US Internal Revenue Service: irb04-38

8/14/2019 US Internal Revenue Service: irb04-38

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Bulletin No. 2004-3September 20, 200

HIGHLIGHTS

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

INCOME TAX

Rev. Rul. 200494, page 491.Dealers in securities futures contracts. This ruling holdsthat Tier 1, Tier 2, and Tier 3 NQLX LLC Market Makers thatsatisfy the market maker requirements described in the rulingperform functions similar to the functions performed by op-

tions dealers (as defined in section 1256(g)(8)(A) of the Code)and that these NQLX LLC Market Makers are therefore dealersin securities futures contracts within the meaning of section1256(g)(9)(B).

Rev. Rul. 200495, page 492.Dealers in securities futures contracts. This ruling holdsthat Category 1 and Category 2 OneChicago LLC Market Mak-ers that satisfy the Market Maker requirements described in theruling and satisfy the section 1256 Dealer Qualification quota-tion requirements described in the ruling perform functions sim-ilar to the functions performed by options dealers (as defined insection 1256(g)(8)(A) of the Code) and that these OneChicagoLLC Market Makers are therefore dealers in securities futurescontracts within the meaning of section 1256(g)(9)(B).

T.D. 9151, page 489.REG11626504, page 505.Final, temporary, and proposed regulations under section 1031of the Code replace the Standard Industrial Classification (SIC)system of codes with the North American Industry Classifica-tion System (NAICS) for purposes of determining what depre-ciable tangible personal property is like-kind to other property.For transfers of property on or before the date of publicationof final regulations, taxpayers may treat properties within the

same SIC product class or the same NAICS product class asproperty of a like class and of like-kind.

REG10688904, page 501.Proposed regulations under section 368 of the Code proviguidance regarding the requirements necessary for a transation to qualify as a mere change in identity, form, or place organization of one corporation under section 368(a)(1)(F).

REG13126404, page 506.

Proposed regulations under section 1502 of the Code provirules for taking into account items of income, gain, deductioand loss of members from transactions between members oconsolidated group. Section 1.150213(c)(7)(ii), Example 1illustrates how the matching rules of the intercompany tranaction regulations treat manufacturer incentive payments froone member of a group to another. These regulations suppment the fact pattern in this example to provide further guance regarding the proper treatment of certain of these maufacturer incentive payment transactions under the intercopany transaction regulations.

EXCISE TAX

T.D. 9149, page 494.REG16390902, page 499.Final, temporary, and proposed regulations under section 42of the Code provide guidance for collectors of communicatioexcise taxes and excise taxes on amounts paid for taxabtransportation under sections 4261 and 4271. These reglations state the time by which collectors must report refusato pay or other failures to collect these excise taxes.

(Continued on the next pag

Finding Lists begin on page ii.


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ADMINISTRATIVE

T.D. 9139, page 495.REG13178603, page 500.Final, temporary, and proposed regulations under section 7701of the Code provide that an eligible entity that makes a timelyand valid election to be classified as an S corporation will bedeemed to have elected to be classified as an association tax-

able as a corporation.

Rev. Proc. 200457, page 498.This procedure allows taxpayers additional time to file thewritten statement required by Rev. Proc. 200423, 200416I.R.B. 785, relating to changes in methods of accountingfor costs to acquire or create intangible assets. Rev. Proc.200423 modified.

Announcement 200468, page 508.This document contains corrections to proposed regulations(REG15056203, 200432 I.R.B. 175) relating to the appli-cation of section 1045 of the Code to partnerships and their

partners.

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The IRS Mission

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

applying the tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-

stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considereand Service personnel and others concerned are cautionagainst reaching the same conclusions in other cases unlethe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.1986 Code.This part includes rulings and decisions based on provisions the Internal Revenue Code of 1986.

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

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

retary (Enforcement).

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

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

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropria

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

200438 I.R.B. September 20, 200


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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 1031.Exchangeof Property Held forProductive Use orInvestment

26 CFR 1.1031(a)2: Additional rules for exchangesof personal property.

T.D. 9151

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

Additional Rules forExchanges of PersonalProperty Under Section1031(a)

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regula-

tions.

SUMMARY: This document contains final

and temporary regulations replacing the

use of the Standard Industrial Classifica-

tion (SIC)system with the North AmericanIndustry Classification System (NAICS)

for determining what properties are of a

like class for purposes of section 1031 of

the Internal Revenue Code (Code). The

text of these temporary regulations also

serves as the text of the proposed regu-

lations (REG11626504) set forth in the

notice of proposed rulemaking on this sub-

ject in this issue of the Bulletin. The fi-

nal regulations consist of technical revi-

sions to reflect the issuance of the tempo-

rary regulations.

DATES: Effective Date: These final and

temporary regulations are effective August

12, 2004.

Applicability Date: For date of applica-

bility, see 1.1031(a)2T(d).

FOR FURTHER INFORMATION

CONTACT: J. Peter Baumgarten, (202)

6224920 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to

26 CFR Part 1 under section 1031(a) relat-ing to the exchange of items of personal

property that are within the same product

class. Section 1031(a)(1) generally pro-

vides that no gain or loss shall be recog-

nized on the exchange of property held for

productive use in a trade or business or

for investment if the property is exchanged

solely for property of like kind to be held

either for productive use in a trade or busi-

ness or for investment. Thus, for a trans-

action to qualify as an exchange under sec-

tion 1031, the transaction must constitute

an exchange, the property relinquished andthe property received in the exchange must

be held for use in a trade or business or for

investment, and the exchanged properties

must be of like kind.

Section 1.1031(a)2(a) provides that

personal properties of a like class are to

be considered of like kind for purposes of

section 1031. Under 1.1031(a)2(b), de-

preciable tangible personal property is of a

like class to other depreciable tangible per-

sonal property if the exchanged properties

are either within the same general asset

class or within the sameproduct class. Thegeneral asset classes are derived from Rev.

Proc. 8756, 19872 C.B. 674, (dealing

with depreciation of personal property).

Section 1.1031(a)2(b)(2) adopts certain

of those general asset classes to determine

what property is of like kind for purposes

of exchanging depreciable tangible per-

sonal property under section 1031, and

identifies the types of personal property

included in each general asset class listed.

Section 1.1031(a)2(b)(3) provides,

in part, that property within a product

class consists of depreciable tangible per-

sonal property that is listed in a 4-digit

product class (or code) within Division

D (pertaining to the manufacturing sec-

tor of the economy) of Executive Office

of the President, Office of Management

and Budget, Standard Industrial Clas-

sification Manual (1987) (SIC Manual).

Section 1.1031(a)2(b)(4) states that the

SIC Manual generally is modified every

5 years and that the product classes fo

section 1031 purposes will follow th

modifications of product classes in th

SIC Manual.

Effective January 1, 1997, the Depart

ment of Commerce discontinued the SICsystem set forth in the SIC Manual an

adopted NAICS as set forth in Executiv

Office of the President, Office of Manage

ment and Budget, North American Indus

try Classification System, United States

1997 (NAICS Manual). The NAICS Man

ual was updated in 2002. Copies of th

NAICS Manual may be obtained from

the National Technical Information Ser

vice of the Department of Commerce and

may be accessed, with a more complet

listing of manufactured products and man

ufacturing industries, on the internet a

http://www.census.gov/naics.

Explanation of Provisions

Asa result of the replacement of the SIC

system with NAICS, these temporary reg

ulations discontinue the use of SIC code

and adopt Sectors 31 through 33 of NAIC

(pertaining to manufacturing) as the sys

tem for defining the product classes fo

purposes of like-kind exchanges of depre

ciable tangible personal property. Withi

NAICS, product classes are designated using 6-digit codes rather than the 4-digi

codes assigned to product classes under th

SIC system. However, properties withi

the same product class under the 4-digi

SIC system generally will be of the sam

product class under the 6-digit NAICS. Fo

example, under theSIC codes, dairy equip

ment and haying machinery are within th

same product class (SIC code 3523). Un

der NAICS, milking machines and hayin

machines are also within the same produc

class (NAICS code 333111).

