us internal revenue service: irb05-28

8/14/2019 US Internal Revenue Service: irb05-28

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Bulletin No. 2005-2July 11, 200

HIGHLIGHTS

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

INCOME TAX

Rev. Rul. 200541, page 69.Special use value; farms; interest rates. The 2005 interestrates to be used in computing the special use value of farm realproperty for which an election is made under section 2032A ofthe Code are listed for estates of decedents.

Rev. Rul. 200542, page 67.Environmental remediation costs. This ruling holds that en-vironmental remediation costs that are incurred to clean up landthat a taxpayer contaminated with hazardous waste by the op-eration of the taxpayers manufacturing activities are incurredby reason of production activities and are properly allocable un-der section 263A of the Code to the inventory produced duringthe taxable year the costs are incurred. Rev. Proc. 20029modified and amplified.

Notice 200551, page 74.Tobacco quota termination payments. This notice providesguidance in a Q&A format regarding the tax treatment of pay-ments made to eligible tobacco quota holders for the termi-nation of tobacco marketing quotas and related price supportprograms under the American Jobs Creation Act of 2004.

Rev. Proc. 200535, page 76.Utilities; taxable income. For federal income tax purposes,if certain conditions are satisfied, a utility may treat an up-frontpayment for network upgrades as not being taxable incomeunder section 61 when received. Rev. Proc. 20029 modifiedand amplified.

EMPLOYMENT TAX

Rev. Proc. 200539, page 82.This procedure updates Rev. Rul. 8229 to allow corporaofficers or authorized agents to sign additional employmetax related documents using alternative signature methodRev. Rul. 8229 modified and clarified.

TAX CONVENTIONS

Announcement 200547, page 71.This announcement provides a memorandum of understandi(MOU) between the Competent Authorities of the United Statand Canada regarding the mutual agreement procedure (MAprocess in accordance with the terms set forth in the UnitStates Canada income tax convention. The MOU establishprinciples and guidelines to improve the performance and eciency of the MAP process.

ADMINISTRATIVE

Notice 200552, page 75.This notice provides that, in the case of bonds subject to t1989 regulations or the 1992 regulations, rebate paymenmust be filed at the same place designated by the Commsioner for bonds subject to section 1.1483 of the regulation

(Continued on the next pag

Finding Lists begin on page ii.


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Rev. Proc. 200536, page 78.Low-income housing tax credit. This procedure publishesthe amounts of unused housing credit carryovers allocated toqualified states under section 42(h)(3)(D) of the Code for cal-endar year 2005.

Rev. Proc. 200537, page 79.This procedure establishes a safe harbor under which housingcredit agencies and project owners may meet the requirements

of section 42(h)(6)(B)(i) of the Code as described in Q&A-5of Rev. Rul. 200482, 200435 I.R.B. 350, concerning ex-tended low-income housing commitments.

Rev. Proc. 200538, page 81.This procedure describes how taxpayers may seek administra-tive relief when the Service has assessed interest for periodsduring which interest should have been suspended under sec-tion 6404(g) of the Code.

Rev. Proc. 200539, page 82.This procedure updates Rev. Rul. 8229 to allow corporateofficers or authorized agents to sign additional employmenttax related documents using alternative signature methods.Rev. Rul. 8229 modified and clarified.

Rev. Proc. 200540, page 83.This procedure provides issuers of state or local bonds subjectto Code section 148(f)(3) and regulations section 1.1483(g)with procedures for correcting a failure to timely pay the properamount of arbitrage rebate. The procedure also modifies Rev.Proc. 9011, 19901 C.B. 469, which provides similar proce-dures for bonds subject to regulations section 1.1481T. Themodification provides a new address for filing late rebate pay-ments and related requests. Rev. Proc. 9011 modified.

July 11, 2005 200528 I.R.B.


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The IRS Mission

Provide Americas taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

Introduction

The 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 considereand Service personnel and others concerned are cautionagainst reaching the same conclusions in other cases unlethe 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 the Internal Revenue Code of 1986.

Part II.Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart Tax Conventions and Other Related Items, and Subpart B, Leislation and Related Committee Reports.

Part III.Administrative, Procedural, and MiscellaneouTo the extent practicable, pertinent cross references to thesubjects are contained in the other Parts and Subparts. Alincluded in this part are Bank Secrecy Act Administrative Rings. Bank Secrecy Act Administrative Rulings are issued the Department of the Treasurys Office of the Assistant Se

retary (Enforcement).

Part IV.Items of General Interest.This part includes notices of proposed rulemakings, disbment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indfor the matters published during the preceding months. Themonthly indexes are cumulated on a semiannual basis, and apublished 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 appropria

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

200528 I.R.B. July 11, 200


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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.Low-IncomeHousing Credit

26 CFR 1.4214: Allocation rules for post-1989

State housing credit ceiling amounts.

Guidance is provided to state housing credit agen-

cies of qualified states that request an allocation

of unused housing credit carryover under section

42(h)(3)(D) of the Internal Revenue Code. See Rev.

Proc. 2005-36, page 78.

26 CFR 1.425: Monitoring compliance with low-

income housing credit requirements.

A safe harbor is provided under which housing

credit agencies and project owners may meet the re-

quirements of section 42(h)(6)(B)(i) of the Internal

Revenue Code as described in Q&A-5 of Rev. Rul.

200482, 200435 I.R.B. 350, concerning extendedlow-income housing commitments. See Rev. Proc.

2005-37, page 79.

Section 263A.Capital-ization and Inclusion inInventory Costs of Cer-tain Expenses

26 CFR 1.263A1: Uniform capitalization of costs.

Environmental remediation costs.

This ruling holds that environmental re-

mediation costs that are incurred to clean

up land that a taxpayer contaminated with

hazardous waste by the operation of the

taxpayers manufacturing activities are

incurred by reason of production activities

and are properly allocable under section

263A of the Code to the inventory pro-

duced during the taxable year the costs

are incurred. Rev. Proc. 20029 modified

and amplified.

Rev. Rul. 200542

ISSUE

Are environmental remediation costs

incurred to clean up land that a taxpayer

contaminated with hazardous waste by the

operation of the taxpayers manufacturing

activities properly allocable under 263A

of the Internal Revenue Code to the inven-

tory produced during the taxable year the

costs are incurred?

FACTS

Situation 1. N, a corporation using an

accrual method of accounting, owns land

and operates a manufacturing plant on Site

Xthat Nuses to produce stoves. Stoves arethe only property produced by N and are

inventory in Ns hands. Ns manufactur-

ing activities discharge hazardous waste.

In the past, Nburied this waste on portions

of Site X in accordance with then applica-

ble law. Site X was not contaminated by

hazardous waste when purchased by N.

In order to comply with federal, state,

and local environmental requirements, N

incurs costs in 2005 to remediate the con-

taminated soil and groundwater at Site X.

The costs Nincurs are not research and ex-

perimental expenditures within the mean-ing of 174, qualified environmental re-

mediation expenditures within the mean-

ing of 198(b), or environmental man-

agement policy costs. The soil remedi-

ation and groundwater treatment restores

SiteXto essentially the same physical con-

dition that existed prior to the contamina-

tion. The soil remediation and ground-

water treatment does not materially add to

the value of Site X, appreciably prolong its

life, or adapt it to a new or different use.

During and after the remediation, N con-

tinues to manufacture stoves at Site X.

Situation 2. The facts are the same as

in Situation 1, except that Nmanufactures

clothes washers at Site X and no longer

manufactures stoves. Clothes washers are

the only property produced by N and are

inventory in Ns hands.


in Situation 1, except that N temporarily

ceases its manufacturing activities at Site

Xduring a part of 2005 while it remediates

the contaminated soil and groundwater.

Situation 4. The facts are the same as inSituation 1, except that Nhas permanently

ceased its manufacturing activities at Site

Xand manufactures stoves at another site.


in Situation 1, except that in the past N

buried the waste on portions of Site Y, a

remote dump site that N did not own or

otherwise use in its manufacturing activ-

ities. N was not obligated to clean up the

site when N buried the waste. In order to

comply with federal, state, and local en

vironmental requirements, N incurs cost

in 2005 to remediate the contaminated soi

and groundwater at Site Y. The soil reme

diation and groundwater treatment restore

Site Yto essentially the same physical condition that existed prior to the contamina

tion. The soil remediation and groundwa

ter treatment does not materially add to th

value of any of Ns property, appreciabl

prolong its life, or adapt it to a new or dif

ferent use. During and after the remedia

tion, Ncontinues to manufacture stoves a

Site X, but has permanently stopped usin

Site Y to bury waste.

