Internal Revenue Bulletin 2004-20 (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
4-20
May 17, 2004
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. 2004–46, page 915.
Royalties; information reporting.This ruling provides guid-
ance concerning the reporting requirements of sections 6041
and 6050N of the Code for payments by publishers to literary
agents on behalf of an author.
T.D. 9121,
page 903.
REG–13979
2–02, page 926.
Final, tem
porary, and proposed regulations under section
704(b) of t
he Code provide guidance on the proper allocation
of certain
foreign tax expenditures of a partnership. A public
hearing on
the proposed regulations is scheduled for Septem-
ber 14, 20
04.
T.D. 9123, page 907.
Final regulations under section 1296 of the Code provide pro-
cedures for certain U.S. persons holding marketable stock in
a passive foreign investment company (PFIC) to elect mark to
market treatment for that stock under section 1296 and re-
lated provisions of sections 1291 and 1295.
T.D. 9124, page 901.
Final regulations provide that all activities are subject to the rule
under section 465 of the Code that amounts borrowed from a
person who has an interest in an activity other than that of a
creditor or from a person related to a person (other than the
borrower) with such an interest do not increase the amount at
risk in the activity.
REG–11
6564–03, page 927.
Propose
d regulations under section 358 of the Code adopt a
tracin
g approach in determining the basis of stock and secu-
rities
received in transactions under sections 355, 368, and
certai
n transactions that qualify under both section 351 and
sectio
n 368.
Rev. Proc. 2004–29, page 918.
Use of statistical sampling under section 274(n).This pro-
cedure provides the statistical sampling methodology by which
a taxpayer may establish the amount of meal and entertainment
expenses excepted from the 50%deduction disallowance of
section 274(n)(1) of the Code.
EXEMPT ORGANIZATIONS
Announcement 2004–36, page 932.
A list is provided of organizations now classified as private foun-
dations.
Fi
nding Lists begin on page ii.

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.
May 17, 20042004-20 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 132.—Certain
Fringe Benefits
26 CFR 1.132–6: De minimis fringes.
Procedures are provided by which taxpayers may
use statistical sampling to determine the amount of
expenses for meals excepted from the 50% deduc-
tion disallowance of section 274(n)(1) by reason of
section 274(n)(2)(B) (relating tode minimisfringes).
See Rev. Proc. 2004-29, page 918.
Section 162.—Trade or
Business Expenses
Procedures are provided by which taxpayers may
use statistical sampling to determine the amount of
trade or business expenses for meals and entertain-
ment excepted from the 50% deduction disallowance
of section 274(n)(1). See Rev. Proc. 2004-29, page
918.
Section 274.—Disallowance
of Certain Entertainment,
etc., Expe
nses
Procedure
s are provided by which taxpayers may
use statis
tical sampling to determine the amount of
meal and e
ntertainment expenses excepted from the
50% deduc
tion disallowance of section 274(n)(1).
See Rev. P
roc. 2004-29, page 918.
Section 465.—Deductions
Limited to Amount at Risk
26 CFR 1.465–8: General rules; interest other than
that of a creditor.
T.D. 9124
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
At-Risk Limitations; Interest
Other Than That of a Creditor
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: These regulations finalize
the rules relating to the treatment, for pur-
poses of the at-risk limitations, of amounts
borrowed from a person who has an in-
terest in an activity other than that of a
creditor or from a person related to a per-
son (other than the borrower) with such an
interest. These regulations affect taxpay-
ers subject to the at-risk limitations and
provide them with guidance necessary to
comply with the law.
DATES:Effective Date:These regulations
are effective May 3, 2004.
Applicability Date:For dates of
applicability, see§§1.465–8(e) and
1.465–20(d).
FOR FURTHER INFORMATION
CONTACT: Tara P. Volungis or
Christopher L. Trump, 202–622–3070
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 to provide rules relating
to the treatment, for purposes of the at-risk
limitations under section 465 of the Inter-
nal Revenue Code (Code), of amounts bor-
rowed from a person who has an interest
in an activity other than that of a creditor.
On June 5, 1979, the IRS published in the
Federal Register(44 FR 32235) proposed
regulations (LR–166–76) relating to the
treatment of investments in certain activi-
ties under section 465 of the Code. On July
8, 2003, a notice of proposed rulemaking
(REG–209377–89, 2003–36 I.R.B. 521
[68 FR 40583]) amending §§1.465–8 and
1.465–20 of the proposed regulations was
published in the Federal Register. No
comments were received from the public
in response to the notice of proposed rule-
making. No public hearing was requested
or held. The proposed regulations under
§§1.465–8 and 1.465–20 are adopted by
this Treasury decision.
Explanation of Provisions
Section 465 limits the deductibility of
losses to a taxpayer’s economic invest-
ment (the amount at risk) in the activity at
the close of a taxable year. A taxpayer is
generally considered at risk in an activity
to the extent of cash and the adjusted ba-
sisofpropertycontributedbythetaxpayer
to the activity. In general, a taxpayer’s
amount at risk also includes any amounts
borrowed for use in the activity if the tax-
payer is personally liable for repayment or
if property other than property used in the
activity is pledged as security.
Under section 465(b)(3), amounts bor-
rowed for use in an activity will not in-
crease the borrower’s amount at risk in the
activity if the lender has an interest other
than that of a creditor in the activity (a dis-
qualifying interest) or if the lender is re-
lated to a person (other than the borrower)
who has a disqualifying interest in the ac-
tivity. This rule applies even if the bor-
rower is personally liable for the repay-
ment of the loan or the loan is secured by
property not used in the activity. Section
465(c)(3)(D) provides that this rule applies
to new activities (activities that were not
subject to section 465 before 1978) only to
the extent provided in regulations.
These regulations apply the rule of sec-
tion 465(b)(3) to new activities and pro-
vide rules for determining when a person
has an interest in an activity other than that
of a creditor. Additional rules are provided
with respect to related persons, interests as
a shareholder, and qualified nonrecourse
financing.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and,
because these regulations do not impose
on small entities a collection of informa-
tion requirement, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
2004-20 I.R.B.901May 17, 2004

for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.
Drafting Information
The principal authors of these regula-
tions are Tara P. Volungis and Christopher
L. Trump of the Office of Associate Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.465–8 also issued under 26
U.S.C. 465.
Section 1.465–20 also issued under 26
U.S.C. 465. * * *
Par. 2. Sections 1.465–8 and 1.465–20
are added to read as follows:
§1.465–8 General rules; interest other
than that of a creditor.
(a)In general—(1)Amounts borrowed.
This section applies to amounts borrowed
for use in an activity described in section
465(c)(1) or (c)(3)(A). Amounts borrowed
with respect to an activity will not increase
the borrower’s amount at risk in the activ-
ity if the lender has an interest in the activ-
ity other than that of a creditor or is related
to a person (other than the borrower) who
has an interest in the activity other than that
of a creditor. This rule applies even if the
borrower is personally liable for the repay-
ment of the loan or the loan is secured by
property not used in the activity. For ad-
ditional rules relating to the treatment of
amounts borrowed from these persons, see
§1.465–20.
(2)Certain borrowed amounts ex-
cepted. (i)Forpurposesofdetermininga
corporation’s amount at risk, an interest in
the corporation as a shareholder is not an
interest in any activity of the corporation.
Thus, amounts borrowed by a corporation
from a shareholder may increase the cor-
poration’s amount at risk.
(ii) For purposes of determining a tax-
payer’samountatriskinanactivityof
holding real property, paragraph (a)(1) of
this section does not apply to financing that
is secured by real property used in the ac-
tivity and is either—
(A) Qualified nonrecourse financing
described in section 465(b)(6)(B); or
(B) Financing that, if it were nonre-
course, would be financing described in
section 465(b)(6)(B).
(b)Loans for which the borrower is per-
sonally liable for repayment—(1)General
rule. If a borrower is personally liable for
the repayment of a loan for use in an activ-
ity, a person shall be considered a person
with an interest in the activity other than
that of a creditor only if the person has ei-
ther a capital interest in the activity or an
interest in the net profits of the activity.
(2)Capital interest. For the purposes of
this section, a capital interest in an activity
means an interest in the assets of the activ-
ity which is distributable to the owner of
the capital interest upon the liquidation of
the activity. The partners of a partnership
and the shareholders of an S corporation
are considered to have capital interests in
the activities conducted by the partnership
or S corporation.
(3)Interest in net profits. For the pur-
poses of this section, it is not necessary for
a person to have any incidents of owner-
ship in the activity in order to have an in-
terest in the net profits of the activity. For
example, an employee or independent con-
tractor any part of whose compensation is
determined with reference to the net prof-
its of the activity will be considered to have
an interest in the net profits of the activity.
(4)Examples. The provisions of this
paragraph may be illustrated by the follow-
ing examples:
Example 1. A, the owner of a herd of cattle sells
the herd to partnership BCD. BCD pays A $10,000
in cash and executes a note for $30,000 payable to A.
The three partners, B, C, and D, each assumes per-
sonal liability for repayment of the amount owed A.
In addition, BCD enters into an agreement with A un-
der which A is to take care of the cattle for BCD in
return for compensation equal to 6 percent of BCD’s
net profits from the activity. Because A has an in-
terest in the net profits of BCD’s farming activity, A
is considered to have an interest in the activity other
than that of a creditor. Accordingly, amounts payable
to A for use in that activity do not increase the part-
ners’ amount at risk even though the partners assume
personal liability for repayment.
Example 2.AssumethesamefactsasinExample
1except that instead of receiving compensation equal
to 6 percent of BCD’s net profits from the activity, A
instead receives compensation equal to 1 percent of
the gross receipts from theactivity. A does not have
a capital interest in BCD. A’s interest in the gross re-
ceipts is not considered an interest in the net profits.
Because B, C, and D assumed personal liability for
the amounts payable to A, and A has neither a capital
interest nor an interest in the net profits of the activ-
ity,Aisnotconsideredtohaveaninterestintheac-
tivity other than that of a creditor with respect to the
$30,000 loan. Accordingly, B, C, and D are at risk
for their share of the loan if the other provisions of
section 465 are met.
Example 3.AssumethesamefactsasinExample
1except that instead of receiving compensation equal
to 6 percent of BCD’s net profits from the activity, A
instead receives compensation equal to 6 percent of
the net profits from the activity or $15,000, whichever
is greater. A is considered to have an interest in the
net profits from the activity and accordingly will be
treated as a person with an interest in the activity other
than that of a creditor.
(c)Nonrecourse loans secured by assets
with a readily ascertainable fair market
value—(1)General rule. This paragraph
shall apply in the case of a nonrecourse
loan for use in an activity where the loan
is secured by property which has a readily
ascertainable fair market value. In the case
of such a loan, a person shall be considered
a person with an interest in the activity
other than that of a creditor only if the
person has either a capital interest in the
activity or an interest in the net profits of
the activity.
(2)Example. The provisions of this
paragraph (c) may be illustrated by the fol-
lowing example:
Example. X is an investor in an activity described
in section 465(c)(1). In order to raise money for the
investment, X borrows money from A, the promoter
(the person who brought X together with other tax-
payers for the purpose of investing in the activity).
The loan is secured by stock unrelated to the activity
which is listed on a national securities exchange. X’s
stock has a readily ascertainable fair market value. A
does not have a capital interest in the activity or an
interest in its net profits. Accordingly, with respect
to the loan secured by X’s stock, A does not have an
interest in the activity other than that of a creditor.
(d)Nonrecourse loans secured by as-
sets without a readily ascertainable fair
market value—(1)General rule.This
paragraph shall apply in the case of a non-
recourse loan for use in an activity where
theloanissecuredbypropertywhichdoes
not have a readily ascertainable fair mar-
ket value. In the case of such a loan, a
person shall be considered a person with
May 17, 20049022004-20 I.R.B.

an interest in the activity other than that
of a creditor if the person stands to re-
ceive financial gain (other than interest)
from the activity or from the sale of in-
terests in the activity. For the purposes of
this section, persons who stand to receive
financial gain from the activity include
persons who receive compensation for
services rendered in connection with the
organization or operation of the activity
or for the sale of interests in the activity.
Such a person will generally include the
promoter of the activity who organizes the
activity or solicits potential investors in
the activity.
(2)Example. The provisions of this
paragraph (d) may be illustrated by the fol-
lowing example:
Example. A is the promoter of an activity de-
scribed in section 465(c)(1). As the promoter, A or-
ganizes the activity and solicits potential investors.
For these services, A is paid a flat fee of $130x. This
fee is paid out of the amounts contributed by the in-
vestors to the activity. X, one of the investors in the
activity, borrows money from A for use in the activity.
X is not personally liable for repayment to A of the
amount borrowed. As security for the loan, X pledges
an asset which does not have a readily ascertainable
fair market value. A is considered a person with an
interest in the activity other than that of a creditor with
respect to this loan because the asset pledged as secu-
rity does not have a readily ascertainable fair market
value, X is not personally liable for repayment of the
loan, and A received financial gain from the activity.
Accordingly, X’s amount at risk in the activity is not
increased despite the fact that property was pledged
as security.
(e)Effective date. This section applies
to amounts borrowed after May 3, 2004.
§1.465–20 Treatment of amounts
borrowed from certain persons and
amounts protected against loss.
(a)General rule.Thefollowing
amounts are treated in the same man-
ner as borrowed amounts for which the
taxpayer has no personal liability and for
which no security is pledged—
(1) Amounts that do not increase the
taxpayer’s amount at risk because they are
borrowed from a person who has an inter-
est in the activity other than that of a cred-
itor or from a person who is related to a
person (other than the taxpayer) who has
an interest in the activity other than that of
a creditor; and
(2) Amounts (whether or not borrowed)
that are protected against loss.
(b)Interest other than that of a creditor;
cross reference. See §1.465–8 for addi-
tional rules relating to amounts borrowed
from a person who has an interest in the
activity other than that of a creditor or is re-
lated to a person (other than the taxpayer)
who has an interest in the activity other
than that of a creditor.
(c)Amounts protected against loss;
cross reference. See §1.465–6 for rules
relating to amounts protected against loss.
(d)Effective date. This section applies
to amounts borrowed after May 3, 2004.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved April 26, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on April 30, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 3, 2004, 69 F.R. 24078)
Section 704.—Partner’s
Distributive Share
26 CFR 1.704–1: Partner’s distributive share.
T.D. 9121
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Partner’s Distributive Share:
Foreign Tax Expenditures
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: The temporary regulations
provide rules for the proper allocation
of partnership expenditures for foreign
taxes. The temporary regulations affect
partnerships and their partners. The text
of the temporary regulations also serves
as the text of the proposed regulations
(REG–139792–02) set forth in this issue
of the Bulletin. The final regulations con-
sist of technical revisions to reflect the
issuance of the temporary regulations.
DATES:Effective Date: These regulations
are effective April 21, 2004.
Applicability Date: For dates of appli-
cability, see §1.704–1(b)(1)(ii).
FOR FURTHER INFORMATION
CONTACT:BeverlyKatzat
202–622–3050 (not a toll-free num-
ber).
SUPPLEMENTARY INFORMATION:
Background
Subchapter K is intended to permit tax-
payers to conduct joint business activities
through a flexible economic arrangement
without incurring an entity-level tax. To
achieve this goal of a flexible economic
arrangement, partners are generally per-
mitted to decide among themselves how a
partnership’s items will be allocated. Sec-
tion 704(a) of the Internal Revenue Code
(Code) provides that a partner’s distribu-
tive share of income, gain, loss, deduc-
tion, or credit shall, except as otherwise
provided, be determined by the partnership
agreement.
Section 704(b) placesa significant lim-
itation on the general flexibility of section
704(a). Specifically, section 704(b) pro-
vides that a partner’s distributive share of
income, gain, loss, deduction, or credit (or
item thereof) shall be determined in ac-
cordance with the partner’s interest in the
partnership (determined by taking into ac-
count all facts and circumstances) if the al-
location to a partner under the partnership
agreement of income, gain, loss, deduc-
tion, or credit (or item thereof) does not
have substantial economic effect. Thus,
the statute provides that partnership allo-
cations either must have substantial eco-
nomic effect or must be in accordance with
the partners’ interests in the partnership.
Section 1.704–1(b)(2)(i) provides that
the determination of whether an allocation
of income, gain, loss, or deduction to a
partner has substantial economic effect in-
volves a two-part analysis that is made as
of the end of the partnership taxable year to
which the allocation relates. First, the al-
location must have economic effect within
the meaning of §1.704–1(b)(2)(ii). Sec-
ond, the economic effect of the allocation
must be substantial within the meaning of
§1.704–1(b)(2)(iii).
For an allocation to have economic ef-
fect, it must be consistent with the under-
lying economic arrangement of the part-
ners. This means that, in the event that
2004-20 I.R.B.903May 17, 2004

there is an economic benefit or burden that
corresponds to the allocation, the partner to
whom the allocation is made must receive
such economic benefit or bear such eco-
nomic burden. §1.704–1(b)(2)(ii). Gen-
erally, an allocation of income, gain, loss,
or deduction (or item thereof) to a part-
ner will have economic effect if, and only
if, throughout the full term of the partner-
ship, the partnership agreement provides:
(1) for the determination and maintenance
of the partners’ capital accounts in accor-
dance with §1.704–1(b)(2)(iv); (2) for liq-
uidating distributions to the partners to be
made in accordance with the positive cap-
ital account balances of the partners; and
(3) for each partner to be uncondition-
ally obligated to restore the deficit bal-
ance in the partner’s capital account fol-
lowing the liquidation of the partner’s part-
nership interest. In lieu of satisfying the
third criterion, the partnership may satisfy
the qualified income offset rules set forth
in §1.704–1(b)(2)(ii)(d).
Section 1.704–1(b)(2)(iii)(a)provides
as a general rule that the economic ef-
fect of an allocation (or allocations) is sub-
stantial if there is a reasonable possibil-
ity that the allocation (or allocations) will
affect substantially the dollar amounts to
be received by the partners from the part-
nership, independent of tax consequences.
The section further provides that, even if
the allocation affects substantially the dol-
lar amounts, the economic effect of the
allocation (or allocations) is not substan-
tial if, at the time the allocation (or allo-
cations) becomes part of the partnership
agreement, (1) the after-tax economic con-
sequences of at least one partner may, in
present value terms, be enhanced com-
pared to such consequences if the alloca-
tion (or allocations) were not contained in
the partnership agreement, and (2) there is
a strong likelihood that the after-tax eco-
nomic consequences of no partner will, in
present value terms, be substantially di-
minished compared to such consequences
if the allocation (or allocations) were not
contained in the partnership agreement.
The regulations under section 704(b)
provide that the allocation of certain items
cannot have substantial economic effect,
and accordingly provide guidance on allo-
cating those items in a manner that will be
deemed to be in accordance with the part-
ners’ interests in the partnership. Items
that cannot be allocated with substan-
tial economic effect include tax credits,
nonrecourse deductions, and recapture
amounts. These items are addressed in
§§1.704–1(b)(4) and 1.704–2.
Explanation of Provisions
1.Clarifying the Allocation of
Expenditures for Foreign Taxes
Section 901(b)(5) provides that an indi-
vidual who is a partner will, subject to cer-
tain limitations, qualify for the foreign tax
credit for his proportionate share of taxes
of the partnership paid or accrued during
the taxable year to a foreign country or to
any possession of the United States. Sec-
tion 702(a)(6) provides that each partner
shall take into account separately his dis-
tributive share of the partnership’s taxes,
described in section 901, paid or accrued
to foreign countries and to possessions of
the United States. Section 703(a)(2)(B)
provides that the partnership is not enti-
tled to the deductionfor taxes provided in
section 164(a) with respect to taxes, de-
scribed in section 901, paid or accrued to
foreign countries and to possessions of the
United States. Section 703(b)(3) provides
that elections affecting the computation of
taxable income derived from a partnership
shall be made by the partnership, except
that any election under section 901 (relat-
ing to taxes of foreign countries and pos-
sessions of the United States), will be made
by each partner separately.
These temporary regulations clarify the
application of the regulations under sec-
tion 704 to creditable foreign tax expendi-
tures for which the partnership bears legal
liability as described in §1.901–2(f). Un-
like most other trade or business expenses,
foreign taxes described in section 901 or
903 are fully creditable against a partner’s
U.S. tax liability, subject to certain limita-
tions, including primarily the foreign tax
credit limitation under section 904. For
this reason, the temporary regulations pro-
vide that partnership allocations of cred-
itable foreign tax expenditures cannot have
substantial economic effect and, therefore,
must be allocated in accordance with the
partners’ interests in the partnership. A
creditable foreign tax is a foreign tax paid
or accrued for U.S. tax purposes by a part-
nership and that is eligible for a credit un-
der section 901(a). A foreign tax is a cred-
itable foreign tax for these purposes with-
out regard to whether a partner receiving
an allocation of such foreign tax elects to
claim a credit for such amount.
The temporary regulations establish
a safe harbor underwhich partnership
allocations of foreign tax expenditures
will be deemed to be in accordance with
the partners’ interests in the partnership.
Under this safe harbor, if the partnership
agreement satisfies the requirements of
§1.704–1(b)(2)(ii)(b)or(d)(i.e., capital
account maintenance,liquidation accord-
ing to capital accounts, and either deficit
restoration obligations or qualified income
offsets), then an allocation of a foreign tax
expenditure that is proportionate to a part-
ner’s distributive share of the partnership
income to which such taxes relate (includ-
ing income allocated pursuant to section
704(c)) will be deemed to be in accor-
dance with the partners’ interests in the
partnership. This rule is consistent with
the underlying purposes of the foreign tax
credit, which is to avoid double taxation
of foreign source income, and the foreign
tax credit limitation, which is to prevent
foreign tax credits from offsetting tax lia-
bility on a taxpayer’s U.S. source income.
Also, this rule achieves greater parity be-
tween entities that are taxed under foreign
law at the partner level and entities that
are taxed under foreign law at the entity
level. If a partnership were taxed under
foreign law at the partner level, then the
amount of foreign taxes imposed on a part-
ner generally would be proportionate to
the partner’s share of the income subject
to the foreign tax. The partner would take
into account this amount of foreign tax in
computing U.S. tax liability. Likewise, for
partnerships that are taxed under foreign
law at the entity level, the safe harbor pro-
vides that a partner is allowed to take into
account in computing U.S. tax liability
the share of the partnership’s foreign tax
expenditures that is proportionate to the
partner’s share of the income to which
such taxes relate.
If the taxpayer does not satisfy this safe
harbor, then the taxpayer’s allocations
will be tested under the partners’ interests
in the partnership standard set forth in
§1.704–1(b)(3). Under that standard, the
determination of a partner’s interest in a
partnership is made by taking into account
all facts and circumstances relating to the
economic arrangement of the partners.
Among the facts to be considered are:
May 17, 20049042004-20 I.R.B.