The temporary regulations gen

erally incorporate the provisions o

1.1031(a)2(b)(3) relating to the us

of product classes but substitute NAIC

codes for SIC codes. For example

1.1031(a)2(b)(3) provides that, un

der the 4-digit SIC system, any 4-dig

product class ending in 9 (a miscellaneou

category) is not property within a produc

class. Similarly, the temporary regulation

200438 I.R.B. 489 September 20, 200


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provide that any NAICS 6-digit product

class ending in 9 is not property within

a product class. Accordingly, such prop-

erty, and property that is not listed in a

6-digit product class, cannot be of a like

class to other property based on the 6-digit

NAICS Manual classification. Taxpayers,

however, may still demonstrate that these

properties are of a like kind.

Comments are specifically requested

regarding the continued utility of SIC

codes and any potential problems in adopt-

ing the 6-digit NAICS codes in lieu of the

4-digit SIC codes, including specific ex-

amples of how a product class is narrowed

if the 6-digit NAICS code is used and

whether this would be a disadvantage to

any class of taxpayers.

The temporary regulations incorporate

the provisions of 1.1031(a)2(b)(4) that

permit taxpayers, in structuring like-kind

exchanges, to rely on modifications tothe product classes resulting from revi-

sions to the NAICS Manual. The tem-

porary regulations omit the provisions of

1.1031(a)2(b)(4) that permit taxpayers

to rely on modifications to the general

asset classes in Rev. Proc. 8756 for pur-

poses of structuring like-kind exchanges.

Under section 6253 of the Technical and

Miscellaneous Revenue Act of 1988 (Pub-

lic Law 100647, 102 Stat. 3342), the

Commissioner may not modify the asset

classes in Rev. Proc. 8756 for depreci-

ation purposes. However, the temporaryregulations provide that the Commissioner

may, through published guidance of gen-

eral applicability, supplement, modify,

clarify and update the rules for the clas-

sification of properties. Therefore, the

Commissioner may determine through

published guidance not to follow a general

asset class or product class for purposes of

identifying property of like class or may

determine that other properties not listed

within the same or in any product class or

general asset class nevertheless are of a

like class.

Effective Date

In general, the temporary regulations

apply to transfers of property made by tax-

payers on or after August 12, 2004. How-

ever, taxpayers may apply the temporary

regulations to transfers of property made

by taxpayers on or after January 1, 1997, in

taxable years for which the period of limi-

tation has not expired. The temporary reg-

ulations include a transition rule permit-

ting taxpayers to treat properties within the

same product classes under a 4-digit SIC

code as properties of like class for transfers

of property made by taxpayers on or before

the date these temporary regulations are

published as final regulations in the Fed-

eral Register. Comments are specifically

requested on whether a longer transition

period should be provided before the use

of the SIC codes is discontinued.

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

that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) does

not apply to these regulations. Please refer

to the cross-referenced notice of proposed

rulemaking published elsewhere in this is-

sue of the Bulletin for applicability of the

Regulatory Flexibility Act (5 U.S.C. Chap-

ter 6). Pursuant to section 7805(f) of the

Code, these temporary regulations will be

submitted to the Chief Counsel for Advo-

cacy of the Small Business Administration

for comment on their impact on small busi-

ness.

Drafting Information

The principal author of these tempo-

rary regulations is J. Peter Baumgarten of

the Office of the Associate Chief Counsel

(Income Tax and Accounting). However,

other personnel from the IRS and Treasury

participated in their development.

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. In 1.1031(a)2, paragraphs

(b)(3) through (b)(6), paragraph (b)(7) Ex-

ample 3 and Example 4, are revised and a

sentence is added at the end of paragraph

(d) to read as follows:

1.1031(a)2 Additional rules for

exchanges of personal property.

* * * * *

(b)(3) through (b)(6) [Reserved]. For

further guidance, see 1.1031(a)2T(b)(3)

through (b)(6).

(b)(7) * * *

Example 3. [Reserved]. For further

guidance, see 1.1031(a)2T(b)(2),Exam-ple 3.

Example 4. [Reserved]. For further

guidance, see 1.1031(a)2T(b)(2),Exam-

ple 4.

* * * * *

(d) * * * For transfers of property made

by taxpayers on or after January 1, 1997,

see 1.1031(a)2T(d).

Par. 3. Section 1.1031(a)2T is added

to read as follows:

1.1031(a)2T Additional rules

for exchanges of personal property

(temporary).

(a) through (b)(2) [Reserved]. For

further guidance, see 1.1031(a)2(a)

through (b)(2).

(3) Product classes. Except as provided

in paragraphs (b)(4) and (b)(5) of this sec-

tion, or as provided by the Commissioner

in published guidance of general applica-

bility, property within a product class con-

sists of depreciable tangible personal prop-

erty that is described in a 6-digit prod-

uct class within Sectors 31, 32, and 33

(pertaining to manufacturing industries) of

the North American Industry Classifica-

tion System (NAICS), set forth in Exec-

utive Office of the President, Office of

Management and Budget, North Ameri-

can Industry Classification System, United

States, 2002 (NAICS Manual), as peri-

odically updated. Copies of the NAICS

Manual may be obtained from the National

Technical Information Service, an agency

of the U.S. Department of Commerce, and

may be accessed on the internet. Sectors31 through 33 of the NAICS Manual con-

tain listings of specialized industries for

the manufacture of described products and

equipment. For this purpose, any 6-digit

NAICS product class with a last digit of 9

(a miscellaneous category) is not a prod-

uct class for purposes of this section. If a

property is listed in more than one prod-

uct class, the property is treated as listed in

any one of those product classes. A prop-

September 20, 2004 490 200438 I.R.B.


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ertys 6-digit product class is referred to as

the propertys NAICS code.

(4) Modifications of NAICS product

classes. The product classes of the NAICS

Manual may be updated or otherwise mod-

ified from time to time as the manual is

updated, effective on or after the date of

the modification. The NAICS Manual

generally is modified every five years, in

years ending in a 2 or 7 (such as 2002,

2007, and 2012). The applicability date of

the modified NAICS Manual is announced

in the Federal Register and generally is

January 1 of the year the NAICS Manual

is modified. Taxpayers may rely on these

modifications as they become effective

in structuring exchanges under this sec-

tion. Taxpayers may rely on the previous

NAICS Manual for transfers of property

made by a taxpayer during the one-year

period following the effective date of the

modification. For transfers of propertymade by a taxpayer on or after January 1,

1997, and on or before January 1, 2003,

the NAICS Manual of 1997 may be used

for determining product classes of the ex-

changed property.

(5) Administrative procedures for re-

vising general asset classes and product

classes. The Commissioner may, through

published guidance of general applicabil-

ity, supplement, modify, clarify, or update

the guidance relating to the classification

of properties provided in this paragraph

(b). (See 601.601(d)(2) of this chapter.)For example, the Commissioner may de-

termine not to follow (in whole or in part)

a general asset class for purposes of iden-

tifying property of like class, may deter-

mine not to follow (in whole or in part)

any modification of product classes pub-

lished in the NAICS Manual, or may deter-

mine that other properties not listed within

the same or in any product class or gen-

eral asset class nevertheless are of a like

class. The Commissioner also may de-

termine that two items of property that

are listed in separate product classes or inproduct classes with a last digit of 9 are

of a like class, or that an item of property

that has a NAICS code is of a like class

to an item of property that does not have a

NAICS code.

(6) No inference outside of section

1031. The rules provided in this section

concerning the use of general asset classes

or product classes are limited to exchanges

under section 1031. No inference is in-

tended with respect to the classification

of property for other purposes, such as

depreciation.

(7) Examples. The provisions of this

paragraph (b) are illustrated by the follow-

ing examples:Example 1 andExample 2 [Reserved]. For further

guidance, see 1.1031(a)2(b)(7), Example 1 andEx-

ample 2.Example 3. Taxpayer E transfers a grader to F in

exchange fora scraper. Neither property is withinany

of the general asset classes. However, both proper-

ties are within the same product class (NAICS code

333120). The grader and scraper are of a like class

and deemed to be of a like kind for purposes of sec-

tion 1031.

Example 4. Taxpayer G transfers a personal

computer (asset class 00.12), an airplane (asset class

00.21) and a sanding machine (NAICS code 333210),

to H in exchange for a printer (asset class 00.12), a

heavy general purpose truck (asset class 00.242) and

a lathe (NAICS code 333210). The personal com-

puter and the printer are of a like class because they

are within the same general asset class; the sandingmachine and the lathe are of a like class because they

are within the same product class (although neither

property is within any of the general asset classes).

