Internal Revenue Bulletin 2004-8 (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
4-8
February 23, 200
4
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. 2004–14, page 511.
Insurance companies; interest rate tables.Prevailing
state assumed interest rates are provided for the determina-
tion of reserves under section 807 of the Code for contracts
issued in 2003 and 2004. Rev. Rul. 92–19 supplemented in
part.
Rev. Rul. 2
004–15, page 515.
Short sale
;broker;transfer.This ruling provides guidance
on whether
the delivery of shares made to a broker in transfer-
ring a sho
rt sale position from one broker to another broker will
(1) cause
a short sale to be deemed consummated under regu-
lations s
ection 1.1233–1(a), and (2) cause a short-against-the-
box trans
actiontoceasetobecoveredbythetransitionrule
of sectio
n 1259 of the Code.
Rev. Rul. 2004–16, page 503.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through March
2004.This ruling announces the monthly bond factor amounts
to be used by taxpayers who dispose of qualified low-income
buildings or interests therein during the period January through
March 2004.
Rev. Rul. 2004–17, page 516.
Treatment of environmental remediation expenses un-
der section 1341.This ruling holds that amounts paid or
incurred in the current taxable year to remediate environmen-
tal contamination that occurred in prior taxable years do not
qualify for treatment under section 1341 of the Code.
Rev. Rul. 2004–18, page 509.
Treatment of environmental remediation expenses un-
der section 263A.This ruling holds that amounts incurred
to clean up land that a taxpayer contaminated with hazardous
waste by the operation of a manufacturing plant must be in-
cluded in inventory costs under section 263A of the Code. Rev.
Ruls. 94–38 and 98–25 clarified. Rev. Proc. 2002–9 modi-
fied and amplified.
Rev. Rul. 2004–19, page 510.
LIFO; price indexes; department stores.The December
2003 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, December 31,
2003.
T.D. 9110, page 504.
Final regulations under section 42 of the Code amend current
regulations that affect the order in which credits are allocated
from the state housing credit ceiling under section 42(h)(3)(C)
and the time for meeting the 10-percent basis requirement un-
der sections 42(h)(1)(E) and (F). These regulations also amend
current regulations under section 42 to facilitate the electronic
filing of income tax returns.
(Continued on the next page)
Finding Lists begin on page ii.
Index for January through February begins on page iv.

ADMINISTRATIVE
T.D. 9109, page 519.
Final regulations under sections 6662 and 6664 of the Code
limit the defenses available to the imposition of the accuracy-re-
lated penalty when taxpayers fail to disclose reportable trans-
actions or fail to disclose they have taken a position based upon
a regulation being invalid. The regulations also clarify the exist-
ing regulations with respect to the facts and circumstances that
the IRS will consider in determining whether a taxpayer acted
with reasonable cause and in good faith in relying on an opin-
ion or advice. The regulations provide that failure to disclose a
reportable transaction strongly indicates that the taxpayer did
not act in good faith.
T.D. 9111, p
age 518.
Final regula
tions under section 6103 of the Code relate to the
definition
of agent for certain purposes. The regulations clar-
ify that the
term agent in certain provisions of section 6103
includes co
ntractors.
February 23, 20042004-8 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin contents are consolidated 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.
* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.
2004-8 I.R.B.February 23, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.
—Low-Income
Housing Cre
dit
Low-income
housing credit; satis-
factory bon
d; “bond factor” amounts
for the peri
od January through March
2004.This
ruling announces the monthly
bond facto
r amounts to be used by taxpay-
ers who dis
pose of qualified low-income
buildings
or interests therein during the
period Jan
uary through March 2004.
Rev. Rul.
2004–16
In Rev. Ru
l. 90–60, 1990–2 C.B.
3, the Int
ernal Revenue Service provided
guidance to
taxpayers concerning the gen-
eral method
ology used by the Treasury
Department
in computing the bond factor
amounts use
d in calculating the amount of
bond consi
dered satisfactory by the Secre-
tary under
§ 42(j)(6) of the Internal Rev-
enue Code.
It further announced that the
Secretary
would publish in the Internal
Revenue B
ulletin a table of bond factor
amounts f
or dispositions occurring during
each cale
ndar month.
Rev. Proc
. 99–11, 1999–1 C.B. 275,
establis
hed a collateral program as an al-
ternativ
e to providing a surety bond for
taxpayer
s to avoid or defer recapture of
the low-inc
ome housing tax credits under
§ 42(j)(6).
Under this program, taxpayers
may establi
sh a Treasury Direct Account
and pledge c
ertain United States Treasury
securitie
s to the Internal Revenue Service
as securit
y.
This reven
ue ruling provides in Table
1 the bond f
actor amounts for calculating
the amount
of bond considered satisfactory
under § 42(
j)(6) or the amount of United
States Tr
easury securities to pledge in a
Treasury
Direct Account under Rev. Proc.
99–11 for
dispositions of qualified low-in-
come buil
dings or interests therein during
the perio
d January through March 2004.
Table 1
Rev. Rul. 2004–16
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition19901991199219931994199519961997199819992000
Jan ’0414.7127.3138.1547.4055.2754.5254.0053.5753.2753.0152.84
Feb ’0414.7127.3138.1547.4055.2754.4053.8953.4553.1652.9152.74
Mar ’0414.7127.3138.1547.4055.2754.2853.7753.3453.0552.8152.65
Table 1 (cont’d)
Rev. Rul. 2004–16
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition2001200220032004
Jan ’0452.9953.4054.0254.15
Feb ’0452.9053.3053.9254.15
Mar ’0452.8153.2253.8354.15
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul.
98–3, 1998–1 C.B. 248; Rev. Rul.
2001–2, 2001–1 C.B. 255; Rev. Rul.
2001–53, 2001–2 C.B. 488; Rev. Rul.
2002–72, 2002–2 C.B. 759; and Rev. Rul.
2003–117, 2003–46 I.R.B. 1051.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Gregory N. Doran of the Office
of Associate Chief Counsel (Passthroughs
2004-8 I.R.B.503February 23, 2004

and Special Industries). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Doran at (202) 622–3040 (not a
toll-free call).
26 CFR 1.42–6: Buildings qualifying for carryover
allocations.
T.D. 9110
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Section 42 Carryover and
Stacking Rule Amendments
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that amend several exist-
ing regulations concerning the low-income
housing tax credit. The regulations pri-
marily reflect changes to the law made by
the Community Renewal Tax Relief Act
of 2000 and affect owners of low-income
housing projects who claim the credit and
the State or local housing credit agencies
who administer the credit.
DATES:Effective Date:These regulations
are effective January 6, 2004.
Applicability Dates:For dates
of applicability of these regulations,
see §§1.42–12(a)(2) and (3), and
1.42–14(l)(2).
FOR FURTHER INFORMATION
CONTACT: Lauren R. Taylor (202)
622–3040 or Christopher J. Wilson (808)
539–2874 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On July 7, 2003, the IRS published a
notice of proposed rulemaking in theFed-
eral Register(REG–131997–02, 2003–33
I.R.B. 366 [68 FR 40218]) proposing
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 42
of the Internal Revenue Code. These
amendments provide guidance regarding
changes to section 42 made by the Com-
munity Renewal Tax Relief Act of 2000
(Public Law 106–554) (2000 Act) and
make certain changes to the regulations to
help facilitate the electronic filing (E-fil-
ing) of income tax returns.
One commentator submitted written
comments in response to the notice of
proposed rulemaking. A public hearing
was scheduled for September 23, 2003,
pursuant to a notice of public hearing pub-
lished simultaneously with the notice of
proposed rulemaking. The IRS received
one request to speak at the public hearing.
This request was withdrawn before the
hearing date. On September 15, 2003,
the IRS published a notice (68 FR 53926)
canceling the public hearing on the pro-
posed regulations. After consideration
of the comments received, the proposed
regulations are adopted as revised by this
Treasury decision. The revisions are dis-
cussed below.
Explanation of Provisions
Section 42 provides for a low-income
housing tax credit that may be claimed as
part of the general business credit under
section 38. In general, the credit is al-
lowable only if the owner of a qualified
low-income building receives a housing
credit allocation from a State or local hous-
ing credit agency (Agency) of the jurisdic-
tion where the building is located.
In general, an allocation must be made
not later than the close of the calendar
year in which the building is placed in
service. Under section 42(h)(1)(E), an
allocation (carryover allocation) may be
made to a “qualified building” that has
not yet been placed in service, provided
the building is placed in service not later
than the close of the second calendar
year following the calendar year of the
allocation. Section 42(h)(1)(F) provides
rules for multi-building projects receiv-
ing project-based carryover allocations.
Following the changes made by the 2000
Act, section 42(h)(1)(E)(ii) defines a qual-
ified building as any building that is part
of a project if the taxpayer’s basis in the
project (as of the later of the date which is
6 months after the date that the allocation
was made or the close of the calendar year
in which the allocation is made) is more
than 10 percent of the taxpayer’s reason-
ably expected basis in the project (as of the
close of the second calendar year follow-
ing the calendar year of the allocation).
The commentator recommended revis-
ing §1.42–6(a)(2) of the proposed regu-
lations to clarifythat each building in a
multi-building project receiving a project-
based carryover allocation under section
42(h)(1)(F) need not separately meet the
10 percent basis requirement. The com-
mentator states that the proposed regula-
tions appear to require that each building
in a multi-building project that receives
a project-based carryover allocation must
meet the 10 percent basis requirement sep-
arately. The proposed regulations do not
require that each building in a multi-build-
ing project satisfy the 10 percent basis
requirement separately for project-based
carryover allocationsmade under section
42(h)(1)(F). For allocations made under
section 42(h)(1)(F), the 10 percent basis
requirement is only required to be met on a
project basis. The final regulations clarify
this issue.
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
the regulations do not impose a new collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. The collection of
informationcontainedinthisTreasuryde-
cision has been previously reviewed and
approved by the Office of Management
and Budget in accordance with the Paper-
work Reduction Act (44 U.S.C. 3507) un-
der control number 1545–1102. Pursuant
to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
that preceded this Treasury decision was
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 authors of these regula-
tions are Christopher J. Wilson and Lauren
R. Taylor, Office of the Associate Chief
February 23, 20045042004-8 I.R.B.

Counsel (Passthroughs and Special Indus-
tries), IRS. However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Adoption of A
mendments to the
Regulations
Accordingly, 26 CFR part 1 is 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 1.42–6 is amended by:
1. Revising paragraphs (a), (b)(4)Ex-
ample 2, (c)(1), (c)(3), (d)(2)(viii), and
(d)(4)(i).
2. Removing the word “September”
from paragraph (b)(4)Example 1.and
adding the word “May” in its place; re-
moving the year “1993” each place it ap-
pears and by adding the year “2003” in its
place; and removing the year “1995” and
adding the year “2005” in its place.
3. Removing the language “by the close
of the calendar year of the allocation” from
the first and last sentences of paragraph
(c)(2) and adding the language “by the
close of the calendar year of the allocation
(for allocations made before July 1) or by
the close of the date that is 6 months after
the date the allocation is made (for alloca-
tions made after June 30)” in its place.
4. Removing the language “, “Carry-
over Allocation of the Low-Income Hous-
ing Credit,”” from paragraph (d)(4)(ii).
5. Removing the language “before the
close of the calendar year of the allocation”
from the first sentence of paragraph (e)(2)
and adding the language “by the close of
the calendar year of the allocation (for al-
locations made before July 1) or by the
close of the date that is 6 months after the
date the allocation is made (for allocations
made after June 30)” in its place.
The revisions read as follows:
§1.42–6 Buildings qualifying for
carryover allocations.
(a)Carryover allocations—(1)In gen-
eral. A carryover allocation is an alloca-
tion that meets the requirements of section
42(h)(1)(E) or (F). If the requirements of
section 42(h)(1)(E) or (F) that are required
to be satisfied by the close of a calendar
year are not satisfied, the allocation is not
valid and is treated as if it had not been
made for that calendar year. For example,
if a carryover allocation fails to satisfy a
requirement in §1.42–6(d) for making an
allocation, such as failing to be signed or
dated by an authorized official of an al-
locating agency by the close of a calen-
dar year, the allocation is not valid and is
treated as if it had not been made for that
calendar year.
(2)10 percent basis requirement.A
carryover allocation may only be made
with respect to a qualified building. A
qualified building is any building which is
part of a project if, by the date specified
underparagraph(a)(2)(i)or(ii)ofthis
section, a taxpayer’s basis in the project
is more than 10 percent of the taxpayer’s
reasonably expected basis in the project
as of the close of the second calendar year
following the calendar year the allocation
is made. For purposes of meeting the 10
percent basis requirement, the determi-
nation of whether a building is part of a
single-building project or multi-building
project is based on whether the carry-
over allocation is made under section
42(h)(1)(E) (building-based allocation)
or section 42(h)(1)(F)(project-based al-
location). In the case of a multi-building
project that receives an allocation under
section 42(h)(1)(F), the 10 percent basis
requirement is satisfied by reference to the
entire project.
(i)AllocationmadebeforeJuly1.Ifa
carryover allocation is made before July 1
of a calendar year, a taxpayer must meet
the 10 percent basis requirement by the
close of that calendar year. If a taxpayer
does not meet the 10 percent basis require-
ment by the close of the calendar year,
the carryover allocation is not valid and is
treated as if it had not been made.
(ii)Allocation made after June 30.Ifa
carryover allocation is made after June 30
of a calendar year, a taxpayer must meet
the 10 percent basis requirement by the
close of the date that is 6 months after the
date the allocation was made. If a tax-
payer does not meet the 10 percent basis
requirement by the close of the required
date, the carryover allocation must be re-
turned to the Agency. Unlike a carryover
allocation made before July 1, if a taxpayer
does not meet the 10 percent basis require-
ment by the close of the required date, the
carryover allocation is treated as a valid al-
location for the calendar year of allocation,
but is included in the “returned credit com-
ponent” for purposes of determining the
State housing credit ceiling under section
42(h)(3)(C) for thecalendar year follow-
ing the calendar year of the allocation. See
§1.42–14(d)(1).
(b) * * *
(4) * * *
Example 2.(i)Facts. D, an accrual-method tax-
payer, received a carryover allocation from Agency,
the state housing credit agency of State X, on Septem-
ber 12, 2003. As of that date, D has not begun con-
struction of the low-income housing building D plans
to build and D does not have basis in the land on
which D plans to build the building. From Septem-
ber 12, 2003, to the close of March 12, 2004, D incurs
some costs related to the planned building, including
architects’ fees. As of the close of March 12, 2004,
these costs do not exceed 10 percent of D’s reason-
ably expected basis in the single-building project as
of the close of 2005.
(ii)Determination of whether building is quali-
fied. Because D’s carryover-allocation basis as of the
close of March 12, 2004, is not more than 10 percent
of D’s reasonably expected basis in the single-build-
ing project, the building is not a qualified building for
purposes of section 42(h)(1)(E)(ii) and paragraph (a)
of this section. Accordingly, the carryover allocation
to D must be returned to the Agency. The allocation is
valid for purposes of determining the amount of credit
allocated by Agency from State X’s 2003 State hous-
ing credit ceiling, but is included in the returned credit
component of State X’s 2004 housing credit ceiling.
(c)Verification of basis by Agency—(1)
Verification requirement. AnAgencythat
makes a carryover allocation to a taxpayer
must verify that the taxpayer has met the
10 percent basis requirement of paragraph
(a)(2) of this section.
(2) * * *
(3)Time of verification—(i)Allocations
made before July 1. For a carryover allo-
cation made before July 1, an Agency may
require that the basis certification be sub-
mitted to or received by the Agency prior
to the close of the calendar year of allo-
cation or within a reasonable time follow-
ing the close of the calendar year of al-
location. The Agency will need to ver-
ify basis as provided in paragraph (c)(2)
of this section to accurately complete the
Form 8610, “Annual Low-Income Housing
Credit Agencies Report,” and the Sched-
ule A (Form 8610), “Carryover Alloca-
tion of Low-Income Housing Credit,” for
the calendar year of the allocation. If the
basis certification is not timely made, or
supporting documentation is lacking, in-
adequate, or does not actually support the
certification, the Agency should notify the
2004-8 I.R.B.505February 23, 2004

