Professional Documents
Culture Documents
2005-7
February 14, 2005
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 menting the principles of Rev. Rul. 2004–43. Rev. Rul.
2004–43 revoked.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of court decisions, rulings, and procedures must be considered,
the Commissioner of Internal Revenue for announcing official and Service personnel and others concerned are cautioned
rulings and procedures of the Internal Revenue Service and for against reaching the same conclusions in other cases unless
publishing Treasury Decisions, Executive Orders, Tax Conven- the facts and circumstances are substantially the same.
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
The Bulletin is divided into four parts as follows:
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis. Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
It is the policy of the Service to publish in the Bulletin all sub- the Internal Revenue Code of 1986.
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod- Part II.—Treaties and Tax Legislation.
ify, or amend any of those previously published in the Bulletin. This part is divided into two subparts as follows: Subpart A,
All published rulings apply retroactively unless otherwise indi- Tax Conventions and Other Related Items, and Subpart B, Leg-
cated. Procedures relating solely to matters of internal man- islation and Related Committee Reports.
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published. 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
Revenue rulings represent the conclusions of the Service on the included in this part are Bank Secrecy Act Administrative Rul-
application of the law to the pivotal facts stated in the revenue ings. Bank Secrecy Act Administrative Rulings are issued by
ruling. In those based on positions taken in rulings to taxpayers the Department of the Treasury’s Office of the Assistant Sec-
or technical advice to Service field offices, identifying details retary (Enforcement).
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements. Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
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 The last Bulletin for each month includes a cumulative index
relied on, used, or cited as precedents by Service personnel in for the matters published during the preceding months. These
the disposition of other cases. In applying published rulings and monthly indexes are cumulated on a semiannual basis, and are
procedures, the effect of subsequent legislation, regulations, published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
CONTENTS
SECTION 1. PURPOSE 2007, 2008, or 2009) of the lesser of (a) losses directly allocable to such receipts;
the qualified production activities income and (c) a ratable portion of deductions, ex-
The Internal Revenue Service and (QPAI) of the taxpayer for the taxable penses, and losses not directly allocable to
Treasury Department currently are de- year, or (b) taxable income (determined such receipts or another class of income.
veloping regulations under § 199 of the without regard to § 199) for the taxable (2) Section 199(c)(2) provides that
Internal Revenue Code, enacted as part of year (or, in the case of an individual, under the Secretary shall prescribe rules for the
the American Jobs Creation Act of 2004, § 199(d)(2), adjusted gross income). proper allocation of items of income, de-
Pub. L. No. 108–357 (the Act), regarding (2) Section 199(b)(1) limits the deduc- duction, expense, and loss for purposes of
the deduction relating to income attrib- tion for a taxable year to 50 percent of the determining QPAI.
utable to domestic production activities. W–2 wages paid by the taxpayer during (3) Section 199(c)(3) provides special
This notice provides interim guidance on the calendar year that ends in such taxable rules for determining costs in computing
which taxpayers may rely until the regula- year. For this purpose, § 199(b)(2) defines QPAI. Under these special rules, any item
tions are issued. The Service and Treasury the term “W–2 wages” to mean the sum or service brought into the United States
Department expect that the regulations of the aggregate amounts the taxpayer is is treated as acquired by purchase, and its
will incorporate the rules set forth in this required under § 6051(a)(3) and (8) to in- cost is treated as not less than its value im-
notice and will be effective for taxable clude on the Forms W–2 of the taxpayer’s mediately after it enters the United States.