(a) the partners’ relative contributions to
the partnership; (b) the interests of the
partners in economic profits and losses
(if different than their interests in taxable
income or loss); (c) the interests of the
partners in cash flow and other non-liq-
uidating distributions; and (d) the rights
of the partners to distributions of capital
upon liquidation. Ultimately, the partners’
interests in the partnership signify the
manner in which the partners have agreed
to share the economic benefit or burden (if
any) corresponding to the income, gain,
loss, deduction, or credit (or item thereof)
that is allocated. The sharing arrangement
with respect to a particular item may or
may not correspond to the overall eco-
nomic arrangement of the partners. Thus,
a partnership’s allocation of a foreign tax
expenditure that doesnot satisfy the safe
harbor contained in these temporary reg-
ulations, may, in unusual circumstances
(such as where there is substantial cer-
tainty that U.S partners will deduct, rather
than credit, foreign taxes) be in accordance
with partners’ interests in the partnership
under §1.704–1(b)(3).
2.Application of §1.704–1(b)(2)(iii)
Substantiality Requirement Where
Partnership Allocation Has Tax Effect on
Owners of Partners
As discussed above, in determining
if the economic effect of a partnership
allocation is substantial, the partnership
must consider the after-tax economic con-
sequences to the partners. The IRS and
Treasury have become aware that some
partnerships are taking the position that,
in determining if the economic effect of a
partnership allocation is substantial, they
need not consider any tax consequences to
an owner of the partner that result from the
allocation. The IRS and Treasury believe
that such a position is inconsistent with
the policies underlying the substantial
economic effect rules, because it would al-
low a partnership to make tax-advantaged
allocations if the tax advantages of the
allocations were to accrue to an owner of
a partner, rather than to the partner itself.
The IRS and Treasury are planning to issue
guidance on the application of the section
704(b) regulations to these situations.
3.Effective Date
The provisions of these regulations
generally apply for partnership taxable
years beginning on or after the date that
the temporary regulations are published
in the Federal Register. A transition rule
is also provided for existing partnerships.
Under the transition rule, if a partnership
agreement was entered into before April
21, 2004, then the partnership may ap-
ply the provisions of §1.704–1(b), as if
the amendments made by this temporary
regulation had not occurred, until any
subsequent material modification to the
partnership agreement, which includes any
change in ownership, occurs. This transi-
tion rule does not apply if, as of April 20,
2004, persons that are related to each other
(within the meaning of section 267(b) and
707(b)) collectively have the power to
amend the partnership agreement without
the consent of any unrelated party. No
inference regarding the treatment of allo-
cations of foreign taxes under §1.704–1(b)
(prior to the amendments made by this
temporary regulation) is intended.
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), refer to the
Special Analyses section of the preamble
to the notice of proposed rulemaking on
this subject published in this issue of the
Bulletin. Pursuant to section 7805(f) of
the Code, this notice of rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of this regulation
is Beverly M. Katz, Office of the Associate
Chief Counsel (Passthroughs & Special In-
dustries). However, other personnel from
the IRS and Treasury Department partici-
pated in its development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.704–1 is amended as
follows:
1. Paragraph (b)(0) is amended by
adding entries for §§1.704–1(b)(1)(ii)(a),
1.704–1(b)(1)(ii)(b), 1.704–1(b)(4)(viii),
1.704–1(b)(4)(ix), 1.704–1(b)(4)(x), and
1.704–1(b)(4)(xi).
2. The text of paragraph (b)(1)(ii) is
redesignated as paragraph (b)(1)(ii)(a).
3. A heading is added to newly desig-
nated paragraph (b)(1)(ii)(a).
4. Paragraphs (b)(1)(ii)(b), (b)(4)(viii),
(b)(4)(ix), (b)(4)(x), and (b)(4)(xi) are
added.
5. Paragraph (b)(5) is amended by
addingExample 20throughExample 28.
6. The additions read as follows:
§1.704–1 Partner’s distributive share.
*****
(b)Determination of partner’s distribu-
tive share—(0)Cross-references.
*****
2004-20 I.R.B.905May 17, 2004

Generally................................................................................... 1.704–1(b)(1)(ii)(a)
Foreigntaxexpenditures ..................................................................... 1.704–1(b)(1)(ii)(b)
*****
[Reserved].................................................................................. 1.704–1(b)(4)(viii)
[Reserved].................................................................................. 1.704–1(b)(4)(ix)
[Reserved].................................................................................. 1.704–1(b)(4)(x)
Allocationofcreditableforeigntaxes.......................................................... 1.704–1(b)(4)(xi)
*****
(1) * * *
(ii)***(a)Generally.
(b)Foreign tax expenditures.[Re-
served]. For further guidance, see
§1.704–1T(b)(1)(ii)(b).
*****
(4) * * *
(viii) [Reserved].
(ix) [Reserved].
(x) [Reserved].
(xi)Allocation of creditable foreign
taxes. [Reserved]. For further guidance,
see §1.704–1T(b)(4)(xi).
(5) * * * *
Examples (20) through (24). [Re-
served].
Examples (25) through (28). [Re-
served]. For further guidance, see
§1.704–1T(b)(5), Examples (25) through
(28).
Par. 3. Section 1.704–1T is added to
read as follows:
§1.704–1T Partner’s distributive share
(temporary).
(a) through (b)(1)(ii)(a)[Reserved].
For further guidance, see §1.704–1(a)
through (b)(1)(ii)(a).
(b)(1)(ii)(b)Rules relating to foreign
tax expenditures—(1)In general. The pro-
visions of paragraphs (b)(4)(xi) (regarding
the allocation of foreign tax expenditures)
apply for partnership taxable years begin-
ning on or after April 21, 2004.
(2)Transition rule. If a partnership
agreement was entered into before April
21, 2004, then the partnership may ap-
ply the provisions of this paragraph (b)
as if the amendments made by this tem-
porary regulation had not occurred, un-
til any subsequent material modification
to the partnership agreement, which in-
cludes any change in ownership, occurs.
This transition rule does not apply if, as
of April 20, 2004, persons that are related
to each other (within the meaning of sec-
tion 267(b) and 707(b)) collectively have
the power to amend the partnership agree-
ment without the consent of any unrelated
party.
(b)(1)(iii) through (b)(4)(vii) [Re-
served]. For further guidance, see
§1.704–1(b)(1)(iii) through (b)(4)(vii).
(b)(4)(viii) through (b)(4)(x) [Re-
served].
(b)(4)(xi)Allocations of creditable for-
eign taxes—(a)In general. Allocations of
creditable foreign taxes cannot have sub-
stantial economic effect and, accordingly,
such expenditures must be allocated in ac-
cordance with the partners’ interests in the
partnership. An allocation of a creditable
foreign tax will be deemed to be in ac-
cordance with the partners’ interests in the
partnership if—
(1) The requirements of either para-
graph (b)(2)(ii)(b)or(b)(2)(ii)(d)ofthis
section are satisfied (i.e., capital accounts
are maintained in accordance with para-
graph (b)(2)(iv) of this section, liquidating
distributions are required to be made in
accordance with positive capital account
balances, and each partner either has an
unconditional deficit restoration obliga-
tion or agrees to a qualified income offset);
and
(2) The partnership agreement provides
for the allocation of the creditable foreign
taxinproportiontothepartners’distribu-
tive shares of income (including income
allocated pursuant to section 704(c)) to
which the creditable foreign tax relates.
(b)Creditable foreign taxes. A cred-
itable foreign tax is a foreign tax paid or
accrued for U.S. tax purposes by a part-
nership and that is eligible for a credit un-
der section 901(a). A foreign tax is a cred-
itable foreign tax for these purposes with-
out regard to whether a partner receiving
an allocation of such foreign tax elects to
claim a credit for such amount.
(c)Income related to foreign taxes.A
foreign tax is related to income if the in-
come is included in the base upon which
the taxes are imposed, which determina-
tion must be made in accordance with the
principles of §1.904–6. SeeExamples(25)
through (28) of paragraph (b)(5) of this
section.
(b)(5)***
Examples1 through 19 [Reserved]. For
further guidance, see §1.704–1(b)(5),Ex-
amples1 through 19.
Examples20through24[Reserved].
Example 25. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chap-
ter), treated as a partnership for U.S. tax purposes.
AB’s partnership agreement (within the meaning of
paragraph (b)(2)(ii)(j) of this section) provides that
the partners’ capital accounts will be determined and
maintained in accordance with paragraph (b)(2)(iv)
of this section, that liquidation proceeds will be dis-
tributed in accordance with the partners’ positive cap-
ital account balances, andthat any partner with a
deficit balance in his capital account following the
liquidation of his interest must restore that deficit to
the partnership. AB operates business M and earns
income from passive investments in country X. As-
sume that country X imposes a 40 percent tax on busi-
ness M income, which tax is a creditable foreign tax,
but exempts from tax income from passive invest-
ments. In year 1, AB earns $100 of income from busi-
ness M and $30 from passive investments and pays
or accrues $40 of country X taxes. For purposes of
section 904(d), the income from business M is gen-
eral limitation income and the income from the pas-
sive investments is passive income. Pursuant to the
partnership agreement, all partnership items, includ-
ing creditable foreign taxes, from business M are al-
located 60 percent to A and 40 percent to B, and all
partnership items, including creditable foreign taxes,
from passive investments are allocated 80 percent to
A and 20 percent to B. Accordingly, A is allocated 60
percent of the business M income ($60) and 60 per-
cent of the country X taxes($24), and B is allocated
40 percent of the business M income ($40) and 40
percent of the country X taxes ($16).
(ii) Under paragraph (b)(4)(xi) of this section, the
$40 of taxes is related to the $100 of general limita-
tion income and no portion of the taxes is related to
the passive income. Because AB’s partnership agree-
ment allocates the general limitation income 60/40
and the country X taxes 60/40, the allocations of the
country X taxes are in proportion to the allocation of
the income to which the foreign tax relates. Because
AB satisfies the requirement of paragraph (b)(4)(xi)
of this section, the allocations of the country X taxes
are deemed to be in accordancewith the partners’ in-
terests in the partnership.
Example 26. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chapter),
treated as a partnership for U.S. tax purposes. AB’s
partnership agreement (within the meaning paragraph
(b)(2)(ii)(j) of this section) provides that the partners’
May 17, 20049062004-20 I.R.B.

capital accounts will be determined and maintained in
accordance with paragraph (b)(2)(iv) of this section,
that liquidation proceeds will be distributed in accor-
dance with the partners’ positive capital account bal-
ances, and that any partner with a deficit balance in
his capital account following the liquidation of his in-
terest must restore that deficit to the partnership. AB
operates business M in country X and business N in
country Y. Assume that country X imposes a 40 per-
cent tax on business M income, country Y imposes a
20 percent tax on business N income, and the country
X and country Y taxes are creditable foreign taxes. In
year 1, AB has $100 of income from business M and
$50 of income from business N. Country X imposes
$40 of tax on the income from business M and coun-
try Y imposes $10 of tax on the income of business N.
Pursuant to the partnership agreement, all partnership
items, including creditableforeign taxes, from busi-
ness M are allocated 75 percent to A and 25 percent to
B, and all partnership items, including creditable for-
eign taxes, from business N are split evenly between
A and B (50/50). Accordingly, A is allocated 75 per-
cent of the income from business M ($75), 75 percent
of the country X taxes ($30), 50 percent of the income
from business N ($25), and 50 percent of the country
Y taxes ($5). B is allocated25 percent of the income
from business M ($25), 25 percent of the country X
taxes ($10), 50 percent of the income from business
N ($25), and 50 percent of the country Y taxes ($5).
(ii) Because the income from business M and
business N is general limitation income and the part-
nership agreement provides for different allocations
with respect to such income, it is necessary to deter-
mine which foreign taxes are related to the business
M income and which foreign taxes are related to the
business N income. Under paragraph (b)(4)(xi) of
this section, the $40 of country X taxes is related to
business M and the $10 of country Y taxes is related
to business N. Because AB’s partnership agreement
allocates the $40 of country X taxes in the same
proportion as the general limitation income from
business M, and the $10 of country Y taxes in the
same proportion as the general limitation income
from business N, the allocations of the country X
taxes and the country Y taxes are in proportion to the
allocation of the income to which the foreign taxes
relate. Because AB satisfies the requirements of
paragraph (b)(4)(xi), the allocations of the country X
and country Y taxes are deemed to be in accordance
with the partners’ interests in the partnership.
Example 27. (i) The facts are the same as inEx-
ample 26, except that AB does not actually receive
the $50 accrued with respect to business N until year
2. Also assume that A, B and AB each report taxable
income on an accrual basis for U.S. tax purposes and
AB reports taxable income on a cash basis for country
X and country Y purposes. In year 1, AB pays coun-
try X taxes of $40. In year 2, AB pays country Y
taxes of $10. Pursuant to the partnership agreement,
in year 1, A is allocated 75 percent of business M in-
come ($75) and country X taxes ($30) and 50 percent
of business N income ($25). B is allocated 25 per-
cent of business M income ($25) and country X taxes
($10) and 50 percent of business N income ($25). In
year 2, A and B will each be allocated 50 percent of
the country Y taxes ($5).
(ii) Because the income from business M and
business N is general limitation income and the part-
nership agreement provides for different allocations
with respect to such income, it is necessary to de-
termine which foreign taxes are related to business
M income and which foreign taxes are related to
business N income. Under paragraph (b)(4)(xi) of
this section, $40 of country X taxes is related to the
$100 of general limitation income from business
M. Under paragraph (b)(4)(xi), the country Y tax
imposed in year 2 is allocable to the $50 of business
N income AB recognizes in year 2 under country Y
law and is treated as paid in year 2 on the $50 of
business N income recognized for U.S. tax purposes
in year 1. See §1.904–6(a)(1)(iv) and (c),Example 5.
Accordingly, the $10 of country Y taxes is related to
the $50 of general limitation income from business
N. Because AB’s partnership agreement allocates the
$40 of country X taxes in proportion to the general
limitation income from business M, and the $10 of
country X taxes from business N in proportion to the
year 1 general limitation income from business N, the
allocations of the country X and country Y taxes are
in proportion to the allocation of the income to which
the foreign taxes relate. Therefore, AB’s partnership
agreement satisfies the requirement of paragraph
(b)(4)(xi)(a)(2) of this section. Because AB also sat-
isfies the requirements of paragraph (b)(4)(xi)(a)(1)
of this section, the allocations of the country X and
Y taxes are deemed to be in accordance with the
partners’ interests in the partnership under paragraph
(b)(4)(xi) of this section.
Example 28. (i) A and B form AB, an eligible
entity (as defined in §301.7701–3(a) of this chap-
ter), treated as a partnership for U.S. tax purposes.
AB’s partnership agreement provides that the part-
ners’ capital accounts will be determined and main-
tained in accordance with paragraph (b)(2)(iv) of this
section, that liquidation proceeds will be distributed
in accordance with the partners’ positive capital ac-
count balances, and that any partner with a deficit bal-
ance in his capital account following the liquidation
of his interest must restore that deficit to the partner-
ship. AB operates business M in country X. Assume
that country X imposes a 20 percent tax on the net in-
come from business M, which tax is a creditable for-
eign tax. In year 1, AB earns $300 of gross income,
has deductible expenses, exclusive of creditable for-
eign taxes, of $100, and pays or accrues $40 of coun-
try X tax. For purposes of section 904(d), all income
from business M is general limitation income. Pur-
suant to the partnership agreement, the first $100 of
gross income each year is allocated to A as a return
on excess capital contributed by A. All remaining
partnership items, including creditable foreign taxes,
are split evenly (50/50) between A and B. Assume
that the gross income allocation is not deductible for
country X purposes.
(ii) Under paragraph (b)(4)(xi) of this section, the
$40 of taxes is related to the $200 of general limita-
tion net income. In year 1, AB’s partnership agree-
ment allocates $150 or 75 percent of the general lim-
itation income to A ($100 attributable to the gross in-
come allocation plus $50 of the remaining $100 of
net income) and $50 or 25 percent of the net income
to B. AB’s partnership agreement allocates the coun-
try X taxes in accordance with the partners’ shares of
partnership items remaining after the $100 gross in-
come allocation. Therefore, AB allocates the country
X taxes 50 percent to A ($20) and 50 percent to B
($20). Under paragraph (b)(4)(xi) of this section, the
allocation of country X taxes cannot have substantial
economic effect and must be allocated in accordance
with the partners’ interests in the partnership. AB’s
allocations of country X taxes are not deemed to be
in accordance with the partners’ interests in the part-
nership under paragraph (b)(4)(xi) of this section, be-
causetheyarenotinproportiontotheallocationof
the income to which the country X taxes relates.
(c) through (e)(4)(ii)(b) [Reserved].
For further guidance, see §1.704–1(c)
through (e)(4)(ii)(b).
John M. Dalrymple,
Acting Deputy Commissioner for
Services and Enforcement.
Approved March 25, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on April 20, 2004,
8:45 a.m., and published in the issue of the Federal Register
for April 21, 2004, 69 F.R. 21405)
Section 1296.—Election
of Mark to Market for
Marketable Stock
26 CFR 1.1296.1: Mark to market election for mar-
ketable stock.
T.D. 9123
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Electing Mark to Market for
Marketable Stock
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that provide procedures for
certain United States persons holding mar-
ketable stock in a passive foreign invest-
ment company (PFIC) to elect mark to
market treatment for that stock under sec-
tion 1296 of the Internal Revenue Code
and related provisionsof sections 1291 and
1295. These final regulations affect United
States persons owning marketable stock in
a PFIC.
DATES:Effective Date:These regulations
are effective May 3, 2004.
2004-20 I.R.B.907May 17, 2004

Applicability Date:For dates of appli-
cability, see §§1.1291–1(j), 1.1295–1(k),
and 1.1296–1(j).
FOR FURTHER INFORMATION
CONTACT: Alexandra K. Helou, (202)
622–3840 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On July 31, 2002, the IRS published in
theFederal Registeranoticeofproposed
rulemaking (REG–112306–00, 2002–2
C.B. 767) under section 1296 and related
provisions of the Internal Revenue Code
(Code). Two written comments were
received in response to the notice of pro-
posed rulemaking. No public hearing was
requestedorheldonthenoticeofpro-
posed rulemaking. After consideration of
the comments, the proposed regulations
are adopted as final regulations with the
modifications discussed below.
Summary of Public Comments and
Explanation of Changes
A. Deferral of Post-October PFIC Losses
by Regulated Investment Companies
(RICs) Under section 852(b)(10)
One commentator recommended that
the regulations provide guidance regard-
ing the determination of post-October “net
reduction in value” of PFIC stock held by
a RIC under section 852(b)(10). Section
852(b)(10) provides that taxable income
of a RIC (other than a RIC to which an
election under section 4982(e)(4) applies)
shall be computed without regard to any
net reduction in value occurring after Oc-
tober 31 of the taxable year of any stock
of a PFIC with respect to which an elec-
tion under section 1296(k) is in effect and
that any such reduction shall be treated as
occurring on the first day of the following
taxable year.
To address concerns relating to a RIC’s
post-October period, the commentator pro-
vided three recommendations. First, that
the regulations clarify whether the deferral
of post-October PFIC losses under section
852(b)(10) is elective or mandatory; sec-
ond, that RICs be permitted to defer their
post-October losses under rules similar to
those that apply to foreign currency gains
and losses under §1.852–11; and third, that
RICs be allowed to include actual post-
October dispositions of PFIC stock when
computing losses eligible for deferral.
The IRS and Treasury have considered
these recommendations and determined
that the issues raised with respect to sec-
tion 852(b)(10) are issues under the RIC
tax provisions that are beyond the scope
of this regulations project.
B. Situations Arising From Different
Tax Years of RICs and the Foreign
Corporations in Which They Invest
One commentator requested guidance
in instances where the RIC and a foreign
corporation in which it invests have differ-
ent or “mismatching” taxable years. This
commentator noted that a RIC may expe-
rience uncertainties with respect to deter-
mining its taxable income and minimum
distribution amount in situations where,
following the end of its taxable year, the
RIC learns that a foreign corporation in
which it has invested is a PFIC or that the
foreign corporation no longer satisfies the
income or asset tests of section 1297(a) for
the current taxable year. To address admin-
istrative concerns arising in this situation,
this commentator recommended that RICs
be permitted to recognize a change in a for-
eign corporation’s PFIC status in the RIC’s
taxable year within which the taxable year
of the foreign corporation ends.
Issues arising from different taxable
years are not specific to PFICs for which a
taxpayer has made a section 1296 election.
Accordingly, this issue is beyond the scope
of this regulations project. However, com-
ments are requested for approaches that
address issues arising when a taxpayer
and a PFIC have different taxable years.
Such issues may be addressed in a future
regulations project.
C. Situations Where a RIC Owns Stock in
a Foreign Corporation That No Longer
Satisfies the PFIC Definition in the
Current Year
One commentator suggested that the
regulations should address certain issues
that arise with respect to a shareholder
that has made a section 1296 election for
its PFIC stock and the foreign corporation
does not satisfy the income or asset test
in section 1297(a) for the year. First, the
commentator suggested that the regula-
tions clarify that the character of gains
from the disposition of the stock of the
foreign corporation during the time that
the corporation did not qualify as a PFIC
should be capital gain. The commen-
tator also requested that the regulations
provide that the character of losses with
respect to stock for which a section 1296
election was made but that is recognized
in a taxable year during which the for-
eign corporation is not a PFIC be treated
as ordinary income to the extent of any
unreversed inclusions at the time of dispo-
sition.
After consideration of these comments,
and in accordance with the statutory pro-
visions of section 1296, the IRS and Trea-
sury have adopted the first comment, but
not the second comment. Accordingly,
two examples were added to the regula-
tions.Example 2in §1.1296–1(c)(7) clari-
fies that any gain from the disposition of
stock of a foreign corporation that does
not qualify as a PFIC for the year of dis-
position will be capital gain because sec-
tion 1296(c)(1)(A) no longer applies at
such time. In the case of losses with re-
spect to stock for which a section 1296
election was made but that is recognized
in a taxable year during which the for-
eign corporation is not a PFIC,Example
4in §1.1296–1(c)(7) was added to clar-
ify that any loss from the disposition of
such stock will be a capital loss because
section 1296(c)(1)(B) no longer applies at
such time.
Second, the commentator recom-
mended that the regulations provide au-
tomatic consent for RICs to terminate a
section 1296 election during a year that
a foreign corporation no longer satisfies
the requirements for PFIC status. The IRS
and Treasury have not adopted this recom-
mendation. The IRS and Treasury believe
that it is appropriate to require consent of
the Commissioner to terminate a section
1296 election. Under §1.1296–1(h)(3), a
shareholder can request the consent of the
Commissioner to revoke a section 1296
election upon a finding of a substantial
change in circumstances, which may in-
clude a foreign corporation ceasing to be
a PFIC.
May 17, 20049082004-20 I.R.B.