LAW

Section 263A(a) provides that the direccosts and indirect costs properly allocabl

to property that is inventory in the hand

of the taxpayer are included in inventory

costs.

Section 1.263A1(a)(3)(ii) of the In

come Tax Regulations provides, in par

that taxpayers that produce tangible per

sonal property must capitalize (1) all direc

costs of producing the property, and (2) th

propertys properly allocable share of indi

rect costs.

Section 1.263A1(c)(1) provides that t

determine these capitalizable costs, taxpayers must allocate or apportion costs to

various activities, including production ac

tivities. Section 1.263A1(c)(1) furthe

provides that after 263A costs are allo

cated to the appropriate production activi

ties, these costs generally are allocated to

the items of property produced during th

taxable year and capitalized to the item

that remain on hand at the end of the tax

able year. As a result, costs incurred durin

the taxable year are either included in th

cost of goods sold during the taxable yea

or are capitalized to the items that remain

on hand at the end of the taxable year usin

a method permitted under 1.263A1(f).

Section 1.263A1(c)(2)(ii) provide

that the amount of any cost required t

be capitalized under 263A may no

be included in inventory or charged t

capital accounts or basis any earlie

than the taxable year during which th

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amount is incurred within the meaning of

1.4461(c)(1)(ii).

Section 1.263A1(c)(3) provides that

capitalize means, in the case of property

that is inventory in the hands of a taxpayer,

to include in inventory costs.

Section 1.263A1(c)(4) provides that

costs that are capitalized under 263A are

recovered through depreciation, amortiza-

tion, cost of goods sold, or by an adjust-

ment to basis at the time the property is

used, sold, placed in service, or otherwise

disposed of by the taxpayer.

Section 1.263A1(e)(3)(i) provides, in

part, that indirect costs are properly allo-

cable to property produced when the costs

directly benefit or are incurred by reason

of the performance of production activi-

ties. Generally, producers must capitalize

direct and indirect costs properly allocable

to property produced under 263A, with-

out regard to whether those costs are in-curred before, during, or after production.

See 1.263A2(a)(3)(i).

Section 1.263A1(e)(3)(ii) provides

examples of indirect costs that must be

capitalized to the extent they are prop-

erly allocable to property produced. In-

direct costs required to be capitalized

include the costs of repairing and main-

taining production equipment or facilities.

See 1.263A1(e)(3)(ii)(O). In addi-

tion, costs related to temporarily idle

production equipment or facilities, other

than depreciation, amortization and costrecovery allowances, are indirect costs

that are required to be capitalized. See

1.263A1(e)(3)(iii)(E).

Rev. Rul. 9438, 19941 C.B. 35,

holds that costs incurred to clean up land

and to treat groundwater contaminated

with hazardous waste from the taxpayers

business are not capital expenditures under

263 because these costs do not materially

add value to the land, prolong the useful

life of the land or adapt the land to a new

or different use and, therefore, such costs

are deductible by the taxpayer as businessexpenses under 162. Costs incurred for

constructing groundwater treatment facil-

ities, however, are capital expenditures

under 263.

Rev. Rul. 200418, 20041 C.B. 509,

considers whether costs incurred to clean

up land that a taxpayer contaminated with

hazardous waste by the operation of the

taxpayers manufacturing activities are in-

cludible in inventory costs under 263A.

Rev. Rul. 200418 states that the hold-

ing of Rev. Rul. 9438 that the costs to

construct a groundwater treatment facility

must be capitalized under 263(a) and

263A, rather than deducted under 162,

demonstrates the distinction between cap-

ital expenditures and costs that are more in

the nature of repairs than capital improve-

ments. As with other types of deductible

business costs, such as labor costs, taxes,

rent, and supplies, once repair costs are de-

termined to be deductible under 162, a

taxpayer with inventories still must apply

the rules of 263A to determine whether

the repair costs must be included in inven-

tory. Rev. Rul. 200418 concludes, there-

fore, that environmental remediation costs

similarly are subject to capitalization un-

der 263A and are required to be included

in inventory costs under the facts of that

ruling.

ANALYSIS

Environmental remediation costs in-

curred to clean up land and to treat ground-

water that a taxpayer contaminated with

hazardous waste from its production ac-

tivities do not materially add to the value

of the land, appreciably prolong its life,

or adapt it to a new or different use. Rev.

Rul. 9438. Thus, these costs are more in

the nature of repairs than capital improve-

ments and, under 263A, are indirect costs

that must be included in inventory coststo the extent allocable to inventory. Rev.

Rul. 200418. Generally, repair costs

incurred to keep equipment or facilities

used in production activities in an ordinar-

ily efficient operating condition directly

benefit or are incurred by reason of the

performance of the production activities

and, therefore, are properly allocable to

inventory, without regard to whether those

costs are incurred before, during, or after

production. See 1.263A1(e)(3)(i),

1.263A1(e)(3)(ii)(O) and 1.263A2(a)

(3)(i). Under 1.263A1(c)(1) and1.263A1(c)(2), these repair costs are al-

locable to the property produced during

the taxable year in which the costs are

incurred, even though the repairs may

have been necessitated by the use of the

equipment or facilities in the production

of property in prior taxable periods.

Like repair costs, environmental re-

mediation costs incurred by a taxpayer

to clean up land and to treat groundwa-

ter that the taxpayer contaminated with

hazardous waste from its production ac-

tivities are costs that directly benefit or

are incurred by reason of the performance

of the production activities even if the

condition that necessitated the remedia-

tion arose during prior taxable periods.

See 1.263A2(a)(3)(i). As with repair

costs, environmental remediation costs are

properly allocable to inventory without

regard to whether those costs are incurred

before, during, or after production. See

1.263A1(c)(2). Likewise, remediation

costs are allocable under 1.263A1(c)(1)

to the property produced during the tax-

able year in which the costs are incurred.

In Situation 1, during 2005, Nmanufac-

tures stoves at Site X. The costs N incurs

in 2005 to clean up Site X are incurred by

reason ofNs production activities, within

the meaning of 1.263A1(e)(3)(i). Be-

cause the environmental remediation coststo clean up Site X are incurred in 2005,

they are properly allocable to the inventory

produced by Nin 2005, in accordance with

1.263A1(c)(1) and 1.263A1(c)(2).

Therefore, the environmental remediation

costs are allocable to the stoves produced

by N during 2005, using an allocation

method permitted under 1.263A1(f).

In Situation 2, during 2005, N man-

ufactures clothes washers at Site X. The

costs N incurs in 2005 to clean up Site

X are incurred by reason of Ns produc-

tion activities, within the meaning of 1.263A1(e)(3)(i). Because the en-

vironmental remediation costs to clean

up Site X are incurred in 2005, they are

properly allocable to the inventory pro-

duced by N in 2005, in accordance with

1.263A1(c)(1) and 1.263A1(c)(2).


costs are allocable to the clothes wash-

ers produced by N during 2005, using

an allocation method permitted under

1.263A1(f).

In Situation 3, during a part of 2005,

Site X is temporarily idle. Neverthe-less, the costs N incurs in 2005 to clean

up Site X are incurred by reason of

Ns production activities, within the

meaning of 1.263A1(e)(3)(i). See

1.263A2(a)(3)(i). Because the en-





1.263A1(c)(1) and 1.263A1(c)(2).

July 11, 2005 68 200528 I.R.B.


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In Situation 4, N has permanently

ceased its manufacturing activities at Site

X. Nevertheless, the costs N incurs in

2005 to clean up Site X are incurred by

reason ofNs production activities, within

the meaning of 1.263A1(e)(3)(i). See






1.263A1(c)(1) and 1.263A1(c)(2).





In Situation 5, N has permanently

ceased burying waste from its manu-facturing activities on Site Y. Never-

theless, the costs N incurs in 2005 to

clean up Site Y are incurred by reason

of Ns production activities, within the

meaning of 1.263A1(e)(3)(i). See



up Site Y are incurred in 2005, they are



1.263A1(c)(1) and 1.263A1(c)(2).


costs are allocable to the stoves producedby N during 2005, using an allocation


HOLDING

Environmental remediation costs that

are incurred to clean up land that a tax-

payer contaminated with hazardous waste

by the operation of the taxpayers manu-

facturing activities are incurred by reason

of the taxpayers production activities and

are properly allocable under 263A to the

inventory produced during the taxable yearthe costs are incurred.

