Internal Revenue Bulletin 2006-3 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
6-3
January 17, 2006
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2006–5, page 302.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through March
2006.This ruling provides the monthly bond factor amounts
to be used by taxpayers who dispose of qualified low-income
buildings or interests therein during the period January through
March 2006.
REG–1372
43–02, page 317.
Proposed r
egulations under section 7216 of the Code update
the rules
regarding the disclosure and use of tax return infor-
mation by
tax return preparers. The regulations announce new
and addit
ional rules for taxpayers to consent electronically to
the discl
osure or use of their tax return information by tax re-
turn prep
arers. The proposed rules provide guidelines for tax
return p
reparers using or disclosing information obtained in the
process
of preparing income tax returns. A public hearing is
schedul
ed for April 4, 2006.
Notice 2006–3, page 306.
Section 1(h) of the Code provides that certain dividends paid
to an individual shareholder from either a domestic corporation
or a “qualified foreign corporation” are subject to tax at the re-
duced rates applicable to certain capital gains. This notice
provides guidance for persons required to make returns and
provide statements under section 6042 regarding distributions
with respect to securities issued by a foreign corporation, and
for individuals receiving such statements. This notice provides
generally that the simplified procedures and other rules con-
tained in Notice 2003–79 and Notice 2004–71 are extended
to apply for 2005 information reporting of distributions with
respect to securities issued by foreign corporations and for fu-
ture years.
Notice 2006–4, page 307.
This notice addresses the application of section 409A of the
Code to outstanding stock rights and specifically the determi-
nation, for purposes of the exclusion from coverage under sec-
tion 409A for certain stock rights, of whether a stock right has
an exercise price equal to or greater than the fair market value
oftheunderlyingstockatthedateofgrant. Forstockrights
issued before January 1, 2005, the notice provides that the
determination will be made in accordance with the rules gov-
erning incentive stock options. For stock rights issued on or
after January 1, 2005, but before the effective date of final
regulations, the notice reiterates the standard set forth in No-
tice 2005–1 that the determination of fair market value may be
made using any reasonable valuation method.
Rev. Proc. 2006–11, page 309.
Simplified service cost and simplified production method
change procedures.This document provides procedures un-
der which a taxpayer may use either the advance consent pro-
cedures of Rev. Proc. 97–27 or the automatic consent proce-
dures of Rev. Proc. 2002–9 to request a change in method of
accounting to comply with section 1.263A–1T or 1.263A–2T
for the taxpayer’s first taxable year ending on or after August
2, 2005. Rev. Procs. 97–27 and 2002–9 modified.
Rev. Proc. 2006–12, page 310.
This document provides procedures under which certain tax-
payers may obtain automatic consent for a taxable year ending
on or after December 31, 2005, and for certain earlier taxable
years, to change to a method of accounting provided in reg-
ulations sections 1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b).
Rev. Procs. 97–27 and 2002–9 modified and amplified. Rev.
Procs. 2004–23 and 2005–9 superseded for certain taxable
years.
(Continued on the next page)
Fi
nding Lists begin on page ii.

EMPLOYEE PLANS
Rev. Proc. 2006–13, page 315.
Reporting requirements; fair market value of conver-
sion; Roth IRAs.Thisprocedureprovidessafeharbormeth-
ods for determining the fair market value of an annuity contract
that has not yet been annuitized for purposes of determining
the amount includible in gross income as a result of a conver-
sion of a traditional IRA to a Roth IRA, as described in Q&A–14
of section 1.408A–4T.
EXEMPT ORGANIZATIONS
Announcement 2006–3, page 327.
American Institute of Marine Studies, Inc., of Lauderdale by
the Sea, FL, and Hampton Roads Community Foundation of
Mechanicsville, VA, no longer qualify as organizations to which
contributions are deductible under section 170 of the Code.
EMPLOYMENT
TAX
T.D. 9233, p
age 303.
Final regul
ations under section 3121 of the Code provide guid-
ance for pay
ments made on account of sickness or accident
disabilit
y under a workers’ compensation law for purposes of
the Federa
l Insurance Contributions Act (FICA).
EXCISE TAX
Announcement 2006–4, page 328.
This document contains a notice of public hearing on proposed
regulations (REG–138647–04) under section 4980G of the
Code that provide guidance on employer comparable contribu-
tions to Health Savings Accounts (HSAs). The hearing is sched-
uled for February 23, 2006.
ADMINISTRATIVE
REG–137243–02, page 317.
Proposed regulations under section 7216 of the Code update
the rules regarding the disclosure and use of tax return infor-
mation by tax return preparers. The regulations announce new
and additional rules for taxpayers to consent electronically to
the disclosure or use of their tax return information by tax re-
turn preparers. The proposed rules provide guidelines for tax
return preparers using or disclosing information obtained in the
process of preparing income tax returns. A public hearing is
scheduled for April 4, 2006.
Rev. Proc. 2006–11, page 309.
Simplified service cost and simplified production method
change procedures.This document provides procedures un-
der which a taxpayer may use either the advance consent pro-
cedures of Rev. Proc. 97–27 or the automatic consent proce-
dures of Rev. Proc. 2002–9 to request a change in method of
accounting to comply with section 1.263A–1T or 1.263A–2T
for the taxpayer’s first taxable year ending on or after August
2, 2005. Rev. Procs. 97–27 and 2002–9 modified.
January 17, 20062006–3 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them 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 of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents 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 of
the 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 internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al 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 these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents 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.
2006–3 I.R.B.January 17, 2006

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 1.—Tax Imposed
A notice provides guidance for persons required
to make returns and provide statements under section
6042 regarding distributions with respect to securities
issued by a foreign corporation, and for individuals
receiving such statements. See Notice 2006-3, page
306.
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satis-
factory bond; “bond factor” amounts
for the period January through March
2006.This ruling provides the monthly
bond factor amounts to be used by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the
period January through March 2006.
Rev. Rul. 2006–5
In Rev. Rul. 90–60, 1990–2 C.B.
3, the Internal Revenue Service provided
guidance to taxpayers concerning the gen-
eral methodology used by the Treasury
Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secre-
tary under § 42(j)(6) of the Internal Rev-
enue Code. It further announced that the
Secretary would publishintheInternal
Revenue Bulletin a table of bond factor
amounts for dispositions occurring during
each calendar month.
Rev. Proc. 99–11, 1999–1 C.B. 275,
established a collateral program as an al-
ternative to providing a surety bond for
taxpayers to avoid or defer recapture of
the low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculat-
ing the amount of bond considered satis-
factory under § 42(j)(6) or the amount of
United States Treasury securities to pledge
in a Treasury Direct Account under Rev.
Proc. 99–11 for dispositions of qualified
low-income buildings or interests therein
during the period January through March
2006.
Table 1
Rev. Rul. 2006–5
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19921993199419951996199719981999200020012002
Jan ’0616.4930.7443.0153.6562.9464.2865.9567.7669.7672.1974.98
Feb ’0616.4930.7443.0153.6562.9464.1465.8167.6269.6172.0374.80
Mar ’0616.4930.7443.0153.6562.9464.0065.6767.4769.4671.8974.63
Table 1 (cont’d)
Rev. Rul. 2006–5
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
2003200420052006
Jan ’0678.0181.0283.6083.98
Feb ’0677.8180.7783.2883.98
Mar ’0677.6180.5383.0083.98
2006–3 I.R.B.302January 17, 2006

For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul. 98–3,
1998–1 C.B. 248; Rev. Rul. 2001–2,
2001–1 C.B. 255; Rev. Rul. 2001–53,
2001–2 C.B. 488; Rev. Rul. 2002–72,
2002–2 C.B. 759; Rev. Rul. 2003–117,
2003–2 C.B. 1051; Rev. Rul. 2004–100,
2004–2 C.B. 718; and Rev. Rul. 2005–67,
2005–43 I.R.B. 771.
DRAFTING INFORMATION
The principal author of this revenue
ruling is David McDonnell of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. McDonnell at (202) 622–3040
(not a toll-free call).
Section 162.—Trade or
Business Expenses
The Service provides the procedures under which
certain taxpayers may obtain automatic consent for
a taxable year ending on or after December 31,
2005, and for certain earlier taxable years, to change
toamethodofaccountingprovidedinsections
1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b) of the reg-
ulations. See Rev. Proc. 2006-12, page 310.
Section 263.—Capital
Expenditures
26 CFR 1.263(a)–4: Amounts paid to acquire or cre-
ate intangibles.
26 CFR 1.263(a)–5: Amounts paid or incurred to fa-
cilitate an acquisition of a trade or business, a change
in the capital structure of a business entity, and cer-
tain other transactions.
The Service provides the procedures under which
certain taxpayers may obtain automatic consent for
a taxable year ending on or after December 31,
2005, and for certain earlier taxable years, to change
toamethodofaccountingprovidedinsections
1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b) of the reg-
ulations. See Rev. Proc. 2006-12, page 310.
Section 408.—Individual
Retirement Accounts
Safe harbors for reporting the fair market value
oftheconversionofanannuityheldinanIndivid-
ual Retirement Account or an Individual Retirement
Annuity to a Roth IRA are set forth. See Rev. Proc.
2006-13, page 315.
Section408A.—RothIRAs
26 CFR 1.408A–4T: Converting amounts to Roth
IRAs.
Safe harbors for reporting the fair market value
of the conversion of an annuity held in an Individ-
ual Retirement Account or an Individual Retirement
Annuity to a Roth IRA are set forth. See Rev. Proc.
2006-13, page 315.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446–1: General rule for methods of ac-
counting.
Can a taxpayer utilize the advance consent proce-
dures of Rev. Proc. 97–27 to request the consent of
the Commissioner to change its method of accounting
to comply with section 1.263A–1T or 1.263A–2T of
the regulations? See Rev. Proc. 2006-11, page 309.
26 CFR 1.446–1: General rule for methods of ac-
counting.
The Service provides the procedures under which
certain taxpayers may obtain automatic consent for
a taxable year ending on or after December 31,
2005, and for certain earlier taxable years, to change
to a method of accounting provided in sections
1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b) of the reg-
ulations. See Rev. Proc. 2006-12, page 310.
Section 461.—General
Rule for Taxable Year
of Deduction
The Service provides the procedures under which
certain taxpayers may obtain automatic consent for
a taxable year ending on or after December 31,
2005, and for certain earlier taxable years, to change
to a method of accounting provided in sections
1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b) of the reg-
ulations. See Rev. Proc. 2006-12, page 310.
Section 48
1.—Adjustments
Required by Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
The Service provides the procedures under which
certain taxpayers may obtain automatic consent for
a taxable year ending on or after December 31,
2005, and for certain earlier taxable years, to change
to a method of accounting provided in sections
1.263(a)–4, 1.263(a)–5, or 1.167(a)–3(b) of the reg-
ulations. See Rev. Proc. 2006-12, page 310.
Section 3121.—Definitions
26 CFR 31.3121(a)(2)–1: Payments on account of
sickness or accident disability, medical or hospital-
ization expenses, or death.
T.D. 9233
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 32
Sickness or Accident Disability
Payments
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance regard-
ing the treatment of payments made on ac-
count of sickness or accident disability un-
der a workers’ compensation law for pur-
poses of the Federal Insurance Contribu-
tions Act (FICA).
DATES:Effective Date: These regulations
are effective December 15, 2005.
Applicability Date: These regulations
apply to payments on account of sickness
or accident disability payments made on or
after December 15, 2005.
FOR FURTHER INFORMATION
CONTACT: David Ford (202) 622–6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR parts 31 and 32 under section
3121(a)(2) of the Internal Revenue Code
(Code). This section excepts from wages
for FICA purposes payments made on ac-
count of sickness or accident disability that
are received under a “workmen’s compen-
sation law,” hereinafter referred to as a
workers’ compensation law.
Proposed regulations (REG–160315–
03, 2005–14 I.R.B. 833) under section
3121(a)(2) were published in theFed-
eral Register(70 FR 12164) on March
11, 2005. No written comments respond-
ing to the notice of proposed rulemaking
January 17, 20063032006–3 I.R.B.

were received and a public hearing was
not requested or held. Accordingly, the
proposed regulations are adopted as final
regulations. In addition, this document
contains amendments to §32.1 of the Tem-
porary Employment Tax Regulations to
provide guidance that the definition of
workers’ compensation law in the final
regulations under §31.3121(a)(2)–1 ap-
plies for payments on account of sickness
or accident disability made on or after
December 15, 2005.
Explanation of Provisions
Section 3121(a)(2)(A) of the Code ex-
cepts from “wages” for FICA tax purposes
payments to an employee or any of his
dependents on account of sickness or ac-
cident disability only if the payments are
received under a workers’ compensation
law.
Section 3121(a)(4) provides that wages
does not include any payment on account
of sickness or accident disability made by
an employer to or on behalf of an em-
ployee after the expiration of 6 calendar
months following the last calendar month
in which the employee worked for the em-
ployer. Thus, unless made under a work-
ers’ compensation law, payments received
on account of sickness or accident disabil-
ity are wages subject to FICA during the
first 6 months the employee is out of work.
These final regulations amend
§31.3121(a)(2)–1 to provide that pay-
ments made under a statute in the nature
of a workers’ compensation act will be
treated as having been made under a
workers’ compensation law and, there-
fore excluded from wages for FICA pur-
poses. For income tax purposes, section
104(a)(1) excludes from gross income cer-
tain amounts received under “workmen’s
compensation acts.” Section 1.104–1(b) of
the Income Tax Regulations, provides that
amounts received under section 104(a)(1)
include amounts received by an employee
under a statute in the nature of a workers’
compensation act. Thus, the final reg-
ulations align the interpretation of what
constitutes payments received under a
workers’ compensation law for FICA pur-
poses with §1.104–1(b) of the Income tax
regulations.
The preamble to the proposed regula-
tions specified that §32.1 of the Tem-
porary Employment Tax Regulations
would be amended, if needed. It is
necessary to remove the reference to
§31.3121(a)(2)–1(a)(2) in the first phrase
of §32.1(a) and insert a reference to
§31.3121(a)(2)–1(d)(3) in §32.1(a)(1)
to specify that the definition of work-
ers’ compensation lawapplicable to pay-
ments on account of sickness or acci-
dent disability made on or after Decem-
ber 15, 2005, is now in final regulation
§31.3121(a)(2)–1(d)(3). No other amend-
ments are made to §32.1.
The preamble to the proposed reg-
ulations also specified guidance would
be provided related to Federal Unem-
ployment Tax Act (FUTA) to the extent
necessary. The IRS has concluded that
no additional guidance is necessary for
FUTA since these payments are made
to employees of states and local gov-
ernments and FUTA does not apply to
services performed by state or local gov-
ernment employees.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section553(b)oftheAdministrativePro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations. In addition, be-
cause no collection of information is im-
posed on small entities, the provisions of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply, and, therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f) of the
Code, these regulations have been submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on the impact on small business.
Drafting Information
The principal author of these regula-
tionsisDavidFordoftheOfficeofDi-
vision Counsel/Associate Chief Counsel
(Tax Exempt/Government Entities). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 32
are amended as follows:
PART 31 — EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT THE SOURCE
Paragraph 1. The authority section for
part 31 continues to read, in part, as fol-
lows:
Authority26U.S.C.7805***
Par. 2. Section 31.3121(a)(2)–1 is
amended by:
1. Revising the section heading.
2. Removing paragraph (a)(1).
3. Redesignating paragraphs (a)(2)
through (a)(4) as (a)(1) through (a)(3),
respectively.
4. Revising newly redesignated para-
graph (a)(1).
5. Redesignating paragraph (d) as (f).
6. Adding new paragraphs (d) and (e)
The revisions and additions are as fol-
lows:
§31.3121(a)(2)–1 Payments on account of
sickness or accident disability, medical or
hospitalization expenses, or death.
(a) * * *
(1) Sickness or accident disability of an
employee or any of his dependents, only
if payment is received under a workers’
compensation law;
*****
(d)Workers’ compensation law.(1)
For purposes of paragraph (a)(1) of this
section, a payment made under a work-
ers’ compensation law includes a payment
made pursuant to a statute in the nature of
a workers’ compensation act.
(2) For purposes of paragraph (a)(1) of
this section, a payment made under a work-
ers’ compensation lawdoes not include a
payment made pursuant to a State tempo-
rary disability insurance law.
(3) If an employee receives a payment
on account of sickness or accident disabil-
ity that is not made under a workers’ com-
pensation law or a statute in the nature of
a workers’ compensation act, the payment
is not excluded from wages as defined by
section 3121(a)(2)(A) even if the payment
must be repaid if the employee receives a
workers’ compensation award or an award
under a statute in the nature of a workers’
2006–3 I.R.B.304January 17, 2006

