also a separate “taxpayer.”As such, the Court of Appeals interpretedSec. 6203’s requirement that the Secretaryof the Treasury record “the liability of thetaxpayer” to require a separate assessmentagainst each of the general partners.

Although the Court of Appeals cor-rectly concluded that an individual partnercan be a “taxpayer,” the inquiry does notend there. Section 6203 speaks of “the li-ability of the taxpayer” (emphasis added),which indicates that the relevant taxpayermust be determined. The liability in thiscase arose from the Partnership’s failure to

comply with Sec. 3402(a)(1) of the Code,which requires “every employer makingpayment of wages” to deduct and with-hold employment taxes. Moreover, “[t]heemployer shall be liable for the paymentof the tax required to be deducted andwithheld.” Sec. 3403. When an employerfails to withhold and submit the requisiteamount of employment taxes, Sec. 3403makes clear that the liable taxpayer is theemployer. In this case, the “employer”was the Partnership.3

B

Respondents also argue that they areprimarily liable for the Partnership’s taxdebt because, under California law, gen-eral partners are jointly and severally li-able for the debts of their partnership, Cal.Corp. Code Ann. Sec. 16306 (Supp.2004). Brief for Respondents 8–16. Asour prior discussion demonstrates, how-ever, respondents cannot show that theyare primarily liable for the payment ofthe Partnership’s employment taxes un-less they can show that they are the “em-ployer.” However, under California’s part-nership principles, a partnership and itsgeneral partners are separate entities. SeeCal. Corp. Code Ann. Sec. 16201(Supp. 2004). Thus respondents cannotargue that, for all intents and purposes, im-posing a tax directly on the Partnership isequivalent to imposing a tax directly onthe general partners. Respondents must in-stead prove that the tax liability was im-posed both on the Partnership and respon-dents as separate “employers.” The factthat respondents are jointly and severallyliable for the debts of the Partnership is ir-relevant to this determination.

III

We now turn to the question whether theGovernment must make separate assess-ments of a single tax debt against personsor entities secondarily liable for that debt

1 Because the Government is attempting to enforce the Partnership’s tax liabilities against respondents in a judicial proceeding, we do not address whether an assessment only against thePartnership is sufficient for the IRS to commence administrative collection of the Partnership’s tax debts by lien or levy against respondents’ property.

We also decline to address whether an assessment against the partnership suffices to trigger liability against the partners for interest and penalties without separate notice and demand tothem.

2 Respondents argue that even if we were to hold that the partners are secondarily liable, the IRS would still be barred from collecting the taxes. Respondents contend that if partners arenot “taxpayers” under Sec. 6203, then their liability arises only under state law, and the state 3-year statute of limitations therefore applies. Brief for Respondents 30–34. Respondents haveforfeited this argument by failing to raise it in the courts below. Indeed, the closest respondents have come to arguing that the state limitations period applies was in the Court of Appeals,when respondents argued that “under California law, any collections suit filed against a partner to collect a partnership debt is subject to the statute limitation provision which applies to theunderlying debt of the partnership.” Brief for Respondents in Nos. 01–55953, 01–55954 (CA9), p. 14. This argument, of course, is contrary to respondents’ position in this Court.

3 Our decision is consistent with this Court’s holding in United States v. Williams, 514 U.S. 527, 532–536 (1995), where we interpreted “taxpayer” under 26 U.S.C. Sec. 6511 more broadly.Here, it is clear that we must interpret “the taxpayer” under Sec. 6203 with reference to the underlying liability.

June 1, 2004 980 2004-22 I.R.B.

in order for Sec. 6502’s extended statuteof limitations to apply to those persons orentities.4 We hold that the Code containsno such requirement. Respondents’ argu-ment that they must be separately assessedturns on a mistaken understanding of thefunction and nature of an assessment asidentical to the initiation of a formal col-lection action against any person or en-tity who might be liable for payment of adebt. In its numerous uses throughout theCode, it is clear that the term “assessment”refers to little more than the calculation orrecording of a tax liability. See, e.g., 26U.S.C. Sec. 6201 (assessment authority);Sec. 6203 (method of assessment); Sec.6204 (supplemental assessments); 26 CFRSec. 601.103 (2003). See also Black’sLaw Dictionary 111 (7th ed. 1999) (defin-ing “assessment” as the “[d]eterminationof the [tax] rate or amount of something,such as a tax or damages”). “The Federaltax system is basically one of self-assess-ment,” whereby each taxpayer computesthe tax due and then files the appropriateform of return along with the requisite pay-ment. 26 CFR Sec. 601.103(a) (2003).In most cases, the Secretary accepts theself-assessment and simply records the lia-bility of the taxpayer. Where the taxpayerfails to file the form of return or miscalcu-lates the tax due, as in this case, the Sec-retary can assess “all taxes (including in-terest, additional amounts, additions to thetax, and assessable penalties),” 26 U.S.C.

Sec. 6201(a), by “recording the liabilityof the taxpayer in the office of the Secre-tary,” Sec. 6203. In other words, wherethe Secretary rejects the self-assessment ofthe taxpayer or discovers that the taxpayerhas failed to file a return, the Secretary cal-culates the proper amount of liability andrecords it in the Government’s books.

To be sure, the assessment of a taxtriggers certain consequences. After theamount of liability has been establishedand recorded, the IRS can employ adminis-trative enforcement methods to collect thetax. Secs. 6321–6327, 6331–6334. Theassessment of a tax liability also extendsthe period during which the Governmentcan collect the tax. But the fact that the actof assessment has consequences does notchange the function of the assessment: tocalculate and record a tax liability.

Under a proper understanding of thefunction and nature of an assessment, itis clear that it is the tax that is assessed,not the taxpayer. See Sec. 6501(a) (“theamount of any tax . . . shall be as-sessed”); Sec. 6502(a) (“[w]here the as-sessment of any tax”). And in UnitedStates v. Updike, 281 U.S. 489 (1930), theCourt, interpreting a predecessor to Sec.6502, held that the limitations period re-sulting from a proper assessment governs“the extent of time for the enforcementof the tax liability,” id., at 495. In otherwords, the Court held that the statute oflimitations attached to the debt as a whole.

The basis of the liability in Updike was atax imposed on the corporation, and theCourt held that the same limitations pe-riod applied in a suit to collect the tax fromthe corporation as in a suit to collect thetax from the derivatively liable transferee.Id., at 494–496. See also United Statesv. Wright, 57 F.3d 561, 563 (CA7 1995)(holding that, based on Updike’s principleof “all-for-one, one-for-all,” the statute oflimitations governs the debt as a whole).

Once a tax has been properly assessed,nothing in the Code requires the IRS toduplicate its efforts by separately assessingthe same tax against individuals or entitieswho are not the actual taxpayers but are, byreason of state law, liable for payment ofthe taxpayer’s debt. The consequences ofthe assessment—in this case the extensionof the statute of limitations for collectionof the debt—attach to the tax debt withoutreference to the special circumstances ofthe secondarily liable parties.

In this case, the tax was properly as-sessed against the Partnership, thereby ex-tending the statute of limitations for col-lection of the debt. The United States nowtimely seeks to collect that debt in judi-cial proceedings against respondents.5 Wetherefore reverse the judgment of the Courtof Appeals and remand the case for furtherproceedings consistent with this opinion.

It is so ordered.

4 We use the term “secondary liability” to mean liability that is derived from the original or primary liability.

5 The Court of Appeals also held that the claims were barred by California partnership law, which requires a creditor first to obtain a judgment against a partnership before holding the partnersliable for the partnership’s debt. 314 F.3d 336, 344 (CA9 2002). When respondents filed for bankruptcy, an automatic stay barred the Government from bringing suit outside the BankruptcyCourt to enforce respondents’ secondary liability. 11 U.S.C. Sec. 362(a)(1). Respondents do not dispute, however, that the adjudication of a disputed claim satisfies California’s requirementthat there be a “judgment against a partner.” Cal. Corp. Code Ann. Sec. 16307(c) (Supp. 2004) Moreover, a claim is allowable in bankruptcy “whether or not such right is reduced tojudgment.” 11 U.S.C. Sec. 101(5)(A).

2004-22 I.R.B. 981 June 1, 2004

Part III. Administrative, Procedural, and MiscellaneousCapital Gain Dividends of RICsand REITs

Notice 2004–39

SECTION 1. PURPOSE

This notice provides guidance to regu-lated investment companies (“RICs”), realestate investment trusts (“REITs”), andtheir shareholders in applying § 1(h) ofthe Internal Revenue Code to capital gaindividends of RICs and REITs. The noticeexplains how the changes to § 1(h) madeby the Jobs and Growth Tax Relief Rec-onciliation Act of 2003 (the “JGTRRA”),Pub. L. No. 108–27, 117 Stat. 752, applyto RIC and REIT capital gain dividendspaid (or accounted for as if paid) in taxableyears that end on or after May 6, 2003.

SECTION 2. BACKGROUND

For individuals, estates, and trusts,§ 1(h) imposes differing rates of tax onvarious transactions depending on thetypes of transactions giving rise to netcapital gains. For transactions taken intoaccount during taxable years ending beforeMay 6, 2003, a taxpayer’s long-term capi-tal gains and losses generally are separatedinto three tax-rate groups: a 20-percentgroup, a 25-percent group, and a 28-per-cent group. See Notice 97–59, 1997–2C.B. 309. For certain taxpayers, transac-tions in the 20-percent group may be taxedat a 10-percent rate, or at an 8-percent rateif the gain is qualified 5-year gain under§ 1(h)(9) (as in effect before the enactmentof the JGTRRA).

For transactions taken into accountduring taxable years ending on or afterMay 6, 2003, and beginning before Jan-uary 1, 2009, the JGTRRA reduced the20-percent rate to 15 percent, reduced the10-percent rate to 5 percent (0 percentfor taxable years beginning after 2007),and repealed the rules dealing with qual-ified 5-year gain. For a taxable year thatincludes May 6, 2003, the reduction inrates and the repeal of the rules dealingwith qualified 5-year gain apply to gainor loss properly taken into account for theportion of the taxable year on or after May6, 2003. Because this effective date gener-ally occurs sometime during a taxpayer’s

taxable year, the amount of capital gainthat benefits from the reduced 15-percent(or 5-percent) rate is generally the lesser ofthe net capital gain for the entire taxableyear or the net capital gain determinedusing only gain and loss properly takeninto account for the portion of the taxableyear on or after May 6, 2003. JGTRRA§ 301(c)(1)–(2) (“the JGTRRA transitionrule”). In applying the JGTRRA transitionrule with respect to a pass-through entity,the determination of when gains and lossesare properly taken into account is made atthe entity level. Id. § 301(c)(4). See thelast paragraph of Section 3 of this noticefor the application of this rule.

The Secretary has authority to issueregulations concerning the application of§ 1(h) to sales and exchanges by (and ofinterests in) pass-through entities, includ-ing RICs and REITs. § 1(h)(9).

To the extent that a RIC or a REIT hasnet capital gain for a taxable year, it maydesignate as capital gain dividends the div-idends that it pays during the year, the divi-dends that § 855 or 858 deems it to pay dur-ing the year, or deficiency dividends under§ 860 that it pays for that year. In gen-eral, a capital gain dividend is treated bythe shareholders that receive it as a gainfrom the sale or exchange of a capital assetheld for more than one year.

Notice 97–64, 1997–2 C.B. 323, de-scribes regulations that will be issued un-der § 1(h) concerning the application of§ 1(h) to capital gain dividends of RICsand REITs, effective for taxable years end-ing on or after May 7, 1997. As describedin Notice 97–64, the regulations will al-low a RIC or REIT to make additionaldesignations of capital gain dividends toreflect the differing tax-rate groups under§ 1(h) and will provide limitations on theamounts that can be designated in the dif-fering tax-rate groups. In calculating thoselimitations, the regulations will provide fora deferral adjustment or bifurcation adjust-ment in certain situations. In addition, theregulations will provide special rules fordistributions of § 1202 gain.

Moreover, when those regulations areissued, they will reflect changes to § 1(h)since the publication of Notice 97–64.(For example, the Tax and Trade Re-lief Extension Act of 1998, Pub. L. No.

105–277, 112 Stat. 2681–886, ended therelevance of holding a capital asset formore than 18 months.)

This Notice 2004–39 describes how thereduction in rates made by the JGTRRAand the JGTRRA transition rule (for tax-able years that include May 6, 2003), ap-ply to capital gain dividends of RICs andREITs. Future guidance may be issued toclarify certain of the rules originally de-scribed in Notice 97–64 and to make othermodifications to take into account industryexperience with the rules. That guidancegenerally will apply on a prospective ba-sis.

SECTION 3. APPLICATION OF § 1(h)TO RIC AND REIT CAPITAL GAINDIVIDENDS

For taxable years ending on or afterMay 6, 2003, the rules described in No-tice 97–64 continue to apply to capital gaindividends of RICs and REITs, with appro-priate modifications to take into accountthe changes that have been made to § 1(h)since that notice was published. Thus, ifa RIC or REIT designates a dividend asa capital gain dividend, the RIC or REITmay make an additional designation of thedividend as a 15%-rate gain distribution,subject to the limitations described in sec-tion 5 of Notice 97–64, including the lim-itation that the additional designation of aclass of capital gain dividend not exceedthe maximum distributable amount in thatclass.

In general, a RIC or REIT determinesthe maximum distributable amounts thatmay be designated in each class of capitalgains dividends by performing the compu-tation required by § 1(h) as if the RIC orREIT were an individual whose ordinaryincome is subject to a marginal tax rateof at least 28 percent. The maximum dis-tributable gain in each class of capital gaindividends is equal to the amount that, inthe computation under § 1(h), is multipliedby the corresponding rate gain percentage.The computation under § 1(h), however, ismodified in the following ways:

• The RIC or REIT disregards qualifieddividend income. That is, net capitalgain is not increased by qualified div-idend income, and qualified dividend

June 1, 2004 982 2004-22 I.R.B.

income is disregarded in determiningthe amount of gain properly taken intoaccount for the portion of a taxableyear on or after May 6, 2003. (Un-der § 854(b) or § 857(c), qualified div-idend income received by the RIC orREIT may contribute to a separate des-ignation of other RIC or REIT divi-dends.)

• The RIC or REIT makes the deferraladjustment or bifurcation adjustmentdescribed in section 6 of Notice 97–64.

• The computation takes into account,if applicable, the JGTRRA transitionrule for taxable years that contain May6, 2003. The JGTRRA transition rule,however, interacts with the deferral ad-justment in a way that differs from theinteraction between that adjustmentand the transition rule for the 1997reductions in capital gains rates. Thatis, for purposes of the JGTRRA tran-sition rule, the deferral adjustment isapplied in determining whether a gainor loss is taken into account beforeMay 6, 2003, or after May 5, 2003.For example, if a RIC sells shares ofstock before May 6, 2003, but the saleis treated under § 852(b)(3)(C) and§ 1.852–11(e) as arising after that date,the sale is taken into account on the

later date for purposes of the JGTRRAtransition rule. This application ofthe deferral adjustment differs fromthe special rule in section 6 of Notice97–64 for transactions occurring dur-ing 1997.

The JGTRRA transition rule applies atboth the RIC/REIT level and at the share-holder level. That is, the rule applies at theRIC/REIT level to taxable years of the RICor REIT that contain May 6, 2003, to gov-ern how capital gain dividends may be des-ignated, and it applies to taxable years ofRIC/REIT shareholders that contain May6, 2003, to govern the application of § 1(h)to the shareholder for that taxable year.Thus, if a RIC or REIT pays a capital gaindividend during 2004 that it properly des-ignates as a 20%-rate gain distribution andthe dividend is received by a fiscal yeartrust in a year of the trust that includes May6, 2003, the dividend is treated by the trustas gain that is properly taken into accountfor the portion of the taxable year beforeMay 6, 2003. On the other hand, if thatsame capital gain dividend is received dur-ing 2004 by an individual shareholder, ora trust, whose taxable year is the calen-dar year, the dividend is subject to tax ata rate no higher than 15 percent, becausethe JGTRRA transition rule applies only toshareholder taxable years that include May6, 2003.

In taxable years beginning on or afterMay 6, 2003, some taxpayers may receivea RIC or REIT distribution amount that isdesignated as a 20%-rate gain distributionand that includes a portion constituting5-year gain. As a result of the repeal of theseparate rules for 5-year gains, the 5-yeargain portion of that 20%-rate gain distribu-tion is not subject to the prior-law 8-per-cent rate for 5-year gain. These taxpay-ers, however, will not be disadvantagedby the rate changes. The 5-year gain por-tion will be treated the same as any other20%-rate gain distribution that is receivedin a taxable year beginning on or after May6, 2003, and therefore will be taxed at arate no higher than 15 percent (5 percentfor certain taxpayers). Any taxpayer thatwould have been eligible in a taxable yearto pay tax at the 8-percent rate for someor all 5-year gain had the prior rates re-mained in effect will be eligible under thenew rules to pay tax on that amount of5-year gain at the 5-percent rate.

SECTION 4. EXAMPLES

(1) Example 1. RIC X’s taxable year ends onApril 30. X has only the following capital gains andlosses for the periods indicated, all of which are fromsales of stock held for less than five years:

GAIN LOSS NET

5/1 to 5/5/2003

Long-term capital gain or loss 100x 0 100x

Short-term capital gain or loss 100x 0 100x

5/6 to 10/31/2003

Long-term capital gain or loss 0 0 0

Short-term capital gain or loss 0 (90x) (90x)

11/1 to 4/30/2004

Long-term capital gain or loss 110x 0 110x

Short-term capital gain or loss 0 0 0

X does not make a deferral adjustment because Xdoes not have a post-October net capital loss or netlong-term capital loss for its taxable year ending April30, 2004. X must make a bifurcation adjustment,however, because it has a pre-November net capitalgain, it has a taxable year ending in April, and it doesnot make a deferral adjustment. Because X must ap-ply both the bifurcation adjustment and the JGTRRAtransition rule, for the pre-November and post-Octo-ber portions of this taxable year X must make separatedeterminations of the maximum amounts that may bedesignated as 20%-rate gain and 15%-rate gain. The

sum of these amounts determines the various maxi-mum amounts that can be designated in the differentclasses of gain for the entire year.

For the pre-November period, the JGTRRA tran-sition rule applies because the period includes May 6,2003. Thus, X determines a net capital gain amountusing only gain and loss properly taken into accountfor the portion of the taxable year that is on or afterMay 6, 2003 (and, because the determination is forthe pre-November period, on or before October 31,2003). The amount so determined is $0. X’s net cap-ital gain for the entire pre-November period is $100x.

Thus, for the pre-November period, X’s maximumdesignation of 20%-rate gain is $100x and its maxi-mum designation of 15%- rate gain is $0. (X also hasa net short-term gain of $10x in the pre-November pe-riod, which results in a dividend that is not speciallydesignated and is treated by shareholders as ordinaryincome.)

For the post-October period, the JGTRRA transi-tion rule does not apply because that period does notinclude May 6, 2003. Because X has $110x of net cap-ital gain for that period, X’s maximum designation of15%-rate gain is $110x.

2004-22 I.R.B. 983 June 1, 2004

For the taxable year ending April 30, 2004, there-fore, X may designate up to $210x of capital gain div-idends, of which up to $110x may be designated as

15%-rate gain distributions and up to $100x may bedesignated as 20%-rate gain distributions.

(2) Example 2. RIC Y ’s taxable year ends onApril 30. Y has only the following capital gains andlosses for the periods indicated, all of which are fromsales of stock held for less than five years:

GAIN LOSS NET

5/1 to 5/5/2003

Long-term capital gain or loss 90x 0 90x

Short-term capital gain or loss 0 0 0

5/6 to 10/31/2003

Long-term capital gain or loss 0 (90x) (90x)

Short-term capital gain or loss 0 0 0

11/1 to 4/30/2004

Long-term capital gain or loss 100x 0 100x

Short-term capital gain or loss 0 0 0

Y does not make a deferral adjustment becauseit does not have a post-October net capital loss ornet long-term capital loss for its taxable year endingApril 30, 2004. Y does not make a bifurcation ad-justment because it does not have a net capital gainfor the pre-November portion of its taxable year end-ing April 30, 2004. Because Y’s taxable year endingApril 30, 2004, includes May 6, 2003, the JGTRRAtransition rule applies in determining Y’s maximumdesignations of capital gain for that taxable year.

Y’s net capital gain for the entire year is $100x.Y’s net capital gain determined using only gain andloss properly taken into account for the portion ofthe taxable year on or after May 6, 2003, however,is $10x. For this taxable year, Y may designate up to$100x of capital gain dividends, of which up to $10xmay be designated as 15%-rate gain distributions andup to $90x may be designated as 20%-rate gain dis-tributions.

Assume that Y pays a capital gain dividend on De-cember 1, 2004, and that, under § 855(a), Y treatsthe dividend as having been paid during its taxableyear ending April 30, 2004, but that, under § 855(b),Y’s shareholders treat the dividend as having been re-ceived in their taxable years that contain December 1,2004. Assume also that shareholder A of Y is an indi-vidual, estate, or trust whose taxable year is the cal-endar year and that, on December 1, 2004, A receivesfrom Y a dividend of $10x, of which $1x is designatedas a 15%-rate gain distribution and $9x is designatedas a 20%-rate gain distribution. Because A’s 2004taxable year does not include May 6, 2003, neitherthe JGTRRA transition rule nor JGTRRA § 301(c)(4)applies to A for that taxable year. Thus, the $10x cap-ital gain dividend received by A in 2004 is subject toa tax rate no higher than 15 percent.

DRAFTING INFORMATION

The principal author of this notice isSonja Kotlica of the Office of AssociateChief Counsel (Financial Institutions &Products). For further information regard-ing this notice, contact Ms. Kotlica at(202) 622–3960 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters.(Also Part I, §§ 851, 852; 1.851–2.)

Rev. Proc. 2004–28

SECTION 1. PURPOSE

This revenue procedure describes con-ditions under which a taxpayer that has in-vested in a repurchase agreement (repo)may treat its position in the repo as a Gov-ernment security for purposes of qualify-ing as a regulated investment company(RIC) under the asset diversification test ofsection 851(b)(3) of the Internal RevenueCode.