CHANGE IN METHOD OF

ACCOUNTING

A taxpayer using a method of account-

ing that does not comply with this revenue

ruling is using an impermissible method

of accounting. Any change in a taxpayers

treatment of environmental remediation

costs to conform with this revenue ruling

is a change in method of accounting to

which the provisions of 446 and 481

and the regulations thereunder apply.

A taxpayer changing its method of ac-

counting to comply with this revenue rul-

ing must file a Form 3115 in accordance

with the automatic change in method of ac-

counting provisions of Rev. Proc. 20029,

20021 C.B. 327, as modified and clari-

fied by Announcement 200217, 20021

C.B. 561, modified and amplified by Rev.

Proc. 200219, 20021 C.B. 696, and

amplified, clarified, and modified by Rev.

Proc. 2002- 54, 20022 C.B. 432, except

that the scope limitations in section 4.02 of

Rev. Proc. 20029 do not apply to a tax-

payer that makes the change for its first or

second taxable year ending after February

6, 2004. A taxpayer that files Form 3115

to comply with Rev. Rul. 200418 and

this revenue ruling for its first taxable year

ending after February 6, 2004, may effectthe change using either a 481(a) adjust-

ment as provided in sections 5.03 and 5.04

of Rev. Proc. 20029 or a cut-off method.

See Rev. Rul. 200418. Additionally, a

taxpayer that (1) files a Form 3115 on or

before July 20, 2005, to comply with Rev.

Rul. 200418 for its first taxable year end-

ing after February 6, 2004, or was not re-

quired to change its method of account-

ing to comply with Rev. Rul. 200418,

and (2) files Form 3115 to comply with

this revenue ruling for its first taxable year

ending after June 20, 2005, may effect thechange using either a 481(a) adjustment

or a cut-off method.

For purposes of Line 1a of Form 3115

(revised December 2003), the designated

number for the automatic accounting

method change authorized by this revenue

ruling is 92. A taxpayer making the

automatic change in method of account-

ing authorized by this revenue ruling and

another automatic change in method of

accounting under 263A for the same

taxable year may file one Form 3115 to

make both changes, but must comply withthe ordering rules of 1.263A7(b)(2)

and must enter the automatic accounting

method change numbers for both changes

on Line 1a of Form 3115 (revised Decem-

ber 2003).

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 20029 is modified and

amplified to include in the APPENDIX the

automatic change provided in this revenu

ruling.

DRAFTING INFORMATION

The principal author of this revenu

ruling is John Roman Faron of the Of

fice of Associate Chief Counsel (Incom

Tax & Accounting). For further infor

mation regarding this revenue rulingcontact Mr. Faron at 2026224930 (no

a toll-free call).

Section 446.General Rulefor Methods of Accounting

If certain conditions are satisfied, a Utility has au

tomatic consent to change to a method under whic

it may treat an Up-front Payment for Network Up

grades as not being taxable income when received

See Rev. Proc. 2005-35, page 76.

Section 451.General Rulefor Taxable Year of Inclusion

For federal income tax purposes, if certain con

ditions are satisfied, a Utility may treat an Up-fron

Payment for Network Upgrades as not being taxabl

income when received. See Rev. Proc. 2005-35

page 76.

Section 2032A.Valuationof Certain Farm, etc.,Real Property

26 CFR 20.2032A4: Method of valuing farm rea

property.

Special use value; farms; interes

rates. The 2005 interest rates to be use

in computing the special use value of farm

real property for which an election is mad

under section 2032A of the Code are liste

for estates of decedents.

Rev. Rul. 200541

This revenue ruling contains a list of th

average annual effective interest rates onew loans under the Farm Credit System

This revenue ruling also contains a list o

the states within each Farm Credit System

Bank Chartered Territory.

Under 2032A(e)(7)(A)(ii) of the In

ternal Revenue Code, rates on new Farm

Credit System Bank loans are used in com

puting the special use value of real prop

erty used as a farm for which an election

is made under 2032A. The rates in thi

200528 I.R.B. 69 July 11, 200


7/26

revenue ruling may be used by estates that

value farmland under 2032A as of a date

in 2005.

Average annual effective interest

rates, calculated in accordance with

2032A(e)(7)(A) and 20.2032A4(e)

of the Estate Tax Regulations, to be used

under 2032A(e)(7)(A)(ii), are set forth in

the accompanying Table of Interest Rates

(Table 1). The states within each Farm

Credit System Bank Chartered Territory

are set forth in the accompanying Table

of Farm Credit System Bank Chartered

Territories (Table 2).

Rev. Rul. 81170, 19811 C.B. 454,

contains an illustrative computation of an

average annual effective interest rate. The

rates applicable for valuation in 2004 are

in Rev. Rul. 200463, 200427 I.R.B.

6. For rate information for years prior to

2004, see Rev. Rul. 200353, 20031

C.B. 969, and other revenue rulings that

are referenced therein.


The principal author of this revenue rul-

ing is Lane Damazo of the Office of the As-

sociate Chief Counsel (Passthroughs and

Special Industries). For further informa-

tion regarding this revenue ruling, contactLane Damazo at (202) 6223090 (not a

toll-free call).

REV. RUL. 200541 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 2005)

Farm Credit System Bank Servicing State in

Which Property is Located Rate

AgFirst, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.68

AgriBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.44CoBank, ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.91

Texas, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11

U.S. AgBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.25

REV. RUL. 200441 TABLE 2

TABLE OF FARM CREDIT SYSTEM BANK CHARTERED TERRITORIES

Farm Credit System Bank Location of Property

AgFirst, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware, District of Columbia, Florida, Georgia, Maryland,North Carolina, Pennsylvania, South Carolina, Virginia,

West Virginia.

AgriBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan,

Minnesota, Missouri, Nebraska, North Dakota, Ohio,

South Dakota, Tennessee, Wisconsin, Wyoming.

CoBank, ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alaska, Connecticut, Idaho, Maine, Massachusetts, Montana,

New Hampshire, New Jersey, New York, Oregon,

Rhode Island, Vermont, Washington.

Texas, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alabama, Louisiana, Mississippi, Texas.

U.S. Agbank, FCB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arizona, California, Colorado, Hawaii, Kansas, New Mexico,

Nevada, Oklahoma, Utah

Section 6011.GeneralRequirement of Return,Statement, or List

A revenue procedure sets out the circumstances

under which facsimile signatures may be used on any

form within the Form 94X series. See Rev. Proc.

2005-39, page 82.

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

Canadian Memorandum ofUnderstanding on Mutual

Agreement Procedure

Announcement 200547

The following is a copy of the News Re-

lease issued by the Director, International

(U.S. Competent Authority) on June 15,

2005 (IR200566).

Memorandum of Understanding

Between the Competent Authorities

of the United States and Canada

Regarding the Mutual Agreement

Procedure

IR200566, June 15, 2005

WASHINGTON On June 3, 2005,

the Competent Authorities of the United

States and Canada entered into a Mem-

orandum of Understanding (MOU) to

establish principles and guidelines to im-

prove the performance and efficiency of

the mutual agreement procedure (MAP)

process in accordance with the terms set

forth in the United States Canada In-

come Tax Convention (1980), as amended

from time to time.

The fundamental purpose of the mutualagreement procedure is to endeavor to re-

solve double taxation or taxation contrary

to a convention. Upon making a MAP

request, the taxpayer places responsibil-

ity for a principled and timely resolution

of the issue in the hands of the respective

Competent Authorities and the manner in

which the resolution of double taxation is

accomplished is at the discretion of the

Competent Authorities. It is for this rea-

son the two Competent Authorities have

reached the understandings outlined in the

MOU.

The text of the Memorandum of Under-

standing is as follows:

MEMORANDUM OF

UNDERSTANDING BETWEEN

THE COMPETENT AUTHORITIES

OF CANADA AND THE UNITED

STATES REGARDING THE MUTUAL

AGREEMENT PROCEDURE

The Director General, International Tax

Directorate, Canada Customs and Rev-

enue Agency (CCRA), Competent Au-

thority for Canada and the Director-Inter-

national, Large and Medium Size Busi-

ness (LMSB), Internal Revenue Service

(IRS), Competent Authority for the United

States through this Memorandum of Un-

derstanding (MOU) agree to establish

principles and guidelines to improve the

performance and efficiency of the mutual

agreement procedure (MAP) process inaccordance with the terms set forth in the

Canada-United States Income Tax Con-

vention (1980), as amended from time to

time (the Convention).