compensation act with respect to the same
period of absence from work.
(4) If an employee receives a payment
on account of non-occupational injury
sickness or accident disability such pay-
ment is not excluded from wages, as
definedbysection3121(a)(2)(A).
(e)Examples. The following examples
illustrate the principles of paragraph (d) of
this section:
Example 1. A local government employee is in-
jured while performing work-related activities. The
employee is not covered by the State workers’ com-
pensation law, but is covered by a local government
ordinance that requires the local government to pay
the employee’s full salary when the employee is out
of work as a result of an injury incurred while per-
forming services for the local government. The ordi-
nance does not limit or otherwise affect the local gov-
ernment’s liability to the employee for the work-re-
lated injury. The local ordinance is not a workers’
compensation law, but it is in the nature of a workers’
compensation act. Therefore, the salary the employee
receives while out of work as a result of the work-re-
lated injury is excluded from wages under section
3121(a)(2)(A).
Example 2. ThefactsarethesameasinExam-
ple 1except that the local ordinance requires the em-
ployer to continue to pay the employee’s full salary
while the employee is unable to work due to an injury
whether or not the injury is work-related. Thus, the
local ordinance does not limit benefits to instances
of work-related disability. A benefit paid under an
ordinance that does not limit benefits to instances of
work-related injuries is not a statute in the nature of a
workers’ compensation act. Therefore, the salary the
injured employee receives from the employer while
out of work is wages subject to FICA even though
the employee’s injury is work-related.
Example 3. The facts are the same as inExample
1except that the local ordinance includes a rebuttable
presumption that certain injuries, including any heart
attack incurred by a firefighter or other law enforce-
ment personnel is work-related. The presumption in
the ordinance does not eliminate the requirement that
the injury be work-related in order to entitle the in-
jured worker to full salary.Therefore, the ordinance
is a statute in the nature of a workers’ compensation
act, and the salary the injured employee receives pur-
suant to the ordinance is excluded from wages under
section 3121(a)(2)(A).
*****
PART 32 — TEMPORARY
EMPLOYMENT TAX REGULATIONS
UNDER THE ACT OF DECEMBER 29,
1981 (PUB. L. 97–123)
Par. 3. The authority section for part 32
continues to read, in part, as follows:
Authority26U.S.C.7805***
Par. 4. Section 32.1 is amended by:
1. Revising paragraph (a) introductory
text.
2. Revising paragraph (a)(1).
The revisions and additions are as fol-
lows:
*****
(a)General rule. The amount of any
payment on or after January 1, 1982, made
to, or on behalf of, an employee or any
of his dependents on account of sick-
ness or accident disability is not excluded
from the term wages as defined in section
3121(a)(2)(A) unless such payment is—
(1) Received under a workmen’s
compensation law (as defined in
§31.3121(a)(2)–1(d)(3) of this chapter
for payments made on or after December
15, 2005), or
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 1, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 14,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 15, 2005, 70 F.R. 74198)
Section 6042.—Returns
Regarding Payments of
Dividends and Corporate
Earnings and Profits
A notice provides guidance for persons required
to make returns and provide statements under section
6042 regarding distributions with respect to securities
issued by a foreign corporation, and for individuals
receiving such statements. See Notice 2006-3, page
306.
Section 6721.—Failure to
File Correct Information
Returns
A notice provides guidance for persons required
to make returns and provide statements under section
6042 regarding distributions with respect to securities
issued by a foreign corporation, and for individuals
receiving such statements. See Notice 2006-3, page
306.
Section 6722.—Failure
to Furnish Correct Payee
Statements
A notice provides guidance for persons required
to make returns and provide statements under section
6042 regarding distributions with respect to securities
issued by a foreign corporation, and for individuals
receiving such statements. See Notice 2006-3, page
306.
Section 6724.—Waiver;
Definitions and Special
Rules
A notice provides guidance for persons required
to make returns and provide statements under section
6042 regarding distributions with respect to securities
issued by a foreign corporation, and for individuals
receiving such statements. See Notice 2006-3, page
306.
January 17, 20063052006–3 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Information Reporting and
Other Guidance Regarding
Distributions With Respect to
Securities Issued by Foreign
Corporations
Notice 2006–3
SECTION 1. OVERVIEW
The Jobs and Growth Tax Relief Rec-
onciliation Act of 2003 (P.L. 108–27, 117
Stat. 752) (the “2003 Act”) was enacted
on May 28, 2003. Subject to certain lim-
itations, the 2003 Act generally provides
thatadividendpaidtoanindividualshare-
holder from either a domestic corporation
or a “qualified foreign corporation” is sub-
ject to tax at the reduced rates applicable
to certain capital gains. A qualified for-
eign corporation includes certain foreign
corporations that are eligible for benefits
of a comprehensive income tax treaty with
the United States which the Secretary de-
termines is satisfactory for purposes of this
provision and which includes an exchange
of information program. In addition, a
foreign corporation not otherwise treated
as a qualified foreign corporation is so
treated with respect to any dividend it pays
if the stock with respect to which it pays
such dividend is readily tradable on an es-
tablished securities market in the United
States. The 2003 Act excluded from the
definition of qualified foreign corporation
any foreign corporation which for the tax-
able year of the corporation in which the
dividend was paid, or the preceding tax-
able year, was a foreign personal hold-
ing company (as defined in section 552),
a foreign investment company (as defined
in section 1246(b)), or a passive foreign
investment company (as defined in sec-
tion 1297). Effective for taxable years of
foreign corporations beginning after De-
cember 31, 2004, the American Jobs Cre-
ation Act (P.L.108–357) (the “AJCA”) re-
pealed the rules applicable to foreign per-
sonal holding companies and foreign in-
vestment companies from the Code. The
AJCA made conforming amendments to
section 1(h)(11)(C)(iii).
This notice provides guidance for per-
sons required to make returns and provide
statements under section 6042 of the In-
ternal Revenue Code with respect to se-
curities issued by a foreign corporation,
and for individuals receiving such state-
ments. This notice provides generally that
the simplified procedures regarding infor-
mation reporting of distributions with re-
spect to securities issued by foreign corpo-
rations and other rules contained in Notice
2003–79 and Notice 2004–71 for tax years
2003 and 2004, respectively, are extended
to apply for 2005 and future years.
SECTION 2. NOTICE 2003–79 and
NOTICE 2004–71
In November of 2003, the Treasury
Department and the IRS issued Notice
2003–79, 2003–2 C.B. 1206, which pro-
vided guidance for persons required to
make returns and provide statements un-
der section 6042 of the Internal Revenue
Code (e.g., Form 1099-DIV) regarding
distributions made in 2003 with respect to
securities issued by a foreign corporation,
and for individuals receiving such state-
ments. Notice 2003–79 identified a series
of separate determinations that must be
made in order to determine whether a dis-
tribution with respect to a security issued
by a foreign corporation is eligible for the
reduced rates of tax under the 2003 Act.
Notice 2003–79 provided simplified pro-
cedures to be used for 2003 information
reporting of a distribution with respect
to such a security. Notice 2003–79 also
provided guidance regarding the deter-
mination as to whether a security (or an
American depositary receipt in respect
of such security) issued by a foreign cor-
poration other than ordinary or common
stock (such as preferred stock) is consid-
ered readily tradable on an established
securities market in the United States for
purposes of the 2003 Act.
In November of 2004, Treasury and
the IRS issued Notice 2004–71, 2004–2
C.B. 793, which provided guidance for
persons required to make returns and pro-
vide statements under section 6042 of the
Internal Revenue Code regarding distribu-
tions made in 2004 with respect to securi-
ties issued by a foreign corporation, and for
individuals receivingsuch statements. No-
tice 2004–71 generally provided that the
simplified procedures and other rules con-
tained in Notice 2003–79 were extended
to apply for 2004 information reporting of
distributions with respect to securities is-
sued by foreign corporations.
SECTION 3. GUIDANCE FOR 2005
AND FUTURE YEARS
.01 Generally.
While the Treasury Department and the
IRS continue to acknowledge that more
detailed information reporting guidance
may be necessary, and such procedures
continue to be under study, Treasury and
the IRS have concluded that it is appro-
priate to extend the simplified procedures
that were provided in Notice 2003–79 and
Notice 2004–71 with respect to tax years
2003 and 2004, to 2005 and future years
with appropriate modifications to take into
account the changes enacted by the AJCA.
Section 3.02 of this notice summarizes
guidance for 2005 and future years infor-
mation reporting of a distribution with re-
spect to a security issued by a foreign cor-
poration. Section 3.03 provides guidance
for 2005 and future years for recipients of
Form 1099-DIV.
.02 Persons Required to File Form
1099-DIV.
The rules for 2003 information report-
ing of a distribution with respect to a secu-
rity issued by a foreign corporation that are
described in detail in sections 3.01 through
3.07 of Notice 2003–79 will continue to
apply for 2005. Those rules are outlined
in the following summary. However, in or-
der to account for the amendments enacted
by the AJCA, for 2006 and future years the
foreign investment company exclusion test
shall be applied without regard to whether
the foreign corporation is or was a foreign
personal holding company or a foreign in-
vestment company.
A person required to make a return un-
der section 6042 shall report a distribution
with respect to such a security in Box 1b of
Form 1099-DIV as a qualified dividend if:
1. either the security with respect to
which the distribution is made is a
commonoranordinaryshare,ora
public SEC filing contains a state-
ment that the security will be, should
be, or more likely than not will be
2006–3 I.R.B.306January 17, 2006

treated as equity rather than debt for
U.S. federal income tax purposes; and
2. either:
a. the security is considered “readily
tradable on an established securi-
ties market in the United States”;
1
b. the foreign corporation is or-
ganized in a possession of the
United States; or
c. the foreign corporation is orga-
nized in a country whose income
tax treaty with the United States
is comprehensive, is satisfactory
to the Secretary for purposes of
section 1(h)(11), and includes
an exchange of information pro-
gram,
2
and if the relevant treaty
contains a limitation on benefits
provision, the corporation’s com-
mon or ordinary stock is listed
on an exchange covered by that
limitation on benefits provision’s
public trading test, unless the per-
sonrequiredtofileaninforma-
tion return knows or has reason to
know that the corporation is not
eligible for benefits under that
treaty; and
3. the person required to file Form 1099-
DIV does not know or have reason to
know that the foreign corporation is or
expects to be, in the taxable year of the
corporation in which the dividend was
paid, or was, in the preceding taxable
year, a foreign personal holding com-
pany (as defined in section 552), a for-
eign investment company (as defined
in section 1246(b)), or a passive for-
eign investment company (as defined
in section 1297);
3
and
4. thepersonrequiredtomakeareturn
under section 6042 determines that the
owner of the distribution has satisfied
the holding period requirement of sec-
tion 1(h)(11) or it is impractical for
such person to make such determina-
tion.
The IRS will exercise its authority un-
der section 6724(a) of the Code to waive
penalties under sections 6721 and 6722
with respect to reporting of payments if
persons required to file Form 1099-DIV
make a good faith effort to report pay-
ments consistent with the rules summa-
rized above and described in detail in sec-
tions 3.01 through 3.06 of Notice 2003–79.
Apersonrequiredtomakeareturnun-
der section 6042 may report a distribution
inBox1basaqualifieddividendevenif
the distribution does not satisfy these sim-
plified information reporting procedures,
subject to the applicable penalty provi-
sions, as described in detail in section 3.07
of Notice 2003–79.
.03 Recipients of Form 1099-DIV.
For taxable years beginning in 2005 and
future tax years, a recipient of Form 1099-
DIV may treat amounts reported in Box 1b
as qualified dividends, unless and to the
extent the recipient knows or has reason to
know that such amounts are not qualified
dividends, as described in detail in section
3.08 of Notice 2003–79.
SECTION 4. EFFECTIVE DATE
This notice is effective for taxable years
beginning on or after January 1, 2005.
SECTION 5. COMMENTS
Treasury and the IRS continue to in-
vite interested persons to comment on
the information reporting procedures con-
tained in this notice and the certification
procedures outlined in Section 5 of No-
tice 2003–79. Written comments may
be submitted to CC:PA:LPD:PR (Notice
2006–3), room 5207, Internal Revenue
Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044. Sub-
missions may be hand delivered Mon-
day through Friday between the hours of
8 am and 5 pm to: CC:PA:LPD:PR (Notice
2006–3), Courier’s desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC 20224. Alternatively,
taxpayers may submit comments electron-
ically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2006–3” in the
subject line of any electronic communica-
tions.
SECTION 6. PAPERWORK
REDUCTION ACT
The information collection referenced
in this notice has been previously reviewed
and approved by the Office of Manage-
ment and Budget as part of the promulga-
tion of Form 1099-DIV. See OMB Control
Number 1545–0110. This notice merely
provides additional guidance regarding the
proper filing of such returns and furnishing
of such statements.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.
SECTION 7. CONTACT
INFORMATION
The principal author of this notice is
Karen A. Rennie of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
David Lundy at (202) 622–3880 (not a toll-
free call).
Interim Guidance With
Respect to the Application of
Section 409A to Outstanding
Stock Rights
Notice 2006–4
I. Background
Section 409A was added to the Internal
Revenue Code as part of the American
Jobs Creation Act of 2004, Pub. Law
1
Notice 2003–71, 2003–2 C.B. 922, and section 3.02 of Notice 2004–71, 2004–2 C.B. 793, provide guidance regarding when a security is considered readily tradable on an established
securities market in the United States for purposes of section 1(h)(11).
2
Notice 2003–69, 2003–2 C.B. 851, contains a list of qualifying treaties for this purpose.
3
Notice 2004–70, 2004–2 C.B. 724, provides guidance regarding the extent to which distributions, inclusions, and other amounts received by, or included in the income of, individual
shareholders as ordinary income from foreign corporations subject to certain anti-deferral regimes may be treated as qualified dividend income forpurposes of section 1(h)(11).
January 17, 20063072006–3 I.R.B.

No. 108–357, 118 Stat. 1418. Section
409A generally provides that all amounts
deferred under a nonqualified deferred
compensation plan for all taxable years
are currently includible in gross income to
the extent not subject to a substantial risk
of forfeiture and notpreviously included
in gross income, unless certain require-
ments are met. The IRS issued Notice
2005–1, 2005–2 I.R.B. 274, on December
20, 2004 (published as modified on Jan-
uary 6, 2005) and issued proposed regula-
tions (REG–158080–04, 2005–43 I.R.B.
786) under section 409A on September 29,
2005 (70 Fed. Reg. 57930 (Oct. 4, 2005)).
The proposed regulations are proposed to
be effective on January 1, 2007, and do
not limit the application of the guidance
provided in Notice 2005–1.
II. Stock Options and Stock Appreciation
Rights Granted before January 1, 2005
A. Application of the Reasonable
Valuation Standard
Commentators expressed concern with
respect to the application of section 409A
to stock options and stock appreciation
rights (collectively,stock rights) issued
before January 1, 2005. Specifically, com-
mentators expressed concern that although
the issuer of a stock right intended to es-
tablish an exercise price not less than the
fair market value of the stock at the time of
grant, the issuer of the stock right may not
be able to demonstrate that the exercise
price of the stock right was determined
using a reasonable valuation method in
accordance with the requirements set
forth in Notice 2005–1, Q&A–4(d) or
§ 1.409A–1(b)(5)(i)(B) of the proposed
regulations. Commentators noted further
that at the time such stock rights were
granted, section 409A had not been en-
acted and thus no guidance with respect to
the application of section 409A to stock
rights was available.
B. Application of the Good Faith
Standards of § 1.422–2(e)(2)
Section 1.422–2(e)(1) generally
provides that except as provided by
§ 1.422–2(e)(2), the option price of an
incentive stock option must not be less
than the fair market value of the stock
subject to the option at the time the option
is granted. Section 1.422–2(e)(2) gener-
ally provides that if a share of stock is
transferred to an individual pursuant to the
exercise of an option which fails to qual-
ify as an incentive stock option merely
because there was a failure of an attempt,
made in good faith, to meet the option
price requirements of § 1.422–2(e)(1),
those option price requirements are con-
sidered to have been met. Whether there
was a good-faith attempt to set the option
price at not less than the fair market value
of the stock subject to the option at the
time the option was granted depends on
the relevant facts and circumstances.
Until further guidance is issued, with
respect to a stock right issued before
January 1, 2005, for purposes of deter-
mining whether the stock option results
in a deferral of compensation pursuant
to Notice 2005–1, Q&A–4(d)(ii), or
the stock appreciation right results in
a deferral of compensation pursuant to
§ 1.409A–1(b)(5)(i)(B) of the proposed
regulations, principles similar to those set
forth in § 1.422–2(e)(2) will be applied.
Accordingly, where there was a good-faith
attempt to set the exercise price of a stock
right granted before January 1, 2005, at a
price not less than the fair market value
of the stock subject to the stock right at
the time the stock right was granted, then
such exercise price will be treated as being
not less than the fair market value of the
stock at the time of grant for purposes of
determining whether the stock right is ex-
cluded from the requirements applicable
to deferred compensation under section
409A.
III. Stock Rights Issued on or after January
1, 2005 and Continued Application of
Notice 2005–1, Q&A–4(d)(ii)
With respect to stock options granted
on or after January 1, 2005 and before the
effective date of final regulations, Notice
2005–1, Q&A–4(d)(ii) remains applicable
guidance. Taxpayers may also rely on
§ 1.409A–1(b)(5)(i)(B) of the proposed
regulations during this period. With re-
spect to stock appreciation rights issued
on or after January 1, 2005 and before the
effective date of final regulations, taxpay-
ers may rely on § 1.409A–1(b)(5)(i)(B)
of the proposed regulations. In applying
the provisions of the proposed regulations
relating to stock appreciation rights, and
specifically § 1.409A–1(b)(5)(i)(B)(1)and
(2), taxpayers may apply the rule set forth
in Notice 2005–1, Q&A–4(d)(ii) that, for
purposes of determining the fair market
value of the stock at the date of grant,
any reasonable valuation method may be
used. Accordingly, where a taxpayer can
demonstrate that the exercise price of a
stock right, granted on or after January 1,
2005, and before the effective date of final
regulations, is intended to be not less than
the fair market value of the stock at the
date of grant and that the value of such
stock was determined using a reasonable
valuation method, then that valuation will
meet the requirements of Notice 2005–1,
Q&A–4(d)(ii) regardless of whether that
determination satisfies the valuation re-
quirements in § 1.409A–1(b)(5)(i)(B) of
the proposed regulations.
IV. Request for Additional Comments
regarding Application of Final
Regulations to Outstanding Stock
Rights
Final regulations may establish more
detailed standards for valuation in the con-
text of stock rights than those provided
in this notice and Notice 2005–1. The
Treasury Department and the IRS continue
to request comments with respect to the
proposed regulations, and specifically how
the standards proposed with respect to the
determination of the fair market value of
stock subject to stock rights may be im-
proved both to meet commentators’ re-
quests for more certainty with respect to
the valuation requirement, and the legisla-
tive intent that only stock rights with exer-
cise prices that may not be lower than the
fair market value of the underlying stock
on the date of grant be excluded from cov-
erage under section 409A. See H.R. Conf.
Rep. No. 108–755, at 735 (2004).
In addition, commentators have ex-
pressed concerns relating to the definition
of service recipient stock for purposes
of the exclusions from coverage under
section 409A for certain stock rights, and
the treatment of modifications, extensions
and renewals of otherwise excluded stock
rights. The Treasury Department and the
IRS are considering comments on these
issues, and invite further comments with
respect to the rules proposed under the
proposed regulations, as well as any ad-
ditional transitional relief that may be
2006–3 I.R.B.308January 17, 2006