years beginning after December 31, 2004, employees during the calendar year ending A similar rule applies in determining the
the effective date of § 199. See § 102(e) during the taxpayer’s taxable year. Sec- adjusted basis of leased or rented prop-
of the Act. This notice requests comments tion 199(b)(3) provides that the Secretary erty when the lease or rental gives rise
on the interim guidance provided herein shall prescribe rules for the application of to DPGR. If the property has been ex-
and any additional guidance that should be § 199(b) in the case of an acquisition or ported by the taxpayer for further manu-
provided in regulations. Comments must disposition of a major portion of either a facture, the increase in cost or adjusted ba-
be received by March 31, 2005. trade or business or a separate unit of a sis must not exceed the difference between
trade or business during the taxable year. the value of the property when exported
SECTION 2. OVERVIEW OF § 199
.02 Qualified Production Activities In- and its value when brought back into the
.01 In General. (1) Section 199(a)(1) come. (1) Under § 199(c)(1), QPAI is the United States after further manufacture.
allows a deduction equal to 9 percent excess of domestic production gross re- (4) Section 199(c)(4)(A) defines DPGR
(3 percent in the case of taxable years be- ceipts (DPGR) over the sum of: (a) the cost to mean the taxpayer’s gross receipts that
ginning in 2005 and 2006, and 6 percent of goods sold (CGS) allocable to such re- are derived from: (a) any lease, rental,
in the case of taxable years beginning in ceipts; (b) other deductions, expenses, or license, sale, exchange, or other disposi-
(iv) A’s basis in the replacement property is guesthouse. In 2006, B exchanges the entire property of the property. Because the guesthouse is business
$430,000, which is equal to the basis of the re- for a residence and a separate property that B intends property separate from the dwelling unit and B has
linquished property at the time of the exchange to use as an office. The total fair market value of B’s not met the use requirements for the guesthouse,
($190,000) increased by the gain excluded under replacement properties is $360,000. The fair market B may not exclude the gain allocable to the guest-
§ 121 ($250,000), and reduced by the cash A re- value of the replacement residence is $240,000 and house under § 1.121–1(e). However, because the fair
ceives ($10,000)). See section 4.03 of this revenue the fair market value of the replacement business market value of the replacement business property
procedure. property is $120,000, which is equal to the fair mar- is equal to the fair market value of the relinquished
Example 2. (i) Taxpayer B buys a prop- ket value of the relinquished business property. From business property and B receives no boot, B may
erty for $210,000. The property consists of two 2001 to 2006, B claims depreciation deductions of defer the remaining gain of $80,000 (1/3 of $360,000
separate dwelling units (within the meaning of $30,000 for the business use. B realizes gain of amount realized, or $120,000, minus $40,000 ad-
§ 1.121–1(e)(2)), a house and a guesthouse. From $180,000 on the exchange. justed basis, which is 1/3 of $210,000 basis, or
2001 until 2006, B uses the house as B’s principal (ii) Under § 121, B may exclude gain of $100,000 $70,000, adjusted by $30,000 depreciation) under
residence and uses the guesthouse as an office in B’s allocable to the residential portion of the house (2/3 § 1031.
trade or business. Based on the square footage of the of $360,000 amount realized, or $240,000, minus These results are illustrated as follows:
respective parts of the property, B allocates 2/3 of 2/3 of $210,000 basis, or $140,000) because B meets
the basis of the property to the house and 1/3 to the the ownership and use requirements for that portion
(iii) Because no portion of the gain attributable 1/3 of the house as an office in C’s trade or business. minus 2/3 of $210,000 basis, or $140,000) because
to the relinquished business property is excluded un- In 2006, C exchanges the entire property for a resi- C meets the ownership and use requirements for that
der § 121 and B receives no boot and recognizes no dence and a separate property that C intends to use as portion of the property.