The airplane and the heavy general purpose truck are

neither within the same general asset class nor within

the same product class, and are not of a like kind.

(8) Transition rule. Properties within

the same product classes based on the

4-digit codes contained in Division D of

the Executive Office of the President, Of-

fice of Management and Budget, Standard

Industrial Classification Manual (1987),

will be treated as property of a like class

for transfers of property made by taxpay-ers on or before the date these regulations

are published as final regulations in the

Federal Register.

(c) [Reserved]. For further guidance,

see 1.1031(a)2(c).

(d) Effective dates. This section applies

to transfers of property made by taxpay-

ers on or after August 12, 2004. How-

ever, taxpayers may apply this section to

transfers of property made by taxpayers on

or after January 1, 1997, in taxable years

for which the period of limitation for fil-

ing a claim for refund or credit under sec-tion 6511 has not expired. For all other

exchanges occurring prior to August 12,

2004, see 1.1031(a)2(d).

Linda M. Kroening,

Acting Deputy Commissioner for

Services and Enforcement.

Approved July 28, 2004.

Gregory F. Jenner

Acting Assistant Secretary of the Treasury

(Filed by the Office of the Federal Register on August 12004, 8:45 a.m., and published in the issue of the FederaRegister for August 13, 2004, 69 F.R. 50067)

Section 1256.Section1256 Contracts Marked

to Market

Dealers in securities futures con

tracts. This ruling holds that Tier 1, Tie

2, and Tier 3 NQLX LLC Market Maker

that satisfy the market maker require

ments described in the ruling perform

functions similar to the functions per

formed by options dealers (as defined in

section 1256(g)(8)(A) of the Code) an

that these NQLX LLC Market Maker

are therefore dealers in securities future

contracts within the meaning of sectio

1256(g)(9)(B).

Rev. Rul. 200494

ISSUE

If a Tier 1, Tier 2, or Tier 3 NQLX LLC

(NQLX) Market Maker satisfies the re

quirements described below, is it a deale

in securities futures contracts (SFCs

within the meaning of 1256(g)(9)(B) o

the Internal Revenue Code?

FACTS

NQLX has been designated by th

Commodity Futures Trading Commissio

(CFTC) as a contract market that is per

mitted to list SFCs. As such, NQLX i

a qualified board or exchange withi

the meaning of 1256(g)(7). NQLX ha

a market maker program under whic

NQLX members may qualify as NQLX

Market Makers. NQLX Market Maker

are obligated to provide liquidity for thei

specifically assigned SFC products tha

trade on NQLX. For this purpose, an SFCproduct consists of contracts that ma

have varying maturities but that all relat

to a particular underlying security or

particular narrow-based index of securi

ties. NQLX Market Makers fall into on

of three classes: Tier 1, Tier 2, and Tie

3. Tier 1 Market Makers are assigned a

least 50, if not all, SFC products listed o

NQLX. Tier 2 Market Makers are assigne

200438 I.R.B. 491 September 20, 200


7/26

25 to 49 SFC products listed on NQLX.

Tier 3 Market Makers are assigned fewer

than 25 SFC products listed on NQLX.

In each case, the SFC products assigned

to a Market Maker in the aggregate must

account for at least 20% of the total vol-

ume in all SFCs traded on NQLX for the

preceding calendar quarter.

An NQLX Market Maker must meet all

of the following requirements:

(1) Be a member of NQLX;

(2) Be registered as a floor trader or

floor broker with the CFTC or as a dealer

with the Securities Exchange Commission

(SEC);

(3) Maintain records sufficient to prove

compliance with the NQLX Market Maker

requirements, including, but not limited to,

documents concerning personnel effecting

relevant orders, relevant trade and cash

blotters, relevant stock records, and docu-

ments concerning applicable internal sys-tem capacity and performance; and

(4) Hold itself out as willing to buy and

sell SFCs for its own account on a regular

or continuous basis.

For an NQLX Market Maker to fulfill

the regular or continuous requirement in

paragraph (4) above, it must satisfy the

following criteria for each of its assigned

SFC products:

(i) Provide continuous two-sided quo-

tations for the first two delivery months of

each assigned SFC product throughout the

trading day, except during unusual marketconditions as determined by NQLX (such

as a fast market in either the SFC product

or the security underlying the SFC prod-

uct) at which times the Market Maker must

use its best efforts to quote continuously

and competitively;

(ii) Quote for the first two delivery

months, with (A) a Maximum Bid/Ask

Spread of no more than the greater of

$0.10 or 150% of the bid/ask spread in the

primary market for the security underly-

ing the SFC product and (B) a Minimum

Number of Contacts of no less than thelesser of 10 contracts or the corresponding

contract size equivalent of the best bid and

best offer for the security underlying the

SFC product; and

(iii) Respond to requests for quota-

tion in each assigned SFC product within

5 seconds for all delivery months other

than the first two delivery months with a

two-sided quotation that has (A) a Maxi-

mum Bid/Ask Spread of no more than the

greater of $0.20 or 150% of the bid/ask

spread in the primary market for the secu-

rity underlying the SFC product and (B)

a Minimum Number of Contracts of no

less than the lesser of 5 contracts or the

corresponding contract size equivalent of

the best bid and best offer for the security

underlying the SFC product.

Any NQLX Market Maker that fails

to comply with the NQLX rules, CFTC

rules, or SEC rules, as applicable, is sub-

ject to disciplinary action in accordance

with NQLX rules.

LAW

Section 1256(g)(8)(A) defines the term

options dealer to mean any person regis-

tered with an appropriate national securi-

ties exchange as a market maker or special-

ist in listed options. Section 1256(g)(9)(B)

provides that a person shall be treated asa dealer in SFCs or options on such con-

tracts if the Secretary determines that such

person performs, with respect to such con-

tracts or options, as the case may be, func-

tions similar to the functions performed by

an options dealer. Section 1256(g)(9)(B)

further provides that such determination

shall be made to the extent appropriate to

carry out the purposes of that section.

The legislative history for 1256(g)(9)

states the following with respect to the de-

termination process:

The determination of who is a dealerin securities futures contracts is to be

made in a manner that is appropriate to

carry out the purposes of the provision,

which generally is to provide compa-

rable tax treatment between dealers in

securities futures contracts, on the one

hand, and dealers in equity options,

on the other. Although traders in se-

curities futures contracts (and options

on such contracts) may not have the

same market-making obligations as

market makers or specialists in equity

options, many traders are expected toperform analogous functions to such

market makers or specialists by pro-

viding market liquidity for securities

futures contracts (and options) even

in the absence of a legal obligation to

do so. Accordingly, the absence of

market-making obligations is not in-

consistent with a determination that a

class of traders are dealers in securities

futures contracts (and options), if the

relevant factors, including providing

market liquidity for such contracts (and

options), indicate that the market func-

tions of the traders is comparable to

that of equity options dealers.

H.R. Conf. Rep. No. 1061033, at 1036

(2000).

HOLDING

It is determined that Tier 1, Tier 2,

and Tier 3 NQLX Market Makers that

satisfy the requirements described above

perform functions similar to the func-

tions performed by options dealers (as

defined in 1256(g)(8)(A)) and that

these NQLX Market Makers are there-

fore dealers in SFCs within the meaning

of 1256(g)(9)(B). This determination

will cease to apply in the event of mate-

rial changes in the NQLX Market Maker

program affecting the Tier 1, Tier 2, orTier 3 Market Makers described above.

See 601.601(d)(2)(v) of the Income Tax

Regulations.

EFFECTIVE DATE

The effective date of this ruling is the

date of publication in the Internal Revenue

Bulletin. Because this ruling is prospec-

tive only, the holding applies to SFCs that

are entered into by a dealer in SFCs on or

after the effective date of this ruling.

DRAFTING INFORMATION

The principal author of this revenue rul-

ing is K. Scott Brown of the Office of As-

sociate Chief Counsel (Financial Institu-

tions & Products). For further informa-

tion regarding this revenue ruling, contact

K. Scott Brown at (202) 6223920 (not a

toll-free call).