taxpayer and try to get adequate documen-
tation. If the Agency cannot verify before
the Form 8610 is filed that the taxpayer has
satisfied the 10 percent basis requirement
for a carryover allocation made before July
1, the allocation is not valid and is treated
as if it had not been made and the carry-
over allocation should not be reported on
the Schedule A (Form 8610).
(ii)Allocations made after June 30.An
Agency may require that the basis certifi-
cation be submitted to or received by the
Agency prior to the close of the date that
is 6 months after the date the allocation
was made or within a reasonable period
of time following the close of the date
that is 6 months after the date the allo-
cation was made. The Agency will need
to verify basis as provided in paragraph
(c)(2) of this section. If the basis certifi-
cation is not timely made, or supporting
documentation is lacking, inadequate, or
does not actually support the certification,
the Agency should notify the taxpayer and
try to get adequate documentation. If the
Agency cannot verify that the taxpayer has
satisfied the 10 percent basis requirement
for a carryover allocation made after June
30, the allocation must be returned to the
Agency. The carryover allocation is a valid
allocation for the calendar year of the allo-
cation, but is included in the returned credit
component of the State housing credit ceil-
ing for the calendar year following the cal-
endar year of the allocation.
(d) * * *
(2) * * *
(viii) For carryover allocations made
before July 1, the taxpayer’s basis in the
project (land and depreciable basis) as of
the close of the calendar year of the allo-
cation and the percentage that basis bears
to the reasonably expected basis in the
project (land and depreciable basis) as of
the close of the second calendar year fol-
lowing the calendar year of allocation;
*****
(4)Recordkeeping requirements—(i)
Taxpayer. When an allocation is made
pursuant to section 42(h)(1)(E) or (F),
the taxpayer must retain a copy of the
allocation document. The Form 8609
that reflects the allocation must be filed
for the first taxable year that the credit is
claimed and for each taxable year there-
after throughout the compliance period,
whetherornotacreditisclaimedforthe
taxable year.
*****
Par. 3. Section 1.42–8 is amended by:
1. Revising the second sentence of
paragraph (a)(6)(i), paragraph (a)(6)(ii),
the sixth sentence of paragraph (a)(7)Ex-
ample 1. (ii), paragraphs (a)(7)Example 1.
(iv), (a)(7)Example 2(iv) and (b)(4)(ii).
2. Removing the year “1993” each
place it appears in paragraph (a)(7),Ex-
ample 1andExample 2andaddingthe
year “2003” in its place; removing the year
“1994” each place it appears in paragraph
(a)(7) and adding the year “2004” in its
place.
3. Removing the second sentence of
paragraph (a)(7)Example 1. (iii), the third
sentence of paragraph (a)(7)Example 2
(iii) and the third sentence of paragraph
(b)(4)(i).
The revisions read as follows:
§1.42–8 Election of appropriate
percentage month.
(a) * * *
(6)Procedures—(i)Taxpayer.***
The taxpayer must retain a copy of the
binding agreement and the election state-
ment.
(ii)Agency. The Agency must retain
the original of the binding agreement and
election statement and, to the extent re-
quired by Schedule A (Form 8610), “Car-
ryover Allocation of Low-Income Housing
Credit,” account for the binding agreement
and election statement on that schedule.
(7) * * *
Example 1.***
(ii)***Becauseallocationsweremadeforthe
building in two separate calendar years, Agency must
issue two Forms 8609, “Low-Income Housing Credit
Allocation Certification,” to X. * * *
*****
(iv) Agency retains the original of the binding
agreement, election statement, and 2003 carryover al-
location document. Agency accounts for the bind-
ing agreement, election statement, and 2003 carry-
over allocation on the Schedule A (Form 8610) that
it files for the 2003 calendar year. After the building
is placed in service in 2004, and assuming other nec-
essary requirements for issuing a Form 8609 are met
(for example, taxpayer has certified all sources and
uses of funds and development costs for the building
under §1.42–17), Agency issues to X a copy of the
Form 8609 reflecting the 2003 carryover allocation of
$100,000. Agency files the original of this Form 8609
with the Form 8610, “Annual Low-Income Housing
Credit Agencies Report,” that it files for the 2004 cal-
endar year. Agency also issues to X a copy of the
Form 8609 reflecting the 2004 allocation of $50,000
and files the original of this Form 8609 with the Form
8610 that it files for the 2004 calendar year. Agency
retains copies of the Forms 8609 that are issued to X.
Example 2.***
*****
(iv) Agency retains the original of the binding
agreements, election statements, and carryover allo-
cation documents. Agency accounts for the binding
agreement, election statement, and 2003 carryover al-
location on the Schedule A (Form 8610) that it files
for the 2003 calendar year. Agency also accounts
for the binding agreement, election statement, and
2004 carryover allocation on the Schedule A (Form
8610) that it files for the 2004 calendar year. After
each separate new building is placed in service, and
assuming other necessary requirements for issuing a
Form 8609 are met (for example, taxpayer has certi-
fied all sources and uses of funds and development
costs for the building under §1.42–17), the Agency
will issue to X a copy of the Form 8609 reflecting
the 2003 carryover allocation of $70,000 and a copy
of the Form 8609 reflecting the 2004 carryover al-
location of $50,000, respectively. Agency files the
original of each Form 8609 with the Form 8610 that
reflects the calendar year each Form 8609 is issued.
Agency retains copies of the Forms 8609 that are is-
sued to X.
(b) * * *
(4) * * *
(ii)Agency. The Agency must retain
the original of the election statement and
a copy of the Form 8609 that reflects the
election statement. The Agency must file
an additional copy of the Form 8609 with
the Agency’s Form 8610 that reflects the
calendar year the Form 8609 is issued.
Par. 4. Section 1.42–12 is amended by
revising paragraph (a) to read as follows:
§1.42–12 Effective dates and transitional
rules.
(a)Effective dates—(1)In general.
Except as provided in paragraphs (a)(2)
and (a)(3) of this section, the rules set
forth in §§1.42–6 and 1.42–8 through
1.42–12 are applicable on May 2, 1994.
However, binding agreements, election
statements, and carryover allocation
documents entered into before May 2,
1994, that follow the guidance set forth
in Notice 89–1, 1989–1 C.B. 620 (see
§601.601(d)(2)(ii)(b) of this chapter) need
not be changed to conform to the rules
set forth in §§1.42–6 and 1.42–8 through
1.42–12.
(2)Community Renewal Tax Relief
Act of 2000—(i)In general. Section
1.42–6(a), (b)(4)(iii)Example 1andEx-
ample 2, (c), (d)(2)(viii), and (e)(2) are ap-
plicable for housing credit dollar amounts
February 23, 20045062004-8 I.R.B.

allocated after January 6, 2004. However,
the rules in §1.42–6(a), (b)(4)(iii)Exam-
ple 1andExample 2, (c), (d)(2)(viii), and
(e)(2) may be applied by Agencies and tax-
payers for housing credit dollar amounts
allocated after December 31, 2000, and
on or before January 6, 2004. Otherwise,
subject to the applicable effective dates of
the corresponding statutory provisions, the
rules that apply for housing credit dollar
amounts allocated on or before January 6,
2004, are contained in §1.42–6 in effect on
and before January 6, 2004 (see 26 CFR
part 1 revised as of April 1, 2003).
(3)Electronic filing simplification
changes. Sections 1.42–6(d)(4) and
1.42–8(a)(6)(i), (a)(6)(ii), (a)(7) Example
1 and Example 2, (b)(4)(i), and (b)(4)(ii)
are applicable for forms filed after January
6, 2004. The rules that apply for forms
filed on or before January 6, 2004, are
contained in §1.42–6 and §1.42–8 in ef-
fect on and before January 6, 2004 (see 26
CFR part 1 revised as of April 1, 2003).
*****
Par. 5. Section 1.42–14 is amended by:
1. Revising the section heading and
paragraphs (a), (g), (i)(2), (k) and (l).
2. Removing paragraph (c) and the sec-
ond to last sentence of paragraph (e).
3. Redesignating paragraph (b) as para-
graph (c).
4. Adding a new paragraph (b).
5. Adding a new sentence at the end of
paragraph (d)(2)(iv)(A).
The revisions and additions read as fol-
lows:
§1.42–14 Allocation rules for post–2000
State housing credit ceiling amount.
(a)State housing credit ceiling—(1)In
general. The State housing credit ceiling
for a State for any calendar year after 2000
is comprised of four components. The four
components are—
(i) The unused State housing credit ceil-
ing, if any, of the State for the preced-
ing calendar year (theunused carryforward
component);
(ii) The greater of—
(A) $1.75 ($1.50 for calendar year
2001) multiplied by the State population;
or
(B) $2,000,000 (the population compo-
nent);
(iii) The amount of State housing credit
ceiling returned in the calendar year (the
returned credit component); plus
(iv) The amount, if any, allocated to
the State by the Secretary under section
42(h)(3)(D) from a national pool of unused
credit (the national pool component).
(2)Cost of Living Adjustment—(i)Gen-
eral rule. For any calendar year after 2002,
the $2,000,000 and $1.75 amounts in para-
graph (a)(1)(ii) of this section are each in-
creased by an amount equal to—
(A) The dollar amount; multiplied by
(B) The cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year by substituting “calendar year
2001” for “calendar year 1992” in section
1(f)(3)(B).
(ii)Rounding. Any increase resulting
from the application of paragraph (a)(2)(i)
of this section which, in the case of the
$2,000,000 amount, is not a multiple of
$5,000, is rounded to the next lowest mul-
tiple of $5,000, and which, in the case of
the $1.75 amount, is not a multiple of 5
cents, is rounded to the next lowest mul-
tiple of 5 cents.
(b)The unused carryforward compo-
nent. The unused carryforward compo-
nent of the State housing credit ceiling for
any calendar year is the unused State hous-
ing credit ceiling, if any, of the State for
the preceding calendar year. The unused
State housing creditceiling for any calen-
dar year is the excess, if any, of—
(1) The sum of the population, returned
credit, and national pool components for
the calendar year; over
(2) The aggregate housing credit dollar
amount allocated for the calendar year re-
duced by the housing credit dollar amounts
allocated from the unused carryforward
component for the calendar year.
*****
(d) * * *
(2) * * *
(iv)***
(A)Building not qualified within re-
quired time period. * * * Also, a build-
ing that has received a post-June 30 carry-
over allocation is not qualified within the
required time period if the taxpayer does
not meet the 10 percent basis requirement
by the date that is 6 months after the date
the allocation was made (as described in
§1.42–6(a)(2)(ii)).
*****
(g)Stacking Order. Credit is treated as
allocated from the various components of
the State housing credit ceiling in the fol-
lowing order. The firstcredit allocated for
any calendar year is treated as credit from
the unused carryforward component of the
State housing creditceiling for the calen-
dar year. After all of the credit in the un-
used carryforward component has been al-
located, any credit allocated is treated as
allocated from the sum of the population,
returned credit, and national pool compo-
nents of the State housing credit ceiling.
*****
(i) * * *
(2)Unused housing credit carryover.
The unused housing credit carryover of a
State for any calendar year is the excess, if
any, of—
(i) The unused carryforward component
of the State housing credit ceiling for the
calendar year; over
(ii) The total housing credit dollar
amount allocated for the calendar year.
*****
(k)Example. (1) The operation of the
rulesofthissectionisillustratedbythe
following examples. Unless otherwise
stated in an example, Agency A is the sole
Agency authorized to make allocations of
housing credit dollar amounts in State M,
all of Agency A’s allocations are valid,
and for calendar year 2003, Agency A has
available for allocation a State housing
credit ceiling consisting of the following
housing credit dollar amounts:
2004-8 I.R.B.507February 23, 2004