Purpose of the MAP

The fundamental purpose of the MAP

is to endeavour to resolve double taxa-

tion or taxation contrary to a convention.

Upon making a MAP request, the taxpayer

places responsibility for a principled and

timely resolution of the issue in the handsof the respective Competent Authorities

and the manner in which the resolution of

double taxation is accomplished is at the

discretion of the Competent Authorities.

It is for this reason that the two Competent

Authorities have reached the following

understandings:

I. Emphasis on Reaching Agreement.

The Competent Authorities for

Canada and the United States are

committed to the principle that the

resolution of double taxation or taxa-tion contrary to the Convention should

be possible in all cases. To improve

the MAP process between our two

countries, the Competent Authorities

agree to adhere to the following prin-

ciples and guidelines when seeking to

reach a resolution in a particular case:

A. Positions shall be Principled,

Reasonable and Consistent. The

positions advanced by the Com

petent Authorities in each cas

should be well documented, hav

merit, and follow the principle

of consistency and reciprocity

Consistency means the Competent Authorities will striv

to ensure that similar cases ar

resolved in a similar manne

Reciprocity means the adjustin

Competent Authority in a partic

ular case should only advance

position that it would be prepare

to accept if it were the relievin

Competent Authority.

B. Agreement on the Facts. Th

Competent Authorities recogniz

the importance of reaching agreement on the facts in MAP cases

Disagreements on the facts as t

the nature of a taxpayers busi

ness operations can cause, or con

tribute to, difficulties in resolvin

a MAP case. Generally speak

ing, the Competent Authoritie

shall accept a transaction as struc

tured by the taxpayer and onl

consider disregarding or restruc

turing a transaction in exceptiona

cases.

If the Competent Authorities ar

unable to obtain agreement o

the underlying facts and circum

stances of a particular MAP cas

after six months of negotiations

they shall agree to refer the cas

to a joint panel comprised of ta

administration officials chose

by the Assistant Commissione

of Appeals for the CCRA and th

Chief of Appeals for the IRS. A

agreement reached as to the fact

of the case will be binding on th

respective MAP organizations

The details of this procedure wil

be set forth in a separate MOU

between the Competent Authori

ties.

The Competent Authorities agre

to consider conducting joint sit

visits with taxpayers in specifi

200528 I.R.B. 71 July 11, 200


9/26

cases in an effort to reach agree-

ment regarding the underlying

facts and circumstances of a tax-

payers business; however, it is

recognized that the use of joint

site visits must be prudent and

judicious, due to resource limita-

tions in each of the respective tax

administrations.

C. Means of Resolving Cases. De-

spite the best efforts of Compe-

tent Authority officers, it is rec-

ognized that substantive differ-

ences on issues may complicate

the ability to reach a resolution on

a specific case even when there

is an agreement on the underly-

ing facts and circumstances of the

case.

In these situations, Competent

Authority officers shall look for

appropriate opportunities to com-

promise. Compromise is often

required when diverging views

otherwise make resolution diffi-

cult to achieve.

If resolution is still not possi-

ble, the appropriate first level

managers in the Competent Au-

thority organizations will jointly

undertake a detailed review of

the case to ensure that all appro-priate action has been taken to

facilitate a resolution. If a MAP

request has not been resolved

within two years from the date of

acceptance, the Director General,

International Tax Directorate,

CCRA and the Director-Interna-

tional, LMSB, IRS agree to meet,

or, if more appropriate, agree to

have their subordinates meet, in

order to resolve the case.

II. Procedural Issues. Procedural issuesmay delay or impede the resolution of

MAP cases. These issues could result

from administrative policies, prac-

tices and procedures of the respective

Competent Authority organizations.

A. Removal of Barriers. It is hereby

agreed that administrative poli-

cies, procedures and practices

that impede or delay the process

of resolving a MAP case will

be identified and removed to the

extent possible under the dele-

gated powers of the Competent

Authorities in their respective tax

administrations.

B. Notification. The Competent Au-

thorities also agree to interpretnotification broadly under the

Convention so as to reflect the in-

tention to be as inclusive as pos-

sible when considering requests

for MAP assistance. A separate

MOU to be executed by the Com-

petent Authorities will address a

number of issues surrounding no-

tification.

III. Substantive Issues in MAP Cases. The

Competent Authorities will follow the

OECDs Transfer Pricing Guidelinesfor Multinational Enterprises and Tax

Administrations to resolve substantive

issues in cases involving transactions

between related parties. Notwith-

standing, the Competent Authorities

have identified a number of issues

that have resulted, or could result, in

a failure to resolve double taxation or

taxation contrary to the Convention.

These issues include, but are not lim-

ited to, the determination of:

an arms length compensation forconsignment manufacturing oper-

ations;

whether a business is integratedto the point where a profit split

method is appropriate and, if so,

the relative value of contributions

made by related parties toward the

generation of profit;

the presence of non-routine intan-gible assets and the determination

of an arms length value;

whether a permanent establish-ment (PE) exists and the amount

of profit to be attributable to the

PE;

whether a transaction is properlycharacterized as a service versus a

license of intangibles;

the amount of compensation, ifany, upon either the closure or re-

location of a business and the allo-

cation of associated closing costs;

and

appropriate relief where sourceand residence countrys laws are

in conflict.

The Competent Authorities express their

commitment to reach an agreement estab-

lishing guidelines to be applied to resolv-

ing cases involving the issues identified

above as well as other issues that are iden-

tified and agreed to by the Competent Au-

thorities. The Director General, Interna-

tional Tax Directorate, CCRA and the Di-

rector-International, LMSB, IRS will des-

ignate one or more representatives from

their respective organizations to meet for

the purpose of establishing such guidelines

for the above issues as well as other issues

that are identified and agreed to. More-

over, the Director General, International

Tax Directorate, CCRA and the Director-

International, LMSB, IRS agree to des-

ignate one or more representatives from

their respective competent authority orga-

nizations to meet at such time as new is-

sues emerge that impede the resolution of

MAP cases. The Director General, Inter-

national Tax Directorate, CCRA and the

Director-International, LMSB, IRS recog-

nize that they may be required to look be-yond their own Competent Authority or-

ganizations to find a designate elsewhere

within their respective tax administration

with the appropriate level of expertise to

assist in developing guidelines.

Conclusion

Through the execution of this MOU, our

respective Competent Authority organiza-

tions will initiate discussions as soon as

possible to: (1) create a MOU to establish

a binding procedure to determine the un-

derlying facts and circumstances of a spe-

cific case; (2) create a set of guidelines to

be used in resolving cases involving the

above substantive issues that complicate

case resolution; (3) identify and remove

procedural obstacles that impede or delay

the process of resolving double taxation

cases; and (4) create a MOU to address a

number of issues surrounding notification.

July 11, 2005 72 200528 I.R.B.


10/26

Other Provisions

The Competent Authorities for Canada

and the United States agree to publish this

MOU to demonstrate our mutual commit-

ment to improving the MAP process.

This is a MOU between the Competent

Authorities of Canada and the United

States addressing procedural matters un-

der the Convention. This MOU is not to

be interpreted as creating any cause of

action, rights or benefits in favor of third

parties or taxpayers.

This MOU may be modified at any tim

by agreement between the Competen

Authorities. The Competent Authoritie

agree to implement this MOU as soon a

possible after signing this agreement. Ei

ther Competent Authority may terminat

the MOU at any time by giving written

notice to the other Competent Authority.

Competent Authority for Canada Competent Authority for the United States

Frederick R. ORiordan

Director General

International Tax Directorate

Canada Customs and Revenue Agency

Robert H. Green

Director-International

Large and Medium Size Business

Internal Revenue Service

Date: Date:

200528 I.R.B. 73 July 11, 200


11/26

Part III. Administrative, Procedural, and Miscellaneous

Termination of TobaccoQuotas and Price SupportPrograms

Notice 200551

PURPOSE

This notice provides answers to fre-

quently asked questions regarding the tax

treatment of federal payments made pur-

suant to 622 of the Fair and Equitable

Tobacco Reform Act of 2004, Title VI of

the American Jobs Creation Act of 2004,

Pub. L. No. 108357, 118 Stat. 1418,

152136 (2004) (the Act).