appropriate in conjunction with the im-
plementation of the final regulations. For
information regarding the submission of
comments, see the “Comments and Public
Hearing” section of the preamble to the
proposed regulations.
V. Drafting Information
The principal author of this guidance is
Stephen Tackney of the Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). However,
other personnel from the Treasury Depart-
ment and the IRS participated in its devel-
opment. For further information regard-
ing this notice, contact Stephen Tackney at
(202) 927–9639 (not a toll-free call).
26 CFR 1.263A–1T: Uniform capitalization of costs
(temporary).
(Also Part I, §§ 446(e); 1.263A–2T, 1.446–1.)
Rev. Proc. 2006–11
SECTION 1. PURPOSE
This revenue procedure provides pro-
cedures by which a taxpayer changing
its method of accounting to comply with
§ 1.263A–1T or 1.263A–2T of the Income
Tax Regulations as set forth in T.D. 9217,
2005–37 I.R.B. 498 (70 FR 44467) for
its first taxable year ending on or after
August 2, 2005, may request the consent
of the Commissioner utilizing either the
advance consent procedures of Rev. Proc.
97–27, 1997–1 C.B. 680 (as modified and
amplified by Rev. Proc. 2002–19, 2002–1
C.B. 696, and amplified and clarified by
Rev. Proc. 2002–54, 2002–2 C.B. 432)
or the automatic consent procedures of
Rev. Proc. 2002–9, 2002–1 C.B. 327 (as
modified and clarified by Announcement
2002–17, 2002–1 C.B. 561, modified and
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).
SECTION 2. BACKGROUND
.01 Under §§ 446(e) and 1.446–1(e), a
taxpayer generally must secure the con-
sent of the Commissioner before chang-
ing a method of accounting for federal in-
come tax purposes. To obtain the Com-
missioner’s consent to a change in method,
§ 1.446–1(e)(3)(i) generally requires a tax-
payer to file Form 3115,Application for
Change in Accounting Method,duringthe
taxable year in which the taxpayer desires
to make the proposed change. Section
1.446–1(e)(3)(ii) authorizes the Commis-
sioner to prescribe administrative proce-
dures that provide the terms and condi-
tions necessary for a taxpayer to obtain
consent to change a method of account-
ing. The terms and conditions the Com-
missioner may prescribe include whether
the change is to be made with a § 481(a)
adjustment, and if so, the § 481(a) adjust-
ment period, or on a cut-off basis.
.02 Section 481(c) and §§ 1.446–
1(e)(3)(ii) and 1.481–4 provide that the
adjustment required by § 481(a) may be
taken into account in determining taxable
income in the manner and subject to the
conditions agreed to by the Commissioner
and the taxpayer.
.03 This revenue procedure applies only
for a taxpayer’s first taxable year ending
on or after August 2, 2005, for a change
in method of accounting to comply with
§ 1.263A–1T or 1.263A–2T. A change in
method of accounting under this revenue
procedure requires a § 481(a) adjustment,
and the § 481(a) adjustment period is two
taxable years for a net positive adjustment.
It is expected that this two-year adjustment
period for a net positive § 481(a) adjust-
ment will apply to changes in methods of
accounting made in future years to com-
ply with the rules in §§ 1.263A–1T and
1.263A–2T, and the successor final regu-
lations.
.04 Rev. Proc. 97–27 provides the
general procedures under §§ 446(e) and
1.446–1(e) for obtaining the consent of the
Commissioner to change a method of ac-
counting for federal income tax purposes.
Except as specificallyprovided in section
4.02 of Rev. Proc. 97–27 or other pub-
lished guidance, Rev. Proc. 97–27 applies
to all taxpayers requesting the Commis-
sioner’s consent to change a method of ac-
counting for federal income tax purposes.
See Rev. Proc. 97–27, sections 1.01 and
4.01.
.05 Section 4.02(1) of Rev. Proc. 97–27
provides that Rev. Proc. 97–27 does not
apply if the changein method of account-
ing is required to be made pursuant to a
published automatic change procedure.
.06 Rev. Proc. 2002–9 provides pro-
cedures under §§ 446(e) and 1.446–1(e)
for obtaining the automatic consent of the
Commissioner to change certain methods
of accounting for federal income tax pur-
poses. Specifically, Rev. Proc. 2002–9
applies to a taxpayer requesting the Com-
missioner’s consent to change to a method
of accounting described in the APPEN-
DIX of such revenue procedure. Rev.
Proc. 2002–9 is the exclusive procedure
for a taxpayer within its scope to obtain
the Commissioner’s consent.SeeRev.
Proc. 2002–9, sections 1 and 4.01.
.07 T.D. 9217 contains final and tempo-
rary regulations relating to the capitaliza-
tion of costs under the simplified service
cost method provided by § 1.263A–1(h)
and the simplified production method pro-
vided by § 1.263A–2(b). Specifically,
the regulations under § 1.263A–1T and
§ 1.263A–2T clarify what property quali-
fies as self-constructed assets produced on
a routine and repetitive basis for purposes
of the simplified service cost method or
the simplified production method, respec-
tively.
.08 Section 1.263A–1T(k)(1) provides
that a change in a taxpayer’s treatment
of mixed service costs to comply with
§ 1.263A–1T is a change in method of
accounting to which the provisions of
§§ 446 and 481 and the regulations there-
under apply. Section 1.263A–1T(k)(1)
further provides that for a taxpayer’s first
taxable year ending on or after August
2, 2005, the taxpayer is granted the con-
sent of the Commissioner to change its
method of accounting to comply with
§ 1.263A–1T, provided the taxpayer fol-
lows the administrative procedures issued
under § 1.446–1(e)(3)(ii), as modified
by § 1.263A–1T(k)(2) through (4), for
obtaining the Commissioner’s automatic
consent to a change in accounting method.
.09 Section 1.263A–2T(e)(1) provides
that a change in a taxpayer’s treatment of
additional § 263A costs to comply with
§ 1.263A–2T is a change in method of
accounting to which the provisions of
§§ 446 and 481 and the regulations there-
under apply. Section 1.263A–2T(e)(1)
further provides that for a taxpayer’s first
taxable year ending on or after August
2, 2005, the taxpayer is granted the con-
sent of the Commissioner to change its
method of accounting to comply with
§ 1.263A–2T, provided the taxpayer fol-
lows the administrative procedures issued
under § 1.446–1(e)(3)(ii), as modified
January 17, 20063092006–3 I.R.B.

by § 1.263A–2T(e)(2) through (4), for
obtaining the Commissioner’s automatic
consent to a changein accounting method.
.10 Pursuant to the foregoing provi-
sions, a taxpayer changing its method of
accounting to comply with § 1.263A–1T
or 1.263A–2T as set forth in T.D. 9217
for its first taxable year ending on or after
August 2, 2005, is required to use the au-
tomatic consent procedures of Rev. Proc.
2002–9 (as modified by § 1.263A–1T(k)
or 1.263A–2T(e), whichever is applicable)
to obtain the consent of the Commissioner
to change its method of accounting. Some
taxpayers contemplating such accounting
method changes are uncertain whether
their proposed methods of accounting will
comply with the regulations under § 263A,
and have requested that the Internal Rev-
enue Service allow for advance review of
their requested accounting methods.
.11 The Service has determined that
it is in the best interest of sound tax ad-
ministration to allow taxpayers changing
their methods of accounting to comply
with § 1.263A–1T or 1.263A–2T for
their first taxable years ending on or after
August 2, 2005, to utilize either the ad-
vance consent procedures of Rev. Proc.
97–27 or the automatic consent procedures
of Rev. Proc. 2002–9. Therefore, when
§§ 1.263A–1T and 1.263A–2T are issued
as final regulations, the final regulations
will allow taxpayers to use the advance
consent procedures for their first taxable
year ending on or after August 2, 2005.
This revenue procedure is being issued in
advance of the final regulations and the
rules provided herein are consistent with
the rules that will be provided in the final
regulations.
SECTION 3. SCOPE
This revenue procedure applies to any
taxpayer seeking to change its method of
accounting for mixed service costs to com-
ply with § 1.263A–1T for its first taxable
year ending on or after August 2, 2005,
and to any taxpayer seeking to change
its method of accounting for additional
§ 263A costs to comply with § 1.263A–2T
for its first taxable year ending on or after
August 2, 2005.
SECTION 4. APPLICATION
.01 The provisions of section 4.02(1)
of Rev. Proc. 97–27 and section 4.01
of Rev. Proc. 2002–9 that preclude a
taxpayer from requesting the Commis-
sioner’s advance consent to change a
method of accounting that is required to
be made pursuant to a published auto-
matic change procedure shall not apply
to changes in method of accounting to
comply with § 1.263A–1T or 1.263A–2T
for a taxpayer’s first taxable year ending
on or after August 2, 2005. Accordingly, a
taxpayer within the scope of this revenue
procedure may utilizeeither the advance
consent procedures of Rev. Proc. 97–27 or
the automatic consent procedures of Rev.
Proc. 2002–9 to obtain the consent of the
Commissioner to make such changes.
.02 The following provisions shall
apply to a taxpayer within the scope of
this revenue procedure that requests the
consent of the Commissioner under Rev.
Proc. 97–27 to change its method of ac-
counting to comply with § 1.263A–1T or
1.263A–2T for its first taxable year ending
on or after August 2, 2005:
(1) Notwithstanding the provisions of
§ 1.446–1(e)(3)(i) and section 5.01(1)(a)
of Rev. Proc. 97–27, a taxpayer may
submit a Form 3115 on or before January
31, 2006, or the date that is 30 days after
the end of the taxpayer’s taxable year for
which the change is requested, whichever
is later;
(2) The provisions of section 4.02 of
Rev. Proc. 97–27 that otherwise would
prevent certain taxpayers under examina-
tion, before appeals or before a federal
court from requesting the Commissioner’s
advance consent to change a method of ac-
counting shall not apply;
(3) A taxpayer that changes its method
of accounting for mixed service costs to
comply with § 1.263A–1T will not receive
audit protection under section 9 of Rev.
Proc. 97–27 if its method of accounting
for mixed service costs is an issue under
consideration (as defined in section 3.08 of
Rev. Proc. 97–27) at the time the Form
3115 is filed with the National Office;
(4) A taxpayer that changes its method
of accounting for additional § 263A costs
to comply with § 1.263A–2T will not re-
ceive audit protection under section 9 of
Rev. Proc. 97–27 if its method of account-
ing for additional § 263A costs is an issue
under consideration (as defined in section
3.08 of Rev. Proc. 97–27) at the time the
Form 3115 is filed with the National Of-
fice; and
(5) The change in method of account-
ing requires a § 481(a) adjustment. The
§ 481(a) adjustment period is two taxable
years for a net positive adjustment.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 97–27 and Rev. Proc.
2002–9 are modified.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Grant D. Anderson of the
Office of Associate Chief Counsel (In-
come Tax & Accounting). For further
information regarding this revenue pro-
cedure, contact Scott Rabinowitz at (202)
622–4970 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part 1, §§ 162, 263, 446, 461, 481;
1.167(a)–3(b), 1.263(a)–4, 1.263(a)–5, 1.446–1,
1.481–1.)
Rev. Proc. 2006–12
SECTION 1. PURPOSE
This revenue procedure provides the
exclusive administrative procedures un-
der which a taxpayer described in section
3 of this revenue procedure may obtain
automatic consent for a taxable year end-
ing on or after December 31, 2005, and
for any earlier taxable year that is after
the taxpayer’s second taxable year end-
ing on or after December 31, 2003, to
change to a method of accounting pro-
vided in §§ 1.263(a)–4, 1.263(a)–5, or
1.167(a)–3(b) of the Income Tax Regula-
tions (the “final regulations”).
SECTION 2. BACKGROUND
.01 On January 5, 2004, the Internal
Revenue Service and Treasury Department
published final regulations in theFederal
Register(T.D. 9107, 2004–1 C.B. 447
[69 FR 436]). Section 1.263(a)–4 pre-
scribes the extent to which taxpayers must
2006–3 I.R.B.310January 17, 2006

capitalize amounts paid or incurred to
acquire or create (or to facilitate the acqui-
sition or creation of) intangibles. Section
1.263(a)–5 prescribes the extent to which
taxpayers must capitalize amounts paid or
incurred to facilitate an acquisition of a
trade or business, a change in the capital
structure of a business entity, and certain
other transactions. Section 1.167(a)–3(b)
provides a safe harbor useful life for
certain intangible assets. The final regula-
tions under §§ 1.263(a)–4 and 1.263(a)–5
are effective for amounts paid or incurred
on or after December 31, 2003. The final
regulations under § 1.167(a)–3(b) are ef-
fective for intangible assets created on or
after December 31, 2003.
.02 Sections 1.263(a)–4(p) and
1.263(a)–5(n) provide that a taxpayer
seeking to change to a method of ac-
counting provided in the final regula-
tions must secure the consent of the
Commissioner in accordance with the
requirements of § 1.446–1(e). In addi-
tion, §§ 1.263(a)–4(p) and 1.263(a)–5(n)
provide that, for the taxpayer’s first tax-
able year ending on or after December
31, 2003, the taxpayer is granted the con-
sent of the Commissioner to change to a
method of accounting provided in the final
regulations, provided the taxpayer follows
the administrative procedures issued un-
der § 1.446–1(e)(3)(ii) for obtaining the
Commissioner’s automatic consent to a
change in accounting method (for further
guidance, for example, see Rev. Proc.
2002–9, 2002–1 C.B. 327, as modified
and clarified by Announcement 2002–17,
2002–1 C.B. 561, modified and amplified
by Rev. Proc. 2002–19, 2002–1 C.B.
696, and amplified, clarified, and modi-
fied by Rev. Proc. 2002–54, 2002–2 C.B.
432). The final regulations further provide
that any applicable § 481(a) adjustment
for a change to a method of accounting
provided in the final regulations for a
taxpayer’s first taxable year ending on or
after December 31, 2003, is determined by
taking into account only amounts paid or
incurred in taxable years ending on or after
January 24, 2002. The preamble to the fi-
nal regulations statesthat the Service may
issue additional guidance for utilizing the
automatic consent procedures to change
to a method of accounting provided in the
regulations.
.03 Section 1.446–1(e)(3)(ii) authorizes
the Commissioner to prescribe adminis-
trative procedures setting forth the limita-
tions, terms, and conditions deemed neces-
sary to permit a taxpayer to obtain consent
to change a method of accounting.
.04 Rev. Proc. 2002–9 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. 2002–9.
.05 Rev. Rul. 90–38, 1990–1 C.B.
57, provides that, if a taxpayer uses an er-
roneous method of accounting for two or
more consecutive taxable years, the tax-
payer has adopted a method of accounting.
The ruling further provides that a taxpayer
may 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.
.06 Rev. Proc. 2004–23, 2004–1 C.B.
785, and Rev. Proc. 2005–9, 2005–2
I.R.B. 303, as modified by Rev. Proc.
2005–17, 2005–13 I.R.B. 797, provide the
exclusive administrative procedures under
which a taxpayer may obtain automatic
consent for the taxpayer’s first and second
taxable years, respectively, ending on or
after December 31, 2003, to change to a
method of accounting provided in the fi-
nal regulations and, if desired, to change
to a method of utilizing the 3
1
/2month
rule authorized by § 1.461–4(d)(6)(ii) or
the recurring item exception authorized by
§ 1.461–5 in conjunction with a change to a
method of accounting provided in the final
regulations. Rev. Proc. 2004–23 and Rev.
Proc. 2005–9 provide, as a term and condi-
tion of obtaining the Commissioner’s con-
sent, that any applicable § 481(a) adjust-
ment take into account only amounts paid
or incurred in taxable years ending on or
after January 24, 2002.
.07 This revenue procedure constitutes
the exclusive guidance for utilizing the au-
tomatic consent procedures to change to a
method of accounting provided in the final
regulations for taxable years subsequent to
those covered by Rev. Proc. 2004–23 and
Rev. Proc. 2005–9 — specifically, a tax-
able year ending on or after December 31,
2005, and any earlier taxable year that is
after the taxpayer’s second taxable year
ending on or after December 31, 2003. As
in Rev. Proc. 2004–23 and Rev. Proc.
2005–9, a term and condition of obtain-
ing the Commissioner’s consent is that any
applicable § 481(a) adjustment take into
account only amounts paid or incurred in
taxable years ending on or after January
24, 2002. For any change in method of
accounting to which this revenue proce-
dure applies, a taxpayer may not file an
application for a change in method of ac-
counting under Rev. Proc. 97–27, 1997–1
C.B. 680, as modified and amplified by
Rev. Proc. 2002–19, 2002–1 C.B. 696,
as amplified and clarified by Rev. Proc.
2002–54, 2002–2 C.B. 432. See section
4.02(1) of Rev. Proc. 97–27.
SECTION 3. SCOPE
This revenue procedure applies to a tax-
payer that seeks, for a taxable year end-
ing on or after December 31, 2005, and for
any earlier taxable year that is after the tax-
payer’s second taxable year ending on or
after December 31, 2003, to change to a
method of accounting provided in the final
regulations.
SECTION 4. APPLICATION
.01In general. A taxpayer within the
scope of this revenue procedure and Rev.
Proc. 2002–9, as modified by this revenue
procedure, is, in accordance with section
6.01 of Rev. Proc. 2002–9, granted the
consent of the Commissioner to change to
a method of accounting provided in the
final regulations provided the taxpayer
follows the automatic change in method
of accounting provisions in Rev. Proc.
2002–9, with the following modifications:
(1) The taxpayer must prepare and file
Form 3115,Application for Change in Ac-
counting Method, in accordance with sec-
tion 4.02 of this revenue procedure;
(2) The taxpayer must compute any ap-
plicable § 481(a) adjustment and take such
adjustment into account in accordance
with section 5 of this revenue procedure;
and
(3) A taxpayer described in section
4.03(2) of this revenue procedure must
file one or more amended federal income
tax returns (amended returns) in accor-
dance with section 4.03(3), (4), or (5), as
applicable, and section 4.03(6), if applica-
ble, of this revenue procedure.
.02Form 3115. In preparing the Form
3115 referred to in section 4.01 of this rev-
enue procedure, a taxpayer must comply
with the following procedures:
January 17, 20063112006–3 I.R.B.

