US Internal Revenue Service: irb05-15

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Bulletin No. 2005-15 April 11, 2005

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

Ct. D. 2080, page 850 .Gross income; litigants recovery includes attorneyscontingent fee. The Supreme Court holds that when alitigants recovery constitutes income, the litigants incomeincludes the portion of the recovery paid to the attorney asa contingent fee. Commissioner of Internal Revenue v .Banks.

Rev. Rul. 200523, page 864 .Federal ra tes; adjusted federal rates; adjusted federallong-ter m rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for April 2005.

T.D. 9190, page 855 .Final regulations under section 664 of the Code concern the or-dering rule of regulations section 1.6641(d). The regulationsprovide rules for characterizing the income distributions fromcharitable remainder trusts (CRTs) when the income is subjectto different federal income tax rates. The regulations reflectchanges made to income tax rates, including capital gains andcertain dividends, by the Taxpayer Relief Act of 1997, the In-ternal Revenue Service Restructuring and Reform Act of 1998,and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

T.D. 9191, page 854 .Final regulations amend regulations under section 163(d) of theCode to provide the rules relating to how and when taxpayersmay elect to take qualified dividend income into account asinvestment income for purposes of calculating the deduction

for investment income expense.

T.D. 9192, page 866 .Final regulations under section 1502 of the Code provide guidance concerning the determination of the tax attributes thatare available for reduction and the method for reducing thoseattributes when a member of a consolidated group excludesdischarge of indebtedness income from gross income undersection 108.

T.D. 9193, page 862 .Final regulations under section 704 of the Code clarify that section 704(c) property is sold for an installment obligation, thinstallment obligation is treated as the contributed property forpurposes of applying sections 704(c) and 737. Likewise, ithe contributed property is a contract, such as an option to ac-quire property, the property acquired pursuant to the contractis treated as the contributed property for these purposes.

Announcement 200525, page 891 .This document contains a correction to final regulations (T.D9187, 200513 I.R.B. 778) that disallow certain losses recog-

nized on sales of subsidiary stock by members of a consolidated group.

EXEMPT ORGANIZATIONS

Announcement 200524, page 889 .A list is provided of organizations now classified as private foudations.

(Continued on the next page)

Finding Lists begin on page ii.


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ADMINISTRATIVE

T.D. 9188, page 883 .REG14719504, page 888 .Temporary and proposed regulations under section 6103 of theCode set forth changes to the list of items of return informa-tion that the IRS discloses to the Department of Commerce forthe purpose of structuring censuses and national economic ac-counts and conducting related statistical activities authorizedby law.

Rev. Proc. 200522, page 886 .Qualified mor tgage bonds; mortgage credit certificates;national median gross income. Guidance is provided con-cerning the use of the national and area median gross incomefigures by issuers of qualified mortgage bonds and mortgagecredit certificates in determining the housing cost/income ratiodescribed in section 143(f) of the Code. Rev. Proc. 200424obsoleted.

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The IRS MissionProvide 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.

IntroductionThe 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 considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.19 86 Code.This part includes rulings and decisions based on provisions othe Internal Revenue Code of 1986.

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

Part III.Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rings. Bank Secrecy Act Administrative Rulings are issued bthe Department of the Treasurys Office of the Assistant Sec

retary (Enforcement).

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

The last Bulletin for each month includes a cumulative indfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 1.Tax Imposed

Ct. D. 2080

SUPREME COURT OF THEUNITED STATES

No. 03-892

COMMISSIONER OF INTERNALREVENUE v. BANKS

CERTIORARI TO THE UNITEDSTATES COURT

OF APPEALS FOR THE SIXTHCIRCUIT

January 24, 2005 *

Syllabus

Respondent Banks settled his federalemployment discrimination suit againsta California state agency and respondentBanaitis settled his Oregon state caseagainst his former employer, but neither included fees paid to their attorneys under contingent-fee agreements as gross in-come on their federal income tax returns.

In each case petitioner Commissioner of Internal Revenue issued a notice of defi-ciency, which the Tax Court upheld. InBanks case, the Sixth Circuit reversedin part, finding that the amount Bankspaid to his attorney was not includableas gross income. In Banaitis case, theNinth Circuit found that because Oregonlaw grants attorneys a superior lien in thecontingent-fee portion of any recovery,that part of Banaitis settlement was notincludable as gross income.

Held : When a litigants recovery con-

stitutes income, the litigants income in-cludes the portion of the recovery paid tothe attorney as a contingent fee. Pp. 512.

(a) Two preliminary observations helpclarify why this issue is of consequence.First, taking the legal expenses as miscel-laneous itemized deductions would havebeen of no help to respondents because theAlternative Minimum Tax establishes a tax

liability floor and does not allow such de-ductions. Second, the American Jobs Cre-ation Act of 2004which amended the In-ternal Revenue Code to allow a taxpayer,in computing adjusted gross income, todeduct attorneys fees such as those at is-suedoes not apply here because it waspassed after these cases arose and is notretroactive. Pp. 56.