BACKGROUND

Sections 611 and 612 of the Act ter-

minate the tobacco marketing quota pro-

gram and the tobacco price support pro-

gram. Section 622 of the Act provides that

the United States Department of Agricul-

ture (USDA) will offer to enter into a con-

tract with an eligible tobacco quota holder

(Owner) under which the Owner may re-

ceive total payments of $7 per pound of

quota in 10 equal annual payments in fis-

cal years 2005 through 2014 (Owner Pay-

ments) in exchange for the termination of

the tobacco marketing quotas and related

price support. Section 622 does not pro-vide for stated interest on payments due

under the contracts.

For federal income tax purposes,

Owner Payments are the proceeds from a

sale of the Owners tobacco quota as of

the effective date applicable to the Owner.

The effective date applicable to an Owner

is the earlier of (1) June 30, 2005, for

flue-cured tobacco and September 30,

2005, for all other types of tobacco, or (2)

the date on which an Owner and USDA

enter into a contract for Owner Payments

with respect to the quota.

QUESTIONS AND ANSWERS

Q1. Are Owner Payments received un-

der the Act subject to federal income tax?

A1. Yes, Owner Payments are sub-

ject to federal income tax. If the amounts

received by the Owner are more than the

Owners adjusted basis in the quota, the

Owner has a taxable gain; if the Owner re-

ceives less than the Owners adjusted ba-

sis, the Owner has a loss that may be de-

ductible for tax purposes if the require-

ments for deduction under 165 of the

Internal Revenue Code are satisfied. In

determining an Owners gain or loss, the

amount received for the quota does not in-

clude any amount treated as interest forfederal tax purposes. See Q&A7 for help

in determining whether any portion of an

Owner Payment is treated as interest for

federal tax purposes.

Q2. How does an Owner determine

the adjusted basis of a quota?

A2. The adjusted basis of a quota

is determined differently depending upon

how the Owner acquired the quota.

An Owner who holds a quota that isderived from an original grant by the

federal government has a basis of zeroin the quota.

The basis of a purchased quota is theprice the Owner paid for it.

Generally an Owner who received aquota as a gift has the same basis in

the quota as the person who gave the

quota to the Owner. Under certain cir-

cumstances, the basis is increased by

an amount related to the amount of gift

tax paid. If the basis is greater than

the fair market value of the quota at thetime of the gift, the basis for determin-

ing loss is that fair market value.

The basis of a quota that an Ownerinherited generally is the fair market

value of the quota at the time of the

decedents death.

The basis of a tobacco quota is not sub-

ject to adjustment through amortization,

depletion, or depreciation. However, if

an Owner improperly has deducted any

amount for these purposes, the Owner

must reduce the basis by the amount de-

ducted before determining the Owners

gain or loss. A similar reduction in the ba-

sis ofa quota mustbe madeforany amount

previously deducted as a loss because of

a reduction in the number of pounds of

tobacco allowable under the quota. If an

Owner purchased a quota and deducted

the entire cost in the year of purchase, then

the Owners basis in the quota is zero.

Q3. If an Owner has a gain and re-

ports Owner Payments under the install-

ment method, when must the gain be in-

cluded in income?

A3. The installment method may be

used to report gain if an Owner receives

at least one Owner Payment after the closeof the Owners taxable year that includes

the effective date applicable to the Owner.

The amount of the gain is the excess of

the total amount of Owner Payments to be

received, reduced by any amount treated

as interest, over the Owners adjusted ba-

sis in the quota. Under the installment

method, a proportionate amountof thegain

is taken into account in each year in which

an Owner Payment is received. See the in-

structions for Form 6252, Installment Sale

Income.

Q4. If an Owner has a gain and electsnot to report Owner Payments under the

installment method, when must the gain be

included in income?

A4. The Owner must report the entire

gain on the Owners federal income tax

return for the taxable year that includes the

effective date applicable to the Owner.

Q5. Is the gain or loss with respect to

a quota ordinary or capital gain or loss?

A5. Whether the gain or loss with

respect to a quota is ordinary or capital

depends on how the Owner used the quota.

If an Owner used a quota in the tradeor business of farming and, on the ef-

fective date applicable to the Owner,

the Owners holding period for the

quota was more than one year, then the

transaction is reported under 1231

on Form 4797, Sales of Business Prop-

erty. If an Owner has no other 1231

transactions reportable on Form 4797,

any gain is treated as long-term capital

gain and any loss is treated as ordi-

nary loss. Even if an Owner has other

reportable 1231 transactions, thenet result of all 1231 transactions

reported generally is either long-term

capital gain or ordinary loss. See the

instructions for Form 4797 for more

detailed information.

If an Owner held a quota for invest-ment purposes, or for the production

of income, but did not use the quota in

July 11, 2005 74 200528 I.R.B.


12/26

a trade or business, any gain or loss is

capital gain or loss.

Under certain circumstances, some or

all of the gain must be recharacterized and

reported as ordinary income. If an Owner

previously deducted (1) the cost of acquir-

ing a quota, (2) amounts for amortization,

depletion, or depreciation, or (3) amounts

to reflect a reduction in the quota pounds,

any gain is taxed as ordinary income up

to the amount previously deducted. The

Owner must report this amount of ordinary

income on the Owners return for the tax-

able year that includes the effective date

applicable to the Owner, even if the Owner

uses the installment method to report the

remainder of the gain.

Q6. Are Owner Payments received

under the Act subject to Self-Employ-

ment Contributions Act (SECA) tax (see

1402)?A6. No.

Q7. Is any portion of an Owner Pay-

ment treated as interest for federal tax pur-

poses?

A7. (a) If the total amount to be paid

under a contract does not exceed $3,000,

no portion of an Owner Payment is treated

as interest for federal tax purposes.

(b) If 483 applies to a contract, a por-

tion of each Owner Payment (other than an

Owner Payment due within six months of

the effective date applicable to the Owner)

is treated as interest for federal tax pur-poses. For example, 483 generally ap-

plies to a contract if the total amount to

be paid under the contract does not exceed

$250,000 or if a cash method election is

made under 1274A and 1.1274A1(c).

A contract is eligible for the cash method

election only if the total amount to be paid

under the contract does not exceed the in-

flation-adjusted amount for a cash method

debt instrument ($3,202,100 for 2005).

(c) In all situations not described in (a)

or (b) above, a portion of each Owner Pay-

ment is treated as interest for federal taxpurposes under 1274.

(d) In general, to determine the amount

of an Owner Payment that is treated as

interest, see 483 or 1274, whichever is

applicable, and the regulations thereunder.

You may wish to consult a tax advisor for

assistance in determining the portion of an

Owner Payment that is treated as interest

and the taxable year in which the interest

is includible in income.

Q8. Does an individual Owners gain

or loss from Owner Payments qualify for

farm income averaging?

A8. No. A tobacco quota is consid-

ered an interest in land, and farm income

averaging is not available for gain or loss

arising from the sale or other disposition of

land.

Q9. Are Owner Payments subject to

information reporting?

A9. Yes. Because a tobacco quota

is considered an interest in land, the to-

tal amount received under a contract by

an owner in a taxable year generally will

be reported by USDA on Form 1099S,

Proceeds From Real Estate Transactions,

if the amount is $600 or more. In addi-

tion, any portion of an Owner Payment

treated as interest for federal tax purposes

generally will be reported by USDA on

Form 1099INT, Interest Income, if the to-

tal amount of interest received in a taxableyear is $600 or more.

Q10. Is the termination of a tobacco

quota under the Act an involuntary conver-

sion of the quota?

A10. No.

Q11. May an Owner enter into a like-

kind exchange of a quota?

A11. Yes. An Owner may postpone

reporting the gain or loss from the termina-

tion of a quota by entering into a like-kind

exchange if the Owner complies with the

requirements of 1031 and the regulations

thereunder. For purposes of 1031, thedate on which an Owner is deemed to re-

linquish a quota is the effective date appli-

cable to the Owner.