gain or loss in the exchange, B’s basis in the replace- an office in C’s trade or business. The total fair mar- (iii) The remaining gain of $80,000 (1/3 of
ment business property is equal to B’s basis in the ket value of C’s replacement properties is $360,000. $360,000 amount realized, or $120,000, minus
relinquished business property at the time of the ex- The fair market value of the replacement residence $40,000 adjusted basis, which is 1/3 of $210,000
change ($40,000). B’s basis in the replacement res- is $240,000 and the fair market value of the replace- basis, or $70,000, adjusted by $30,000 depreciation)
idential property is the fair market value of the re- ment business property is $120,000, which is equal is allocable to the business portion of the house
placement residential property at the time of the ex- to the fair market value of the business portion of the (the office). Under section 4.02(1) of this revenue
change ($240,000). relinquished property. From 2001 to 2006, C claims procedure, C applies § 121 before applying the non-
Example 3. (i) Taxpayer C buys a property for depreciation deductions of $30,000 for the business recognition rules of § 1031. Under § 1.121–1(e),
$210,000. The property consists of a house that con- use. C realizes gain of $180,000 on the exchange. C may exclude $50,000 of the gain allocable to the
stitutes a single dwelling unit under § 1.121–1(e)(2). (ii) Under § 121, C may exclude the gain of office because the office and residence are part of a
From 2001 until 2006, C uses 2/3 of the house (by $100,000 allocable to the residential portion of the single dwelling unit. C may not exclude that portion
square footage) as C’s principal residence and uses house (2/3 of $360,000 amount realized, or $240,000, of the gain ($30,000) attributable to depreciation
(iv) C’s basis in the replacement residential ment business property is $110,000, which is $10,000 Under § 1.121–1(e), C may exclude $50,000 of the
property is the fair market value of the replacement less than the fair market value of the business portion gain allocable to the business portion of the house
residential property at the time of the exchange of the relinquished property ($120,000). but may not exclude the $30,000 of gain attributable
($240,000). C’s basis in the replacement business (ii) Under § 121, C may exclude the gain of to depreciation deductions. Under section 4.02(2)
property is $90,000, which is equal to C’s basis in $100,000 allocable to the residential portion of the of this revenue procedure, C may defer the $30,000
the relinquished business property at the time of the house (2/3 of $360,000 amount realized, or $240,000, of gain under § 1031. Although C receives $10,000
exchange ($40,000), increased by the gain excluded minus 2/3 of $210,000 basis, or $140,000). of cash (boot) in the exchange, C is not required to
under § 121 attributable to the relinquished business (iii) The remaining gain of $80,000 (1/3 of recognize gain because the boot is taken into account
property ($50,000). See section 4.03 of this revenue $360,000 amount realized, or $120,000, minus for purposes of § 1031(b) only to the extent the boot
procedure. $40,000 adjusted basis) is allocable to the business exceeds the amount of excluded gain attributable to
Example 4. (i) The facts are the same as in Exam- portion of the house. Under section 4.02(1) of this the relinquished business property. See 4.02(3) of
ple 3 except that C also receives $10,000 of cash in revenue procedure, C applies § 121 to exclude gain this revenue procedure.
the exchange and the fair market value of the replace- before applying the nonrecognition rules of § 1031. These results are illustrated as follows:
(iv) C’s basis in the replacement residential value of the replacement residence is $360,000, the revenue procedure, C excludes the gain before ap-
property is the fair market value of the replacement fair market value of the replacement business prop- plying the nonrecognition rules of § 1031. Under
residential property at the time of the exchange erty is $180,000, and C realizes gain of $360,000 on § 1.121–1(e), C may exclude $30,000 of the gain
($240,000). C’s basis in the replacement business the exchange. allocable to the business portion, at which point C
property is $80,000, which is equal to C’s basis in the (ii) Under § 121, C may exclude the gain of will have excluded the maximum limitation amount
relinquished business property ($40,000), increased $220,000 allocable to the residential portion of the of $250,000. C may defer the remaining gain of
by the gain excluded under § 121 ($50,000), and house (2/3 of $540,000 amount realized, or $360,000, $110,000 ($140,000 realized gain minus the $30,000
reduced by the cash ($10,000) received. See section minus 2/3 of $210,000 basis, or $140,000). gain excluded under § 121), including the $30,000
4.03 of this revenue procedure. (iii) The remaining gain of $140,000 (1/3 of gain attributable to depreciation, under § 1031.