A.unusedcarryforwardcomponent................................................
$
50
B.populationcomponent.........................................................
$
110
C.returnedcreditcomponent......................................................
$
10
D.nationalpoolcomponent.......................................................
$
0
Total.............................................................................
$
170
(2) In addition, the $10 of returned
credit component was returned before Oc-
tober 1, 2003.
Example 1—(i)Additional facts. By the close of
2003, Agency A had allocated $80 of the State M
housing credit ceiling. Of the $80 allocated, $17 was
allocated to projects involving qualified nonprofit or-
ganizations.
(ii)Application of stacking rules. The $80 of al-
located credit is first treated as allocated from the un-
used carryforward component of the State housing
credit ceiling. The $80 of allocated credit exceeds the
$50 attributable to the unused carryforward compo-
nent by $30. Because the unused carryforward com-
ponent is fully utilized, no credit will be forfeited by
State M to the 2004 National Pool. The remaining
$30 of allocated credit will next be treated as allo-
cated from the $120 in credit determined by aggre-
gating the population, returned credit, and national
pool components ($110 + 10 + 0 = $120). The $90 of
unallocated credit remaining in State M’s 2003 State
housing credit ceiling ($120 - 30 = $90) represents the
unused carryforward component of State M’s 2004
State housing credit ceiling. Under paragraph (i)(3)
of this section, State M does not qualify for credit
from the 2004 National Pool.
(iii)Nonprofit set-aside. Agency A allocated
exactly the amount of credit to projects involving
qualified nonprofit organizations as necessary to
meet the nonprofit set-aside requirement ($17, 10%
of the $170 ceiling).
Example 2—(i)Additional facts. By the close of
2003, Agency A had allocated $40 of the State M
housing credit ceiling. Of the $40 allocated, $20 was
allocated to projects involving qualified nonprofit or-
ganizations.
(ii)Application of stacking rules. The $40 of al-
located credit is first treated as allocated from the un-
used carryforward component of the State housing
credit ceiling. Because the $40 of allocated credit
does not exceed the $50 attributable to the unused car-
ryforward component, the remaining components of
the State housing credit ceiling are unaffected. The
$10 remaining in the unused carryforward component
is assigned to the Secretary for inclusion in the 2004
National Pool. The $120 in credit determined by ag-
gregating the population, returned credit, and national
pool components becomes the unused carryforward
component of State M’s 2004 State housing credit
ceiling. Under paragraph (i)(3) of this section, State
M does not qualify for credit from the 2004 National
Pool.
(iii)Nonprofit set-aside. Agency A allocated $3
more credit to projects involving qualified nonprofit
organizations than necessary to meet the nonprofit
set-aside requirement. This does not reduce the ap-
plication of the 10% nonprofit set-aside requirement
to the State M housing credit ceiling for calendar year
2004.
Example 3—(i)Additional fact. None of the ap-
plications for credit that Agency A received for 2003
are for projects involving qualified nonprofit organi-
zations.
(ii)Nonprofit set-aside. Because at least 10% of
the State housing credit ceiling must be set aside for
projects involving a qualified nonprofit organization,
Agency A can allocate only $153 of the $170 State
housing credit ceiling for calendar year 2003 ($170 -
17 = $153). If Agency A allocates $153 of credit, the
credit is treated as allocated $50 from the unused car-
ryforward component and $103 from the sum of the
population, returned credit, and national pool compo-
nents. The $17 of unallocated credit that is set aside
for projects involving qualified nonprofit organiza-
tions becomes the unused carryforward component
of State M’s 2004 State housing credit ceiling. Un-
derparagraph(i)(3)ofthis section, State M does not
qualify for credit from the 2004 National Pool.
Example 4—(i)Additional facts. The $10 of re-
turned credit component was returned prior to Octo-
ber 1, 2003. However, a $40 credit that had been
allocated in calendar year 2002 to a project involv-
ing a qualified nonprofit organization was returned
to the Agency by a mutual consent agreement dated
November 15, 2003. By the close of 2003, Agency
A had allocated $170 of the State M’s housing credit
ceiling, including $17 of credit to projects involving
qualified nonprofit organizations.
(ii)Effect of three-month rule. Under the three-
month rule of paragraph (d)(2)(iii) of this section,
Agency A may treat all or part of the $40 of previ-
ously allocated credit as returned on January 1, 2004.
If Agency A treats all of the $40 amount as hav-
ing been returned in calendar year 2004, the State
M housing credit ceiling for 2003 is $170. This en-
tire amount, including the $17 nonprofit set-aside, has
been allocated in 2003. Under paragraph (i)(3) of this
section, State M qualifies for the 2004 National Pool.
(iii)If three-month rule not used. If Agency A
treats all of the $40 of previously allocated credit
as returned in calendar year 2003, the State hous-
ing credit ceiling for the 2003 calendar year will be
$210 of which $50 will be attributable to the returned
credit component ($10 + $40 = $50). Because credit
amounts allocated to a qualified nonprofit organiza-
tion in a prior calendar year that are returned in a sub-
sequent calendar year do not retain their nonprofit
character, the nonprofit set-aside for calendar year
2003 is $21 (10% of the $210 State housing credit
ceiling). The $170 that Agency A allocated during
2003 is first treated as allocated from the unused car-
ryforward component of the State housing credit ceil-
ing. The $170 of allocated credit exceeds the $50 at-
tributable to the unused carryforward component by
$120. Because the unused carryforward component
is fully utilized, no credit will be forfeited by State
M to the 2004 National Pool. The remaining $120
of allocated credit will next be treated as allocated
from the $160 in credit determined by aggregating the
population, returned credit, and national pool compo-
nents ($110 + 50 + 0 = $160). The $40 of unallocated
credit (which includes $4of unallocatedcredit from
the $21 nonprofit set-aside) remaining in State M’s
2003 housing credit ceiling ($160 - 120 = $40) rep-
resents the unused carryforward component of State
M’s 2004 housing credit ceiling. Under paragraph
(i)(3) of this section, State M does not qualify for
credit from the 2004 National Pool.
(l)Effective dates—(1)In general.Ex-
cept as provided in paragraph (l)(2) of this
section, the rules set forth in §1.42–14 are
applicable on January 1, 1994.
(2)Community Renewal Tax Relief Act
of 2000 changes. Paragraphs (a), (b), (c),
(e), (i)(2) and (k) of this section are appli-
cable for housing credit dollar amounts al-
located after January 6, 2004. However,
paragraphs (a), (b), (c), (e), (i)(2) and (k)
of this section may be applied by Agen-
cies and taxpayers for housing credit dol-
lar amounts allocated after December 31,
2000, and on or before January 6, 2004.
Otherwise, subject to the applicable effec-
tive dates of the corresponding statutory
provisions, the rules that apply for housing
credit dollar amounts allocated on or be-
fore January 6, 2004, are contained in this
section in effect on and before January 6,
2004 (see 26 CFR part 1 revised as of April
1, 2003).
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 19, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 31,
2003, 11:59 a.m., and published in the issue of the Federal
Register for January 6, 2004, 69 F.R. 502)
Section 162.—Trade or
Business Expenses
Environmental remediation costs that are other-
wise deductible under section 162 are includible in
inventory costs under section 263A by a taxpayer that
contaminated land with hazardous waste as part of
February 23, 20045082004-8 I.R.B.

the ordinary business operations of a manufacturing
plant. See Rev. Rul. 2004-18, page 509.
Section 263A.—Capital-
ization and Inclusion in
Inventory Costs of Cer-
tain Expenses
26 CFR 1.263A–1: Uniform capitalization of costs.
Costs incurred to clean up land that a taxpayer con-
taminated with hazardous waste by the operation of a
manufacturing plant do not qualify for treatment un-
der section 1341 because, under section 263A, the
costs are inventory costs and do not satisfy the de-
duction requirement of section 1341(a)(2). See Rev.
Rul. 2004-17, page 516.
26 CFR 1.263A–1: Uniform capitalization of costs.
(Also § 162.)
Treatment of environmental remedi-
ation expenses under section 263A.This
ruling holds that amounts incurred to clean
up land that a taxpayer contaminated with
hazardous waste by the operation of a man-
ufacturing plant must be included in inven-
tory costs under section 263A of the Code.
Rev. Ruls. 94–38 and 98–25 clarified.
Rev. Proc. 2002–9 modified and ampli-
fied.
Rev. Rul. 2004–18
ISSUE
Are costs incurred to clean up land that
a taxpayer contaminated with hazardous
waste by the operation of the taxpayer’s
manufacturing plant includible in inven-
tory costs under § 263A of the Internal
Revenue Code?
FACTS
X, a corporation using an accrual
method of accounting, owns and oper-
ates a manufacturing plant that produces
property that is inventory inX’s hands.
X’s manufacturing operations discharge
hazardous waste. In the past,Xburied this
waste on portions ofX’s land. The land
was not contaminated by hazardous waste
when purchased byX.
In order to comply with applicable
federal, state, and local environmental
requirements,Xincurs costs (within the
meaning of § 461(h)) to remediate the
soil and groundwater that had been con-
taminated by the hazardous waste, and
to establish an appropriate system for the
continued monitoring of the groundwater
to ensure that the remediation removes
all hazardous waste. The costsXincurs
are not research and experimental expen-
ditures within the meaning of § 174 or
environmental management policy costs.
The soil remediation and groundwater
treatment restoresX’s land to essentially
the same physical condition that existed
prior to the contamination. During and
after the remediation and treatment,X
continues to use the land and operate the
plant in the same manner asXdid prior
to the cleanup except thatXdisposes of
any hazardous waste in compliance with
environmental requirements.
LAW
Section 263A(a) provides that the direct
costs and indirect costs properly allocable
to property that is inventory in the hands of
the taxpayer shall be included in inventory
costs.
Section 1.263A–1(a)(3)(ii) of the In-
come Tax Regulations provides, in part,
that taxpayers that produce tangible per-
sonal property must capitalize (1) all direct
costs of producing the property, and (2) the
property’s allocable share of indirect costs.
Section 1.263A–1(e)(3)(i) provides, in
part, that indirect costs are properly allo-
cable to property produced when the costs
directly benefit or are incurred by reason
of the performance ofproduction activ-
ities. Cost recovery, production facility
repair and maintenance costs, and scrap
and spoilage costs, such as waste removal
costs, are examples of indirect costs that
must be capitalized to the extent the costs
are properly allocable to produced prop-
erty. See § 1.263A–1(e)(3)(ii) (I), (O) and
(Q).
Section 1.263A–1(e)(4)(iv)(I) provides
that costs incurred for environmental man-
agement policy generally are not allocated
to production or resale activities (except to
the extent that the costs of any system or
procedure benefit a particular production
or resale activity).
Section 1.263A–1(c)(2)(ii) provides
that the amount of any cost required to
be capitalized under § 263A may not be
included in inventory or charged to capital
account or basis before the taxable year
during which the amount is incurred within
the meaning of § 1.446–1(c)(1)(ii). Pur-
suant to § 461(h), in determining whether
an accrual method taxpayer has incurred
an amount for any item during the taxable
year, the all events test shall not be treated
as met any earlier than when economic
performance occurs.
Section 1.263A–2(a)(3)(i) provides
that any cost required to be capitalized
by § 263A must be capitalized regardless
of whether the cost was incurred before,
during, or after production.
Rev. Rul. 94–38, 1994–1 C.B. 35, an-
alyzes whether costsincurred to clean up
land and to treat groundwater that a tax-
payer contaminated with hazardous waste
from the taxpayer’s manufacturing busi-
ness are capital expenditures. The ruling
holds that the costs to clean up land used
in the taxpayer’s manufacturing process
and to treat groundwater are not capital ex-
penditures because these costs do not pro-
long the useful life of the land or adapt
the land to a new or different use. There-
fore, costs incurred to clean up land and
to treat groundwater that a taxpayer con-
taminated with hazardous waste from the
taxpayer’s business are deductible by the
taxpayer as business expenses under § 162.
Costs properly allocable to constructing
groundwater treatment facilities, however,
are capital expenditures under § 263.
Rev. Rul. 98–25, 1998–1 C.B. 998,
holds that costs incurred to replace un-
derground storage tanks containing waste
by-products under the circumstances in the
ruling are not capital expenditures under
§ 263, but are ordinary and necessary ex-
penses under § 162.
ANALYSIS
ThediscussioninRev. Rul. 94–38
ofPlainfield-Union Water Co. v. Com-
missioner, 39 T.C. 333 (1962),nonacq.,
1964–2 C.B. 8, demonstrates that the
revenue ruling was intended to address
whether the costs to clean up the land
and to treat the groundwater are capital
expenditures that must be capitalized into
the basis of the land under § 263(a) or
whether the costs are ordinary and nec-
essary repair expenses under § 162. Rev.
Rul. 94–38 does not address the treatment
of these costs as inventory costs under
§ 263A. Similarly, Rev. Rul. 98–25 does
not address whether amounts incurred to
2004-8 I.R.B.509February 23, 2004