SECTION 2. BACKGROUND

.01 A repo is a written agreement thatprovides for a “sale” and “repurchase” ofa security or securities (the “underlyingsecurities,” or the “collateral”. The pur-chaser agrees to purchase the underlyingsecurities at a specific price and the seller,or “counterparty,” agrees to repurchase thesame securities on a specific date for aspecified price, plus an additional amountthat reflects the time value of the pur-chaser’s investment from the date of pur-chase of the underlying securities to thedate of their repurchase by the seller.

.02 RICs purchase securities in repotransactions as a convenient means to in-vest idle cash at competitive rates on a se-cured basis, generally for short periods oftime. See Securities and Exchange Com-mission (SEC) Release No. IC–25058, 66FR 36156, 36156–57 (July 11, 2001):

While a repurchase agreement haslegal characteristics of both a sale anda secured transaction, economically itfunctions as a loan from the fund tothe counterparty, in which the securitiespurchased by the fund serve as collat-eral for the loan and are placed in thepossession or under the control of thefund’s custodian during the term of theagreement. . . .

. . . .A fund investing in a properly struc-

tured repurchase agreement looks pri-marily to the value and liquidity of thecollateral rather than the credit of thecounterparty for satisfaction of the re-purchase agreement.

Id. at 36157 (footnote omitted)..03 Section 851(b) provides that cer-

tain requirements must be satisfied fora domestic corporation to be taxed as aRIC under subchapter M, part I. Section851(b)(3) imposes certain asset diversi-fication requirements with respect to aRIC’s total assets that must be satisfied asof the close of each quarter of the RIC’staxable year.

.04 Section 851(b)(3)(A) requires thatat least 50 percent of the value of a cor-poration’s total assets be represented bycash and cash items (including receiv-ables), Government securities, securitiesof other RICs, and other securities gener-ally limited in respect of any one issuerto an amount not greater in value than 5percent of the value of the total assets ofthe RIC and to not more than 10 percent ofthe outstanding voting securities of suchissuer.

June 1, 2004 984 2004-22 I.R.B.

.05 Section 851(b)(3)(B) provides thatnot more than 25 percent of the RIC’s to-tal assets may be invested in the securities(other than Government securities and thesecurities of other RICs) of any one issuer,or of two or more issuers that the RIC con-trols and that are determined, under regu-lations, to be engaged in the same or simi-lar trades or businesses or related trades orbusinesses.

.06 Section 5(b)(1) of the InvestmentCompany Act of 1940, 15 U.S.C. 80a–1et seq. (1940 Act) defines a “diversifiedcompany” as a management company thathas at least 75 percent of its assets investedin cash and cash items (including receiv-ables), Government securities, securitiesof other investment companies, and othersecurities that, for the purpose of this cal-culation, are limited in respect of any oneissuer to an amount not greater in valuethan 5 percent of the value of the total as-sets of the management company and tonot more than 10 percent of the outstand-ing voting securities of the issuer. Theremaining 25 percent of the managementcompany’s assets may be invested in anymanner.

.07 Effective August 15, 2001, the SECadopted Rule 5b–3, which is intended toadapt the 1940 Act to the economic real-ities of repos and to reflect recent devel-opments in bankruptcy law protecting par-ties to repos. SEC Release No. IC–25058.Subject to certain conditions, Rule 5b–3permits a fund to “look through” the coun-terparty to the collateral in determiningwhether the fund is in compliance with theinvestment criteria for diversified funds setforth in section 5(b)(1) of the 1940 Act andwith certain other securities laws.

.08 The following definition is set forthin Rule 5b–3:

(1) Collateralized Fully in the caseof a repurchase agreement means that:

(i) The value of the securitiescollateralizing the repurchase agree-ment (reduced by the transaction costs(including loss of interest) that the in-vestment company reasonably couldexpect to incur if the seller defaults)is, and during the entire term of therepurchase agreement remains, at leastequal to the Resale Price provided forin the agreement;

(ii) The investment companyhas perfected its security interest in thecollateral;

(iii) The collateral is main-tained in an account of the investmentcompany with its custodian or a thirdparty that qualifies as a custodian underthe [1940] Act;

(iv) The collateral consists en-tirely of:

(A) Cash items;(B) Government securi-

ties;(C) Securities that at the

time the repurchase agreement is en-tered into are rated in the highest ratingcategory by the requisite nationally rec-ognized statistical rating organizations[as defined in Rule 5b–3(c)(5)]; or

(D) Unrated Securities thatare of comparable quality to securitiesthat are rated in the highest rating cat-egory by the requisite nationally rec-ognized statistical rating organizations,as determined by the investment com-pany’s board of directors or its delegate;and

(v) Upon an Event of Insol-vency with respect to the seller, therepurchase agreement would qualifyunder a provision of applicable insol-vency law providing an exclusion fromany automatic stay of creditors’ rightsagainst the seller.

Rule 5b–3(c)(1)..09 The “Collateralized Fully” defini-

tion plays a critical role in the applicationof the 1940 Act diversification rules to re-pos:

(a) Repurchase Agreements. For pur-poses of [the 1940 Act investmentcriteria for diversified investment com-panies and prohibition on registeredinvestment companies from acquiringan interest in a broker-dealer, under-writer, or investment advisor], theacquisition of a repurchase agreementmay be deemed to be an acquisition ofthe underlying securities, provided theobligation of the seller to repurchasethe securities from the investment com-pany is Collateralized Fully.

Rule 5b–3(a).The effect of this rule is that, for purposesof the definition of a diversified invest-ment company in section 5 of the1940 Act,if a repo is Collateralized Fully, a fund may(but need not) treat an investment in therepo as an investment in the underlying se-curity or securities.

.10 Section 851(c)(5) provides that, forpurposes of section 851(b)(3), all terms notspecifically defined in section 851(c) shallhave the same meaning as when used in the1940 Act, as amended. The term “Govern-ment security” is not specifically definedin section 851(c).

.11 Section 2(a)(16) of the 1940 Act de-fines the term “Government security” forpurposes of the 1940 Act without specificreference to funds investing in repos forwhich Government securities serve as col-lateral.

.12 The RIC diversification rules ofsubchapter M are substantially similar instructure and purpose to those of section5(b)(1) of the 1940 Act. Both sets of rulesimpose numerical limitations on the per-centages and types of assets that may beheld by an investment company. Both setsof rules are intended to protect the investorfrom the risks of loss and of illiquidity in-herent in the concentration of assets in thesecurities of a single or a small numberof issuers. See H.R. Rep. No. 2020, 86th

Cong., 2d Sess. 820–26. In view of thecommonality of structure and purpose ofboth sets of rules and in view of the needfor RICS simultaneously to comply withboth, the RIC diversification provisions ofthe Code and those of the1940 Act shouldbe interpreted consistently.

SECTION 3. SCOPE

This revenue procedure applies to re-pos that, within the meaning of Rule5b–3(c)(1), are Collateralized Fully withsecurities that qualify as Government se-curities for purposes of section 851(b)(3).

SECTION 4. PROCEDURE

If a taxpayer has invested in a repo towhich this revenue procedure applies, thetaxpayer may treat its position in that repoas a Government security for purposes ofsection 851(b)(3) even if the taxpayer isnot treated as the owner of the underlyingsecurities for federal tax purposes.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective forrepos held by a RIC on or after August 15,2001.

2004-22 I.R.B. 985 June 1, 2004

DRAFTING INFORMATION

The principal author of this revenueprocedure is Susan Thompson Baker ofthe Office of Assistant Chief Counsel (Fi-nancial Institutions and Products). Forfurther information regarding this revenueprocedure, contact her at (202) 622–3940(not a toll-free call).

26 CFR 601.204: Changes in accounting periods andmethods of accounting.(Also Part I, §§ 461, 481; 1.461–2.)

Rev. Proc. 2004–31

SECTION 1. PURPOSE

This revenue procedure provides pro-cedures for taxpayers to change theirmethod of accounting for deducting under§ 461(f) of the Internal Revenue Codeamounts transferred to trusts in trans-actions described in Notice 2003–77,2003–49 I.R.B. 1182.

SECTION 2. BACKGROUND

.01 On November 19, 2003, the InternalRevenue Service and Treasury Departmentfiled with the Federal Register proposedand temporary regulations under § 461(f).T.D. 9095, 2003–49 I.R.B. 1175 [68 F.R.65634]; REG–136890–02, 2003–49 I.R.B.1191 [68 F.R 65645]. These regulationsclarify that the transfer of a taxpayer’snote or promise to provide property or ser-vices in the future is not a transfer for thesatisfaction of a contested liability under§ 461(f). The regulations also provide thata transfer of a taxpayer’s stock or the stockor note of a related party is not a trans-fer for the satisfaction of a contested lia-bility under § 461(f). The regulations fur-ther provide that, in general, economic per-formance does not occur when a taxpayertransfers money or other property to a trust,escrow account, or court to provide for thesatisfaction of a contested workers com-pensation, tort, or other payment liabil-ity. Rather, economic performance occurswhen payment is made to the claimant.

.02 Notice 2003–77, 2003–49I.R.B. 1182, identifies as “listedtransactions” for purposes of§ 1.6011–4(b)(2) of the Income TaxRegulations and §§ 301.6111–2(b)(2) and

301.6112–1(b)(2) of the Procedure andAdministration Regulations, transactionsin which taxpayers established trustspurported to qualify under § 461(f) thatare the same as or substantially similar tothe following transactions:

(1) Transactions in which a taxpayertransfers money or other property in tax-able years beginning after December 31,1953, and ending after August 16, 1954,and retains certain powers over the moneyor other property transferred;

(2) Transactions in which a taxpayertransfers any indebtedness of the taxpayeror any promise by the taxpayer to provideservices or property in the future in taxableyears beginning after December 31, 1953,and ending after August 16, 1954;

(3) Transactions in which a taxpayer us-ing an accrual method of accounting trans-fers money or other property after July 18,1984, to provide for the satisfaction of aworkers compensation or tort liability (un-less the trust is the person to which theliability is owed, or payment to the trustdischarges the taxpayer’s liability to theclaimant);

(4) Transactions in which a taxpayer us-ing an accrual method of accounting trans-fers money or other property in taxableyears beginning after December 31, 1991,to provide for the satisfaction of a liabil-ity for which payment is economic per-formance under § 1.461–4(g) (unless thetrust is the person to which the liability isowed, or payment to the trust dischargesthe taxpayer’s liability to the claimant),other than a liability for workers compen-sation or tort; and

(5) Transactions in which a taxpayertransfers stock issued by the taxpayer, orindebtedness or stock issued by a partyrelated to the taxpayer (as defined in§ 267(b)), on or after November 19, 2003.

.03 Section 1.6011–4(a) provides thatevery taxpayer that has participated (as de-scribed in § 1.6011–4(c)(3)) in a reportabletransaction and that is required to file a taxreturn must attach a disclosure statementto its return. A reportable transaction in-cludes any transaction that is the same asor substantially similar to one of the typesof transactions that the IRS has determinedto be a tax avoidance transaction and iden-tified by published guidance as a listedtransaction. Section 1.6011–4(b)(2). Gen-erally, a listed transaction is not treated asa reportable transaction if the transaction

affected the taxpayer’s Federal income taxliability as reported on any tax return filedon or before February 28, 2000. Sec-tion 1.6011–4T(b)(2) as published in T.D.8877, 2000–1 C.B. 747, in 65 Fed. Reg.11205. See also § 1.6011–4(h).

.04 Sections 446(e) and 1.446–1(e) pro-vide that, except as otherwise provided, ataxpayer must secure the consent of theCommissioner before changing a methodof accounting for federal income tax pur-poses. Section 1.446–1(e)(3)(i) providesthat, to obtain the Commissioner’s consentto an accounting method change, a tax-payer must file a Form 3115, Applicationfor Change in Accounting Method, duringthe taxable year in which the taxpayer de-sires to make the proposed change. Sec-tion 1.446–1(e)(3)(ii) authorizes the Com-missioner to prescribe administrative pro-cedures setting forth the limitations, terms,and conditions deemed necessary to permita taxpayer to obtain consent to change amethod of accounting in accordance with§ 446(e).

.05 Rev. Proc. 97–27, 1997–1 C.B.680, (as modified and amplified by Rev.Proc. 2002–19, 2002–1 C.B. 696, asamplified and clarified by Rev. Proc.2002–54, 2002–2 C.B. 432), providesprocedures for obtaining the consent ofthe Commissioner to change a method ofaccounting for federal income tax pur-poses. In general, under these proceduresa taxpayer must file a Form 3115 duringthe year of change and may not requestor make a retroactive change in methodof accounting unless specifically autho-rized by the Commissioner. Rev. Proc.97–27, sections 5.01, 2.04. In addition,under these procedures a taxpayer gener-ally takes into account a positive § 481(a)adjustment resulting from the change inmethod of accounting ratably over fourtaxable years and receives audit protec-tion for taxable years prior to the yearof change. Rev. Proc. 97–27, sections5.02(3)(a), 9.01. However, section 8.01 ofRev. Proc. 97–27 states that the Servicereserves the right to decline to processa Form 3115 “in situations in which itwould not be in the best interest of soundtax administration to permit the requestedchange. In this regard, the Service willconsider whether the change in methodof accounting would clearly and directlyfrustrate compliance efforts of the Servicein administering the income tax laws.”

June 1, 2004 986 2004-22 I.R.B.

.06 Rev. Rul. 90–38, 1990–1 C.B.57, provides that, if a taxpayer uses an er-roneous method of accounting for two ormore consecutive taxable years, the tax-payer has adopted a method of accounting.The ruling further provides that a taxpayermay not, without the Commissioner’s con-sent, retroactively change from an erro-neous to a permissible method of account-ing by filing an amended return.

.07 A change from deducting an as-serted liability in the taxable year of trans-fer of money or other property to a trustdescribed in Notice 2003–77 to deductingthe liability in the taxable year of paymentto the claimant is a change in method ofaccounting. The Service has determinedthat it is not in the best interest of soundtax administration to permit a prospectivechange in method of accounting for suchdeductions in transactions that are requiredto be disclosed as listed transactions un-der § 1.6011–4. In addition, in the inter-est of sound tax administration, the Servicehas determined that the terms and condi-tions set forth in Rev. Proc. 97–27 shouldbe modified for changes in methods of ac-counting for such deductions in transac-tions that are not required to be disclosedas listed transactions under § 1.6011–4.

SECTION 3. SCOPE

This revenue procedure applies to tax-payers that desire to change a method ofaccounting for transactions described insection 2.02 of this revenue procedure.

SECTION 4. APPLICATION

.01 Change in method of account-ing for transactions described in Notice2003–77 that are required to be disclosedas listed transactions under § 1.6011–4.The Service will not process applicationsfor changes in method of accounting filedfor transactions within the scope of thisrevenue procedure that are required to bedisclosed under § 1.6011–4. Taxpayersmay change their method of accountingfor these transactions by filing an amendedreturn in accordance with section 4.04 ofthis revenue procedure.

.02 Change in method of accounting fortransactions described in Notice 2003–77that are not required to be disclosed aslisted transactions under § 1.6011–4.

Taxpayers that desire to change a methodof accounting for transactions withinthe scope of this revenue procedure thatare not required to be disclosed under§ 1.6011–4 may change their method ofaccounting for these transactions by filingan amended return in accordance with sec-tion 4.04 of this revenue procedure or mayrequest a change in method of accountingin accordance with the advance consentprocedures of Rev. Proc. 97–27 with thefollowing modifications:

(1) In lieu of the four year spread periodfor positive § 481(a) adjustments providedin section 5.02(3)(a) of Rev. Proc. 97–27,the taxpayer must take into account the en-tire amount of a positive § 481(a) adjust-ment in the taxable year of change; and

(2) The taxpayer must describe eachtransaction, explain in the Form 3115 whythe transaction is not required to be dis-closed under § 1.6011–4, and state theamount of § 481(a) adjustment for thattransaction.

.03 Change in method of accounting bytaxpayers that have engaged in multipletransactions described in Notice 2003–77,some of which are required to be disclosedas listed transactions under § 1.6011–4. Ataxpayer changing its method of account-ing for multiple transactions within thescope of this revenue procedure, some ofwhich are required to be disclosed under§ 1.6011–4 and some of which are not re-quired to be disclosed under § 1.6011–4:

(1) May change its method of account-ing for transactions that are not requiredto be disclosed under § 1.6011–4 in ac-cordance with section 4.02 of this revenueprocedure, but must take into account incomputing the § 481(a) adjustment onlyamounts attributable to those transactions;and

(2) Must file amended returns in accor-dance with sections 4.01 and 4.04 of thisrevenue procedure to change its method ofaccounting for all transactions required tobe disclosed under § 1.6011–4 prior to fil-ing the Form 3115 for transactions not re-quired to be disclosed.

.04 Change in method of accounting byfiling amended return.

(1) In accordance with§ 1.446–1(e)(3)(ii) and Rev. Rul. 90–38,consent is hereby granted for any taxpayerthat has engaged in a transaction withinthe scope of this revenue procedure to file

amended returns to retroactively changean impermissible method of accountingfor amounts transferred to trusts purportedto qualify under § 461(f) to a method thatcomplies with § 461(f) and the regulationsthereunder. This consent is granted onlyif the taxpayer files such amended returnsfor the first taxable year in which thetaxpayer used the impermissible methodof accounting for these transactions (orif the period of limitations has expiredfor such taxable year, for the first taxableyear for which the period of limitationshas not expired) and for each subsequenttaxable year in which the taxpayer’s useof the impermissible method of account-ing for these transactions reduced thetaxpayer’s taxable income. If the periodof limitations has expired for the firsttaxable year in which a taxpayer used theimpermissible method of accounting forthese transactions and the taxpayer filesamended returns pursuant to this consent,the amended return for the first taxableyear for which the period of limitations hasnot expired must include the entire amountof the § 481(a) adjustment attributable tothe change in accounting method.

(2) A taxpayer that complies with sec-tion 4.04(1) of this revenue procedure alsomay file amended returns for any taxableyears in which the taxpayer’s use of theimpermissible method of accounting forthese transactions increased its taxable in-come.

(3) Taxpayers filing amended returnsunder this revenue procedure must write“FILED UNDER REVENUE PROCE-DURE 2004–31” at the top of the amendedreturn. Taxpayers also must comply withthe requirements of § 1.6011–4 includ-ing, but not limited to, attaching to theamended return any disclosure statementsthat may be required in accordance with§ 1.6011–4(a) and (e).

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective onMay 6, 2004.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Norma Rotunno of the Of-fice of the Associate Chief Counsel (In-come Tax & Accounting). For further

2004-22 I.R.B. 987 June 1, 2004

information regarding this notice, contactMs. Rotunno at (202) 622–7900 (not atoll-free number).

26 CFR 601.204: Changes in accounting periods andin methods of accounting.(Also: §§ 446, 451.)

Rev. Proc. 2004–32

SECTION 1. PURPOSE

This revenue procedure allows creditcard issuers described in Rev. Rul.2004–52, 2004–22 I.R.B. 973, datedJune 1, 2004, this Bulletin, to accountfor annual fee income using the RatableInclusion Method for Credit Card AnnualFees, which is set forth in section 4 of thisrevenue procedure. The procedure alsoprovides automatic consent procedures fora credit card issuer within the scope of thisrevenue procedure to change its method ofaccounting for annual fee income.

SECTION 2. BACKGROUND

.01 Rev. Rul. 2004–52 describes cer-tain taxpayers that issue credit cards. Eachcard allows the cardholder to access a re-volving line of credit to make purchases ofgoods and services and, if otherwise pro-vided by the applicable cardholder agree-ment, to obtain cash advances. These tax-payers may charge cardholders a creditcard annual fee. Rev. Rul. 2004–52 holdsthat credit card annual fees are not interestfor federal income tax purposes and thatthey are includible in income when the allevents test under § 451 of the Internal Rev-enue Code is satisfied. Under the facts ofRev. Rul. 2004–52, the all events test issatisfied when the credit card annual feebecomes due and payable under the tax-payer’s cardholder agreements.

.02 Any change in a taxpayer’s treat-ment of income from credit card annualfees, including a change to conform thetaxpayer’s method to either Rev. Rul.2004–52 or to the Ratable InclusionMethod for Credit Card Annual Fees,which is permitted by section 4 of thisrevenue procedure, is a change in methodof accounting to which the provisions of§§ 446 and 481 apply.

.03 Under § 446(e) and § 1.446–1(e)(2)(i) of the Income Tax Regulations,

a taxpayer generally must secure the con-sent of the Commissioner before changinga method of accounting for federal incometax purposes. Section 1.446–1(e)(3)(ii)authorizes the Commissioner to prescribeadministrative procedures setting forth theterms and conditions necessary to obtainconsent to change a method of accounting.Rev. Proc. 2002–9, 2002–1 C.B. 327 (asmodified and clarified by Announcement2002–17, 2002–1 C.B. 561, modifiedand amplified by Rev. Proc. 2002–19,2002–1 C.B. 696, and amplified, clarified,and modified by Rev. Proc. 2002–54,2002–2 C.B. 432), provides proceduresby which a taxpayer may obtain auto-matic consent to change to the methodsof accounting described in the Appendixof Rev. Proc. 2002–9. Section 5.03 ofRev. Proc. 2002–9 provides that, unlessotherwise provided, a taxpayer makinga change in method of accounting underthe revenue procedure must take into ac-count a § 481(a) adjustment in the mannerprovided in section 5.04 of Rev. Proc.2002–9.

SECTION 3. SCOPE

This revenue procedure applies to a tax-payer that uses an overall accrual methodof accounting for federal income tax pur-poses and that issues credit cards to, andreceives annual fees from, cardholders un-der agreements that allow each cardholderto use a credit card to access a revolvingline of credit to make purchases of goodsand services and, if so authorized, to ob-tain cash advances.

SECTION 4. RATABLE INCLUSIONMETHOD FOR CREDIT CARDANNUAL FEES

.01 Permission to use the Ratable Inclu-sion Method for Credit Card Annual Fees.The Commissioner in an exercise of hisdiscretion under § 446 permits taxpayerswithin the scope of this revenue procedureto account for their income from creditcard annual fees using the Ratable Inclu-sion Method for Credit Card Annual Fees,which is described in this section 4.

.02 Description of method. Under theRatable Inclusion Method for Credit CardAnnual Fees, a credit card annual fee isrecognized in income ratably over the pe-riod covered by the fee.

.03 Special rules. A taxpayer’s use ofthe Ratable Inclusion Method for CreditCard Annual Fees does not clearly reflectits credit card annual fee income (and thusthe Commissioner does not permit its use)unless the taxpayer also complies with therules in section 4.03(1) and 4.03(2) of thisrevenue procedure.