Dealers in securities futures con-

tracts. This ruling holds that Category 1and Category 2 OneChicago LLC Mar-

ket Makers that satisfy the Market Maker

requirements described in the ruling and

satisfy the section 1256 Dealer Qualifi-

cation quotation requirements described

in the ruling perform functions similar to

the functions performed by options deal-

ers (as defined in section 1256(g)(8)(A)

of the Code) and that these OneChicago

LLC Market Makers are therefore dealers

September 20, 2004 492 200438 I.R.B.


8/26

in securities futures contracts within the

meaning of section 1256(g)(9)(B).

Rev. Rul. 200495

ISSUE

If a Category 1 or Category 2

OneChicago LLC (OneChicago) Mar-

ket Maker satisfies the Market Maker

requirements described below and sat-

isfies the Section 1256 Dealer Qualifi-

cation quotation requirements described

below, is it a dealer in securities futures

contracts (SFCs) within the meaning of

1256(g)(9)(B) of the Internal Revenue

Code?

FACTS

OneChicago has been designated by the

Commodity Futures Trading Commission(CFTC) as a contract market that is per-

mitted to list SFCs. As such, OneChicago

is a qualified board or exchange within

the meaning of 1256(g)(7). OneChicago

has a market maker program under which

OneChicago members may qualify as

OneChicago Market Makers eligible for

the market maker exclusion provided in

OneChicagos customer margin rules.

OneChicago Market Makers are obli-

gated to provide liquidity for their specifi-

cally assigned SFC products that trade on

OneChicago. For this purpose, an SFCproduct consists of contracts that may

have varying maturities but that all relate

to a particular underlying security or a par-

ticular narrow-based index of securities.

A Category 1 or Category 2

OneChicago Market Maker must meet

all of the following requirements:

(1) Be a member of OneChicago;

(2) Be registered as a floor trader or

floor broker with the CFTC or as a dealer

with the Securities and Exchange Com-

mission (SEC);

(3) Maintain records sufficient to provecompliance with OneChicago Market

Maker requirements and the related regu-

lations and rules of the CFTC or SEC, as

applicable, including, without limitation,

trading account statements and other fi-

nancial records sufficient to detail activity;

and

(4) Hold itself out as willing to buy and

sell SFCs for its own account on a regular

or continuous basis.

For a OneChicago Market Maker to ful-

fill the regular or continuous requirement

in paragraph (4) above, it must satisfy the

following criteria, as applicable, for each

of its assigned SFC products:

Category 1 Market Maker The mem-

ber provides continuous two-sided quo-

tations throughout the trading day for

all delivery months of all assigned SFC

products (where such assigned SFC prod-

ucts represent in the aggregate at least a

meaningful proportion of the total trading

volume on OneChicago), except during

unusual market conditions as determined

by OneChicago (such as a fast market in

either an SFC product or a security un-

derlying an SFC product), at which time

the member must use its best efforts to

quote continuously and competitively;

and, when the member provides quota-

tions, it quotes for a minimum of one SFC

with a Maximum Bid/Ask Spread of nomore than the greater of $0.20 or 150%

of the bid/ask spread in the primary mar-

ket for the security underlying each SFC

product; or

Category 2 Market Maker The mem-

ber responds to at least 75% of the re-

quests for quotation (RFQs) for all deliv-

ery months of all assigned SFC products

(where such assigned SFC products rep-

resent in the aggregate at least a mean-

ingful proportion of the total trading vol-

ume on OneChicago), except during un-

usual market conditions as determined byOneChicago (such as a fast market in ei-

ther an SFC product or a security under-

lying an SFC product), at which times

the member must use its best efforts to

quote competitively; and, when the mem-

ber responds to RFQs, it quotes within five

seconds for a minimum of one SFC with

a Maximum Bid/Ask Spread of no more

than the greater of $0.20 or 150% of the

bid/ask spread in the primary market for

the security underlying each SFC product.

For purposes of the preceding require-

ments for Category 1 and Category 2 Mar-ket Makers, a meaningful proportion of

the total trading volume on OneChicago

means a minimum of 20% of the trading

volume of SFCs traded on OneChicago

during the calendar quarter.

Any OneChicago Market Maker that

fails to comply with the OneChicago rules,

CFTC rules, or SEC rules, as applicable,

is subject to disciplinary action in accor-

dance with OneChicago rules.

Section 1256 Dealer Qualification

Category 1 and Category 2 Market Mak

ers seeking to qualify as a 1256(g)(9)(B

dealer under OneChicagos market make

program must agree to meet minimum

quotation size requirements for all of thei

assigned SFC products that are speci

fied for purposes of the market make

exclusion provided in OneChicagos mar

gin rules. Category 1 and Category

Market Makers must provide continuou

two-sided quotations or respond to re

quests for quotations in accordance with

the applicable obligations set forth abov

by quoting:

(a) ten contracts for each product no

covered by (b) or (c);

(b) five contracts for each product spec

ified by the member to the extent such quo

tations are provided for delivery month

other than the next two delivery month

then trading; and(c) one contract for any single stock fu

tures contract where the average marke

price for the underlying stock was $100 o

higher for the preceding calendar month

or for any narrow-based stock index fu

tures contract, as defined by 1a(25) of th

Commodity Exchange Act.

LAW

Section 1256(g)(8)(A) defines the term

options dealer to mean any person regis

tered with an appropriate national securities exchange as a marketmaker or special

ist in listed options. Section 1256(g)(9)(B

provides that a person shall be treated a

a dealer in SFCs or options on such con

tracts if the Secretary determines that suc

person performs, with respect to such con

tracts or options, as the case may be, func

tions similar to the functions performed by

an options dealer. Section 1256(g)(9)(B

further provides that such determinatio

shall be made to the extent appropriate to

carry out the purposes of that section.

The legislative history for 1256(g)(9states the following with respect to the de

termination process:

The determination of who is a deale

in securities futures contracts is to b

made in a manner that is appropriate t

carry out the purposes of the provision

which generally is to provide compa

rable tax treatment between dealers i

securities futures contracts, on the on

hand, and dealers in equity options

200438 I.R.B. 493 September 20, 200


9/26

on the other. Although traders in se-

curities futures contracts (and options

on such contracts) may not have the

same market-making obligations as

market makers or specialists in equity

options, many traders are expected to

perform analogous functions to such

market makers or specialists by pro-

viding market liquidity for securities

futures contracts (and options) even

in the absence of a legal obligation to

do so. Accordingly, the absence of

market-making obligations is not in-

consistent with a determination that a

class of traders are dealers in securities

futures contracts (and options), if the

relevant factors, including providing

market liquidity for such contracts (and

options), indicate that the market func-

tions of the traders is comparable to

that of equity options dealers.

H.R. Conf. Rep. No. 1061033, at 1036(2000).

HOLDING

It is determined that Category 1 and

Category 2 OneChicago Market Makers

that satisfy the Market Maker require-

ments described above and satisfy the

Section 1256 Dealer Qualification quo-

tation requirements described above per-

form functions similar to the functions

performed by options dealers (as de-

fined in 1256(g)(8)(A)) and that theseOneChicago Market Makers are therefore

dealers in SFCs within the meaning of

1256(g)(9)(B). This determination will

cease to apply in the event of material

changes in the OneChicago Market Maker

program affecting the Category 1 or Cat-

egory 2 Market Makers described above.

See 601.601(d)(2)(v) of the Income Tax

Regulations.

EFFECTIVE DATE

The effective date of this ruling is the

date of publication in the Internal Revenue

Bulletin. Because this ruling is prospec-

tive only, the holding applies to SFCs that

are entered into by a dealer in SFCs on or

after the effective date of this ruling.

DRAFTING INFORMATION

The principal author of this revenue rul-

ing is K. Scott Brown of the Office of As-

sociate Chief Counsel (Financial Institu-

tions & Products). For further informa-

tion regarding this revenue ruling, contact

K. Scott Brown at (202) 6223920 (not a

toll-free call).

Section 4291.Cases Where Persons ReceivingPayment Must Collect Tax

26 CFR 49.42911: Persons receiving payment must

collect tax.

T.D. 9149

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 40 and 49

Collected Excise Taxes; Duties

of CollectorAGENCY: Internal Revenue Service

(IRS), Treasury.


tions.

SUMMARY: This document contains fi-

nal and temporary regulations relating to

the obligations of persons that receive

payments for air transportation or com-

munications services subject to excise tax

when persons liable for tax refuse to pay

the tax. These temporary regulations af-fect persons that receive payments subject

to tax and persons liable for those taxes.