SUBSEQUENT GUIDANCE

Section 623 of the Act provides that

USDA will offer to enter into a con-

tract with an eligible tobacco producer

(Grower) under which the Grower may re-

ceive total payments of up to $3 per pound

of quota in 10 equal annual payments in

fiscal years 2005 through 2014 (GrowerPayments) in exchange for the termina-

tion of the tobacco marketing quotas and

related price support. Grower Payments

are determined by reference to the amount

of quota under which the Grower pro-

duced (or planted) tobacco during the

2002, 2003, and 2004 tobacco market-

ing years and are prorated based on the

number of years that the Grower produced

(or planted) quota tobacco during those

years. The federal tax treatment of Growe

Payments is expected to be addressed in

subsequent guidance.


The principal author of this notice i

Marnette M. Myers of the Office of As

sociate Chief Counsel (Income Tax &

Accounting). For further information regarding Q&A7 of this notice, contac

Pamela Lew of the Office of Associat

Chief Counsel (Financial Institution

and Products) at (202) 6223950 (no

a toll-free call). For further informatio

regarding the remainder of this notice

contact Ms. Myers at (202) 6224920 (no

a toll-free call).

Address Change for ArbitrageRebate Payments

Notice 200552

SECTION 1. PURPOSE

This notice announces that the Incom

Tax Regulations under 148 of the Inter

nal Revenue Code will be amended to pro

vide that, in the case of bonds subject t

(a) 1.1481T which was initially pub

lished on May 12, 1989, as part of T.D

8252, 19891 C.B. 25 (and which expiredin May of 1992), or (b) 1.1481 which

was published on May 18, 1992, as part o

T.D. 8418, 19921 C.B. 29 (and which ex

pired on June 30, 1993), rebate payment

must be filed at the same place or place

designated by the Commissioner for bond

subject to 1.1483.

SECTION 2. BACKGROUND

.01 Section 103(a) generally provide

that gross income does not include inter

est on any State or local bond. Unde 103(b)(2), however, interest on an arbi

trage bond (within the meaning of 148) i

includable in gross income.

.02 Section 148(f)(1) generally pro

vides that a bond that is part of an issu

shall be treated as an arbitrage bond unles

the issuer pays to the United States th

amounts described in 148(f)(2) for th

issue (rebate amounts) in accordance wit

148(f)(3).

200528 I.R.B. 75 July 11, 200


13/26

.03 Section 148(f)(3) provides that, ex-

cept to the extent provided by the Secre-

tary, rebate amounts must be paid in in-

stallments that are made at least once ev-

ery five years. The last installment must

be made no later than 60 days after the day

on which the last bond of the issue is re-

deemed.

.04 Section 1.1483(g) provides that a

rebate payment is paid when it is filed with

the Internal Revenue Service at the place

or places designated by the Commissioner.

See 7502(a) for the treatment of certain

payments made by U.S. mail.

.05 Section 1.1481T, which was ini-

tially published on May 12, 1989, as part

of T.D. 8252 and which expired in May of

1992 (the 1989 regulations), provides rules

for complying with the rebate requirement

with respect to certain bonds issued be-

fore the expiration of the 1989 regulations.

Section 1.1481T(b)(3)(v) of the 1989 reg-ulations provides that a rebate or correc-

tion amount is paid when filed with the In-

ternal Revenue Service Center, Philadel-

phia, Pennsylvania 19255.

.06 Section 1.1481, which was pub-

lished on May 18, 1992, as part of T.D.

8418 and which expired on June 30, 1993

(the 1992 regulations), provides rules for

complying with the rebate requirement

with respect to certain bonds issued before

July 1, 1993. Section 1.1481(b)(3)(v) of

the 1992 regulations provides that a rebate

or correction amount is paid when filedwith the Internal Revenue Service Center,

Philadelphia, Pennsylvania 19255.

SECTION 3. AMENDMENTS TO

REGULATIONS

The regulations will be amended to pro-

vide that, in the case of bonds subject to

the 1989 regulations (as defined in section

2.05) or the 1992 regulations (as defined

in section 2.06), rebate payments must be

filed at the same place or places designated

by the Commissioner for bonds subject to 1.1483. Until further notice, rebate pay-

ments for bonds subject to the 1989 regu-

lations or the 1992 regulations should be

sent to the following address:

Internal Revenue Service

Ogden Submission Processing Center

Ogden, Utah 84201


The principal author of this notice is

David White of the Office of Division

Counsel/Associate Chief Counsel (Tax

Exempt and Government Entities). For

further information regarding this revenue

procedure, contact Mr. White at (202)

6223980 (not a toll-free call).

26 CFR 601.204: Changes in accountingperiods and

in methods of accounting.

(Also Part I, 61, 446, 451.)

Rev. Proc. 200535

SECTION 1. PURPOSE

This revenue procedure sets forth a safe

harbor method of accounting for a Util-

itys treatment of an Up-front Payment

that the Utility receives from a Generatorto finance Network Upgrades to the Util-

itys Transmission System. This revenue

procedure also provides a procedure for a

Utility to obtain automatic consent of the

Commissioner to change to the safe harbor

method of accounting. Finally, this rev-

enue procedure provides audit protection

to a Utility that has used the safe harbor

method of accounting, provided that cer-

tain conditions are satisfied.


.01 A Utility is required pursuant to

Federal Energy Regulatory Commission

(FERC) rules and policy to accommodate

any request from a Generator to intercon-

nect the Generator to the Utilitys Trans-

mission System. In general, for a Gen-

erator to begin providing electricity from

its facility to its customers over a Util-

itys Transmission System, certain Net-

work Upgrades must be made to the Trans-

mission System to accommodate the ad-

dition of the facilitys electricity. Under

FERC policy, costs of the Network Up-grades generally must be paid in advance

to the Utility in the form of an Up-front

Payment by the interconnecting Generator.

To comply with FERC policy, the Inter-

connection Agreement between the Utility

and the Generator typically requires that

the Generators Up-front Payment to the

Utility be reimbursed by the Utility.

.02 The FERC standard Interconnec-

tion Agreement, FERC Order No. 2003B

issued December 20, 2004 (70 FR 265),

requires that the Utility reimburse the

Generators Up-front Payment in cash,

plus make additional payments to the

Generator that are designated as interest

by FERC Order No. 2003B (FERC

Interest). Prior FERC approved Intercon-

nection Agreements permit the Utility to

make reimbursements in cash, in assign-

able transmission credits that may be used

to offset the cost of transmission services,

or in a combination of cash and assignable

transmission credits.

.03 The IRS has received numerous in-

quiries about how Utilities should treat

Up-front Payments for federal income tax

purposes.

.04 Section 1.4461(e)(3)(ii) of the In-

come Tax Regulations 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 a

method of accounting.

.05 Rev. Proc. 20029, 20021 C.B.

327 (as modified and clarified by An-

nouncement 200217, 20021 C.B. 561,

modified and amplified by Rev. Proc.

200219, 20021 C.B. 696, and ampli-

fied, clarified, and modified by Rev. Proc.

200254, 20022 C.B. 432) provides pro-

cedures by which a taxpayer may obtain

automatic consent to change to a method

of accounting described in the Appendix

of Rev. Proc. 20029..06 Section 2.04 of Rev. Proc. 20029

provides that unless specifically autho-

rized by the Commissioner, a taxpayer

may not request, or otherwise make, a

retroactive change in method of account-

ing, regardless of whether the change is

from a permissible or an impermissible

method. See generally Rev. Rul. 9038,

19901 C.B. 57.

SECTION 3. SCOPE

This revenue procedure applies to aUtility that receives an Up-front Payment

from a Generator to finance Network

Upgrades to the Utilitys Transmission

System.

SECTION 4. DEFINITIONS

The following definitions apply for pur-

poses of this revenue procedure:

July 11, 2005 76 200528 I.R.B.


14/26

.01 Commercial Operation Date means

the date on which the Generator com-

mences commercial operation of its facil-

ity after trial operation of such facility has

been completed and confirmed in writing

as prescribed by FERC.

.02 Generator means the owner or op-

erator of an electric generation facility.

.03 Interconnection Agreement means

the agreement entered into between a Util-

ity and a Generator for the purpose of inter-

connecting the Generator with the Utilitys

Transmission System.

.04 Network Upgrades mean the addi-

tions, modifications, and upgrades to the

Transmission System required at or be-

yond the point at which the Generator in-

terconnects to the Transmission System to

accommodate the interconnection of the

Generator to the Transmission System.

.05 Transmission System means the fa-

cilities owned, controlled, or operated bya Utility that are used to provide electric

transmission service, including any addi-

tions, modifications, or upgrades made to

such facilities.