(1) Closed accounts. If a credit card iscancelled or if a cardholder account is oth-erwise closed during a taxable year, any re-maining unrecognized portion of the creditcard annual fee that is allocable to the ac-count must be recognized in income in thatyear, unless the remaining portion is re-funded.

(2) Fees billed in installments. If acredit card annual fee is due and payable ininstallments, each installment must be rec-ognized ratably over the period to whichthe installment relates.

.04 Aggregation of fees. Taxpayers mayaccount for income from credit card annualfees in an aggregate manner. A taxpayerthat accounts for annual fees in an aggre-gate manner must establish that its recog-nition of credit card annual fee income sat-isfies the rules in sections 4.02 and 4.03 ofthis revenue procedure.

SECTION 5. CHANGE IN METHODOF ACCOUNTING

A taxpayer within the scope of thisrevenue procedure that wants to changeits method of accounting for income fromcredit card annual fees, either to a methodthat satisfies the all events test in accor-dance with Rev. Rul. 2004–52 or to theRatable Inclusion Method for Credit CardAnnual Fees that is described in section4 of this revenue procedure, must followthe provisions of Rev. Proc. 2002–9 (orits successor), with the following modifi-cations:

.01 The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply toa taxpayer that wants to make the changefor either its first or second taxable yearending on or after December 31, 2003; and

.02 The taxpayer must prepare and filea Form 3115 in accordance with section6 of Rev. Proc. 2002–9 and must enterthe designated number for the automaticchange in method in Line 1a of Form 3115.

(1) The designated number for the au-tomatic accounting method change to in-

June 1, 2004 988 2004-22 I.R.B.

clude credit card annual fees in income asrequired by Rev. Rul. 2004–52 is “80”.

(2) The designated number for the au-tomatic accounting method change to theRatable Inclusion Method for Credit CardAnnual Fees is “81”.

SECTION 6. AUDIT PROTECTION

If a taxpayer within the scope of thisrevenue procedure currently uses themethod described in section 4 of this rev-enue procedure, the method of accountingfor the taxpayer’s credit card annual feeswill not be raised as an issue by the Servicein a taxable year that ends before Decem-ber 31, 2003. Also, if a taxpayer currentlyuses the method described in section 4 ofthis revenue procedure, and its use of thatmethod is an issue under consideration(within the meaning of section 3.09 ofRev. Proc. 2002–9) in examination, be-fore an appeals office, or before the U.S.Tax Court for any taxable year that endsbefore December 31, 2003, that issue willnot be further pursued by the Service.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–9 is modified andamplified to include this automatic changein the APPENDIX.

SECTION 8. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after December31, 2003.

DRAFTING INFORMATION

The principal authors of this revenueprocedure are Rebecca E. Asta, AlexaDubert and Tina Jannotta of the Officeof Associate Chief Counsel (FinancialInstitutions and Products). For furtherinformation regarding this revenue proce-dure, contact the principal authors at (202)622–3930 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods andin methods of accounting.(Also: §§ 446, 1272.)

Rev. Proc. 2004–33

SECTION 1. PURPOSE

This revenue procedure describes con-ditions under which the Commissionerwill allow a taxpayer to treat its incomefrom credit card late fees as interest in-come on a pool of credit card loans. Thisrevenue procedure also provides the ex-clusive procedure by which a taxpayerwithin the scope of this revenue proceduremay obtain the Commissioner’s consentto change its method of accounting for in-come from credit card late fees to a methodthat treats these fees as interest that createsor increases the amount of original issuediscount (OID) on the pool of credit cardloans to which the fees relate.

SECTION 2. BACKGROUND

.01 Certain taxpayers issue credit cardsthat allow a cardholder to access a revolv-ing line of credit to purchase goods and ser-vices. Some of these taxpayers may alsoissue credit cards that allow a cardholderto obtain cash advances.

.02 The terms and conditions that gov-ern the cardholder’s use of the credit cardare provided in a credit card agreement.Under many credit card agreements, thecardholder is charged a fee when the card-holder is delinquent with respect to a pay-ment due (late fee).

.03 For federal income tax purposes,interest is an amount that is paid in com-pensation for the use or forbearance ofmoney. Deputy v. DuPont, 308 U.S. 488(1940), 1940–1 C.B. 118; Old ColonyRailroad Co. v. Commissioner, 284 U.S.552 (1932), 1932–1 C.B. 274. Whether afee is an interest charge for federal incometax purposes is determined by reference toall of the relevant facts and circumstancessurrounding the imposition of the charge.Neither the label used for the charge (forexample, a “finance charge”) nor a tax-payer’s treatment of the item for financialor regulatory reporting purposes is deter-minative of the proper federal income taxcharacterization of the fee. See Rev. Rul.72–315, 1972–1 C.B. 49; see also ThorPower Tool Co. v. Commissioner, 439

U.S. 522, 542–43 (1979), 1979–1 C.B.167.

.04 Rev. Rul. 74–187, 1974–1 C.B.48, holds that late fees on utility bills areinterest absent evidence that the late pay-ment charge assessed by the public utilityis for a specific service performed in con-nection with the customer’s account. Evenif a charge is a one-time charge or is im-posed as a flat sum in addition to a statedperiodic interest rate, that charge may stillbe interest for federal income tax purposes.See Rev. Rul. 77–417, 1977–2 C.B. 60,and Rev. Rul. 72–2, 1972–1 C.B. 19.

.05 Under § 1273(a)(1) of the Inter-nal Revenue Code, OID is the excessof the stated redemption price at matu-rity (SRPM) of a debt instrument overthe issue price of that instrument. Un-der § 1273(a)(2), the SRPM of a debtinstrument is the amount fixed by the lastmodification of the purchase agreementand includes interest and other amountspayable at that time, other than qualifiedstated interest (QSI). Under § 1.1273–1(b)of the Income Tax Regulations, the SRPMis the sum of all payments provided bythe debt instrument other than QSI. Un-der § 1.1273–1(c), QSI is stated interestthat is unconditionally payable in cash orproperty (other than debt instruments ofthe issuer) or that will be constructivelyreceived under § 451 at least annually at asingle fixed rate.

.06 Section 1004 of the Taxpayer ReliefAct of 1997, which is effective for taxableyears beginning after August 5, 1997, ex-tended the rules of § 1272(a)(6) to any poolof debt instruments the yield on which maybe affected by reason of prepayments. SeeH.R. Conf. Rep. No. 220, 105th Cong., 1st

Sess. 522 (1997). Section 1272(a)(6) pro-vides rules for determining the daily por-tions of OID if principal is subject to ac-celeration.

.07 Any change in the taxpayer’s treat-ment of income from credit card late feesthat affects when those fees are recognizedin income is a change in method of ac-counting to which the provisions of §§ 446and 481 apply. Under § 1.446–1(e)(2)(i),a taxpayer generally must secure the con-sent of the Commissioner before changinga method of accounting for federal incometax purposes. Section 1.446–1(e)(3)(ii) au-thorizes the Commissioner to prescribe ad-ministrative procedures setting forth the

2004-22 I.R.B. 989 June 1, 2004

terms and conditions necessary to obtainconsent to change a method of accounting.

.08 Rev. Proc. 2002–9, 2002–1 C.B.327 (as modified and clarified by An-nouncement 2002–17, 2002–1 C.B. 561,modified and amplified by Rev. Proc.2002–19, 2002–1 C.B. 696, and ampli-fied, clarified, and modified by Rev. Proc.2002–54, 2002–2 C.B. 432), providesprocedures by which taxpayers may ob-tain automatic consent to change to themethods of accounting described in theAppendix of Rev. Proc. 2002–9. Sec-tion 5.03 of Rev. Proc. 2002–9 providesthat, unless otherwise provided, a taxpayermaking a change in method of accountingunder the revenue procedure must takeinto account a section 481(a) adjustmentin the manner provided in section 5.04 ofRev. Proc. 2002–9.

SECTION 3. SCOPE

This revenue procedure applies to a tax-payer if—

.01 The taxpayer issues credit cards al-lowing cardholders to access a revolvingline of credit established by the taxpayer;and

.02 None of the cardholders’ credit cardtransactions with the taxpayer is treated bythe taxpayer for federal income tax pur-poses as creating either debt that is givenin consideration for the sale or exchangeof property (within the meaning of §1274)or debt that is deferred payment for prop-erty (within the meaning of § 483).

SECTION 4. APPLICATION

.01 Subject to subsection .02 of this sec-tion 4, if a taxpayer is within the scopeof this revenue procedure, the Commis-sioner will not challenge either the tax-payer’s treatment of credit card late fees asinterest or the taxpayer’s treatment of thisinterest as being part of SRPM and thusas creating or increasing OID on a pool ofcredit card loans to which these fees relate.

.02 Subsection .01 of section 4 of thisrevenue procedure applies only if the tax-payer follows all of the requirements ofsection 5 of this revenue procedure and, ifthe taxpayer is changing its method of ac-counting, all of the requirements of section6 of this revenue procedure.

SECTION 5. REQUIREMENTS

A taxpayer must be able to demonstratethe following:

.01 The amount of any credit cardlate fee charged to each cardholder bythe taxpayer is separately stated on thecardholder’s account when the late fee isimposed; and

.02 Under the applicable credit cardagreement governing each cardholder’suse of the credit card, no amount iden-tified as a credit card late fee is chargedfor property or for specific services per-formed by the taxpayer for the benefit ofthe cardholder.

SECTION 6. CHANGE IN METHODOF ACCOUNTING

If a taxpayer within the scope of thisrevenue procedure wants to change itsmethod of accounting for income fromcredit card late fees and if, under themethod to which the taxpayer is chang-ing, these fees are treated as interest thatcreates or increases the amount of OID ona pool of credit card loans to which thesefees relate, the taxpayer must follow theprovisions of Rev. Proc. 2002–9 (or itssuccessor), with the following modifica-tions:

.01 The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply toa taxpayer that wants to make the changefor either its first or second taxable yearending on or after December 31, 2003; and

.02 The taxpayer must prepare and filea Form 3115 in accordance with section 6of Rev. Proc. 2002–9 and enter the des-ignated number (“82”) for this automaticchange in method in Line 1a of Form 3115.

SECTION 7. AUDIT PROTECTION

.01 If a taxpayer within the scope of thisrevenue procedure currently uses a methodof accounting that treats credit card latefees as interest that creates or increases theamount of OID on a pool of credit cardloans to which these fees relate, the issueof whether the taxpayer is properly treatingits credit card late fees as OID on a pool ofcredit card loans will not be raised by theCommissioner in a taxable year that endsbefore December 31, 2003.

.02 If a taxpayer within the scope of thisrevenue procedure currently uses a methodof accounting that treats credit card latefees as interest that creates or increases theamount of OID on a pool of credit cardloans to which these fees relate and its useof that method is an issue under consider-ation (within the meaning of section 3.09of Rev. Proc. 2002–9) in examination, be-fore an appeals office, or before the U.S.Tax Court for any taxable year that endsbefore December 31, 2003, that issue willnot be further pursued by the Service.

.03 Neither the audit protection pro-vided in connection with a change in a tax-payer’s method of accounting for creditcard late fees that is properly made undersection 6 of this revenue procedure, northe audit protection provided under sec-tions 7.01 and 7.02 of this revenue pro-cedure, is a determination by the Com-missioner that the taxpayer is properly ac-counting for any OID income on that poolof credit card loans. Thus, for example,the Service is not precluded from pursu-ing the issue of whether a taxpayer is prop-erly accounting for its OID income (in-cluding any OID attributable to late fees)on its pool of credit card loans in accor-dance with § 1272(a)(6).

SECTION 8. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–9 is modified andamplified to include this automatic changein the APPENDIX.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after December31, 2003.

DRAFTING INFORMATION

The principal authors of this revenueprocedure are Rebecca E. Asta, AlexaDubert and Tina Jannotta of the Officeof Associate Chief Counsel (FinancialInstitutions and Products). For furtherinformation regarding this revenue proce-dure, contact the principal authors at (202)622–3930 (not a toll-free call).

June 1, 2004 990 2004-22 I.R.B.

26 CFR 601.204: Changes in accounting periods andin methods of accounting.(Also Part I, sections 446, 451; 1.446–1, 1.451–1.)

Rev. Proc. 2004–34

SECTION 1. PURPOSE

This revenue procedure allows taxpay-ers a limited deferral beyond the taxableyear of receipt for certain advance pay-ments. Qualifying taxpayers generallymay defer to the next succeeding tax-able year the inclusion in gross incomefor federal income tax purposes of ad-vance payments (as defined in section 4of this revenue procedure) to the extentthe advance payments are not recognizedin revenues (or, in certain cases, are notearned) in the taxable year of receipt.Except as provided in section 5.02(2) ofthis revenue procedure for certain shorttaxable years, this revenue procedure doesnot permit deferral to a taxable year laterthan the next succeeding taxable year.This revenue procedure neither restrictsa taxpayer’s ability to use the methodsprovided in § 1.451–5 of the Income TaxRegulations regarding advance paymentsfor goods nor limits the period of deferralavailable under § 1.451–5.

This revenue procedure also providesthe exclusive administrative proceduresunder which a taxpayer within the scopeof this revenue procedure may obtain con-sent to change to a method of accountingprovided in section 5 of this revenue pro-cedure.

SECTION 2. BACKGROUND ANDCHANGES

.01 In general, § 451 of the InternalRevenue Code provides that the amountof any item of gross income is includedin gross income for the taxable year inwhich received by the taxpayer, unless, un-der the method of accounting used in com-puting taxable income, the amount is tobe properly accounted for as of a differ-ent period. Section 1.451–1(a) providesthat, under an accrual method of account-ing, income is includible in gross incomewhen all the events have occurred that fixthe right to receive the income and theamount can be determined with reasonableaccuracy. All the events that fix the rightto receive income generally occur when

(1) the payment is earned through perfor-mance, (2) payment is due to the taxpayer,or (3) payment is received by the taxpayer,whichever happens earliest. See Rev. Rul.84–31, 1984–1 C.B. 127.

.02 Section 1.451–5 generally allowsaccrual method taxpayers to defer theinclusion in gross income for federal in-come tax purposes of advance paymentsfor goods until the taxable year in whichthey are properly accruable under the tax-payer’s method of accounting for federalincome tax purposes if that method resultsin the advance payments being includedin gross income no later than when theadvance payments are recognized in rev-enues under the taxpayer’s method ofaccounting for financial reporting pur-poses.

.03 Rev. Proc. 71–21, 1971–2 C.B.549, was published to implement an ad-ministrative decision of the Commissionerin the exercise of his discretion under § 446to allow accrual method taxpayers in cer-tain specified and limited circumstances todefer the inclusion in gross income for fed-eral income tax purposes of payments re-ceived (or amounts due and payable) inone taxable year for services to be per-formed by the end of the next succeed-ing taxable year. Rev. Proc. 71–21 wasdesigned to reconcile the federal incometax and financial accounting treatment ofpayments received for services to be per-formed by the end of the next succeedingtaxable year without permitting extendeddeferral of the inclusion of those paymentsin gross income for federal income tax pur-poses.

.04 Considerable controversy existsabout the scope of Rev. Proc. 71–21. Inparticular, advance payments for non-ser-vices (and often, for combinations ofservices and non-services) do not qual-ify for deferral under Rev. Proc. 71–21,and taxpayers and the Internal RevenueService frequently disagree about whetheradvance payments are, in fact, for “ser-vices.” In addition to the issue of defining“services” for purposes of Rev. Proc.71–21, questions also arise about whetheradvance payments received under a se-ries of agreements, or under a renewableagreement, are within the scope of Rev.Proc. 71–21. In the interest of reducingthe controversy surrounding these issues,the Service has determined that it is appro-priate to expand the scope of Rev. Proc.

71–21 to include advance payments forcertain non-services and combinationsof services and non-services. Addition-ally, the Service has determined that it isappropriate to expand the scope of Rev.Proc. 71–21 to include advance paymentsreceived in connection with an agreementor series of agreements with a term orterms extending beyond the end of thenext succeeding taxable year. The Servicehas determined, however, that for taxpay-ers deferring recognition of income underthis revenue procedure it is appropriateto retain the limited one-year deferral ofRev. Proc. 71–21 (except as provided insection 5.02(2) of this revenue procedurefor certain short taxable years).

SECTION 3. SCOPE

This revenue procedure applies to tax-payers using or changing to an overall ac-crual method of accounting that receiveadvance payments as defined in section 4of this revenue procedure.

SECTION 4. DEFINITIONS

The following definitions apply solelyfor purposes of this revenue procedure —

.01 Advance Payment. Except as pro-vided in section 4.02 of this revenue pro-cedure, a payment received by a taxpayeris an “advance payment” if —

(1) including the payment in gross in-come for the taxable year of receipt is apermissible method of accounting for fed-eral income tax purposes (without regardto this revenue procedure);

(2) the payment is recognized by thetaxpayer (in whole or in part) in revenuesin its applicable financial statement (as de-fined in section 4.06 of this revenue proce-dure) for a subsequent taxable year (or, fortaxpayers without an applicable financialstatement as defined in section 4.06 of thisrevenue procedure, the payment is earnedby the taxpayer (in whole or in part) in asubsequent taxable year); and

(3) the payment is for —(a) services;(b) the sale of goods (other than

for the sale of goods for which the tax-payer uses a method of deferral providedin § 1.451–5(b)(1)(ii));

(c) the use (including by licenseor lease) of intellectual property as definedin section 4.03 of this revenue procedure;

2004-22 I.R.B. 991 June 1, 2004

(d) the occupancy or use of prop-erty if the occupancy or use is ancillary tothe provision of services (for example, ad-vance payments for the use of rooms orother quarters in a hotel, booth space ata trade show, campsite space at a mobilehome park, and recreational or banquet fa-cilities, or other uses of property, so longas the use is ancillary to the provision ofservices to the property user);

(e) the sale, lease, or license ofcomputer software;

(f) guaranty or warranty contractsancillary to an item or items described insubparagraph (a), (b), (c), (d), or (e) of thissection 4.01(3);

(g) subscriptions (other than sub-scriptions for which an election under§ 455 is in effect), whether or not providedin a tangible or intangible format;

(h) memberships in an organiza-tion (other than memberships for which anelection under § 456 is in effect); or

(i) any combination of items de-scribed in subparagraphs (a) through (h) ofthis section 4.01(3).

.02 Exclusions From Advance Payment.The term “advance payment” does not in-clude —

(1) rent (except for amounts paid withrespect to an item or items described insubparagraph (c), (d), or (e) of section4.01(3));

(2) insurance premiums, to the extentthe recognition of those premiums is gov-erned by Subchapter L;

(3) payments with respect to financialinstruments (for example, debt instru-ments, deposits, letters of credit, notionalprincipal contracts, options, forward con-tracts, futures contracts, foreign currencycontracts, credit card agreements, finan-cial derivatives, etc.), including purportedprepayments of interest;

(4) payments with respect to servicewarranty contracts for which the taxpayeruses the accounting method provided inRev. Proc. 97–38, 1997–2 C.B. 479;

(5) payments with respect to warrantyand guaranty contracts under which a thirdparty is the primary obligor;

(6) payments subject to § 871(a), 881,1441, or 1442; and

(7) payments in property to which § 83applies.

.03 Intellectual Property. The term “in-tellectual property” includes copyrights,patents, trademarks, service marks, trade

names, and similar intangible propertyrights (such as franchise rights and arenanaming rights).

.04 Received. Income is “received” bythe taxpayer if it is actually or construc-tively received, or if it is due and payableto the taxpayer.

.05 Next Succeeding Taxable Year.The term “next succeeding taxable year”means the taxable year immediately fol-lowing the taxable year in which theadvance payment is received by the tax-payer.

.06 Applicable Financial Statement.The taxpayer’s applicable financial state-ment is the taxpayer’s financial statementlisted in paragraphs (1) through (3) ofthis section 4.06 that has the highest pri-ority (including within paragraph (2)).A taxpayer that does not have a finan-cial statement described in paragraphs (1)through (3) of this section 4.06 does nothave an applicable financial statement forpurposes of this revenue procedure. Thefinancial statements are, in descendingpriority —

(1) a financial statement required tobe filed with the Securities and ExchangeCommission (“SEC”) (the 10–K or the An-nual Statement to Shareholders);

(2) a certified audited financial state-ment that is accompanied by the report ofan independent CPA (or in the case of aforeign corporation, by the report of a sim-ilarly qualified independent professional),that is used for —

(a) credit purposes,(b) reporting to shareholders, or(c) any other substantial non-tax

purpose; or(3) a financial statement (other than a

tax return) required to be provided to thefederal or a state government or any fed-eral or state agencies (other than the SECor the Internal Revenue Service).

SECTION 5. PERMISSIBLE METHODSOF ACCOUNTING FOR ADVANCEPAYMENTS

.01 Full Inclusion Method. A taxpayerwithin the scope of this revenue procedurethat includes the full amount of advancepayments in gross income for federal in-come tax purposes in the taxable year ofreceipt is using a proper method of ac-counting under § 1.451–1, regardless ofwhether the taxpayer recognizes the full

amount of advance payments in revenuesfor that taxable year for financial report-ing purposes and regardless of whether thetaxpayer earns the full amount of advancepayments in that taxable year.

.02 Deferral Method.(1) In general.

(a) A taxpayer within the scope ofthis revenue procedure that chooses to usethe Deferral Method described in this sec-tion 5.02 is using a proper method of ac-counting under § 1.451–1. Under the De-ferral Method, for federal income tax pur-poses the taxpayer must —

(i) include the advance pay-ment in gross income for the taxable yearof receipt (and, if applicable, in gross in-come for a short taxable year described insection 5.02(2) of this revenue procedure)to the extent provided in section 5.02(3) ofthis revenue procedure, and

(ii) except as provided in sec-tion 5.02(2) of this revenue procedure, in-clude the remaining amount of the advancepayment in gross income for the next suc-ceeding taxable year.

(b) Except as provided in section5.02(3)(b) of this revenue procedure, a tax-payer using the Deferral Method must beable to determine —

(i) the extent to which ad-vance payments are recognized in rev-enues in its applicable financial statement(as defined in section 4.06 of this revenueprocedure) in the taxable year of receipt(and a short taxable year described in sec-tion 5.02(2) of this revenue procedure, ifapplicable), or

(ii) if the taxpayer does nothave an applicable financial statement (asdefined in section 4.06 of this revenue pro-cedure), the extent to which advance pay-ments are earned (as described in section5.02(3)(b) of this revenue procedure), inthe taxable year of receipt (and a short tax-able year described in section 5.02(2) ofthis revenue procedure, if applicable).