D. Technical Coordination Issues Arising
From Marking PFIC Stock to Market
Under the Former Proposed §1.1291–8
and Notice 92–53
A commentator suggested that the reg-
ulations should clarify how the former
proposed §1.1291–8 (see Notice 92–53,
1992–2 C.B. 384) and the current statutory
PFIC mark to market rules under section
1296 interact. For example, the commen-
tator requested clarification concerning the
RIC’s adjustments to the basis of its PFIC
stock to reflect gains previously included
under the former proposed §1.1291–8.
The IRS and Treasury believe that no
additional clarification is needed. To the
extent a taxpayer increased its basis or
received a new holding period under the
former proposed §1.1291–8, those con-
sequences will be respected even though
the proposed regulations were withdrawn
without being finalized following the
enactment of current section 1296 (see
INTL–941–86, 1991–1 C.B. 1255 [64 FR
5015] (February 2, 1999) withdrawing
proposed §1.1291–8). As a result, the
suggestion was not adopted.
This same commentator also recom-
mended thatExample 2of proposed
§1.1296–1(i)(4) be clarified by specifi-
cally providing that the RIC had not made
a mark to market election under the former
proposed §1.1291–8. The commentator
suggested this modification to eliminate
potential ambiguities that may arise over
the relationship between an election under
the former proposed §1.1291–8 and sec-
tion 1296. This suggestion was adopted,
and the example has been revised accord-
ingly.
E. The Regulations Should Allow Qualified
Shareholders to Make Protective and
Retroactive Mark to Market Elections
One commentator recommended that
the regulations should provide rules sim-
ilar to those contained in the qualified
electing fund (QEF) regime for purposes
of making a retroactive QEF election. The
IRS and Treasury have considered this
comment and continue to believe that the
appropriate process for retroactive relief
for late mark to market elections is un-
der the §301.9100 relief provisions, as
set forth in §1.1296–1(h)(1)(iii). Accord-
ingly, this suggestion was not adopted.
F. Termination of Existing Section 1296
Mark to Market Elections Without the
Consent of the Commissioner
One commentator suggested permitting
a taxpayer with an existing section 1296
election to make a QEF election and ter-
minate its existing 1296 election without
the consent of the Commissioner. The pro-
posed regulations were structured to facil-
itate an election for mark to market treat-
ment by permitting a taxpayer with an ex-
isting QEF election to make a section 1296
election and terminate the existing QEF
election without requiring the consent of
the Commissioner. Conversely, a taxpayer
with an existing section 1296 election is
permitted to make a QEF election only if
the section 1296 election is terminated as
provided by section 1296 and the regula-
tions thereunder (e.g., if the PFIC stock
ceases to be marketable) or is revoked with
consent of the Commissioner. This ap-
proach reflects consideration of the rela-
tive administrative burdens imposed under
each set of rules, and the stated intent of
Congress that one of the purposes for en-
acting section 1296 was to provide another
alternative to the interest charge rules of
section 1291 that would be available in in-
stances where taxpayers cannot obtain suf-
ficient information to make a QEF elec-
tion. See H.R. Rep. No. 105–148, at
533 (1997); S. Rep. No. 105–33 at 94
(1997). After consideration of the com-
ment, the IRS and Treasury continue to be-
lieve the rules coordinating QEF elections
and mark to market elections under sec-
tion 1296 are appropriate for the reasons
discussed above. Accordingly, this recom-
mendation was not adopted.
G. Proposals to Enhance the Utility of
QEF Elections for RICs
One commentator provided two sug-
gestions focused on enhancing the utility
of QEF elections for RICs. Specifically,
the commentator first suggested allow-
ing RICs to use U.S. Generally Accepted
Accounting Principles (U.S. GAAP) or
International Financial Reporting Stan-
dards (IFRS) for purposes of computing
QEF inclusions under section 1295(a)(2).
The commentator also suggested revising
the retroactive QEF election rules in cases
where a RIC learns of the PFIC status of
a foreign corporation immediately prior
to the deadline for making a QEF elec-
tion. These comments, which raise issues
regarding the QEF rules, are beyond the
scope of this regulation. Accordingly,
these comments were not adopted but will
be considered in the context of any guid-
ance to be issued under the appropriate
substantive provisions.
H. Additional Revisions
The final regulations also clarify that
the regulations apply to taxable years be-
ginning on or after May 3, 2004. Addi-
tionally, the several examples in proposed
§1.1296–1(c) have been grouped together
in new §1.1296–1(c)(7) in order to make
the regulation more readable.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose 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) of the Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regula-
tions is Alexandra K. Helou, Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
2004-20 I.R.B.909May 17, 2004

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1296–1 also issued under 26
U.S.C. 1296(g) and 26 U.S.C. 1298(f).
***
Par. 2. §1.1291–0 (table of contents) is
amended by revising the introductory text
and by adding the entries for §1.1291–1 to
read as follows:
§1.1291–0 Treatment of shareholders
of certain passive foreign investment
companies; table of contents.
This section contains a listing of the
headings for §§1.1291–1, 1.1291–9, and
1.1291–10.
§1.1291–1 Taxation of U.S. persons that
are shareholders of section 1291 funds.
(a) through (b) [Reserved].
(c) Coordination with other PFIC rules.
(1) and (2) [Reserved].
(3) Coordination with section 1296:
distributions and dispositions.
(4) Coordination with mark to market
rules under chapter 1 of the Internal Rev-
enue Code other than section 1296.
(i) In general.
(ii) Coordination rule.
(d) [Reserved].
(e) Exempt organization as shareholder.
(1) In general.
(2) Effective date.
(f) through (i) [Reserved].
(j) Effective date.
*****
Par. 3. Section 1.1291–1 is amended
by:
1. Revising paragraphs (a) through (d).
2. Adding paragraphs (f) through (j).
The revisions and additions read as fol-
lows:
§1.1291–1 Taxation of U.S. persons that
are shareholders of section 1291 funds.
(a) and (b) [Reserved].
(c)Coordination with other PFIC rules.
(1) and (2) [Reserved].
(3)Coordination with section 1296:
distributions and dispositions. If PFIC
stock is marked to market under sec-
tion 1296 for any taxable year, then,
except as provided in §1.1296–1(i), sec-
tion 1291 and the regulations thereunder
shall not apply to any distribution with
respect to section 1296 stock (as defined
in §1.1296–1(a)(2)), or to any disposition
of such stock, for such taxable year.
(4)Coordination with mark to market
rules under chapter 1 of the Internal Rev-
enue Code other than section 1296—(i)In
general. If PFIC stock is marked to mar-
ket for any taxable year under section 475
or any other provision of chapter 1 of the
Internal Revenue Code, other than section
1296, regardless of whether the applica-
tion of such provision is mandatory or
results from an election by the taxpayer or
another person, then, except as provided in
paragraph (c)(4)(ii) of this section, section
1291 and the regulations thereunder shall
not apply to any distribution with respect
to such PFIC stock or to any disposition of
such PFIC stock for such taxable year. See
§§1.1295–1(i)(3) and 1.1296–1(h)(3)(i)
for rules regarding the automatic termina-
tion of an existing election under section
1295 or section 1296 when a taxpayer
marks to market PFIC stock under section
475 or any other provision of chapter 1 of
the Internal Revenue Code.
(ii)Coordination rule—(A) Notwith-
standing any provision in this section to the
contrary, the rule of paragraph (c)(4)(ii)(B)
of this section shall apply to the first tax-
able year in which a United States per-
son marks to market its PFIC stock un-
der a provision of chapter 1 of the Internal
Revenue Code, other than section 1296, if
such foreign corporation was a PFIC for
any taxable year, prior to such first tax-
able year, during the United States per-
son’s holding period (as defined in section
1291(a)(3)(A) and §1.1296–1(f)) in such
stock, and for which such corporation was
not treated as a QEF with respect to such
United States person.
(B) For the first taxable year of a United
States person that marks to market its PFIC
stock under any provision of chapter 1 of
the Internal Revenue Code, other than sec-
tion 1296, such United States person shall,
in lieu of the rules under which the United
States person marks to market, apply the
rules of §1.1296–1(i)(2) and (3) as if the
United States person had made an election
under section 1296 for such first taxable
year.
(d) [Reserved].
*****
(f) through (i) [Reserved].
(j)Effective dates. This section applies
for taxable years beginning on or after May
3, 2004, except as otherwise provided in
paragraph (e)(2) of this section.
Par. 4. §1.1295–0 (table of contents) is
amended by:
1.Revising the entries for
§1.1295–1(i)(3) and (i)(4) and adding
paragraph (i)(5), (i)(5)(i), and (i)(5)(ii).
2. Revising the entry for §1.1295–1(k).
The revisions and addition read as fol-
lows:
§1.1295–0 Table of contents. * * *
§1.1295–1 Qualified electing funds.
*****
(i) * * *
(3) Automatic termination.
(4) Effect of invalidation, termination
or revocation.
(5) Election after invalidation, termina-
tion or revocation.
(i) In general.
(ii) Special rule.
*****
(k) Effective dates.
*****
§1.1295–1 Qualified electing funds.
Par. 5. Section 1.1295–1 is amended
by:
1. Redesignating paragraphs (i)(3) and
(i)(4) as paragraphs (i)(4) and (i)(5), re-
spectively.
2. Adding a new paragraph (i)(3).
3. Revising newly designated para-
graph (i)(5).
4. Revising paragraph (k).
The revisions and addition read as fol-
lows:
§1.1295–1 Qualified electing funds
*****
(i) * * *
(3)Automatic termination.IfaUnited
States person, or the United States share-
holder on behalf of a controlled foreign
corporation, makes an election pursuant to
section 1296 and the regulations thereun-
der with respect to PFIC stock for which a
QEF election is in effect, or marks to mar-
ket such stock under another provision of
chapter 1 of the Internal Revenue Code, the
May 17, 20049102004-20 I.R.B.

QEF election is automatically terminated
with respect to such stock that is marked to
market under section 1296 or another pro-
vision of chapter 1 of the Internal Revenue
Code. Such termination shall be effective
on the last day of the shareholder’s tax-
able year preceding thefirst taxable year
for which the section 1296 election is in
effect or such stock is marked to market
under another provision of chapter 1 of the
Internal Revenue Code.
Example. Corp Y, a domestic corporation, owns
directly 100 shares of marketable stock in foreign
corporation FX, a PFIC. Corp Y also owns a 50
percent interest in FP, a foreign partnership that owns
200 shares of FX stock. Accordingly, under section
1298(a)(3) and §1.1296–1(e)(1), Corp Y is treated as
indirectly owning 100 shares of FX stock. Corp Y
also owns 100 percent of the stock of FZ, a foreign
corporation that is not a PFIC. FZ owns 100 shares of
FX stock, and therefore under section 1298(a)(2)(A),
Corp Y is treated as owning the 100 shares of FX
stock owned by FZ. For taxable year 2005, Corp Y
has a QEF election in effect with respect to all 300
shares of FX stock that it owns directly or indirectly.
See generally §1.1295–1(c)(1). For taxable year
2006, Corp Y makes a timely election pursuant to
section 1296 and the regulations thereunder. For
purposes of section 1296, Corp Y is treated as own-
ing stock held indirectly through a partnership, but
not through a foreign corporation. Section 1296(g);
§1.1296–1(e)(1). Accordingly, Corp Y’s section
1296 election covers the 100 shares it owns directly
and the 100 shares it owns indirectly through FP,
but not the 100 shares owned by FZ. With respect
to the first 200 shares, Corp Y’s QEF election is
automatically terminated effective December 31,
2005. With respect to the 100 shares Corp Y owns
through foreign FZ, Corp Y’s QEF election remains
in effect unless invalidated, terminated, or revoked
pursuant to this paragraph (i).
*****
(5)Effect after invalidation, termina-
tion, or revocation—(i)In general. With-
out the Commissioner’s consent, a share-
holder whose section 1295 election was
invalidated, terminated, or revoked under
this paragraph (i) may not make the section
1295 election with respect to the PFIC be-
fore the sixth taxable year in which the in-
validation, termination, or revocation be-
came effective.
(ii)Special rule. Notwithstanding
paragraph (i)(5)(i) of this section, a share-
holder whose section 1295 election was
terminated pursuant to paragraph (i)(3)
of this section, and either whose section
1296 election has subsequently been ter-
minated because its PFIC stock ceased to
be marketable or who no longer marks to
market such stock under another provision
of chapter 1 of the Internal Revenue Code,
maymakeasection1295electionwith
respect to its PFIC stock before the sixth
taxable year in which its prior section 1295
election was terminated.
*****
(k)Effective dates. Except as oth-
erwise provided, paragraphs (b)(2)(iii),
(b)(3), (b)(4), and (c) through (j) of this
section are applicable to taxable years of
shareholders beginning after December
31, 1997. However, taxpayers may apply
the rules under paragraphs (b)(4), (f) and
(g) of this section to a taxable year begin-
ning before January 1, 1998, provided the
statute of limitations on the assessment of
tax has not expired as of April 27, 1998,
and, in the case of paragraph (b)(4) of
this section, the taxpayers who filed the
joint return have consistently applied the
rules of that section to all taxable years
following the year the election was made.
Paragraph (b)(3)(v) of this section is ap-
plicable as of February 7, 2000, however,
a taxpayer may apply the rules to a taxable
year prior to the applicable date provided
the statute of limitations on the assess-
ment of tax for that taxable year has not
expired. Paragraphs (i)(3) and (i)(5)(ii)
of this section are applicable for taxable
years beginning on or after May 3, 2004.
Par. 6. Section 1.1296–1 is added to
read as follows:
§1.1296–1 Mark to market election for
marketable stock.
(a)Definitions—(1)Eligible RIC.An
eligible RICis a regulated investment
company that offers for sale, or has out-
standing, any stock of which it is the
issuer and which is redeemable at net asset
value, or that publishes net asset valua-
tions at least annually.
(2)Section 1296 stock.Thetermsec-
tion 1296 stockmeans marketable stock
in a passive foreign investment company
(PFIC), including any PFIC stock owned
directly or indirectly by an eligible RIC,
for which there is a valid section 1296 elec-
tion. Section 1296 stock does not include
stock of a foreign corporation that previ-
ously had been a PFIC, and for which a
section 1296 election remains in effect.
(3)Unreversed inclusions—(i)Gen-
eral rule.Thetermunreversed inclusions
means with respect to any section 1296
stock, the excess, if any, of—
(A) The amount of mark to market gain
included in gross income of the United
States person under paragraph (c)(1) of
this section with respect to such stock for
prior taxable years; over
(B) The amount allowed as a deduc-
tion to the United States person under para-
graph (c)(3) of this section with respect to
such stock for prior taxable years.
(ii)Section 1291 adjustment.The
amount referred to in paragraph
(a)(3)(i)(A) of this section shall include
any amount subject to section 1291 un-
der the coordination rule of paragraph
(i)(2)(ii) of this section.
(iii)Example. An example of the com-
putation of unreversed inclusions is as fol-
lows:
Example. A, a United States person, acquired
stock in Corp X, a foreign corporation, on January 1,
2005, for $150. At such time and at all times there-
after, Corp X was a PFIC and A’s stock in Corp X was
marketable. For taxable years 2005 and 2006, Corp
X was a nonqualified fund subject to taxation under
section 1291. A made a timely section 1296 election
with respect to the X stock, effective for taxable year
2007. The fair market value of the X stock was $200
as of December 31, 2006, and $240 as of December
31, 2007. Additionally, Corp X made no distribution
with respect to its stock for the taxable years at issue.
In 2007, pursuant to paragraph (i)(2)(ii) of this sec-
tion, A must include the $90 gain in the X stock in ac-
cordance with the rules of section 1291 for purposes
of determining the deferred tax amount and any appli-
cable interest. Nonetheless, for purposes of determin-
ing the amount of the unreversed inclusions pursuant
to paragraph (a)(3)(ii) of this section, A will include
the $90 of gain that was taxed under section 1291 and
not the interest thereon.
(iv)Special rule for regulated invest-
ment companies. In the case of a regulated
investment company which had elected
to mark to market the PFIC stock held by
such company as of the last day of the
taxable year preceding such company’s
first taxable year for which such company
makes a section 1296 election, the amount
referred to in paragraph (a)(3)(i)(A) of this
section shall include amounts previously
included in gross income by the company
pursuant to such mark to market elec-
tion with respect to such stock for prior
taxable years. For further guidance, see
Notice 92–53, 1992–2 C.B. 384, (see also
601.601(d)(2) of this chapter).
(b)Application of section 1296 elec-
tion—(1)In general. Any United States
person and any controlled foreign corpora-
tion (CFC) that owns directly, or is treated
as owning under this section, marketable
stock, as defined in §1.1296–2, in a PFIC
2004-20 I.R.B.911May 17, 2004

maymakeanelectiontomarktomarket
such stock in accordance with the provi-
sions of section 1296 and this section.
(2)Election applicable to specific
United States person. A section 1296
election applies only to the United States
person (or CFC that is treated as a U.S.
person under paragraph (g)(2) of this
section) that makes the election. Accord-
ingly, a United States person’s section
1296 election will not apply to a transferee
of section 1296 stock.
(3)Election applicable to specific cor-
poration only. A section 1296 election is
made with respect to a single foreign cor-
poration, and thus a separate section 1296
election must be made for each foreign cor-
poration that otherwise meets the require-
mentsofthissection.AUnitedStatesper-
son’s section 1296 election with respect to
stock in a foreign corporation applies to
all marketable stock of the corporation that
the person owns directly, or is treated as
owning under paragraph (e) of this section,
at the time of the election or that is subse-
quently acquired.
(c)Effect of election—(1)Recognition
of gain. If the fair market value of section
1296 stock on the last day of the United
States person’s taxable year exceeds its ad-
justed basis, the United States person shall
include in gross income for its taxable year
the excess of the fair market value of such
stock over its adjusted basis (mark to mar-
ket gain).
(2)Character of gain. Marktomarket
gain,andanygainonthesaleorother
disposition of section 1296 stock, shall be
treated as ordinary income.
(3)Recognition of loss. If the adjusted
basis of section 1296 stock exceeds its fair
market value on the last day of the United
States person’s taxable year, such person
shall be allowed a deduction for such tax-
able year equal to the lesser of the amount
of such excess or the unreversed inclusions
with respect to such stock (mark to market
loss).
(4)Character of loss—(i)Losses not
in excess of unreversed inclusions.Any
mark to market loss allowed as a deduction
under paragraph (c)(3) of this section, and
any loss on the sale or other disposition
of section 1296 stock, to the extent that
such loss does not exceed the unreversed
inclusions attributable to such stock, shall
be treated as an ordinary loss, deductible
in computing adjusted gross income.
(ii)Losses in excess of unreversed in-
clusions. Any loss recognized on the sale
or other disposition of section 1296 stock
in excess of any prior unreversed inclu-
sions will be subject to the rules generally
applicable to losses provided elsewhere in
the Internal Revenue Code and the regula-
tions thereunder.
(5)Application of election to separate
lots of stock. In the case in which a United
States person purchased or acquired shares
of stock in a PFIC at different prices, the
rules of this section shall be applied in
a manner consistent with the rules of
§1.1012–1.
(6)Source rules. The source of any
amount included in gross income under
paragraph (c)(1) of this section, or the al-
location and apportionment of any amount
allowed as a deduction under paragraph
(c)(3) of this section, shall be determined
in the same manner as if such amounts
were gain or loss (as the case may be) from
the sale of stock in the PFIC.
(7)Examples. The following examples
illustrate this paragraph (c):
Example 1.Treatment of gain as ordinary in-
come. A, a United States individual, purchases stock
in FX, a foreign corporation that is not a PFIC, in
1990 for $1,000. On January 1, 2005, when the fair
market value of the FX stock is $1,100, FX becomes a
PFIC. A makes a timely section 1296 election for tax-
able year 2005. On December 31, 2005, the fair mar-
ket value of the FX stock is $1,200. For taxable year
2005, A includes $200 of mark to market gain (the
excess of the fair market value of FX stock ($1,200)
over A’s adjusted basis ($1,000)) in gross income as
ordinary income and pursuant to paragraph (d)(1) of
this section increases his basis in the FX stock by that
amount.
Example 2.Treatmentofgainascapitalgain.
The facts are the same as inExample 1. For taxable
year 2006, FX does not satisfy either the asset test
or the income test of section 1297(a). A does not
revoke the section 1296 election it made with respect
to the FX stock. On December 1, 2006, A sells the
FX stock when the fair market value of the stock is
$1,500. For taxable year 2006, A includes $300 of
gain (the excess of the fair market value of FX stock
($1,500) over A’s adjusted basis ($1,200)) in gross
income as long-term capital gain because at the time
of sale of the FX stock by A, FX did not qualify as
a PFIC, and, therefore, the FX stock was not section
1296 stock at the time of the disposition. Further, A’s
holding period for non-PFIC purposes was more than
one year.
Example 3.Treatmentoflossesasordinarywhere
they do not exceed unreversed inclusions. The facts
are the same as inExample 1. On December 1, 2006,
A sells the stock in FX for $1,100. At that time, A’s
unreversed inclusions (the amount A included in in-
come as mark to market gain) with respect to the stock
in FX are $200. Accordingly, for taxable year 2006,
A recognizes a loss on the sale of the FX stock of
$100, (the fair market value of the FX stock ($1,100)
minus A’s adjusted basis ($1,200) in the stock) that is
treated as an ordinary loss because the loss does not
exceed the unreversed inclusions attributable to the
stock of FX.
Example 4.Treatment of losses as long-term cap-
ital losses. ThefactsarethesameasinExample 3,
except that FX does not satisfy either the asset test
or the income test of section 1297(a) for taxable year
2006. For taxable year 2006, A’s $100 loss from the
sale of the FX stock is treated as long-term capital
loss because at the time of the sale of the FX stock by
A FX did not qualify as a PFIC, and, therefore, the
FX stock was not section 1296 stock at the time of
the disposition. Further, A’s holding period in the FX
stock for non-PFIC purposes was more than one year.
Example 5.Long-term capital loss treatment of
losses in excess of unreversed inclusions. The facts
are the same as inExample 3,exceptthatAsellshis
FX stock for $900. At the time of A’s sale of the
FX stock on December 1, 2006, A’s unreversed inclu-
sions with respect to the FX stock are $200. Accord-
ingly, the $300 loss recognized by A on the disposi-
tion is treated as an ordinary loss to the extent of his
unreversed inclusions ($200). The amount of the loss
in excess of A’s unreversed inclusions ($100) will be
treated as a long-term capital loss because A’s hold-
ing period in the FC stock for non-PFIC purposes was
more than one year.
Example 6.Application of section 1296 election
to separate lots of stock. On January 1, 2005, Corp
A, a domestic corporation, purchased 100 shares (first
lot) of stock in FX, a PFIC, for $500 ($5 per share).
On June 1, 2005, Corp A purchased 100 shares (sec-
ond lot) of FX stock for $1,000 ($10 per share). Corp
A made a timely section 1296 election with respect
to its FX stock for taxable year 2005. On December
31, 2005, the fair market value of FX stock was $8
per share. For taxable year 2005, Corp A includes
$300 of gain in gross income as ordinary income un-
der paragraph (c)(1) of this section with respect to the
first lot, and adjusts its basis in that lot to $800 pur-
suant to paragraph(d)(1) of this section. With respect
to the second lot, Corp A is not permitted to recog-
nize a loss under paragraph (c)(3) of this section for
taxable year 2005. Although Corp A’s adjusted basis
in that stock exceeds its fair market value by $200,
Corp A has no unreversed inclusions with respect to
that particular lot of stock. On July 1, 2006, Corp A
sells 100 shares of FX stock for $900. Assuming that
Corp A adequately identifies (in accordance with the
rules of §1.1012–1(c)) the shares of FX stock sold as
being from the second lot, Corp A recognizes $100 of
long term capital loss pursuant to paragraph (c)(4)(ii)
of this section.
(d)Adjustment to basis—(1)Stock held
directly. The adjusted basis of the sec-
tion 1296 stock shall be increased by the
amount included in the gross income of
the United States person under paragraph
(c)(1) of this section with respect to such
stock, and decreased by the amount al-
lowed as a deduction to the United States
person under paragraph (c)(3) of this sec-
tion with respect to such stock.
(2)Stock owned through certain for-
eign entities. (i) In the case of section
May 17, 20049122004-20 I.R.B.