.06 Up-front Payment means the

amount or amounts paid by a Generator

to a Utility pursuant to their Interconnec-

tion Agreement for costs with respect to

Network Upgrades to the Utilitys Trans-

mission System.

.07 Utilitymeans an electrical transmis-

sion or distribution system owner or oper-

ator that is subject to the regulatory author-ity of FERC as well as a State public util-

ity commission or other appropriate State

agency.

SECTION 5. APPLICATION

.01 For federal income tax purposes,

if an Up-front Payment is made pursuant

to an Interconnection Agreement that sat-

isfies all of the conditions of either sec-

tion 5.02 or 5.03 of this revenue procedure,

whichever is applicable, a Utility may treat

that Up-front Payment as not being tax-able incomeunder 61 of the Internal Rev-

enue Code when received (the safe har-

bor method). In addition, a Utility that

uses the safe harbor method is not entitled

to any deduction for its reimbursements

of the Up-front Payment. To the extent

that FERC Interest is deductible, it must be

properly allocated to the periods in which

it accrues.

.02 For Interconnection Agreements

entered into on or after December 20,

2004:

(1) The Interconnection Agreement

must entitle the Generator to receive re-

imbursement of an amount that is not less

than the amount of the Up-front Payment;


must require reimbursement of the

Up-front Payment to be made in cash;


must require that the Utility pay the Gen-

erator FERC Interest calculated in accor-

dance with FERC Order No. 2003B; and


must require full reimbursement of the

Up-front Payment, plus the FERC Interest

calculated in accordance with FERC Order

No. 2003B, to be paid to the Generator

no later than twenty (20) years after the

Commercial Operation Date.

.03 For Interconnection Agreementsentered into before December 20, 2004:

(1) Pursuant to the Interconnection

Agreement, the Generator either has re-

ceived, or must be entitled to receive,

reimbursement of an amount that is not

less than the amount of the Up-front Pay-

ment;


must require reimbursement of the

Up-front Payment to be made either in

cash, assignable transmission credits, or a

combination of both; and

(3) On July 11, 2005, the Utility mustreasonably expect that under the terms of

the Interconnection Agreement, full reim-

bursement of the Up-front Payment will be

made no later than twenty (20) years after

the Commercial Operation Date.

SECTION 6. CHANGE IN METHOD

OF ACCOUNTING

.01 In general. A change in a Utilitys

treatment of an Up-Front Payment, includ-

ing a change to the safe harbor method pro-

vided in section 5.01 of this revenue pro-cedure, is a change in method of account-

ing to which the provisions of 446 and

481 and the regulations thereunder apply.

For Up-front Payments received pursuant

to Interconnection Agreements that satisfy

the conditions of section 5.02 or 5.03 of

this revenue procedure, whichever is appli-

cable, a Utility must follow section 6.02 or

6.03 of this revenue procedure to change

its treatment of the Up-front Payments to

the safe harbor method provided in sectio

5.01 of this revenue procedure.

.02 Automatic change. A Utility withi

the scope of this revenue procedure tha

desires to change its treatment of Up-fron

Payments to the safe harbor method pro

vided in section 5.01 of this revenue pro

cedure for any taxable year ending on o

after July 11, 2005, must follow the auto

matic change in accounting method provi

sions of Rev. Proc. 20029 (or its succes

sor), with the following modifications:

(1)The scope limitations in section 4.0

of Rev. Proc. 20029 do not apply for th

first taxable year ending on or after July 11

2005; and

(2) The Utility must prepare and file

Form 3115 in accordance with section 6 o

Rev. Proc. 20029 and must enter the des

ignated number for the automatic chang

in method in Line 1a of Form 3115. Th

designated number for the automatic accounting method change to the safe har

bor method provided in section 5.01 of thi

revenue procedure is 91.

.03 Change for prior taxable years. A

Utility within the scope of this revenu

procedure that desires to change its treat

ment of Up-front Payments to the safe har

bor method provided in section 5.01 o

this revenue procedure for any open tax

able year in a series of consecutive ope

taxable years ending with the taxable yea

immediately prior to Utilitys first taxabl

year ending on or after July 11, 2005, musfollow the automatic change in accountin

method provisions of Rev. Proc. 2002

(or its successor), with the following mod

ifications:

(1)The scope limitations in section 4.0

of Rev. Proc. 20029 do not apply;

(2) The Utility must prepare a Form

3115 in accordance with section 6 of Rev

Proc. 20029 and must enter the desig

nated number for the automatic change i

method in Line 1a of Form3115 (the desig

nated number for the automatic accountin

method change to the safe harbor methoprovided in section 5.01 of this revenu

procedure is 91); and

(3) The timely duplicate filing require

ments of section 6.02(3) of Rev. Proc

20029 do not apply; in lieu of such re

quirements, the Utility must:

(a) attach a completed Form 3115 to a

amended return for the year of change, an

must file, on or before December 31, 2005

that amended return and amended return

200528 I.R.B. 77 July 11, 200


15/26

for all subsequent affected taxable years, if

any; and

(b) file a copy of the Form 3115 with

the IRS National Office no later than when

the original Form 3115 is filed with the

amended return.

In accordance with 1.4461(e)(3)(ii)

and Rev. Rul. 9038, a Utility complying

with the provisions of this section 6.03 is

hereby granted consent to make a retroac-

tive change in method of accounting to

the safe harbor method provided in section

5.01 of this revenue procedure.

SECTION 7. AUDIT PROTECTION

.01 If a Utility uses the safe harbor

method provided in section 5.01 of this

revenue procedure for Up-front Payments

and does not deduct its reimbursements of

the Up-front Payments, the method of ac-

counting for an Up-front Payment will not

be raised asan issue by the IRS ina taxable

year that ends on or before July 11, 2005,

provided the Up-front Payment was made

pursuant to an Interconnection Agreement

that satisfies all of the conditions of either

section 5.02 or 5.03 of this revenue pro-

cedure, whichever is applicable. Also, if

a Utility uses the safe harbor method pro-

vided in section 5.01 of this revenue pro-

cedure for Up-front Payments and does not

deduct its reimbursements of the Up-front

Payments, and its use of that method is

an issue under consideration (within themeaning of section 3.09 of Rev. Proc.

20029) in examination, before an appeals

office, or before the U.S. Tax Court for any

taxable year that ends on or before July 11,

2005, that issue will not be further pursued

by the IRS, provided that the conditions

in either section 5.02 or 5.03 of this rev-

enue procedure, whichever is applicable,

are satisfied.

SECTION 8. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 20029 is modified and

amplified to include this automatic change

in the APPENDIX.

SECTION 9. DRAFTING

INFORMATION

The principal author of this revenue

procedure is David B. Silber of the Office

of the Associate Chief Counsel (Financial

Institutions and Products). For further

information regarding this revenue proce-dure, contact Mr. Silber at (202) 6223930

(not a toll-free call).

26 CFR 601.105: Examination of returns and claims

for refund, credit, or abatement; determination of

correct tax liability.

(Also Part I, 42; 1.4214.)

Rev. Proc. 200536

SECTION 1. PURPOSE

This revenue procedure publishes the

amounts of unused housing credit carry-

overs allocated to qualified states under

42(h)(3)(D) of the Internal Revenue

Code for calendar year 2005.


Rev. Proc. 9231, 19921 C.B. 775,

provides guidance to state housing credit

agencies of qualified states on the pro-

cedure for requesting an allocation ofunused housing credit carryovers under

42(h)(3)(D). Section 4.06 of Rev. Proc.

9231 provides that the Internal Rev-

enue Service will publish in the Internal

Revenue Bulletin the amount of unused

housing credit carryovers allocated to

qualified states for a calendar year from

a national pool of unused credit authority

(the National Pool). This revenue proce-

dure publishes these amounts for calendar

year 2005.

SECTION 3. PROCEDURE

The unused housing credit carryover

amount allocated from the National Pool

by the Secretary to each qualified state for

calendar year 2005 is as follows:

Qualified State Amount Allocated

Alabama $107,035

Alaska 15,486

California 848,068

Connecticut 82,780

Delaware 19,619

Florida 411,045

Georgia 208,613

Idaho 32,919

Illinois 300,387

Indiana 147,376

Kansas 64,632

Kentucky 97,956

Maine 31,123

Maryland 131,321

Massachusetts 151,604

Michigan 238,932

Minnesota 120,521

July 11, 2005 78 200528 I.R.B.