(1) The taxpayer may use one Form
3115 for all changes in method of account-
ing made pursuant to the final regulations;
(2) The taxpayer is required to complete
only the following information on Form
3115:
(a) The identification section of Page 1
(above Part I);
(b) The signature section at the bottom
of Page 1;
(c) Part I, Line 1(a). The designated au-
tomatic accounting method change num-
ber for changes in method of accounting
made pursuant to this revenue procedure is
No. “78”;
(d) Part II, all lines except lines 11, 13,
14, 15, and 17 (for purposes of completing
line 12, see section 5.02(2) of this revenue
procedure if the taxpayer is making more
than one change in method of accounting);
(e) Part IV, in accordance with section
5 of this revenue procedure; and
(f) Schedule E, if applicable;
(3) In addition to the other informa-
tion required on line 12 of Form 3115, the
taxpayer must include the citation to the
paragraph of the final regulations that pro-
vides for the proposed method of account-
ing for each item (e.g., § 1.263(a)–4(d)(6)
or § 1.263(a)–4(f));
(4) In addition to the other informa-
tion required on Schedule E of Form
3115 (if applicable), the taxpayer must
include a statement as to whether the
useful life is the safe harbor useful life
prescribed by § 1.167(a)–3(b)(1) or
§ 1.167(a)–3(b)(1)(iv) and, if the useful
life is the safe harbor useful life prescribed
by § 1.167(a)–3(b)(1), a statement ex-
plaining why the intangible asset does not
have a useful life the length of which can
be estimated with reasonable accuracy;
and
(5) A taxpayer that must file one or
more amended returns as provided in sec-
tion 4.03 of this revenue procedure to be
eligible to use the automatic consent pro-
cedures of this revenue procedure must at-
tach to the Form 3115 a written statement
signed under penalties of perjury confirm-
ing that the taxpayer has filed the amended
returns pursuant to section 4.03 of this rev-
enue procedure.
.03Unauthorized change in a preced-
ing year.
(1) A taxpayer may change a method
of accounting only with the consent of the
Commissioner. § 1.446–1(e)(2). A tax-
payer that changes a method of account-
ing without the consent of the Commis-
sioner has made an unauthorized change
in method of accounting. If a taxpayer
makes an unauthorized change in method
of accounting, the Service may adjust the
taxpayer’s taxable income during the ex-
amination of the taxpayer’s income tax
return for the taxable year the unautho-
rized change was made and for all affected
subsequent taxable years. In the notice
of proposed rulemaking that preceded
the publication of the final regulations
(REG–125638–01, 2003–1 C.B. 373 [67
FR 77701]), the Service and Treasury De-
partment advised taxpayers not to seek
to change a method of accounting in re-
liance on rules contained in the notice of
proposed rulemaking until the rules were
published as final regulations. The Service
and Treasury Department are aware that
some taxpayers have made an unautho-
rized change in method of accounting for
an item the treatment of which is provided
for in the final regulations. The Service
and Treasury Department have determined
that it is not appropriate for taxpayers that
have made an unauthorized change in
method of accounting for an item the
treatment of which is provided for in the
final regulations to obtain automatic con-
sent under this revenue procedure without
correcting such unauthorized change.
Therefore, a taxpayer that made an unau-
thorized change in method of accounting
for an item the treatment of which is pro-
vided for in the final regulations is eligible
to use the automatic consent procedures
provided in this revenue procedure only if
the taxpayer amends prior federal income
tax returns to correct the unauthorized
change in method of accounting. How-
ever, as a matter of administrative grace,
the Service and Treasury Department have
limited the application of this section 4.03
to certain taxpayers described in section
4.03(2) of this revenue procedure.
(2) This section 4.03 applies to a tax-
payer that —
(a) in a taxable year for which the due
date of the federal income tax return (in-
cluding extensions, regardless of whether
such extension is automatic and whether or
not actually requested) is after January 24,
2002 —
(i) made any unauthorized change in
method of accounting foran item the treat-
ment of which is provided for in the final
regulations; or
(ii) impermissibly changed the treat-
ment of an item that is provided for in
the final regulations for the taxable year
preceding the taxable year for which the
taxpayer is requesting to change to a
method of accounting provided in the final
regulations under this revenue procedure
and used such treatment on only one fed-
eral income tax return; or
(b) made an unauthorized change in
method of accounting to a method of ac-
counting that is provided in the final regu-
lations in a taxable year for which the due
date of the federal income tax return (in-
cluding extensions, regardless of whether
such extension is automatic and whether
or not actually requested) is on or before
January 24, 2002, if the taxpayer wishes
to use the automatic consent procedures
to obtain the Commissioner’s consent to
change to the same method of accounting
to which the taxpayer previously made the
unauthorized change.
(3) A taxpayer described in section
4.03(2)(a)(i) of this revenue procedure
is eligible to use the automatic consent
procedures to obtain the Commissioner’s
consent to change to a method of account-
ing provided in the final regulations only
if the taxpayer changes back to its prior
method of accounting (i.e.,themethod
of accounting used for an item prior to
making the unauthorized change for the
item) for each item referred to in section
4.03(2)(a)(i) of this revenue procedure by
amending its federal income tax returns
for all of the preceding taxable years in
which the unauthorized method (or meth-
ods) was used. See section 4.03(6) of this
revenue procedure if the period of limita-
tions has expired for the taxable year in
which the taxpayer made the unauthorized
change in method of accounting or for any
subsequent taxable year.
(4) A taxpayer described in section
4.03(2)(a)(ii) of this revenue procedure
is eligible to use the automatic consent
procedures to obtain the Commissioner’s
consent to change to a method of account-
ing provided in the final regulations only
if the taxpayer amends its federal income
tax return for the preceding taxable year
in which the unauthorized treatment was
used to change the treatment of each item
referred to in section 4.03(2)(a)(ii) of this
revenue procedure to a treatment consis-
2006–3 I.R.B.312January 17, 2006

tent with the taxpayer’s historic method of
accounting (i.e., the method of accounting
used for an item prior to changing the
treatment of the item).
(5) A taxpayer described in section
4.03(2)(b) of this revenue procedure is
eligible to use the automatic consent pro-
cedures to obtain the Commissioner’s
consent to change to the same method
of accounting provided in the final regu-
lations to which the taxpayer previously
made the unauthorized change only if the
taxpayer changes back to its prior method
of accounting for the item (i.e., the method
of accounting used for the item prior to
making the unauthorized change for the
item) by amending its federal income tax
returns for all of the preceding taxable
years in which the unauthorized method
was used. See section 4.03(6) of this
revenue procedure if the period of limita-
tions has expired forthe taxable year in
which the taxpayer made the unauthorized
change in method of accounting or for any
subsequent taxable year.
(6) For purposes of section 4.03(3) or
(5) of this revenue procedure, if the period
of limitations has expired for the taxable
year in which a taxpayer made the unau-
thorized change in method of accounting
or for any subsequent taxable year, the tax-
payer is eligible to use the automatic con-
sent procedures to change to a method of
accounting provided in the final regula-
tions only if the taxpayer changes back to
the prior method of accounting for the ear-
liest taxable year for which the statute of
limitation has not expired and that does
not precede a taxable year for which the
statute of limitations has expired (retroac-
tive year of change) by amending its fed-
eral income tax returns for the retroactive
year of change and all subsequent taxable
years in which the unauthorized method
(or methods) was used. The taxpayer must
take the entire amount of the § 481(a) ad-
justment attributable to the change back
to the prior method of accounting into ac-
count in the retroactive year of change.
The taxpayer must identify that § 481(a)
adjustment on its federal income tax return
for the retroactive year of change as result-
ing from a retroactive change in method of
accounting under section 4.03(6) of Rev.
Proc. 2006–12.
Example. X, a calendar year taxpayer, made an
unauthorized change to a method of accounting pro-
vided in the final regulations in 2001. X continued to
use its new method in all subsequent taxable years.
In February 2009, X decides to properly change to
that method under this revenue procedure for 2008.
At that time, the statute of limitations has expired for
X’s 2001, 2002, and 2004 federal income tax returns.
However, the statute of limitations on X’s 2003 tax
federal income tax return has not expired. Because
2005 is the earliest taxable year that does not precede
a taxable year for which the statute of limitations has
expired, pursuant to section 4.03(6) of this revenue
procedure, 2005 is the retroactive year of change. X
must file amended federal income tax returns for tax-
able years 2005, 2006 and 2007 to change back to the
method of accounting X used before its unauthorized
change in method of accounting in 2001. Further, X
must take the entire amount of the section 481(a) ad-
justment attributable to the change in method of ac-
counting back to X’s prior method into account in
2005.
(7) A taxpayer filing one or more
amended returns pursuant to section 4.03
of this revenue procedure must file the
amended returns on or before the date
the taxpayer files a Form 3115 under this
revenue procedure (including the copy of
Form 3115 filed with the national office).
For this purpose, a taxpayer under exami-
nation will be considered to have filed an
amended return by providing the amended
return to the examining agent.
(8) In accordance with § 1.446–
1(e)(3)(ii) and Rev. Rul. 90–38, con-
sent is hereby granted for a taxpayer
changing to a method of accounting pro-
vided in the final regulations under this
revenue procedure that is described in
section 4.03(2)(a)(i) or (b) of this revenue
procedure to file the amended returns re-
ferred to in section 4.03(3) or (5), and
section 4.03(6) of this revenue procedure,
as applicable, to retroactively change its
method of accounting. This consent is
granted for the taxable year for which the
taxpayer made the unauthorized change
or, if applicable, the retroactive year of
change pursuant to section 4.03(6) of this
revenue procedure, and for all subsequent
taxable years affected by the unauthorized
change.
.04Prior change. For purposes of
this revenue procedure, the 5-year prior
change scope limitation contained in sec-
tion 4.02(6) of Rev. Proc. 2002–9 is
modified. In applying the 5-year prior
change scope limitation contained in sec-
tion 4.02(6) of Rev. Proc. 2002–9, the
taxpayer does not take into account a
change in method of accounting provided
in the final regulations requested or made
for a taxable year ending on or before De-
cember 31, 2005. For example, a taxpayer
that applied for a change in method of
accounting provided in the final regula-
tions for its taxable year ended December
31, 2002, and withdrew its request or had
its request denied is not prohibited under
section 4.02(6) of Rev. Proc. 2002–9 from
obtaining automatic consent to change to a
method of accounting provided in the final
regulations under this revenue procedure
for its taxable year ended December 31,
2005.
SECTION 5. COMPUTATION OF
SECTION 481(a) ADJUSTMENT
.01In general. A taxpayer chang-
ing to a method of accounting provided
in the final regulations under this rev-
enue procedure is required to take into
account any applicable § 481(a) adjust-
ment as provided in §§ 1.263(a)–4(p)(3)
and 1.263(a)–5(n)(3). The § 481(a) ad-
justment is computed as of the first day
of the taxpayer’s taxable year of change
and, as provided in the final regulations,
takes into account only amounts paid or
incurred in taxable years ending on or
after January 24, 2002. Thus, the § 481(a)
adjustment is computed by taking into
account only amounts paid or incurred
in the period beginning with the first day
of the taxable year that includes January
24, 2002, and ending with the last day
of the last taxable year prior to the year
of change. The amount of the § 481(a)
adjustment must include (i) as a reduction
of taxable income, any amounts paid or
incurred in the period beginning with the
first day of the taxable year that includes
January 24, 2002, and ending with the last
day of the taxable year prior to the tax-
able year of change, that were capitalized
under the taxpayer’s present method of
accounting and are currently deductible
under the taxpayer’s proposed method
of accounting, reduced by the amount of
such capitalized costs recovered through
amortization or depreciation under the
taxpayer’s present method of accounting,
(ii) as an increase to taxable income, any
amounts paid or incurred in the period
beginning with the first day of the taxable
year that includes January 24, 2002, and
ending with the last day of the taxable
year prior to the taxable year of change,
that were currently deducted under the
taxpayer’s present method of accounting
and are capitalized under the taxpayer’s
January 17, 20063132006–3 I.R.B.

proposed method of accounting, reduced
by the amount of capitalized costs that
would have been recovered through amor-
tization or depreciation if the taxpayer’s
proposed method of accounting had been
applied in taxable years ending on or after
January 24, 2002, and (iii) as an increase
or a reduction to taxable income, as ap-
propriate, any other adjustments required
as a result of the change in method of
accounting. If under its present method
of accounting a taxpayer capitalized costs
incurred prior to the first taxable year that
includes January 24, 2002, the taxpayer
must continue to treat amortization or de-
preciation deductions attributable to those
costs in accordance with the taxpayer’s
present method of accounting. Thus, for
example, a taxpayer that files its federal
income tax return on a calendar year ba-
sis continues to amortize or depreciate
in 2005 an intangible created in 2001,
even though the taxpayer has changed to
a method of accounting provided in the
final regulations under which the entire
cost of the intangible would be currently
deductible if incurred in 2005. For taxpay-
ers who correct an unauthorized change in
a preceding year under section 4.03 of this
revenue procedure, the taxpayer’s present
method of accounting is the method used
by the taxpayer prior to making the unau-
thorized change.
.02Reporting the section 481(a) adjust-
ment on Form 3115.
(1)Netting. For purposes of determin-
ing the adjustment period under section
2.05(2) of Rev. Proc. 2002–9, the § 481(a)
adjustment is determined separately for
each change in method of accounting be-
ing made under this revenue procedure.
Thus, a positive adjustment attributable to
a change in one method may not be netted
against a negative adjustment attributable
to a change in another method. However,
in determining the adjustment attribut-
able to a change in method, a taxpayer
must net positive § 481(a) adjustments
and negative § 481(a) adjustments result-
ing from that change in method (e.g.,ifa
taxpayer changes to a method of applying
the 12-month rule to prepaid amounts,
the taxpayer must net the resulting nega-
tive § 481(a) adjustment with the positive
§ 481(a) adjustment that results from
including those amounts in inventory pur-
suant to the taxpayer’s existing § 263A
method of accounting for inventory).
(2)Itemized listing on Form 3115.The
taxpayer must include on Form 3115, Part
IV, line 25, the total § 481(a) adjustment
for all changes in methods of accounting
being made. If the taxpayer is making
more than one change in method of ac-
counting under the final regulations, the
taxpayer must include on an attachment to
Form 3115 —
(a) the information required by Part
IV, line 25 for each change in method of
accounting (including the amount of the
§ 481(a) adjustment for each change in
method of accounting);
(b) the information required by Part II,
line 12 of Form 3115 that is associated with
each change; and
(c) the citation to the paragraph of the
final regulations that provides for each
proposed method of accounting (e.g.,
§ 1.263(a)–4(d)(6) or § 1.263(a)–4(f)).
.03
Example: Y, a calendar year taxpayer that uses an
accrual method of accounting, is a service provider
not required to maintain inventories. Y wishes to
change to a method of accounting provided in the
final regulations for taxable year 2005. Y incurred
and capitalized $100x in taxable year 2001, $200x in
taxable year 2002, $250x in taxable year 2003, and
$300x in taxable year 2004. In addition, Y incurred
$330x in taxable year 2005. The $100x, $200x,
$250x, and $300x capitalized and depreciated by
Y in 2001, 2002, 2003, and 2004 all relate to the
same method of accounting and would be currently
deductible under the final regulations if the amounts
had been incurred on or after December 31, 2003.
Y claimed a depreciation deduction of $10x in each
of the taxable years 2001, 2002, 2003, and 2004
with respect to the $100x incurred and capitalized in
2001, a depreciation deduction of $20x in each of the
taxable years 2002, 2003, and 2004 with respect to
the $200x incurred and capitalized in 2002, a depre-
ciation deduction of $25x in each of the taxable years
2003 and 2004 with respect to the $250x incurred
and capitalized in 2003, and a depreciation deduction
of $30x in taxable year 2004 with respect to the
$300x incurred and capitalized in 2004. For taxable
year 2005, Y may apply for an automatic change
in method of accounting with respect to the method
under which the amounts had been capitalized. Y’s
section 481(a) adjustment is a decrease in income of
$610x ($140x relating to amounts capitalized in 2002
($200x - $60 ($20 for each of 2002, 2003, and 2004))
+ $200x relating to amounts capitalized in 2003
($250x - $50x ($25 for each of 2003 and 2004)) +
270x relating to amounts capitalized in 2004 ($300x
- $30x)). Y must continue to use its present method
of accounting for the amount capitalized in 2001. Y
uses its new method of accounting for the amount
incurred in 2005.
SECTION 6. HOW THIS REVENUE
PROCEDURE DIFFERS FROM REV.
PROC. 2005–9
.01 Rev. Proc. 2005–9 applies to a tax-
payer’s second taxable year ending on or
after December 31, 2003. This revenue
procedure applies to a taxable year ending
on or after December 31, 2005, and any
earlier taxable year that is after the tax-
payer’s second taxable year ending on or
after December 31, 2003.
.02 Rev. Proc. 2005–9 grants tax-
payers the Commissioner’s consent to
change to a method of accounting uti-
lizing the 3
1
/2month rule authorized by
§ 1.461–4(d)(6)(ii) or to utilize the re-
curring item exception authorized by
§ 1.461–5 for the item for which the tax-
payer is simultaneously changing to a
method of accounting provided in the fi-
nal regulations. This revenue procedure
provides consent only for a change to a
method of accounting provided in the final
regulations. This revenue procedure does
not provide consent for a change in method
utilizing the 3
1
/2month rule or the recur-
ring item exception in conjunction with a
change to a method provided by the final
regulations. Thus, for a change in method
of accounting utilizing the 3
1
/2month rule
or the recurring item exception in conjunc-
tion with a change to a method provided
by the final regulations, a taxpayer must
file two separate applications for a change
in method of accounting — an application
for a change in method of accounting un-
der this revenue procedure to change to the
method of accounting provided in the final
regulations, and a separate application for
a change in method of accounting under
Rev. Proc. 97–27 for a change in method
of accounting utilizing the 3
1
/2month rule
or the recurring item exception.
.03 Rev. Proc. 2005–9, as modi-
fied by Rev. Proc. 2005–17, waives the
5-year prior change scope limitation con-
tained in section 4.02(6) of Rev. Proc.
2002–9. This revenue procedure modi-
fies the waiver of the 5-year prior change
scope limitation to restrict such waiver to
prior requests for, or changes in, methods
of accounting provided in the final reg-
ulations for a taxable year ending on or
before December 31, 2005. See section
4.04 of this revenue procedure.
.04 Unlike Rev. Proc. 2005–9, this
revenue procedure provides procedures to
2006–3 I.R.B.314January 17, 2006