The text of the temporary regulations also

serves as the text of the proposed reg-

ulations (REG16390902) set forth in

the notice of proposed rulemaking on this

subject in this issue of the Bulletin.

DATES: Effective Date: These regulations

are effective October 1, 2004.

Applicability Date: For dates of ap-

plicability, see 40.6302(c)3T(b)(2)(ii)

and 49.42911T.


CONTACT: Taylor Cortright (202)



Background

This document contains amendments to

the Excise Tax Procedural Regulations (26

CFR part 40) and the Facilities and Ser-

vices Excise Tax Regulations (26 CFR part

49). Section 4251 of the Internal Revenue

Code (Code) imposes an excise tax on

amounts paid for certain communications

services. Sections 4261(a) and (b) impose

excise taxes on amounts paid for taxable

transportation of persons by air. Section

4261(e)(3) provides that any amount paid

to an air carrier or related party for the right

to provide mileage awards for (or other re-

ductions in the cost of) any transportation

of persons by air is treated for purposes of

section 4261(a) as an amount paid for tax-

able transportation and is therefore subject

to tax. Section 4261(c) imposes an excise

tax on any amount paid for the air trans-

portation of persons that begins or ends in

the United States. Section 4271 imposes

an excise tax on amounts paid for taxable

transportation of property by air. These

taxes collectively are referred to as col-lected excise taxes.

For each of the collected excise taxes,

the person liable for the tax is the person

making the payment on which tax is im-

posed (the taxpayer). Under section 4291,

the person receiving the payment on which

tax is imposed (the collector) generally

must collect the tax from the person mak-

ing the payment and pay it over to the gov-

ernment.

If the taxpayer refuses to pay the tax the

collector is required, under 49.42911,

to report this refusal to the IRS. The IRSwill then assertthe tax against thetaxpayer.

Current regulations do not specify the time

within which the collector must report this

refusal to the IRS.

Collectors are responsible for filing

returns with respect to the collected ex-

cise taxes and for making deposits of

tax as required by section 6302. Sec-

tion 40.6302(c)3 provides an alternative

method for computing the amount of de-

posits of collected excise taxes. Under

the alternative method, collectors may

compute the amount of tax to be depositedon the basis of amounts considered as

collected instead of on the basis of actual

collections of tax. A person may use the

alternative method with respect to a tax

only if the person separately accounts for

the tax. The separate account must reflect

for each month all items of tax that are

included in amounts billed or tickets sold

to customers during the month and items

of adjustment (including bad debts and

September 20, 2004 494 200438 I.R.B.


10/26

errors) relating to the tax for prior months

within the period of limitations for cred-

its or refunds. When a collector using

the alternative method determines that a

taxpayer has refused to pay the tax, the

collector adjusts the separate account to

reflect that the tax was not collected. Cur-

rent regulations do not specify the time for

adjusting the separate account to reflect

that refusal.

The temporary regulations provide that

the collector must report the refusal to pay

the tax to the IRS by the due date of the

return on which the tax would have been

reported but for the refusal to pay. In

addition, the temporary regulations pro-

vide that, for a person using the alterna-

tive method, the separate account cannot

be adjusted to reflect a refusal to pay tax

for the month unless such refusal has been

reported.

Special Analyses




12866. Therefore, a regulatory assessment

is not required. It also has been deter-

mined that section 553(b) of the Admin-

istrative Procedure Act (5 U.S.C. chapter

5) does not apply to these regulations. For

applicability of the the Regulatory Flexi-

bility Act, please refer to the cross-refer-

enced notice of proposed rulemaking pub-

lished elsewhere in this issue of the Bul-

letin. Pursuant to section 7805(f) of the

Code, these temporary regulations will be

submitted to the Chief Counsel for Advo-

cacy of the Small Business Administration

for comment on their impact on small busi-

ness.


The principal author of these regula-

tions is Patrick S. Kirwan, Office of As-

sociate Chief Counsel (Passthroughs and

Special Industries). However, other per-sonnel from the IRS and Treasury Depart-

ment participated in their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 40 and 49

are amended as follows:

PART 40EXCISE TAX

PROCEDURAL REGULATIONS


part 40 is amended by adding an entry in

numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Section 40.6302(c)3T also issued un-

der 26 U.S.C. 6302 * * *

Par. 2. Paragraph (b)(2)(ii) of40.6302(c)3 is amended by:

a. Removing the language and at the

end of paragraph (b)(2)(ii)(A).

b. Redesignating paragraph (b)(2)(ii)

(B) as paragraph (b)(2)(ii)(C) and re-

moving the language Items and adding

Other items in its place.

c. Adding new paragraph (b)(2)(ii)(B)

to read as follows:

40.6302(c)3 Special rules for use of

Government depositaries under chapter

33.

* * * * *

(b) * * *

(2) * * *

(ii) * * *

(B) [Reserved]. For further guidance,

see 40.6302(c)3T(b)(2)(ii)(B).

* * * * *

Par. 3. Section 40.6302(c)3T is added

to read as follows:

40.6302(c)3T Special rules for use of


33 (temporary).

(a) through (b)(2)(ii)(A) [Re-

served]. For further guidance, see

40.6302(c)3(a) through (b)(2)(ii)(A).

(b)(2)(ii)(B) Applicable October

1, 2004, the account required under

40.6302(c)3(b)(2)(i)(A) may not re-

flect an item of adjustment for any month

during a quarter if the adjustment results

from a refusal to pay or inability to collect

the tax and the uncollected tax has not

been reported under 49.42911 of thischapter on or before the due date of the

return for that quarter; and

(b)(2)(ii)(C) through (g) [Re-

served]. For further guidance, see

40.6302(c)3(b)(2)(ii)(C) through (g).

PART 49FACILITIES AND

SERVICES EXCISE TAXES

Par. 4. The authority citation for par

49 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 5. Section 49.42911 is amende

by adding a sentence after the third sen

tence to read as follows:

49.42911 Persons receiving payment

must collect tax.

* * * For further guidance, se

49.42911T. * * *

Par. 6. Section 49.42911T is added t

read as follows:

49.42911T Persons receiving payment

must collect tax (temporary).

Applicable October 1, 2004, a person

required to report uncollected tax unde

49.42911 must make the report on o

before the due date of the return on whic

the refusal to pay or inability to collec

such tax is reflected (or could be reflected

but for the limitation in 40.6302(c)3T)

Mark E. Matthews

Deputy Commissioner fo

Services and Enforcemen

Approved June 21, 2004.

Gregory F. Jenner

Acting Assistant Secretary of the Treasury

(Filed by the Office of the Federal Register on August 92004, 8:45 a.m., and published in the issue of the FederaRegister for August 10, 2004, 69 F.R. 48393)

Section 7701.Definitions

26 CFR 301.77013: Classification of certain bus

ness entities.

T.D. 9139

DEPARTMENT OF

THE TREASURYInternal Revenue Service26 CFR Part 301

200438 I.R.B. 495 September 20, 200


11/26

Deemed Election To Be anAssociation Taxable as aCorporation for a QualifiedElecting S Corporation


(IRS), Treasury.


tions.

SUMMARY: This document contains a

temporary regulation that deems certain

eligible entities that file timely S cor-

poration elections to have elected to be

classified as associations taxable as cor-

porations. This regulation affects certain

eligible entities filing timely elections

to be S corporations on or after July 20,

2004. The text of this temporary regula-

tion also serves as the text of the proposed

regulations (REG13178603) set forth in

a notice of proposed rulemaking on this

subject published elsewhere in this issue

of the Bulletin.

DATES: Effective Date: These regulations

are effective July 20, 2004.


CONTACT: Rebekah A. Myers, (202)



Background

Section 301.77013(a) provides that

an eligible entity with two or more own-

ers may elect to be classified as an as-

sociation (and thus a corporation under

301.77012(b)(2)) or a partnership, and

an eligible entity with a single owner may

elect to be classified as an association or to

be disregarded as an entity separate from

its owner. Section 301.77013(b) provides

that, unless the entity elects otherwise, a

domestic eligible entity is a partnership if

it has two or more owners or is disregardedas an entity separate from its owner if it

has a single owner. Section 301.77013(c)

describes the time and place for filing

an entity classification election. Section

301.77013(c)(1)(i) provides that an eli-

gible entity may elect to be classified as

other than its default classification or to

change its classification by filing Form

8832, Entity Classification Election,

with the service center designated on the

form.