Example 5. (i) The facts are the same as in Ex- $540,000 amount realized, or $180,000, minus These results are illustrated as follows:
ample 3 except that the total fair market value of the $40,000 adjusted basis) is allocable to the business
replacement properties is $540,000. The fair market portion of the house. Under section 4.02(1) of this
(iv) C’s basis in the replacement residential replacement properties is $750,000. The fair market of $110,000 allocable to the residential portion that
property is the fair market value of the replacement value of the replacement residence is $500,000, the exceeds the § 121(b) exclusion limitation amount.
residential property at the time of the exchange fair market value of the replacement business prop- (iii) The remaining gain of $210,000 (1/3 of
($360,000). C’s basis in the replacement business erty is $250,000, and C realizes gain of $570,000 on $750,000 amount realized, or $250,000, minus
property is $70,000, which is equal to C’s basis in the exchange. $40,000 adjusted basis) is allocable to the business
the relinquished business property ($40,000), in- (ii) The gain allocable to the residential portion portion of the house. C may defer the $210,000
creased by the amount of the gain excluded under is $360,000 (2/3 of $750,000 amount realized, or of gain, including the $30,000 gain attributable to
§ 121 ($30,000). See section 4.03 of this revenue $500,000, minus 2/3 of $210,000 basis, or $140,000). depreciation, under § 1031.
procedure. C may exclude gain of $250,000 from gross income These results are illustrated as follows:
Example 6. (i) The facts are the same as in Ex- under § 121. C must include in income the gain
ample 3 except that the total fair market value of the
(iv) C’s basis in the replacement residential apply this revenue procedure in taxable information regarding this revenue pro-
property is the fair market value of the replacement years for which the period of limitation on cedure, contact Ms. Shepherd at (202)
residential property at the time of the exchange
refund or credit under § 6511 has not ex- 622–4960 (not a toll-free call).
($500,000). C’s basis in the replacement business
property is $40,000, which is equal to C’s basis in
pired.
the relinquished business property at the time of the
exchange. DRAFTING INFORMATION
Redesignate As Add
Example 12 Example 16
Example 15
Examples 11 and 11A Examples 14 and 14A
Examples 10 and 10A Examples 13 and 13A
Example 9 Example 12
Examples 10 and 11
Example 8 Example 9
Examples 7, 7A, 7B, and 7C Examples 8, 8A, 8B, and 8C
Examples 6 and 6A Examples 7 and 7A
Examples 5, 5A, and 5B Examples 6, 6A, and 6B
Examples 6C and 6D
Example 4 Example 5
Example 5A
18. In paragraph (d)(3), newly desig- 19. In paragraph (d)(3), newly desig- the first column, replace the language in
nated Example 6A, paragraph (i), the first nated Example 6B and Example 9 are re- the second column with the language in the
and last sentences are revised. vised. third column:
20. In paragraph (d)(3), for each of
the newly designated examples listed in
22. In paragraph (e)(1), remove the 368(a)(1) involving a transfer of assets un- (i) In general. A transfer of foreign
first sentence and add two sentences in its der section 361. If, in a transfer described stock or securities described in section
place. in section 361, a domestic merging corpo- 367(a) and the regulations thereunder as
The revisions and additions are as fol- ration transfers stock of a controlling cor- well as in section 367(b) and the regula-
lows: poration to a foreign surviving corporation tions thereunder shall be subject concur-
in a reorganization described in sections rently to sections 367(a) and (b) and the
§1.367(a)–3 Treatment of transfers of 368(a)(1)(A) and (a)(2)(E), such section regulations thereunder, except as provided
stock or securities to foreign corporations. 361 transfer is not subject to section 367(a) in paragraph (b)(2)(i)(A) or (B) of this
if the stock of the controlling corporation section. See paragraph (d)(3), Example