change back to the taxpayer’s method of
accounting used for an item prior to mak-
ing an unauthorized change when the pe-
riod of limitations has expired for one or
more affected taxable years. See section
4.03(6) of this revenue procedure.
.05. This revenue procedure eliminates
the requirement to submit the copy of
Form 3115 to a special address. Taxpay-
ers must submit the copy of Form 3115
to the address for taxpayers filing under
automatic change request procedures. See
the current Instructions for Form 3115 for
the address.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 2002–9 is modified
and amplified to include these automatic
changes in method of accounting to meth-
ods provided in the final regulations in sec-
tion 3 of the APPENDIX.
.02 Rev. Proc. 2004–23 and Rev. Proc.
2005–9 are superseded for taxable years
ending on or after December 31, 2005, and
for any earlier taxable year that is after the
taxpayer’s second taxable year ending on
or after December 31, 2003.
.03 Rev. Proc. 97–27 is modified and
amplified to state that, for changes to meth-
ods of accounting provided in the final reg-
ulations, any applicable § 481(a) adjust-
ment takes into account only amounts paid
or incurred in taxable years ending on or
after January 24, 2002.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for
a taxable year ending on or after Decem-
ber 31, 2005, and for any earlier taxable
year that is after the taxpayer’s second tax-
able year ending on or after December 31,
2003.
SECTION 9. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Grace Matuszeski of the As-
sociate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, call
Ms. Matuszeski at (202) 622–7900 (not a
toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 408 and 408A; § 1.408A–4T.)
Rev. Proc. 2006–13
SECTION 1. PURPOSE
This revenue procedure provides safe
harbor methods that are permitted to be
used in determining the fair market value
of an annuity contract for purposes of de-
termining the amount includible in gross
income as a result of the conversion of a
traditional IRA to a Roth IRA, as described
in Q&A–14 of § 1.408A–4T of the tempo-
rary regulations. The safe harbor method
provided in Section 3 of this revenue pro-
cedure is available to determine the fair
market value of an annuity contract that
has not yet been annuitized with respect
to any Roth IRA conversion described in
A–14 of § 1.408A–4T until further guid-
ance is issued. The simplified safe harbor
method provided in Section 4 of this rev-
enue procedure is available where such a
conversion occurs before January 1, 2006.
SECTION 2. BACKGROUND
Under § 408(d) of the Code and A–7 of
§ 1.408A–4 of the regulations, any amount
that is converted from a traditional IRA to
a Roth IRA is includible in gross income as
a distribution for the taxable year in which
the amount is distributed or transferred
from the traditional IRA. In the case of a
conversion involving property, the conver-
sion amount generally is the fair market
value of the property on the date of distri-
bution or the date the property is treated as
distributed from the traditional IRA. Under
A–1 of § 1.408A–7, any amount converted
from a traditional IRA to a Roth IRA is
treated as a distribution for which a Form
1099-R must be filed by the trustee main-
taining the traditional IRA.
Temporary regulations under § 408A
regarding the valuation of annuity con-
tracts upon conversion of a traditional
IRA were published in the Federal Reg-
ister on August 22, 2005 (T.D. 9220,
2005–39 I.R.B. 596 [70 FR 48868]). Sec-
tion 1.408A–4T, A–14 of the temporary
regulations states that, when a traditional
individual retirement annuity is converted
to a Roth IRA, the amount that is treated as
distributed is the fair market value of the
annuity contract on the date the annuity
contract is converted. Similarly, when a
traditional individual retirement account
holds an annuity contract as an account
asset and the account is converted to a
Roth IRA, the amount that is treated as
distributed with respect to the annuity con-
tract is the fair market value of the annuity
contract on the date the annuity contract is
distributed or treated as distributed from
the traditional IRA.
A–14 of § 1.408A–4T does not apply to
a conversion of a traditional IRA where the
conversion is accomplished by the com-
plete surrender of an annuity contract for
its cash value and the reinvestment of the
cash proceeds in a Roth IRA, but only if
the surrender extinguishes all benefits and
other characteristics of the contract. A–14
of § 1.408A–4T does not apply in that cir-
cumstance because the contract is not be-
ing converted. Instead, the cash from the
surrendered contract is reinvested in the
Roth IRA.
A–14 of § 1.408A–4T also provides
rules for determining the fair market value
of an annuity contract in the case of a con-
version. These rules vary depending on
certain factors, including whether the con-
version occurs soon after the contract was
sold, whether there has been a material
change in market conditions, and whether
future premiums are to be paid. A–14 of
§ 1.408A–4T applies to any conversion
where an annuity contract is distributed
or treated as distributed from a traditional
IRA on or after August 19, 2005. As indi-
cated in the preamble to the temporary reg-
ulations, no implication is intended con-
cerning whether or not a rule adopted in
the regulations is applicable law for earlier
conversions.
The temporary regulations also provide
authority for the Commissioner to issue
additional guidance regarding the fair mar-
ket value of an annuity contract, includ-
ingformulastobeusedindeterminingfair
market value. The Service and Treasury
requested and received comments regard-
ing this anticipated guidance. Commenta-
tors indicated that a more specific method-
ology for valuing the annuity contracts is
needed and noted that they are currently
implementing the method under A–12 of
§ 1.401(a)(9)–6 of the regulations for valu-
ing annuity contracts that have not yet been
annuitized.
January 17, 20063152006–3 I.R.B.

Under A–12 of § 1.401(a)(9)–6, an
employee’s entire interest under an an-
nuity contract that has not yet been an-
nuitized (which is used to determine the
employee’s required minimum distribu-
tion) is the sum of the following: (1) the
dollar amount credited to the employee
or beneficiary under the contract (which
may not be reduced to reflect any surren-
der charges under the contract) and (2)
the actuarial present value of any addi-
tional benefits (such as survivor benefits
in excess of the account balance, any guar-
anteed minimum benefits, and any charges
that are expected to be refunded, rebated
or otherwise reversed at a later date) that
will be provided under the contract.
For this purpose, the actuarial present
value of any additional benefits is to be
determined using reasonable actuarial
assumptions, including reasonable as-
sumptions as to future distributions, and
without regard to an individual’s health.
However, paragraph (c)(1) of A–12 of
§ 1.401(a)(9)–6 provides that the actuarial
present value of the additional benefits
may be disregarded if: (1) the sum of the
dollar amount credited to the employee
or beneficiary under the contract and the
actuarial present value of the additional
benefits is no more than 120 percent of the
dollar amount credited to the employee
or beneficiary under the contract and (2)
the additional benefits satisfy certain other
requirements. Also, paragraph (c)(2) of
A–12 of § 1.401(a)(9)–6 provides that the
actuarial value of the right to receive a
final payment upon death that does not ex-
ceed the excess of the premiums paid less
the amount of prior distributions may also
be disregarded if it is the only additional
benefit under the contract. Because some
benefits may be disregarded, the method-
ology of A–12 of § 1.401(a)(9)–6 does not
always reflect the full value of all of the
benefits under the contract.
SECTION 3. SAFE HARBOR
METHOD FOR ROTH IRA
CONVERSIONS
The Service and Treasury recognize
that it may be difficult to determine the
fair market value of an annuity contract
under the temporary regulations. More-
over, the Service and Treasury believe it
is appropriate to permit the use of a mod-
ified version of the methodology applied
under A–12 of § 1.401(a)(9)–6 as a safe
harbor method to be used in determining
the fair market value of such an annuity
contract. Accordingly, this revenue proce-
dure provides that, until further guidance
is issued, for purposes of determining the
amount includible in gross income as a
result of the conversion of a traditional
IRA to a Roth IRA as described in A–14
of § 1.408A–4T, the fair market value of
an annuity contract that has not yet been
annuitized is permitted to be determined
using the methodology provided in A–12
of § 1.401(a)(9)–6 with the following
modifications:
(1) All front-end loads and other non-
recurring charges assessed in the twelve
months immediately preceding the conver-
sion must be added to the account value.
(2) Future distributions are not to be
assumedinthedeterminationoftheactu-
arial present value of additional benefits.
(3) The exclusions provided under
paragraphs (c)(1) and (c)(2) of A–12 of
§ 1.401(a)(9)–6 are not to be taken into
account.
SECTION 4. SIMPLIFIED SAFE
HARBOR METHOD FOR PRE–2006
ROTH IRA CONVERSIONS
The Service and Treasury recognize
that Forms 1099-R must soon be issued
for Roth IRA conversions occurring in
2005. Accordingly, this section 4 provides
that, in the case of a Roth IRA conver-
sion where an annuity contract that has
not yet been annuitizedis distributed or
treated as distributed before January 1,
2006, for purposes of determining the
amount includible in gross income as a
result of the conversion of a traditional
IRA to a Roth IRA as described in A–14
of § 1.408A–4T, the fair market value of
the contract is permitted to be determined
using the methodology provided in A–12
of § 1.401(a)(9)–6 except that all front-end
loads and other non-recurring charges as-
sessed in the twelve months immediately
preceding the conversion must be added
to the account value.
DRAFTING INFORMATION
The principal authors of this rev-
enue procedure are Larry Isaacs and
Robert Walsh of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this revenue procedure, please contact the
Service’s taxpayer assistance telephone
service between the hours of 8:30 a.m.
and 4:30 p.m. Eastern time, Monday
through Friday, by calling 800–829–1040
(a toll-free number). Mr. Isaacs and
Mr. Walsh may be reached at (202)
283–9888 (not a toll-free number).
2006–3 I.R.B.316January 17, 2006

Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Guidance Necessary to
Facilitate Electronic Tax
Administration-Updating of
Section 7216 Regulations
REG–137243–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations to update the rules re-
garding the disclosure and use of tax re-
turn information by tax return preparers.
The proposed regulations announce new
and additional rules for taxpayers to con-
sent electronically to the disclosure or use
of their tax return information by tax re-
turn preparers. The proposed rules provide
guidelines for tax return preparers using
or disclosing information obtained in the
process of preparing income tax returns.
DATES: Written or electronically gener-
ated comments must be received by March
8, 2006.
Outlines of topics to be discussed at
the public hearing scheduled for April 4,
2006, in the Auditorium of the Internal
Revenue Building at 1111 Constitution Av-
enue, NW, Washington, DC 20224, must
be received by March 14, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–137243–02), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–137243–02),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC, or sent electronically, via the IRS
Internet site athttp://www.irs.gov/regs
or via the Federal eRulemaking Portal
athttp://www.regulations.gov(IRS and
REG–137243–02). The public hearing
will be held in the IRS Auditorium, Inter-
nal Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Dillon Taylor, at (202) 622–4940;
concerning submissions of comments,
LaNita Van Dyke of the Publications and
Regulations Branch at (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Regulations on Pro-
cedure and Administration (26 CFR Part
301) under section 7216 of the Internal
Revenue Code (Code). Section 7216
imposes criminal penalties on tax return
preparers who make unauthorized disclo-
sures or uses of information furnished to
them in connection with the preparation of
an income tax return. In addition, tax re-
turn preparers are subject to civil penalties
under section 6713 for disclosure or use of
this information unless an exception under
the rules of section 7216(b) applies to the
disclosure or use.
Section 7216 was enacted by section
316 of the Revenue Act of 1971, Public
Law 92–178 (85 Stat. 529, 1971). In
1988, Congress modified the section by
limiting the criminal sanction to knowing
or reckless unauthorized disclosures. Pub-
lic Law 100–647, (102 Stat. 3749, 1988).
At the same time, Congress enacted the
civil penalty that is now found in section
6713. Public Law 100–647, §6242(a) (102
Stat. 3759, 1988). In 1989, Congress fur-
ther modified section 7216, directing the
Treasury Department to issue regulations
permitting disclosures of tax return infor-
mation for quality or peer reviews. Pub-
lic Law 101–239, 7739(a) (102 Stat. 3759,
1989).
The Treasury Department and the IRS
proposed regulations under section 7216
on December 20, 1972 (37 FR 28070).
Final regulations were issued on March
29, 1974 (T.D. 7310, 1974–1 C.B. 348 [39
FR 11537]). These regulations are divided
into three parts: section 301.7216–1 for
general provisions and definitions; section
301.7216–2 for disclosures and uses that
do not require formal taxpayer consent;
and section 301.7216–3 for disclosures
and uses that require formal taxpayer con-
sent. Since the regulations were adopted
in 1974, the Treasury Department and the
IRS have amended §301.7216–2 on occa-
sion, but §§301.7216–1 and 301.7216–3
have remained unchanged.
The current regulations were written in
a paper filing era. They do not address cur-
rent common industry practices, such as
electronic preparationorfilingoftaxre-
turns. The regulations are silent on tax-
payers’ consent to the disclosure or use of
tax return information in an electronic en-
vironment. The proposed regulations ad-
dress these issues.
The proposed regulations also contain
other modifications to reflect the princi-
ple that taxpayers may provide knowing,
informed, and voluntary consent to a tax
return preparer’s use of tax return infor-
mation for purposes other than tax return
preparation. While the ability of a tax re-
turn preparer to solicit consent from a tax-
payer remains limited under certain cir-
cumstances, such as when the taxpayer has
already rejected a substantially similar re-
quest for consent, these regulations allow
a tax return preparer to solicit a taxpayer’s
consent to use tax return information under
certain circumstances that the existing reg-
ulations currently prohibit. For example,
these proposed regulations allow tax return
preparers to obtain consents to use tax re-
turn information for solicitation of services
or facilities furnished by any person rather
than limiting solicitations to the services or
facilities offered by the tax return preparer
or member of the tax return preparer’s “af-
filiated group.”
Concurrently, with publication of these
proposed regulations, the IRS is publish-
ing a notice (Notice 2005–93, 2005–52
I.R.B. 1204) containing a proposed rev-
enue procedure that would provide guid-
ance to tax return preparers on the format
and content of consents to disclose and
consents to use tax return information un-
der §301.7216–3. The proposed revenue
procedure would also provide specific
guidance for electronic signatures when a
taxpayer executes an electronic consent to
January 17, 20063172006–3 I.R.B.

the disclosure or use of the taxpayer’s tax
return information.
Explanation of Provisions
1.§301.7216–1 Penalty for Disclosure or
Use of Tax Return Information.
The regulations revise and clarify sev-
eral definitions and clarify the scope of the
rules. For example, section 7216, rather
than section 7701(a)(36) (defining income
tax return preparer) or the privacy pro-
visions of Title V of the Gramm-Leach-
Bliley Act, Public Law 106–102 (113 Stat.
1338, GLBA), governs the disclosure and
use of tax return information by tax return
preparers. The GLBA governs the use and
disclosure of customer information by fi-
nancial institutions. Any requirements of
the GLBA that may be applicable to tax
return preparers do not supersede, alter, or
affect the requirements of section 7216 and
§§301.7216–1 through 301.7216–3. Simi-
larly, the requirements of section 7216 and
§§301.7216–1 through 301.7216–3 do not
nullify any requirements or restrictions of
the GLBA, which are in addition to the re-
quirements or restrictions of section 7216
and §§301.7216–1 through 301.7216–3.
A.Tax return preparer
The definition oftax return prepareris
revised to distinguish it from the definition
of income tax return preparer in section
7701(a)(36); tax return preparers subject
to section 7216 include a broader group
of persons than income tax return prepar-
ers defined in section 7701(a)(36). Some
persons who are excluded from the def-
inition of an income tax return preparer
under section 7701(a)(36), for example,
persons providing secretarial services, are
tax return preparers under section 7216, as
defined by §301.7216–1(b)(2). Some of
the examples and exclusions have been re-
vised to address common scenarios.
B.Tax return information
The revised definition oftax return in-
formationclarifies that the term encom-
passes a broader range of information than
what taxpayers literally furnish to a tax re-
turn preparer. The taxpayer’s entitlement
to a refund and the amount of the refund
are both tax return information. Similarly,
information the IRS furnishes a tax return
preparer with respect to the processing of
a return, including the acknowledgment
of acceptance of an electronically-filed re-
turn, is tax return information, even though
the taxpayer does not communicate that in-
formationtothetaxreturnpreparer.
C.Use and disclosure
The proposed regulations add a defini-
tion of the term “use” to clarify applica-
tion of that term in the context of electronic
preparation and filing. The proposed reg-
ulations add a definition of “disclosure” to
clarify that the term should be broadly con-
strued. The proposed regulations provide
that to the extent that a taxpayer’s use of a
hyperlink results in the transmission of tax
return information, that transmission of tax
return information is a disclosure.
2.§301.7216–2 Permissible Disclosures
or Uses Without Consent of the Taxpayer.
Proposed §301.7216–2 provides ex-
ceptions to the general rule of section
7216(a) that imposes criminal penalties
on tax return preparers who make unau-
thorized disclosures or uses of tax return
information. A tax return preparer may
disclose or use tax return information
as §301.7216–2 permits without obtain-
ing consent from a taxpayer. A number
of subsections dealing with disclosures
or uses without consent are proposed in
substantially their current form. Some
subsections are renumbered to achieve
a more logical ordering, and some sub-
sections have been proposed with minor
changes to the current language to refine
the rules or promote clarity. Some sub-
sections addressing disclosures between
tax return preparers have been changed to
reflect new rules.
A.Proposed changes to specifically
account for technological, legal, and
other developments
(1) Proposed §301.7216–2(b) provides
that disclosures to the IRS that will facil-
itate electronic tax administration are au-
thorized without the taxpayer’s prior writ-
ten consent. Disclosures that will facili-
tate electronic tax administration include
IRS requests for tax return information to
investigate compliance with electronic fil-
ing rules or to evaluate the effectiveness of
electronic filing programs.
(2) Proposed §301.7216–2(d) expands
current §301.7216–2(h), which authorizes
disclosures to tax return preparers who
process tax return information. The pro-
posed regulations provide that disclosures
between tax return preparers are autho-
rized when the disclosures (i) assist in the
preparation of a return; (ii) as long as the
services provided by the recipient of the
disclosure are not substantive determi-
nations or advice affecting a taxpayer’s
reported tax liability; and (iii) as long as
the disclosure is to a tax return preparer
located in the United States. The pro-
posed regulations clarify that disclosures
to other tax return preparers for substan-
tive determinations or advice require the
taxpayer’s prior written consent. The pro-
posed regulations also provide that tax
return preparers’ disclosures to other tax
return preparers located outside of the
United States require the taxpayer’s prior
written consent. The written consent for
disclosure of tax return information out-
side of the United States is needed because
it is difficult for the Secretary to pursue a
criminal action under section 7216 against
a tax return preparer located outside of the
United States or to collect a civil penalty
assessed under section 6713 from a tax
return preparer located outside the United
States. Proposed §301.7216–2(d) also
provides that a tax return preparer may
disclose tax return information to contrac-
tors performing certain auxiliary services
in connection with tax return prepara-
tion. For the disclosure to fall within this
exception, the tax return preparer must
present the individuals receiving the dis-
closure with a written notice informing
them that section 7216 applies to them and
describes the requirements and penalties
of section 7216. Contractors to whom
disclosures are made pursuant to this pro-
vision are tax return preparers pursuant to
§301.7216–1(b)(2)(i)(D).
(3) Proposed §301.7216–2(f) amends
current §301.7216–2(c), regarding disclo-
sures pursuant to an order of a court or an
administrative order, demand, summons
or subpoena issued by a Federal or State
agency, by also authorizing disclosures
made pursuant to a subpoena issued by
the United States Congress. In addition,
the IRS is aware that most state accoun-
tancy boards work in conjunction with the
American Institute of Certified Public Ac-
countants’ (AICPA) Professional Ethics
2006–3 I.R.B.318January 17, 2006