A taxpayer whose default classification

is a partnership or a disregarded entity

may seek to be classified as an S corpo-

ration. In these cases, the taxpayer must

elect to be classified as an association un-

der 301.77013(c)(1)(i) by filing Form

8832 and must elect to be an S corpora-

tion under section 1362(a) by filing Form

2553, Election by a Small Business Cor-

poration. In some cases, an entity may

timely file the Form 2553 but fail to file

the Form 8832. The entity must then sub-

mit a letter ruling request for an extension

of time under 301.9100 to file a late en-

tity classification election. The temporary

regulation provides relief for these entities.

In other cases, the Form 2553 and the Form

8832 are filed late, and the entity must sub-

mit a rulingrequest under 301.9100 to file

a late entity classification election and un-der section 1362(b)(5) to file a late S cor-

poration election. Rev. Proc. 200448,

200432 I.R.B. 172, provides relief for

these entities.

Explanation of Provisions

Requiring eligible entities to file two

elections in order to be classified as S cor-

porations creates a burden on those enti-

ties and on the Internal Revenue Service

(IRS). The temporary regulation simplifies

these paperwork requirements by eliminat-

ing, in certain cases, the requirement that

the entity elect to be classified as an associ-

ation. Instead, an eligible entity that makes

a timely and valid election to be classified

as an S corporation will be deemed to have

elected to be classified as an association

taxable as a corporation.

The temporary regulation amends

301.77013(c)(1)(v) to provide that,

if an eligible entity makes a timely and

valid election to be an S corporation under

section 1362(a)(1), it is treated as having

made an election to be classified as an as-sociation under 301.77013. However, if

the eligible entitys election is not timely

and valid, the default classification rules

provided in 301.77013(b) will apply to

the entity unless the Service provides late

S corporation election relief or inadvertent

invalid election relief. If the late or invalid

election is not perfected, the default rules

will maintain the passthrough taxation

treatment by classifying the entity as a

partnership or a disregarded entity.

Effective Date

The regulations apply to elections to

be an S corporation filed on or after July

20, 2004. However, eligible entities that

timely filed S elections July 20, 2004, may

also rely on the provisions of the regula-tion.

Special Analysis




12866. Therefore a regulatory assessment

is not required. For the applicability of the

Regulatory Flexibility Act (5 U.S.C. chap-

ter 6), refer to the Special Analysis section

of the preamble to the notice of proposed

rulemaking on this subject published else-where in this issue of the Bulletin.


The principal author of this regulation

is Rebekah A. Myers, Office of Associate

Chief Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department


* * * * *

Adoption of Amendments to theRegulations


as follows:

PART 301PROCEDURE AND

ADMINISTRATION


part 301 continues to read, in part, as fol-

lows:

Authority: 26 U.S.C. 7805 ***

Par. 2. Section 301.77013 is amended

by adding paragraphs (c)(1)(v)(C) and(h)(3) to read as follows:

301.77013 Classification of certain

business entities.

* * * * *

(c) * * *

(1) * * *

(v) * * *

September 20, 2004 496 200438 I.R.B.


12/26

(C) S corporations. [Reserved]. For

further guidance, see 301.77013T(c)

(1)(v)(C).

* * * * *

(h) * * *

(3) Deemed elections for S corpora-

tions. [Reserved]. For further guidance,

see 301.77013T(h)(3).

Par. 3. Section 301.77013T is addedto read as follows:

301.77013T Classification of certain

business entities (temporary).

(a) through (c)(1)(v)(B) [Reserved].

For further guidance, see 301.77013(a)

through (c)(1)(v)(B).

(c)(1)(v)(C) S corporations. An eli-

gible entity that timely elects to be an S

corporation under section 1362(a)(1) is

treated as having made an election under

this section to be classified as an associa-

tion, provided that (as of the effective date

of the election under section 1362(a)(1))

the entity meets all other requirements

to qualify as a small business corpora-

tion under section 1361(b). Subject to

301.77013(c)(1)(iv), the deemed elec-

tion to be classified as an association will

apply as of the effective date of the S cor-

poration election and will remain in effect

until the entity makes a valid election, un-

der 301.77013(c)(1)(i), to be classified

as other than an association.

(c)(2) through (h)(2)(iii) [Reserved].

For further guidance, see 301.7701

3(c)(2) through (h)(2)(iii).

(h) * * *

(3) Deemed elections for S corpora-

tions. Paragraph (c)(1)(v)(C) of this sec-

tion applies to timely S corporation elec

tions under section 1362(a) filed on or afte

July 20, 2004. Eligible entities that file

timely S elections before July 20, 2004

may also rely on the provisions of the reg

ulation.

Mark E. Matthews

Deputy Commissioner fo

Services and Enforcemen

Approved July 6, 2004.

Gregory F. Jenner

Acting Assistant Secretary of th

Treasury (Tax Policy)

(Filed by the Office of the Federal Register on July 19, 20048:45 a.m., and published in the issue of the Federal Registefor July 20, 2004, 69 F.R. 43317)

200438 I.R.B. 497 September 20, 200


13/26

Part III. Administrative, Procedural, and Miscellaneous26 CFR 601.204: Changes in accounting periods

and in methods of accounting.

(Also, Part 1, 162, 263, 446, 461, 481;

1.167(a)3(b), 1.263(a)4, 1.263(a)5, 1.4461,

1.4614, 1.4615, 1.4811.)

Rev. Proc. 200457

SECTION 1. PURPOSE

This revenue procedure allows ad-

ditional time for taxpayers to comply

with the requirements of section 6.02 of

Rev. Proc. 200423, 200416 I.R.B.

785. Section 6.02 of Rev. Proc. 200423

requires certain taxpayers that seek to

change to a method of accounting pro-

vided in 1.263(a)4, 1.263(a)5, and

1.167(a)3(b) of the Income Tax Reg-

ulations to submit a written statement

containing information necessary to ob-

tain automatic consent for the change.

SECTION 2. BACKGROUND

.01 On March 24, 2004, the Internal

Revenue Service released Rev. Proc.

200423. Rev. Proc. 200423 provides

procedures under which certain taxpayers

may obtain automatic consent for the tax-

payers first taxable year ending on or after

December 31, 2003, to change to a method

of accounting provided in 1.263(a)4,

1.263(a)5, and 1.167(a)3(b) of the In-

come Tax Regulations. As a term and

condition of obtaining this automatic

consent, taxpayers must file Form 3115,

Application for Change in Accounting

Method, and provide therein certain infor-

mation specifically required by Rev. Proc.

200423.

.02 Section 6.02 of Rev. Proc. 200423

provides transition rules applicable to cer-

tain taxpayers that filed Form 3115 prior

to April 26, 2004, and did not include

in the Form 3115 all of the informationrequired by Rev. Proc. 200423. In

lieu of preparing and filing a new Form

3115, these transition rules permit taxpay-

ers to prepare and file a written statement

that includes all of the necessary infor-

mation that was not included in the orig-

inal Form 3115. Section 6.02(2) of Rev.

Proc. 200423 requires taxpayers to sub-

mit the written statement, with an attached

copy of page 1 of the original Form 3115

filed by the taxpayer, to the national of-

fice within the timely filing requirements

of section 6.02(3)(a) (including the auto-

matic extension period described in sec-

tion 6.02(3)(b)(i)) of Rev. Proc. 20029,20021 C.B. 327, as modified and clarified

by Announcement 200217, 20021 C.B.

561, modified and amplified by Rev. Proc.

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

fied, clarified, and modified by Rev. Proc.

200254, 20022 C.B. 432.

.03 Section 6.02(3) of Rev. Proc.

200423 requires taxpayers to attach the

written statement and a copy of the orig-

inal Form 3115 to the taxpayers federal

income tax return for the taxpayers

(i) first taxable year ending on or after

December 31, 2003, or

(ii) second taxable year ending on or

after December 31, 2003, if the taxpayer

prior to April 26, 2004, has filed the tax-

payers federal income tax return for the

taxpayers first taxable year ending on or

after December 31, 2003, that includes

a Form 3115, a copy of which also has

been filed with the national office, and the

481(a) adjustment included on that re-

turn was computed correctly as described

in section 5 of Rev. Proc. 200423.