1296stockthataUnitedStatespersonis
treated as owning through certain foreign
entities pursuant to paragraph (e) of this
section, the basis adjustments under para-
graph (d)(1) of this section shall apply to
such stock in the hands of the foreign entity
actually holding such stock, but only for
purposes of determining the subsequent
treatment under chapter 1 of the Internal
Revenue Code of the United States person
with respect to such stock. Such increase
or decrease in the adjusted basis of the sec-
tion 1296 stock shall constitute an adjust-
ment to the basis of partnership property
only with respect to the partner making the
section 1296 election.Corresponding ad-
justments shall be made to the adjusted ba-
sis of the United States person’s interest
in the foreign entity and in any intermedi-
ary entity described in paragraph (e) of this
section through which the United States
person holds the PFIC stock.
(ii)Example. The following example
illustrates this paragraph (d)(2):
Example. FP is a foreign partnership. Corp A, a
domestic corporation, owns a 20 percent interest in
FP. Corp B, a domestic corporation, owns a 30 per-
cent interest in FP. Corp C, a foreign corporation, with
no direct or indirect shareholders that are U.S. per-
sons, owns a 50% interest in FP. Corp A, Corp B, and
FP all use a calendar year for their taxable year. In
2005, FP purchases stock in FX, a foreign corpora-
tion and a PFIC, for $1,000. Corp A makes a timely
section 1296 election for taxable year 2005. On De-
cember 31, 2005, the fair market value of the PFIC
stock is $1,100. Corp A includes $20 of ordinary in-
come in taxable year 2005 under paragraphs (c)(1)
and (2) of this section. Corp A increases its basis in
its FP partnership interest by $20. FP increases its
basis in the FX stock to $1,020 solely for purposes
of determining the subsequent treatment of Corp A,
under chapter 1 of the Internal Revenue Code, with
respect to such stock. In 2006, FP sells the FX stock
for $1,200. For purposes of determining the amount
of gain of Corp A, FP will be treated as having $180
in gain of which $20 is allocated to Corp A. Corp A’s
$20 of gain will be treated as ordinary income under
paragraph (c)(2) of this section. For purposes of de-
termining the amount of gain attributable to Corp B,
FP will be treated as having $200 gain, $60 of which
will be allocated to Corp B.
(3)Stock owned indirectly by an eligible
RIC. Paragraph (d)(2) of this section shall
alsoapplytoaneligibleRICwhichisan
indirect shareholder under §1.1296–2(f) of
stock in a PFIC and has a valid section
1296 election in effect with respect to the
PFIC stock.
(4)Stock acquired from a decedent.In
the case of stock of a PFIC which is ac-
quired by bequest, devise, or inheritance
(or by the decedent’s estate) and with re-
spect to which a section 1296 election was
in effect as of the date of the decedent’s
death, notwithstanding section 1014, the
basis of such stock in the hands of the per-
son so acquiring it shall be the adjusted ba-
sis of such stock in the hands of the dece-
dent immediately before his death (or, if
lesser, the basis which would have been
determined under section 1014 without re-
gard to this paragraph).
(5)Transition rule for individuals be-
coming subject to United States income
taxation—(i)In general. If any individ-
ualbecomesaUnitedStatespersonina
taxable year beginning after December 31,
1997, solely for purposes of this section,
the adjusted basis, before adjustments un-
der this paragraph (d), of any section 1296
stock owned by such individual on the first
day of such taxable year shall be treated as
being the greater of its fair market value or
its adjusted basis on such first day.
(ii) An example of the transition rule
for individuals becoming subject to United
States income taxation is as follows:
Example. A, a nonresident alien individual, pur-
chases marketable stock in FX, a PFIC, for $50 in
1995. On January 1, 2005, A becomes a United States
person and makes a timely section 1296 election with
respect to the stock in accordance with paragraph (h)
of this section. The fair market value of the FX stock
on January 1, 2005, is $100. The fair market value
of the FX stock on December 31, 2005, is $110. Un-
der paragraph (d)(5)(i) of this section, A computes
the amount of mark to market gain or loss for the
FX stock in 2005 by reference to an adjusted basis
of $100, and therefore A includes $10 in gross in-
come as mark to market gain under paragraph (c)(1)
of this section. Additionally, under paragraph (d)(1)
of this section, A’s adjusted basis in the FX stock for
purposes of this section is increased to $110 (and to
$60 for all other tax purposes). A sells the FX stock
in 2006 for $120. For purposes of applying section
1001, A must use its original basis of $50, with any
adjustments under paragraph (d)(1) of this section,
$10 in this case, and therefore A recognizes $60 of
gain. Under paragraph (c)(2) of this section (which
is applied using an adjusted basis of $110), $10 of
such gain is treated as ordinary income. The remain-
ing $50 of gain from the sale of the FX stock is long
term capital gain because A held such stock for more
than one year.
(e)Stock owned through certain foreign
entities—(1)In general. Except as pro-
vided in paragraph (e)(2) of this section,
the following rules shall apply in determin-
ing stock ownership for purposes of this
section. PFIC stock owned, directly or in-
directly, by or for a foreign partnership,
foreign trust (other than a foreign trust de-
scribed in sections 671 through 679), or
foreign estate shall be considered as be-
ing owned proportionately by its partners
or beneficiaries. PFIC stock owned, di-
rectly or indirectly, by or for a foreign
trust described in sections 671 through 679
shall be considered as being owned pro-
portionately by its grantors or other per-
sons treated as owners under sections 671
through 679 of any portion of the trust that
includes the stock. The determination of
a person’s proportionate interest in a for-
eign partnership, foreign trust or foreign
estate will be made on the basis of all the
facts and circumstances. Stock considered
owned by reason of this paragraph shall,
for purposes of applying the rules of this
section, be treated as actually owned by
such person.
(2)Stock owned indirectly by eligible
RICs. The rules for attributing ownership
of stock contained in §1.1296–2(f) will ap-
ply to determine the indirect ownership of
PFICstockbyaneligibleRIC.
(f)Holding period. Solely for purposes
of sections 1291 through 1298, if section
1296 applied to stock with respect to the
taxpayer for any prior taxable year, the tax-
payer’s holding period in such stock shall
be treated as beginning on the first day of
the first taxable year beginning after the
last taxable year for which section 1296 so
applied.
(g)Special rules—(1)Certain disposi-
tions of stock. To the extent a United States
person is treated as actually owning stock
in a PFIC under paragraph (e) of this sec-
tion, any disposition which results in the
United States person being treated as no
longer owning such stock, and any disposi-
tion by the person owning such stock, shall
be treated as a disposition by the United
States person of the stock in the PFIC.
(2)Treatment of CFC as a United States
person. In the case of a CFC that owns, or
is treated as owning under paragraph (e) of
this section, section 1296 stock:
(i) Other than with respect to the sourc-
ing rules in paragraph (c)(6) of this sec-
tion, this section shall apply to the CFC
in the same manner as if such corporation
wereaUnitedStatesperson.TheCFCwill
be treated as a foreign person for purposes
of applying the source rules of paragraph
(c)(6).
(ii) For purposes of subpart F of part III
of subchapter N of the Internal Revenue
Code—
(A) Amounts included in the CFC’s
gross income under paragraph (c)(1) or
2004-20 I.R.B.913May 17, 2004

(i)(2)(ii) of this section shall be treated as
foreign personal holding company income
under section 954(c)(1)(A); and
(B) Amounts allowed as a deduction
under paragraph (c)(3) of this section shall
be treated as a deduction allocable to for-
eign personal holding company income for
purposes of computing net foreign base
company income under §1.954–1(c).
(iii) A United States shareholder, as de-
fined in section 951(b), of the CFC shall
not be subject to section 1291 with respect
to any stock of the PFIC for the period dur-
ingwhichthesection1296electionisinef-
fect for that stock, and the holding period
rule of paragraph (f) of this section shall
apply to such United States shareholder.
(iv) The rules of this paragraph (g)(2)
shall not apply to a United States person
that is a shareholder of the PFIC for pur-
poses of section 1291, but is not a United
States shareholder under section 951(b)
with respect to the CFC making a section
1296 election.
(3)Timing of inclusions for stock owned
through certain foreign entities. In the case
of section 1296 stock that a United States
person is treated as owning through certain
foreign entities pursuant to paragraph (e)
of this section, the mark to market gain or
mark to market loss is determined in accor-
dance with paragraphs (c) and (i)(2)(ii) of
this section as of the last day of the tax-
able year of the foreign partnership, for-
eign trust or foreign estate and then in-
cluded in the taxable year of such United
States person that includes the last day of
the taxable year of the entity.
(h)Elections—(1)Timing and manner
formakingasection1296election—(i)
United States persons. A United States
person that owns marketable stock in a
PFIC, or is treated as owning marketable
stock under paragraph (e) of this section,
on the last day of the taxable year of such
person, and that wants to make a section
1296 election, must make a section 1296
election for such taxable year on or before
the due date (including extensions) of the
United States person’s income tax return
for that year. The section 1296 election
must be made on the Form 8621,“Return
by a Shareholder of a Passive Foreign In-
vestment Company or Qualified Electing
Fund”, included with the original tax re-
turn of the United States person for that
year, or on an amended return, provided
that the amended return is filed on or be-
fore the election due date.
(ii)Controlled foreign corporations.
A section 1296 election by a CFC shall
be made by its controlling United States
shareholders, as defined in §1.964–1(c)(5),
and shall be included with the Form 5471,
“Information Return of U.S. Persons With
Respect To Certain Foreign Corpora-
tions”, for that CFC by the due date (in-
cluding extensions) of the original income
tax returns of the controlling United States
shareholders for that year. A section 1296
electionbyaCFCshallbebindingonall
United States shareholders of the CFC.
(iii)Retroactive elections for PFIC
stock held in prior years. A late section
1296 election may be permitted only in ac-
cordance with §301.9100 of this chapter.
(2)Effect of section 1296 election—(i)
A section 1296 election will apply to the
taxable year for which such election is
made and remain in effect for each suc-
ceeding taxable year unless such election
is revoked or terminated pursuant to para-
graph (h)(3) of this section.
(ii)Cessation of a foreign corporation
as a PFIC. A United States person will not
include mark to market gain or loss pur-
suant to paragraph (c) of this section with
respect to any stock of a foreign corpora-
tion for any taxable year that such foreign
corporation is not a PFIC under section
1297 or treated as a PFIC under section
1298(b)(1) (taking into account the hold-
ing period rule of paragraph (f) of this sec-
tion). Cessation of a foreign corporation’s
status as a PFIC will not, however, termi-
nate a section 1296 election. Thus, if a
foreign corporation is a PFIC in a taxable
year after a year in which it is not treated
as a PFIC, the United States person’s orig-
inal election (unless revoked or terminated
in accordance with paragraph (h)(3) of this
section) continues to apply and the share-
holder must include any mark to market
gain or loss in such year.
(3)Revocation or termination of elec-
tion—(i)In general. A United States per-
son’s section 1296 election is terminated
if the section 1296 stock ceases to be mar-
ketable; if the United States person elects,
or is required, to mark to market the sec-
tion 1296 stock under another provision of
chapter 1 of the Internal Revenue Code;
or if the Commissioner, in the Commis-
sioner’s discretion, consents to the United
States person’s request to revoke its sec-
tion 1296 election upon a finding of a sub-
stantial change in circumstances. A sub-
stantial change in circumstances for this
purposemayincludeaforeign corporation
ceasing to be a PFIC.
(ii)Timing of termination or revocation.
Where a section 1296 election is termi-
nated automatically (e.g., the stock ceases
to be marketable), section 1296 will cease
to apply beginning with the taxable year in
which such termination occurs. Where a
section 1296 election is revoked with the
consent of the Commissioner, section 1296
will cease to apply beginning with the first
taxable year of the United States person af-
ter the revocation is granted unless other-
wise provided by the Commissioner.
(4)Examples. The operation of the
rules of this paragraph (h) is illustrated by
the following examples:
Example 1. A, a United States person, owns stock
in FX, a PFIC. A makes a QEF election in 1996 with
respect to the FX stock. For taxable year 2005, A
makes a timely section 1296 election with respect to
its stock, and thus its QEF election is automatically
terminated pursuant to §1.1295–1(i)(3). In 2006, A’s
stock in FX ceases to be marketable, and therefore its
section 1296 election is automatically terminated un-
der paragraph (h)(3) of this section. Beginning with
taxable year 2006, A is subject to the rules of section
1291 with respect to its FX stock unless it makes a
new QEF election. See §1.1295–1(i)(5).
Example 2.ThefactsarethesameasinExample
1, except that A’s stock in FX becomes marketable
again in 2007. A may make a new section 1296 elec-
tion with respect to the FX stock for its taxable year
2007, or thereafter. A will be subject to the coordina-
tion rules under paragraph (i) of this section unless it
made a new QEF election in 2006.
(i)Coordination rules for first year of
election—(1)In general. Notwithstanding
any provision in this section to the con-
trary, the rules of this paragraph (i) shall
applytothefirsttaxable year in which
a section 1296 election is effective with
respect to marketable stock of a PFIC if
such foreign corporation was a PFIC for
any taxable year, prior to such first tax-
able year, during the United States per-
son’s holding period (as defined in para-
graph (f) of this section) in such stock, and
for which such corporation was not treated
as a QEF with respect to such United States
person.
(2)Shareholders other than regulated
investment companies. For the first taxable
year of a United States person (other than a
regulated investment company) for which
a section 1296 election is in effect with
respect to the stock of a PFIC, such United
May 17, 20049142004-20 I.R.B.

States person shall, in lieu of the rules of
paragraphs (c) and (d) of this section—
(i) Apply the rules of section 1291 to
any distributions with respect to, or dispo-
sition of, section 1296 stock;
(ii)Applysection1291totheamountof
the excess, if any, of the fair market value
of such section 1296 stock on the last day
of the United States person’s taxable year
over its adjusted basis, as if such amount
were gain recognized from the disposition
of stock on the last day of the taxpayer’s
taxable year; and
(iii) Increase its adjusted basis in the
section 1296 stock by the amount of ex-
cess, if any, subject to section 1291 under
paragraph (i)(2)(ii) of this section.
(3)Shareholders that are regulated in-
vestment companies. For the first taxable
year of a regulated investment company
for which a section 1296 election is in ef-
fect with respect to the stock of a PFIC,
such regulated investment company shall
increase its tax under section 852 by the
amount of interest that would have been
imposed under section 1291(c)(3) for such
taxable year if such regulated investment
company were subject to the rules of para-
graph (i)(2) of this section, and not this
paragraph (i)(3). No deduction or increase
in basis shall be allowed for the increase in
tax imposed under this paragraph (i)(3).
(4) The operation of the rules of this
paragraph (i) is illustrated by the following
examples:
Example (1). A, a United States person and a cal-
endar year taxpayer, owns marketable stock in FX,
a PFIC that it acquired on January 1, 1992. At all
times, A’s FX stock was a nonqualified fund subject
to taxation under section 1291. A made a timely sec-
tion 1296 election effective for taxable year 2005. At
the close of taxable year 2005, the fair market value
of A’s FX stock exceeded its adjusted basis by $10.
Pursuant to paragraph (i)(2)(ii) of this section, A must
treat the $10 gain under section 1291 as if the FX
stock were disposed of on December 31, 2005. Fur-
ther, A increases its adjusted basis in the FX stock by
the $10 in accordance with paragraph (i)(2)(iii) of this
section.
Example (2). Assume the same facts as inEx-
ample (1), except that A is a RIC that had not made
an election prior to 2005 to mark to market the PFIC
stock. In taxable year 2005, A includes $10 of ordi-
nary income under paragraph (c)(1) of this section,
and such amount is not subject to section 1291. A
also increases its tax imposed under section 852 by
the amount of interest that would have been deter-
mined under section 1291(c)(3), and no deduction is
permitted for such amount. Finally, under paragraph
(d)(1) of this section, A increases its adjusted basis in
the FX stock by $10.
(j)Effective date. The provisions in
this section are applicable for taxable years
beginningonorafterMay3,2004.
Par. 7. Section 1.1296(e)–1 is redesig-
nated as §1.1296–2 and amended by:
1. Revising paragraph (b)(2).
2. Adding paragraph (b)(3).
3. Revising both references to “sections
958(a)(1) and (2)” in paragraph (f)(1) to
read “section 1298(a)”.
The revisions and addition read as fol-
lows:
§1.1296–2 Definition of marketable stock.
*****
(b) * * *
(2)Special rule for year of initial public
offering. For the calendar year in which a
corporation initiatesapublicofferingofa
class of stock for trading on one or more
qualified exchanges or other markets, as
defined in paragraph (c) of this section,
such class of stock meets the requirements
of paragraph (b)(1) of this section for such
year if the stock is regularly traded on such
exchanges or markets, other than inde
minimisquantities, on 1/6 of the days re-
maining in the quarter in which the offer-
ing occurs, and on at least 15 days during
each remaining quarter of the taxpayer’s
calendar year. In cases where a corpora-
tion initiates a public offering of a class of
stock in the fourth quarter of the calendar
year, such class of stock meets the require-
ments of paragraph (b)(1) of this section in
the calendar year of the offering if the stock
is regularly traded on such exchanges or
markets, other than inde minimisquanti-
ties, on the greater of 1/6 of the days re-
maining in the quarter in which the offer-
ing occurs, or 5 days.
(3)Anti-abuse rule.Tradesthathaveas
one of their principal purposes the meeting
of the trading requirements of paragraph
(b)(1) or (2) of this section shall be dis-
regarded. Further, a class of stock shall
not be treated as meeting the trading re-
quirement of paragraph (b)(1) or (2) of this
section if there is a pattern of trades con-
ducted to meet the requirement of para-
graph (b)(1) or (2) of this section. Simi-
larly, paragraph (b)(2) of this section shall
not apply to a public offering of stock
that has as one of its principal purposes
to avail itself of the reduced trading re-
quirements under the special rule for the
calendar year of an initial public offering.
For purposes of applying the immediately
preceding sentence, consideration will be
given to whether the trading requirements
of paragraph (b)(1) of this section are sat-
isfied in the subsequent calendar year.
*****
Par. 8. Section 1.6031(a)–1 is amended
by:
1. Redesignating the text of paragraph
(b)(1) as (b)(1)(i).
2. Adding a heading to newly desig-
nated paragraph (b)(1)(i).
3. Adding paragraph (b)(1)(ii).
The additions read as follows:
§1.6031(a)–1 Return of Partnership
income.
*****
(b) * * * (1) * * * (i)Filing requirement.
***
(ii)Special rule. For purposes of this
paragraph (b)(1) and paragraph (b)(3)(iii)
of this section, a foreign partnership will
not be considered to have derived income
from sources within the United States
solely because a U.S. partner marks to
market hispro ratashare of PFIC stock
held by the foreign partnership pursuant to
an election under section 1296.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved April 7, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on April 30, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 3, 2004, 69 F.R. 24071)
Section 6050N.—Returns
Regarding Payments
of Royalties
26 CFR 1.6050N–1: Statements to recipients of roy-
alties.
(Also: 6041, 1.6041–1.)
Royalties; information reporting.
This ruling providesguidance concern-
ing the reporting requirements of sections
6041 and 6050N of the Code for payments
by publishers to literary agents on behalf
of an author.
2004-20 I.R.B.915May 17, 2004

Rev. Rul. 2004–46
ISSUES
What is the correct information report-
ing for royalty payments made by a pub-
lisher for the rights to an author’s book or
other literary composition if such royalties
are paid to the author’s literary agent who
then forwards all or part of such payments
to the author?
FACTS
A publisher enters into a contract for the
license to use an author’s literary works.
The author is an individual. Pursuant to the
contract, the publisher pays the author’s
royalties directly to the author’s literary
agent. The literary agent, upon receiving
the royalties, subtracts his commission and
expenses and then forwards the balance to
the author pursuant to a contract between
the literary agent and the author. During
calendar year 2004, the royalties paid by
the publisher exceeded $10.
LAW AND ANALYSIS
Section 6041 of the Internal Revenue
Code provides that all persons engaged in
a trade or business who make a payment in
the course of such trade or business to an-
other person of rent, salaries, wages, pre-
miums, annuities, compensations, remu-
nerations, emoluments, or other fixed or
determinable gains, profits, and income of
$600 or more in any taxable year shall ren-
der a true and accurate return setting forth
the amount of such gains, profits, and in-
come, and the name and address of the re-
cipient of such payment.
Section 1.6041–1(a)(1)(i) of the In-
come Tax Regulations provides that the
payments required to be reported under
section 6041 include the following: (1)
salaries, wages, commissions, fees, and
other forms of compensation for services
rendered aggregating $600 or more; and
(2) interest, rents, royalties, annuities,
pensions, and other gains, profits, and
income aggregating $600 or more. The
return of information required by section
1.6041–1(a)(1)(i) must be made on Form
1099.Seesection 1.6041–1(a)(2).
Sections 6041(a) and 1.6041–1(a)(ii)
provide that payments for which an infor-
mation return is required by, or under the
authority of, section 6050N(a) (relating
to royalties), are not subject to reporting
under section 1.6041–1(a)(1)(i).
Section 6050N(a) provides that every
person who: (1) makes payments of royal-
ties (or similar amounts) aggregating $10
or more to any other person during any
calendar year, or (2) receives payments of
royalties (or similar amounts) as a nominee
and who makes payments aggregating $10
or more during any calendar year to any
other person with respect to the royalties
(or similar amounts) so received, shall file
a return setting forth the aggregate amount
of such payments and the name and ad-
dress of the recipient of such payment.
Section 6050N(b) provides that every per-
son required to make a return under sec-
tion 6050N(a) must furnish a statement to
each person whose name is required to be
set forth in such return. Form 1099–MISC
is used for this reporting requirement.
The legislative history to section 6050N
provides that section 6050N applies to
royalty payments for the right to exploit
intangible property, such as copyrights,
trade names, trademarks, books and other
literary compositions.SeeH.R. Conf.
Rep. No. 99–841, 99
th
Cong., 2
nd
Sess.
II–788–789 (1986), 1986–3 (Vol. 4) C.B.
788–789.
Section 6050N(c) provides that sec-
tion 6050N does not apply to any amount
paid to a person described in section
6049(b)(4)(A) through (F). Section
6049(b)(4)(A) describes a corporation
as such a person.
Section 1.6050N–1(c)(2) provides that
the term payor shall have the meaning
ascribed to it under section 1.6049–4(a).
Section 1.6049–4(a)(2) defines a payor
as a person who: (1) makes a payment
of the type and of the amount subject to
reporting under section 6049 (or under
an applicable section of 26 CFR chapter
1) to any other person during a calendar
year; or (2) collects on behalf of another
person payments of the type and of the
amount subject to reporting under section
6049 (or under an applicable section of
26 CFR chapter 1), or who otherwise acts
as a middleman (as defined in paragraph
(f)(4) of section 6049) with respect to such
payment.
Based on the facts described above,
both the publisher and the literary agent
are payors of royalties for purposes of sec-
tion 6050N. The royalty payments made
by the publisher to the literary agent and
the royalty payments made by the literary
agent to the author thus are not reportable
under section 6041 and the regulations
thereunder because such payments are
payments to which 6050N applies. The
publisher must file Form 1099–MISC
reporting payments of royalties to the lit-
erary agent pursuant to section 6050N. If
the literary agent is acorporation, no Form
1099–MISC is required pursuant to sec-
tions 6050N(c) and 6049(b)(4)(A). The lit-
erary agent must file a Form 1099–MISC
for the royalties paid to the author regard-
less of whether the literary agent receives
a Form 1099–MISC from the publisher.
Section 301.6011–1(b) provides that
the Internal Revenue Service may pre-
scribe in forms, instructions, or other
appropriate guidance the information or
documentation required to be included
with any return. The instructions to Form
1099–MISC provide that gross royalties
(before reduction for fees, commissions,
or expenses) paid by a publisher directly to
an author or literary agent or paid by a lit-
erary agent to an author must be reported
on Form 1099–MISC. Thus, although
the literary agent may have subtracted
commissions and expenses before mak-
ing the payment to the author, the Form
1099–MISC required to be filed by the lit-
erary agent must report the gross amount
of royalties received from the publisher
pursuant to section 6050N.
Payments by a publisher to a liter-
ary agent for an author’s services (e.g.,
speaker fees) that do not constitute roy-
alties are not reportable under section
6050N. The information reporting for
such payments is governed by section
6041 and the regulations thereunder. In
such case, section 1.6041–1(e) would ap-
ply to determine whether the literary agent
or the publisher must report the fees to the
author.Seesections 1.6041–1(e)(i) and
1.6041–1(e)(5),Example 6.
HOLDING
Pursuant to section 6050N, a publisher
who makes royalty payments to a literary
agent for the rights to an author’s book or
other literary composition must file an in-
formation return with respect to the pay-
ments to the literary agent unless the liter-
ary agent is a corporation. In addition, the
literary agent (whether or not a corpora-
tion) who receives such payments and for-
May 17, 20049162004-20 I.R.B.

wards all or part of such payments to the
author must file an information return re-
porting the gross amount of royalty pay-
ments pursuant to section 6050N.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Tiffany P. Smith of the Office
of Associate Chief Counsel (Procedure
and Administration). For further informa-
tion regarding this revenue ruling, contact
Tiffany P. Smith at (202) 622–4910 (not a
toll-free call).
2004-20 I.R.B.917May 17, 2004