replace underground storage tanks must be
included in inventory costs under § 263A.
The holding of Rev. Rul. 94–38 that
the costs to construct a groundwater treat-
ment facility must be capitalized under
§§ 263(a) and 263A rather than deducted
under § 162 demonstrates the distinction
between capital expenditures and costs
that are more in the nature of repairs than
capital improvements. As with other types
of deductible business costs, such as labor
costs, taxes, rent, and supplies, once repair
costs are determined to be deductible un-
der § 162, a taxpayer with inventories must
still apply the rules of § 263A to determine
whether the repair costs must be included
in inventory. Section 1.263A–1(e)(3). In
addition, if repair costs must be capitalized
under §§ 263(a) and 263A to a depreciable
asset, a taxpayer with inventories must
still apply the rules of §§ 263A to deter-
mine whether the depreciation expense
must be included in inventory. Section
1.263A–1(e)(3)(ii)(I).
In this situation,Xincurs environmen-
tal remediation costs to clean up land that
was contaminated as part of the ordinary
business operations ofX’s manufacturing
of inventory.X’s environmental remedi-
ation costs are incurred by reason ofX’s
production activities within the meaning
of § 1.263A–1(e)(3)(i). The costs are
properly allocable toproperty produced
byXthat is inventory inX’s hands under
§ 1.263A–1(e)(3)(i). Accordingly,Xmust
capitalize the otherwise deductible envi-
ronmental remediation costs by including
the costs in inventory costs in accordance
with § 1.263A–1(c)(3). Similarly, costs
incurred to replace underground storage
tanks and depreciation cost recoveries of
the groundwater treatment facility must be
included in inventory costs to the extent
properly allocable to inventory.
HOLDING
Environmental remediation costs
are subject to capitalization under
§ 263A. Therefore, costs incurred
(within the meaning of § 461(h) and
§ 1.263A–1(c)(2)(ii)) to clean up land that
a taxpayer contaminated with hazardous
waste by the operation of the taxpayer’s
manufacturing plant must be included in
inventory costs under § 263A.
TRANSITION RULE
This paragraph applies to costs that
would have been properly deducted in
the taxable year but for the requirement
to capitalize the coststoinventoryun-
der § 263A, and for which the taxpayer’s
method of accounting was to deduct the
costs. The Internal Revenue Service will
not challenge the treatment of environ-
mental remediation costs to which this
paragraph applies as deductible expenses
rather than as costs properly capitalized
to inventory under § 263A in any taxable
year ending on or before February 6, 2004.
Therefore, the treatment of environmental
remediation costs to which this paragraph
appliesasamountsproperly capitalized to
inventory under § 263A will not be raised
as an issue in any taxable year ending on or
before February 6, 2004, and, if the treat-
ment of such environmental remediation
costs as deductible expenses rather than as
amounts properly capitalized to inventory
under § 263A has already been raised as
an issue in examination or before Appeals
or the Tax Court in a taxable year ending
on or before February 6, 2004, the issue
will not be further pursued. The Service
will not impose penalties on taxpayers
or preparers for treating environmental
remediation costs to which this paragraph
applies as deductible expenses rather than
as costs properly capitalized to inventory
under § 263A in taxable years ending on
or before February 6, 2004.
CHANGE IN METHOD OF
ACCOUNTING
A taxpayer using a method of account-
ing that does not comply with this revenue
ruling is using an impermissible method
of accounting. Any change in a taxpayer’s
treatment of environmental remediation
costs to conform with this revenue ruling is
a change in method of accounting to which
the provisions of §§ 446 and 481 and the
regulations thereunder apply. A taxpayer
changing its method of accounting to
comply with this revenue ruling must file
a Form 3115 in accordance with the au-
tomatic change in method of accounting
provisions of Rev. Proc. 2002–9, 2002–1
C.B. 327, as amplified, clarified and mod-
ified by Rev. Proc. 2002–54, 2002–2 C.B.
432, and Rev. Proc. 2002–19, 2002–1
C.B. 696, with the following modifica-
tions: (1) the scope limitations in section
4.02 of Rev. Proc. 2002–9 do not ap-
ply to a taxpayer that wants to make the
change for its first taxable year ending
after February 6, 2004; and (2) a taxpayer
that files a Form 3115 in accordance with
this revenue ruling to make the change in
method of accounting for its first taxable
year ending after February 6, 2004, may
effect the change using either a § 481(a)
adjustment as provided in sections 5.03
and 5.04 of Rev. Proc. 2002–9 or a cut-off
method. For purposes of Line 1a of Form
3115 (revised December 2003), the desig-
nated number for the automatic accounting
method change authorized by this revenue
ruling is “77.” A taxpayer making the
automatic change in method of account-
ing authorized by this revenue ruling and
another automatic change in method of
accounting under § 263A for the same
taxable year may file one Form 3115 to
make both changes, but must comply with
the ordering rules of § 1.263A–7(b)(2)
and must enter the automatic accounting
method change numbers for both changes
on Line 1a of Form 3115 (revised Decem-
ber 2003).
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 98–25 and Rev. Rul. 94–38
are clarified by providing that the other-
wise deductible amounts at issue in Rev.
Rul. 98–25 and Rev. Rul. 94–38 are
subject to capitalization to inventory under
§ 263A.
Rev. Proc. 2002–9 is modified and
amplified to include in the APPENDIX the
automatic change provided in this revenue
ruling.
DRAFTING INFORMATION
The principal author of this revenue
ruling is John Moriarty of the Office of
Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue ruling, contact
Mr. Moriarty at 202–622–4930 (not a
toll-free call).
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories
LIFO; price indexes; department
stores.The December 2003 Bureau of
February 23, 20045102004-8 I.R.B.

Labor Statistics price indexes are accepted
for use by department stores employing
the retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, December 31, 2003.
Rev. Rul. 2004–19
The following Department Store In-
ventory Price Indexes for December 2003
were issued by the Bureau of Labor Statis-
tics. The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, December 31, 2003.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsDec. 2002Dec. 2003
Percent Change
from Dec. 2002
to Dec. 2003
¹
1. PieceGoods .............................................465.6473.71.7
2. DomesticsandDraperies..................................561.8543.9-3.2
3. Women’sandChildren’sShoes ............................640.1629.7-1.6
4. Men’sShoes.............................................888.0847.8-4.5
5. Infants’Wear ............................................612.4586.4-4.2
6. Women’sUnderwear......................................536.7509.6-5.0
7. Women’sHosiery ........................................345.3344.1-0.3
8. Women’sandGirls’Accessories ...........................540.3551.32.0
9. Women’sOuterwearandGirls’Wear .......................356.4362.71.8
10. Men’sClothing ..........................................550.6535.1-2.8
11. Men’sFurnishings........................................584.7583.4-0.2
12. Boys’ClothingandFurnishings............................446.2429.0-3.9
13. Jewelry..................................................855.4848.0-0.9
14. Notions .................................................793.2799.60.8
15. ToiletArticlesandDrugs..................................967.5976.50.9
16. FurnitureandBedding ....................................623.8612.9-1.7
17. FloorCoverings..........................................596.3595.1-0.2
18. Housewares..............................................734.4710.6-3.2
19. MajorAppliances.........................................219.4206.8-5.7
20. RadioandTelevision......................................47.343.8-7.4
21. Recreation and Education
2
.................................84.381.5-3.3
22. Home Improvements
2
.....................................125.8125.4-0.3
23. Automotive Accessories
2
..................................111.3112.10.7
Groups1–15:SoftGoods .......................................560.7555.8-0.9
Groups16–20:DurableGoods...................................402.4386.8-3.9
Groups 21–23: Misc. Goods
2
....................................95.293.5-1.8
Store Total
3
..............................................503.0495.1-1.6
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
Section 807.—Rules for
Certain Reserves
Insurance companies; interest rate
tables.Prevailing state assumed interest
2004-8 I.R.B.511February 23, 2004

rates are provided for the determination of
reserves under section 807 of the Code for
contracts issued in 2003 and 2004. Rev.
Rul. 92–19 supplemented in part.
Rev. Rul. 2004–14
For purposes of § 807(d)(4) of the In-
ternal Revenue Code, for taxable years be-
ginning after December 31, 2002, this rul-
ing supplements the schedules of prevail-
ing state assumed interest rates set forth
in Rev. Rul. 92–19, 1992–1 C.B. 227.
Thisinformationistobeusedbyinsurance
companies in computing their reserves for
(1) life insurance and supplementary total
and permanent disability benefits, (2) in-
dividual annuities and pure endowments,
and (3) group annuities and pure endow-
ments. As § 807(d)(2)(B) requires that the
interest rate used to compute these reserves
be the greater of (1) the applicable federal
interest rate, or (2) the prevailing state as-
sumed interest rate, the table of applicable
federal interest rates in Rev. Rul. 92–19 is
also supplemented.
Following are supplements to schedules
A, B, C, and D to Part III of Rev. Rul.
92–19, providing prevailing state assumed
interest rates for insurance products with
different features issued in 2003 and 2004,
and a supplement to the table in Part IV of
Rev. Rul. 92–19, providing the applica-
ble federal interest rates under § 807(d) for
2003 and 2004. This ruling does not sup-
plement Parts I and II of Rev. Rul. 92–19.
This is the twelfth supplement to the in-
terest rates provided in Rev. Rul. 92–19.
Earlier supplements were published in
Rev. Rul. 93–58, 1993–2 C.B. 241 (inter-
est rates for insurance products issued in
1992 and 1993); Rev. Rul. 94–11, 1994–1
C.B. 196 (1993 and 1994); Rev. Rul.
95–4, 1995–1 C.B. 141 (1994 and 1995);
Rev. Rul. 96–2, 1996–1 C.B. 141 (1995
and 1996); Rev. Rul. 97–2, 1997–1 C.B.
134 (1996 and 1997); Rev. Rul. 98–2,
1998–1 C.B. 259 (1997 and 1998); Rev.
Rul. 99–10, 1999–1 C.B. 671 (1998 and
1999); Rev. Rul. 2000–17, 2000–1 C.B.
842 (1999 and 2000); Rev. Rul. 2001–11,
2001–1 C.B. 780 (2000 and 2001); Rev.
Rul. 2002–12, 2002–1 C.B. 624 (2001 and
2002); and Rev. Rul. 2003–24, 2003–1
C.B. 557 (2002 and 2003).
Part III. Prevailing State Assumed InterestRates — Products Issued in Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST RATES
BASED ON THE 1980 AMENDMENTS TO THE
NAIC STANDARD VALUATION LAW
A. Life insurance valuation:
Guarantee Duration
(years)
Calendar Year of Issue
2004
10 or fewer5.00
More than 10
but not more than 20
4.75**
More than 204.50**
Source: Rates calculated from the monthly averages, ending June 30, 2003, of Moody’s Composite Yield on Seasoned Corporate
Bonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates).
** As the applicable federal interest rate for2004 of 4.82 percent exceeds this prevailing state assumed interest rate, the interest
rate to be used for this product under § 807 is 4.82 percent.
* The terms used in the schedules in this ruling and in Part IIIof Rev. Rul. 92–19 are those used in the Standard Valuation
Law; the terms are defined in Rev. Rul. 92–19.
February 23, 20045122004-8 I.R.B.

Part III, Schedule B
STATUTORY VALUATION INTEREST RATES
BASED ON THE 1980 AMENDMENTS TO THE
NAIC STANDARD VALUATION LAW
B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash
settlement options and from guaranteed interest contracts with cash settlement options:
Calendar Year of IssueValuation Interest Rate
20036.00*
Source: Rate
s calculated from the monthly averages, ending June 30,2003, of Moody’s Composite Yield on Seasoned Corporate
Bonds (form
erly known as Moody’s Corporate Bond Yield Average —Monthly Average Corporates). The terms used in this
schedule ar
e those used in the Standard Valuation Law as defined in Rev. Rul. 92–19.
*As this prevailing state assumed interest exceeds the applicable federal interest rate for 2003 of 5.27 percent, the valuation
interest rate of 6.00 percent is to be used for this product under § 807.
Part III, Schedule C21–2003
STATUTOR
Y VALUATION INTEREST RATES
BASED ON N
AIC STANDARD VALUATION LAW
FOR2003C
ALENDAR YEAR BUSINESS
GOVERNED B
Y THE 1980 AMENDMENTS
C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:
Valuation Interest Rate
For Plan Type
Cash
Settlem
ent
Options
?
Future
Interes
t
Guarant
ee?
Guarant
ee Duration
(years)ABC
YesYes5 or fewer6.005.25*4.75*
More than 5, but not
more than 10
5.755.25*4.75*
More tha
n 10, but not
more tha
n20
5.504.75*4.75*
More than 204.75*4.25*4.25*
YesNo5 or fewer6.255.505.00*
More th
an 5, but not
more th
an 10
6.005.505.00*
More than 10, but not
more than 20
5.505.00*4.75*
More than 204.75*4.50*4.50*
2004-8 I.R.B.513February 23, 2004

NoYes or No5 or fewer6.00
More than 5, but not
more than 10
5.75NOT
APPLICABLE
More than 10, but not
more than 20
5.50
More than 204.75*
Source: Rates calculated from the monthly averages, ending June 30, 2003, of Moody’s Composite Yield on Seasoned Corporate
Bonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates).
*As the applicable federal interest rate for 2003 of 5.27 percent exceeds this prevailing state assumed interest rate, the interest
rate to be used for this product under § 807 is 5.27 percent.
Part III, Schedule D21–2003
STATUTORY VALUATION INTEREST RATES
BASEDONNAICSTANDARDVALUATIONLAW
FOR2003CALENDAR YEAR BUSINESS
GOVERNED BY THE 1980 AMENDMENTS
D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options
and that are valued on a change in fund basis:
Valuation Interest Rate
For Plan Type
Cash
Settlement
Options?
Future
Interest
Guarantee?
Guarantee Duration
(years)ABC
YesYes5 or fewer6.506.255.00*
More than 5, but not
more than 10
6.256.255.00*
More than 10, but not
more than 20
6.005.755.25*
More than 205.25*5.25*4.50*
YesNo5 or fewer6.756.255.25*
More than 5, but not
more than 10
6.506.255.25*
More than 10, but not
more than 20
6.256.005.00*
More than 205.505.504.75*
Source: Rates calculated from the monthly averages, ending June 30, 2003, of Moody’s Composite Yield on Seasoned Corporate
Bonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates).
*As the applicable federal interest rate for 2003 of 5.27 percent is equal to or exceeds this prevailing state assumed interest rate,
the interest rate to be used for this product under § 807 is 5.27 percent.
February 23, 20045142004-8 I.R.B.