Executive Committee,and state and local
bar associations to investigate potential
ethical violations by certified public ac-
countants who are members of the AICPA.
The proposed amendment authorizes dis-
closures to the AICPA made pursuant to
an ethics violation investigation of the tax
return preparer. The proposed amendment
authorizes disclosures made pursuant to a
formal demand from the Public Company
Accounting Oversight Board.
(4) Proposed §301.7216–2(g), govern-
ing disclosures for use in Treasury investi-
gations or court proceedings, amends cur-
rent §301.7216–2(d), which limits disclo-
sures to IRS investigations and court pro-
ceedings. This change is necessary be-
cause a function within the Treasury De-
partment, but outside of the IRS, may han-
dle some investigations that will require a
disclosure of tax return information. Dis-
closures are also authorized to officers of a
court in court proceedings in which a tax-
payer-client of a return preparer is a party.
The proposed regulations clarify that the
tax return preparer need not be a party to
a court proceeding for a disclosure to be
authorized underthis section.
(5) Proposed §301.7216–2(k) expands
the current provision in §301.7216–2(k)
governing the preparation or audit of State
or local tax returns to allow the use of tax
return information to assist in the prepara-
tion of any tax return of the taxpayer under
the law of a country other than the United
States. Disclosures are also expanded to
allow for the preparation of tax returns un-
der the law of another country to the same
extent that disclosures are allowed for the
preparation and filing of a Federal tax re-
turn.
(6) Proposed §301.7216–2(o) addresses
the use of tax return information to prepare
statistical compilations and the use of the
statistical compilations themselves. Rev.
Rul. 79–114, 1979–1 C.B. 441, holds that
the current regulations prohibit a tax return
preparer’s use of tax return information
to prepare anonymousstatistical compila-
tions unless the affected taxpayers indi-
vidually consent. Section 301.7216–2(o)
will obsolete Rev. Rul. 79–114. Sec-
tion 301.7216–2(o) will permit the use of
tax return information to prepare anony-
mous statistical compilations for limited
purposes related to management or support
of the tax return preparer’s business. The
taxreturninformationwillremainpro-
tected from any other use and disclosure
outside the limited purposes of this pro-
posed section.
B.Other changes to existing provisions
(1) Proposed §301.7216–2(h) amends
current §301.7216–2(e), which authorizes
attorneys and accountants to disclose tax
return information to third parties in the
normal course of rendering legal or ac-
counting services if the taxpayer expressly
or impliedly consents to the disclosure.
The proposed regulations remove the re-
quirement that the taxpayer’s express or
implied consent is necessary before these
types of disclosures can be made because
implied consent would exist in virtually
every situation when an attorney or ac-
countant is required to disclose tax return
information to a third party in the normal
course of providing legal or accounting
services to a taxpayer. The proposed reg-
ulations provide that these disclosures are
authorized unless the taxpayer directs oth-
erwise.
(2) Proposed §301.7216–2(i) amends
current §301.7216–2(f), which provides
that corporate fiduciaries are authorized
to disclose tax return information to a
taxpayer’s attorney, accountant, or invest-
ment advisor only with the taxpayer’s
express or implied consent. As with
disclosures made by attorneys and ac-
countants, a taxpayer will generally give
implied consent to disclosures by corpo-
rate fiduciaries to a taxpayer’s attorney,
accountant, or investment advisor. The
proposed regulations remove the express
or implied consent requirement, and pro-
vide instead that disclosures are authorized
unless the taxpayer directs otherwise.
(3) Proposed §301.7216–2(c) amends
current §301.7216–2(i), regarding disclo-
sures by an officer, employee, or member
of a tax return preparer to another officer,
employee, or member of the same tax re-
turn preparer to perform services that assist
in the preparation of, or assist in provid-
ing auxiliary services in connection with
the preparation of, the tax return of a tax-
payer. The proposed regulations provide
that these disclosures or uses are autho-
rized without the taxpayer’s written con-
sent only if the officer, employee, or mem-
ber to whom the information is disclosed
is located within the United States. The
written consent for disclosure of tax return
information outside of the United States is
needed because it is difficult for the Secre-
tary to pursue a criminal action under sec-
tion 7216 against a tax return preparer lo-
cated outside of the United States or to col-
lect a civil penalty assessed under section
6713 from a tax return preparer located
outside the United States. Therefore, a tax-
payer’s written consent is required before
a tax return preparer can disclose a tax-
payer’s tax return information to another
tax return preparer located outside of the
United States.
(4) Proposed §301.7216–2(q) amends
current §301.7216–2(n), regarding disclo-
sures to report the commission of a crime,
by clarifying that penalties for disclosure
shall not apply to disclosures necessary to
report a crime, nor to any disclosures nec-
essary for the investigation and prosecu-
tion of the crime.
3.Proposed §301.7216–3: Disclosures
and Uses Authorized by Taxpayer
Consent.
Significant revisions are proposed un-
der §301.7216–3 to address a number
of issues concerning the application of
these rules in the context of electronic
return preparation and filing. The Trea-
sury Department and the IRS propose
these amendments to protect taxpayers’
tax return information, and to ensure that
taxpayers are fully informed when provid-
ing consent to disclose or use tax return
information.
A.Restrictions regarding the offering of
certain services
The current regulations restrict use of
tax return information for the solicitation
of services or facilities in matters not re-
latedtotheIRStothose“currentlyof-
fered” by the tax return preparer or mem-
bers of the tax return preparer’s “affili-
ated group,” within the meaning of sec-
tion 1504. Because taxpayers must con-
sent to any use or disclosure connected
with the solicitation, taxpayer privacy in-
terests are adequately protected regardless
of whether a service is currently offered or
whether a business offering a service to the
taxpayer is a member of a tax return pre-
parer’s affiliated group. The currently-of-
fered and affiliated-group rules restrict the
ability of taxpayers to control and direct
the use of their own tax return information
January 17, 20063192006–3 I.R.B.

as they see fit. The proposed regulations
adopt an approach that ensures taxpayers
are provided with a meaningful opportu-
nity to consent to the use and disclosure
of their tax return information. Accord-
ingly, the proposed rules revoke the affil-
iated-group and currently-offered restric-
tions.
The current regulations do not place
limitsontaxreturnpreparers’abilitytoob-
tain consents to use tax return information
to solicit business in matters related to the
IRS. The proposed regulations remove the
distinction between matters related to the
IRS and matters not related to the IRS, and
thereby make uniformthe requirements re-
garding consents to use tax return informa-
tion to solicit business.
B.Form of consent
The proposed regulations provide that
the IRS may provide guidance, by rev-
enue procedure, on the form and content
of a taxpayer’s consent. The proposed
regulations also allow a taxpayer to use
a single document to consent to multi-
ple uses of their tax return information,
or use a single document to consent to
multiple disclosures of their tax return in-
formation, provided certain requirements
are met. Although the proposed regula-
tions permit a single document to authorize
multiple uses or multiple disclosures, the
taxpayer must affirm separately each use
or disclosure within the single document.
In addition, because the Treasury Depart-
ment and the IRS believe taxpayers should
be alerted to the significant difference be-
tween consenting to disclosures to third
parties and consenting to uses of tax re-
turn information by their tax return prepar-
ers, the proposed regulations provide that
a single document cannot authorize both
uses and disclosures; rather, one document
must authorize uses and another separate
document must authorize disclosures.
Proposed Effective Date
These regulations are proposed to apply
on the date that is 30 days after the final
regulations are published in theFederal
Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f), this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact.
Comments and Public Hearing
Before these regulations are adopted
as final regulations, consideration will be
giventoanywrittencommentsandelec-
tronic comments thatare submitted timely
to the IRS. The Treasury Department and
the IRS specifically request comments
on the following: whether it is necessary
to have an exception to section 7216 for
disclosures made to contractors as pro-
vided in proposed §301.7216–2(d)(2),
and, if so, how should the regulations
protect the information from being used
or disclosed by the contractors; and what
should constitute an electronic signature
on electronic consents. In addition, the
IRS and Treasury Department specifically
request comments on the clarity of the
proposed regulations and how they can be
made easier to understand. All comments
will be available for public inspection and
copying.
The public hearing is scheduled for
April 4, 2006, at 10 a.m., and will be
held in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
Constitution Avenue entrance. All visitors
must present photo identification to enter
the building. Visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
March 8, 2006, and submit an outline of
the topics to be discussed and the time
to be devoted to each topic by March 14,
2006. A period of 10 minutes will be al-
located to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receivingoutlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of the regulations
are Brinton T. Warren, Bridget E. Tombul,
and Dillon Taylor of the Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division.
*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301— PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7216–0 is added to
read as follows:
§301.7216–0 Table of contents.
This section lists captions contained in
§§301.7216–1 through 301.7216–3.
§301.7216–1 Penalty for disclosure or use
of tax return information.
(a) In general.
(b) Definitions.
(c) Gramm-Leach-Bliley Act.
(d) Effective date.
§301.7216–2 Permissible disclosures or
uses without consent of the taxpayer.
(a) Disclosure pursuant to other provi-
sions of Internal Revenue Code.
(b) Disclosure to facilitate electronic
tax administration.
(c) Disclosures or uses for preparation
of a taxpayer’s return.
2006–3 I.R.B.320January 17, 2006

(d) Disclosures to other tax return pre-
parers.
(e) Disclosure or use of information in
the case of related taxpayers.
(f) Disclosure pursuanttoanorderof
a court, or an administrative order, a de-
mand, summons or subpoena which is
issued in the performance of its duties by a
Federal or State agency, the United States
Congress, a professional ethics board, or
the Public Company Accounting Over-
sight Board.
(g) Disclosure for use in Treasury in-
vestigations or court proceedings.
(h) Certain disclosures by attorneys and
accountants.
(i) Corporate fiduciaries.
(j) Disclosure to taxpayer’s fiduciary.
(k) Disclosure or use of information in
preparation or audit of State or local tax
returns or assisting a taxpayer with foreign
country tax obligations.
(l) Payment of tax preparation services.
(m) Retention of records.
(n) Lists for solicitation of tax return
business.
(o) Producing statistical information
in connection with tax return preparation
business.
(p) Disclosure or use of information for
quality or peer reviews.
(q) Disclosure to report the commission
of a crime.
(r) Disclosure of tax return information
due to a tax return preparer’s incapacity or
death.
(s) Effective date.
§301.7216–3 Disclosure or use permitted
only with the taxpayer’s consent.
(a) In general.
(b) Timing requirements and limita-
tions.
(c) Special rules.
(d) Permissible disclosures to third par-
ties at the request of the taxpayer.
(e) Effective date.
Par. 3. Section 301.7216–1 is revised
to read as follows:
§301.7216–1 Penalty for disclosure or use
of tax return information.
(a)In general. Section 7216(a) pre-
scribes a criminal penalty for tax return
preparers who knowingly or recklessly
disclose or use tax return information for a
purpose other than preparing a tax return.
A violation of section 7216 is a misde-
meanor, with a maximum penalty of up
to one year imprisonment or a fine of not
more than $1,000, or both, together with
the costs of prosecution. Section 7216(b)
establishes exceptions to the general rule
in section 7216(a) prohibiting disclosure
and use. Section 7216(b) also authorizes
the Secretary to promulgate regulations
prescribing additional permitted disclo-
sures and uses. Section 6713(a) prescribes
a related civil penalty for disclosures and
uses that constitute a violation of section
7216. The penalty for violating section
6713 is $250 for each disclosure and use,
not to exceed a total of $10,000 for a calen-
dar year. Section 6713(b) provides that the
exceptions in section 7216(b) also apply
to section 6713. Under section 7216(b),
the provisions of section 7216(a) will not
apply to any disclosure or use permitted
under regulations prescribed by the Secre-
tary.
(b)Definitions. For purposes of sec-
tion 7216 and §§301.7216–1 through
301.7216–3:
(1)Tax return.Thetermtax return
means any return (or amended return) of
income tax imposed by chapter 1 of the In-
ternal Revenue Code.
(2)Tax return preparer—(i)In general.
The termtax return preparermeans:
(A) Any person who is engaged in
the business of preparing or assisting in
preparing tax returns;
(B) Any person who is engaged in the
business of providing auxiliary services in
connection with the preparation of tax re-
turns, including a person who develops
software that is used to prepare or file a
tax return and any Authorized IRSe-file
Provider;
(C) Any person who is otherwise com-
pensated for preparing, or assisting in
preparing, a tax return for any other per-
son; or
(D) Any individual who, as part of their
duties of employment with any person de-
scribed in paragraph (b)(2)(i)(A), (B), or
(C) of this section performs services that
assist in the preparation of, or assist in
providing auxiliary services in connection
with the preparation of, a tax return.
(ii)Business of preparing returns.
A person is engaged in the business of
preparing tax returns as described in para-
graph (b)(2)(i)(A) of this section if, in the
course of the person’s business, the person
holds himself out to tax return preparers
or taxpayers as a person who prepares tax
returns or assists in preparing tax returns,
whether or not tax return preparation is
the person’s sole business activity and
whether or not the person charges a fee for
tax return preparation services.
(iii)Providing auxiliary services.A
person is engaged in the business of pro-
viding auxiliary services in connection
with the preparation of tax returns as de-
scribed in paragraph (b)(2)(i)(B) of this
section if, in the course of the person’s
business, the person holds himself out to
tax return preparers or to taxpayers as a
person who performs auxiliary services,
whether or not providing the auxiliary ser-
vices is the person’s sole business activity
and whether or not the person charges a
fee for the auxiliary services. Likewise, a
person is engaged in the business of pro-
viding auxiliary services if, in the course
of the person’s business, the person re-
ceives a taxpayer’s tax return information
from another tax return preparer pursuant
to the provisions of §301.7216–2(d)(2).
(iv)Otherwise compensated.Atax
return preparer described in paragraph
(b)(2)(i)(C) of this section includes any
person who—
(A) Is compensated for preparing a tax
return for another person, but not in the
course of a business; or
(B) Is compensated for helping, on a ca-
sual basis, a relative, friend, or other ac-
quaintance to prepare their tax return.
(v)Exclusions. A person is not a tax
return preparer merely because he leases
office space to a tax return preparer, fur-
nishes credit to a taxpayer whose tax return
is prepared by a tax return preparer, fur-
nishes information to a tax return preparer
at the taxpayer’s request, furnishes access
(free or otherwise) to a separate person’s
tax return preparation website through a
hyperlink on his own website, or otherwise
performs some service that only inciden-
tally relates to the preparation of tax re-
turns.
(vi)Application of section 7701(a)(36).
If a person is an income tax return pre-
parer for purposes of section 7701(a)(36),
the person is subject to the provisions of
section 7216 and is a tax return preparer
for purposes of §§301.7216–1 through
301.7216–3. The fact that a person is not
an income tax return preparer for purposes
of section 7701(a)(36), however, is not
January 17, 20063212006–3 I.R.B.

determinative of whether the person is a
tax return preparer for purposes of sec-
tion 7216(a) and §§301.7216–1 through
301.7216–3.
(vii)Examples. The application of
§301.7216–1(b)(2) may be illustrated by
the following examples:
Example 1. Bank B is a tax return preparer within
the meaning of paragraph (b)(2)(i)(A) of this section,
andanAuthorizedIRSe-fileProvider. B employs one
individual, Q, to solicit the necessary tax return infor-
mation for the preparation of a tax return; another in-
dividual, R, to prepare the return on the basis of the in-
formation that is furnished; a secretary, S, who types
the information on the returns into a computer; and
an administrative assistant, T, who uses a computer
to file electronic versions of the tax returns. Under
these circumstances, only R is an income tax return
preparer for purposes of section 7701(a)(36), but all
four employees are tax return preparers for purposes
of section 7216, as provided in paragraph (b) of this
section.
Example 2. Tax return preparer P contracts with
department store D to rent space in D’s store. D
advertises that taxpayers who use P’s services may
charge the cost of having their tax return prepared
to their charge account with D. Under these circum-
stances, D is not a tax return preparer because it pro-
vides space, credit, and services only incidentally re-
lated to the preparation of tax returns.
(3)Tax return information—(i)In gen-
eral.Thetermtax return information
means any information, including, but not
limited to, a taxpayer’s name, address, or
identifying number, which is furnished in
any form or manner for, or in connection
with, the preparation of a tax return of
the taxpayer. This information includes
information that the taxpayer furnishes
to a tax return preparer and information
furnished the tax return preparer by a third
party. Tax return information also includes
information the tax return preparer derives
or generates from tax return information
in connection with the preparation of a
taxpayer’s return.
(A) Tax return information can be pro-
vided directly by the taxpayer or by an-
other person. Likewise, tax return infor-
mation includes information received by
the tax return preparer from the IRS in
connection with the processing of such re-
turn, including an acknowledgment of ac-
ceptance or notice of rejection of an elec-
tronically filed return.
(B) Tax return information includes sta-
tistical compilationsof tax return informa-
tion, even in a form that cannot be asso-
ciated with, or otherwise identify, directly
or indirectly, a particular taxpayer. See
§301.7216–2(o) for limited use of tax re-
turn information to make statistical com-
pilations without taxpayer consent and to
use the statistical compilations for limited
purposes.
(C) Tax return information does not in-
clude information identical to any tax re-
turn information that has been furnished
to a tax return preparer if the identical in-
formation was obtained otherwise than in
connection with the preparation of a tax
return. Information maintained in a form
that is associated with the tax return prepa-
ration, however, becomes tax return infor-
mation, regardless of how the information
was initially obtained.
(D) Information is considered “in con-
nection with tax return preparation,” and
therefore tax return information, if the tax-
payer would not have furnished the infor-
mation to the tax return preparer but for his
intention to engage, or his engagement of,
the tax return preparer to prepare his tax
return.
(ii)Examples. The application of this
paragraph (b)(3) may be illustrated by the
following examples:
Example 1. Taxpayer A purchases computer soft-
ware designed to assist with the preparation and fil-
ing of her income tax return. When A loads the soft-
ware onto her computer, it prompts her to register her
purchase of the software. As part of the registration
process, the software provider states that it will pro-
vide registrants with any updates to the software. In
this situation, the software provider is a tax return pre-
parerunderparagraph(b)(2)(i)(B)ofthissectionand
the information that A provides to register her pur-
chase is tax return information because she is provid-
ing it in connection with the preparation of a tax re-
turn.
Example 2. Corporation A is a brokerage firm
that maintains a website through which its clients may
access their accounts, trade stocks, and generally con-
duct a variety of financial activities. Through its web-
site, A offers its clients free access to its own tax
preparation software. Taxpayer B is a client of A and
has furnished A his name, address, and other informa-
tion when registering for use of A’s website to use A’s
brokerage services. In addition, A has a record of B’s
brokerage account activity, including sales of stock,
dividends paid, and IRA contributions made. B uses
A’s tax preparation software to prepare his tax return.
The software populates some fields on B’s return on
the basis of information A already maintains in its
databases. A is a tax return preparer within the mean-
ing of paragraph (b)(2)(i)(B) of this section because it
has prepared and provided software for use in prepar-
ing tax returns. The information in A’s databases that
the software accesses topopulate B’s return,i.e.,the
registration information and brokerage account activ-
ity, is not tax return information because A did not re-
ceive that information in connection with the prepa-
ration of a tax return. Once A uses the information
to populate the return, however, the information as-
sociated with the return becomes tax return informa-
tion. If A retains the information in a form in which A
can identify that the information was used in connec-
tion with the preparation of a return, the information
in that form is tax return information. If, however,
A retains the information in a database in which A
cannot identify whether the information was used in
connection with the preparation of a return, then that
information is not tax return information.
(4)Use—(i)In general.Useoftax
return information includes any circum-
stance in which a tax return preparer refers
to, or relies upon, tax return information as
the basis to take or permit an action.
(ii)Example. The application of this
paragraph (b)(4) may be illustrated by the
following example:
Example. Preparer G is a tax return preparer as
defined by paragraph (b)(2)(i)(A) of this section. If
G determines, upon preparing a return, that a refund
is due to the taxpayer, G will ask whether the tax-
payer desires a refund anticipation loan,i.e.,aloan
that the taxpayer repays from the taxpayer’s refund
proceeds. G does not ask about refund anticipation
loans in cases in which the taxpayer is not due a re-
fund. G is using tax return information when it asks
whether a taxpayer is interested in obtaining a refund
anticipation loan because G is basing the inquiry on
the taxpayer’s being entitled to a refund.
(5)Disclosure.Thetermdisclosure
means the act of making tax return infor-
mation known to any person in any manner
whatever. To the extent that a taxpayer’s
use of a hyperlink results in the transmis-
sion of tax return information, such trans-
mission of tax return information is a dis-
closure by the tax return preparer subject
to penalty under section 7216 if not autho-
rized by regulation.
(6)Hyperlink. For purposes of section
7216, a hyperlink is the device used to
transfer an individualusing tax preparation
software from a tax return preparer’s web-
page to a webpage operated by another per-
son without the individual having to sepa-
rately enter the web address of the destina-
tion page.
(7)Request for consent.Arequestfor
consent includes any effort by a tax return
preparer to obtain the taxpayer’s consent to
use or disclose the taxpayer’s tax return in-
formation. The act of supplying a taxpayer
with a paper or electronic form that meets
the requirements of a revenue procedure
published pursuant to §301.7216–3(a) is
a request for a consent. When a tax re-
turn preparer requests a taxpayer’s con-
sent, any associated efforts of the tax re-
turn preparer, including, but not limited to,
verbal or written explanations of the form,
are part of the request for consent.
2006–3 I.R.B.322January 17, 2006