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 6
01.105: Examination of returns and claims
for ref
und, credit or abatement; determination of cor-
rect ta
x liability.
(Also P
art I, §§ 132, 162, 274; 1.132–6.)
Rev. Proc. 2004–29
SECTIO
N 1. PURPOSE
This re
venue procedure provides the
stati
stical sampling methodology that
ataxp
ayer may use in establishing the
amoun
t of substantiated meal and enter-
tainm
ent expenses excepted from the 50%
dedu
ction disallowance of § 274(n)(1) of
the I
nternal Revenue Code by reason of
§274
(n)(2)(A), (B), (C), (D), or (E).
SECTION 2. BACKGROUND
.01 Section 162(a) allows a deduction
for all ordinary and necessary expenses
paid or incurred during the taxable year in
carrying on any trade or business, includ-
ing certain expenses for meals and enter-
tainment.
.02 Section 274(d) disallows a § 162
deduction for any expense for travel (in-
cluding meals and lodging while away
from home), entertainment, gifts, or listed
property unless the taxpayer substantiates
the elements of the expense by adequate
records or by sufficient evidence. See
§ 1.274–5T of the Income Tax Regula-
tions.
.03 Section 274(n)(1) provides that the
amount allowable as a deduction for any
expense for food or beverages, or any
item with respect to an activity that is of
a type generally considered to constitute
entertainment, amusement, or recreation,
or with respect to a facility used in connec-
tion with these activities, may not exceed
50% of the amount of the expense.
.04 Section 274(n)(2)(A) provides
that the 50% deduction disallowance of
§ 274(n)(1) does not apply to expenses
described in § 274(e)(2) (expenses treated
on the taxpayer’s return as compensation
to an employee under chapter 1 and as
wages to the employee for purposes of
chapter 24), (e)(3) (expenses paid or in-
curred under a reimbursement or similar
arrangement in connection with the per-
formance of services), (e)(4) (recreational
and similar expenses for employees),
(e)(7)
(expenses relating to items available
to the p
ublic), (e)(8) (expenses relating to
entert
ainment sold to customers), or (e)(9)
(expen
ses includible in income of persons
who ar
e not employees).
.05 Sec
tion 274(n)(2)(B) provides
that t
he 50% deduction disallowance of
§ 274(
n)(1) does not apply to an expense
for fo
od or beverages that is excludable
from t
he gross income of the recipient
unde
r § 132(e) (relating tode minimis
frin
ge benefits excluded from income un-
der §
132(a)(4)).
.06 S
ection 132(e) defines ade min-
imis
fringe as any property or service the
valu
e of which is (after taking into ac-
coun
t the frequency with which similar
fri
nges are provided by the employer to
the
employer’s employees) so small as
to m
ake accounting for it unreasonable
or a
dministratively impracticable. Under
§1.
132–6(c), a cash fringe benefit (other
th
an overtime meal money and local trans-
po
rtation fare) is never excludable as ade
mi
nimisfringe benefit. For example, ex-
pe
nses for meals and entertainment reim-
bu
rsed to employees under an accountable
p
lan (as defined in § 1.62–2(c)(2)) do not
q
ualify asde minimisfringe benefits.
.
07 Section 1.132–6(b) provides that
t
he frequency with which similar fringes
a
re provided by the employer to the em-
p
loyer’s employees is generally deter-
m
ined by reference to the frequency with
w
hich the employer provides the fringes
to each individual employee. However,
if it would be administratively difficult
to determine frequency with respect to
individual employees, the frequency with
which similar fringes are provided by the
employer to the employer’s employees is
determined by reference to the workforce
as a whole. This exception to the em-
ployee-measured frequency requirement
does not apply to overtime meals, meal
money, or local transportation fare.
.08 Section 274(n)(2)(C) provides
that the 50% deduction disallowance of
§ 274(n)(1) does not apply to an expense
covered by a package involving a ticket
describedin§274(l)(1)(B)(exceptionfor
certain charitable sports events).
.09 Section 274(n)(2)(D) provides
that the 50% deduction disallowance of
§ 274(n)(1) does not apply to taxable
paymen
ts or reimbursements of moving
expens
es of an employee by the employer.
.10 Sec
tion 274(n)(2)(E) provides
that th
e 50% deduction disallowance of
§274(n
)(1) does not apply to expenses for
food or
beverages (i) required by Federal
law to
be provided to crew members of a
comme
rcial vessel, (ii) provided to crew
membe
rs of certain commercial vessels, or
(iii)
provided on or in proximity to certain
oil o
r gas platforms or drilling rigs.
SECTI
ON 3. SCOPE
This revenue procedure applies to a
taxpayer filing an original return, un-
der examination, in litigation, or making
a refund claim that desires to establish
with respect to its income tax liability the
amount of substantiated expenses paid
or incurred for meals and entertainment
excepted from the 50% deduction dis-
allowance of § 274(n)(1) by reason of
§ 274(n)(2)(A), (B), (C), (D), or (E).
SECTION 4. APPLICATION
.01In general. A taxpayer filing an
original return, under examination, in lit-
igation, or making a refund claim, may
use statistical sampling in connection with
establishing, with respect to its income
tax liability, the amount of the taxpayer’s
substantiated expenses paid or incurred
for meals and entertainment excepted
from the 50% deduction disallowance of
§ 274(n)(1) by reason of § 274(n)(2)(A),
(B), (C), (D), or (E) by following the
procedures provided in Appendix A (Sam-
pling Plan Standards), Appendix B (Sam-
pling Documentation Standards), Appen-
dix C (Technical Formulas), and (in the
case ofde minimisfringes) in paragraph
4.02 of this revenue procedure.
.02Additional procedures required for
de minimis fringe benefits.
(1)Reimbursements under accountable
plans. In conducting the study, expenses
for meals and entertainment reimbursed by
employers to employees under an account-
able plan may not be treated asde minimis
fringe benefits.
(2)Determination of frequency.Toes-
tablish the amount of identified expenses
that are excepted from § 274(n)(1) by rea-
son of § 274(n)(2)(B), a taxpayer is re-
quired to determine the frequency with
May 17, 20049182004-20 I.R.B.

which similar fringes were provided by the
taxpayer to the taxpayer’s employees on
an employee-measured or employer-mea-
sured basis, as described in paragraphs (3)
and (4) below. Thus, after selecting a sta-
tistical sample, as discussed below, the tax-
payer may be required to review documen-
tation from outside both the sample and
the target population (the set of items from
which the sample is drawn) to identify sim-
ilar fringes included in employees’ gross
income and similar fringes previously ex-
cluded from employees’ gross income as
de minimisfringe benefits.
(3)Employee-measured frequency.
(a)In general.Whenusingem-
ployee-measured frequency to determine
the amount of identified expenses that
are excepted from § 274(n)(1) by reason
of § 274(n)(2)(B), the taxpayer must es-
tablish the frequency with which similar
fringes were provided to each individual
employee of the taxpayer. Therefore, af-
ter identifying the statistical sample, the
taxpayer must review the remainder of the
target population (and records that docu-
ment similar fringes that are not included
in the target population) to identify the ag-
gregate number of similar fringes provided
to the individual employees included in
the statistical sample.
(b)Example. Taxpayer maintains a
meal and entertainment expense account
that includes invoices for meals provided
in-kind to Taxpayer’s employees that may
bede minimisfringe benefits. The in-
voices specifically identify the employees
who received the in-kind meals. There-
fore, it would not be administratively
difficult to determine the frequency with
which in-kind meals were provided to in-
dividual employees, and Taxpayer must
determine the frequency with which it
provided in-kind meals to each of the indi-
vidual employees included in the sample.
Taxpayer has no other accounts that in-
clude expenses for in-kind meals provided
to employees.
Taxpayer selects a statistical sample
of the meal and entertainment expense
account that identifies 10 employees who
have received in-kind meals. In order
to determine if the meals arede minimis
fringes, Taxpayer must review documen-
tation (such as invoices) in the remainder
of the target population to identify all
in-kind meals provided to each of the
10 individual employees included in the
sample. Taxpayer must consider in-kind
meals that Taxpayer included in each em-
ployee’s gross incomeand similar fringes
previously excluded from the employees’
gross income asde minimisfringe benefits
in determining the frequency with which
similar fringes were provided to each of
the 10 employees. After conducting this
review, Taxpayer determines (after con-
sidering both the value and frequency of
the meals) that the meals provided to 4 of
the10employeesinthesamplearede min-
imisfringe benefits not subject to the 50%
deduction disallowance of § 274(n)(1).
Taxpayer may increase proportionately
the deductible amount of expenses in the
population not subject to the § 274(n)(1)
limitation. See paragraph 6 of Appendix
A.
(4)Employer-measured frequency.
(a)In general. When using em-
ployer-measured frequency to determine
the amount of identified expenses that are
excepted from § 274(n)(1) by reason of
§ 274(n)(2)(B), the taxpayer must establish
the frequency with which similar fringes
were provided to the taxpayer’s workforce
as a whole. Thus, the target population
must include all relevant records prior
to selection of the statistical sample in
order to determine the aggregate number
of similar fringes provided to all eligible
employees and the aggregate number of
employees eligible to receive such fringes.
(b)Example. Taxpayer maintains a
meal and entertainment expense account
that includes invoices for meals provided
in-kind to Taxpayer’s employees that may
bede minimisfringe benefits. The in-
voices are for in-kind meals of a type
for which it is administratively difficult
to identify the particular employees who
received the meals, and the invoices do
not specifically identify those employees.
Therefore, it would be administratively
difficult to determine the frequency with
which in-kind meals were provided to
individual employees, and Taxpayer may
determine the frequency with which sim-
ilar fringes were provided by Taxpayer
to Taxpayer’s employees by reference to
all employees eligible to receive in-kind
meals. Taxpayer maintains an account in
addition to the meal and entertainment
expense account that includes expenses
for in-kind meals provided to employees.
Taxpayer’s workforce includes 500 em-
ployees who are eligible to receive the
fringe benefit of in-kind meals.
Taxpayer merges the meal and enter-
tainment expense account and the other
account that includes expenses for in-kind
meals to create a target population that in-
cludes all relevant records and conducts a
statistical sample of the merged accounts.
In determining whether the in-kind meals
included in the sample arede minimis
fringes, Taxpayer must consider in-kind
meals that Taxpayer included in eligi-
ble employees’ gross income and similar
fringes previously excluded from employ-
ees’ gross income asde minimisfringe
benefits. Taxpayer identifies in the sample
50in-kindmealsprovidedtoemployees.
The 50 meals represent 1000 in-kind meals
in the target population as a whole, or two
meals per eligible employee. Assuming
that the provision of two meals with a
given cost per eligible employee results in
a value that is so small as to make account-
ing for it unreasonable or administratively
impracticable, Taxpayer may treat all of
the in-kind meals in the meal and enter-
tainment expense account asde minimis
fringe benefits not subject to the 50%
deduction disallowance of § 274(n)(1),
subject, however, to apro ratareduction
to the extent that any in-kind meals are
evaluated under employee-measured fre-
quency and fail to qualify asde minimis
fringes.
.03Limitations.
(1) This revenue procedure does not au-
thorize the use of statistical sampling to
substantiate meal and entertainment ex-
penses as required by § 274(d).
(2) This revenue procedure does not au-
thorize the use of statistical sampling to de-
termine a taxpayer’s liability for employ-
ment taxes or whether an amount is ex-
cludable from a taxpayer’s income.
(3) This revenue procedure does not es-
tablish the correctness of a taxpayer’s in-
terpretation of § 274(n) or characterization
of meal and entertainment expenses as ex-
penses excepted from § 274(n)(1).
(4) This revenue procedure does not
preclude the Internal Revenue Service
from raising or pursuing any income, em-
ployment, or other tax issues identified in
the review of a statistical sample.
2004-20 I.R.B.919May 17, 2004

SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after May 3,
2004. However, with respect to the use of
statistical sampling by a taxpayer for a tax-
able year ending before May 3, 2004, for
which the applicable period of limitations
has not expired, the Service will permit,
but not require, application of this revenue
procedure.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1847.
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.
The collection of information in this
revenue procedure is in Appendix B. This
information is required to ensure compli-
ance with the statistical sampling method-
ology contained in this revenue procedure.
The information will be used to evaluate
compliance with the procedures described
in this revenue procedure. The collection
of information is mandatory. The likely
recordkeepers are businesses or other for-
profit institutions.
The estimated total annual recordkeep-
ing burden is 3200 hours. The estimated
annual burden per recordkeeper varies
from six to ten hours, depending on indi-
vidual circumstances, with an estimated
average of eight hours. The estimated
number of recordkeepers is 400.
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.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kari L. Fisher of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue procedure, con-
tact Ms. Fisher at (202) 622–4970 (not
a toll-free call). For further information
regarding Appendices A, B and C, con-
tact Ed Cohen of the Large and Mid-Size
Business Division at (212) 719–6693 (not
a toll-free call).
APPENDIX A
SAMPLING PLAN STANDARDS
The statistical sampling must be con-
ducted in accordance with the following
methodology.
1. Statistical (probability) sampling
methodology may not include the use of
judgment sampling.
2. Taxpayers may apply the results of a
statistical sample only to the taxable years
included in the sample.
3. A statistical sample may include data
from no more than three consecutive tax-
able years.
4. Data from a taxable year may be
included in only one statistical sample.
5. The estimated amount of expenses
not subject to the § 274(n)(1) limitation
must be based on a statistical (probabil-
ity) sample, in which each sampling unit
has a known (non-zero) chance of selec-
tion, using either a simple random sam-
pling method or stratified random sam-
pling method.
6. In general, the computation of the
estimated amount of expenses not subject
to the § 274(n)(1) limitation must be at the
least advantageous 95% one-sided con-
fidence limit. The “least advantageous”
confidence limit is either the upper or
lower limit that results in the least benefit
to the taxpayer. However, if the precision
of the change in the estimated deductible
amount of expenses not subject to the
§ 274(n)(1) limitation (see paragraph 9
below) divided by the change in the esti-
mated deductible amount of expenses not
subject to the § 274(n)(1) limitation does
not exceed 10%, the point estimate may
be used in place of the least advantageous
confidence limit. All strata for which
“substantially all” ofthe population sam-
pling units are sampled will be treated as
100% strata. That is, the overall point esti-
mate and its precision will be estimated by
treating all 100% strata appropriately for
the sample design used. Also, the calcu-
lation of the denominator for the relative
precision will exclude all 100% strata. For
this revenue procedure, “substantially all”
is defined as 80% or more.
7. Recognizing that many methods
exist to estimate population values from
the sample data, the Service will consider
acceptable only the following estimators.
Variable estimators permitted include the
mean (also known as the direct projection
method), difference (using “paired vari-
ables”), (combined) ratio (using a variable
of interest and a “correlated” variable), and
(combined) regression (using a variable
of interest and a “correlated” variable).
The first variable used for the difference,
ratio and regression estimators must be
the variable used in the mean estimator.
The second variable used for the differ-
ence, ratio and regression estimators must
be a variable that can be paired with the
first variable and should be related to the
first variable. For example, in a typical
audit-sampling situation, the first variable
would be the audited value of a trans-
action and the second variable would be
the originally reported value of the same
transaction. Since the latter two variable
methods are statistically biased, there must
be a demonstration that the bias is neg-
ligible before the Service will accept the
method.
8. Variable sampling plans must use the
qualifying final estimate with the smallest
overall standard error as an absolute value
(for example, the size of the estimate is
irrelevant in the determination of the re-
ported value).
9. Variable sampling plans must cal-
culate confidence limits by addition and
subtraction of the precision of the esti-
mate from the point estimate in which the
determination of precision proceeds by
multiplication of the standard error by (i)
the 95% one-sided confidence coefficient
basedontheStudent’st-distribution with
the appropriate degrees of freedom, or (ii)
1.645 (the normal distribution), assuming
the sample size is at least 100 in each
non–100% stratum.
10. For either the (combined) ratio or
regression methods, to demonstrate little
statistical bias exists, the following applies
after excluding all strata tested on 100%
basis (the entire population of a stratum is
selected for evaluation).
a. The total sample size of all strata
must be at least 100 units.
May 17, 20049202004-20 I.R.B.

b. Each stratum for a population es-
timate should contain at least 30 sample
units.
c. The coefficient of variation of the
paired variable must be 15% or less. The
coefficient of variation of the paired vari-
able (y) is defined as the standard error of
the total “y” variables divided by point es-
timate of the total “y” variables when the
“y” variables are commonly the reported
values in accounting situations.
d. The coefficient of variation of the
primary variable of interest, represented by
either the corrected value or the difference
between the reported and corrected values
in common accounting situations, must be
15% or less. The coefficient of variation
for the corrected value (x) is defined as
the standard error of the total “x” vari-
ables divided by point estimate of the to-
tal “x” variables when the “x” variables are
commonly the corrected values in account-
ing situations. The coefficient of variation
for the difference (d) between the reported
and corrected values (x-y) is defined as
thesmallerofthestandarderroroftheto-
tal “x-y” or total “d” variables divided by
the amount equaling total population value
represented by “Y” plus point estimate of
the total “x-y” or total “d” variables or the
standard error of the total “x-y” or total
“d” variables divided by the total “x-y” or
total “d” variables when the “x-y” vari-
ables are commonly the difference (“d”)
between the reported (“y”) and corrected
(“x”) values in accounting situations.
e. For only the (combined) ratio
method, the reported values of units must
be of the same sign.
11. When sampling the same expense
accounts for multiple taxable years, if a
single projection does not materially af-
fect other computations that are more ap-
propriately made on a yearly basis, it is
permissible to combine the accounts into
one population. There should be alloca-
tion of the combined result by a reasonable
method determined prior to the selection of
the sampling units.
12. A written sampling plan is required
prior to the execution of a sample. A plan
must include the following:
a. The objective of the plan including a
description of the value for estimation and
the applicable taxable year(s);
b. Population definition and reconcilia-
tion of the population to the tax return;
c. Definition of the sampling frame;
d. Definition of the sampling unit;
e. Source of the random numbers, the
starting point or seed, and the method of
selection;
f. Sample size, along with supporting
factors in the determination;
g. Method to associate random num-
bers to the frame;
h. Steps to ensure that the serialization
of the frame is independent of the drawing
of random numbers;
i. Steps for evaluating the sampling
unit; and
j. The estimator that was used for ap-
praising the sample.
APPENDIX B
SAMPLING DOCUMENTATION
STANDARDS
The taxpayer must retain adequate
documentation to support the statistical
application, sample unit findings, and all
aspects of the sample plan and execution.
The execution of the sample must include
information for eachof the following
items:
1. The seed or starting point of the
random numbers;
2. The pairing of random numbers to
the frame along with supporting informa-
tion to retrace the process;
3. List of sampling units selected and
the results of the evaluation of each unit;
4. Supporting documentation such as
notes, invoices, purchase orders, project
descriptions, etc., which support the con-
clusion reached about each sample item;
5. The calculation of the projected esti-
mate(s) to the population, including com-
putation of the standard error of the esti-
mate(s);
6. A statement describing any slips or
blemishes in the execution of the sampling
procedure and any pertinent decision rules;
and
7. Computation of all associated adjust-
ments.
APPENDIX C
TECHNICAL FORMULAS
The formulas below are included to
clarify the statistical sampling terms used
and to ensure consistent application of
the procedures described in the revenue
procedure.
UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
MEAN ESTIMATOR
STRATIFIED
MEAN ESTIMATOR
Sample Mean of Audited Amounts
Estimate of Total Audited Amount
2004-20 I.R.B.921May 17, 2004

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
MEAN ESTIMATOR
STRATIFIED
MEAN ESTIMATOR
Estimated Standard Deviation of the Audited Amount
Estimated Standard Error of the Total Audited Amount
Achieved Precision of the Total Audited Amount
UNSTRATIFIED (SIMPLE RANDOM SAM
PLE)
DIFFERENCE ESTIMATOR
STRATIFIED
DIFFERENCE ESTIMATOR
Estimate of Total Difference
Estimate of Total Audited Amount
Estimated Standard Deviation of the Difference Amount
Estimated Standard Error of the Difference Amount
Achieved Precision of the Difference Amount
May 17, 20049222004-20 I.R.B.

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
RATIO ESTIMATOR
STRATIFIED
COMBINED RATIO ESTIMATOR
Estimated Ratio of Audited Amount to Recorded Amount
Estimate of Total Audited Amount
Estimated Standard Deviation of the Ratio
Estimated Standard Deviation of the Ratio ini
th
Stratum
Estimated Standard Error of the Ratio Amounts
Achieved Precision of the Ratio Amounts
UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
REGRESSION ESTIMATOR
STRATIFIED
COMBINED REGRESSION ESTIMATOR
Estimated Regression Coefficient
Estimate of Total Audited Amount
2004-20 I.R.B.923May 17, 2004

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
REGRESSION ESTIMATOR
STRATIFIED
COMBINED REGRESSION ESTIMATOR
Estimated Standard Deviation of the Regression Amounts
Estimated Covariance between the Audited and Recorded Amounts ini
th
Stratum
Estimated Standard Deviation between the Audited and Recorded Amounts ini
th
Stratum
Estimated Standard Error of the Audited and Recorded Amounts
Achieved Precision of the Audited and Recorded Amounts
Definition of Symbols
TERMDEFINITION
nSampleSize
NPopulation Size
xThe value of the sampling unit that is being used as the primary variable of interest. In audit sampling,
this would be the audited (or revised) value of the transaction.
yThe value of the sampling unit that is being used as the “paired” variable that is related to the variable
of interest. In audit sampling, this would be the reported (or original) value of the transaction.
dThe value of the sampling unit that is the difference between “paired” variable (y) and the variable
of interest (x). That is, d = x – y. In audit sampling, this would be the difference (or the change)
of each transaction’s value.
XThe total value of the primary variable of interest. In audit sampling, this would be the estimated total
audited value of the population. Typically, this value is not known for the entire population and is
estimated based on the probability sample selected.
May 17, 20049242004-20 I.R.B.

TERMDEFINITION
YThe total value of the variable that is paired with variable of interest. In audit sampling, this would
be the total reported value of the population. Typically, this value is known for the entire population
and may be estimated based on the probability sample selected.
DThe total value of the difference between the “paired” variable and the variable of interest. In audit
sampling, this would be the estimated total difference of the population. Typically, this value is not
known for the entire population and is estimated based on the probability sample selected.
U
R
The confidence coefficient whichis based on either the Student’st-distribution or the normal
distribution. For example, a 95% one-sided confidence coefficient based on the normal distribution is
1.645. This term is often referred to as thet-value and thez-value.
2004-20 I.R.B.925May 17, 2004

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Public Hearing
Partner’s Distributive Share:
Foreign Tax Expenditures
REG–139792–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to the proper
allocation of partnership expenditures for
foreign taxes. The proposed regulations
affect partnerships and their partners. In
this issue of the Bulletin, the IRS is issu-
ing temporary regulations (T.D. 9121) that
modify the rules relating to the proper allo-
cation of creditable foreign taxes. The text
of the temporary regulations also serves
as the text of these proposed regulations.
This document also contains a notice of
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments
must be received by Tuesday, August 24,
2004. Outlines of topics to be discussed at
the public hearing scheduled for Tuesday,
September 14, 2004, at 10 a.m., must be
received by Tuesday, August 24, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–139792–02), room
5203, Internal Revenue Service, P.O. 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–139792–02),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit electronic comments directly to the
IRS internet site atwww.irs.gov/regsor
www.regulations.gov. The public hearing
will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Beverly M. Katz, (202)
622–3050; concerning submissions
and the hearing, Treena Garrett, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The temporary regulations amend the
rules in 26 CFR part 1 regarding the alloca-
tion of foreign taxes among partners under
section 704(b). The text of the temporary
regulations also serves as the text of these
proposed regulations. The preamble to the
temporary regulations explains the regula-
tion.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because these regulations do not im-
pose on small entities a collection of infor-
mation requirement, the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled
for Tuesday, September 14, 2004, at 10
a.m. in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Because of access re-
strictions, visitors will not be admitted be-
yond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
on the building access list to attend the
hearing, see the FOR FURTHER INFOR-
MATION CONTACT portion of this pre-
amble. The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments must submit writ-
ten or electronic comments by Tuesday,
August 24, 2004, and an outline of the
topics to be discussed and the time to be
devoted to each topic (a signed original
and eight (8) copies) by Tuesday, August
24, 2004. A period of 10 minutes will be
allotted 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 author of this regulation
is Beverly M. Katz, Office of the Associate
Chief Counsel (Passthroughs & Special In-
dustries). However, other personnel from
the IRS and Treasury Department partici-
pated in its development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.704–1 is amended as
follows:
1.Paragraphs (b)(1)(ii)(b)and
(b)(4)(xi) are added.
2. Paragraph (b)(5) is amended by
addingExample 25throughExample 28.
May 17, 20049262004-20 I.R.B.