(2) Short taxable years. If the nextsucceeding taxable year is a taxable year(other than a taxable year in which the tax-payer dies or ceases to exist in a trans-action other than a transaction to which§ 381(a) applies) of 92 days or less, a tax-payer using the Deferral Method must in-clude the portion of the advance paymentnot included in the taxable year of receiptin gross income for the short taxable yearto the extent provided in section 5.02(3) of

June 1, 2004 992 2004-22 I.R.B.

this revenue procedure. Any amount of theadvance payment not included in the tax-able year of receipt and the short taxableyear must be reported in gross income forthe taxable year immediately following theshort taxable year.

(3) Inclusion of advance payments ingross income.

(a) Except as provided in para-graph (b) of this section 5.02(3), a taxpayerusing the Deferral Method must —

(i) include the advance pay-ment in gross income for the taxable yearof receipt (and, if applicable, in gross in-come for a short taxable year described insection 5.02(2) of this revenue procedure)to the extent recognized in revenues in itsapplicable financial statement (as definedin section 4.06 of this revenue procedure)for that taxable year, and

(ii) include the remain-ing amount of the advance payment ingross income in accordance with section5.02(1)(a)(ii) of this revenue procedure.

(b) If the taxpayer does not havean applicable financial statement (as de-fined in section 4.06 of this revenue proce-dure), or if the taxpayer is unable to deter-mine, as required by section 5.02(1)(b)(i)of this revenue procedure, the extent towhich advance payments are recognized inrevenues in its applicable financial state-ments for the taxable year of receipt (anda short taxable year described in section5.02(2) of this revenue procedure, if ap-plicable), a taxpayer using the DeferralMethod must include the advance paymentin gross income for the taxable year of re-ceipt (and, if applicable, in gross incomefor a short taxable year described in section5.02(2)) to the extent earned in that taxableyear and include the remaining amount ofthe advance payment in gross income inaccordance with section 5.02(1)(a)(ii) ofthis revenue procedure. The determinationof whether an amount is earned in a tax-able year must be made without regard towhether the taxpayer may be required torefund the advance payment upon the oc-currence of a condition subsequent. If thetaxpayer is unable to determine the extentto which a payment (such as a payment forcontingent goods or services) is earned inthe taxable year of receipt (and, if appli-cable, in a short taxable year described insection 5.02(2)), the taxpayer may deter-mine that amount —

(i) on a statistical basis if ad-equate data are available to the taxpayer;

(ii) on a straight line ratablebasis over the term of the agreement if thetaxpayer receives advance payments undera fixed term agreement and if it is not un-reasonable to anticipate at the end of thetaxable year of receipt that the advancepayment will be earned ratably over theterm of the agreement; or

(iii) by the use of any other ba-sis that in the opinion of the Commissionerresults in a clear reflection of income.

(4) Allocable payments.(a) General rule. A taxpayer that

receives a payment that is partially attrib-utable to an item or items described in sec-tion 4.01(3) of this revenue procedure mayuse the Deferral Method for the portion ofthe payment allocable to such item or itemsand, with respect to the remaining por-tion of the payment, may use any propermethod of accounting (including the De-ferral Method if the remaining portion ofthe advance payment is for an item or itemsdescribed in section 4.01(3) of this rev-enue procedure with a different deferralperiod (based on the taxpayer’s applica-ble financial statement or the earning ofthe payment, as applicable)), provided thatthe taxpayer’s method for determining theportion of the payment allocable to suchitem or items is based on objective crite-ria.

(b) Advance payments under sec-tion 4.01(3)(i). An advance payment un-der section 4.01(3)(i) that is wholly attrib-utable to two or more items described insubparagraphs (a) through (h) of section4.01(3) of this revenue procedure that havethe same deferral period (based on the tax-payer’s applicable financial statement orthe earning of the payment, as applicable)is not an allocable payment under section5.02(4)(a) of this revenue procedure.

(c) Allocation deemed to be basedon objective criteria. A taxpayer’s allo-cation method with respect to an allocablepayment described in section 5.02(4)(a) ofthis revenue procedure will be deemed tobe based on objective criteria if the allo-cation method is based on payments thetaxpayer regularly receives for an item oritems it regularly sells or provides sepa-rately.

(5) Acceleration of advance payments.Notwithstanding section 5.02(1) of thisrevenue procedure, a taxpayer using the

Deferral Method must include in grossincome for the taxable year of receipt (or,if applicable, for a short taxable year de-scribed in section 5.02(2) of this revenueprocedure) all advance payments not pre-viously included in gross income —

(a) if, in that taxable year, thetaxpayer either dies or ceases to exist ina transaction other than a transaction towhich § 381(a) applies, or

(b) if, and to the extent that, inthat taxable year, the taxpayer’s obligationwith respect to the advance payments issatisfied or otherwise ends other than in —

(i) a transaction to which§ 381(a) applies, or

(ii) a § 351(a) transfer inwhich (a) substantially all assets of thetrade or business (including advance pay-ments) are transferred, (b) the transfereeadopts or uses the Deferral Method in theyear of transfer, and (c) the transferee andthe transferor are members of an affiliatedgroup of corporations that file a consoli-dated return, pursuant to §§ 1504–1564.

.03 Examples. In each example below,the taxpayer uses an accrual method of ac-counting for federal income tax purposesand files its returns on a calendar year ba-sis. Except as stated otherwise, the tax-payer in each example has an applicablefinancial statement as defined in section4.06 of this revenue procedure.

Example 1. On November 1, 2004, A, in the busi-ness of giving dancing lessons, receives an advancepayment for a 1-year contract commencing on thatdate and providing for up to 48 individual, 1-hourlessons. A provides eight lessons in 2004 and another35 lessons in 2005. In its applicable financial state-ment, A recognizes 1/6 of the payment in revenues for2004, and 5/6 of the payment in revenues for 2005.A uses the Deferral Method. For federal income taxpurposes, A must include 1/6 of the payment in grossincome for 2004, and the remaining 5/6 of the paymentin gross income for 2005.

Example 2. Assume the same facts as in Example1, except that the advance payment is received for a2-year contract under which up to 96 lessons are pro-vided. A provides eight lessons in 2004, 48 lessonsin 2005, and 40 lessons in 2006. In its applicable fi-nancial statement, A recognizes 1/12 of the paymentin revenues for 2004, 6/12 of the payment in revenuesfor 2005, and 5/12 of the payment in gross revenuesfor 2006. For federal income tax purposes, A mustinclude 1/12 of the payment in gross income for 2004,and the remaining 11/12 of the payment in gross in-come for 2005.

Example 3. On June 1, 2004, B, a landscape archi-tecture firm, receives an advance payment for goodsand services that, under the terms of the agreement,must be provided by December 2005. On December31, 2004, B estimates that 3/4 of the work under theagreement has been completed. In its applicable fi-

2004-22 I.R.B. 993 June 1, 2004

nancial statement, B recognizes 3/4 of the payment inrevenues for 2004 and 1/4 of the payment in revenuesfor 2005. B uses the Deferral Method. For federalincome tax purposes, B must include 3/4 of the pay-ment in gross income for 2004, and the remaining 1/4of the payment in gross income for 2005, regardlessof whether B completes the job in 2005.

Example 4. On July 1, 2004, C, in the businessof selling and repairing television sets, receives anadvance payment for a 2-year contract under whichC agrees to repair or replace, or authorizes a repre-sentative to repair or replace, certain parts in the cus-tomer’s television set if those parts fail to functionproperly. In its applicable financial statement, C rec-ognizes 1/4 of the payment in revenues for 2004, 1/2

of the payment in revenues for 2005, and 1/4 of thepayment in revenues for 2006. C uses the DeferralMethod. For federal income tax purposes, C must in-clude 1/4 of the payment in gross income for 2004 andthe remaining 3/4 of the payment in gross income for2005.

Example 5. On December 2, 2004, D, in the busi-ness of selling and repairing television sets, sells for$200 a television set with a 90-day warranty on partsand labor (for which D, rather than the manufacturer,is the obligor). D regularly sells televisions sets with-out the warranty for $188. In its applicable financialstatement, D allocates $188 of the sales price to thetelevision set and $12 to the 90-day warranty, recog-nizes 1/3 of the amount allocable to the warranty ($4)in revenues for 2004, and recognizes the remaining2/3 of the amount allocable to the warranty ($8) in rev-enues for 2005. D uses the Deferral Method. For fed-eral income tax purposes, D must include the $4 al-locable to the warranty in gross income for 2004 andthe remaining $8 allocable to the warranty in grossincome for 2005.

Example 6. E, in the business of photographicprocessing, receives advance payments for mailersand certificates that oblige E to process photographicfilm, prints, or other photographic materials returnedin the mailer or with the certificate. E tracks each ofthe mailers and certificates with unique identifyingnumbers. On July 20, 2004, E receives payments for2 mailers. One of the mailers is submitted and pro-cessed on September 1, 2004, and the other is submit-ted and processed on February 1, 2006. In its appli-cable financial statement, E recognizes the paymentfor the September 1, 2004, processing in revenuesfor 2004 and the payment for the February 1, 2006,processing in revenues for 2006. E uses the Defer-ral Method. For federal income tax purposes, E mustinclude the payment for the September 1, 2004, pro-cessing in gross income for 2004 and the payment forthe February 1, 2006, processing in gross income for2005.

Example 7. F, a hair styling salon, receives ad-vance payments for gift cards that may later be re-deemed at the salon for hair styling services or haircare products at the face value of the gift card. Thegift cards look like standard credit cards, and eachgift card has a magnetic strip that, in connection withF’s computer system, identifies the available balance.The gift cards may not be redeemed for cash, and haveno expiration date. In its applicable financial state-ment, F recognizes advance payments for gift cards inrevenues when redeemed. F is not able to determinethe extent to which advance payments are recognizedin revenues in its applicable financial statement for

the taxable year of receipt and therefore does not meetthe requirement of section 5.02(1)(b)(i) of this rev-enue procedure. Further, F does not determine undera basis described in section 5.02(3)(b) of this revenueprocedure the extent to which payments are earnedfor the taxable year of receipt . Therefore, F may notuse the Deferral Method for these advance payments.

Example 8. Assume the same facts as in Example7, except that the gift cards have an expiration date12 months from the date of sale, F does not acceptexpired gift cards, and F recognizes unredeemed giftcards in revenues in its applicable financial statementfor the taxable year in which the cards expire. Be-cause F tracks the sale date and the expiration dateof the gift cards for purposes of its applicable finan-cial statement, F is able to determine the extent towhich advance payments are recognized in revenuesfor the taxable year of receipt. Therefore, F meetsthe requirement of section 5.02(1)(b)(i) of this rev-enue procedure and may use the Deferral Method forthese advance payments.

Example 9. G, a video arcade operator, receivespayments in 2004 for game tokens that are used bycustomers to play the video games offered by G. Thetokens cannot be redeemed for cash. The tokens areimprinted with the name of the video arcade, but theyare not individually marked for identification. Forpurposes of its applicable financial statement, G com-pleted a study that determined that for payments re-ceived for tokens in the current year, x percent of to-kens are expected to be used in the current year, ypercent of tokens are expected to be used in the nextyear, and z percent of tokens are expected to never beused. Based on the study, in its applicable financialstatement G recognizes in revenues for 2004 x per-cent (tokens expected to be used in 2004) and z per-cent (tokens expected never to be used) of the pay-ments received in 2004 for tokens; G recognizes inrevenues for 2005 the remaining y percent of the pay-ments received in 2004 for tokens. G uses the Defer-ral Method. Using the study, G determines the extentto which advance payments are recognized in rev-enues in its applicable financial statement for the tax-able year of receipt and therefore meets the require-ment of section 5.02(1)(b)(i) of this revenue proce-dure. Under section 5.02(3)(a) of this revenue pro-cedure, G must include advance payments in grossincome in accordance with its applicable financialstatement in the taxable year of receipt, provided thatany portion of the payment not included in income inthe taxable year of receipt is included in gross incomefor the next succeeding taxable year. Thus, for federalincome tax purposes, G must include x percent and zpercent of the advance payments in gross income for2004, and y percent of the advance payments in grossincome for 2005.

Example 10. Assume the same facts as in Exam-ple 9, except that G does not have an applicable fi-nancial statement (as defined in section 4.06 of thisrevenue procedure). G completed a study on a sta-tistical basis, based on adequate data available to G,and concluded that for payments received in the cur-rent year, x percent of tokens are expected to be usedin the current year, y percent of tokens are expectedto be used in the next year, and the remaining z per-cent of tokens are expected to never be used. Basedon the study, G treats as earned for 2004 x percent(for tokens expected to be used in that year) as wellas z percent (for tokens that are expected to never be

used). G uses the Deferral Method. Using the study,G determines the extent to which advance paymentsare earned in the taxable year of receipt and there-fore meets the requirement of section 5.02(1)(b)(ii)of this revenue procedure. Because G does not havean applicable financial statement, G may determinethe extent to which a payment is earned in the tax-able year of receipt on a statistical basis under section5.02(3)(b)(i) of this revenue procedure, provided thatany portion that is not included in the taxable yearof receipt is included in the next succeeding taxableyear. Thus, for federal income tax purposes, G mustinclude x percent and z percent of the advance pay-ments in gross income for 2004, and y percent of theadvance payments in gross income for 2005.

Example 11. H is in the business of compilingand providing business information for a particularindustry in an online format accessible over the inter-net. On September 1, 2004, H receives an advancepayment from a subscriber for 1 year of access to itsonline database, beginning on that date. In its appli-cable financial statement, H recognizes 1/3 of the pay-ment in revenues for 2004 and the remaining 2/3 inrevenues for 2005. H uses the Deferral Method. Forfederal income tax purposes, H must include 1/3 of thepayment in gross income for 2004 and the remaining2/3 of the payment in gross income for 2005.

Example 12. On December 1, 2004, I, in the busi-ness of operating a chain of “shopping club” retailstores, receives advance payments for membershipfees. Upon payment of the fee, a member is allowedaccess for a 1-year period to I’s stores, which offerdiscounted merchandise and services. In its applica-ble financial statement, I recognizes 1/12 of the pay-ment in revenues for 2004 and 11/12 of the payment inrevenues for 2005. I uses the Deferral Method. Forfederal income tax purposes, I must include 1/12 of thepayment in gross income for 2004, and the remaining11/12 of the payment in gross income for 2005.

Example 13. In 2004, J, in the business of op-erating tours, receives payments from customers fora 10-day cruise that will take place in April 2005.Under the agreement, J charters a cruise ship, hiresa crew and a tour guide, and arranges for entertain-ment and shore trips for the customers. In its applica-ble financial statement, J recognizes the payments inrevenues for 2005. J uses the Deferral Method. Forfederal income tax purposes, J must include the pay-ments in gross income for 2005.

Example 14. On November 1, 2004, K, a travelagent, receives payment from a customer for an air-line flight that will take place in April 2005. K pur-chases and delivers the airline ticket to the customeron November 14, 2004. K retains a portion of the cus-tomer’s payment (the excess of the customer’s pay-ment over the cost of the airline ticket) as its com-mission. Because K is not required to provide anyservices after the ticket is delivered to the customer,K earns its commission when the airline ticket is de-livered. The customer may cancel the flight and re-ceive a refund from K only to the extent the airlineitself provides refunds. K does not have an applica-ble financial statement (as defined in section 4.06 ofthis revenue procedure), but, in its unaudited financialstatements, K recognizes its commission in revenuesfor 2005. The commission is not an advance paymentas defined in section 4.01 of this revenue procedurebecause the payment is not earned by K, in whole or

June 1, 2004 994 2004-22 I.R.B.

in part, in a subsequent taxable year. Thus, K may notuse the Deferral Method for this payment.

Example 15. L, a professional sports franchise, isa member of a sports league that enters into contractswith television networks for the right to broadcastgames to be played between teams in the league. Themoney received by the sports league under the con-tracts is divided equally among the member teams.The league entered into a 3-year broadcasting con-tract beginning October 1, 2004. L receives threeequal installment payments on October 1 of each con-tract year, beginning in 2004. In its applicable finan-cial statement, L recognizes 1/4 of the first installmentpayment in revenues for 2004 and 3/4 in revenues for2005; L recognizes 1/4 of the second installment inrevenues for 2005 and 3/4 in revenues for 2006; Lrecognizes 1/4 of the third installment in revenues for2006 and 3/4 in revenues for 2007. L uses the De-ferral Method. Under section 4 of this revenue pro-cedure, each installment payment constitutes an “ad-vance payment.” For federal income tax purposes, Lmust include 1/4 of the first installment payment ingross income for 2004 and 3/4 in gross income for2005; 1/4 of the second installment in gross incomefor 2005 and 3/4 in gross income for 2006; and 1/4 ofthe third installment in gross income for 2006 and 3/4in gross income for 2007.

Example 16. M is in the business of negotiating,placing, and servicing insurance coverage and admin-istering claims for insurance companies. On Decem-ber 1, 2004, M enters into a contract with an insurancecompany to provide property and casualty claims ad-ministration services for a 4-year period beginningJanuary 1, 2005. Pursuant to the contract, the insur-ance company makes four equal annual payments toM; each payment relates to a year of service and ismade during the month prior to the service year (forexample, M is paid on December 1, 2004, for the ser-vice year beginning January 1, 2005). In its applica-ble financial statement, M recognizes the first pay-ment in revenues for 2005; the second payment inrevenues for 2006; the third payment in revenues for2007; and the fourth payment in revenues for 2008.M uses the Deferral Method. Under section 4 of thisrevenue procedure, each annual payment constitutesan “advance payment.” For federal income tax pur-poses, M must include the first payment in gross in-come for 2005; the second payment in gross incomefor 2006; the third payment in gross income for 2007;and the fourth payment in gross income for 2008.

Example 17. N is a cable internet service providerthat enters into contracts with subscribers to provideinternet services for a monthly fee (paid prior to theservice month). For those subscribers who do notown a compatible modem, N provides a rental cablemodem for an additional monthly charge (also paidprior to the service month). Pursuant to the contract,N will replace or repair the cable modem if it provesdefective during the contract period. In December2004, N receives payments from subscribers for Jan-uary 2005 internet service and cable modem use. Inits applicable financial statement, N recognizes theentire amount of these payments in revenues for 2005.N uses the Deferral Method. Because a subscriber’suse of a cable modem is ancillary to the provision ofinternet services by N, and because the cable modemwarranty is ancillary to the use of the cable modem,the payments are advance payments within the mean-ing of section 4.01(3)(i) of this revenue procedure.

Further, because the deferral period for each item isthe same in N’s applicable financial statement, N isnot required to allocate the advance payments (seesection 5.02(4)(b) of this revenue procedure). Forfederal income tax purposes, N must include the ad-vance payments in gross income for 2005.

Example 18. On January 1, 2005, O enters into,and receives advance payments pursuant to, a 5-yearlicense agreement for its computer software. Underthe contract, the licensee pays O both the first-year(2005) license fee and the fifth-year (2009) licensefee upon commencement of the agreement. The feesfor the second, third, and fourth years are payableon January 1 of each license year. In its applicablefinancial statement, O recognizes the fees in revenuesfor the respective license year. O uses the DeferralMethod. For federal income tax purposes, O mustinclude the first-year license fee in gross income for2005, the second-year and the fifth-year license feein gross income for 2006, the third-year license feein gross income for 2007, and the fourth-year licensefee in gross income for 2008.

Example 19. On July 1, 2004, P, in the business ofselling and licensing computer software (off the shelf,fully customized, and semi-customized) and provid-ing customer support, receives an advance paymentfor a 2-year “software maintenance contract” underwhich P will provide software updates if it developsan update within the contract period, as well as on-line and telephone customer support. In its applica-ble financial statement, P recognizes 1/4 of the pay-ment in revenues for 2004, 1/2 in revenues for 2005,and the remaining 1/4 in revenues for 2006, regard-less of when P provides updates or customer support.P uses the Deferral Method. For federal income taxpurposes, P must include 1/4 of the payment in grossincome for 2004 and 3/4 in gross income for 2005.

Example 20. Assume the same facts as in Exam-ple 19, except that P changes its taxable period toa fiscal year ending March 31 so that P has a shorttaxable year beginning January 1, 2005, and endingMarch 31, 2005. In its applicable financial state-ment, P recognizes 1/4 of the payment in revenuesfor the taxable year ending December 31, 2004; 1/8in revenues for the short taxable year ending March31, 2005; 1/2 in revenues for the taxable year endingMarch 31, 2006; and 1/8 in revenues for the taxableyear ending March 31, 2007. Because the taxableyear ending March 31, 2005, is 92 days or less, sec-tion 5.02(2) of this revenue procedure applies. Forfederal income tax purposes, P must include 1/4 of thepayment in gross income for the taxable year endingDecember 31, 2004, 1/8 in gross income for the shorttaxable year ending March 31, 2005, and the remain-ing 5/8 in gross income for the taxable year endingMarch 31, 2006.

Example 21. Assume the same facts as in Exam-ple 19, except that P ceases to exist on December1, 2004, in a transaction other than a transaction towhich § 381(a) applies. For federal income tax pur-poses, P must include the entire advance payment ingross income for 2004.

Example 22. On July 1, 2004, Q, in the businessof selling and licensing computer software (off theshelf, fully customized, and semi-customized) andproviding customer support, receives an advance pay-ment of $100 for a 2-year software license agree-ment that includes a 1-year “software maintenancecontract” under which Q will provide software up-

dates if it develops an update within the contract pe-riod, as well as online and telephone customer sup-port. In its applicable financial statement, Q allocates$20 of the payment to the maintenance contract and$80 to the license agreement, based on objective cri-teria. With respect to the $20 allocable to the main-tenance contract, Q recognizes 1/2 ($10) in revenuesfor 2004 and the remaining 1/2 ($10) in revenues for2005 regardless of when Q provides updates or cus-tomer support. With respect to the $80 allocable tothe license agreement, Q recognizes 1/4 ($20) in rev-enues for 2004, 1/2 ($40) in revenues for 2005, and theremaining 1/4 ($20) in revenues for 2006. Q uses theDeferral Method. For federal income tax purposes, Qmust include $30 in gross income for 2004 ($10 allo-cable to the maintenance contract and $20 allocableto the license agreement) and the remaining $70 ingross income for 2005.