SECTION 3. ADDITIONAL TIME TO

SUBMIT WRITTEN STATEMENT

.01 A taxpayer is treated as meeting

the timely filing requirement of section

6.02(2) of Rev. Proc. 200423 if the

taxpayer submits the written statement

referred to in section 6.02(2) of Rev. Proc.

200423, along with the attached copy of

page 1 of the original Form 3115 filed by

the taxpayer, to the national office at the

special address provided in section 4.01(3)

of Rev. Proc. 200423 on or before thetime that the taxpayer files the federal

income tax return referred to in section

6.02(3)(i) or (ii) (whichever is applicable)

of Rev. Proc. 200423.

.02 A taxpayer is treated as meeting

the timely filing requirement of section

6.02(3)(ii) of Rev. Proc. 200423 by at-

taching the written statement and a copy of

the original Form 3115 to the taxpayers

federal income tax return for the tax-

payers second taxable year ending on or

after December 31, 2003, if the taxpayer

prior to April 26, 2004, filed the tax-

payers federal income tax return for the

taxpayers first taxable year ending on orafter December 31, 2003, that included a

Form 3115, a copy of which also has been

filed with the national office, whether or

not the 481(a) adjustment was computed

correctly in the taxpayers federal income

tax return for the taxpayers first taxable

year ending on or after December 31,

2003, but only if computing the 481(a)

adjustment in accordance with section 5

of Rev. Proc. 200423 does not result in

any change in the taxable income reported

on that return.

.03 For purposes of section 3.01 of this

revenue procedure, section 6.02(3)(ii) of

Rev. Proc. 200423 is applied after taking

into account section 3.02 of this revenue

procedure.

.04 Sections 3.01 and 3.02 of this rev-

enue procedure do not apply to a taxpayer

described in section 4.03(2) of Rev. Proc.

200423 (relating to an unauthorized

change in method of accounting or change

in the treatment of an item).

SECTION 4. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 200423 is modified.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective on

September 1, 2004.

SECTION 6. INQUIRIES

For further information regard-

ing this revenue procedure, contact

Grace Matuszeski of the Office of As-sociate Chief Counsel (Income Tax and

Accounting) at (202) 6227900 (not a

toll-free call).

September 20, 2004 498 200438 I.R.B.


14/26

Part IV. Items of General Interest

Notice of ProposedRulemaking byCross-Reference toTemporary Regulations

Collected Excise Taxes; Dutiesof Collector

REG16390902


(IRS), Treasury.

ACTION: Notice of proposed rulemaking

by cross-reference to temporary regula-

tions.

SUMMARY: In this issue of the Bulletin,

the IRS is issuing temporary regulations

(T.D. 9149) relating to the obligations of

persons that receive payments for air trans-

portation or communications services sub-

ject to excise tax when persons liable for

the tax refuse to pay the tax. The text

of those temporary regulations also serves

as the text of these proposed regulations.

These proposed regulations affect persons

liable for those taxes and persons that re-

ceive payments subject to tax.

DATES: Written and electronic comments

and requests for a public hearing must bereceived by November 8, 2004.

ADDRESSES: Send submissions to:

CC:PA:LPD:PR (REG16390902), room

5203, Internal Revenue Service, POB

7604, Ben Franklin Station, Washing-

ton, DC 20044. Submissions may be

hand delivered Monday through Friday

between the hours of 8 a.m. and 4 p.m.

to: CC:PA:LPD:PR (REG16390902),

Couriers Desk, Internal Revenue Service,

1111 Constitution Avenue, NW, Wash-

ington, DC. Alternatively, taxpayers maysubmit comments electronically via the

IRS Internet site at www.irs.gov/regs, or

via the Federal eRulemaking Portal at

www.regulations.gov (indicate IRS and

REG16390902).


CONTACT: Concerning submissions, the

Publication and Regulations Unit, (202)

6227180; concerning the regulations,

Taylor Cortright, (202) 6223130 (not

toll-free numbers).


Background

These proposed regulations relate to the

obligations of persons that receive pay-

ments for air transportation or communi-

cations services subject to excise tax when

persons liable for the tax refuse to pay the

tax. These proposed regulations would

amend the Excise Tax Procedural Regula-

tions (26 CFR part 40) and the Facilities

and Services Excise Tax Regulations (26

CFR part 49). The text of temporary reg-

ulations published in this issue of the Bul-

letin also serves as the text of these pro-

posed regulations. The preamble to thetemporary regulations explains the tempo-

rary regulations.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant

regulatory action as defined in Executive

Order 12866. Therefore, a regulatory as-

sessment is not required. It also has been

determined that section 553(b) of the Ad-

ministrative Procedure Act (5 U.S.C. chap-

ter 5) does not apply to these regulations,and because the notice of proposed rule-

making does not impose a collection of in-

formation on small entities, the provisions

of the Regulatory Flexibility Act (5 U.S.C.

chapter 6) do not apply. Pursuant to sec-

tion 7805(f) of the Code, this notice of pro-

posed rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

its impact on small business.

Comments and Requests for a Public

Hearing

Before these proposed regulations are

adopted as final regulations, consideration

will be given to any written comments

(a signed original and eight (8) copies)

or electronic comments that are submitted

timely to the IRS. The IRS and Treasury

Department specifically request comments

on the clarity of the proposed regulations

and how they may be made easier to un

derstand. All comments will be availabl

for public inspection and copying. A pub

lic hearing may be scheduled if requeste

in writing by any person that timely sub

mits written comments. If a public hearin

is scheduled, notice of the date, time, anplace for the hearing will be published i

the Federal Register.


The principal author of these regula

tions is Patrick S. Kirwan, Office of As

sociate Chief Counsel (Passthroughs an

Special Industries). However, other per

sonnel from the IRS and Treasury Depart

ment participated in their development.

* * * * *

Proposed Amendments to the

Regulations

Accordingly, 26 CFR parts 40 and 4

are proposed to be amended as follows:

PART 40EXCISE TAX

PROCEDURAL REGULATIONS

Paragraph 1. The authority citation fo

part 40 continues to read, in part, as fol

lows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 40.6302(c)3 is amended by revising paragraph (b)(2)(ii)(B) to

read as follows:

40.6302(c)3 Special rules for use of


33.

* * * * *

(b) * * *

(2) * * *

(ii) * * *

(B) [The text of this propose

paragraph is the same as the text o40.6302(c)3T(b)(2)(ii)(B) publishe

elsewhere in this issue of the Bulletin].

* * * * *

PART 49FACILITIES AND

SERVICES EXCISE TAXES

Par. 3. The authority citation for par

49 continues to read in part as follows:

200438 I.R.B. 499 September 20, 200


15/26

Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 49.42911 is amended

by revising the fourth sentence to read as

follows:

49.42911 Persons receiving payment

must collect tax.

* * * [The text of thisproposed sentence

is the same as the text of 49.42911Tpublished elsewhere in this issue of the

Bulletin].* * *

Mark E. Matthews,

Deputy Commissioner for


(Filed by the Office of the Federal Register on August 9,2004, 8:45 a.m., and published in the issue of the FederalRegister for August 10, 2004, 69 F.R. 48432)

Notice of ProposedRulemaking by CrossReference to TemporaryRegulations

Deemed Election To Be anAssociation Taxable as aCorporation for a QualifiedElecting S Corporation

REG13178603

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking

by cross reference to temporary regula-

tions.

SUMMARY: In this issue of the Bulletin,

the IRS is issuing temporary regulations

(T.D. 9139) that deem certain eligible en-

tities that file timely S corporation elec-

tions to have elected to be classified as

associations taxable as corporations. The

text of those temporary regulations alsoserves as the text of these proposed regula-

tions. These regulations affect certain eli-

gible entities filing timely elections to be S

corporations on or after July 20, 2004.

DATES: A request for a public hearing and

written or electronic comments must be

received by October 18, 2004.

ADDRESSES: Send submissions to


5203, Internal Revenue Service, POB


ton, DC, 20044. Submissions may be

hand delivered between the hours of 8

a.m. and 4 p.m. to CC:PA:LPD:PR

(REG13178603), Couriers Desk,

Internal Revenue Service, 1111 Con-

stitution Avenue, NW, Washington,

DC, or sent electronically, via the IRS

Internet site at: www.irs.gov/regs or

via the Federal E-Rulemaking Por-

tal at www.regulations.gov (IRS and

REG13178603).