The additions and revisions read as fol-
lows.
§1.704–1 Partner’s distributive share.
*****
(b) * * *
(1) * * *
(ii) * * *
(b)[Thetextofthisproposed
amendment is the same as the text of
§1.704–1T(b)(1)(ii)(b) published else-
where in this issue of the Bulletin].
*****
(4) * * *
(xi) [The text of this proposed
amendment is the same as the text of
§1.704–1T(b)(4)(xi) published elsewhere
in this issue of the Bulletin].
*****
(5) [The text of this proposed amend-
ment of §1.704–1(b)(5) is the same as the
text of §1.704–1T(b)(5) published else-
where in this issue of the Bulletin].
John M. Dalrymple,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on April 20, 2004,
8:45 a.m., and published in the issue of the Federal Register
for April 21, 2004, 69 F.R. 21454)
Notice of Proposed
Rulemaking
Determination of Basis
of Stock or Securities
Received In Exchange for,
or With Respect to, Stock
or Securities in Certain
Transactions
REG–116564–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under section 358 that
provide guidance regarding the determina-
tion of the basis of stock or securities re-
ceived in exchange for, or with respect to,
stock or securities in certain transactions.
These proposed regulations affect share-
holders of corporations.
DATES: Written or electronic comments
must be received by July 2, 2004.
ADDRESSES: Send submissions to
CC:PA:LPD:PR(REG–116564–03),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand delivered Monday through Fri-
day between the hours of 8 am and 4 pm
to: CC:PA:LPD:PR (REG–116564–03),
Courier’s desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC 20044, or sent electronically, via
the IRS Internet site atwww.irs.gov/regs
or via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–116564–03).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Theresa Kolish, Emidio
J. Forlini, Jr. or Reginald Mombrun,
(202) 622–7930, concerning submis-
sions of comments, Treena Garrett, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Section 1012 of the Internal Revenue
Code (Code) provides that the basis of
property is generally the cost of such prop-
erty. Section 1.1012–1(c) provides that,
if shares of stock are sold or transferred
by a taxpayer who purchased or acquired
lots of stock on different dates or at dif-
ferent prices, and the lot from which the
stock was sold or transferred cannot be ad-
equately identified, the stock sold or trans-
ferred is charged against the earliest of
such lots purchased or acquired in order to
determine the basis of such stock.
Under this rule, a shareholder has
greater flexibility in planning the tax
consequences of the sale by specifically
identifying the shares sold. The rules for
adequate identification operate differently
depending on the manner in which the
shares are held and actions taken by the
shareholder. For example, when shares
are held through a broker, an adequate
identification is effected by giving the
proper instructions to the broker. This rule
allows identification without regard to the
particular shares physically transferred by
the broker. The rule also allows identifi-
cation when several lots are represented
by a single share certificate. However, if a
shareholder holds a different share certifi-
cate for each lot, the identity of the shares
is determined by the specific certificate
sold.
Section 358(a)(1) generally provides
that the basis of property received pur-
suant to an exchange to which section
351, 354, 355, 356, or 361 applies is the
same as that of the property exchanged,
decreased by the fair market value of any
other property (except money) received by
the taxpayer, the amount of any money re-
ceived by the taxpayer, and the amount of
loss to the taxpayer which was recognized
on such exchange, and increased by the
amount which was treated as a dividend,
and the amount of gain to the taxpayer
which was recognized on such exchange
(not including any portion of such gain
which was treated as a dividend). Section
358(b)(1) provides that, under regulations
prescribed by the Secretary, the basis de-
termined under section 358(a)(1) must be
allocated among the properties received in
the exchange or distribution.
Section 1.358–2(a)(2) provides that, if
as the result of an exchange or distribu-
tion under section 354, 355, 356, or for-
mer 371(b) a shareholder who owned stock
of only one class before the transaction
owns stock of two or more classes after the
transaction, then the basis of all the stock
held before the transaction (as adjusted un-
der §1.358–1) must be allocated among
the stock of all classes (whether or not
received in the transaction) held immedi-
ately after the transaction in proportion to
the fair market values of the stock of each
class. In addition, §1.358–2(a)(3) provides
that, if as the result of an exchange under
section 354, 355, 356, or former 371(b)
a security holder who owned only secu-
rities, all of one class, before the trans-
action, owns securities or stock of more
than one class, or owns both stock and se-
curities, then the basis of all the securi-
ties held before the transaction (as adjusted
under §1.358–1) must be allocated among
all the stock and securities (whether or not
received in the transaction) held immedi-
ately after the transaction in proportion to
2004-20 I.R.B.927May 17, 2004

the fair market values of the stock of each
class and the securities of each class.
Section 1.358–2(a)(4) provides that, in
every case in which, before the transac-
tions, a person owned stock of more than
one class or securities of more than one
class or owned both stock and securities, a
determination must be made, upon the ba-
sis of all the facts, of the stock or securi-
ties received with respect to stock and se-
curities of each class held (whether or not
surrendered). The allocation described in
§1.358–2(a)(2) is separately made as to the
stock of each class with respect to which
there is an exchange or distribution and the
allocation describedin §1.358–2(a)(3) is
separately made with respect to the secu-
rities of each class, part or all of which are
surrendered in the exchange.
Section 1.358–2(a)(5) provides a spe-
cial rule that applies in cases in which a
shareholder retains stock or securities pur-
suant to a plan of recapitalization under
section 368(a)(1)(E). In those cases, the
basis of the stock retained remains un-
changed.
When all of the taxpayer’s stock in a
target corporation is transferred in a reor-
ganization in exchange for stock of the ac-
quiring corporation or the issuing corpora-
tion, it may be difficult to identify physi-
cally which share of stock of the target cor-
porationwassurrenderedforwhichshare
of stock of the acquiring or issuing cor-
poration. Questions have arisen regarding
whether, for purposes of section 1012 and
the regulations thereunder, a shareholder
that sells or transfers shares of stock re-
ceived in an exchange or distribution to
which section 354, 355, or 356 applies can
identify that share as being traceable to a
particular lot of exchanged shares and, if
so, how such an identification can be ef-
fected.
A number of authorities have addressed
this issue but have reached inconsistent re-
sults. For example, inArrott v. Commis-
sioner, 136 F.2d 449 (3d Cir. 1943), the
court reasoned that the shares surrendered
in an acquisitive reorganization lost their
identity when traded for new shares in the
reorganization and held that the basis of the
shares acquired was determined by averag-
ing the basis of the shares exchanged. Ac-
cordCommissioner v. Bolender,82F.2d
591 (7th Cir. 1936);Helvering v. Stifel,75
F.2d 583 (4th Cir. 1935);Commissioner v.
Von Gunten, 76 F.2d 670 (6th Cir. 1935);
see also Revenue Ruling 55–355, 1955–1
C.B. 418.
On the other hand, other courts have re-
jected the average basis method for deter-
mining the basis of stock received in a reor-
ganization. For example, inBloch v. Com-
missioner, 148 F.2d 452 (9th Cir. 1945),
the court permitted the basis of blocks of
stock received in an acquisitive reorgani-
zation to be traced to the basis of the sur-
rendered stock. The court reasoned that
where the shareholder can trace the “trans-
migrations” of shares of stock, there is no
reason the shareholder should not be enti-
tled to identify which shares are sold. In
Kraus v. Commissioner,88F.2d616(2d
Cir. 1937), the court held that if a taxpayer
acquires a corporation’s stock at different
times and at different prices and exchanges
that stock in a recapitalization, the bases of
that stock are not blended or averaged in
computing the basis of the acquired stock.
See alsoOsrow v. Commissioner,49T.C.
333 (1968).
The IRS and Treasury Department have
considered whether tracing or averaging
is the more appropriate method for de-
termining the basis of stock received in
a reorganization described in section 368
or a distribution to which section 355 ap-
plies. In view of the carryover basis rule
of section 358, the IRS and Treasury are
not convinced that a reorganization is an
event that justifies averaging the bases of
the exchanged blocks of stock. Moreover,
the IRS and Treasury Department are con-
cerned that averaging the bases of the ex-
changed blocks of stock may inappropri-
ately limit the ability of taxpayers to ar-
range their affairs or may afford opportuni-
ties for the avoidance of certain provisions
of the Code.
The authorities holding that the basis
of shares received in a reorganization is
determined by the average basis method
have reached that conclusion on the basis
that it is not possible to match shares re-
ceived with shares surrendered. The IRS
and Treasury Department do not believe
that this inability requires the use of the
average basis method. When stock of one
corporation is surrendered in exchange for
stock of another corporation in a reorga-
nization, the documents governing the re-
organization will typically identify how
many, and what class of, shares of the tar-
get corporation are being exchanged for
how many, and what class of, shares of the
acquiring or issuing corporation. That is,
the exchanging shareholder will know that
one or more shares of the acquiring or is-
suing corporation are being received in ex-
change for one or more shares of the tar-
get corporation. However, when the share-
holder sells or transfers stock of the acquir-
ing or issuing corporation, it may not know
which share of stock of the target corpo-
ration corresponds to a particular share of
the acquiring or issuing corporation. Al-
though, in some cases, the exchange may
present obstacles to physical tracing, these
obstacles are not materially different from
those that exist in the absence of a reorga-
nization where shares are held through a
broker or consolidated in a single certifi-
cate. Thus, the IRS and Treasury Depart-
ment believe that it is appropriate to permit
shareholders to identify the shares of the
acquiring corporation sold or transferred
by reference to the shares surrendered in
exchange therefor.
These proposed regulations remove
§1.358–2(a)(2) through (5) and (c) and
replace these provisions with a more com-
plete set of rules for determining the basis
of each share or security received in a re-
organization described in section 368 and
a distribution to which section 355 applies.
These proposed regulations generally pro-
vide that the basis of each share of stock
or security received in an exchange to
which section 354, 355, or 356 applies
will be the same as the basis of the share
or shares of stock or security or securities
exchanged therefor. The determination
of which share of stock or security is re-
ceived in exchange for, or with respect to,
a particular share of stock or security will
be made in accordance with the terms of
the exchange or distribution.
If more than one share of stock or se-
curity (or a combination of shares of stock
and securities) is received in exchange for
one share of stock or security, the basis
of the share of stock or security surren-
dered will be allocated to the shares and/or
securities received based on the fair mar-
ket value of the shares and/or securities re-
ceived. In addition, if one share of stock or
security is received in respect of more than
one share of stock or security or a fraction
of a share of stock or security is received,
the basis of the shares of stock or securities
surrendered must be allocated to the shares
of stock or securities received in a manner
that, to the greatest extent possible, reflects
May 17, 20049282004-20 I.R.B.

that a share of stock or security received
is received in respect of shares of stock or
securities acquired on the same date and at
the same price. Therefore, if a shareholder
that acquired 2 shares of stock of a target
corporation on Date 1 for $2 each and 2
shares of stock of the target corporation on
Date 2 for $3 each and the shareholder ex-
changes such shares for 2 shares of the ac-
quiring corporation, one share of the ac-
quiring corporation will be treated as ac-
quired for the shares of the target corpora-
tion acquired on Date 1 and the other share
will be treated as acquired for the shares
of the target corporation on Date 2. Ac-
cordingly, one share will have a basis of
$4 and the other share will have a basis of
$6. This rule avoids, to the greatest extent
possible, creating shares or securities with
split holding periods.
In the case of an exchange to which
both section 351 and section 354 or sec-
tion 356 applies, however, these rules do
not apply if, in connection with the ex-
change, the shareholder or security holder
also exchanges property for stock or se-
curities in an exchange to which neither
section 354 nor 356 applies or liabilities
of the shareholder or security holder are
assumed. This limitation on the applica-
tion of these rules is intended to prevent a
conflict between, on the one hand, those
rules that apply to determine the basis of
stock received in an exchange to which
section 351 applies (including the effect of
the application of section 357(c)) and, on
the other hand, these proposed rules.
In the case of a distribution to which
section 355 applies in connection with
which there is no exchange of shares of
stock or securities but only the receipt of
additional shares of stock or securities,
these proposed regulations provide that
the basis of each share of stock or security
of the distributing corporation is allocated
between the share of stock or security of
the distributing corporation and the share
of stock or security received with respect
to such share of stock or security of the
distributing corporation in proportion to
their fair market values. If one share of
stock or security is received in respect of
more than one share of stock or security or
a fraction of a share of stock or security is
received, the basis of each share of stock
or security of the distributing corporation
must be allocated to the shares of stock
or securities received in a manner that re-
flects that, to the greatest extent possible,
a share of stock or security received is
received in respect of shares of stock or
securities acquired on the same date and
at the same price.
The IRS and Treasury Department rec-
ognize that, in certain cases, the share-
holder will not be able to identify which
particular share (or portion of a share) of
stock or security was exchanged for, or re-
ceived with respect to, a particular share
(or portion of a share) of stock or secu-
rity. In these cases, the proposed regu-
lations permit the shareholder or security
holder to designate which share or security
was received in exchange for, or in respect
of, which share or security. Such designa-
tion, however, must be consistent with the
terms of the exchange or distribution.
The designation must be made on or be-
fore the first date on which the basis of a
share or security received is relevant, for
example, the date on which a share or se-
curity received is sold or is transferred in
an exchange described in section 351 or
section 721 or a reorganization described
in section 368. The designation is bind-
ing for purposes of determining the Fed-
eral tax consequences of subsequent trans-
actions involving any share or security re-
ceived or property received with respect
to such share or security. If the share-
holder fails to make a designation, then
the shareholder will not be able to iden-
tify which shares are sold or transferred
for purposes of determining the basis of
property sold or transferred under section
1012 and §1.1012–1(c) and, instead, will
be treated as selling or transferring the
share received in respect of the earliest
share purchased or acquired.
The current regulations under section
358 include references to transactions
described in former sections 371(b) and
374, which were repealed by section
11801(a)(19) of Public Law 101–508 (104
Stat. 1388) effective November 5, 1990.
To reflect the repeal of these sections,
these proposed regulations remove the
references to sections 371(b) and 374 as
they currently appear in the regulations
under section 358.
Effective Date
These regulations are proposed to ap-
ply to exchanges and distributions of stock
or securities occurring after the date these
regulations are published as final regula-
tions in theFederal Register.
Effect on Other Documents
These proposed regulations would ob-
solete Revenue Ruling 55–355, 1955–1
C.B. 418, for transactions occurring after
the date these regulations are published as
final regulations in theFederal Register.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose 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) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight copies) that
are submitted timely to the IRS. Alterna-
tively, taxpayers may submit comments
electronically via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by any person who
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place of the hearing will be
published in theFederal Register.
Drafting Information
The principal authors of these regu-
lations are Reginald Mombrun, Theresa
Kolish, and Emidio J. Forlini, Jr. of the
Office of the Associate Chief Counsel
2004-20 I.R.B.929May 17, 2004

(Corporate), IRS. However, other per-
sonnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.358–2 also issued under 26
U.S.C. 358. * * *
Par. 2. Section 1.358–1 is amended by:
1. Revising paragraph (a).
2. Adding paragraph (c).
The revision and addition read as fol-
lows:
§1.358–1 Basis to distributees.
(a) In the case of an exchange or distri-
bution to which section 354 or 355 applies
in which, under the law applicable to the
year in which the exchange is made, only
nonrecognition property is received, the
sum of the basis of all of the stock and se-
curities in the corporation whose stock and
securities are exchanged or with respect to
which the distribution is made, held imme-
diately after the transaction, plus the basis
of all stock and securities received in the
transaction shall be the same as the basis of
all the stock and securities in such corpora-
tion held immediately before the transac-
tion allocated in the manner described in
§1.358–2. In the case of an exchange to
which section 351 or 361 applies in which,
under the law applicable to the year in
which the exchange was made, only non-
recognition property is received, the basis
of all the stock and securities received in
the exchange shall be the same as the basis
of all property exchanged therefor. If in an
exchange or distribution to which section
351, 356, or 361 applies both nonrecog-
nition property and “other property” are
received, the basis of all the property ex-
cept “other property” held after the trans-
action shall be determined as described in
the preceding two sentences decreased by
the sum of the money and the fair mar-
ket value of the “other property” (as of the
date of the transaction) and increased by
the sum of the amount treated as a divi-
dend (if any) and the amount of the gain
recognized on the exchange, but the term
gain as here used does not include any por-
tion of the recognized gain that was treated
as a dividend. In any case in which a
taxpayer transfers property with respect to
which loss is recognized, such loss shall
be reflected in determining the basis of the
property received in the exchange. The ba-
sis of the “other property” is its fair market
value as of the date of the transaction. See
§1.460–4(k)(3)(iv)(A) for rules relating to
stock basis adjustments required where a
contract accounted for using a long-term
contract method of accounting is trans-
ferred in a transaction described in section
351 or a reorganization described in sec-
tion 368(a)(1)(D) with respect to which the
requirements of section 355 (or so much of
section 356 as relates to section 355) are
met.
*****
(c)Effective date. Paragraph (a) of
this section applies to exchanges or dis-
tributions of stock and securities after the
date these regulations are published as fi-
nal regulations in theFederal Register.
Paragraph (b) of this section applies to ex-
changes or distributions of stock and secu-
rities after December 31, 1953.
Par. 3. Section 1.358–2 is amended by:
1. Revising paragraphs (a)(1) and
(a)(2).
2. Removing paragraphs (a)(3), (a)(4),
and (a)(5).
3. Revising paragraphs (b)(1) and (c).
4. Adding paragraph (d).
The revisions and addition read as fol-
lows:
§1.358–2 Allocation of basis among
nonrecognition property.
(a)Allocation of basis in exchanges or
distributions to which section 354, 355, or
356 applies. (1) As used in this paragraph,
the termstockmeans stock which is not
“other property” under section 356. The
termsecuritiesmeans securities (includ-
ing, where appropriate, fractional parts of
securities) which are not “other property”
under section 356.
(2)(i) If a shareholder or security holder
surrenders a share of stock or a security
in an exchange under the terms of section
354, 355, or 356, the basis of each share of
stock or security received in the exchange
shall be the same as the basis of the alloca-
ble portion of the share or shares of stock
or security or securities exchanged there-
for (as adjusted under §1.358–1). If more
than one share of stock or security is re-
ceived in exchange for one share of stock
or one security, the basis of the share of
stock or security surrendered shall be allo-
cated to the shares of stock or securities re-
ceived in the exchange in proportion to the
fair market value of the shares of stock or
securities received. If one share of stock or
security is received in respect of more than
one share of stock or security or a fraction
of a share of stock or security is received,
the basis of the shares of stock or securities
surrendered must be allocated to the shares
of stock or securities received in a manner
that reflects, to the greatest extent possible,
that a share of stock or security received
is received in respect of shares of stock or
securities acquired on the same date and at
the same price.
(ii) If a shareholder or security holder
receives one or more shares of stock or one
or more securities in a distribution under
the terms of section 355 (or so much of
section 356 as relates to section 355) and
does not surrender any shares of stock or
securities in connection with the distribu-
tion, the basis of each share of stock or
security of the distributing corporation (as
defined in §1.355–1(b)), as adjusted under
§1.358–1, shall be allocated between the
share of stock or security of the distribut-
ingcorporationwithrespecttowhichthe
distribution is made and the share or shares
of stock or security or securities (or alloca-
ble portions thereof) received with respect
to the share of stock or security of the dis-
tributing corporation in proportion to their
fair market values. If one share of stock or
security is received in respect of more than
one share of stock or security or a fraction
of a share of stock or security is received,
the basis of each share of stock or secu-
rity of the distributing corporation must be
allocated to the shares of stock or securi-
ties received in a manner that reflects that,
to the greatest extent possible, a share of
stock or security received is received in re-
spect of shares of stock or securities ac-
quired on the same date and at the same
price.
May 17, 20049302004-20 I.R.B.

(iii)Ifashareholder or security holder
that purchased or acquired shares of stock
or securities in a corporation on differ-
ent dates or at different prices exchanges
such shares of stock or securities under the
terms of section 354, 355, or 356, or re-
ceives a distribution of shares of stock or
securities under the terms of section 355,
and the shareholder or security holder is
not able to identify which particular share
of stock or security (or portion of a share of
stock or security) is received in exchange
for, or with respect to, a particular share of
stock or security, the shareholder or secu-
rity holder may designate which share of
stock or security is received in exchange
for, or with respect to, a particular share of
stock or security, provided that such des-
ignation is consistent with the terms of the
exchange or distribution. The designation
must be made on or before the first date
on which the basis of a share of stock or
security received is relevant. The basis of
the shares or securities received, for exam-
ple, is relevant when such shares or securi-
ties are sold or otherwise transferred. The
designation will be binding for purposes of
determining the Federal tax consequences
of any sale or transfer of, or distribution
with respect to, the shares or securities re-
ceived. If the shareholder fails to make a
designation, then the shareholder will not
be able to identify which shares are sold
or transferred for purposes of determining
the basis of property sold or transferred un-
der section 1012 and §1.1012–1(c) and, in-
stead, will be treated as selling or transfer-
ring the share received in respect of the ear-
liest share purchased or acquired.
(iv) Paragraphs (a)(2)(i) through (iii) of
this section shall not apply to determine
the basis of a share of stock or security re-
ceived by a shareholder or security holder
in an exchange described in both section
351 and section 354 or section 356, if, in
connection with the exchange, the share-
holder or security holder exchanges prop-
erty for stock or securities in an exchange
to which neither section 354 nor 356 ap-
plies or liabilities of the shareholder or se-
curity holder are assumed.
(b)Allocation of basis in exchanges to
which section 351 or 361 applies.(1)As
used in this paragraph (b), the termstock
refers only to stock which is not “other
property” under section 351 or 361 and
the termsecuritiesrefers only to securities
which are not “other property” under sec-
tion 351 or 361.
*****
(c)Examples. The application of para-
graphs (a) and (b) of this section is illus-
trated by the following examples:
Example 1.(i)Facts. F, an individual, acquired
20 shares of Corporation N stock on Date 1 for $3
eachand10sharesofCorporationNstockonDate2
for $6 each. On Date 3, Corporation O acquires the
assets of Corporation N in a reorganization under sec-
tion 368(a)(1)(A). Pursuant to the terms of the plan of
reorganization, F receives 2shares of Corporation O
stock for each share of Corporation N stock. There-
fore, F receives 60 shares of Corporation O stock.
Pursuant to section 354, F recognizes no gain or loss
on the exchange. F is not able to identify which shares
of Corporation O stock are received in exchange for
each share of Corporation N stock.
(ii)Analysis. Under paragraph (a)(2) of this sec-
tion, F has 40 shares of Corporation O each of which
has a basis of $1.50 and is treated as having been ac-
quired on Date 1 and 20 shares of Corporation O each
of which has a basis of $3 and is treated as having
been acquired on Date 2. On or before the date on
which the basis of a share of Corporation O stock re-
ceived becomes relevant, F may designate which of
the shares of Corporation O have a basis of $1.50 and
which have a basis of $3.
Example 2.(i)Facts. The facts are the same as in
Example 1, except that instead of receiving 2 shares
of Corporation O stock for each share of Corporation
N stock, F receives 1
1
/2shares of Corporation O stock
for each share of Corporation N stock. Therefore, F
receives 45 shares of Corporation O stock. Again,
F is not able to identify which shares (or portions of
shares) of Corporation O stock are received in ex-
change for each share of Corporation N stock.
(ii)Analysis. Under paragraph (a)(2) of this sec-
tion, F has 30 shares of Corporation O each of which
has a basis of $2 and is treated as having been ac-
quired on Date 1 and 15 shares of Corporation O each
of which has a basis of $4 and is treated as having
been acquired on Date 2. On or before the date on
which the basis of a share of Corporation O stock re-
ceived becomes relevant, F may designate which of
the shares of Corporation O have a basis of $2 and
which have a basis of $4.
Example 3.(i)Facts. E, an individual, purchased
20 shares of Class A stock of Corporation P on Date
1 for $3 per share and 10 shares of Class B stock of
Corporation P on Date 2 for $3 per share. On Date 3,
E exchanges each share of Class A stock for one share
of new Class C stock and one share of new Class D
stock in a reorganization under section 368(a)(1)(E).
Pursuant to section 354, E recognizes no gain or loss
on the exchange. On the date of the exchange, the fair
market value of each share of Class A stock is $6, the
fair market value of each share of Class C stock is
$2, and the fair market value of each share of Class
D stock is $4. E is not able to identify which shares
of Class C and Class D stock of Corporation P are
received in exchange for each share of Class A stock
of Corporation P.
(ii)Analysis. Under paragraph (a)(2) of this sec-
tion, because E receives one share of Class C stock
and one share of Class D stock for each share of Class
A stock, the basis of each share of Class A stock sur-
rendered is allocated to one share of Class C stock
and one share of Class D stock in proportion to their
fair market values. Therefore, $1 of the basis of each
share of Class A stock is allocated to each share of
Class C stock and $2 of the basis of each share of
Class A stock is allocated to each share of Class D
stock. E’s basis in each share of Class B stock re-
mains $3.
Example 4.(i)Facts. G, an individual, purchased
10 shares of Corporation Q stock on Date 1 for $2 per
share and 10 shares of Corporation Q stock on Date 2
for $5 per share. On Date 3, Corporation R acquires
the stock of Corporation Q in a reorganization under
section 368(a)(1)(B). Pursuant to the terms of the re-
organization, G receives one share of Corporation R
stock for every 2 shares of Corporation Q stock. Pur-
suant to section 354, G recognizes no gain or loss on
the exchange. G is not able to identify which portion
of each share of Corporation R stock is received in
exchange for each share of Corporation Q stock.
(ii)Analysis. Under paragraph (a)(2) of this sec-
tion, G has 5 shares of Corporation R each of which
has a basis of $4 and is treated as having been ac-
quired on Date 1 and 5 shares of Corporation R each
of which has a basis of $10 and is treated as having
been acquired on Date 2. On or before the date on
which the basis of a share of Corporation R stock re-
ceived becomes relevant, G may designate which of
the shares of Corporation R have a basis of $4 and
which have a basis of $10.
Example 5.(i)Facts. The facts are the same as in
Example 4, except that, in addition to transferring the
stock of Corporation Q to Corporation R, G transfers
land to Corporation R. In addition, after the transac-
tion, G owns stock of Corporation R satisfying the re-
quirements of section 368(c). G’s transfer of the Cor-
porationQstocktoCorporationRisanexchangede-
scribed in sections 351 and 354. G’s transfer of land
to Corporation R is an exchange described in section
351.
(ii)Analysis. Pursuant to paragraph (a)(2)(iv) of
this section, because neither section 354 nor section
356 applies to the transfer of land to Corporation R,
the rules of paragraphs (a)(2)(i) through (iii) of this
sectiondonotapplytodetermineG’sbasisinthe
Corporation R stock received in the transaction.
Example 6.(i)Facts. H, an individual, purchased
10 shares of Corporation T stock on Date 1 for $3 per
share and 10 shares of Corporation T stock on Date 2
for $6 per share. On Date 3, Corporation V, a newly
formed, wholly owned subsidiary of Corporation U,
merges with and into Corporation T with Corporation
T surviving. As part of the plan of merger, H receives
one share of Corporation U stock for each share of
Corporation T stock. In connection with the transac-
tion, Corporation U assumes a liability of H. In addi-
tion, after the transaction, H owns stock of Corpora-
tion U satisfying the requirements of section 368(c).
H’s transfer of the Corporation T stock to Corpora-
tion U is an exchange described in sections 351 and
354.
(ii)Analysis. Pursuant to paragraph (a)(2)(iv) of
this section, because, in connection with the transfer
of the Corporation T stock to Corporation U, Corpo-
ration U assumed a liability of H, the rules of para-
graphs (a)(2)(i) through (iii) of this section do not ap-
ply to determine H’s basis in the Corporation U stock
received in the transaction.
2004-20 I.R.B.931May 17, 2004