Part IV. Applicable Federal Interest Rates.
TABLE OF
APPLICABLE FEDERAL INTEREST RATES
FORPURPOSESOF§807
YearInterest Rate
20035.27
20044.82
Sources: Rev. Rul. 2002–81, 2002–2 C.B. 928 for the 2003 rate and Rev. Rul. 2003–122, 2003–49 I.R.B. 1179 for the 2004 rate.
EFFECT ON OTHER REVENUE
RULINGS
Rev.
Rul. 92–19 is supplemented by
the a
ddition to Part III of that ruling of pre-
vail
ing state assumed interest rates under
§ 807
for certain insurance products issued
in 20
03 and 2004 and is further supple-
men
tedbyanadditiontothetableinPart
IV o
f Rev. Rul. 92–19 listing applicable
fed
eral interest rates. Parts I and II of Rev.
Rul
. 92–19 are not affected by this ruling.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Ann H. Logan of the Office of Asso-
ciate Chief Counsel (Financial Institutions
and Products). For further information re-
garding this revenue ruling, contact her at
(202) 622–3970 (not a toll-free call).
Se
ction 1233.—Gains and
Lo
sses From Short Sales
(Also § 1259; 26 CFR 1.1233–1.)
Short sale; broker; transfer.This
ruling provides guidance on whether the
delivery of shares made to a broker in
transferring a short sale position from one
broker to another broker will (1) cause a
short sale to be deemed consummated un-
der regulations section 1.1233–1(a), and
(2) cause a short-against-the-box transac-
tion to cease to be covered by the transition
rule of section 1259 of the Code.
Rev. Rul. 2004–15
ISSUES
(1) If a taxpayer is obligated to transfer
stock to a broker as a result of a short sale
and borrows stock from another broker to
satisfy the obligation to the first broker by
having the second broker transfer the bor-
rowed stock to the first broker, does the
transfer close the short sale for purposes of
§ 1.1233–1(a) of the Income Tax Regula-
tions?
(2) If a taxpayer held appreciated stock,
entered into a short sale prior to June 9,
1997, of identical stock borrowed from a
broker, identified the short sale and the
stock as offsetting positions in accordance
with the transition rule in § 1001(d)(2) of
the Taxpayer Relief Act of 1997, 1997–4
(Vol. 1) C.B. 1, 121, and continues to hold
the appreciated stock, does a transfer of
stock borrowed from another broker to sat-
isfy the obligation to the first broker cause
the transition rule to cease to apply?
FACTS
In January 1997, TaxpayerTPowned
100 shares ofXYZstock. In May 1997, at
atimewhenthevalueoftheXYZstock ex-
ceededTP’s basis in the stock,TPeffected
a short sale (the Short Sale) of 100 shares
ofXYZstock. To do this,TPborrowed 100
shares ofXYZstock from BrokerAand in-
structed BrokerAto sell those borrowed
shares onTP’s behalf. Thus, as a result
of the Short Sale,TPincurred an obliga-
tion to transfer 100 shares ofXYZstock
to BrokerA. Before September 4, 1997, in
itsbooksandrecords,TPclearly identified
the Short Sale and theXYZstock (which
TPstill owned) as offsetting positions un-
der § 1001(d)(2) of the Taxpayer Relief
Act of 1997.
In January 2004,TPdecides to replace
its obligation to BrokerAwith a substan-
tially identical obligation to BrokerB.To
do so,TParranges for BrokerBto deliver
100 shares ofXYZstocktoBrokerAin sat-
isfaction ofTP’s obligation to BrokerA,
andTPthus incurs an obligation to transfer
100 shares ofXYZstock to BrokerB.After
BrokerB’s transfer of 100 shares ofXYZ
stocktoBrokerA,TPcontinues to have
the obligation to deliver 100 shares ofXYZ
stock, but the obligation is owed to Broker
Brather than to BrokerA.
TPcontinues to hold theXYZstock, and
TPhas not satisfied its obligation to Broker
B.
LAW AND ANALYSIS
(1)Section 1233
Section 1.1233–1(a)(1) provides, “For
income tax purposes, a short sale is not
deemed to be consummated until delivery
of property to close the short sale.” Pur-
suant to § 1.1233–1(a)(4), if the short sale
is made through a broker and the broker
borrows property to make a delivery, the
short sale is not deemed to be consum-
mated until the obligation of the seller cre-
ated by the short sale is finally discharged
by delivery of property to the broker to re-
place the property borrowed by the broker.
In general, a short sale is closed (and
thus is consummated) by the transfer of
property that the short seller already owns
or property that the short seller purchases
for the purpose of satisfying the obliga-
tion from the short sale. If, however, a
taxpayer satisfies its obligation created un-
der a short sale by transferring property
borrowed from another lender, the trans-
fer of the borrowed property does not close
the short sale. InRichardson v. Commis-
sioner,42B.T.A.830,840(1940),aff’d,
121 F.2d 1 (2d Cir. 1941), the taxpayer
borrowed stock to sell short. With re-
spect to a portion of the borrowed stock,
2004-8 I.R.B.515February 23, 2004

the taxpayer subsequently borrowed other
stock from another lender to satisfy the
obligation that resulted from the original
borrowing. The taxpayer later satisfied
the obligation under the second borrowing
by transferring shares that he purchased.
The Board of Tax Appeals required the
taxpayer to recognize the gain or loss in
the year in which the obligation from the
second borrowing was satisfied, and the
Board calculated the amount of the gain
or loss on the short sale by reference to
the purchase price of the stock used to sat-
isfy the second borrowing. Although the
opinion does not discuss the effect of using
borrowed shares to satisfy an obligation to
replace other shares previously borrowed
from another lender, it is implicit in the
computation of gain or loss that the satis-
faction was not treated as closing the short
sale.
Section 1.1233–1(a) does not require a
different result. When a taxpayer trans-
fers borrowed property to satisfy its ini-
tial obligation under a short sale, the tax-
payer’s short sale obligation is not “finally
discharged.” Here, the obligation ofTPto
deliver 100 shares ofXYZstock continues
to exist, and thus BrokerB’s delivery of
borrowed stock to BrokerAonTP’s be-
half does not close the Short Sale under
§ 1.1233–1(a).
(2)Section 1259 Transition Rule
Section 1259(a)(1) provides that, if
there is a constructive sale of an appreci-
ated financial position, the taxpayer must
recognize gain as if the position were
sold, assigned, or otherwise terminated
at its fair market value on the date of the
constructive sale. “Appreciated finan-
cial position” is defined in § 1259(b)(1)
as including a position with respect to
stock if there would be gain were the
position sold, assigned, or otherwise ter-
minated at its fair market value. Pursuant
to § 1259(c)(1)(A), a taxpayer is treated
as having made a constructive sale of an
appreciated financial position if the tax-
payer enters into a short sale of the same
or substantially identical property.
Under § 1001(d)(2) of the Taxpayer Re-
lief Act of 1997 (the transition rule), if “be-
fore June 9, 1997, the taxpayer entered into
any transaction which is a constructive sale
of any appreciated financial position, and
...beforethecloseofthe30-dayperiod
beginning on the date of the enactment of
this Act [August 5, 1997] or before such
later date as may be specified by the Sec-
retary of the Treasury, such transaction and
position are clearly identified in the tax-
payer’s records as offsetting, such trans-
action and position shall not be taken into
account in determining whether any other
constructive sale after June 8, 1997, has
occurred. The preceding sentence shall
cease to apply as of the date such trans-
action is closed or the taxpayer ceases to
hold such position.” Section 1001(d)(2) of
the Taxpayer Relief Act of 1997, 1997–4
(Vol. 1) C.B. 1, 121.
In May 1997, when the value of the
XYZstock exceeded its basis,TPentered
into the Short Sale. Thus,TPentered
into a transaction that is described in
§ 1259(c)(1), but, because the Short Sale
was entered into before June 9, 1997, no
gain was recognized under § 1259(a)(1).
Furthermore, before the close of the
30-day period beginning on August 5,
1997,TPclearly identified theXYZstock
and the Short Sale in its books and records
as offsetting positions. Thus, theXYZ
stock and the Short Sale fall within the
transition rule, and, until eitherTPceases
to hold theXYZstock or the Short Sale
is closed, neither theXYZstock nor the
Short Sale is taken into account in deter-
mining whether any constructive sale has
occurred after June 8, 1997.
In January 2004, whenTPreplaces the
obligation to BrokerAwith the obliga-
tion to BrokerB,TPcontinues to hold the
XYZstock, and the Short Sale has not been
closed for purposes of § 1.1233–1(a). Ac-
cordingly, the transition rule continues to
apply to the Short Sale and theXYZstock.
HOLDINGS
(1) When, as a result of the Short Sale,
TPis obligated to transfer stock to Broker
AandTPsatisfies the obligation by caus-
ing BrokerBto transfer stock thatTPbor-
rows from BrokerB, the transfer of the bor-
rowed stock does not close the Short Sale
under § 1.1233–1(a).
(2) Because replacing the obligation
to BrokerAwith the obligation to Bro-
kerBdoes not close the Short Sale under
§ 1.1233–1(a), the transfer does not cause
the transition rule to cease to apply to
either the Short Sale or theXYZstock.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Kate Sleeth of the Office of As-
sociate Chief Counsel (Financial Institu-
tions and Products). For further informa-
tion regarding this revenue ruling, con-
tact Ms. Sleeth at (202) 622–3920 (not a
toll-free call).
Section 1341.—Com-
putation of Tax Where
Taxpayer Restores Sub-
stantial Amount Held Under
Claim of Right
26 CFR 1.1341–1: Restoration of amounts received
or accrued under claim of right.
(Also§263A.)
Treatment of environmental remedi-
ation expenses under section 1341.This
ruling holds that amounts paid or incurred
in the current taxable year to remediate en-
vironmental contamination that occurred
in prior taxable years do not qualify for
treatment under section 1341 of the Code.
Rev. Rul. 2004–17
ISSUES
Do amounts paid or incurred in the cur-
rent taxable year to remediate environmen-
tal contamination that occurred in prior
taxable years qualify for treatment under
§ 1341 of the Internal Revenue Code?
FACTS
Situation 1
Nmanufactures products that it sells to
wholesalers and retailers.N’s manufac-
turing process creates hazardous waste.N
uses an accrual method of accounting and
the calendar taxable year. From the incep-
tion of its business in 1950 until 1979,N
buried the hazardous waste on land that
it owned in accordance with then applica-
ble state, federal, and local environmental
laws.Naccounted for waste disposal costs
as a deducible expense under § 162.
Significantly stricter state, federal, and
local hazardous waste disposal laws were
enacted in later years. In 2004, in order to
comply with current environmental laws,
February 23, 20045162004-8 I.R.B.