***** is provided to the merging corporation by 11, of this section.
(a) * * * However, if, in an exchange the controlling corporation pursuant to the (A) If a foreign corporation transfers as-
described in section 354 or 356, a U.S. plan of reorganization; a section 361 trans- sets to a domestic corporation in a transac-
person exchanges stock of a foreign cor- fer of other property, including stock of tion to which §1.367(b)–3(a) and (b) and
poration in a reorganization described in the controlling corporation not provided the indirect stock transfer rules of para-
section 368(a)(1)(E), or a U.S. person ex- by the controlling corporation pursuant to graph (d) of this section apply, then the sec-
changes stock of a domestic or foreign cor- the plan of reorganization, by the domestic tion 367(b) rules shall apply prior to the
poration for stock of a foreign corporation merging corporation to the foreign surviv- section 367(a) rules. See paragraph (d)(3),
pursuant to an asset reorganization that is ing corporation pursuant to such a reorga- Example 15, of this section. This para-
not treated as an indirect stock transfer un- nization is subject to section 367(a). For graph (b)(2)(i)(A) applies only to transac-
der paragraph (d) of this section, such sec- special basis and holding period rules in- tions occurring after the date these regula-
tion 354 or 356 exchange is not a trans- volving foreign corporations that are par- tions are published as final regulations in
fer to a foreign corporation subject to sec- ties to certain reorganizations under sec- the Federal Register.
tion 367(a). See paragraph (d)(3), Exam- tion 368(a)(1), see §1.367(b)–13.* * * (B) Except as provided in paragraph
ple 16, of this section. For purposes of this (b) * * * (b)(2)(i)(A) of this section, section 367(b)
section, an asset reorganization is defined (2) * * * and the regulations thereunder shall not ap-
as a reorganization described in section ply if the foreign corporation is not treated
Abbreviations
The following abbreviations in current use ER—Employer. PRS—Partnership.
and formerly used will appear in material ERISA—Employee Retirement Income Security Act. PTE—Prohibited Transaction Exemption.
EX—Executor. Pub. L.—Public Law.
published in the Bulletin.
F—Fiduciary. REIT—Real Estate Investment Trust.
FC—Foreign Country. Rev. Proc.—Revenue Procedure.
A—Individual.
FICA—Federal Insurance Contributions Act. Rev. Rul.—Revenue Ruling.
Acq.—Acquiescence.
B—Individual. FISC—Foreign International Sales Company. S—Subsidiary.
FPH—Foreign Personal Holding Company. S.P.R.—Statement of Procedural Rules.
BE—Beneficiary.
F.R.—Federal Register. Stat.—Statutes at Large.
BK—Bank.
B.T.A.—Board of Tax Appeals. FUTA—Federal Unemployment Tax Act. T—Target Corporation.
FX—Foreign corporation. T.C.—Tax Court.
C—Individual.
G.C.M.—Chief Counsel’s Memorandum. T.D. —Treasury Decision.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations. GE—Grantee. TFE—Transferee.
GP—General Partner. TFR—Transferor.
CI—City.
GR—Grantor. T.I.R.—Technical Information Release.
COOP—Cooperative.
Ct.D.—Court Decision. IC—Insurance Company. TP—Taxpayer.
I.R.B.—Internal Revenue Bulletin. TR—Trust.
CY—County.
LE—Lessee. TT—Trustee.
D—Decedent.
DC—Dummy Corporation. LP—Limited Partner. U.S.C.—United States Code.
LR—Lessor. X—Corporation.
DE—Donee.
M—Minor. Y—Corporation.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation. Nonacq.—Nonacquiescence. Z —Corporation.
O—Organization.
DR—Donor.
P—Parent Corporation.
E—Estate.
EE—Employee. PHC—Personal Holding Company.
PO—Possession of the U.S.
E.O.—Executive Order.
PR—Partner.
Proposed Regulations:
Revenue Procedures:
1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B. 303
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B. 1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B. 86
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B. 118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B. 128
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B. 170
1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
February 14, 2005 iii *U.S. Government Printing Office: 2005—310–365/70002 2005–7 I.R.B.