Example 7.(i)Facts. J, an individual, purchased
5 shares of Corporation X stock for $4 per share on
Date 1 and 5 shares of Corporation X stock for $8
per share on Date 2. Corporation X owns all of the
outstanding stock of Corporation Y. The fair market
value of the stock of Corporation X, excluding the
stock of Corporation Y, is $900. The fair market value
of the stock of Corporation Y is $900. In a distribu-
tion to which section 355 applies, Corporation X dis-
tributes all of the stock of Corporation Ypro ratato
its shareholders. No stock of Corporation X is surren-
dered in connection with the distribution. In the dis-
tribution, J receives 2 shares of Corporation Y stock
with respect to each share of Corporation X stock.
Pursuant to section 355, J recognizes no gain or loss
on the receipt of the shares of Corporation Y stock. J
is not able to identify which share of Corporation Y
stock is received in respect of each share of Corpora-
tion X stock.
(ii)Analysis. Under paragraph (a)(2) of this
section, because J receives 2 shares of Corporation
Y stock with respect to each share of Corporation
X stock, the basis of each share of Corporation X
stock is allocated between such share of Corporation
X stock and two shares ofCorporation Y stock in
proportion to the fair market value of those shares.
Therefore, each of the 5 shares of Corporation X
stock acquired on Date 1 will have a basis of $2 and
each of the 10 shares of Corporation Y stock received
with respect to those shares will have a basis of $1.
In addition, each of the 5 shares of Corporation X
stock acquired on Date 2 will have a basis of $4 and
each of the 10 shares of Corporation Y stock received
with respect to those shares will have a basis of $2.
Onorbeforethedateonwhichthebasisofashare
of Corporation Y stock received becomes relevant,
H may designate which of the shares of Corporation
Y have a basis of $1 and which have a basis of $2.
(d)Effective date. This section applies
to exchanges or distributions of stock and
securities after the date these regulations
are published as final regulations in the
Federal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on April 20, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 3, 2004, 69 F.R. 24107)
Foundations Status of Certain
Organizations
Announcement 2004–36
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
1A Directors Champs Program, Inc.,
Southlake, TX
1st Lt. Alan Michael Hook Memorial
Fund, Torrance, CA
3rd Power Foundation, Copiague, NY
1420 Foundation for Sustainable
Development Education, Orlando, FL
A. P. Hart Precious Moments Daycare,
East Orange, NJ
Access New York, Inc., Jamaica, NY
Actors Summit, Akron, OH
Adolescent Health Alliance, Inc.,
New York, NY
African American Childrens Theatre,
Ltd., Milwaukee, WI
African American Health Initiative, Inc.,
Louisville, KY
African American Males Making a
Difference, Charlottesville, VA
African Diaspora Music and Art, Inc.,
New York, NY
Ahepa 371 II, Inc., Detroit, MI
Airlie Gardens Foundation, Inc.,
Wilmington, NC
Aiun Foundation for International
Education and Democracy, Inc.,
Salem, OR
Akron Newstead Youth Center, Inc.,
Akron, NY
Al Horton Memorial Rotary Foundation,
Desert Hot Springs, CA
Allegheny West Business Education
Foundation, Pittsburgh, PA
Alliance Charitable Foundation, Inc.,
Amesbury, MA
Alma Rangel Gardens Housing
Development Fund Company, Inc.,
New York, NY
Alpha House Project, Inc., Duluth, GA
Alternative Community Living Services,
Inc., Marietta, GA
Alternative Medical Institute, Inc.,
Winsted, CT
Amani Christian Community
Development Corp., Pittsburgh, PA
America Alevit Cultural Center, Inc.,
Brooklyn, NY
Amherst Domestic Violence Task Force,
Inc., East Amherst, NY
Anais Enterprises, Greensboro, NC
Anshei Bnai Torah, Monsey, NY
Arlington Golden Pride Band Booster,
Riverside, CA
Art Sanctuary, Philadelphia, PA
Art Works Studio School, Incorporated,
Washington, DC
Atlanta Metropolitan Amateur Athletic
Club, Atlanta, GA
Atlantic Chamber Orchestra, Portland, ME
Ats Foundation, Inc., Paoli, PA
Azimuth Education Foundation,
Lake Forest, CA
Babylon Village Educational Foundation,
Inc., Babylon, NY
Baltimore County Small Business
Resource Center, Inc., Towson, MD
Banning Police Activities League, Inc.,
Banning, CA
Barcare, Inc., Edison, NJ
Beaver Girls Bantam Basketball Program,
Beaver, PA
Bedford Girls Basketball, Bedford, IN
Beginning With Books, Pittsburgh, PA
Believers Community Outreach,
Los Angeles, CA
Belleville Public Schools District
118 Educational Foundation, Ltd.,
Belleville, IL
Bentley Hall Development Corporation,
Inc., Philadelphia, PA
Beth Chinuch Soro Bohel, Inc.,
Brooklyn, NY
Black Geeks Online, Washington, DC
Black Men for Progress, Farrell, PA
Black Swamp Arts Council, Archbold, OH
Blacksburg Volunteer Fire Department,
Blacksburg, VA
Bloomfield Amateur Boxing Association,
Inc., Bloomfield, CT
Bloomington Activities Foundation,
Bloomington, MN
Blue Ridge Education Fund, Inc.,
Roanoke, VA
Blue Shift Theatre Ensemble, Boone, NC
Blue Society of Center Pennsylvania,
Shermans Dale, PA
Bobby Telfer Memorial Scholarship Fund,
Lansing, MI
Books for Kids, Inc., Raleigh, NC
Boyer Center for Education and Society,
Grantham, PA
May 17, 20049322004-20 I.R.B.

Brea Olinda Wildcat Softball Boosters,
Brea, CA
Brick City Soccer Club, Inc., Newark, NJ
Briercrest Family of Schools USA
Foundation, Point Roberts, WA
Buffalo Neighborhood Network, Inc.,
Buffalo, NY
Bulgaria America Cultural Exchange,
Inc., Larchmont, NY
California Condor Youth Wrestling,
Huntington, CA
California Conservatory of Music,
Menlo Park, CA
California Inland Region of Narcotics
Annonomous, Banning, CA
Cal-Lee Retirement Villa, Inc.,
Southern Pines, NC
Camden Urban Ministry Initiative, Inc.,
Camden, NJ
Camp Cathedral School of the Arts, Inc.,
Atlanta, GA
Capital Area Housing Resource Center,
Inc., Trenton, NJ
Care Consulting Services, Inc.,
Frederick, MD
Care Link Services, Lima, OH
Caring Citizens for Action, Inc.,
La Mesa, CA
Caritas of Yucaipa, Solana Beach, CA
Carolina Christian Education Foundation,
Fayetteville, NC
Carroll Elementary PTO, Inc.,
Shermans Dale, PA
Celebration Christian Life Community,
Ridgewood, NJ
Center for Natural Resources,
Stockton, MO
Center in the City, Scranton, PA
Central Park Towers, Inc., Kansas City, KS
Central School District Foundation,
Park Hills, MO
Century High School Model United
Nations Support Group, Santa Ana, CA
Charity Childrens Home at Ebenezer,
N. Wilkesboro, NC
Charleston Rotary Charitable Foundation,
Charleston, IL
Chatham Cultural Center, Inc.,
Chatham, MA
Cheltenham York Road Nursing
and Rehabilitation Center, Inc.,
Philadelphia, PA
Child & Family Profile, Inc., Chicago, IL
Child Assault Prevention of Ottawa
County, Port Clinton, OH
Childrens Dance Theatre of Ashland,
Ashland, OR
Christian Learning Centers of the Upstate,
Easley, SC
Christmas in April Topeka Shawnee Co.,
Inc., Topeka, KS
Christmas in April West End Cities,
Ontario, CA
Christs Mission, Marion, IL
City of Orange Public Library Foundation,
Orange, CA
Classical New Jersey Society, Inc.,
Plainfield, NJ
Clayton Rotary Foundation, Inc.,
Clayton, GA
Cleveland Center and Shelter,
Cleveland, OH
Cleveland Foot and Ankle Clinic,
Cleveland, OH
Cleveland Lumberjacks Charities, Inc.,
Cleveland, OH
Clover Commons, Inc., Rock Hill, SC
Coalition on Autism, Plains, PA
Colesville Lions Foundation, Inc.,
Silver Spring, MD
Colquitt Options, Albany, GA
Columbia South Rotary Foundation,
Columbia, MO
Commissioners Honor Camp Cadet, Inc.,
Hershey, PA
Communities in School of Maryland, Inc.,
Baltimore, MD
Communities in School of Prince Georges
County, Inc., Hyattsville, MD
Community Builders of Durham, Inc.,
Durham, NC
Community Connections, N. Platte, NE
Community Enforcement Authority, Inc.,
Atlanta, GA
Community Foundation of Mahoning
Valley, Youngstown, OH
Community Technology Development,
Inc., Newton, MA
Community Voices Collaborative
of the District of Columbia, Inc.,
Washington, DC
Compassionate Outreach Ministries
Christian Academy, Inc.,
Winter Park, FL
Connecticut Sports Institute Baseball
Association, Inc., Bridgeport, CT
Consumer Benefits Work America
Program, Mount Holly, NJ
Contextual Program Development
Foundation, Washington, DC
Cook County Intervention, Oak Lawn, IL
Costa Mesa Community Foundation,
Costa Mesa, CA
Coventry High School Gridiron Club,
Inc., Coventry, CT
Cross Connection Family Services,
Philadelphia, PA
Cross High Band Booster, Cross, SC
Dance Harrison Street, Inc., Easton, MD
Decalogue Education Fund, Inc.,
Chicago, IL
Depth Foundation, Inc., Northport, MI
Diakonia Media Group, Inc.,
Duxbury, MA
Dillsboro Tomorrow, Inc., Dillsboro, NC
Dimensions Dance Company,
St. Louis, MO
Disability Technologies, Inc.,
Hedgesville, WV
District Heights Community Development
Corporation, District Heights, MD
Dl Blades, Detroit Lakes, MN
Doc Communications Media Group,
Somerset, NJ
Downingtown Community Center, Inc.,
Downingtown, PA
Downtown Senior Center, Inc.,
Scranton, PA
Downtown Yonkers Management
Association, Inc., Yonker, NY
Dressing to Succeed Licking County, Inc.,
Newark, OH
Duanesburg Education Foundation, Inc.,
Duanesburg, NY
Duneland Building Trades Corp.,
Chesterton, IN
Dunkard Creek Watershed Assn., Inc.,
Morgantown, WV
Durham Regional Financial Center,
Durham, NC
Dusty Wings of the Desert, Inc.,
Palm Desert, CA
Eagle Valley Senior Housing, Inc.,
Allentown, PA
East End Business & Merchants Council,
Bridgeport, CT
Eastfield Youth Activities, Nebo, NC
Eastside Community Economic
Development Corporation,
Charlotte, NC
Eaton Area Senior Center, Inc.,
Charlotte, MI
Eau Claire High School Foundation,
Chapin, SC
Education Express Company, Howell, NJ
Educational Foundation of Park Forest
Chicago Heights, Inc., Park Forest, IL
Educational Netcasting Foundation, Inc.,
Cambridge, MA
Ellwood City Education Foundation,
Ellwood City, PA
Elvie Neighborhood Community
Association, Inc., Wilson, NC
2004-20 I.R.B.933May 17, 2004

Emmanuel Bible Institute, New York, NY
Empire Theatre Co., Chicago, IL
Enrichment and Training Center,
Black Mountain, NC
E S P, Ltd., Dover, NH
Essex County Educational Foundation,
Inc., W. Orange, NJ
EssexItv,Inc.,Newark,NJ
Evangelical Catholic, Inc., Columbus, WI
Fair Housing for America, Riverside, CA
Fair Lawn Association for Special
Education, Fair Lawn, NJ
Fair Tide, Inc., Kittery, ME
Family Art Studio, Inc., St. Louis, MO
Family Depot, Inc., St. Louis, MO
Family First, Hamden, CT
Family Law and Policy Institute, Inc.,
Washington, DC
Family Life Home Christian School
Independent Study Program,
San Marcos, CA
Family Preservation Program, Inc.,
Warm Springs, VA
Family Support Network of Vance
Granville Franklin and Warren,
Oxford, NC
Family Support Systems, Pacifica, CA
Fauna Communications Research
Institute, Hillsborough, NC
Federacion De Organizaciones Mexicanas
En Nueva Inglaterra, Inc., Chelsea, MA
Federal Enterprise Community of Buffalo,
Inc.,Buffalo,NY
First Flight, Inc., Sumter, SC
First Night Pittsburgh, Inc., Pittsburgh, PA
First Step Childcare & Preschool, Inc.,
Waterford Wks, NJ
Flights for Humanity, Incorporated,
Littleton, MA
Foundation for Charter Schools, Inc.,
Newark, NJ
Foundation for the Advancement of
Sexual Equity, Long Beach, CA
Foundation for United States Russian
Cultural Relations, Inc., Alexandria, VA
Foundations Reach Youth, Richmond, VA
FRAMES,Flint,MI
Franco Foundation, Inc.,
Silver Spring, MD
Freedom Through Christ Ministry, Inc.,
Bloomington, IN
Freehold Borough Educational
Foundation, Inc., Freehold, NJ
Freehold Township Foundation for
Educational Excellence Incorporate,
Freehold, NJ
Friends of Cabot Woods, Inc.,
Newton, MA
Friends of Charlotte Advantage Charter
School, Inc., Charlotte, NC
Friends of Clinton Youth and Family
Service Bureau, Inc., Clinton, CT
Friends of College Wrestling, Inc.,
Grand Rapids, MI
Friends of Everett Arena, Concord, NH
Friends of Kalamazoo Advantage
Academy, Inc., Kalamazoo, MI
Friends of Mountain History, Inc.,
Asheville, NC
Friends of Octavio Paz Charter School,
Inc., Chicago, IL
Friends of Poway High Foundation,
Poway, CA
Friends of Rocky Mount Charter School,
Inc., Battleboro, NC
Friends of Seacoast Hospice,
Portsmouth, NH
Friends of the Public Library, Clive, IA
Friends of the School, Inc., Portland, IN
Friends of Wasatch Summit Counties
Childrens Justice Center, Park City, UT
Friends of Worc, Inc., Lake Success, NY
Friends of Wvon, Chicago, IL
Friends Who Care, Inc., New York, NY
Frontiers Journal, Inc., Rhinebeck, NY
Gary Wheaton Memorial Tri State
Respiratory Clinics, Vincennes, IN
Gateway Management Corporation,
Buffalo, NY
GEM Recreation & Health Center,
Kill Devil Hills, NC
Genesis Corporation, Thomasville, NC
Geoffrey Lance Foundation for Spinal
Cord Injury Res and Support,
Philadelphia, PA
Georgia Institute for Community
Development and Outreach, Inc.,
Atlanta, GA
Get the Message, Inc., Baltimore, MD
Ghana Computer Literacy & Distant
Education, Incorporated, Chicago, IL
Gilgal Development Corporation,
Plainfield, NJ
Global Childrens Health & Environment
Fund, Washington, DC
Global Education Foundation,
Alexandria, VA
Golden Dogs Academy, Inc.,
Mount Vernon, OH
Granite State Federation of Families, Inc.,
Manchester, NH
Great Expectations Weight Loss Camp,
Inc., Oakville, CT
Great Pond Foundation, Inc.,
Edgartown, MA
Greater Grand Forks Community Center
LLC, Grand Forks, ND
Greater Hope Life Center, Inc.,
New York, NY
Greater Options for Adolescent Lives,
Inc., Boston, MA
Greater Philadelphia Cancer Foundation,
Philadelphia, PA
Greater Southern Brooklyn Health
Coalition, Inc., Brooklyn, NY
Greenville Chinese School,
Greenville, NC
Greenwich Agora, Inc., Greenwich, CT
Grosse Pointe South Choir Boosters, Inc.,
Grosse Pointe Farms, MI
Hall-Light and Associates, Hampton, VA
Hamilton County Self Help Housing,
Webster City, IA
Hampden County Land Trust, Inc.,
Monson, MA
Hand Craft Alliance, Waynesboro, VA
Hands & Minds, Inc., Cambridge, MA
Hands on Helpers, Inc., Princeton, NJ
Happy Times Development Corporation,
Inc., Philadelphia, PA
Harlem Renaissance Economic
Development Corporation,
New York, NY
Hartford Teen Center,
White River Junction, VT
Hawaii Ola Waimanalo, Honolulu, HI
Hawkeye East Wrestling Club, Inc.,
Christiansburg, VA
Health, Incorporated, Sioux City, IA
Heart and Soul Ministries, Inc.,
Altoona, PA
Heartland Opera Theatre, Webb City, MO
Hellas United Fc, Inc., Boston, MA
Henry White Experimental Farm
Foundation, Belleville, IL
Heritage Band Boosters, Monroeville, IN
Herminia M. Roque Memorial Social
Service Center, Chicago, IL
High Tech High Foundation,
San Diego, CA
Hillel of Rockland County, Inc.,
Monsey, NY
Hillside Business Association,
Duluth, MN
Hinsdale South High School Foundation,
Darien, IL
Hiram Foundation,Incorporated,
Long Beach, CA
Hispanic National Law Enforcement
Association New York Chapter
Foundation, New York, NY
Historical Advancement Association,
Philadelphia, PA
May 17, 20049342004-20 I.R.B.

Hoffman Estates Park District Foundation,
Hoffman Estates, IL
Holy Care, Inc., Lanham, MD
Holy Cross Neighborhood Development,
Inc., Pittsburgh, PA
Home of Hope Learning and Resource
Center, Inc., Hinesville, GA
Homegrown, Inc., Brockton, MA
Hope & Help, Inc., Brooklyn, NY
Hope and New Dreams of Adelphi, Inc.,
Adelphi, MD
H O P E Initiatives, Inc., Heralding
Opportunities Potentials Education,
Macon, GA
Housing Opportunities Made Economical,
Inc., Fredericksburg, VA
Human Family Foundation,
Annandale, VA
Humanist Ministries, Inc., Milwaukee, WI
Hunter College High School
Chinese Parents Association, Inc.,
New York, NY
Huntsville Bible Students, Huntsville, AL
I Vote Project, Inc., Wilmington, DE
Ice Dogs Hockey Club,
Dearborn Heights, MI
Independence Empowerment Center, Inc.,
Manassas, VA
Independent Tech Alumni Council, Inc.,
Boston, MA
Indo-Pacific Conservation Alliance,
Washington, DC
Infinities Chamber Ensemble, Inc.,
Kensington, NH
Innerchange Freedom Initiative,
Washington, DC
Intelliport Corporation, Chillicothe, OH
International Centre for Eyecare
Education Foundation,
So. San Francisco, CA
International Concerned Friends
and Family of Mumia Abu Jamal,
Philadelphia, PA
International Housing & Family Services
Corp., Thousand Oaks, CA
International Society for Craniofacial
Surgery, Philadelphia, PA
Interscholastic Athletic Association of
Maryland, Inc., Baltimore, MD
Ivan Pravilov Dainius Zubrus Hockey
Club and School, Mounds View, MN
Jersey Knights, E. Brunswick, NJ
JHS Boys Soccer Boosters,
Shepherdstown, WV
JHS Girls Soccer Boosters,
Harpers Ferry, WV
Jocobus Academy Group Home, Inc.,
Baltimore, MD
Jones College Scholarship Fund,
Charlotte, NC
Kemper Military School and Endowment,
Inc., Boonville, MO
Key Works Association, Chicago, IL
Kings Highway, Inc., Mt. Holly, NJ
Kuntu Repertory Theatre, Pittsburgh, PA
Kutag, Kankakee, IL
KVMH Charitable Foundation, Inc.,
Waimea, HI
La Quinta High School Foundation,
La Quinta, CA
Laguna Hills High School Friends
of Model United Nations,
Laguna Hills, CA
Lake City Education Foundation,
Lake City, MN
Lakeview Parent Teacher Council,
Warsaw, IN
Lakeville Performing Arts, Lakeville, MN
Lakewood Community Mediation Center,
Inc., Lakewood, NJ
Lakewood Redevelopment Corp.,
Atlanta, GA
Lapiedra Family Firefighters Memorial
Fund, Staten Island, NY
Leadership Akron, Akron, OH
Leaven Center, Eden Prairie, MN
Lebanon Riverside NH Rotary Charities,
Inc., West Lebanon, NH
Lesc House Housing Development Fund
Corp., New York, NY
Lexington Area Economic Development
Corporation, Lexington, MO
Libertyville Hockey Club Organization,
Incorporated, Libertyville, IL
Library Foundation of Madison County,
Inc., Canton, MS
Life Long Learning Group, Matthews, NC
Lincoln Park Elementary School PTO,
Lincoln Park, NJ
Liverpool High School Student Activities,
Liverpool, NY
Living Letters Ministries, Inc.,
St. Louis, MO
Love Is, Incorporated, Ontario, CA
Loving Hands, Inc., South Bend, IN
Low Country Artists and Artisans Society,
Savannah, GA
Lutheran Social Services of Central Ohio
Mansfield Housing, Inc., Columbus, OH
Mahwah Ramapo Ridge Home and
School Organization, Inc., Mahwah, NJ
Main Line Academy of Music, Inc.,
Ardmore, PA
Maine Rural Network, Standish, ME
Make It Happen Foundation, Inc.,
Atlanta, GA
Managing Earths Resources, Inc.,
Beverly, MA
Mars Hill Media, Minneapolis, MN
Marthas Vineyard Touchdown Club,
Oak Bluffs, MA
Massachusetts Mental Health Counselors
Association, Inc., Natick, MA
McFarland Education Foundation,
McFarland, CA
McPherson County Connections, Inc.,
McPherson, KS
McPherson Junior Pups Basketball Club,
McPherson, KS
Media Unit, Inc., Syracuse, NY
Mediation Association of Northwest
Ohio, Toledo, OH
Medway Youth Community Organization,
Inc., Medway, MA
Mental Health Consumer Advocates of
Rhode Island, Inc., Providence, RI
Mental Health Workers Without Borders
USA, Inc., New York, NY
Merrimack Valley Regional Animal
Shelter, Inc., Newburyport, MA
Merry Mixers, Inc., Marblehead, MA
Metro Health Florida, Inc., Roswell, GA
Metro Health Indiana II, Inc., Roswell, GA
Metro Health Vermont, Inc., Roswell, GA
Metro Universal Career Center, Inc.,
Lithonia, GA
Millrace Playground Committee,
Millersville, MD
Mission Twenty Eight Ninteen,
Medina, OH
Missouri Centers for Independent Living,
Kansas City, MO
Missouri Sports Development Office,
Inc., Saint Peters, MO
Mobridge Family Resource Center,
Mobridge, SD
Montgomery County Womens Fair
Committee, Inc., Rockville, MD
Mountain Vista Advocates,
Apple Valley, CA
Mountaineer Region of Narcotics
Anonymous, Morgantown, WV
Mt. Olivet of Harlem Housing
Development, New York, NY
Multi-Cultural Center, Chicago, IL
Multiple Sclerosis Association of
America Gardens at Evesham, Inc.,
Cherry Hill, NJ
Museum of the Americas Foundation,
Inc., Arlington, VA
Music in the City, Inc., Kansas City, MO
Music Outreach Program,
Washington, DC
2004-20 I.R.B.935May 17, 2004