Nincurs expenses for all necessary ser-
vices to eliminate soil and water contam-
ination caused by the buried waste, trans-
port the waste to a waste disposal facility
that complies with current environmental
laws, and restore the land.
Situation 2
ThefactsarethesameasinSituation 1
except thatNaccounted for waste disposal
costs as a productioncost in calculating its
inventory costs for all years.
LAW AND ANALYSIS
Section 1341 applies if: (1) the tax-
payer included an item in gross income for
a prior taxable year (or years) because it
appeared that the taxpayer had an unre-
stricted right to the item, (2) a deduction
is allowable to the taxpayer for the tax-
able year because it was established after
the close of the taxable year (or years) of
inclusion that the taxpayer did not have
an unrestricted right to the item or to a
portion of the item, and (3) the amount
of the deduction exceeds $3,000. Section
1341(a)(1)–(3).
If § 1341 applies, the chapter 1 tax for
the taxable year equals the lesser of: (1) the
tax for the taxable year computed with the
current deduction, or (2) the tax for the tax-
able year computed without the deduction,
less the decrease in tax for the prior taxable
year (or years) that would have occurred
if the item or portion thereof had been ex-
cluded from gross income in the prior tax-
able year (or years). Section 1341(a)(4)
and (5). Section 1341 ensures that the tax-
payer’s position is not worse than the posi-
tion the taxpayer would have been in if the
taxpayer had not included the item or por-
tion thereof in grossincome in the earlier
year (except for the time value of money).
Section 1.1341–1(a)(1) of the Income
Tax Regulations provides that § 1341 ap-
plies if the taxpayer is entitled to a deduc-
tion of more than $3,000 because of the
restoration to another of an item that was
included in the taxpayer’s gross income
for a prior taxable year (or years) under a
claim of right.
Under the claim of right doctrine, a
taxpayer that receives an amount under a
claim of right without restriction on dispo-
sition must include the amount in gross in-
come in the taxable year received, notwith-
standing that the taxpayer’s right to retain
the amount received may be uncertain and
the taxpayer subsequently may be required
to restore the amount to the rightful owner.
North American Oil Consol. v. Burnet,
286 U.S. 417, 424 (1932).
InUnited States v. Lewis,340U.S.
590 (1951), the Supreme Court concluded
that a taxpayer who was required under the
claim of right doctrine to include a bonus
in income in the taxable year received, and
who had to repay part of the bonus in a
later year, could not amend his tax return
for the earlier year. The taxpayer’s only
remedy was to deduct the amount repaid
in the taxable year in which the taxpayer
restored it to the payor. The Court fol-
lowed the principle that income is properly
reported under the claim of right doctrine
in the year received, consistent with a tax
system based on annualrather than trans-
actional accounting.See Burnet v. San-
ford & Brooks Co., 282 U.S. 359, 364, 365
(1931).
The application of the claim of right
doctrine may result in an inequity when,
because of changes in tax rates or other cir-
cumstances, the tax increase resulting from
the income inclusion inthe earlier year ex-
ceeds the tax decrease that results from the
deduction in the later year. Congress en-
acted § 1341 to ameliorate this inequity in
cases such asLewis, in which a taxpayer
receives an amount that it is required in a
later taxable year to restore or repay to an-
other claimant.SeeS. Rep. No. 1622,
83d Cong. 2d Sess. 118 (1954) (“Under
present law if a taxpayer is obligated tore-
payamounts which he hadreceivedin a
prior year and included in income because
it appeared that he had an unrestricted right
to such amounts, he may take a deduc-
tion in the year of restitution”) (emphasis
added); H.R. Rep. No. 1337, 83d Cong.
2d Sess. 86 (1954) (same).
Section 1341(a)(2) requires that it be
established after the close of the taxable
year or years that the taxpayer did not
have an unrestricted right to the item of
gross income or portion thereof. To satisfy
this test the taxpayer must repay or restore
the item or portion of the item to another
claimant. Section 1.1341–1(a)(1);see also
Chernin v. United States, 149 F.3d 805
(8
th
Cir. 1998) (relying on a “legislative
history [that] is replete with references to
repayment, restoration, and restitution”);
S. Rep. No. 1622, 83d Cong. 2d Sess. at
118; H.R. Rep. No. 1337, 83d Cong. 2d
Sess. at 86.
For purposes of § 1341, to restore an
item included in income, the repayment
must arise out of the same circumstances,
terms, and conditions as the original pay-
ment of the item to the taxpayer.Griffiths
v. United States, 54 Fed. Cl. 198 (2002).
The fact that the amount of the repayment
bears no relationship to the amount in-
cluded in income indicates that the repay-
ment does not arise from the same or spe-
cific circumstances, terms, and conditions
as the original transaction.Bailey v. Com-
missioner, 756 F.2d 44 (6
th
Cir. 1985);
Uhlenbrock v. Commissioner,67T.C.818
(1977).
In bothSituation 1andSituation 2,the
environmental remediation costsNincurs
in 2004 do not qualify for treatment under
§ 1341(a).Ndid not include an item in
gross income thatNis repaying or restor-
ing in a later year. In these situations,
the item of gross income for purposes of
§1341(a) is the proceeds received from the
sale ofN’s products from 1950 to 1979.
SeeRev. Rul. 72–28, 1972–1 C.B. 269.
During 1950 to 1979,Nhad an unrestricted
right to the proceeds received from the sale
ofN’s products during those years. In
2004,N’s right to the sales proceeds re-
ceived during 1950 to 1979 remains unre-
stricted.N’s payment of the environmen-
tal remediation costs does not restore in a
later taxable year any portion of the pro-
ceeds received from the original sale ofN’s
products in 1950 through 1979. Moreover,
N’s obligation to incur the environmental
remediation costs does not arise from the
same or specific circumstances, terms, or
conditions as the original sale ofN’s prod-
ucts in 1950 to 1979. The amount ofN’s
environmental remediation costs bears no
relation to the amount of proceeds received
fromthesaleofN’s products in 1950 to
1979. Accordingly,N’s payment of en-
vironmental remediation costs in 2004 is
not a repayment or restoration of an item
included in gross income.N’s environ-
mental remediation costs do not satisfy the
repayment or restoration requirement of
§ 1341(a)(2).
Section 1341(a)(2) also requires, as a
prerequisite to § 1341 treatment, that a
deduction must be allowable to the tax-
payer for the repayment or restoration of
the item included in income. Section 1341
itself provides no right to a deduction.
2004-8 I.R.B.517February 23, 2004

Instead, the deduction must be allow-
able under another provision of the Code.
Section 1.1341–1(a)(1);Wood v. United
States, 863 F.2d 417, 420 (5
th
Cir. 1989);
MidAmerican Energy Co. v. Commis-
sioner, 114 T.C. 570, 583 (2000),aff’d,
271F.3d740(8
th
Cir. 2001).
Inventory costs under § 263A are recov-
ered through cost of goods sold when the
inventory is sold. Section 1.263A–1(c)(4).
Costs of goods sold, or inventory costs,
are not deductions but are properly treated
as adjustments to gross income. Section
1.61–3(a). Environmental remediation
costs incurred by reason of a production
activity must be included in inventory
costs.SeeRev. Rul. 2004–18, 2004–8
I.R.B. 509 (clarifying Rev. Rul. 94–38,
1994–1 C.B. 35); § 1.263A–1(e)(3). Thus,
under § 263A,N’s environmental remedi-
ation costs are inventory costs, not deduc-
tions. Furthermore, inSituation 2, because
the environmental remediation costsNin-
curs in 2004 would have been accounted
for underN’s method of accounting as
inventory costs in 1950 through 1979 if
incurred in those earlier years, the costs
are properly treated as inventory costs
underN’s method of accounting when
incurred in 2004. Therefore,N’s environ-
mental remediation costs do not qualify
for treatment under § 1341 because the
costs are inventory costs and do not satisfy
the deduction requirement of § 1341(a)(2).
Section 1341(b)(2) provides that
§ 1341(a) does not apply to any deduc-
tion allowable with respect to an item
included in gross income by reason of
the sale or other disposition of the tax-
payer’s stock in trade (or other property of
a kind that would have been included in
the taxpayer’s inventory if on hand at the
close of the prior taxableyear)orproperty
held by the taxpayer primarily for sale
to customers in the ordinary course of its
trade or business. Thus, even ifN’s en-
vironmental remediation costs constituted
deductible expenses rather than inventory
costs recovered through cost of goods
sold, § 1341(a) would not apply.N’s en-
vironmental remediation costs are a con-
sequence of the manufacture and sale of
N’s products and, if not an inventory cost,
would be deductible as an ordinary and
necessary business expense of sellingN’s
products. Accordingly, in bothSituations
1and2, the environmental remediation
costs would be allowable with respect to
an item that is included in gross income
by reason of the sale ofN’s products and
would not be eligible for § 1341(a) treat-
ment by reason of § 1341(b)(2).
HOLDING
Amounts paid or incurred in the current
taxable year to remediate environmental
contamination that occurred in prior tax-
able years do not qualify for treatment un-
der § 1341.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Forest Boone of the Office of As-
sociate Chief Counsel (Income Tax & Ac-
counting). For further information regard-
ing this revenue ruling, contact Mr. Boone
at 202–622–4960 (not a toll-free call).
Section 6103.—Confi-
dentiality and Disclosure
of Returns and Return
Information
26 CFR 301.6103(l)–1: Disclosure of returns and re-
turn information for purposes other than tax admin-
istration.
T.D. 9111
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Definition of Agent for Certain
Purposes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the definition of
agent for certain purposes. The final reg-
ulations clarify that the term agent in cer-
tain provisions of section 6103 of the In-
ternal Revenue Code (Code) includes con-
tractors.
DATES:Effective Date:These regulations
are effective January 6, 2004.
Applicability Date:For dates of ap-
plicability, see §§301.6103(l)–1(b) and
301.6103(m)–1(b).
FOR FURTHER INFORMATION
CONTACT: Helene R. Newsome,
202–622–4570 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 301 under section 6103(l)
and (m) of the Code. On February 1, 2002,
theFederal Registerpublished a notice of
proposed rulemaking (REG–120135–01,
2002–1 C.B. 552 [67 FR 4938]) regarding
the definition of agent for certain purposes.
No public comments or requests for hear-
ing were received. The Treasury decision
adopts the regulations as proposed.
Generally, returns and return informa-
tion are confidential under section 6103 of
the Code unless a specific statutory excep-
tion applies. In casesof non-tax-related
disclosures, returns and return information
generally may be disclosed only to officers
and employees of Federal, state, and local
government agencies, and not to contrac-
tors or agents of such agencies. In certain
limited circumstances, however, Congress
has permitted disclosures to “agents” of
these agencies. See section 6103(l)(6)(B),
(l)(12), (m)(2), (m)(4), (m)(5), (m)(7).
This document contains final regula-
tions that clarify that the termagentin
section 6103(l) and (m) includes contrac-
tors. Clarification that the termagentin-
cludes contractors is necessary for the pur-
pose of bringing certain statutory grants
of disclosure authority into alignment with
the reality of many agencies’ operations.
Agencies generally procure the services
of third parties under public contracting
laws, which do not necessarily incorpo-
rate common law concepts ofagent.This
clarification is also consistent with Con-
gressional intent. For example, the Sen-
ate Finance Committee, in amending sec-
tion 6103(m)(2), stated, “[a]gents are those
who are engaged directly in performing
or assisting in collection functions for the
federal government, presumably, private
collection agencies who have contracted
with the government to collect claims ... .”
S. Rep. No. 97–378, at 15 (1982).
This clarification does not provide any
new disclosure authority, nor does it autho-
rize the disclosure of return information
to contractors that Congress has not previ-
ously specifically authorized in the Code.
February 23, 20045182004-8 I.R.B.

With regard to protection of taxpayer data,
agents/contractors are subject to safeguard
requirements, redisclosure prohibitions,
and civil and criminal penalties for unau-
thorized disclosures. Accordingly, the
regulations do not have an impact on tax-
payer privacy.
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 determined
thatsection553(b)and(d)oftheAdmin-
istrative Procedure Act (5 U.S.C. chapter
5) and the Regulatory Flexibility Act (5
U.S.C. chapter 6) do not apply to these reg-
ulations, and, therefore, a Regulatory Flex-
ibility Analysis is not required. Pursuant to
section 7805(f) of the Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel of the Small Business Administration
for comment on its impact on small busi-
nesses.
Drafting Information
The principal author of these regula-
tions is Helene R. Newsome, Office of
the Associate Chief Counsel (Procedure
& Administration), Disclosure & Privacy
Law Division.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301 — PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(l)–1 also issued un-
der 26 U.S.C. 6103(q).
Section 301.6103(m)–1 also issued un-
der 26 U.S.C. 6103(q). * * *
Par. 2. Section 301.6103(l)–1 is added
to read as follows:
§301.6103(l)–1 Disclosure of returns and
return information for purposes other
than tax administration.
(a)Definition. For purposes of apply-
ing the provisions of section 6103(l) of the
Internal Revenue Code, the termagentin-
cludes a contractor.
(b)Effective date.Thissectionisappli-
cable January 6, 2004.
Par. 3. Section 301.6103(m)–1 is added
to read as follows:
§301.6103(m)–1 Disclosure of taxpayer
identity information.
(a)Definition. For purposes of apply-
ing the provisions of section 6103(m) of
the Internal Revenue Code, the termagent
includes a contractor.
(b)Effective date.Thissectionisappli-
cable January 6, 2004.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 16, 2003.
Pamela F. Olson,
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 31,
2003, 11:59 a.m., and published in the issue of the Federal
Register for January 6, 2004, 69 F.R. 506)
Section 6662.—Imposition
of Accuracy-Related
Penalty
26 CFR 1
.6662–2: Accuracy-related penalty.
T.D. 9109
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Establishing Defenses
to the Imposition of the
Accuracy-Related Penalty
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that affect the defenses avail-
able to the imposition of the accuracy-re-
lated penalty when taxpayers fail to dis-
close reportable transactions or fail to dis-
close that they have taken a return position
based on the conclusion that a regulation is
invalid. The final regulations are intended
to promote disclosure of reportable trans-
actions and positions based on the conclu-
sion that a regulation is invalid by narrow-
ing a taxpayer’s ability to establish good
faith and reasonable cause as a defense.
The final regulations also clarify the ex-
isting regulations with respect to the facts
and circumstances to be considered in de-
termining whether a taxpayer acted with
reasonable cause and in good faith.
DATES:Effective Dates:These regula-
tions are effective December 30, 2003.
Applicability Dates:These regulations
apply to returns filed after December 31,
2002, with respect to transactions entered
into on or after January 1, 2003.
FOR FURTHER INFORMATION
CONTACT: Jamie G. Bernstein at (202)
622–4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1. On December 31,
2002, the IRS and the Treasury Depart-
ment published in theFederal Register
proposed amendments to the regulations
(REG–126016–01, 2003–1 C.B. 486 [67
FR 79894]) under sections 6662 and 6664
of the Internal Revenue Code (Code).
No public hearing was requested or held.
Written and electronic comments respond-
ing to the notice of proposed rulemaking
were received. After consideration of all
the comments, the proposed regulations
under sections 6662 and 6664 are adopted
as amended by this Treasury decision. The
revisions are discussed below.
Explanation of Revisions and Summary
of Comments
These final regulations generally adopt
the provisions of the proposed regulations.
The changes to the proposed regulations
reflected in these finalregulations, as well
2004-8 I.R.B.519February 23, 2004