SECTION 6. EFFECTIVE DATE

.01 In General. Except as provided insection 6.02 of this revenue procedure, thisrevenue procedure is effective for taxableyears ending on or after May 6, 2004.

.02 Automatic Change for 2003. For achange in accounting method under sec-tion 8.02 or 8.04(1) of this revenue pro-cedure, this revenue procedure is effec-tive for taxable years ending on or afterDecember 31, 2003. See section 8.06 ofthis revenue procedure for applicable tran-sition rules.

SECTION 7. AUDIT PROTECTION

If a taxpayer uses the Deferral Methoddescribed in section 5.02 of this revenueprocedure for advance payments (as de-fined in section 4 of this revenue proce-dure), the taxpayer’s use of the Defer-ral Method will not be raised as an is-sue by the Service in a taxable year thatends before May 6, 2004. But see sec-tions 9 and 10 of Rev. Proc. 2002–9,2002–1 C.B. 327 (as modified and clari-fied by Announcement 2002–17, 2002–1C.B. 561, modified and amplified by Rev.Proc. 2002–19, 2002–1 C.B. 696, andamplified, clarified, and modified by Rev.Proc. 2002–54, 2002–2 C.B. 432); sec-tion 11 of Rev. Proc. 97–27, 1997–1 C.B.680 (as modified and amplified by Rev.Proc. 2002–19, as amplified and clarifiedby Rev. Proc. 2002–54). If the taxpayeruses the Deferral Method described in sec-tion 5.02 of this revenue procedure, and thetreatment of advance payments (as definedin section 4 of this revenue procedure) un-der the Deferral Method is an issue underconsideration (within the meaning of sec-

2004-22 I.R.B. 995 June 1, 2004

tion 3.09 of Rev. Proc. 2002–9) in ex-amination, in appeals, or before the U.S.Tax Court in a taxable year that ends beforeMay 6, 2004, that issue will not be furtherpursued by the Service.

SECTION 8. CHANGE IN METHODOF ACCOUNTING

.01 In General. A change in a tax-payer’s treatment of advance payments toeither of the methods described in section5 of this revenue procedure is a changein method of accounting to which theprovisions of §§ 446 and 481, and theregulations thereunder, apply. A taxpayermay adopt any permissible method ofaccounting for advance payments for thefirst taxable year in which the taxpayerreceives advance payments. A taxpayerthat seeks to change its method of account-ing for advance payments must use Form3115, Application for Change in Account-ing Method, and complete all applicableparts thereof. See § 1.446–1(e).

.02 Automatic Change. Except withrespect to a change in method to whichsection 8.03 or 8.04(2) of this revenueprocedure applies, a taxpayer within thescope of this revenue procedure that wantsto change to one of the methods of ac-counting provided in section 5 of thisrevenue procedure must follow the au-tomatic change in method of accountingprovisions in Rev. Proc. 2002–9 (or itssuccessor) with the following modifica-tions —

(1) The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply toa taxpayer that wants to change its methodfor its first or second taxable year endingon or after December 31, 2003, providedthe taxpayer’s method of accounting foradvance payments is not an issue underconsideration for taxable years under ex-amination, within the meaning of section3.09 of Rev. Proc. 2002–9, at the time thecopy of the Form 3115 is filed with thenational office;

(2) For purposes of Line 1a of Form3115, the designated automatic accountingmethod change number for the changes inaccounting method provided in section 5Aof the Appendix of Rev. Proc. 2002–9, asadded by this revenue procedure, are 83 forchanges to the Full Inclusion Method and84 for changes to the Deferral Method; and

(3) In lieu of providing the informa-tion and documentation required by line 1of Schedule B to Form 3115, a taxpayerchanging to the Deferral Method under thissection must —

(a) state whether the taxpayeruses an applicable financial statement (asdefined in section 4.06 of this revenueprocedure) and, if so, identify the type;

(b) describe the basis used for de-ferral (i.e., the method the taxpayer uses inits applicable financial statement or howthe taxpayer determines amounts earned,as applicable); and

(c) if the taxpayer makes an allo-cation to which section 5.02(4)(c) of thisrevenue procedure applies, include a state-ment that the allocation method is based onpayments the taxpayer regularly receivesfor an item or items it regularly providesseparately.

.03 Advance Consent Change.(1) A taxpayer within the scope of this

revenue procedure that wants to use theDeferral Method for allocable paymentsdescribed in section 5.02(4)(a) of thisrevenue procedure (other than allocablepayments described in section 5.02(4)(c)of this revenue procedure) or for pay-ments for which a method under section5.02(3)(b)(i) or (iii) of this revenue pro-cedure applies must follow the change inmethod of accounting provisions in Rev.Proc. 97–27.

(2) In lieu of providing the informa-tion and documentation required by line 1of Schedule B to Form 3115, a taxpayerchanging to the Deferral Method under thissection 8.03 must —

(a) state whether the taxpayeruses an applicable financial statement (asdefined in section 4.06 of this revenueprocedure) and, if so, identify the type;

(b) describe the basis used for de-ferral (i.e., the method the taxpayer uses inits applicable financial statement or howthe taxpayer determines amounts earned,as applicable);

(c) provide a redacted copy ofrepresentative actual contracts or repre-sentative sample contracts relating to theadvance payments and indicate the par-ticular parts of the contract(s) that arerelevant to the requested change;

(d) if the taxpayer makes an allo-cation to which section 5.02(4)(a) of thisrevenue procedure applies, include a rep-resentation that the claimed allocation is

based on objective criteria and a descrip-tion of the criteria used for the allocation;

(e) if the taxpayer has advancepayments to which the method under sec-tion 5.02(3)(b)(i) applies, describe thestatistical basis used to determine whenthe advance payments are earned and de-scribe the data and methodology used todevelop the statistical basis; and

(f) if the taxpayer has advancepayments to which the method under sec-tion 5.02(3)(b)(iii) applies, provide anexplanation of how the basis used fordeferral results in a clear reflection of in-come.

.04 Changes to an Overall AccrualMethod and the Deferral Method.

(1) Automatic change.(a) In general. This section

8.04(1) applies to a taxpayer that qual-ifies under section 8.02 of this revenueprocedure to change automatically to theDeferral Method and that either —

(i) qualifies under Rev. Proc.2002–9 to change automatically to an over-all accrual method or to an overall accrualmethod in conjunction with the recurringitem exception of § 461(h)(3) (see section5.01(1)(a)(i) or (ii) of the Appendix of Rev.Proc. 2002–9), or

(ii) is required to change to anoverall accrual method under § 448 forthe first taxable year it is subject to § 448(“first § 448 year”) and otherwise wouldbe required to make the change under theprovisions of § 1.448–1(h)(3).

(b) Application. A taxpayer de-scribed in section 8.04(1)(a) of this rev-enue procedure must follow the automaticchange in method of accounting provisionsin Rev. Proc. 2002–9 (or its successor) (in-cluding all the requirements of section 5.01of the Appendix of Rev. Proc. 2002–9),with the following modifications —

(i) The taxpayer must file asingle Form 3115 for both changes;

(ii) The taxpayer must in-clude both change number 30 and changenumber 84 on Line 1a of Form 3115;

(iii) The taxpayer must com-plete all parts of Form 3115 that are ap-plicable to both the change to an overallaccrual method and the change to the De-ferral Method (see section 8.02(3) of thisrevenue procedure);

(iv) For changes under section8.04(1)(a)(i) of this revenue procedure, thetaxpayer must complete Schedule A (com-

June 1, 2004 996 2004-22 I.R.B.

putation of the § 481(a) adjustment) ofForm 3115, including line 1b (income re-ceived or reported before it was earned),and must take the net § 481(a) adjustmentinto account as provided in section 5.04 ofRev. Proc. 2002–9 or section 2.02 of Rev.Proc. 2002–19, as applicable; and

(v) For changes under section8.04(1)(a)(ii) of this revenue procedure,the taxpayer must complete ScheduleA (computation of the § 481(a) adjust-ment) of Form 3115, including line 1b(income received or reported before it wasearned), and must take the net § 481(a)adjustment into account as provided in§ 1.448–1(g)(2)(i), (g)(2)(ii), or (g)(3), asapplicable.

(2) Advance consent change.(a) In general. A taxpayer within

the scope of this revenue procedure thatwants to change to the Deferral Methodunder section 8.03 of this revenue proce-dure, and also wants to change to an over-all accrual method or to an overall ac-crual method in conjunction with the recur-ring item exception, must request to makeboth changes by filing one Form 3115, andthe taxpayer must follow the change inmethod of accounting provisions in Rev.Proc. 97–27. Only one user fee is requiredfor these changes. See section 5.01(3)of the Appendix of Rev. Proc. 2002–9.The taxpayer must complete all parts ofForm 3115 that are applicable to both thechange to an overall accrual method andthe change to the Deferral Method (seesection 8.03(2) of this revenue procedure).

(b) First § 448 year and DeferralMethod change. A taxpayer within thescope of this revenue procedure that wantsto change to the Deferral Method undersection 8.03 of this revenue procedure andis required to change to an overall accrualmethod under § 448 for its first § 448 yearmust make the change under the provisionsof § 1.448–1(h)(3). Only one user fee is re-quired for these changes and the taxpayermust complete all parts of Form 3115 thatare applicable to both the change to anoverall accrual method and the change tothe Deferral Method (see section 8.03(2)of this revenue procedure).

.05 Previously Filed Forms 3115. Ifa taxpayer within the scope of this rev-enue procedure that qualifies to change itsmethod automatically under section 8.02or 8.04(1) of this revenue procedure fileda Form 3115 with the national office for ataxable year ending on or after December31, 2003, and the Form 3115 is pendingwith the national office on May 6, 2004,the taxpayer must notify the national of-fice in writing prior to July 6, 2004, if thetaxpayer wants to withdraw its Form 3115to make the change under section 8.02 or8.04(1) of this revenue procedure. If thetaxpayer notifies the national office withinthe time provided in this section 8.05, thetaxpayer’s Form 3115, and any user feethat was submitted with the Form 3115,will be returned to the taxpayer. A tax-payer whose Form 3115 is returned un-der this section 8.05 may file a new Form3115 under the provisions prescribed insection 8.02 or 8.04(1) of this revenue pro-cedure. If the taxpayer does not notify thenational office within the time provided inthis section 8.05, the national office willcontinue to process the taxpayer’s Form3115 in accordance with the administra-tive procedures under which it was orig-inally filed, using existing authority (suchas Rev. Proc. 71–21 or § 1.451–5, as appli-cable). With regard to changes under sec-tion 8.04(1) of this revenue procedure, thissection 8.05 does not waive the generallyapplicable scope provisions and other re-quirements in section 5.01 of the Appen-dix of Rev. Proc. 2002–9.

.06 Automatic Change Transition Rule.A taxpayer within the scope of this rev-enue procedure that qualifies to changeits method automatically under section8.02 or 8.04(1) of this revenue proceduremay change to the Full Inclusion Method,the Deferral Method, or an overall ac-crual method and the Deferral Method,as applicable, for taxable years endingon or after December 31, 2003. If a tax-payer has timely filed its federal incometax return for its first taxable year end-ing on or after December 31, 2003, andhas not attached a Form 3115 to changeits method of accounting for that taxable

year to a method provided in this rev-enue procedure, the taxpayer, as providedin section 6.02(3)(b)(i) of Rev. Proc.2002–9, is granted an automatic extensionof 6 months from the due date of its federalincome tax return for the year of change(excluding extensions) to obtain the au-tomatic consent provided by this revenueprocedure, provided the taxpayer attachesForm 3115 to an amended return for theyear of change and otherwise complieswith section 6.02(3)(b)(i) of Rev. Proc.2002–9.

SECTION 9. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 71–21 is modified and su-perseded. Rev. Proc. 2002–9 is modifiedand amplified to include in section 5 ofthe Appendix the automatic change pro-vided in section 8.04(1) of this revenueprocedure, and to include in section 5Aof the Appendix the automatic changeprovided in section 8.02 of this revenueprocedure. The Deferral Method providedin this revenue procedure is availableto qualifying taxpayers notwithstandingrevenue rulings, revenue procedures, no-tices, or announcements published by theService that may provide different rulesfor when advance payments must be in-cluded in gross income. See, e.g., Rev.Rul. 70–445, 1970–2 C.B. 101; Rev.Rul. 68–44, 1968–1 C.B. 191; Rev. Rul.65–141, 1965–1 C.B. 210; and Rev. Rul.60–85, 1960–1 C.B. 181.

SECTION 10. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Edwin B. Cleverdon of theOffice of Associate Chief Counsel (In-come Tax and Accounting). For furtherinformation regarding this revenue pro-cedure, contact Mr. Cleverdon at (202)622–7900 (not a toll-free call).

2004-22 I.R.B. 997 June 1, 2004

Part IV. Items of General InterestIssuance of Advance PaymentRevenue Procedure

Announcement 2004–48

PURPOSE

The Internal Revenue Service has is-sued Rev. Proc. 2004–34, page 991 ofthis Bulletin, which finalizes, with modi-fications, the revenue procedure proposedin Notice 2002–79, 2002–2 C.B. 964 (theproposed revenue procedure). The pur-pose of this announcement is to discusssome of the most significant issues raisedin connection with finalizing the revenueprocedure.

BACKGROUND

Notice 2002–79 proposed a revenueprocedure to modify and supersede Rev.Proc. 71–21, 1971–2 C.B. 549. Theproposed revenue procedure provideda limited deferral beyond the taxableyear of receipt for certain advance pay-ments for services, certain non-services,and combinations of services and certainnon-services. Notice 2002–79 requestedcomments on the proposed revenue proce-dure and on the following specific issues:

• whether the proposed revenue proce-dure should take into account the costof goods sold in deferring advancepayments from the sale of goods;

• whether a taxpayer should be per-mitted to allocate advance paymentsbetween the deferral provisions in§ 1.451–5 of the Income Tax Reg-ulations and the proposed revenueprocedure;

• whether advance payments should beaccelerated as a result of non-taxabletransfers, such as transfers under § 351or § 721 of the Internal Revenue Code,and the treatment of short tax years re-sulting from § 381(a) transactions; and

• whether the use of statistical method-ologies for tracing advance paymentsshould be permitted if the taxpayer isunable to determine the extent to whichparticular advance payments received

in a given taxable year are actually in-cluded in gross receipts for financialreporting purposes in that year.

The Service received comments on theseand several other issues. The most signif-icant comments, along with certain otherchanges to the proposed revenue proce-dure, are discussed below.

CHANGES TO THE PROPOSEDREVENUE PROCEDURE AND OTHERISSUES

Allocations

Notice 2002–79 requested commentson allocations of advance payments be-tween the Deferral Method in the proposedrevenue procedure and § 1.451–5. Com-mentators suggested various approachesto resolve allocation issues involving§ 1.451–5, including providing defer-ral rules identical to those provided in theregulations (making the regulations redun-dant), or making the revenue procedureand regulations mutually exclusive. Com-mentators also suggested that clarifyingthe types of services that are integral to asale of goods for which advance paymentsmay be deferred under § 1.451–5 wouldeliminate confusion about whether an al-location is necessary.

The Service does not believe it is appro-priate to conform the deferral provisions ofthe revenue procedure to the regulations.Instead, the Service continues to believe itis appropriate to retain for purposes of therevenue procedure the one-year limited de-ferral rather than to use the longer deferralperiod allowable under the regulations. Inaddition, the Service does not believe thatthe revenue procedure and the regulationsshould be mutually exclusive. One of thepurposes of the revenue procedure is to re-duce controversy by allowing a taxpayer touse the revenue procedure without requir-ing the taxpayer to determine whether thepayment qualifies for deferral under theregulations.

The Service recognizes that a taxpayermay receive an advance payment that ispartially attributable to an item eligiblefor the Deferral Method under the revenueprocedure and partially attributable to an-other item, such as: (1) an item that isnot eligible for the Deferral Method; (2)

an item that is eligible for the DeferralMethod, but on a different deferral sched-ule; or (3) an item that is eligible for de-ferral under § 1.451–5. In some of thesesituations, a taxpayer may be able to de-termine objectively the portion of the ad-vance payment that is eligible for the De-ferral Method. In these cases, the Servicebelieves it is appropriate to allow a tax-payer to allocate an advance payment andto apply the Deferral Method to part of thepayment and another method of account-ing to the rest of the payment. The finalrevenue procedure, therefore, allows a tax-payer to make allocations if the taxpayeruses objective criteria for the allocation.

A taxpayer that wants to allocate ad-vance payments generally must use theadvance consent procedures for a changeof accounting method set forth in Rev.Proc. 97–27, 1997–1 C.B. 680, as modi-fied and amplified by Rev. Proc. 2002–19,2002–1 C.B. 696, as amplified and clari-fied by Rev. Proc. 2002–54, 2002–2 C.B.432. However, the final revenue proce-dure includes a safe harbor allocation forwhich the taxpayer may use the automaticchange of accounting method proceduresin Rev. Proc. 2002–9, 2002–1 C.B. 327, asmodified and clarified by Announcement2002–17, 2002–1 C.B. 561, modified andamplified by Rev. Proc. 2002–19, andamplified, clarified, and modified by Rev.Proc. 2002–54. Under the safe harbor, if ataxpayer bases the allocation on paymentsthe taxpayer regularly receives for an itemor items it regularly provides separately,the allocation will be deemed to be basedon objective criteria.

Treatment Of Short Taxable Years

The proposed revenue procedure re-tained the requirement under Rev. Proc.71–21 that advance payments be includedin gross income by the end of the “nextsucceeding taxable year” following thetaxable year of receipt. Notice 2002–79requested comments concerning the ap-plication of this rule when the next suc-ceeding taxable year is a short taxableyear resulting from a § 381 transaction.Commentators suggested various reme-dies including disregarding short taxableyears or providing a minimum fixed de-ferral period to approximate the limited

June 1, 2004 998 2004-22 I.R.B.

one-year deferral that would be allowedunder the revenue procedure.

The Service agrees that an additionaltaxable year of deferral should be permit-ted in the case of certain short taxableyears. Therefore, the final revenue pro-cedure provides that, when the next suc-ceeding taxable year is a short taxable year(other than a taxable year in which the tax-payer dies or ceases to exist in a transactionother than a transaction to which § 381(a)applies) of 92 days or less, a taxpayer us-ing the deferral method must include ingross income for the short taxable yearthe portion of the advance payment rec-ognized for financial reporting purposes(or earned, if applicable) in the short tax-able year. Any remaining amount must beincluded in gross income for the taxableyear immediately following the short tax-able year.

Acceleration Of Income

The proposed revenue procedure re-tained the requirement in Rev. Proc.71–21 regarding the acceleration of in-clusion in gross income if the taxpayerdies or ceases to exist (other than in atransaction to which § 381(a) applies) orif the taxpayer’s obligation related to theadvance payment otherwise ends. Thenotice requested comments on whetheracceleration should be required withrespect to certain non-taxable trans-fers. Several commentators suggesteda “step-into-the-shoes” treatment for thetransferee, which the Service believeswould create significant complexity. An-other commentator suggested an exceptionsimilar to the exception provided in themethod change procedures for § 481(a)adjustments for transfers under § 351within a consolidated group.

The final revenue procedure incorpo-rates a limited exception for § 351 trans-fers. A taxpayer will not be required toinclude the advance payment in gross in-come if, in a § 351 transaction, (1) sub-stantially all assets of the trade or business(including advance payments) are trans-ferred, (2) the transferee adopts or uses theDeferral Method in the procedure in theyear of transfer, and (3) the transferee andthe transferor are members of an affiliatedgroup of corporations that file a consoli-dated return pursuant to §§ 1504 – 1564.

Definition Of “Applicable FinancialStatement”

The deferral permitted under the pro-posed revenue procedure was based onthe amount deferred under the taxpayer’smethod of financial reporting. Commen-tators expressed concern that, without spe-cific guidelines, taxpayers would adopt fi-nancial reporting methods that would max-imize deferrals but that might not accu-rately reflect the true nature of the tax-payer’s financial condition. Some com-mentators recommended adopting a stan-dard based on generally accepted account-ing principles (GAAP), and other com-mentators expressed concern that taxpay-ers without financial reports would be ex-cluded from using the Deferral Method.

The final revenue procedure adopts an“applicable financial statement” standardsimilar to that set forth in § 1.56–1(c) re-garding the types, and priority, of financialstatements. Under the revenue procedure,a taxpayer’s applicable financial statementis the first listed of the following:

• Financial statement required to be filedwith Securities and Exchange Com-mission (“SEC”) (the 10–K or the An-nual Statement to Shareholders);

• Certified audited financial statementused for (in this priority) credit pur-poses, reporting to shareholders, orother substantial non-tax purposes;and

• Financial statement provided to a gov-ernment regulator other than the SECor the Internal Revenue Service.

Thus, for example, a taxpayer that bothfiles a 10–K with the SEC and providesfinancial statements to a government reg-ulator would be required to use the 10–Kas the applicable financial statement underthe revenue procedure. For those taxpay-ers that do not have an applicable financialstatement described above, the final rev-enue procedure provides deferral method-ologies based on when the advance pay-ments is earned through performance.

Statistical Sampling

Because the deferral method in the pro-posed revenue procedure was based exclu-sively on the taxpayer’s financial reportingmethod, the proposed revenue procedure

did not provide an independent methodfor using a statistical or other basis fordetermining when an advance payment isearned through performance. Section 3.06of Rev. Proc. 71–21 provided a rule for us-ing a statistical basis, if adequate data areavailable to the taxpayer, for determiningwhen services are performed with respectto contingent service agreements. Somecommentators were concerned that a sim-ilar provision was not included in the pro-posed revenue procedure.

Because some taxpayers do not havean applicable financial statement as pre-viously described, and because some tax-payers are unable to trace the recognitionof individual advance payments in theirapplicable financial statements, section5.02(3)(b) of the final revenue procedurewas added to allow these taxpayers to usecertain other methods, including a statis-tical basis (if adequate data are availableto the taxpayer), to include advance pay-ments in gross income. If a taxpayer seeksto use a statistical basis or other method-ology (other than a straight line ratablebasis) to determine the amount deferred,the taxpayer must use the advance consentprocedures for a change of accountingmethod set forth in Rev. Proc. 97–27.