(c)Gramm-Leach-Bliley Act.Any
applicable requirements of the Gramm-
Leach-Bliley Act, Public Law 106–102
(113 Stat. 1338), do not supersede, alter,
or affect the requirements of section 7216
and §§301.7216–1 through 301.7216–3.
Similarly, the requirements of section 7216
and §§301.7216–1 through 301.7216–3 do
not nullify any requirements or restrictions
of the Gramm-Leach-Bliley Act, which are
in addition to the requirements or restric-
tions of section 7216 and §§301.7216–1
through 301.7216–3.
(d)Effective date. This section applies
on the date that is 30 days after the final
regulations are published in theFederal
Register.
Par. 4. Section 301.7216–2 is revised
to read as follows:
§301.7216–2 Permissible disclosures or
uses without consent of the taxpayer.
(a)Disclosure pursuant to other
provisions of Internal Revenue Code.
The provisions of section 7216(a) and
§301.7216–1 shall not apply to any dis-
closure of tax return information if the
disclosure is made pursuant to any other
provision of the Internal Revenue Code
or the regulations thereunder. Thus, for
example, these provisions will not apply
to—
(1) A disclosure under section 7269 to
an officer or employee of the IRS of infor-
mation concerning the estate of a decedent;
or
(2) A disclosure under section 7602
(through formal or informal procedures)
to an officer or employee of the IRS of
books, papers, records, or other tax return
information that may be relevant to any
person’s income tax liability.
(b)Disclosures to facilitate electronic
tax administration. Tax return preparers
may disclose to the IRS any tax return
information the IRS requests to assist in
the administration of electronic filing pro-
grams. The information can include tax
return information requested in the course
of investigating Authorized IRSe-file
Providers for compliance with electronic
filing rules or tax return information that
the IRS determines would assist in evalu-
ating the effectiveness of electronic filing
programs.
(c)Disclosures or uses for preparation
of a taxpayer’s return—(1)Tax return pre-
parers located within the same firm in the
United States. If a taxpayer furnishes tax
return information to a tax return preparer
located within the United States, including
any territory or possession of the United
States, an officer, employee, or member of
a tax return preparer may use the tax re-
turn information, or disclose the tax return
information to another officer, employee,
or member of the same tax return preparer,
for the purpose of performing services that
assist in the preparation of, or assist in
providing auxiliary services in connection
with the preparation of, the taxpayer’s tax
return. If an officer, employee, or member
to whom the tax return information is to be
disclosed is located outside of the United
States or any territory or possession of the
United States, the taxpayer’s consent un-
der §301.7216–3 prior to any disclosure is
required.
(2)Furnishing tax return information
to tax return preparers located outside the
United States. If a taxpayer initially fur-
nishes tax return information to a tax re-
turn preparer located outside of the United
States or any territory or possession of
the United States, an officer, employee,
or member of a tax return preparer may
use tax return information, or disclose any
tax return information to another officer,
employee, or member of the same tax re-
turn preparer, for the purpose of perform-
ing services that assist in the preparation
of, or assist in providing auxiliary services
in connection with the preparation of, the
tax return of a taxpayer by or for whom the
information was furnished without the tax-
payer’s consent under §301.7216–3.
(3)Examples. The following examples
illustrate this paragraph (c):
Example 1. T is a client of Firm, which is a tax
return preparer. E, an employee at Firm’s State A
office, receives tax return information from T for use
in preparing T’s income tax return. E discloses the tax
return information to P, an employee in Firm’s State B
office; P uses the tax return information to process T’s
income tax return. Firm is not required to receive T’s
consent under §301.7216–3 prior to E’s disclosure of
T’s tax return information to P, because the tax return
information is disclosed to an employee employed by
the same tax return preparer located within the United
States.
Example 2. Same facts asExample 1except T’s
tax return information is disclosed to FE who is lo-
cated in Firm’s Country F office. FE uses the tax
return information to process T’s income tax return.
After processing, FE returns the processed tax return
information to E in Firm’s State A office. Because
FE is outside of the United States, Firm is required
to obtain T’s consent under §301.7216–3 prior to E’s
disclosure of T’s tax return information to FE.
Example 3. T, Firm’s client, is temporarily lo-
cated in Country F. She initially furnishes her tax re-
turn information to employee FE in Firm’s Country F
office for the purpose of having Firm prepare her U.S.
income tax return. FE makes the substantive determi-
nations concerning T’s tax liability and forwards T’s
tax return information to FP, an employee in Firm’s
Country P office, for the purpose of processing T’s
tax return information. FP processes the return infor-
mation and forwards it to Partner at Firm’s State A
office in the United States for review and delivery to
T. Because T initially furnished the tax return infor-
mation to a tax return preparer outside of the United
States, T’s prior consent for use or disclosure under
§301.7216–3 was not required. An officer, employee,
or member of Firm in the United States may use T’s
tax return information or disclose the tax return in-
formation to another officer, employee, or member of
Firm without T’s prior consent under §301.7216–3 as
long as any use or disclosure of T’s tax return infor-
mation is within the United States. Firm is required to
receive T’s consent under §301.7216–3 prior to any
subsequent disclosure of T’s tax return information
to a tax return preparer located outside of the United
States.
(d)Disclosures to other tax return
preparers—(1)Preparer-to-preparer dis-
closures. Except as limited in paragraph
(d)(2) of this section, an officer, em-
ployee, or member of a tax return preparer
may disclose tax return information of a
taxpayer to another tax return preparer
located in the United States (including
any territory or possession of the United
States) for the purpose of preparing, or
assisting in preparing a tax return, or ob-
taining or providing auxiliary services in
connection with the preparation of any tax
return so long as the services provided are
not substantive determinations or advice
affecting a taxpayer’s reported tax liabil-
ity. The authorized disclosures permitted
under this subparagraph include one tax
return preparer disclosing tax return in-
formation to another tax return preparer
for the purpose of having the second tax
return preparer transfer that information
to, and compute the tax liability on, a tax
return of the taxpayer by means of elec-
tronic, mechanical, or other form of tax
return processing service. The authorized
disclosures permitted under this subpara-
graph also include disclosures by a tax
return preparer to an Authorized IRSe-file
Provider for the purpose of electronically
filing the return with the IRS. Authorized
disclosures also include disclosures by
a tax return preparer to a second tax re-
turn preparer for thepurpose of making
information concerning the return avail-
January 17, 20063232006–3 I.R.B.

able to the taxpayer. This would include,
for example, whether the return has been
accepted or rejected by the IRS, or the
status of the taxpayer’s refund. Except as
provided in paragraph (c) of this section,
a tax return preparer may not disclose tax
return information to another tax return
preparer for the purpose of the second
tax return preparer providing substantive
determinations without first receiving the
taxpayer’s consent in accordance with the
rules under §301.7216–3.
(2)Disclosures to contractors.Ataxre-
turn preparer may disclose tax return infor-
mation to a person under contract with the
tax return preparer in connection with the
programming, maintenance, repair, test-
ing, or procurement of equipment or soft-
ware used for purposes of tax return prepa-
ration only to the extent necessary for the
person to provide the contracted services,
andonlyifthetaxreturnpreparerensures
that all individuals who are to receive dis-
closures of tax return information receive
a written notice that informs them of the
applicability of sections 6713 and 7216 to
them and describes the requirements and
penalties of sections 6713 and 7216. Con-
tractors receiving tax return information
pursuant to this subsection are tax return
preparers under section 7216 because they
are performing auxiliary services in con-
nection with tax return preparation. See
§301.7216–1(b)(2)(i)(B) and (D).
(3)Examples. The following examples
illustrate this paragraph (d):
Example 1. E, an employee at Firm’s State A of-
fice, receives tax return information from T for Firm’s
use in preparing T’s income tax return. E makes sub-
stantive determinations and forwards the tax return
information to P, an employee at Processor; Proces-
sor is located in State B. P places the tax return in-
formation on the income tax return and furnishes the
finished product to E. E is not required to receive T’s
prior consent under §301.7216–3 before disclosing
T’s tax return information to P, because Processor’s
services are not substantive determinations and the
tax return information remained in the United States
at Processor’s State B office during the entire course
of the tax return preparation process.
Example 2. Firm, a tax return preparer, offers in-
come tax return preparation services. Firm’s contract
with its software provider, Contractor, requires Firm
to periodically randomly select certain taxpayers’ tax
return information solely for the purpose of testing
the reliability of the software sold to Firm. Under
its agreement with Contractor, Firm discloses tax re-
turn information to Contractor’s employee, C, who
services Firm’s contract without providing Contrac-
tor or C with a written notice that describes the re-
quirements of and penalties under sections 7216 and
6713. C uses the tax return information solely for
quality assurance purposes. Firm’s disclosure of tax
return information to C was an impermissible disclo-
sure, because Firm failed to ensure that C received
a written notice that describes the requirements and
penalties of sections 7216 and 6713.
Example 3. E, an employee of Firm in State A
in the United States, receives tax return information
from T for use in preparing T’s income tax return.
After E enters T’s tax return information into Firms’
computer, that information is stored on a computer
server that is physically located in State A. Firm
contracts with Contractor, located in Country F, to
prepare its clients’ tax returns. FE, an employee of
Contractor, uses a computer in Country F and in-
puts a password to view T’s income tax information
stored on the computer server in State A to prepare
T’s tax return. A computer program permits FE to
view T’s tax return information, but prohibits FE
from downloading or printing out T’s tax return
information from the computer server. Because Firm
is disclosing T’s tax return information outside of the
United States, Firm is required to obtain T’s consent
under §301.7216–3 prior to the disclosure to FE.
(e)Disclosure or use of information in
the case of related taxpayers. (1) In prepar-
ingataxreturnofasecondtaxpayer,a
tax return preparer may use, and may dis-
close to the second taxpayer, in the form
in which it appears on the return, any tax
return information that the tax return pre-
parer obtained from a first taxpayer if—
(i) The second taxpayer is related to the
first taxpayer within the meaning of para-
graph (e)(2) of this section;
(ii) The first taxpayer’s tax interest in
the information is not adverse to the sec-
ond taxpayer’s tax interest in the informa-
tion; and
(iii) The first taxpayer has not expressly
prohibited the disclosure or use.
(2) For purposes of paragraph (e)(1)(i)
of this section, a taxpayer is related to an-
other taxpayer if they have any one of the
following relationships: husband and wife,
child and parent, grandchild and grandpar-
ent, partner and partnership, trust or es-
tate and beneficiary, trust or estate and
fiduciary, corporation and shareholder, or
members of a controlled group of corpora-
tions as defined in section 1563.
(3) See §301.7216–3 for disclosure or
use of tax return information of the tax-
payer in preparing the tax return of a sec-
ond taxpayer when the requirements of this
paragraph are not satisfied.
(f)Disclosure pursuant to an order of
a court, or an administrative order, de-
mand, summons or subpoena which is is-
sued in the performance of its duties by a
Federal or State agency, the United States
Congress, a professional ethics board, or
the Public Company Accounting Oversight
Board. The provisions of section 7216(a)
and §301.7216–1 will not apply to any dis-
closure of tax return information if the dis-
closure is made pursuant to any one of the
following documents:
(1) The order of any court of record,
Federal, State, or local.
(2) A subpoena issued by a grand jury,
Federal or State.
(3) A subpoena issued by the United
States Congress.
(4) An administrative order, demand,
summons or subpoena that is issued in the
performance of its duties by—
(i) Any Federal agency as defined in
5 U.S.C. 551(1) and 5 U.S.C. 552(f), or
(ii) A State agency, body, or commis-
sion charged under the laws of the State or
a political subdivision of the State with the
licensing, registration, or regulation of tax
return preparers.
(5) A written request from a profes-
sional ethics board investigating the ethi-
cal conduct of the tax return preparer.
(6) A formal demand from the Public
Company Accounting Oversight Board to
registered public accounting firms in con-
nection with an inspection under section
104 of the Sarbanes-Oxley Act of 2002
(Act), 15 U.S.C. 7214, or an investigation
under section 105 of the Act.
(g)Disclosure for use in Treasury in-
vestigations or court proceedings.Atax
return preparer may disclose tax return in-
formation—
(1) To his attorney, or to an employee of
the Treasury Department, for use in con-
nection with any investigation of the tax
return preparer (including investigations
relating to the tax return preparer in its ca-
pacity as a practitioner) conducted by the
IRS or the Treasury Department; or
(2) To his attorney, or to any officer of a
court, for use in connection with proceed-
ings involving the tax return preparer (in-
cluding proceedings involving the tax re-
turn preparer in its capacity as a practi-
tioner), or the return preparer’s client, be-
fore the court or before any grand jury that
may be convened by the court.
(h)Certain disclosures by attorneys and
accountants. The provisions of section
7216(a) and §301.7216–1 shall not apply
to any disclosure of tax return information
permitted by this paragraph (h).
(1) (i) A tax return preparer who is law-
fully engaged in the practice of law or ac-
2006–3 I.R.B.324January 17, 2006

countancy and prepares a tax return for a
taxpayer may use the taxpayer’s tax re-
turn information, or disclose the informa-
tion to another officer, employee or mem-
ber of the tax return preparer’s law or ac-
counting firm, consistent with applicable
legal and ethical responsibilities, who may
use the tax return information for the pur-
pose of providing other legal or account-
ing services to the taxpayer. As an ex-
ample, a lawyer who prepares a tax return
for a taxpayer may use the tax return in-
formation of the taxpayer for, or in con-
nection with, rendering legal services, in-
cluding estate planning or administration,
or preparation of trial briefs or trust instru-
ments, for the taxpayer or the estate of the
taxpayer. In addition, the lawyer who pre-
pared the tax return may disclose the tax
return information to another officer, em-
ployee or member of the same firm for the
purpose of providing other legal services
to the taxpayer. As another example, an
accountant who prepares a tax return for a
taxpayer may use the tax return informa-
tion, or disclose it to another officer, em-
ployee or member of the firm, for use in
connection with the preparation of books
and records, working papers, or account-
ing statements or reports for the taxpayer.
In the normal course of rendering the legal
or accounting services to the taxpayer, the
attorney or accountant may make the tax
return information available to third par-
ties, including stockholders, management,
suppliers, or lenders, consistent with the
applicable legal andethical responsibili-
ties, unless the taxpayer directs otherwise.
For rules regarding disclosing outside of
the United States, see §301.7216–2(c) and
(d).
(ii) A tax return preparer’s law or ac-
counting firm does not include any related
or affiliated firms. For example, if law
firm A is affiliated with law firm B, offi-
cers, employees and members of law firm
A must receive a taxpayer’s consent un-
der §301.7216–3 before disclosing the tax-
payer’s tax return information to an offi-
cer, employee or member of law firm B.
(2) A tax return preparer who is law-
fully engaged in the practice of law or ac-
countancy and prepares a tax return for a
taxpayer may, consistent with the applica-
ble legal and ethical responsibilities, take
the tax return information into account,
and may act upon it, in the course of per-
forming legal or accounting services for
a client other than the taxpayer, or dis-
close the information to another officer,
employee or member of the tax return pre-
parer’s law or accounting firm to enable
that other officer, employee or member to
take the information into account, and act
upon it, in the course of performing legal or
accounting services for a client other than
the taxpayer. This is permissible when the
information is, or may be, relevant to the
subject matter of the legal or accounting
services for the other client, and consid-
eration of the information by those per-
forming the services is necessary for the
proper performance of the services. In no
event, however, may the tax return infor-
mation be disclosed to a person who is
not an officer, employee or member of the
law or accounting firm, unless the disclo-
sure is exempt from the application of sec-
tion 7216(a) and §301.7216–1 by reason
of another provision of §§301.7216–2 or
301.7216–3.
(3) The application of this paragraph
may be illustrated by the following exam-
ples:
Example 1. A, a member of an accounting firm,
renders an opinion on a financial statement of M Cor-
poration that is part of a registration statement filed
with the Securities and Exchange Commission. After
the registration statement is filed, but before its effec-
tive date, B, a member of the same accounting firm,
prepares an income tax return for N Corporation. In
the course of preparing N’s income tax return, B dis-
covers that N does business with M and concludes
that the information given by N should be consid-
ered by A to determine whether the financial state-
ment opined on by A contains an untrue statement of
material fact or omits a material fact required to keep
the statement from being misleading. B discloses to
A the tax return information of N for this purpose. A
determines that there is an omission of material fact
and that an amended statement should be filed. A so
advises M and the Securities and Exchange Commis-
sion. A explains that the omission was revealed as a
result of confidential information that came to A’s at-
tention after the statement was filed, but A does not
disclose the identity of the taxpayer or the tax return
information itself. Section 7216(a) and §301.7216–1
do not apply to B’s disclosure of N’s tax return in-
formationtoAandA’suseoftheinformationinad-
vising M and the Securities and Exchange Commis-
sion of the necessity for filing an amended statement.
Section 7216(a) and §301.7216–1 would apply to a
disclosure of N’s tax return information to M or to
the Securities and Exchange Commission unless the
disclosure is exempt from the application of section
7216(a) and §301.7216–1 by reason of another pro-
vision of either this section or §301.7216–3.
Example 2. A, a member of an accounting firm,
is conducting an audit of M Corporation, and B, a
member of the same accounting firm, prepares an in-
come tax return for D, an officer of M. In the course
of preparing the return, B obtains information from
DindicatingthatD,pursuanttoanarrangementwith
a supplier doing business with M, has been receiving
from the supplier a percentage of the amounts that the
supplier invoices to M. B discloses this information
to A who, acting upon it, searches in the course of
the audit for indications of a kickback scheme. As
a result, A discovers information from audit sources
that independently indicate the existence of a kick-
back scheme. Without revealing the tax return infor-
mation A has received from B, A brings to the at-
tention of officers of M the audit information indi-
cating the existence of the kickback scheme. Section
7216(a) and §301.7216–1 do not apply to B’s disclo-
sure of D’s tax return information to A, A’s use of D’s
information in the course of the audit, and A’s dis-
closure to M of the audit information indicating the
existence of the kickback scheme. Section 7216(a)
and §301.7216–1 would apply to a disclosure to M,
or to any other person not an employee or member
of the accounting firm, of D’s tax return information
furnished to B.
(i)Corporate fiduciaries.Atrustcom-
pany, trust department of a bank, or other
corporate fiduciary that prepares a tax re-
turn for a taxpayer for whom it renders
fiduciary, investment, or other custodial or
management services may, unless the tax-
payer directs otherwise—
(1) Disclose or use the taxpayer’s tax
return information in the ordinary course
of rendering such services to or for the
taxpayer; or
(2) Make the information available to
the taxpayer’s attorney, accountant, or in-
vestment advisor.
(j)Disclosure to taxpayer’s fiduciary.
If, after furnishing tax return informa-
tion to a tax return preparer, the taxpayer
dies or becomes incompetent, insolvent,
or bankrupt, or the taxpayer’s assets are
placed in conservatorship or receivership,
the tax return preparer may disclose the in-
formation to the duly appointed fiduciary
of the taxpayer or his estate, or to the duly
authorized agent of the fiduciary.
(k)Disclosure or use of information in
preparation or audit of State or local tax
returns or assisting a taxpayer with foreign
country tax obligations. The provisions of
paragraphs (c) and (d) of this section shall
apply to the disclosure by any tax return
preparer of any tax return information in
the preparation of, or in connection with
the preparation of, any tax return of the
taxpayer under the law of any State or po-
litical subdivision thereof, of the District
of Columbia, of any territory or possession
of the United States, or of a country other
than the United States. The provisions of
section 7216(a) and §301.7216–1 shall not
apply to the use by any tax return preparer
January 17, 20063252006–3 I.R.B.