Naim Frasheri School of Madison, Inc.,
Middleton, WI
National Institute for Prostate &
Urological Research, Chicago, IL
National Organization for Children, Inc.,
Morrisville, PA
Native American Medicine Persons
Association, Maple Grove, MN
Native American Society for Historical
Preservation, Inc., Hessel, MI
Near South Family Life Center
Collaborative,Inc., Chicago, IL
Neighborhoods Incorporated of Hammond
Indiana, Hammond, IN
Neil J. Brassell Jr, Foundation for Youth
Development, Bensalem, PA
New Bern Family Resources, Inc.,
New Bern, NC
New Creation Community Development
Corporation, Reading, PA
New Day Development Corporation,
Kansas City, MO
New Jersey Association of Child Care
Resource and Referral Agencies,
Pennington, NJ
New Life Community Services,
Philadelphia, PA
New Life Multi Cultural Family
Community Center, Inc., Brockton, MA
New Light Family Life & Educational
Center, Richmond, VA
New Sudanese Association of Oregon,
Portland, OR
NewYorkCityCenterforUrbanWildlife
Rehabilitation, New York, NY
NewYorkStateAssociationforWomenin
Administration, Inc., Baldwinsville, NY
Newton County Help Center, Neosho, MO
Nimrod Project, Highland Park, MI
Noahs Ark a Safe Place, Inc.,
Washington, PA
Non-Profit AllianceCenter for Leadership
Development, Inc., Dorchester, MA
Nonquit Street Neighborhood Association
and Land Trust, Inc., Dorchester, MA
North Andover Coalition Against Risky
Behavior, Inc., North Andover, MA
North Carolina Amateur Wrestling
Association, Mooresville, NC
North Carolina Family Resource
Coalition, Swannanoa, NC
North Carolina Shore and Beach
Preservation Association, Inc.,
Oak Island, NC
North Crown Heights Nostrand
Ave. Merchants Association, Inc.,
Brooklyn, NY
North Hero Education Foundation, Inc.,
North Hero, VT
Northborough Education Foundation,
Inc., Northborough, MA
Northeastern Pennsylvania Diversity
Education Consortium, Dallas, PA
Northfield Community School
Organization, Inc., Northfield, VT
Northmont Future Bolts Basketball,
Dayton, OH
Northmont Traveling Baseball,
Dayton, OH
Northside Norfolk Rotary Foundation,
Norfolk, VA
Northview Choral Music Organization,
Sylvania, OH
Oak Grove Parent Teacher Organization,
Green Oaks, IL
OCPM Research Foundation,
Cleveland, OH
Old Silver Spring House Tour Association,
Inc., Silver Spring, MD
Omega First, Incorporated, Charlotte, NC
Omicron Zeta Charitable and Educational
Fund, Inc., Raleigh, NC
Orange County Health Research Alliance,
Santa Ana, CA
Orange County Scholastic Foundation,
Irvine, CA
Our Town Civic Organization, Inc.,
Westminster, VT
Overture Theatre Corp., Woodbury, NY
Paddle Providence, Inc., Providence, RI
Panther Partners, Inc., Vista, CA
Parents Advocating Challenging
Education, Saint Charles, MO
Parents Coalition for Literacy, Inc.,
Richmond, IN
Partners With Parents, Inc.,
Los Angeles, CA
Pathways Retreat & Education Center,
Madison, VA
Patrick Marsh Parent Student Teacher
Organization, Sun Prairie, WI
Peaks at Raleigh, Inc., Asheville, NC
People are Surviving Today, Gallatin, TN
Perennial Garden Club, Washington, DC
Peter V. Destephano Foundation for
Budd Chiari Syndrome Research,
Lombard, IL
Pieces, Inc., Saint Charles, MO
Piedmont Bioethics Network,
High Point, NC
Pikesville High School Music Boosters,
Inc., Baltimore, MD
Pinecrest School Parent Council,
East Lansing, MI
Place of Our Own, Inc., Baltimore, MD
Pleasants County Humane Society, Inc.,
Saint Marys, WV
Portage County Culture Festival, Inc.,
Stevens Point, WI
Portuguese Cultural Center, Inc.,
Danbury, CT
Professional Reading Outreach, Inc.,
Falls Church, VA
Progress in Education, Contoocook, NH
Project Freedom, Inc., Boston, MA
Project on African American International
Law, Chicago, IL
Project Success of Decatur and Macon
County, Decatur, IL
Prokids Athletic League, Inc., Atlanta, GA
Prosthetic Abilities Center of Excellence,
San Diego, CA
Providers Caring for Kids, Inc.,
New York, NY
Psalms Foundation, Inc., Annapolis, MD
PTA-PTO Thrift Shop, Inc.,
Lynchburg, VA
Radio Maria, Inc., Landsdale, PA
Raise the Bar, Inc., Stamford, CT
Rallying Against Drugs Association,
Rialto, CA
Reaching Children for God, Inc.,
Maineville, OH
Rebuilding Together Bergen County, Inc.,
Ridgewood, NJ
Recovery Plus II, Inc., Chicago, IL
Red Devil Wrestling Club, Inc.,
Lowell, IN
Refreshing Waters for Life Ministry, Inc.,
Attica, NY
Region 15 Education Foundation, Inc.,
Middlebury, CT
Response International, King George, VA
RHA Affordable Housing IV, Inc.,
Atlanta, GA
RHS Spirit Squad Booster, Ramona, CA
Ring of Fire Productions, Inc.,
Brooklyn, NY
Rio Rancho Astronomical Society, Inc.,
Rio Rancho, NM
Riverside Community Foundation,
Incorporated, Washington, IA
Riverwatch Association, Mineola, NY
Riverworks a Creative Center, Inc.,
Dobbs Ferry, NY
RMP Ministries, Inc., Charlotte, NC
Robert C. Hill Elementary PTO,
Romeoville, IL
R O C H Foundation, Inc., Durham, NC
Rockwell Swaledale Education
Foundation, Charles City, IA
Ross Camper Brunson Family Services,
Baltimore, MD
May 17, 20049362004-20 I.R.B.

Rotary Club of Marthas Vineyard
Charitable Foundation, Inc.,
W. Yarmouth, MA
Rotary Club of Northport New York
Charity Fd, Inc., Northport, NY
Rotary Club of Temecula Foundation,
Murrieta, CA
Rotary Healthy Youth Foundation,
Roseville, MN
Roxborough Education Foundation, Inc.,
Philadelphia, PA
Russian American Voters Educational
League, Inc., Richmond Hill, NY
Safe Harbor Community Services, Inc.,
Manchester, NH
San Diego Cultural Arts Alliance,
San Diego, CA
San Diego National and International
Black Film Festival, San Diego, CA
Sandra Starr Foundation, Princeton, NJ
S. E. Gross School Parent Teacher
Organization, Brookfield, IL
Sea Girt P A R K S, Inc., Sea Girt, NJ
Second Chance Services Unlimited, Inc.,
Randallstown, MD
Self Foundation, Philadelphia, PA
Self Training Institute, Philadelphia, PA
Servant Missions Unlimited, Inc.,
Roswell, GA
Seymour Basketball Fan Club, Inc.,
Seymour, IN
Shades of Strength, Pacifica, CA
Sleepy Eye Area Home Health, Inc.,
Eden Prairie, MN
Smart Start Day Care, Inc., Monett, MO
Social Lites Scholarship Fund, Rialto, CA
Society for the Education and Eradication
of Depression, Inc., Robbinsville, NJ
Society of Many Faces, Inc.,
Brooklyn, NY
Sonrise Development Corporation,
Englewood, NJ
South Atlanta Redevelopment
Corporation, Atlanta, GA
South Jersey Opportunities
Industrializations Centers, Inc.,
Camden, NJ
South Memphis Youth Initiative, Inc.,
Memphis, TN
Sparks Family of Edutainment Media,
Inc., Silver Spring, MD
Special Services Home & School
Association, Inc., Ridgewood, NJ
Spring Hope Elementary School Parent
Teacher Organization, Spring Hope, NC
Springfield Peer Lending, Inc.,
Springfield, MA
St. Anthony Homes, Inc., Bel Air, MD
St. James Park Day Care, Inc., Bronx, NY
Stanly Net, Albemarle, NC
Steelville Community Development and
Care Corporation, Salem, MO
Stepping Stone Community Theater,
Shrewsbury, MA
Stone Mountain Charter School, Inc.,
Stone Mountain, GA
Story County Child Abuse Council,
Ames, IA
StreetTalk,Glencoe,IL
Student Outreach Program, Inc.,
Wilton, CT
Substance Awareness Greater Anderson
Coalition, Cincinnati, OH
Sudanese Development Initiative, Inc.,
Palm Beach, FL
Support Education and Research
for Chronic Hepatitis C, Inc.,
Jamaica Plain, MA
Synergy Residential Academy,
Minneapolis, MN
Tarheel Community Development
Corporation, New Bern, NC
Team Thunder Wheelchair Sports,
Willow Wood, OH
Tebucky Jones Youth Foundation,
New Britain, CT
Ted Williams Housing Corporation,
Oceanside, CA
Teen Rap, Jackson, MI
Teens Taking Charge, Inc., Atlanta, GA
Timeless Charities, Inc., Morris Plains, NJ
TINC Road School Parent Teachers
Organization, Inc., Flanders, NJ
Toms River Community Foundation, Inc.,
Toms River, NJ
Torrance Mission Health Center,
Torrance, CA
Tramway Elementary PTO, Inc.,
Sanford, NC
Trans Action San Diego, San Jose, CA
Transitional Services, Inc.,
St. Michaels, MD
Tri Star Employee Development Corp.,
San Antonio, TX
Trilogy Fleming of Topeka KS, Inc.,
Scottsdale, AZ
True Hens, Inc., Wilmington, DE
Typical Life Corporation, Mount Wolf, PA
United Clayton Area Network for Youth,
Inc., Clayton, NC
Unity Center, Snow Hill, NC
University City Community Development,
Charlotte, NC
University of Cincinnati, Cincinnati, OH
Upaya Institute, Incorporated,
New York, NY
Upper Iowa Audubon Society, Cresco, IA
Upper Neuse River Basin Association,
Inc., Rtp, NC
Urban Bankers Coalition Foundation,
Inc., New York, NY
Valerius Parent Teacher Organization,
Urbandale, IA
Vance Housing, Inc., Beckley, WV
Vermont Student Opportunity Scholarship
Fund, Williston, VT
Vickery Crek Middle School PTO,
Cumming, GA
Villa Farnese, Philadelphia, PA
Voices That Listen, Oaklawn, IL
Wall Watchers, Matthews, NC
Watertown Boosters Association,
Watertown, MA
Waterville Valley Music Center,
New York, NY
Wayne County Enrichment & Fitness
Center, Goldsboro, NC
Wells Sports Complex, Inc., Escanaba, MI
West Side 2000, Chicago, IL
West Virginia Center for Civic Life, Inc.,
Charleston, WV
Western Catarba County Family Resource
Center, Inc., Newton, NC
Western Maryland YMCA Services
Corporation, Cumberland, MD
Western North Carolina Safety & Fire
Education Assn., Weaverville, NC
Westfield United Soccer Club, Inc.,
Westfield, MA
Weston Education Foundation, Inc.,
Weston, VT
WhalingCityRowingClub,
New Bedford, MA
Whitehall Coplay Class Memorial
Scholarship Foundation, Inc.,
Whitehall, PA
Wide Sky Theatre Company, Inc.,
New York, NY
Williamsburg Film Festival, Inc.,
Toano, VA
Wilmington Education Fund, Inc.,
Wilmington, VT
Window of Hope Community Services,
Incorporated, Berkeley, IL
Windsor Healing Centre, Incorporated,
Catlett, VA
Wiscupa, Inc., Oshkosh, WI
Women of NU, Chicago, IL
Womens Business Institute, Inc.,
Tustin, CA
Womens Social Impact Workshop, Inc.,
Philadelphia, PA
Wood Ridge High School Band Parents
Association, Wood-Ridge, NJ
2004-20 I.R.B.937May 17, 2004

Woodcliff Lake PFA, Inc., Woodcliff, NJ
Woodcock Foundation, Inc.,
Baltimore, MD
Woodland Park Middle School Music
Booster Club, San Marcos, CA
Yes Youth Outreach, Inc., Omaha, NE
Young Equestrians Program,
Plymouth, MN
Youth Force, Inc., Bronx, NY
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
May 17, 20049382004-20 I.R.B.

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.
2004-20 I.R.B.iMay 17, 2004

Numerical Finding List
1
Bulletins 2004–1 through 2004–20
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
2004-8, 2004-6 I.R.B.441
2004-9, 2004-6 I.R.B.441
2004-10, 2004-7 I.R.B.501
2004-11, 2004-10 I.R.B.581
2004-12, 2004-9 I.R.B.541
2004-13, 2004-9 I.R.B.543
2004-14, 2004-10 I.R.B.582
2004-15, 2004-11 I.R.B.612
2004-16, 2004-13 I.R.B.668
2004-17, 2004-12 I.R.B.635
2004-18, 2004-12 I.R.B.639
2004-19, 2004-13 I.R.B.668
2004-20, 2004-13 I.R.B.673
2004-21, 2004-13 I.R.B.673
2004-22, 2004-14 I.R.B.709
2004-23, 2004-13 I.R.B.673
2004-24, 2004-14 I.R.B.714
2004-25, 2004-15 I.R.B.737
2004-26, 2004-15 I.R.B.743
2004-27, 2004-14 I.R.B.714
2004-28, 2004-16 I.R.B.818
2004-29, 2004-15 I.R.B.772
2004-30, 2004-17 I.R.B.833
2004-31, 2004-18 I.R.B.854
2004-32, 2004-18 I.R.B.860
2004-33, 2004-18 I.R.B.862
2004-34, 2004-19 I.R.B.895
2004-35, 2004-17 I.R.B.839
2004-36, 2004-20 I.R.B.932
2004-37, 2004-17 I.R.B.839
2004-38, 2004-18 I.R.B.878
2004-39, 2004-17 I.R.B.840
2004-40, 2004-17 I.R.B.840
2004-41, 2004-18 I.R.B.879
2004-42, 2004-17 I.R.B.840
Court Decisions:
2078, 2004-16 I.R.B.773
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
Notices— Continued:
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
2004-12, 2004-10 I.R.B.556
2004-13, 2004-12 I.R.B.631
2004-14, 2004-9 I.R.B.526
2004-15, 2004-9 I.R.B.526
2004-16, 2004-9 I.R.B.527
2004-17, 2004-11 I.R.B.605
2004-18, 2004-11 I.R.B.605
2004-19, 2004-11 I.R.B.606
2004-20, 2004-11 I.R.B.608
2004-21, 2004-11 I.R.B.609
2004-22, 2004-12 I.R.B.632
2004-23, 2004-15 I.R.B.725
2004-24, 2004-13 I.R.B.642
2004-25, 2004-15 I.R.B.727
2004-26, 2004-16 I.R.B.782
2004-27, 2004-16 I.R.B.782
2004-28, 2004-16 I.R.B.783
2004-29, 2004-17 I.R.B.828
2004-30, 2004-17 I.R.B.828
2004-31, 2004-17 I.R.B.830
2004-32, 2004-18 I.R.B.847
2004-33, 2004-18 I.R.B.847
2004-34, 2004-18 I.R.B.848
2004-35, 2004-19 I.R.B.889
2004-36, 2004-19 I.R.B.889
Proposed Regulations:
REG-106590-00, 2004-14 I.R.B.704
REG-116664-01, 2004-3 I.R.B.319
REG-129447-01, 2004-19 I.R.B.894
REG-106681-02, 2004-18 I.R.B.852
REG-122379-02, 2004-5 I.R.B.392
REG-139792-02, 2004-20 I.R.B.926
REG-139845-02, 2004-5 I.R.B.397
REG-165579-02, 2004-13 I.R.B.651
REG-166012-02, 2004-13 I.R.B.655
REG-115471-03, 2004-14 I.R.B.706
REG-116564-03, 2004-20 I.R.B.927
REG-121475-03, 2004-16 I.R.B.793
REG-126459-03, 2004-6 I.R.B.437
REG-126967-03, 2004-10 I.R.B.566
REG-128309-03, 2004-16 I.R.B.800
REG-149752-03, 2004-14 I.R.B.707
REG-153172-03, 2004-15 I.R.B.729
REG-156232-03, 2004-5 I.R.B.399
REG-156421-03, 2004-10 I.R.B.571
REG-167217-03, 2004-9 I.R.B.540
REG-167265-03, 2004-15 I.R.B.730
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-12, 2004-9 I.R.B.528
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
2004-16, 2004-10 I.R.B.559
2004-17, 2004-10 I.R.B.562
2004-18, 2004-9 I.R.B.529
2004-19, 2004-10 I.R.B.563
2004-20, 2004-13 I.R.B.642
2004-21, 2004-14 I.R.B.702
2004-22, 2004-15 I.R.B.727
2004-23, 2004-16 I.R.B.785
2004-24, 2004-16 I.R.B.790
2004-25, 2004-16 I.R.B.791
2004-26, 2004-19 I.R.B.890
2004-27, 2004-17 I.R.B.831
2004-29, 2004-20 I.R.B.918
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-3, 2004-7 I.R.B.486
2004-4, 2004-6 I.R.B.414
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
2004-8, 2004-10 I.R.B.544
2004-9, 2004-6 I.R.B.428
2004-10, 2004-7 I.R.B.484
2004-11, 2004-7 I.R.B.480
2004-12, 2004-7 I.R.B.478
2004-13, 2004-7 I.R.B.485
2004-14, 2004-8 I.R.B.511
2004-15, 2004-8 I.R.B.515
2004-16, 2004-8 I.R.B.503
2004-17, 2004-8 I.R.B.516
2004-18, 2004-8 I.R.B.509
2004-19, 2004-8 I.R.B.510
2004-20, 2004-10 I.R.B.546
2004-21, 2004-10 I.R.B.544
2004-22, 2004-10 I.R.B.553
2004-23, 2004-11 I.R.B.585
2004-24, 2004-10 I.R.B.550
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
May 17, 2004ii2004-20 I.R.B.

Revenue Rulings— Continued:
2004-25, 2004-11 I.R.B.587
2004-26, 2004-11 I.R.B.598
2004-27, 2004-12 I.R.B.625
2004-28, 2004-12 I.R.B.624
2004-29, 2004-12 I.R.B.627
2004-30, 2004-12 I.R.B.622
2004-31, 2004-12 I.R.B.617
2004-32, 2004-12 I.R.B.621
2004-33, 2004-12 I.R.B.628
2004-34, 2004-12 I.R.B.619
2004-35, 2004-13 I.R.B.640
2004-36, 2004-12 I.R.B.620
2004-37, 2004-11 I.R.B.583
2004-38, 2004-15 I.R.B.717
2004-39, 2004-14 I.R.B.700
2004-40, 2004-15 I.R.B.716
2004-41, 2004-18 I.R.B.845
2004-42, 2004-17 I.R.B.824
2004-43, 2004-18 I.R.B.842
2004-44, 2004-19 I.R.B.885
2004-46, 2004-20 I.R.B.915
Tax Conventions:
2004-3, 2004-7 I.R.B.486
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
9104, 2004-6 I.R.B.406
9105, 2004-6 I.R.B.419
9106, 2004-5 I.R.B.384
9107, 2004-7 I.R.B.447
9108, 2004-6 I.R.B.429
9109, 2004-8 I.R.B.519
9110, 2004-8 I.R.B.504
9111, 2004-8 I.R.B.518
9112, 2004-9 I.R.B.523
9113, 2004-9 I.R.B.524
9114, 2004-11 I.R.B.589
9115, 2004-14 I.R.B.680
9116, 2004-14 I.R.B.674
9117, 2004-15 I.R.B.721
9118, 2004-15 I.R.B.718
9119, 2004-17 I.R.B.825
9120, 2004-19 I.R.B.881
9121, 2004-20 I.R.B.903
9122, 2004-19 I.R.B.886
9123, 2004-20 I.R.B.907
9124, 2004-20 I.R.B.901
2004-20 I.R.B.iiiMay 17, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–20
Announcements:
93-60
Obsoleted by
Rev. Proc. 2004-23, 2004-16 I.R.B.785
2003-56
Modified by
Ann. 2004-11, 2004-10 I.R.B.581
Notices:
98-5
Withdrawn by
Notice 2004-19, 2004-11 I.R.B.606
2000-4
Obsoleted by
T.D. 9115, 2004-14 I.R.B.680
2003-76
Modified by
Notice 2004-19, 2004-11 I.R.B.606
2004–2
Modified by
Notice 2004–25, 2004–15 I.R.B.727
Proposed Regulations:
REG-110896-98
Corrected by
Ann. 2004-14, 2004-10 I.R.B.582
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-138499-02
Partially withdrawn by
REG-106590-00, 2004-14 I.R.B.704
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-163974-02
Corrected by
Ann. 2004-13, 2004-9 I.R.B.543
REG-166012-02
Corrected by
Ann. 2004-40, 2004-17 I.R.B.840
Revenue Procedures:
85-35
Obsoleted by
Rev. Proc. 2004-26, 2004-19 I.R.B.890
87-19
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
93-15
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
94-55
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
98-16
Suspended by
Notice 2004-12, 2004-10 I.R.B.556
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2001-10
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2001-23
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Rev. Proc. 2004-23, 2004-16 I.R.B.785
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
Ann. 2004-16, 2004-13 I.R.B.668
2002-28
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
Revenue Procedures— Continued:
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
2003-23
Modified and superseded by
Rev. Proc. 2004-14, 2004-7 I.R.B.489
2003-26
Supplemented by
Rev. Proc. 2004-17, 2004-10 I.R.B.562
2003-29
Obsoleted, except as provided in section 5.02, by
Rev. Proc. 2004-24, 2004-16 I.R.B.790
2003-64
Modified by
Rev. Proc. 2004-21, 2004-14 I.R.B.702
2004-1
Corrected by
Ann. 2004-8, 2004-6 I.R.B.441
2004-4
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-5
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-6
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
Revenue Rulings:
55-748
Modified and superseded by
Rev. Rul. 2004-20, 2004-10 I.R.B.546
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
May 17, 2004iv2004-20 I.R.B.

Revenue Rulings— Continued:
92-19
Supplemented in part by
Rev. Rul. 2004-14, 2004-8 I.R.B.511
94-38
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
98-25
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
2004-38
Modified by
Rev. Proc. 2004-22, 2004-15 I.R.B.727
Treasury Decisions:
9088
Corrected by
Ann. 2004-39, 2004-17 I.R.B.840
2004-20 I.R.B.vMay 17, 2004
*U.S. Government Printing Office: 2004—304–778/60135