Items Not Eligible For Deferral AsAdvance Payments

Credit Card Fees

The proposed revenue procedure ex-cluded credit card fees from the defini-tion of advance payments. Several com-mentators requested that credit card fees(including annual fees) be included withinthe document’s scope. The final revenueprocedure continues to exclude paymentswith respect to credit card agreements be-cause the Service has addressed credit cardfees in separate guidance. See Rev. Rul.2004–52, page 973 of this Bulletin, Rev.Proc. 2004–32, page 988 of this Bulletin,and Rev. Proc. 2004–33, page 989 of thisBulletin.

Insurance Premiums

The proposed revenue procedure ex-cluded “insurance premiums” from thedefinition of “advance payments” to avoidconflicts with accounting rules applica-ble to insurance companies. After furtherconsideration, the Service determined that

2004-22 I.R.B. 999 June 1, 2004

a more focused definition would be ap-propriate. Therefore, the final revenueprocedure excludes “insurance premiums,to the extent the recognition of those pre-miums is governed by Subchapter L.” Thislanguage is intended to exclude insurancecompanies as well as other entities thatrecognize income from insurance activ-ities under the subchapter L accountingregime, but not taxpayers that are inel-igible for the subchapter L regime (forexample, taxpayers that issue insurancecontracts but are not insurance compa-nies within the meaning of § 816(a) or§ 1.801–3(a)).

Advance Rentals

In conjunction with the final revenueprocedure, the Service and Treasury areamending the regulations at § 1.61–8(b) toallow the Service to provide for the defer-ral of advance rentals. These amendmentswill be effective retroactively to the datethe regulations were proposed in the Fed-eral Register (December 18, 2002). Thefinal revenue procedure applies to advancepayments for the use of computer softwareand intellectual property, which may other-wise be considered advance rentals. Somecommentators requested that the revenueprocedure be expanded to include advancerentals for tangible property. The Ser-vice has not adopted this suggestion. TheService continues to believe that advancerentals for tangible property should be in-cluded in gross income when received un-less § 467 requires otherwise.

Other Excluded Items

The proposed revenue procedure in-cluded payments for warranties in thelist of items that may be eligible to bedeferred as advance payments. Commen-tators stated that there could be confusionwhether a warranty would be excluded asinsurance. In addition to the clarificationsmade with respect to insurance as dis-cussed above, the Service determined thatit was appropriate to exclude warrantiesand guaranty contracts under which a thirdparty is the primary obligor.

The proposed revenue procedure didnot exclude payments in property to which§ 83 applies or payments subject to thewithholding rules in § 871, 881, 1441, or1442. Upon further consideration, the Ser-vice has determined that because of the

specific statutory and regulatory incometreatment for transactions under § 83, it isappropriate to exclude payments in prop-erty to which § 83 applies from the de-ferral provisions of the revenue procedure.Additionally, the final revenue procedureexcludes payments subject to the specificwithholding rules in § 871, 881, 1441, or1442 from the deferral provisions.

Method Change Issues

The proposed revenue procedure pro-vided that taxpayers would use the auto-matic change in accounting method pro-cedures in Rev. Proc. 2002–9 to changeto either the Deferral Method or the FullInclusion Method. The Service believesthat certain changes permitted under thefinal revenue procedure raise issues thatwarrant closer scrutiny by the Service.Therefore, the Service has determined thata taxpayer that wants to change to an ac-counting method that involves allocationsof payments between the Deferral Methodin the revenue procedure and some othermethod generally must follow the ad-vance consent procedures in Rev. Proc.97–27, rather than the automatic methodchange procedures. Similarly, a taxpayerthat wants to use the Deferral Method,but either does not have an applicablefinancial statement or does not trace indi-vidual advance payments for purposes ofits applicable financial statements, mustfollow the advance consent procedures ofRev. Proc. 97–27 if it wants to defer ad-vance payments on a basis other a straightline ratable basis. The final revenue pro-cedure also provides automatic methodchange procedures for certain changes toan overall accrual method of accountingcombined with a change to the DeferralMethod.

Record Keeping

Section 8 of the proposed revenue pro-cedure set forth record keeping rules fortaxpayers using an accounting method pro-vided by the revenue procedure. How-ever, because that section did not add tothe general record keeping rules applicableto all taxpayers, it was determined that theprovision is unnecessary. Thus, althoughthe final revenue procedure does not in-clude this provision, the record keepingrules in § 6001 and the regulations thereun-der continue to apply to taxpayers that use

a method of accounting provided by the fi-nal revenue procedure.

COGS

The proposed revenue procedure didnot provide a special rule for cost of goodssold (COGS), but requested comments onwhether the revenue procedure should takeinto account COGS in deferring advancepayments from the sale of goods.

Some commentators suggested that theService does not have the authority to treatadvance payments for the sale of goodsas income when received, on the theorythat the Code and regulations do not allowa tax on gross receipts, and that the Ser-vice should require taxpayers to defer ad-vance payments for the sale of inventori-able goods.

The revenue procedure does not adoptthis recommendation. The long-stand-ing position of the Service has been thatadvance payments are income when re-ceived, unless the taxpayer elects to deferunder an exception to that general rule.The final revenue procedure is designedto simplify the various issues that havearisen under Rev. Proc. 71–21. Aftercareful consideration, the Service hasdetermined that a special COGS rule isinconsistent with that simplification. Tax-payers that receive advance paymentsfor goods and qualify to use the deferralmethod in § 1.451–5 may use that method,including the rule for COGS included inthe regulation. Taxpayers that use the de-ferral method provided in the final revenueprocedure must use the general rules under§ 461 and the regulations thereunder fordetermining when a liability (includingCOGS) is incurred.

Effective Date

The revenue procedure is effective fortaxable years ending on or after May 6,2004. However, a transition rule allowstaxpayers who are eligible to use the au-tomatic change provisions to adopt orchange to a method provided in the rev-enue procedure for taxable years endingon or after December 31, 2003.

DRAFTING INFORMATION

The principal author of this announce-ment is Edwin B. Cleverdon of the Of-fice of Associate Chief Counsel (Income

June 1, 2004 1000 2004-22 I.R.B.

Tax & Accounting). For further informa-tion regarding this announcement, contact

Edwin B. Cleverdon at (202) 622–7900(not a toll-free call).

Announcement of Disciplinary Actions InvolvingAttorneys, Certified Public Accountants, Enrolled Agents,and Enrolled Actuaries — Suspensions, Censures,Disbarments, and ResignationsAnnouncement 2004-49

Under Title 31, Code of Federal Regu-lations, Part 10, attorneys, certified publicaccountants, enrolled agents, and enrolledactuaries may not accept assistance from,or assist, any person who is under disbar-ment or suspension from practice beforethe Internal Revenue Service if the assis-tance relates to a matter constituting prac-tice before the Internal Revenue Serviceand may not knowingly aid or abet another

person to practice before the Internal Rev-enue Service during a period of suspen-sion, disbarment, or ineligibility of suchother person.

To enable attorneys, certified publicaccountants, enrolled agents, and enrolledactuaries to identify persons to whomthese restrictions apply, the Director, Of-fice of Professional Responsibility, willannounce in the Internal Revenue Bulletin

their names, their city and state, their pro-fessional designation, the effective dateof disciplinary action, and the period ofsuspension. This announcement will ap-pear in the weekly Bulletin at the earliestpracticable date after such action and willcontinue to appear in the weekly Bulletinsfor five successive weeks.

Consent Disbarments From Practice Before the InternalRevenue Service

Under Title 31, Code of Federal Regu-lations, Part 10, an attorney, certified pub-lic accountant, enrolled agent, or enrolledactuary, in order to avoid institution or con-clusion of a proceeding for his or her dis-barment or suspension from practice be-

fore the Internal Revenue Service, may of-fer his or her consent to disbarment fromsuch practice. The Director, Office of Pro-fessional Responsibility, in his discretion,may disbar an attorney, certified public ac-

countant, enrolled agent, or enrolled actu-ary in accordance with the consent offered.

The following individuals have beenplaced under consent disbarment frompractice before the Internal Revenue Ser-vice:

Name Address Designation Date of Disbarment

Ranes III, Wesse C. Annapolis, MD CPA IndefinitefromMay 1, 2004

Consent Suspensions From Practice Before the InternalRevenue Service

Under Title 31, Code of Federal Regu-lations, Part 10, an attorney, certified pub-lic accountant, enrolled agent, or enrolledactuary, in order to avoid institution or con-

clusion of a proceeding for his or her dis-barment or suspension from practice be-fore the Internal Revenue Service, may of-fer his or her consent to suspension from

such practice. The Director, Office of Pro-fessional Responsibility, in his discretion,may suspend an attorney, certified publicaccountant, enrolled agent, or enrolled ac-

2004-22 I.R.B. 1001 June 1, 2004

tuary in accordance with the consent of-fered.

The following individuals have beenplaced under consent suspension from

practice before the Internal Revenue Ser-vice:

Name Address Designation Date of Suspension

Montgomery, Goldie L. Lancaster, CA Enrolled Agent IndefinitefromFebruary 1, 2004

Frost, Charles L. San Antonio, TX Enrolled Agent IndefinitefromFebruary 1, 2004

Briggs, John W. Sayville, NY Enrolled Agent February 10, 2004fromAugust 8, 2004

Lahman, Gary M. Ft. Collins, CO Enrolled Agent IndefinitefromFebruary 12, 2004

Stanny, Gertrude M. South Lyon, MI Enrolled Agent IndefinitefromMarch 1, 2004

Millar, Mark Tall Timbers, MD Enrolled Agent IndefinitefromMarch 1, 2004

Murray, Maureen E. Naugatuck, CT Enrolled Agent IndefinitefromMarch 1, 2004

Keith, James S. Imperial Beach, CA Enrolled Agent March 2, 2004fromJune 30, 2004

Zelek, Linda S. Moultonboro, NH CPA IndefinitefromMarch 4, 2004

Gilpin, Charles H. San Leandro, CA Enrolled Agent IndefinitefromMarch 5, 2004

Smith, Sean M. Silver Spring, MD Enrolled Agent IndefinitefromMarch 15, 2004

Morelini, Wayne C. Modesto, CA Enrolled Agent IndefinitefromMarch 15, 2004

Bower, Jay Redmond, OR Enrolled Agent IndefinitefromMarch 16, 2004

Lynn, Celia M. Locust Grove, VA Enrolled Agent IndefinitefromApril 1, 2004

June 1, 2004 1002 2004-22 I.R.B.

Name Address Designation Date of Suspension

Swantz Jr., H. E. San Diego, CA Enrolled Agent IndefinitefromApril 6, 2004

Hart, David A. Lake Zurich, IL Enrolled Agent IndefinitefromApril 8, 2004

Lau, Dennis K.M. Honolulu, HI Enrolled Agent IndefinitefromApril 20, 2004

Lentz, Carole Mastic, NY Enrolled Agent IndefinitefromApril 23, 2004

Goble, Dennis R. Valparaiso, IN CPA IndefinitefromApril 26, 2004

Rivera, Eduardo M. Torrence, CA Attorney May 1, 2004toOctober 29, 2006

Grant, Elaine C. Woodway, WA Enrolled Agent May 1, 2004toOctober 31, 2004

Bell, Don Grand Junction, CO Enrolled Agent IndefinitefromMay 1, 2004

Cohick, Jeffrey S. Newville, PA Enrolled Agent May 1, 2004fromOctober 30, 2004

Expedited Suspensions From Practice Before the InternalRevenue Service

Under Title 31, Code of Federal Regu-lations, Part 10, the Director, Office of Pro-fessional Responsibility, is authorized toimmediately suspend from practice beforethe Internal Revenue Service any practi-tioner who, within five years from the date

the expedited proceeding is instituted (1)has had a license to practice as an attor-ney, certified public accountant, or actuarysuspended or revoked for cause or (2) hasbeen convicted of certain crimes.

The following individuals have beenplaced under suspension from practice be-fore the Internal Revenue Service by virtueof the expedited proceeding provisions:

Name Address Designation Date of Suspension

Candelario, Alexander Cabins, WV CPA IndefinitefromFebruary 1, 2004

Riener, Richard St. Paul, MN Attorney IndefinitefromMarch 1, 2004

2004-22 I.R.B. 1003 June 1, 2004

Name Address Designation Date of Suspension

Dunkle, Clark Carlisle, PA CPA IndefinitefromMarch 15, 2004

Bailey, Donald D. Tucson, AZ CPA IndefinitefromMarch 18, 2004

Hill, Donald R. Clinchco, VA CPA IndefinitefromApril 1, 2004

Bergeson, Nancy Inver Grove Hghts, MN CPA IndefinitefromApril 14, 2004

Reese, Kenneth J. Nebraska City, NE CPA IndefinitefromApril 15, 2004

Coates, Marsden S. Baltimore, MD Attorney IndefinitefromApril 15, 2004

Schaefer, Robert J. Moorhead, MN Attorney IndefinitefromApril 20, 2004

Mills, Stuart B. Pender, NE Attorney IndefinitefromMay 1, 2004

Harris-Smith, Bridgette Silver Spring, MD Attorney IndefinitefromMay 3, 2004

Janousek, Donald R. Omaha, NE Attorney IndefinitefromMay 3, 2004

Williams, Gary W. Diamond Bar, CA CPA IndefinitefromMay 3, 2004

Demaio, Louis J. Bel Air, MD Attorney IndefinitefromMay 3, 2004

Miller, Frederick C. Cedar Hill, TX CPA IndefinitefromMay 15, 2004

Censure Issued by ConsentUnder Title 31, Code of Federal Reg-

ulations, Part 10, in lieu of a proceedingbeing instituted or continued, an attorney,certified public accountant, enrolled agent,

or enrolled actuary, may offer his or herconsent to the issuance of a censure. Cen-sure is a public reprimand.

The following individuals have con-sented to the issuance of a Censure:

June 1, 2004 1004 2004-22 I.R.B.

Name Address Designation Date of Censure

Friedman, Milton G. Ft. Lauderdale, FL CPA December 30, 2003

Stevens, William E. Omaha, NE CPA February 13, 2004

Turner, Mark A. Cincinnati, OH CPA February 25, 2004

Rath, Dorris A. Bradenton, FL Enrolled Agent March 9, 2004

Damiano, Lisa South Windsor, CT Enrolled Agent March 9, 2004

Silbiger, Arnold R. Baltimore, MD Attorney March 11, 2004

Farwell, Nancy K. Citrus Heights, CA Enrolled Agent April 5, 2004

Dembrowski, Karen E. Encino, CA CPA April 13, 2004

Foundations Status of CertainOrganizations

Announcement 2004–50

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:

129th Rescue Member Foundation,Moffett Field, CA

A D Player Endowment Fund, Inc.,Houston, TX

Abraham Lincoln Institute, Joppa, ILAbraham Lincoln National Cemetery

Support Committee, Joliet, ILAchondroplasia Information Source,

Hubbard, TXAdvokids, Inc., Baltimore, MDAfrican Repertory Troupe, Inc.,

Mattapan, MAAfricatown Community Mobilization

Project, Inc., Mobile, AL

Afrikan Historical Preservation Society,Inc., Brooklyn, NY

Agape Complete Services Parent TeacherHotline, Donaldsonville, LA

Agape Eleos Ministries InternationalFoundation, Pleasanton, CA

Agape Foundation, Mountain View, CAAgape in Action, Inc., Scottsdale, AZAgape Life Institute, Austin, TXAgatha Foundation, Los Angeles, CAAHA Regional Cancer Research

Treatment Center, Joudanton, TXAlabama Chapter of the National

Organization of Professional Black,Annistont, AL

Alabama Fire and Life Safety EducationAssociation, Birmingham, AL

Alabama Lyric Theatre, Mobile, ALAlcore Community Development

Corporation, Elizabeth, NJAlicias Animal Haven, Encino, CAAll Children’s Assistance Fund,

Santa Ana, CAAllasso Ministries, Inc., West Bend, WIAlliance to Revitalize Todays Society

Project, Greeley, COAlpha-Omega Sports Ministries,

Ridgefield, WAAlyans Atizay Ayisyn, Inc., Miami, FLAmerican Asian Pacific Health

Care Organization Corporation,Westminster, CA

American Institute of Film and NewMedia, Los Angeles, CA

American Lifecare, Inc.,Palm Beach Gardens, FL

American Research Center for Asia andthe Pacific, Bethesda, MD

American Student Athlete Association,Chicago, IL

Angels in Heaven & Earth Foundation,Winnetka, CA

Angleton Pal, Angleton, TXAnimal Foundation of East Tennessee,

Powell, TNAnnie Davis Foundation, Inc.,

Memphis, TNAnointed Creations and Word Wellness

Ministries, Fort Worth, TXAntioch Youth Center, Macon, GAApex Soccer Club, Inc.,

Thousand Oaks, CAArizona Fragile X Foundation,

Glendale, AZArlington High School Choir Booster

Club, Arlington, TXArt & Industrial Womens Club of Barstow,

Barstow, CAArtes Alba, Inc., Miami Shores, FLArtichoke Dance Company, Inc.,

New York, NYArtists Advancement Crusade,

Chicago, ILAsdew Residential Facility,

Los Angeles, CAAssociation of Chinese Schools

in Southeastern United States,Huntsville, AL

Atlantic Society for the Arts, Inc.,Great Neck, NY

Attingham Trust for the Study of CountryHouses and Collections, England

Avalon Home and School Association,Avalon, NJ

Back to the Workplace, Inc.,High Ridge, MO

Bao Phat Thanh Corporation,Westminster, CA

Baptist Life Communities, Inc.,Cincinnati, OH

Bark Banks Animal Rescue Kennel,Lexington, NC

Beacon Senior Housing Corp.,Glendale, CA

2004-22 I.R.B. 1005 June 1, 2004

Bedford Initiative, Inc., Boston, MABellamy Outreach, Inc., Columbia, SCBerkeley Center for the Study of Best

Practice, Berkeley, CABertram J. Zelden Foundation, Inc.,

Old Greenwich, CTBethesda Living Centers of Colorado

Springs, Colorado Springs, COBethesda Living Centers of Grand

Junction, Colorado Springs, COBethesda Living Centers of Kearney,

Colorado Springs, COBethesda Living Centers of Omaha,

Colorado Springs, COBetty Shabazz National Black Wholistic

Retreat Center, Boston, MAB I B L E, Detroit, MIBini Association of Northern California,

Oakland, CABJBS Enterprises, Inc., Tarsana, CABlack Cultural Council of Odessa,

Odessa, TXBlackfeet Original Allotment Heirs

Association, Browning, MTBlair Mountain Historical Organization,

Blair, WVBlaze Premier Soccer Club, Inc., Boise, IDBlue Hill Area Community Center,

Blue Hill, MEBlue Water Ministries, Los Angeles, CABluelicks Pantry, Falmouth, KYBoca Grande Soccer Club,

Boca Grande, FLBoys & Girls Club of the Omaha Nation,

Inc., Macy, NEBrevard Crisis Pregnancy Center and

Shelter, Inc., Merritt Island, FLBridge Over Trouble Water, Inc.,

Morven, NCBright Dreams International, Dallas, TXBristol Heritage Collection, Nashville, TNBroad Creek Conservancy, Inc.,

Ft. Washington, MDBrothers & Sisters of Tribe, Phoenix, AZBrothers for Change, Inc., Madison, WIButler County Humane Society,

Greenville, ALCafeteria Workers Local 634 Scholarship

Tr. Fund, Philadelphia, PACaleb Missionary Relief Services,

Decatur, GACalifornia Sacrifice, Ceres, CACall to Service, Big Lake, MNCamerata Chamber Winds of Coppell,

Coppell, TXC A P Adult Family Homes Corporation,

Cleveland, OH

Capital Area Diamond Star Motor Club,Inc., Centreville, VA

Cardiology Associates Foundation,New York, NY

Carlton-Hickman Foundation, Inc.,Detroit, MI

Carrick Band Boosters Association, Inc.,Pittsburgh, PA

Cat Heaven, El Cajon, CACelebrate History, Inc., Berkeley, CACenter for the Preservation & Education

of Ancient Western Civilization Artand, Tucson, AZ

Central Alabama Pride, Inc.,Birmingham, AL

Central Dupage Kiwanis Club Foundation,Wheaton, IL

Central Texas Elite Track Club,Austin, TX

Centre for Early Christian Studies,San Jose, CA

Ceres Food Society, Inc., Palm Coast, FLChallenges Foundation, Los Angeles, CAChallenges Unlimited, Asheville, NCCherokee Childrens Nutrition,

Brentwood, TNCherry Street Memorial A M E Zion Lay

Council, Pine Bluff, ARChesapeake Sheriffs Pipe Band, Inc.,

Chesapeake, VAChesterfield Education and Training

Institute, Seattle, WAChild and Adult Care Services, Inc.,

Wilmington, NCChildrens Place PTO, Inc.,

New Windsor, NYChildrens Resource Foundation,

Spring, TXChildrens Scholarship Fund Miami, Inc.,

Miami, FLChinatown Community Housing

Corporation, Honolulu, HIChristian Lewis Holdings, Inc.,

Swansea, UKChristian Research Hospital,

Cedar Rapids, IAChristians in Emergency Services,

Nashville, TNChurch of Alternative Nutritional Science,

Las Vegas, NVCitizens Against Illegal Drugs, Inc.,

Watertown, NYCity School Press, Inc., Brooklyn, NYClassics Gymnastics Parents Boosters

Club, Inc., Copley, OHClear Brook Volleyball Booster Club,

Friendswood, TX

Cleveland Little Dribblers, Cleveland, TXClub Morelia, Blue Island, ILCoastwatch Wildlife Society,

Sausalito, CAColeman Hawkins Jazz Heritage Society,

St. Joseph, MOCollecting Kids for Christ Ministries -

The Kids House, Inc., Sanford, FLCollins Graham H O P E Foundation,

Atlanta, GAColumbia Soccer Association, Inc.,

Columbia, TNColumbus Chinese Association,

Columbus, INCome Together Steering Committee,

San Angelo, TXComing Together to Help Promotions,

Inc., Philadelphia, PACommunity Activators Breast Cancer

Project, Vashon, WACommunity Art Partners, Glen Ellyn, ILCommunity by the Sea, Inc., Malabar, FLCommunity Developmental Leadership

Organization, Roseboro, NCCommunity Restoration Center,

Columbus, OHCommunity Supported Housing for the

Underprivileged, Memphis, TNCompetition, Iowa Park, TXConnecticut Babe Ruth Softball Leagues,

New Milford, CTConnecticut Supportive Housing

Development Co., Inc., New Haven, CTConservation Technology Support

Program, San Francisco, CAConsumer Debt Reduction Institute,

Rockford, ILCoral Park Baseball Booster Club, Inc.,

Miami, FLCorpus Christi Foundation of

Holland/Zeeland, Holland, MICourts in Session, Inc., Lexington, KYCove Foundation, Inc., Key Largo, FLCreators Gift 137, Deltona, FLCrichton Economic Development, Inc.,

Crichton, ALCunningham Charitable Group,

Los Angeles, CAD C Public Charter School Resource,

Washington, DCDaniel Andresen Foundation, Dekalb, ILDansarte, Inc., Burlington, VTDare to Dream, Inc., New York, NYDarke County Search & Rescue, Inc.,

Greenville, OHDavid H. Jones Ministries,

Springfield, MO

June 1, 2004 1006 2004-22 I.R.B.