as comments received, are discussed be-
low.
1.Applicability of Disclosure Regulations
Under Section 6011 and Effective Date
These final regulations were proposed
to apply to returns filed after December 30,
2002, with respect to transactions entered
into on or after January 1, 2003, to coincide
with temporary regulations relating to dis-
closure, promulgated under section 6011
and applicable for transactions entered into
on or after January 1, 2003 (the Tempo-
rary Disclosure Regulations). The Tem-
porary Disclosure Regulations were pub-
lished in theFederal Registeron Octo-
ber 22, 2002. See 67 FR 64799 (T.D.
9017, 2002–2 C.B. 815) and 67 FR 64840
(REG–103735–00, 2002–2 C.B. 832) (Oc-
tober 22, 2002). Final regulations under
section 6011 were published on March 4,
2003, and apply to transactions entered
into on or after February 28, 2003. See
68 FR 10161, 10163 (T.D. 9046, 2003–1
C.B. 614) (March 4, 2003) (the Final Dis-
closure Regulations). The Final Disclo-
sure Regulations define reportable trans-
actions more narrowly than the Tempo-
rary Disclosure Regulations. For trans-
actions entered into on or after January
1, 2003, and before February 28, 2003,
the taxpayer may apply the Final Disclo-
sure Regulations instead of the Tempo-
rary Disclosure Regulations. Revisions
throughout these final regulations refer to
the definition of reportable transaction in
§1.6011–4(b) or 1.6011–4T(b), as applica-
ble, to accommodate situations in which
the Temporary Disclosure Regulations ap-
ply to a transaction.
One commentator suggested that the fi-
nal regulations under sections 6662 and
6664applytotransactionsenteredintoon
or after February 28, 2003, because that
date is the effective date for the Final Dis-
closure Regulations. See 68 FR 10161,
10163 (March 4, 2003). The final reg-
ulations do not adopt this recommenda-
tion. The proposed regulations under sec-
tions 6662 and 6664 provided adequate no-
tice that failure to comply with the Tempo-
rary or Final Disclosure Regulations could
limit the penalty defenses available under
sections 6662 and 6664.
2.Applicability of the Reasonable Cause
and Good Faith Defense
The proposed regulations prohibited re-
liance on tax advice to establish a rea-
sonable cause and good faith defense to
the accuracy-related penalties if a taxpayer
failed to disclose a reportable transaction
pursuant to the Final or Temporary Dis-
closure Regulations, as applicable. Three
commentators suggested that it is inappro-
priate to preclude a taxpayer from rely-
ing on the advice of a tax advisor in cir-
cumstances in which the taxpayer does not
lack good faith in failing to disclose a re-
portable transaction. The Treasury De-
partment and the IRS believe that good
faith requires taxpayers to be forthcoming
and that taxpayers should construe the Fi-
nal and Temporary Disclosure Regulations
broadly in favor of disclosure. Nonethe-
less, there may be circumstances in which
a taxpayer does not lack good faith in fail-
ing to disclose a reportable transaction.
Accordingly, the final regulations revise
the proposed regulations to provide that a
taxpayer’s failure to disclose a reportable
transaction is a strong indication that the
taxpayer failed to act in good faith, which
would bar relief under section 6664(c).
These final regulations also adopt the
requirement in the proposed regulations
that a taxpayer may not rely on an opinion
or advice that a regulation is invalid to es-
tablish that the taxpayer acted with reason-
able cause and in good faith unless the tax-
payer adequately disclosed its position that
the regulation is invalid. One commenta-
tor suggested that this provision is inappro-
priate because it would be difficult for a
taxpayer to discern whether its position is
contrary to a regulation without consulting
with a tax advisor. This suggestion was re-
jected because the requirement of revised
§1.6664–4(c)(2)(iii) does not apply to situ-
ations in which a taxpayer has taken a posi-
tion that is merely contrary to a regulation,
but instead applies to situations in which a
taxpayer has taken a return position based
on advice or an opinion that a regulation is
invalid.
3.Definition of Advice
One commentator suggested that the
proposed regulations more clearly define
what constitutes professional advice or
opinion. Section 1.6664–4(c)(2) defines
the termadvice. Neither the proposed nor
the final regulations change the definition
of the term advice.
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the proposed reg-
ulations preceding these regulations were
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 these regula-
tions is Jamie Bernstein, Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division.
*****
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 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6662–0 is amended
by adding an entry for §1.6662–2(d)(5) to
read as follows:
§1.6662–0 Table of Contents.
*****
§1.6662–2 Accuracy-related penalty.
*****
(d) * * *
(5) Returns filed after December 31,
2002.
*****
February 23, 20045202004-8 I.R.B.

Par. 3. Section 1.6662–2 is amended
by:
1. Revising the firstsentence of para-
graph (d)(2).
2. Adding new paragraph (d)(5).
The revision and addition read as fol-
lows:
§1.6662–2 Accuracy-related penalty.
*****
(d)***(1)***
(2)***Exceptasprovidedinpara-
graphs (d)(3), (4) and (5) of this section
and the last sentence of this paragraph
(d)(2), the provisions of §§1.6662–1
through 1.6662–4 and §1.6662–7 (as
revised to reflect the changes made to the
accuracy-related penalty by the Omnibus
Budget Reconciliation Act of 1993) and
of §1.6662–5 apply to returns the due date
of which (determined without regard to
extensions of time for filing) is after De-
cember 31, 1993. * * *
*****
(5)For returns filed after Decem-
ber 31, 2002. Sections 1.6662–3(a),
1.6662–3(b)(2) and 1.6662–3(c)(1) (re-
lating to adequate disclosure) apply to
returns filed after December 31, 2002,
with respect to transactions entered into
on or after January 1, 2003. Except as
provided in paragraph (d)(1) of this sec-
tion, §§1.6662–3(a), 1.6662–3(b)(2) and
1.6662–3(c)(1) (as contained in 26 CFR
part 1 revised April 1, 2003) apply to
returns filed with respect to transactions
entered into prior to January 1, 2003.
Par. 4. Section 1.6662–3 is amended by
revising paragraph (a), the last sentence of
paragraph (b)(2), and the first sentence of
paragraph (c)(1) to read as follows:
§1.6662–3 Negligence or disregard of
rules or regulations.
(a)In general. If any portion of an un-
derpayment, as defined in section 6664(a)
and §1.6664–2, of any income tax imposed
under subtitle A of the Internal Revenue
Code that is required to be shown on a re-
turn is attributable to negligence or disre-
gard of rules or regulations, there is added
to the tax an amount equal to 20 percent
of such portion. The penalty for disre-
garding rules or regulations does not ap-
ply, however, if the requirements of para-
graph (c)(1) of this section are satisfied
andthepositioninquestionisadequately
disclosed as provided in paragraph (c)(2)
of this section (and, if the position relates
to a reportable transaction as defined in
§1.6011–4(b) (or §1.6011–4T(b), as appli-
cable), the transaction is disclosed in ac-
cordance with §1.6011–4 (or §1.6011–4T,
as applicable)), or to the extent that the
reasonable cause and good faith exception
to this penalty set forth in §1.6664–4 ap-
plies. In addition, if a position with re-
spect to an item (other than with respect
to a reportable transaction, as defined in
§1.6011–4(b) or §1.6011–4T(b), as appli-
cable) is contrary to a revenue ruling or no-
tice (other than a notice of proposed rule-
making) issued by the Internal Revenue
Service and published in the Internal Rev-
enue Bulletin (see §601.601(d)(2) of this
chapter), this penaltydoes not apply if the
position has a realistic possibility of being
sustained on its merits. See §1.6694–2(b)
of the income tax return preparer penalty
regulations for a description of the realis-
tic possibility standard.
(b)* * * * *
(2)***Nevertheless,ataxpayerwho
takes a position (other than with respect
to a reportable transaction, as defined in
§1.6011–4(b) or §1.6011–4T(b), as appli-
cable) contrary to a revenue ruling or no-
tice has not disregarded the ruling or notice
if the contrary position has a realistic pos-
sibility of being sustained on its merits.
*****
(c)***(1)***Nopenaltyundersec-
tion 6662(b)(1) may be imposed on any
portion of an underpayment that is attrib-
utable to a position contrary to a rule or
regulation if the position is disclosed in ac-
cordance with the rulesof paragraph (c)(2)
of this section (and, if the position relates
to a reportable transaction as defined in
§1.6011–4(b) (or §1.6011–4T(b), as appli-
cable), the transaction is disclosed in ac-
cordance with §1.6011–4 (or §1.6011–4T,
as applicable)) and,in case of a position
contrary to a regulation, the position repre-
sents a good faith challenge to the validity
of the regulation. * * *
*****
§1.6662–4 [Amended]
Par. 5. Section 1.6662–4(g)(1)(iv) is
amended by removing the reference to
“§1.6664–4(e)” and adding the reference
“§1.6664–4(f)” in its place.
Par. 6. Section 1.6664–0 is amended
by:
1. Adding entries for §§1.6664–1
(b)(2)(i), (b)(2)(ii) and 1.6664–4(c)(1)(iii).
2. Redesignating the entries for
§1.6664–4(d), (e), (f), and (g), as
§1.6664–4(e), (f), (g), and (h), respec-
tively.
3.Adding a new entry for
§1.6664–4(d).
The additions read as follows:
§1.6664–0 Table of contents.
*****
§1.6664–1 Accuracy-related and fraud
penalties, definitions and special rules.
*****
(b) * * *
(2) * * *
(i) For returns due after September 1, 1995.
(ii) For returns filed after December 31,
2002.
*****
§1.6664–4 Reasonable cause and good
faith exception to section 6662 penalties.
*****
(c) * * *
(1) * * *
(iii) Reliance on the invalidity of a regula-
tion.
(d) Underpayments attributable to re-
portable transactions.
*****
Par. 7. Section 1.6664–1 is amended
by:
1. Redesignating the text of paragraph
(b)(2) as (b)(2)(i).
2. Adding a new paragraph heading for
newly designated paragraph (b)(2)(i).
3. Adding paragraph (b)(2)(ii).
The revisions and additions are as fol-
lows:
§1.6664–1 Accuracy-related and fraud
penalties; definitions and special rules.
*****
(b)***(1)***
(2) * * * (i)For returns due after
September 1, 1995.***
2004-8 I.R.B.521February 23, 2004

(ii)For returns filed after December 31,
2002. Sections 1.6664–4(c) (relating to re-
lying on opinion or advice) and (d) (re-
lating to underpayments attributable to re-
portable transactions) apply to returns filed
after December 31, 2002, with respect to
transactions entered into on or after Jan-
uary 1, 2003. Except as provided in para-
graph (b)(2)(i) of this section, §1.6664–4
(as contained in 26 CFR part 1 revised
April 1, 2003) applies to returns filed with
respect to transactions entered into before
January 1, 2003.
Par. 8. Section 1.6664–4 is amended
by:
1. Removing the language “(g) of this
section” from the last sentence of para-
graph (a) and adding the language “(h) of
this section” in its place.
2. Revising paragraph (c)(1) introduc-
tory text and the last sentence of paragraph
(c)(1)(i).
3. Adding paragraph (c)(1)(iii).
4. Redesignating paragraphs (d), (e), (f)
and (g) as paragraphs (e), (f), (g) and (h),
respectively.
5. Adding a new paragraph (d).
6. Removing the language “(e)” wher-
ever it appears in newly designated para-
graphs (f)(1), (f)(2)(i), (f)(2)(ii), (f)(3), and
(f)(4) and adding the language “(f)” in its
place.
7. Removing the language “(g)” wher-
ever it appears in newly designated para-
graphs (h)(1), (h)(1)(i), (h)(2), and (h)(3)
and adding the language “(h)” in its place.
The revisions and additions read as fol-
lows:
§1.6664–4 Reasonable cause and good
faith exception to section 6662 penalties.
*****
(c)Reliance on opinion or advice—(1)
Facts and circumstances; minimum re-
quirements. All facts and circumstances
must be taken into account in determining
whether a taxpayer has reasonably relied
in good faith on advice (including the
opinion of a professional tax advisor) as
to the treatment of the taxpayer (or any
entity, plan, or arrangement) under Fed-
eral tax law. For example, the taxpayer’s
education, sophistication and business ex-
perience will be relevant in determining
whether the taxpayer’s reliance on tax
advice was reasonable and made in good
faith. In no event will a taxpayer be con-
sideredtohavereasonablyreliedingood
faith on advice (including an opinion),
unless the requirements of this paragraph
(c)(1) are satisfied. The fact that these
requirements are satisfied, however, will
not necessarily establish that the taxpayer
reasonably relied on the advice (including
the opinion of a tax advisor) in good faith.
For example, reliance may not be reason-
able or in good faith if the taxpayer knew,
or reasonably should have known, that the
advisor lacked knowledge in the relevant
aspects of Federal tax law.
(i) * * * In addition, the requirements
of this paragraph (c)(1) are not satisfied if
the taxpayer fails to disclose a fact that it
knows, or reasonably should know, to be
relevant to the proper tax treatment of an
item.
*****
(iii)Reliance on the invalidity of a reg-
ulation. A taxpayer may not rely on an
opinion or advice that a regulation is in-
valid to establish that the taxpayer acted
with reasonable cause and good faith un-
less the taxpayer adequately disclosed, in
accordance with §1.6662–3(c)(2), the po-
sition that the regulation in question is in-
valid.
(d)Underpayments attributable to re-
portable transactions. If any portion
of an underpayment is attributable to
a reportable transaction, as defined in
§1.6011–4(b) (or §1.6011–4T(b), as ap-
plicable), then failure by the taxpayer to
disclose the transaction in accordance with
§1.6011–4 (or §1.6011–4T, as applicable)
is a strong indication that the taxpayer did
not act in good faith with respect to the
portion of the underpayment attributable
to the reportable transaction.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 18, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 29,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2003, 68 F.R. 75126)
February 23, 20045222004-8 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.
2004-8 I.R.B.iFebruary 23, 2004