16/26

Qualified State Amount Allocated

Mississippi 68,589

Missouri 135,965

Nebraska 41,282

New Hampshire 30,703

New Jersey 205,530

New Mexico 44,969

New York 454,281

North Carolina 201,805Ohio 270,744

Oregon 84,930

Pennsylvania 293,125

Rhode Island 25,532

Tennessee 139,423

Texas 531,375

Utah 56,446

Virginia 176,254

Washington 146,578

West Virginia 42,892

Wisconsin 130,162

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective

for allocations of housing credit dollar

amounts attributable to the National Pool

component of a qualified states housing

credit ceiling for calendar year 2005.


The principal author of this revenue

procedure is Christopher J. Wilson of

the Office of Associate Chief Counsel(Passthroughs and Special Industries). For

further information regarding this revenue

procedure, contact Mr. Wilson at (202)

6223040 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims

for refund, credit, or abatement; determination of

correct tax liability.

(Also Part I, 42; 1.425.)

Rev. Proc. 200537

SECTION 1. PURPOSE

This revenue procedure establishes a

safe harbor under which housing credit

agencies and project owners may meet

the requirements of 42(h)(6)(B)(i) of

the Internal Revenue Code as described in

Q&A5 of Rev. Rul. 200482, 200435

I.R.B. 350, concerning extended low-in-

come housing commitments (commit-

ments).


Section 42(a) provides for a credit for

investment in qualified low-income build-

ings (as defined in 42(c)(2)). Under

42(i)(3)(A), low-income units in a build-

ing must be occupied by individuals who

meet the income limitation applicable un-

der 42(g)(1) to the project of which thebuilding is a part. The building owner

must elect under 42(g)(1) to rent a per-

centage of the residential units to individ-

uals whose income is 50 percent or less of

area median gross income or 60 percent or

less of area median gross income.

Section 42(h)(6)(A) provides that no

credit will be allowed with respect to any

building for the taxable year unless a com-

mitment (as defined in 42(h)(6)(B)) is in

effect as of the end of the taxable year.

Section 42(h)(6)(B)(i) requires com-

mitments to include the prohibitions

against the actions described in subclauses

(I) and (II) of 42(h)(6)(E)(ii) during the

extended use period, that is, prohibitions

against eviction or termination of tenancy

of an existing tenant of any low-income

unit (other than for good cause) and any

increase in the gross rent with respect to a

low-income unit not otherwise permitted

by 42, applicable throughout the entir

commitment period.

Section 42(h)(6)(B)(ii) provides that

commitment must allow individuals wh

meet the income limitation applicabl

to the building under 42(g) (whethe

prospective, present, or former occu

pants of the building) the right to enforc

in any state court the prohibitions o

42(h)(6)(B)(i).

Section 42(h)(6)(J) provides that if

during a taxable year, there is a determina

tion that a commitment was not in effecas of the beginning of the taxable year, th

determination shall not apply to any perio

before the year and subparagraph (A) shal

be applied without regard to the determi

nation if the failure is corrected within

year from the date of determination.

Section 1.425(c)(1)(xi) of the Incom

Tax Regulations provides that a housin

credit agency must require the owner of

low-income housing project to certify a

least annually to the housing credit agency

that, for the preceding 12-month period

a commitment as described in 42(h)(6

was in effect (for buildings subject t

7108(c)(1) of the Omnibus Budget Rec

onciliation Act of 1989, 19901 C.B

210), including the requirement unde

42(h)(6)(B)(iv) that an owner canno

refuse to lease a unit in the project to a

applicant because the applicant holds

voucher or certificate of eligibility unde

200528 I.R.B. 79 July 11, 200


17/26

section 8 of the United States Housing

Act of 1937, 42 U.S.C. 1437f (for build-

ings subject to 13142(b)(4) of the Om-

nibus Budget Reconciliation Act of 1993,

19933 C.B. 1).

On August 30, 2004, the Service ruled

in Q&A5 of Rev. Rul. 200482 that

42(h)(6)(B)(i) requires commitments to

include the prohibitions against the ac-

tions described in subclauses (I) and (II)

of 42(h)(6)(E)(ii) during the extended

use period, that is, prohibitions against

eviction or termination of tenancy of an

existing tenant of any low-income unit

(other than for good cause) and any in-

crease in the gross rent with respect to

a low-income unit not otherwise permit-

ted by 42, applicable throughout the

entire commitment period. This require-

ment for commitments extends back to

the effective date of 42(h)(6)(B)(i). See

11701(a)(7)(A) of the Omnibus BudgetReconciliation Act of 1990, 19912 C.B.

481, 531.

Q&A5 provided that if it is deter-

mined by the end of a taxable year that

a taxpayers commitment does not meet

the requirements for a commitment under

42(h)(6)(B) (for example, it does not

provide no-cause eviction protection for

the tenants of low-income units through-

out the extended use period), the low

income housing credit is not allowable

with respect to the building for the taxable

year, or any prior taxable year. However,if the failure to have a valid commitment

in effect is corrected within 1 year from

the date of the determination, the determi-

nation will not apply to the current year of

the credit period or any prior year.

Q&A5 required each Agency to re-

view its existing commitments by Decem-

ber 31, 2004, to ensure that the no-cause

eviction protection and the prohibition

against improper increases in gross rent

apply throughout the extended use period.

If during that review, an Agency deter-

mined that a commitment did not complywith these requirements, the 1-year period

described under 42(h)(6)(J) will com-

mence on the date of that determination.

SECTION 3. SAFE HARBOR

.01 The Service has determined that

Agencies may satisfy the review require-

ments under Q&A5 for commitments en-

tered into before January 1, 2006, under

42(h)(6)(B)(i) in the following manner:

(1) Commitments entered into before

January 1, 2006, that contain general lan-

guage requiring building owners to com-

ply with the requirements of 42 (catch-all

language) satisfy the requirements under

Q&A5, if:

(a) Agencies notify building owners in

writing on or before December 31, 2005,

that consistent with the interpretation in

Q&A5, the catch-all language prohibits

the owner from evicting or terminating

the tenancy of an existing tenant of any

low-income unit (other than for good

cause) throughout the entire commitment

period. Further, Agencies must notify

building owners that the catch-all lan-

guage prohibits the owner from making an

increase in the gross rent with respect to a

low-income unit not otherwise permittedby 42 throughout the entire commitment

period;

(b) The owner must, as part of its cer-

tification under 1.425(c)(1)(xi), certify

annually that for the preceding 12-month

period no tenants in low-income units were

evicted or had their tenancies terminated

other than for good cause and that no ten-

ants had an increase in the gross rent with

respect to a low-income unit not otherwise

permitted under 42;

(c) If the owner fails to make the certi-

fications in (b) above or the Agency learnsthat the owner has evicted tenants in low-

income units or terminated their tenancies

other than for good cause or has increased

the gross rent of a tenant with respect to

a low-income unit not otherwise permit-

ted under 42, the Agency shall report

the owner to the Internal Revenue Service

using Form 8823, Low-Income Housing

Credit Agencies Report of Noncompliance

or Building Disposition; and

(d) Section 3.02 shall also apply to any

amendment to any commitment containing

catch-all language if the amendment is ex-ecuted after December 31, 2005.

(2) Commitments entered into before

January 1, 2006, that do not contain spe-

cific language on the 42(h)(6)(B)(i) pro-

hibition against the actions described in

subclauses (I) and (II) of 42(h)(6)(E)(ii)

or catch-all language do not satisfy

the requirements of Q&A5 and must

be amended to clearly provide for the

42(h)(6)(B)(i) prohibition against the

actions described in subclauses (I) and

(II) of 42(h)(6)(E)(ii) by December 31,

2005.

.02 The Service has determined that

Agencies may satisfy the review require-

ments under Q&A5 for commitments ex-

ecuted after December 31, 2005, under

42(h)(6)(B)(i) in the following manner:

(1) Commitments executed after De-

cember 31, 2005, must clearly provide for

the 42(h)(6)(B)(i) prohibition against the

actions described in subclauses (I) and (II)

of 42(h)(6)(E)(ii);

(2) The owner must, as part of its certi-

fications under 1.425(c)(1)(xi), certify

annually that for the preceding 12-month

period no tenants in low-income units were

evicted or had their tenancies terminated

other than for good cause and that no ten-

ants had an increase in the gross rent withrespect