Davis Dimension Christian WomensOrganization, Incorporated,South Holland, IL

Daytona Beach Housing DevelopmentCorporation, Daytona Beach, FL

Deaf and Hard of Hearing in Government,Inc., Washington, DC

Delco Associates Limited, Quincy, MADesoto Community Economic

Development Foundation, Inc.,Mansfield, LA

Detroit Black Womans Health Project,Detroit, MI

Detroit Food Security Council, Troy, MIDHS Baseball Boosters, Duncanville, TXDirect Action, Inc., El Cajon, CADominican Republic Health Education

Language Project, Gainesville, FLDown Syndrome Association of Polk

County, Lakeland, FLDowntown Miami Transportation

Management Association, Inc.,Miami, FL

Eagle Heights, Boise, IDEastern Market Community Advisory

Committee, Washington, DCEastside Cardinals, Detroit, MIEd Rimer Ministries, Inc.,

Albuquerque, NMEdgewood Elementary School Parent

Teacher Organization, Moriarty, NMEduskate Foundation, Inc.,

Boca Raton, FLEl Paso Barrios Unidos, El Paso, TXElohim Outreach Center, Hartsville, SCEluzai, Inc., Riverdale, GAEmpact Southeast Alabama, Inc.,

Dothan, ALEmpty Arms Foundation, Inc.,

Hackensack, NJEncore Theatre, Inc., Lucas, TXEndless Mountains Theatre Company,

New Milford, PAEphesus Road Housing Corporation,

Raleigh, NCEpic Blitz Soccer, Harpers Ferry, WVEvangelique Economic Development,

Inc., Delray Beach, FLEvin Thayer Scholarship Fund,

Houston, TXEye of the Storm, Bowie, MDFabulous Feet Parents Club,

Brentwood, CAFamilia Unidas De Val Verde County,

Del Rio, TXFaubourg Theatre, Inc., Hanover Park, ILFertilityCare Centers International, Inc.,

Omaha, NE

Fido in Prospect Park, Brooklyn, NYFighting for Equality in Allocation of

Textbooks, Inc., Roosevelt Island, NYFive Thousand Orphans, Arlington, VAFlora D. Parrish Foundation, Tucson, AZFlorida West Coast Resource Conservation

& Development Council, Ellenton, FLFollow Your Dream, Inc., Methuen, MAFort Collins International Visitors

Council, Fort Collins, COFort Worth Rugby Football Corporation,

Fort Worth, TXFoundation Ridge Housing Corporation,

Raleigh, NCFriends for Christmas at the Zoo, Inc.,

Ltl Suamico, WIFriends of Abused Children Everywhere,

Inc., Blanco, TXFriends of Crest, El Cajon, CAFriends of Frederick County Public

Libraries, Inc., Frederick, MDFriends of Mama D, Inc., Roseville, MNFriends of the Globe Public Library,

Globe, AZFriends of the Grand County Childrens

Justice Center, Moab, UTFundacion Boriqua, Inc., Oviedo, FLFuture American Scientists and

Technologists, Inc., Tulsa, OKFuture Awareness, Oakland, CAGateways Incorporation, Boston, MAGator Country Resource Conservation

& Development Council, Inc.,Live Oak, FL

Generation Gerannomo, Philadelphia, PAGentle Hearts Animal Shelter of Taylor

County, Incorporated, Medford, WIGet Real Ministries, Jonesboro, ARGI Bill Alumni Association,

Philadelphia, PAGlen Rose Youth Baseball Association,

Glen Rose, TXGlobal Dialoge Institute, Gladwyne, PAGlobal Harmony Productions,

Houston, TXGods Special Care, Gary, INGolden Triangle Public Improvement

Corporation, Inc., Starkville, MSGood Son Ministries, Pelham, ALGoodvillage Foundation, Friendship, WIGrace House of Madison County, Inc.,

Anderson, INGrand Glaice Safe Boating Association,

Osage Beach, MOGrandview High School of Boca Raton,

Inc., Boca Raton, FLGreat Dane Rescue of WI, Inc.,

Stoughton, WI

Great Falls Elks Lodge Charitable Corp.,Great Falls, MT

Greater Squaw Bay Association, Inc.,Coeur D Alene, ID

Greater Washington Shores AreaAssociation of Orlando, Inc.,Orlando, FL

Green Mountain State Games,Winooski, VT

Greer High School Alumni and FriendsAssociation, Greer, SC

Guardettes of Orange County, Inc.,Garden Grove, CA

Guest House, Inc., Dallas, TXGull Lake Little League, Richland, MIHamilton Diagnostics-Ellijay, Inc.,

East Ellijay, GAHampton Supportive Housing, Inc.,

Glendale, CAHealthy Families Jacksonville, Inc.,

Jacksonville, FLHeart & Hands, Inc., Winterset, IAHeartwood Foundation, Seattle, WAHelendale Silver Lakes Little League,

Helendale, CAHelp, Inc., Atlanta, GAHelp Other People Evolve, Inc.,

Oakland, CAH I G H, Inc., Missouri City, TXHistoric Music Broadcasts, Inc.,

New York, NYHo Okupu, Inc., Atlanta, GAHolmes Elementary Parent Teacher

Group, Spokane, WAHoma Lusa Corporation, Richmond, CAHonorable Elijah Muhammad Educational

Foundation, Chicago, ILHousing Services of Alabama, Inc.,

Dothan, ALHouston Repertory Theatre, Houston, TXHoward K. Russell Memorial Scholarship

Fund, Chino Hills, CAHowell Wrestling Club, Inc., Howell, NJHuman Support Systems Foundation,

Cleveland, OHI Am Somebody Pantry, Inc., Dallas, TXI Need a Miracle Foundation, Flippin, ARI C E P S Ltd., Ulman, MOIdaho Education Alliance for Solutions,

Inc., Shelley, IDImage for Success, San Rafael, CAImmerse Yourself in Celebration, Inc.,

Ft. Lauderdale, FLIndependence Preserve Our Legacy

Foundation, Independence, IAInfants Palace Day Care, Inc., Raleigh, NCInforming Seniors in Crisis, Corona, CAInneract Foundation, Inc., Marietta, GA

2004-22 I.R.B. 1007 June 1, 2004

Innercircle - Integrating Spirituality andHealing, San Francisco, CA

Institute for Computer Researchand Jewish Jurisprudence, Inc.,New York, NY

Intalab, Inc., - International AffairsLaboratory for Research and Education,Oklahoma City, OK

International Academy of Voice andStage, Incorporated, Hollywood, FL

International Court of the EnvironmentFoundation, New York, NY

International Design Center for theEnvironment, Raleigh, NC

International Science Foundation ofCambridge, Somerville, MA

International Womens TaekwondoFederation, Canoga Park, CA

Investing in People, Arlington, TXInvisible Gift Foundation for Childrens

Fund, Inc., Miami, FLIt’s A Wonderful Life, Midland Park, NJJa Dal Community Development, Inc.,

Shorter, ALJack and Jill Daycare Preschool,

Pine Bluff, ARJacksonville Art Museum, Inc.,

Jacksonville, FLJazz Center, Cambridge, MAJendayi Home, Oakland, CAJewish Armed Forces Association,

Miami, FLJFJ Christian Foundation, Houston, TXJim Pecota Ministries, Kent, WAJo Ella Ellison Ministries dba Therapon

Counseling Center, Austin, TXJoot Media Production, Bastrop, TXJoshua Faith Ministries, Kent, WAJoy Senior Apartments, Inc.,

Petersburg, WVJudo Affiliates of Michigan JAM,

Southfield, MIJump Start, Las Vegas, NVJunction City Swimming Pool &

Community Center Foundation,Junction City, OR

Kalamazoo Chapter of Te Links, Inc.,Kalamazoo, MI

Katies Kids, Philadelphia, PAKeylife Foundation, Encino, CAKeys, Inc., Virginia Beach, VAKids Et Cetera Day Care Center, Inc.,

Brooklyn, NYKids Tech the Cool School, Chicago, ILKinship Institute, Santa Fe, NMKiwanis Club of the Boulevard Amherst

Foundation, Inc., Tonawanda, NY

Klein Oak Area Swim Team, Inc.,Spring, TX

Klothes for Kids, Inc., Phoenix, AZKollel Torah Mitzion, Inc., Chicago, ILL. McNeese Ministries, Clarksville, TNLake Prince Center, Inc., Newton, NCLake Region Thunder Softball Boosters,

Inc., Winter Haven, FLLake Shore Charter Chapter Scholarship

Fund, Oak Park, MILandskroner Foundation for Children,

Cleveland, OHLatchery, Inc., Ruston, LALathrop Tumbling Foundation,

Rockford, ILLawrence County School-to-Work, Inc.,

New Castle, PAL E A D Ministries, Inc., Washington, DCLeaping Frogs, Inc., Mattituck, NYLebanon High School Sports Boosters,

Inc., Lebanon, INLes Ballets Grandiva, Ltd., New York, NYLiberty Elementary School District

Educational Foundation, Buckeye, AZLife Candle Light, Venice, ILLife Resources, Inc., Mandeville, LALightbox Films, Pleasanton, CALittle Bear Child Development Center,

Waukegan, ILLong View Learning, Inc., Raleigh, NCLos Amigos Baseball Association of

Santa Monica, Santa Monica, CALos Angeles Chapter of National Football

League Retired Players, Whitties, CALos Angeles Community Chest,

Los Angeles, CALost Voices Foundation, Inc.,

Staten Island, NYLowell Community Charter School

Friends, Inc., Lowell, MALubbock Korean Christian Fellowship,

Lubbock, TXLuminous Group, Inc., New York, NYMabak International, Los Angeles, CAMadison Aquatic Club, Inc., Madison, WIMafio, Inc., Worcester, MAMajor Taylor Alliance, Inc.,

Indianapolis, INMake a Dream Come True Project

Rhema Paradise for Street Children,St. Augustine, FL

Malama Na Keiki Foundation,Honolulu, HI

Mantech International Special AssistanceFund, Inc., Fairfax, VA

Marion Youth Organization, Marion, TXMartin Luther King Cello Program,

Santa Monica, CA

Mary Elizabeth Baker Parent and ChildDevelopment Center, Long Beach, CA

Mary Stewart Health and EducationFoundation, Carson, CA

Master Care Ministries, Minnetonka, MNMasters Plan Foundation, Scottsdale, AZMatts House, Inc., Appleton, WIMavericks Swimming Association,

Half Moon Bay, CAMechanicsburg Summer Youth Leagues,

Mechanicsburg, OHMedia, Houston, TXMedia Knowledge, Incorporated,

New Fairfield, CTMelador Foundation, Carson, CAMennello Museum of American Folk Art,

Inc., Orlando, FLMentally Challenged Advocacy Council,

Inc., Corpus Christi, TXMercy Home Healthcare, Memphis, TNMercy Road, Murrieta, CAMetropolitan Kappa Youth Development

& Scholarship Foundation,Silver Spring, MD

Metropolitan Oval Foundation, Inc.,Brooklyn, NY

Mexico Academy EducationalFoundation, Mexico, NY

Meyer Group, Incorporated,Key Biscayne, FL

Michigan Intertribal Coalition ofIshpeming & Negaunee, Negaunee, MI

Michigan Panthers Baseball Club, Inc.,Wixom, MI

Mid-Northeast Collaborative,Washington, DC

Mid-Pinellas Homeless Outreach, Inc.,St. Petersburg, FL

Mid-Willamette Valley Senior ServicesFoundation, Salem, OR

Middle Penninsula Hospice & PallativeCare, St. Stephens Church, VA

Middle School Connection,Minneapolis, MN

Midland Park Public EducationFoundation, Inc., Short Hills, NJ

Millenium Dance Syndicate, Inc.,Delray Beach, FL

Milton Avenue Community Association,Inc., Baltimore, MD

Milton-Freewater Valley Swim Team,Milton Freewater, OR

Milwaukee Swish, Inc., Milwaukee, WIMinisterio Economico Educativo,

Chula Vista, CAMinnesota Skating Scholarship,

Edina, MN

June 1, 2004 1008 2004-22 I.R.B.

Mirror Image Education Thru Drama,Greenwood Village, CO

Mission That Cares, Inc., Catonsville, MDMississippi Propane Education and

Research Council, Jackson, MSMolly K. Gibson Memorial Scholarship

Fund, Inc., Franklin, INMonumental Redevelopment Corporation,

Memphis, TNMoose Mountain Alpine Sports Club,

Inc., Fairbanks, AKMoshannon Valley Parent Teacher

Organization, Houtzdale, PAMount Jumbo West Little League,

Missoula, MTMountain Do Ers, Spanaway, WAMountain View Residential Homes, Inc.,

Clinton, TNMs Interact, Westchester, PAMSU Ice Breakers Club, East Lansing, MIMuhammad Development Corporation,

Springfield, MAMulti-Cultural Artists Organization,

San Francisco, CAMunuscong River Watershed Association,

Kinross, MIMuseum of Human Rights, Union City, NJNational Abuse Prevention Council,

Costa Mesa, CANational Association for Gifted Youth,

Charlotte, NCNational Association of Farmers Market

Nutrition Programs, Alexandria, VANational Highway Traffic Safety

Foundation, Inc., Englewood, FLNational Institute on Youth Camp Safety,

Inc., Staten Island, NYNdu Time Inner City Youth Ministry,

Wilmington, DENeedham High School Parent Teacher

Council Trust, Needham, MANehemiah Group, Little Rock, ARNeighbors Helping Neighbors Interfaith

Volunteer Caregivers, Martinsburg, WVNelson Hockey Association, Inc.,

Arnold, MDNevada Museum of Aviation & Military

History, Las Vegas, NVNew Art Music International,

Bellingham, WANew Canaan Soccer Association,

New Canaan, CTNew Day Faith Foundation,

Philadelphia, PANew Directors Charity Group, Inc.,

Pacific Palisades, CANew England Graduate Accounting Study

Conference, Inc., Providence, RI

New Horizon Ministries, Inc.,Chandler, AZ

New Initiatives Community DevelopmentCorporation, Washington, DC

New Jersey Hepatitis C Coalition, Inc.,Toms River, NJ

New Life in Christ Ministries,Lanham, MD

New Mexico Alternative Transit,Santa Fe, NM

New River Jazz, Beckley, WVNew Rythms Foundation, Tiburon, CANew Sudan-American Hope,

Rochester, MNNguoi Viet Foundation, Westminster, CANicaraguan Mission Project, Inc.,

East Amherst, NYNightingale Hospice,

Sault Sainte Marie, MINM Crime Stoppers Commission,

Albuquerque, NMNoblesville Boys & Girls Club Auxiliary,

Inc., Noblesville, INNoon, Inc., New York, NYNorth American Youth Sports, Gurnee, ILNorth Beach Kiwanis Foundation,

Kitty Hawk, NCNorth Carolina Advance Training Center,

High Point, NCNorth East Florida Resource Conservation

& Development Council, Live Oak, FLNorth Idaho Timber and Train Interpretive

Center, Inc., Sandpoint, IDNorth Santa Barbara County Substance

Abuse Treatment Court Alumni,Santa Maria, CA

Northglenn Middle School Booster Club,Northglenn, CO

Nu Chapter of Chi Eta Phi Sorority, Inc.,Miramar, FL

Nuestra Palabra Latino Care of WritersHaving Their Say, Houston, TX

Nurturing Love, Inc., Humble, TXOak Grove Music Boosters, Concord, CAOakland Community Pools Project,

Oakland, CAOakland Jazzthere Festival, Oakland, CAOakland Learning Center,

Bel Tiburon, CAOasis Center for the Arts OTC,

Glendale, AZOklahoma Education Enhancement

Foundation, Mustang, OKOld Glory 2000, Irving, TXOn Solid Grounds, N. Charleston, SCOn Stage Productions, Inc.,

Fall River, MA

One Lord One Faith Development Corp.,Chicago, IL

Open Classrooms Chartered A New JerseyNonprofit Corporation, Baltimore, MD

Optimist Club of Chatham, Inc.,Siler City, NC

Orange Villa Park Girls Softball League,Orange, CA

Organization for Educational & EconomicDevelopment, Highland Park, MI

Our Kids Our Future, Kalamazoo, MIOwens Booster Club, Inc., Athens, ALPacific Rim Community Foundation,

Costa Mesa, CAPacific Youth Ballet, Honolulu, HIPacifica Sea Lions Aquatic Club, Inc.,

Pacifica, CAPadres De Familia for Un Futuro Mejor,

Pacoima, CAPakistan Public Health Foundation, Inc.,

Baltimore, MDPalm Beach Panthers Hockey, Inc.,

Wellington, FLPanther Girls Basketball Association,

Inc., Indianapolis, INPapillion Firefighters Foundation,

Incorporated, Papillion, NEParamount Foundation, Bloomingdale, ILParent Information Network of Kentucky,

Louisville, KYParents for Education, San Rafael, CAPasadena Lyric Opera, Inc., Pasadena, CAPathway Ministries, Ltd., Calais, VTPennsylvania Appalachian Capital

Alliance, Pittston, PAPeople Work for People, Tifton, GAPerspective Publications, Inc.,

Santa Fe, NMPhillips Tutoring-Learning Center, Inc.,

Owensboro, KYPillars of the Community, Inc.,

Wallingford, PAPine Bush Girls Softball League, Inc.,

Guilderland, NYPinellas Park Middle School Music

Boosters, Inc., Pinellas Park, FLPleasant House Recovery, Inc.,

Louisville, KYPolar Path Communications Corporation,

Anchorage, AKPolice Activities League of Sherwood,

Sherwood, ORPompano Beach Cultural Arts Foundation,

Inc., Pompano Beach, FLPositive Solutions, Inc., Tuscaloosa, ALPostsecondary Education and Technology,

Inc., Washington, DC

2004-22 I.R.B. 1009 June 1, 2004

Preferred Credit Management, Inc.,Phoenix, AZ

Primary Healthcare Prevention andEducation Foundation for Africa,Southfield, MI

Prisma Zona Exploration De Puerto Rico,Inc., Santurce, PR

Project Christian Care, Flagstaff, AZProject Steamboat, Sumrall, MSProject S T O R M, Inc., Evans, GAProjects, Inc., Washington, DCProviders Group, Inc., Milwaukee, WIQ Cinema, Inc., Fort Worth, TXQuad Cities Education Incentive,

Davenport, IAQuad City Reds, Rock Island, ILQueens Division Hatzolo, New York, NYR. L. Alford Scholarship Foundation,

Conway, SCRainbows and Sunshine for Kids,

La Quinta, CARainier Valley Community Development

Association, Seattle, WARalph E. Noddin Home and School Club,

San Jose, CARanger Foundation, Inc., Portsmouth, NHReach Community Health Foundation,

Inc., North Adams, MARecycle Otesgo County, Gaylord, MIReformers Ministries International, Inc.,

Bronx, NYRehoboth Youth Basketball, Inc.,

Rehoboth, MARelief Alliance, Provo, UTRenaissance Corporation of Albany,

Albany, NYRichard Burdell Memorial Foundation,

Portland, ORRight Move Support Law Enforcement,

Inc., Sonora, CARiver of Light Enterprise, Inc.,

Fredericksburg, VARochester Flute Association, Inc.,

Fairport, NYRockland Affordable Housing, Inc.,

Monsey, NYRodney Dangerfields Respect Foundation,

Beverly Hills, CARose City Chamber Orchestra,

Portland, ORRose Education Center, Portland, ORRotary Club of Lynbrook East

Rockaway Charitable Foundation,Inc., Lynbrook, NY

Round Valley Housing ManagementCorporation, Pinon, AZ

Rude Mechanical Productions,Okemos, MI

Rural Alabama Area Health EducationCenter, Tuscaloosa, AL

Sacramento Southern Gospel Music,Sacramento, CA

Sacramento Works, Inc., Sacramento, CASafe Community Coalition of Lapeer

County, Lapeer, MISafer-Teens, Inc., Elberton, GASafetyed International, Boulder Creek, CASagola Fire Department Auxiliary,

Channing, MISailing Development Fund, Detroit, MISan Joaquin Student Athletes,

Stockton, CASan Pedro Teen Center, San Pedro, CASandough Komak Be Masajed Va

Madares, Inc., New York, NYSaving Soles Foundation, Chicago, ILSchererville Splash, Schererville, INSchlenker-Farmer Management

Association, Inc., Collingsworth, NJScioto Ridge Parent Teacher Organization,

Powell, OHScottown Area Community Food &

Clothing Bank, Scottown, OHSelect F C, Libertyville, ILS E N D Ministry, Whitewright, TXSeniorlife of New England, Providence, RIShelter Hawaii, Honolulu, HIShenandoah County Thrift Store, Inc.,

Woodstock, VAShine Publications, Inc., Richmond, VAShoreline Recreational Support Services,

North Branford, CTSilicon Valley Visual Arts, Inc.,

Palo Alto, CASims’ Institute, Inc., Montgomery, ALSisters Healing Sisters in the New

Millenium, Houston, TXSisters of Joy, Inc., Houston, TXSky High Broadcasting, Inc., El Paso, TXSociety for Human Kindness, Inc.,

Bethesda, MDSocrates Opportunity Scholarship

Foundation, Calabasas, CASoftware for Seniors, Inc., Seminole, FLSolutions Behavioral Health Care

Professionals, Moorhead, MNSomerset County Cultural Arts Center,

Inc., Bound Brook, NJSonny Parker Youth Foundation, Inc.,

Chicago, ILSoutheast AIDS Project, Poplar Bluff, MOSoutheastern Amateur Hockey

Association, Inc., Columbia, MDSouthern California Waves,

Santa Barbara, CA

Southern Tech. Apparel & TextileEducation Foundation, Inc., Atlanta, GA

Southern Wyoming Intertribal Foundation,Cheyenne, WY

Southwest Mississippi Adult Services,McComb, MS

Spirit of Youth Baseball, Inc.,Vero Beach, FL

Sports and Recreation Authority, Ltd.,St. Louis, MO

St. Bruno School Foundation,Whittier, CA

St. Croix Valley Juniors, Stillwater, MNSt. Francis Xavier Home & School

Association, Inc., Brunswick, GAStand and be Counted, Palmdale, CAStanley Grierson Nature Foundation,

Bass Harbor, MEStaples of Life Foundation, Dallas, TXStarbase, Inc., Beaufort, SCStep Into the Light Day Care Center, Inc.,

Memphis, TNStrafford Community Betterment Team,

Strafford, MOStuart Wrestling Club, Palm City, FLSuisun Valley Parent Club, Fairfield, CASummerdance Santa Barbara,

Santa Barbara, CASun City Hoops Girls Basketball Club,

El Paso, TXSun Coast Resource Conservation

& Development Council, Inc.,Live Oak, FL

Sunflower County Crimestoppers, Inc.,Indianola, MS

Super Kids International, Yakima, WASuwanee Area Little Theatre, Inc.,

Suwanee, GASvenskarnas Dag Girls Choir, Eagan, MNSynchro Saint Louis, Ballwin, MOTampa Bay Reads, Inc., Tampa, FLTate White & Smith Association for

Community Development, Inc.,Steelton, PA

Tazewell County Kids Wrestling Club,Pekin, IL

Team Fast Pitch Softball, Sarasota, FLTechnology R&D, Inc.,

San Luis Obispo, CATeen Community Forum, Inc.,

Dayton, MDTemecula Valley Grizzlies Baseball Club,

Temecula, CATender Loving Pets, Saint Charles, MOTexas Israel Resource Fund, Inc.,

Houston, TXTexas Music Hall of Fame Foundation,

Inc., Austin, TX

June 1, 2004 1010 2004-22 I.R.B.