Numerical Finding List
1
Bulletins 2004–1 through 2004–8
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
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
Proposed Regulations:
REG-116664-01, 2004-3 I.R.B.319
REG-122379-02, 2004-5 I.R.B.392
REG-139845-02, 2004-5 I.R.B.397
REG-126459-03, 2004-6 I.R.B.437
REG-156232-03, 2004-5 I.R.B.399
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
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
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
Revenue Rulings— Continued:
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
2004-9, 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
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
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.
February 23, 2004ii2004-8 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–8
Proposed Regulations:
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
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
Revenue Procedures:
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
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
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
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
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
Revenue Procedures— Continued:
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
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:
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
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
2004-8 I.R.B.iiiFebruary 23, 2004

INDEX
Internal Revenue Bulletins
2004–1 through 2004–8
The abbreviation and number in parenthesis
following the index entry refer to the specific
item; numbers in roman and italic type follow-
ing the parentheses refer to the Internal Rev-
enue Bulletin in which the item may be found
and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Determination letters, issuing procedures
(RP 6) 1,197
Electronic delivery of payee statements
(Notice 10) 6,433
Forms 1099 and 5498 payee statements,
electronic delivery (Notice 10) 6,433
Full funding limitations, weighted aver-
age interest rate for:
January 2004 (Notice 3) 5,391
Letter rulings:
And determination letters, areas which
will not be issued from:
Associates Chief Counsel and Divi-
sion Counsel (TE/GE) (RP 3) 1,
114
Associate Chief Counsel (Interna-
tional) (RP 7) 1,237
And information letters, etc. (RP 4) 1,
125
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
1) 1,1; correction of user fee (Ann
8) 6,441
User fees, request for letter rulings (RP
8) 1,240
Minimum funding standards, waivers (RP
15) 7,490
EMPLOYEE
PLANS—Cont.
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Qualified retirement plans:
Employee stock ownership plans, syn-
thetic equity, listed transactions (RR
4) 6,414
Minimum participation standards, spe-
cial rule (RR 11) 7,480
Rollovers (RR 12) 7,478
Top-heavy status, special rules (RR 13)
7,485
Vesting, consent (RR 10) 7,484
Roth IRAs, tax shelters (Notice 8) 4,333
S corporations, employee stock owner-
ship plans (ESOPs), termination of
election (RP 14) 7,489
Technical advice:
To directors and appeals area direc-
tors from Associates Chief Coun-
sel and Division Counsel/Associate
Chief Counsel (TE/GE) (RP 2) 1,83
To IRS employees (RP 5) 1,167
EMPLOYMENT TAX
Delinquent tax, levy on wages, salary,
and other income, exempt amount ta-
bles (Notice 4) 2,273
Form W-2, new reporting code for Box
12,2004(Ann2)3,322
Mileage allowance, local transporta-
tion expenses computed similarly to a
courier’s compensation, accountable
plan (RR 1) 4,325
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
ESTATE TAX
Gross estate, election to value on alternate
valuation date, section 20.2032–1(b)
(REG–139845–02) 5,397
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Proposed Regulations:
26 CFR 20.2032–1(b), revised;
301.9100–6T, amended; gross es-
tate, election to value on alternate
valuation date (REG–139845–02) 5,
397
ESTATE TAX—Cont.
Regulations:
26 CFR 20.2056(b), amended;
20.2056A–5, amended; 20.2056A–
13, revised; definition of income for
trust purposes (TD 9102) 5,366
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
EXCISE TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
EXEMPT
ORGANIZATIONS
Declaratory judgment suits, annual notice
to doners regarding pending and settled
suits (Ann 1) 1,254
Electronic delivery of payee statements
(Notice 10) 6,433
Forms 1099 and 5498 payee statements,
electronic delivery (Notice 10) 6,433
Letter rulings:
And determination letters, areas which
will not be issued from Associates
Chief Counsel and Division Counsel
(TE/GE) (RP 3) 1,114
And information letters, etc. (RP 4) 1,
125
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
1) 1,1; correction of user fee (Ann
8) 6,441
User fees, request for letter rulings (RP
8) 1,240
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Public advocacy activities conducted by
certain tax-exempt organizations (RR
6) 4,328
Technical advice:
To directors and appeals area direc-
tors from Associates Chief Coun-
sel and Division Counsel/Associate
Chief Counsel (TE/GE) (RP 2) 1,83
To IRS employees (RP 5) 1,167
February 23, 2004iv2004-8 I.R.B.

GIFT TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Regulations:
26 CFR 25.2523(e)–1, amended;
25.2523(h)–2, amended; 26.2601–1,
amended; definition of income for
trust purposes (TD 9102) 5,366
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
INCOME TAX
Agent for certain purposes, definition (TD
9111) 8,518
Capitalization:
Of amounts paid to acquire or create
intangibles (TD 9107) 7,447
Tangible property (Notice 6) 3,308
Charitable contributions, intellectual
property (Notice 7) 3,310
Confidential transactions (TD 9108) 6,
429
Credits:
Increasing research activities credit:
Internal-use software, advance no-
tice of proposed rulemaking –
REG–153656–03 (Ann 9) 6,441
Qualified research definition (TD
9104) 6,406
Research credit recordkeeping
agreements, pilot program (No-
tice 11) 6,434
Low-income housing credit:
Satisfactory bond, “bond factor”
amounts for the period:
January through March 2004
(RR 16) 8,503
State or local housing tax credit (TD
9110) 8,504
Declaratory judgment suits, annual notice
to doners regarding pending and settled
suits (Ann 1) 1,254
Disciplinary actions involving attorneys,
certified public accountants, enrolled
agents, and enrolled actuaries (Ann 6)
3,499
Disclosure of relative values of optional
forms of benefit (TD 9099) 2,255
Electronic filing of certain income tax re-
turns and other forms (TD 9100) 3,297;
(REG–116664–01) 3,319
INCOME TAX—Cont.
Environmental remediation expenses:
Restoration of amount held under
claim of right (RR 17) 8,516
Uniform capitalization of costs (RR
18) 8,509
Forms:
8806, Information Return for Ac-
quisition of Control or Substantial
Change in Capital Structure, new
(Ann 5) 4,361
8858, Information Return of U.S.
Persons With Respect to Foreign
Disregarded Entities, comments re-
quested (Ann 4) 4,357
Health Savings Accounts (HSAs), ques-
tions and answers (Notice 2) 2,269
Individual TaxpayerIdentification Num-
bers (ITINs), new application process
(Notice 1) 2,268
Information reporting:
Extension of certain 2004 deadlines
(Notice 9) 4,334
For payments in lieu of dividends (TD
9103) 3,306
Insurance companies:
Loss payment patterns and discount
factors for the 2003 accident year
(RP 9) 2,275
Salvage discount factors for the 2003
accident year (RP 10) 2,288
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2004 (RR 2) 2,265
February 2004 (RR 9) 6,428
Rate tables (RR 14) 8,511
Inventory:
LIFO, price indexes used by depart-
ment stores for:
November 2003 (RR 7) 4,327
December 2003 (RR 19) 8,510
Letter rulings:
And determination letters, areas which
will not be issued from:
Associates Chief Counsel and Divi-
sion Counsel (TE/GE) (RP 3) 1,
114
Associate Chief Counsel (Interna-
tional) (RP 7) 1,237
And information letters issued by As-
sociate Offices, determination letters
issued by Operating Divisions (RP
INCOME TAX—Cont.
1) 1,1; correction of user fee (Ann
8) 6,441
Methods of accounting, changes in de-
termining depreciation or amortization
(RP 11) 3,311; (TD 9105) 6,419;
(REG–126459–03) 6,437
Partnerships:
Charitable contributions, trust govern-
ing instrument requirement (RR 5) 3,
295
Electing large partnerships, separately
stated items, qualified dividend in-
come (Notice 5) 7,489
Penalties, defenses available to the im-
position of the accuracy-related penalty
(TD 9109) 8,519
Practice before the Internal Revenue Ser-
vice (REG–122379–02) 5,392
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
Proposed Regulations:
26 CFR 1.167(e)–1, amended;
1.446–1, amended; 1.1016–3,
amended; changes in computing
depreciation (REG–126459–03) 6,
437
26 CFR 1.170A–11, amended;
1.556–2, amended; 1.565–1,
amended; 1.936–7, amended;
1.1017–1, amended; 1.1368–1,
amended; 1.1377–1, amended;
1.1502–21,–75,amended;
1.1503–2, amended; 1.6038B–1,
amended; 301.7701–3, amended;
guidance necessary to facili-
tate business electronic filing
(REG–116664–01) 3,319
26 CFR 1.482–6, –9, amended; treat-
ment of services under section 482,
allocation of income and deductions
from intangibles (REG–115037–00,
REG–146893–02); correction (Ann
7) 4,365
26 CFR 1.6043–4, added; 1.6045–3,
added; information reporting re-
lating to taxable stock transactions
(REG–156232–03) 5,399
31 CFR 10.33, revised; 10.35, added;
10.36, added; 10.37, added; reg-
ulations governing practice be-
fore the Internal Revenue Service
(REG–122379–02) 5,392
2004-8 I.R.B.vFebruary 23, 2004

INCOME TAX—Cont.
Publication 1220, Specifications for Fil-
ing Forms 1098, 1099, 5498 and W-2G
Electronically or Magnetically, changes
affecting tax year 2003 filing of infor-
mation returns (Ann 3) 2,294
Qualified offer regulations, award of at-
torney’s fees and other costs (TD 9106)
5,384
Regulations:
26 CFR 1.41–0, –4, amended;
602.101, amended; credit for in-
creasing research activities (TD
9104) 6,406
26 CFR 1.42–6, –8, –12, –14,
amended; section 42 carryover
and stacking rule amendments (TD
9110) 8,504
26 CFR 1.167(a)–3, amended;
1.263(a)–0, –4, –5, added; 1.446–5,
added; 602.101, amended; guidance
regarding deduction and capitaliza-
tion of expenditures (TD 9107) 7,
447
26 CFR 1.167(e)–1, amended;
1.167(e)–1T, added; 1.446–1,
amended;1.446–1T, added;
1.1016–3, amended; 1.1016–3T,
added; changes in computing depre-
ciation (TD 9105) 6,419
26 CFR 1.170A–11, amended;
1.170A–11T, added; 1.556–2,
amended;1.556–2T, added;
1.565–1, amended; 1.565–1T,
added;1.936–7,amended;
1.936–7T, added;1.1017–1,
–1T, amended;1.1368–1,
amended; 1.1368–1T, added;
1.1377–1, amended; 1.1377–1T,
added;1.1502–21,–21T,
–75, amended;1.1502–75T,
added;1.1503–2, amended;
1.1503–2T, added; 1.6038B–1, –1T,
amended; 301.7701–3, amended;
301.7701–3T, added; 602.101,
amended; guidance necessary to
facilitate business electronic filing
(TD 9100) 3,297
26 CFR 1.401(a)–11, –(20), revised;
1.417(a)(3)–1, added; 1.417(e)–1,
amended; 602.101, amended; dis-
closure of relative values of optional
forms of benefit (TD 9099) 2,255
26 CFR 1.642(c)–2, amended;
1.642(c)–5, revised; 1.643, revised;
1.651(a)–2(d), added; 1.661(a)–2(f),
revised; 1.664–3, amended; defini-
INCOME TAX—Cont.
tion of income for trust purposes
(TD 9102) 5,366
26 CFR 1.1502–35T, amended; sus-
pension of losses on certain stock
dispositions (TD 9048); correction
(Ann 10) 7,501
26 CFR 1.6011–4, amended;
301.6112–1, amended; confiden-
tial transactions (TD 9108) 6,429
26 CFR 1.6043–4T, revised;
1.6045–3T, revised; information
reporting relating to taxable stock
transactions (TD 9101) 5,376
26 CFR 1.6045–2, amended; informa-
tion statements for certain substitute
payments (TD 9103) 3,306
26 CFR 1.6662–0, –2, –3, –4,
amended; 1.6664–0, –1, –4,
amended; establishing defenses to
the imposition of the accuracy-re-
lated penalty (TD 9109) 8,519
26 CFR 301.6103(1)–1, added;
301.6103(m)–1, added; definition
of agent for certain purposes (TD
9111) 8,518
26 CFR 301.7430–7, added;
301.7430–7T, removed; awards of
attorney’s fees and other costs based
upon qualified offers (TD 9106) 5,
384
Reporting an acquisition of control or sub-
stantial change in capital structure, new
Form 8806 (Ann 5) 4,362
Stocks:
Constructive sale, short sale, and trans-
fers by broker (RR 15) 8,515
Guidance under section 1502, suspen-
sion of losses on certain stock dispo-
sitions (TD 9048); correction (Ann
10) 7,501
Information reporting relating to tax-
able stock transactions (TD 9101) 5,
376; (REG–156232–03) 5,399
Tax conventions, taxation of nonresident
partners in a service partnership that
conducts activities in the United States
(RR 3) 7,486
Technical advice to directors and appeals
area directors from Associates Chief
Counsel and Division Counsel/Asso-
ciate Chief Counsel (TE/GE) (RP 2) 1,
83
Treatment of services under section 482
(REG–115037–00, REG–146893–02);
correction (Ann 7) 4,365
INCOME TAX—Cont.
Trusts, definition of income, total return,
adjustments to income (TD 9102) 5,
366
SELF-EMPLOYMENT
TAX
Presidentially-declared disaster or combat
zone, postponement of certain acts (RP
13) 4,335
February 23, 2004vi2004-8 I.R.B.
*U.S. Government Printing Office: 2004—304–774/60123