CONTACT: Rebekah A. Myers at (202)



Background

Temporary regulations published else-

where in this issue of the Bulletin amend

301.77013T(c)(1)(v)(C) to provide that

certain eligible entities that file timely S

corporation elections are deemed to have

elected to be classified as associations tax-

able as corporations. The text of the tem-

porary regulations also serves as the text of

these proposed regulations. The preamble

to the temporary regulations explains the

temporary regulations.

Special Analysis

It has been determined that this notice

of proposed rulemaking is not a signifi-

cant regulatory action as defined in Exec-

utive Order 12866. Therefore a regulatory

assessment is not required. It is hereby

certified that the collection of information

in these regulations will not have a sig-

nificant economic impact on a substantial

number of small entities. This certification

is based upon the fact that the purpose of

the regulation is to decrease the number ofentities required to file an entity classifi-

cation election, Form 8832. Therefore, a

Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C. chap-

ter 6) is not required. Pursuant to section

7805(f) of the Internal Revenue Code, this

notice of proposed regulation will be sub-

mitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

Comments and Requests for Public

Hearing

Before these proposed regulations are

adopted as final regulations, considera-

tion will be given to any written (a signed

original and eight (8) copies) or electroniccomments that are submitted timely to

the IRS. The IRS and Treasury Depart-

ment request comments on the clarity of

the proposed rules and how they can be

made easier to understand. All comments

will be available for public inspection and

copying. A public hearing will be sched-

uled if requested in writing by any person

that timely submits written comments. If a

public hearing is scheduled, notice of the

date, time, and place of the public hearing

will be published in the Federal Register.


The principal author of this regulation

is Rebekah A. Myers, Office of Associate

Chief Counsel (Passthroughs and Special

Industries), IRS. However, other person-

nel from the IRS and Treasury Department


* * * * *

Proposed Amendments to the

Regulations


as follows:

PART 301PROCEDURE AND

ADMINISTRATION


part 301 continues to read, in part, as fol-

lows:

Authority: 26 U.S.C. 7805 * * *

Para. 2. Section 301.77013

is amended by adding paragraphs

(c)(1)(v)(C) and (h)(3) to read as fol-

lows:

301.77013 Classification of certain

business entities.

[The text of the proposed amendment

is the same as the text of 301.77013T

published elsewhere in this issue of the

Bulletin].

September 20, 2004 500 200438 I.R.B.


16/26

Mark E. Matthews,

Deputy Commissioner for


(Filed by the Office of the Federal Register on July 19, 2004,8:45 a.m., and published in the issue of the Federal Registerfor July 20, 2004, 69 F.R. 43369)

Notice of ProposedRulemaking

Reorganizations UnderSection 368(a)(1)(E) or (F)

REG10688904


(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-

posed regulations that provide guidance

regarding the requirements for a transac-

tion to qualify as a reorganization under

section 368(a)(1)(E) or (F) of the Inter-

nal Revenue Code. The proposed regu-

lations will affect corporations and their

shareholders.

DATES: Written or electronic comments

and requests for a public hearing must be

received by November 10, 2004.

ADDRESSES: Send submissions to:


5203, Internal Revenue Service, PO Box


ton, DC 20044. Submissions may be

hand-delivered Monday through Friday

between the hours of 8 a.m. and 4 p.m.

to CC:PA:LPD:PR (REG10688904),

Couriers Desk, Internal Revenue Service,

1111 Constitution Avenue, NW, Wash-

ington, DC, or sent electronically, via the

Internal Revenue Service Internet site at

www.irs.gov/regs or via the Federal eRule-making Portal at www.regulations.gov

(IRS REG10688904).


CONTACT: Concerning the proposed reg-

ulations, Robert B. Gray, (202) 6227550;

concerning submissions of comments,

Guy R. Traynor, (202) 6227180 (not

toll-free numbers).


Background and Explanation of

Provisions

In general, upon the exchange of prop-

erty, gain or loss must be accounted for

if the new property differs materially, in

kind or extent, from the old property. See

Internal Revenue Code (Code) 1001;

1.3681(b). The purpose of the reorgani-

zation provisions of the Internal Revenue

Code (the Code) is to except from the

general rule certain specifically described

exchanges that are required by business

exigencies and effect only a readjust-

ment of continuing interests in property

under modified corporate forms. See

1.3681(b).

Section 368(a)(1)(E) provides that the

term reorganization includes a recapital-

ization (an E reorganization). A recapital-ization has been defined as a reshuffling

of a capital structure within the framework

of an existing corporation. Helvering v.

Southwest Consolidated Corp., 315 U.S.

194 (1942).

Section 368(a)(1)(F) provides that

the term reorganization includes a mere

change in identity, form, or place of or-

ganization of one corporation, however

effected (an F reorganization). One court

has described the F reorganization as fol-

lows:

[The F reorganization] encompass[es]only the simplest and least significant

of corporate changes. The (F)-type re-

organization presumes that the surviv-

ing corporation is the same corporation

as the predecessor in every respect, ex-

cept for minor or technical differences.

For instance, the (F) reorganization typ-

ically has been understood to compre-

hend only such insignificant modifica-

tions as the reincorporation of the same

corporate business with the same as-

sets and the same stockholders surviv-

ing under a new charter either in thesame or in a different State, the renewal

of a corporate charter having a limited

life, or the conversion of a U.S.-char-

tered savings and loan association to a

State-chartered institution.

Berghash v. Commissioner, 43 T.C. 743,

752 (1965) (citation and footnotes omit-

ted), affd, 361 F.2d 257 (2nd Cir. 1966).

To qualify as a reorganization, a trans-

action must generally satisfy not only the

statutory requirements of the reorganiza

tion provisions but also certain nonstatu

tory requirements, including the continuit

of interest and continuity of business enter

prise requirements. See 1.3681(b). Th

purpose of the continuity requirements i

to ensure that reorganizations are limite

to readjustments of continuing interests i

property under modified corporate form

and to prevent transactions that resembl

sales from qualifying for nonrecognitio

of gain or loss available to corporate re

organizations. 1.3681(d)(1) and (e)(1)

see also LeTulle v. Scofield, 308 U.S. 41

(1940); Helvering v. Minnesota Tea Co

296 U.S. 378 (1935); Pinellas Ice & Col

Storage Co. v. Commissioner, 287 U.S

462 (1933).

Despite the general rule, the courts an

the Service have taken the position tha

the continuity of interest and continuit

of business enterprise requirements neenot be satisfied for a transaction to qual

ify as an E reorganization. See Hicko

v. Commissioner, 32 T.C. 80 (1959)

Rev. Rul. 8234, 19821 C.B. 59; Rev

Rul. 77415, 19772 C.B. 311. In Rev

enue Rulings 77415 and 8234, the IR

reasoned that the continuity of interes

and continuity of business enterprise re

quirements are necessary in an acquisitiv

reorganization to ensure that the transac

tion does not involve an otherwise taxabl

transfer of stock or assets, but that they

are not necessary when the transactioinvolves only a single corporation.

Although an F reorganization may in

volve an actual or deemed transfer of as

sets from one corporation to another, such

a transaction effectively involves only on

corporation. In this way, an F reorgani

zation is much like an E reorganization

which can only involve one corporatio

even in form. As a result, an F reorga

nization is treated for most purposes o

the Code as if the reorganized corporatio

were the same entity as the corporation in

existence before the reorganization. Consequently, the taxable year of the corpora

tion does not end on the date of the transfe

and the losses of the reorganized corpora

tion can be carried back to offset incom

of its predecessor. See 1.381(b)1(a)(2

Nonetheless, courts have applied the conti

nuity requirements in determining whethe

a transaction qualifies as an F reorganiza

tion. See, e.g., Pridemark, Inc. v. Com

missioner, 345 F.2d 35 (4th Cir. 1965

200438 I.R.B. 501 September 20, 200


17/26

(stating that the application of the F reor-

ganization statute is limited to cases where

the corporate enterprise continues uninter-

rupted, except perhaps for a distribution

of some of its liquid assets); Yoc Heat-

ing Corp. v. Commissioner, 61 T.C. 168