Therapeutic Art Program of BeaufortCounty, Beaufort, SC

Tikar, Inc., Temple, TXTimestep Players Educational Childrens

Theater, Oviedo, FLTom Bradley Library Foundation,

Burbank, CATotal Impact Center for Youth,

Houston, TXTouch N Tutor Research and Development

Foundation, New York, NYTransformation Titusville Coalition, Inc.,

Titusville, FLTransitional Housing Corporation of Cass

County Indiana, Logansport, INTres Dias Central Georgia, Inc.,

Warner Robins, GATri-Ad Veterans League, Dorchester, MATri-City Project T.E.A.M.,

Winston-Salem, NCTri County Childrens Advocacy Center,

Lafayette, ALTri-Scue, Ltd., Canyon Country, CATsunami on the Square, Prescott, AZTucson Mormon Battlion Monument

Foundation, Tucson, AZTurn in Around, Inc., Nashville, TNTurtle Island Institute, Carlsbad, CATwo Worlds United, Simi Valley, CAUnited Fishing Association Foundation,

Inc., Tuckahoe, NYUnited Ministries, Inc., Buckeye, AZUnlimited Outreach, Tylertown, MSUpper Kanawha Valley Enterprise

Community, Inc., Cabin Creek, WVUrban Action Engine, Inc.,

Lake Oswego, ORUrban Aspirations, San Francisco, CAUrban Choice Community Development

Corporation, Picayune, MSUrban Intervention Community Center,

Inc., Detroit, MIUrban Wellness Institute, Inc.,

Los Angeles, CAUrban Youth Outreach, Inc.,

Wind Gap, PA

Ventura Breakers Basketball Club,Ventura, CA

Venture Ministries, Lake Oswego, ORVermont Mobile Imaging, Inc.,

Burlington, VTViet Nam E R A, O Fallon, MOVillage Hands Resource Center, Inc.,

Conover, NCVioleta Barrios De Chamorro Foundation,

Inc., Pittsburgh, PAVirginia Felder-Pipkins Care Center,

Indianapolis, INVirginia Storm, Inc., Chesapeake, VAVirtual Christianity, Inc., Los Angeles, CAVisions Plus Community Development

Corporation, Cocoa, FLVoice of Life World Outreach Ministries,

Inc., Jacksonville, FLVolunteers for Students Foundation,

Algonquin, ILVolunteers of Africa, Inglewood, CAWaking the World Foundation,

Bloomfield, MIWarr-Women at Real Risk,

Washington, DCWarren-Bradley County Civic League,

Warren, ARWaterheart International, Inc.,

Scottsdale, AZWatermark Pictures, Inc.,

San Francisco, CAWay to Be Educational, Inc.,

West New York, NJWebb Bridge Park Community

Playground, Inc., Alpharetta, GAWellington Childrens Association,

Clinton, WAWesley Youth Foundation, Inc.,

Jackson, MSWest Alabama Child Nutrition, Eutaw, ALWest Columbus Development Corp.,

Cerro Gordo, NCWest High Alumni Athletic Assn.,

Anchorage, AKWest Houston Dance Company,

Houston, TX

Westbank Community Youth Association,Austin, TX

Western New York Soccer Association,Inc., Hilton, NY

Wild Heart Animal Rescue,Yucca Valley, CA

Wildcat Booster Club, North Bend, WAWireless Consumers Alliance, Inc.,

Del Mar, CAWisconsin Crime Prevention Practitioners

Association, Inc., Kenosha, WIWisconsin Self Help for Hard of Hearing

People, Minocqua, WIWolverine Basketball Association,

Duluth, GAWomen in Need, Seattle, WAWords on Dance, San Francisco, CAWorld Limb Project, Fayetteville, NCWorldstories, Inc., Oakland, CAXLR8, Midland, TXYouth Emergency Shelter Services, Inc.,

Detroit, MIYouth of the Beaches Arts Guild, Inc.,

Jacksonville Beach, FLYouth Rebuild, Inc., Bridgeport, CTYouth Recreation Association of Hobe

Sound, Inc., Hobe Sound, FLYouth Vision, Inc., College Park, MDZhi-Qing Association of Southern

California, Temple City, CA

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.

2004-22 I.R.B. 1011 June 1, 2004

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.

June 1, 2004 i 2004-22 I.R.B.

Numerical Finding List1

Bulletins 2004–1 through 2004–22

Announcements:

2004-1, 2004-1 I.R.B. 254

2004-2, 2004-3 I.R.B. 322

2004-3, 2004-2 I.R.B. 294

2004-4, 2004-4 I.R.B. 357

2004-5, 2004-4 I.R.B. 362

2004-6, 2004-3 I.R.B. 322

2004-7, 2004-4 I.R.B. 365

2004-8, 2004-6 I.R.B. 441

2004-9, 2004-6 I.R.B. 441

2004-10, 2004-7 I.R.B. 501

2004-11, 2004-10 I.R.B. 581

2004-12, 2004-9 I.R.B. 541

2004-13, 2004-9 I.R.B. 543

2004-14, 2004-10 I.R.B. 582

2004-15, 2004-11 I.R.B. 612

2004-16, 2004-13 I.R.B. 668

2004-17, 2004-12 I.R.B. 635

2004-18, 2004-12 I.R.B. 639

2004-19, 2004-13 I.R.B. 668

2004-20, 2004-13 I.R.B. 673

2004-21, 2004-13 I.R.B. 673

2004-22, 2004-14 I.R.B. 709

2004-23, 2004-13 I.R.B. 673

2004-24, 2004-14 I.R.B. 714

2004-25, 2004-15 I.R.B. 737

2004-26, 2004-15 I.R.B. 743

2004-27, 2004-14 I.R.B. 714

2004-28, 2004-16 I.R.B. 818

2004-29, 2004-15 I.R.B. 772

2004-30, 2004-17 I.R.B. 833

2004-31, 2004-18 I.R.B. 854

2004-32, 2004-18 I.R.B. 860

2004-33, 2004-18 I.R.B. 862

2004-34, 2004-19 I.R.B. 895

2004-35, 2004-17 I.R.B. 839

2004-36, 2004-20 I.R.B. 932

2004-37, 2004-17 I.R.B. 839

2004-38, 2004-18 I.R.B. 878

2004-39, 2004-17 I.R.B. 840

2004-40, 2004-17 I.R.B. 840

2004-41, 2004-18 I.R.B. 879

2004-42, 2004-17 I.R.B. 840

2004-43, 2004-21 I.R.B. 955

2004-44, 2004-21 I.R.B. 957

2004-45, 2004-21 I.R.B. 958

2004-46, 2004-21 I.R.B. 964

2004-47, 2004-21 I.R.B. 966

2004-48, 2004-22 I.R.B. 998

2004-49, 2004-20 I.R.B. 966

2004-50, 2004-22 I.R.B. 1005

Court Decisions:

2078, 2004-16 I.R.B. 773

2079, 2004-22 I.R.B. 978

Notices:

2004-1, 2004-2 I.R.B. 268

2004-2, 2004-2 I.R.B. 269

2004-3, 2004-5 I.R.B. 391

2004-4, 2004-2 I.R.B. 273

2004-5, 2004-7 I.R.B. 489

2004-6, 2004-3 I.R.B. 308

2004-7, 2004-3 I.R.B. 310

2004-8, 2004-4 I.R.B. 333

2004-9, 2004-4 I.R.B. 334

2004-10, 2004-6 I.R.B. 433

2004-11, 2004-6 I.R.B. 434

2004-12, 2004-10 I.R.B. 556

2004-13, 2004-12 I.R.B. 631

2004-14, 2004-9 I.R.B. 526

2004-15, 2004-9 I.R.B. 526

2004-16, 2004-9 I.R.B. 527

2004-17, 2004-11 I.R.B. 605

2004-18, 2004-11 I.R.B. 605

2004-19, 2004-11 I.R.B. 606

2004-20, 2004-11 I.R.B. 608

2004-21, 2004-11 I.R.B. 609

2004-22, 2004-12 I.R.B. 632

2004-23, 2004-15 I.R.B. 725

2004-24, 2004-13 I.R.B. 642

2004-25, 2004-15 I.R.B. 727

2004-26, 2004-16 I.R.B. 782

2004-27, 2004-16 I.R.B. 782

2004-28, 2004-16 I.R.B. 783

2004-29, 2004-17 I.R.B. 828

2004-30, 2004-17 I.R.B. 828

2004-31, 2004-17 I.R.B. 830

2004-32, 2004-18 I.R.B. 847

2004-33, 2004-18 I.R.B. 847

2004-34, 2004-18 I.R.B. 848

2004-35, 2004-19 I.R.B. 889

2004-36, 2004-19 I.R.B. 889

2004-37, 2004-21 I.R.B. 947

2004-38, 2004-21 I.R.B. 949

2004-39, 2004-22 I.R.B. 982

Proposed Regulations:

REG-106590-00, 2004-14 I.R.B. 704

REG-116664-01, 2004-3 I.R.B. 319

REG-129447-01, 2004-19 I.R.B. 894

REG-106681-02, 2004-18 I.R.B. 852

REG-122379-02, 2004-5 I.R.B. 392

REG-139792-02, 2004-20 I.R.B. 926

REG-139845-02, 2004-5 I.R.B. 397

REG-165579-02, 2004-13 I.R.B. 651

REG-166012-02, 2004-13 I.R.B. 655

Proposed Regulations— Continued:

REG-115471-03, 2004-14 I.R.B. 706

REG-116564-03, 2004-20 I.R.B. 927

REG-121475-03, 2004-16 I.R.B. 793

REG-126459-03, 2004-6 I.R.B. 437

REG-126967-03, 2004-10 I.R.B. 566

REG-128309-03, 2004-16 I.R.B. 800

REG-128590-03, 2004-21 I.R.B. 952

REG-149752-03, 2004-14 I.R.B. 707

REG-153172-03, 2004-15 I.R.B. 729

REG-156232-03, 2004-5 I.R.B. 399

REG-156421-03, 2004-10 I.R.B. 571

REG-167217-03, 2004-9 I.R.B. 540

REG-167265-03, 2004-15 I.R.B. 730

Revenue Procedures:

2004-1, 2004-1 I.R.B. 1

2004-2, 2004-1 I.R.B. 83

2004-3, 2004-1 I.R.B. 114

2004-4, 2004-1 I.R.B. 125

2004-5, 2004-1 I.R.B. 167

2004-6, 2004-1 I.R.B. 197

2004-7, 2004-1 I.R.B. 237

2004-8, 2004-1 I.R.B. 240

2004-9, 2004-2 I.R.B. 275

2004-10, 2004-2 I.R.B. 288

2004-11, 2004-3 I.R.B. 311

2004-12, 2004-9 I.R.B. 528

2004-13, 2004-4 I.R.B. 335

2004-14, 2004-7 I.R.B. 489

2004-15, 2004-7 I.R.B. 490

2004-16, 2004-10 I.R.B. 559

2004-17, 2004-10 I.R.B. 562

2004-18, 2004-9 I.R.B. 529

2004-19, 2004-10 I.R.B. 563

2004-20, 2004-13 I.R.B. 642

2004-21, 2004-14 I.R.B. 702

2004-22, 2004-15 I.R.B. 727

2004-23, 2004-16 I.R.B. 785

2004-24, 2004-16 I.R.B. 790

2004-25, 2004-16 I.R.B. 791

2004-26, 2004-19 I.R.B. 890

2004-27, 2004-17 I.R.B. 831

2004-28, 2004-22 I.R.B. 984

2004-29, 2004-20 I.R.B. 918

2004-30, 2004-21 I.R.B. 950

2004-31, 2004-22 I.R.B. 986

2004-32, 2004-22 I.R.B. 988

2004-33, 2004-22 I.R.B. 989

2004-34, 2004-22 I.R.B. 991

Revenue Rulings:

2004-1, 2004-4 I.R.B. 325

2004-2, 2004-2 I.R.B. 265

2004-3, 2004-7 I.R.B. 486

2004-4, 2004-6 I.R.B. 414

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin2003–52, dated December 29, 2003.

2004-22 I.R.B. ii June 1, 2004

Revenue Rulings— Continued:

2004-5, 2004-3 I.R.B. 295

2004-6, 2004-4 I.R.B. 328

2004-7, 2004-4 I.R.B. 327

2004-8, 2004-10 I.R.B. 544

2004-9, 2004-6 I.R.B. 428

2004-10, 2004-7 I.R.B. 484

2004-11, 2004-7 I.R.B. 480

2004-12, 2004-7 I.R.B. 478

2004-13, 2004-7 I.R.B. 485

2004-14, 2004-8 I.R.B. 511

2004-15, 2004-8 I.R.B. 515

2004-16, 2004-8 I.R.B. 503

2004-17, 2004-8 I.R.B. 516

2004-18, 2004-8 I.R.B. 509

2004-19, 2004-8 I.R.B. 510

2004-20, 2004-10 I.R.B. 546

2004-21, 2004-10 I.R.B. 544

2004-22, 2004-10 I.R.B. 553

2004-23, 2004-11 I.R.B. 585

2004-24, 2004-10 I.R.B. 550

2004-25, 2004-11 I.R.B. 587

2004-26, 2004-11 I.R.B. 598

2004-27, 2004-12 I.R.B. 625

2004-28, 2004-12 I.R.B. 624

2004-29, 2004-12 I.R.B. 627

2004-30, 2004-12 I.R.B. 622

2004-31, 2004-12 I.R.B. 617

2004-32, 2004-12 I.R.B. 621

2004-33, 2004-12 I.R.B. 628

2004-34, 2004-12 I.R.B. 619

2004-35, 2004-13 I.R.B. 640

2004-36, 2004-12 I.R.B. 620

2004-37, 2004-11 I.R.B. 583

2004-38, 2004-15 I.R.B. 717

2004-39, 2004-14 I.R.B. 700

2004-40, 2004-15 I.R.B. 716

2004-41, 2004-18 I.R.B. 845

2004-42, 2004-17 I.R.B. 824

2004-43, 2004-18 I.R.B. 842

2004-44, 2004-19 I.R.B. 885

2004-45, 2004-22 I.R.B. 971

2004-46, 2004-20 I.R.B. 915

2004-47, 2004-21 I.R.B. 941

2004-48, 2004-21 I.R.B. 945

2004-49, 2004-21 I.R.B. 939

2004-50, 2004-22 I.R.B. 977

2004-51, 2004-22 I.R.B. 974

2004-52, 2004-22 I.R.B. 973

Tax Conventions:

2004-3, 2004-7 I.R.B. 486

Treasury Decisions:

9099, 2004-2 I.R.B. 255

9100, 2004-3 I.R.B. 297

9101, 2004-5 I.R.B. 376

9102, 2004-5 I.R.B. 366

Treasury Decisions— Continued:

9103, 2004-3 I.R.B. 306

9104, 2004-6 I.R.B. 406

9105, 2004-6 I.R.B. 419

9106, 2004-5 I.R.B. 384

9107, 2004-7 I.R.B. 447

9108, 2004-6 I.R.B. 429

9109, 2004-8 I.R.B. 519

9110, 2004-8 I.R.B. 504

9111, 2004-8 I.R.B. 518

9112, 2004-9 I.R.B. 523

9113, 2004-9 I.R.B. 524

9114, 2004-11 I.R.B. 589

9115, 2004-14 I.R.B. 680

9116, 2004-14 I.R.B. 674

9117, 2004-15 I.R.B. 721

9118, 2004-15 I.R.B. 718

9119, 2004-17 I.R.B. 825

9120, 2004-19 I.R.B. 881

9121, 2004-20 I.R.B. 903

9122, 2004-19 I.R.B. 886

9123, 2004-20 I.R.B. 907

9124, 2004-20 I.R.B. 901

9128, 2004-21 I.R.B. 943

June 1, 2004 iii 2004-22 I.R.B.

Findings List of Current Actions onPreviously Published Items1

Bulletins 2004–1 through 2004–22

Announcements:

93-60

Obsoleted by

Rev. Proc. 2004-23, 2004-16 I.R.B. 785

2003-56

Modified by

Ann. 2004-11, 2004-10 I.R.B. 581

2004-38

Modified by

Ann. 2004-43, 2004-21 I.R.B. 955

Notices:

98-5

Withdrawn by

Notice 2004-19, 2004-11 I.R.B. 606

2000-4

Obsoleted by

T.D. 9115, 2004-14 I.R.B. 680

2003-76

Modified by

Notice 2004-19, 2004-11 I.R.B. 606

2004–2

Modified by

Notice 2004–25, 2004–15 I.R.B. 727

Proposed Regulations:

REG-110896-98

Corrected by

Ann. 2004-14, 2004-10 I.R.B. 582

REG-115037-00

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-138499-02

Partially withdrawn by

REG-106590-00, 2004-14 I.R.B. 704

REG-143321-02

Withdrawn by

REG-156232-03, 2004-5 I.R.B. 399

REG-146893-02

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-163974-02

Corrected by

Ann. 2004-13, 2004-9 I.R.B. 543

REG-166012-02

Corrected by

Ann. 2004-40, 2004-17 I.R.B. 840

Revenue Procedures:

71-21

Modified and superseded by

Rev. Proc. 2004-34, 2004-22 I.R.B. 991

85-35

Obsoleted by

Rev. Proc. 2004-26, 2004-19 I.R.B. 890

87-19

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

93-15

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

94-41

Superseded by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

94-55

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

98-16

Suspended by

Notice 2004-12, 2004-10 I.R.B. 556

2000-38

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2000-50

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2001-10

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2001-23

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2002-9

Modified and amplified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509Rev. Proc. 2004-23, 2004-16 I.R.B. 785Rev. Proc. 2004-30, 2004-21 I.R.B. 950Rev. Proc. 2004-32, 2004-22 I.R.B. 988Rev. Proc. 2004-33, 2004-22 I.R.B. 989Rev. Proc. 2004-34, 2004-22 I.R.B. 991

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311Ann. 2004-16, 2004-13 I.R.B. 668

2002-28

Modified by

Ann. 2004-16, 2004-13 I.R.B. 668

2002-71

Superseded by

Rev. Proc. 2004-13, 2004-4 I.R.B. 335

Revenue Procedures— Continued:

2003-1

Superseded by

Rev. Proc. 2004-1, 2004-1 I.R.B. 1

2003-2

Superseded by

Rev. Proc. 2004-2, 2004-1 I.R.B. 83

2003-3

As amplified by Rev. Proc. 2003-14, and as

modified by Rev. Proc. 2003-48 superseded by

Rev. Proc. 2004-3, 2004-1 I.R.B. 114

2003-4

Superseded by

Rev. Proc. 2004-4, 2004-1 I.R.B. 125

2003-5

Superseded by

Rev. Proc. 2004-5, 2004-1 I.R.B. 167

2003-6

Superseded by

Rev. Proc. 2004-6, 2004-1 I.R.B. 197

2003-7

Superseded by

Rev. Proc. 2004-7, 2004-1 I.R.B. 237

2003-8

Superseded by

Rev. Proc. 2004-8, 2004-1 I.R.B. 240

2003-23

Modified and superseded by

Rev. Proc. 2004-14, 2004-7 I.R.B. 489

2003-26

Supplemented by

Rev. Proc. 2004-17, 2004-10 I.R.B. 562

2003-29

Obsoleted, except as provided in section 5.02, by

Rev. Proc. 2004-24, 2004-16 I.R.B. 790

2003-64

Modified by

Rev. Proc. 2004-21, 2004-14 I.R.B. 702

2004-1

Corrected by

Ann. 2004-8, 2004-6 I.R.B. 441

2004-4

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-5

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-6

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,2003.

2004-22 I.R.B. iv June 1, 2004

Revenue Rulings:

55-748

Modified and superseded by

Rev. Rul. 2004-20, 2004-10 I.R.B. 546

92-19

Supplemented in part by

Rev. Rul. 2004-14, 2004-8 I.R.B. 511

94-38

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

98-25

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

2004-38

Modified by

Rev. Proc. 2004-22, 2004-15 I.R.B. 727

Treasury Decisions:

9088

Corrected by

Ann. 2004-39, 2004-17 I.R.B. 840

June 1, 2004 v 2004-22 I.R.B.*U.S. Government Printing Office: 2004—304–778/60137