of any tax return information in the prepa-
ration of, or in connection with the prepa-
ration of, any tax return of the taxpayer un-
der the law of any State or political subdi-
vision thereof, of the District of Columbia,
of any territory or possession of the United
States, or of a country other than the United
States. The provisions of section 7216(a)
and §301.7216–1 shall not apply to the dis-
closure or use by any tax return preparer
of any tax return information in the audit
of, or in connection with the audit of, any
tax return of the taxpayer under the law of
any State or political subdivision thereof,
of the District of Columbia, of any terri-
tory or possession of the United States.
(l)Payment for tax preparation ser-
vices. A tax return preparer may use and
disclose, without the taxpayer’s written
consent, tax return information that the
taxpayer provides to the tax return pre-
parer to pay for tax preparation services
to the extent necessary to process the
payment. For example, if the taxpayer
gives the tax return preparer a credit card
to pay for tax preparation services, the
tax return preparer may disclose the tax-
payer’s name, credit card number, credit
card expiration date, and amount due for
tax preparation services to the credit card
company, as necessary, to process the pay-
ment. Any tax return information that is
not relevant to the payment may not be
used or disclosed by the tax return pre-
parer without the taxpayer’s prior written
consent, unless otherwise permitted under
another provision of this section.
(m)Retention of records.Ataxreturn
preparer may retain tax return information
of a taxpayer, including copies of tax re-
turns, in paper or electronic format, pre-
paredonthebasisofthetaxreturninfor-
mation, and may use the information in
connection with the preparation of other
tax returns of the taxpayer or in connec-
tion with an examination by the Internal
Revenue Service of any tax return or sub-
sequent tax litigation relating to the tax re-
turn. The provisions of paragraph (n) of
this section regarding the transfer of a tax-
payer list also apply to the transfer of any
records and related papers to which this
paragraph applies.
(n)Lists for solicitation of tax return
business. A tax return preparer may com-
pile and maintain a separate list contain-
ing solely the names, addresses, e-mail ad-
dresses, and phone numbers of taxpayers
whose tax returns the tax return preparer
has prepared or processed. This list may
be used by the compiler solely to contact
the taxpayers on the list for the purpose of
offering tax information or additional tax
return preparation services to such taxpay-
ers. The compiler of the list may not trans-
fer the taxpayer list, or any part thereof, to
any other person unless the transfer takes
place in conjunction with the sale or other
disposition of the compiler’s tax return
preparation business. A person who ac-
quires a taxpayer list, or a part thereof, in
conjunction with a sale or other disposition
of a tax return preparation business is sub-
ject to the provisions of this paragraph with
respect to the list. The termlist,asused
in this paragraph, includes any record or
system whereby the names and addresses
of taxpayers are retained. The provisions
of this paragraph also apply to the transfer
of any records and related papers to which
this paragraph (n) applies.
(o)Producing statistical information
in connection with tax return prepara-
tion business. Ataxreturnpreparermay
use, for the limited purpose specified in
this paragraph, tax return information to
produce a statistical compilation of data
described in §301.7216–1(b)(3)(i)(B). The
purpose and use of the statistical compi-
lation must relate directly to the internal
management or support of the tax return
preparer’s tax return preparation business.
The tax return preparer may not disclose
or use the tax return information in con-
nection with, or support of, businesses
other than tax return preparation. The
compiler of the statistical compilation
may not transfer the compilation, or any
part thereof, to any other person unless the
transfer takes place upon the sale or other
disposition of the tax return preparation
business of the compiler. A person who
acquires a compilation, or a part thereof,
in conjunction with a sale or other disposi-
tion of a tax return preparation business is
subject to the provisions of this paragraph
with respect to the compilation as if the
acquiring person had compiled it.
(p)Disclosure or use of information for
quality or peer reviews. The provisions of
section 7216(a) and §301.7216–1 shall not
apply to any disclosure for the purpose of
a quality or peer review to the extent nec-
essary to accomplish the review. A qual-
ity or peer review is a review that is un-
dertaken to evaluate, monitor, and improve
the quality and accuracy of a tax return pre-
parer’s tax preparation, accounting, or au-
diting services. A quality or peer review
may be conducted only by attorneys, cer-
tified public accountants, enrolled agents,
and enrolled actuaries who are eligible to
practice before the Internal Revenue Ser-
vice. See Department of the Treasury Cir-
cular 230, 31 CFR part 10. Disclosure of
tax return information is also authorized
to persons who provide administrative or
support services to an individual who is
conducting a quality or peer review under
this paragraph (p), but only to the extent
necessary for the reviewer to conduct the
review. Tax return information gathered in
conducting a review may be used only for
purposes of a review. No tax return infor-
mation identifying a taxpayer may be dis-
closed in any evaluative reports or recom-
mendations that may be accessible to any
person other than the reviewer or the tax
return preparer being reviewed. The tax
return preparer being reviewed will main-
tain a record of the review including the in-
formation reviewed and the identity of the
persons conducting the review. After com-
pletion of the review, no documents con-
taining information that may identify any
taxpayer by name or identification number
may be retained by a reviewer or by the re-
viewer’s administrative or support person-
nel. Any person (including administrative
and support personnel) receiving tax return
information in connection with a quality or
peer review is a tax return preparer for pur-
poses of sections 7216(a) and 6713(a).
(q)Disclosure to report the commis-
sion of a crime. The provisions of section
7216(a) and §301.7216–1 shall not apply
to the disclosure of any tax return infor-
mation to the proper Federal, State, or lo-
cal official in order, and to the extent nec-
essary, to inform the official of activities
that may constitute, or may have consti-
tuted, a violation of any criminal law or to
assist the official in investigating or pros-
ecuting a violation of criminal law. A dis-
closure made in thebona fidebut mistaken
belief that the activities constituted a vio-
lation of criminal law is not subject to sec-
tion 7216(a) and §301.7216–1.
(r)Disclosure of tax return information
due to a tax return preparer’s incapacity or
death. In the event of incapacity or death
of a tax return preparer, disclosure of tax
return information may be made for the
purpose of assisting the tax return preparer
2006–3 I.R.B.326January 17, 2006

or his legal representative (or the represen-
tative of a deceased tax return preparer’s
estate) in operating the business. Any per-
son receiving tax return information un-
der the provisions of this paragraph (r) is
a tax return preparer for purposes of sec-
tions 7216(a) and 6713(a).
(s)Effective date. This section applies
on the date that is 30 days after the final
regulations are published in theFederal
Register.
Par. 5. Section 301.7216–3 is revised
to read as follows:
§301.7216–3 Disclosure or use permitted
only with the taxpayer’s consent.
(a)In general—(1)Taxpayer con-
sent. Unless section 7216 or §301.7216–2
specifically authorizes the disclosure or
use of tax return information, a tax re-
turn preparer may not disclose or use a
taxpayer’s tax return information prior to
obtaining a consent from the taxpayer, as
described in this section. The consent must
be knowing and voluntary. As an example,
a tax return preparer may not condition
its provision of preparation services upon
the taxpayer’s consenting to a use of the
taxpayer’s tax return information. Except
as provided in paragraph (a)(2) of this
section, conditioning the provision of ser-
vices on the taxpayer’s furnishing consent
will make the consent involuntary, and the
consent will not satisfy the requirements
of this section.
(2)Taxpayer consent to a tax return pre-
parer furnishing tax return information to
another tax return preparer.Ataxre-
turn preparer may condition its provision
of preparation services upon a taxpayer’s
consenting to disclosure of the taxpayer’s
tax return information to another tax re-
turn preparer for the purpose of perform-
ing services that assist in the preparation
of, or provide auxiliary services in connec-
tion with the preparation of, the tax return
of the taxpayer.
(3)Guidance describing the form and
contents of taxpayer consents.TheCom-
missioner may issue guidance, by revenue
procedure, describing the form and content
of taxpayer consents authorized under this
section.
(b)Timing requirements and limita-
tions—(1)No retroactive consent.A
taxpayer must provide written consent be-
fore a tax return preparer discloses or uses
the taxpayer’s tax return information.
(2)Time limitations on requesting con-
sent. A tax return preparer may not request
a taxpayer’s consent to use or disclose tax
return information after the tax return pre-
parer provides a completed tax return to
the taxpayer for signature.
(3)No requests for consent after an un-
successful request. With regard to tax re-
turn information for each income tax re-
turn that a tax return preparer prepares, if a
taxpayer declines a request for consent to
the use or disclosure of tax return informa-
tion, the tax return preparer may not make
another request to obtain consent for a pur-
pose substantially similar to that of the re-
jected request.
(4)Duration of consent. No consent to
the use or disclosure of tax return informa-
tion may be effective for a period longer
than one year from the date the taxpayer
signed the consent.
(c)Special rules—(1)Multiple disclo-
sures within a single consent form or mul-
tiple uses within a single consent form.
A taxpayer may consent to multiple uses
within the same written document, or mul-
tiple disclosures within the same written
document. A single written document,
however, cannot authorize both uses and
disclosures; rather one written document
must authorize the uses and another sepa-
rate written document must authorize the
disclosures. Furthermore, a consent that
authorizes multiple uses or multiple dis-
closures must specifically and separately
identify each use or disclosure.
(2)Disclosure of entire return.Acon-
sent may authorize the disclosure of all in-
formation contained within a return. A
consent authorizing the disclosure of an
entire return must set forth an explanation
of the reasons why a consent authorizing a
more limited disclosure of tax return infor-
mation is unsatisfactory for the purpose of
the consent.
(3)Copy of consent must be provided
to taxpayer. The tax return preparer must
provide a copy of the executed consent to
the taxpayer at the time of execution. The
requirements of this paragraph may also be
satisfied by giving the taxpayer the oppor-
tunity, at the time of executing the consent,
to print the completed consent or save it in
electronic form.
(d)Permissible disclosures to third par-
ties at the request of the taxpayer.A
tax return preparer may disclose tax re-
turn information to third parties as the tax-
payer directs so long as the taxpayer pro-
vides a consent to disclose tax return in-
formation that satisfies the requirements
of this paragraph and as prescribed by the
Commissioner by revenue procedure. (See
§601.601(d)(2) of this chapter.)
(e)Effective date. This section applies
on the date that is 30 days after the final
regulations are published in theFederal
Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 7,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 8, 2005, 70 F.R. 72954)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2006–3
The names of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal Rev-
enue Code of 1986 are listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletinthatanorganizationnolonger
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on January 17, 2006,
January 17, 20063272006–3 I.R.B.

and would end on the date the court first
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
American Institute of Marine Studies, Inc.
Lauderdale by the Sea, FL
Hampton Roads Community Foundation
Mechanicsville, VA
Employer Comparable
Contributions to Health
Savings Accounts Under
Section 4980G; Hearing
Announcement 2006–4
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Notice of public hearing on pro-
posed rulemaking.
SUMMARY: This document contains
a notice of public hearing on proposed
regulations (REG–138647–04, 2005–41
I.R.B. 697) providing guidance on em-
ployer comparable contributions to Health
Savings Accounts (HSAs) under section
4980G.
DATES: The public hearing is being held
on February 23, 2006, at 10 a.m. The
IRS must receive outlines of the topics to
bediscussedatthehearingbyFebruary2,
2006.
ADDRESSES: The public hearing is be-
ing held in the IRS Auditorium, Internal
Revenue Service Building, 1111 Con-
stitution Avenue, NW, Washington, DC.
Send submissions to: CC:PA:LPD:PR
(REG–138647–04), Room 5203, Inter-
nal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–138647–04),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit electronic outlines of oral com-
ments directly to the IRS Internet site
http://www.irs.gov/regs.
FOR FURTHER INFORMATION: Con-
cerning submission of comments, the hear-
ing, and/or to be placed on the building ac-
cess to attend the hearing, Kelly Banks at
(202) 622–7180 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
The subject of the public hearing is
the notice of proposed rulemaking
(REG–138647–04) that was published
in theFederal Registeron August 26,
2005 (70 FR 50233).
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
A period of 10 minutes is allotted to
each person for presenting oral comments.
The IRS will prepare an agenda contain-
ing the schedule of speakers. Copies of
the agenda will be made available, free of
charge, at the hearing.
Because of access restrictions, the IRS
will not admit visitors beyond the imme-
diateentranceareamorethan30minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFORMA-
TION CONTACT” section of this docu-
ment.
Guy R. Traynor,
Acting Chief, Publications and
Regulations Branch,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on December 21,
2005, 8:45 a.m., and published in the issue of the Federal
Register for December 22, 2005, 70 F.R. 75998)
2006–3 I.R.B.328January 17, 2006

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the 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 the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
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—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
January 17, 2006i2006–3 I.R.B.

Numerical Finding List
1
Bulletin 2006–1 through 2006–3
Announcements:
2006-1, 2006-1 I.R.B.260
2006-2, 2006-2 I.R.B.300
2006-3, 2006-3 I.R.B.327
2006-4, 2006-3 I.R.B.328
Notices:
2006-2, 2006-2 I.R.B.278
2006-3, 2006-3 I.R.B.306
2006-4, 2006-3 I.R.B.307
Proposed Regulations:
REG-137243-02, 2006-3 I.R.B.317
REG-133446-03, 2006-2 I.R.B.299
Revenue Procedures:
2006-1, 2006-1 I.R.B.1
2006-2, 2006-1 I.R.B.89
2006-3, 2006-1 I.R.B.122
2006-4, 2006-1 I.R.B.132
2006-5, 2006-1 I.R.B.174
2006-6, 2006-1 I.R.B.204
2006-7, 2006-1 I.R.B.242
2006-8, 2006-1 I.R.B.245
2006-9, 2006-2 I.R.B.278
2006-10, 2006-2 I.R.B.293
2006-11, 2006-3 I.R.B.309
2006-12, 2006-3 I.R.B.310
2006-13, 2006-3 I.R.B.315
Revenue Rulings:
2006-1, 2006-2 I.R.B.261
2006-2, 2006-2 I.R.B.261
2006-3, 2006-2 I.R.B.276
2006-4, 2006-2 I.R.B.264
2006-5, 2006-3 I.R.B.302
Treasury Decisions:
9231, 2006-2 I.R.B.272
9232, 2006-2 I.R.B.266
9233, 2006-3 I.R.B.303
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin
2005–52, dated December 27, 2005.
2006–3 I.R.B.iiJanuary 17, 2006

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2006–1 through 2006–3
Proposed Regulations:
REG-138647-04
Corrected by
Ann. 2006-4, 2006-3 I.R.B.328
Revenue Procedures:
96-52
Superseded by
Rev. Proc. 2006-10, 2006-2 I.R.B.293
97-27
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2002-9
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2004-23
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2004-40
Superseded by
Rev. Proc. 2006-9, 2006-2 I.R.B.278
2005-1
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-2
Superseded by
Rev. Proc. 2006-2, 2006-1 I.R.B.89
2005-3
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-4
Superseded by
Rev. Proc. 2006-4, 2006-1 I.R.B.132
2005-5
Superseded by
Rev. Proc. 2006-5, 2006-1 I.R.B.174
2005-6
Superseded by
Rev. Proc. 2006-6, 2006-1 I.R.B.204
2005-7
Superseded by
Rev. Proc. 2006-7, 2006-1 I.R.B.242
Revenue Procedures— Continued:
2005-8
Superseded by
Rev. Proc. 2006-8, 2006-1 I.R.B.245
2005-9
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2005-12
Section10modifiedandsupersededby
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-61
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-68
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
Rev. Proc. 2006-3, 2006-1 I.R.B.122
Revenue Rulings:
74-503
Revoked by
Rev. Rul. 2006-2, 2006-2 I.R.B.261
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,
2005.
January 17, 2006iii2006–3 I.R.B.
U.S. GPO: 2006—320–797/20040