(b) The Code defines gross incomebroadly to include all economic gains nototherwise exempted. Under the anticipa-tory assignment of income doctrine, a tax-payer cannot exclude an economic gainfrom gross income by assigning the gainin advance to another party, e.g., Lucas v. Earl , 281 U.S. 111, because gains shouldbe taxed to those who earn them, id ., at114. The doctrine is meant to prevent tax-payers from avoiding taxation through ar-rangements and contracts devised to pre-vent income from vesting in the one whoearned it. Id ., at 115. Because the rule ispreventative and motivated by administra-tive and substantive concerns, this Courtdoes not inquire whether any particular as-signment has a discernible tax avoidancepurpose. Pp. 67.

(c) The Court agrees with the Com-missioner that a contingent-fee agreement

should be viewed as an anticipatory as-signment to the attorney of a portion of the clients income from any litigation re-covery. In an ordinary case, attributionof income is resolved by asking whether a taxpayer exercises complete dominionover the income in question. However,in the context of anticipatory assignments,where the assignor may not have domin-ion over the income at the moment of re-ceipt, the question is whether the assignor retains dominion over the income-gener-ating asset. Looking to such control pre-

serves the principle that income should betaxed to the party who earns the incomeand enjoys the consequent benefits. Inthe case of a litigation recovery, the in-come-generating asset is the cause of ac-tion derived from the plaintiffs legal in- jury. The plaintiff retains dominion over this asset throughout the litigation. Re-spondents counterarguments are rejected.

The legal claims value may be specula-tive at the moment of the assignment, butthe anticipatory assignment doctrine is notlimited to instances when the precise dol-lar value of the assigned income is knownin advance. In these cases, the taxpayer retained control over the asset, diverted someof the income produced to another party,and realized a benefit by doing so. Alsorejected is respondents suggestion that theattorney-client relationship be treated as asort of business partnership or joint ven-ture for tax purposes. In fact, that relationship is a quintessential principal-agentrelationship, for the client retains ultimatedominion and control over the underlyingclaim. The attorney can make tactical de-cisions without consulting the client, butthe client still must determine whether tosettle or proceed to judgment and makeas well, other critical decisions. The attor-ney is an agent who is duty bound to act inthe principals interests, and so it is appro-priate to treat the full recovery amount asincome to the principal. This rule appliesregardless of whether the attorney-clientcontract or state law confers any specialrights or protections on the attorney, solong as such protections do not alter therelationships fundamental principal-agent

character. The Court declines to commenton other theories proposed by respondentsand their amici , which were not advancedin earlier stages of the litigation or exam-ined by the Courts of Appeals. Pp. 710.

(d) This Court need not address Bankscontention that application of the anticipa-tory assignment principle would be incon-sistent with the purpose of statutory fee-shifting provisions, such as those applica-ble in his case brought under 42 U.S.CSecs. 1981, 1983, and 2000(e) et seq . Hsettled his case, and the fee paid to his

attorney was calculated based solely onthe contingent-fee contract. There was nocourt-ordered fee award or any indicationin his contract with his attorney or the set-tlement that the contingent fee paid was inlieu of statutory fees that might otherwisehave been recovered. Also, the AmericanJobs Creation Act redresses the concern

* Together with No. 03907, Commissioner of Internal Revenue v. Banaitis , on certiorari to the United States Court of Appeals for the Ninth Circuit.

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for many, perhaps most, claims governedby fee-shifting statutes. P. 11.

No. 03892, 345 F.3d 373; No.03907, 340 F.3d 1074, reversed andremanded.

KENNEDY, J., delivered the opinionof the Court, in which all other Members joined, except REHNQUIST, C.J., whotook no part in the decision of the cases.

SUPREME COURT OF THEUNITED STATES

No. 03-892

COMMISSIONER OF INTERNALREVENUE, PETITIONER v.

JOHN W. BANKS, II

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT

OF APPEALS FOR THE SIXTHCIRCUIT

No. 03907

COMMISSIONER OF INTERNALREVENUE, PETITIONER v.

SIGITAS J. BANAITIS

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT

OF APPEALS FOR THE NINTHCIRCUIT

January 24, 2005

JUSTICE KENNEDY delivered theopinion of the Court.

The question in these consolidatedcases is whether the portion of a money judgment or settlement paid to a plaintiffsattorney under a contingent-fee agreementis income to the plaintiff under the InternalRevenue Code, 26 U.S.C. Sec. 1 et seq .(2000 ed. and Supp. I). The issue dividesthe courts of appeals. In one of the instant

cases, Banks v. Commissioner , 345 F.3d373 (2003), the Court of Appeals for theSixth Circuit held the contingent-fee por-tion of a litigation recovery is not includedin the plaintiffs gross income. The Courtsof Appeals for the Fifth and Eleventh Cir-cuits also adhere to this view, relying onthe holding, over Judge Wisdoms dissent,in Cotnam v. Commissioner , 263 F.2d119, 125126 (CA5 1959). Srivastava v.Commissioner , 220 F.3d 353, 363365

(CA5 2000); Foster v. United States , 249F.3d 1275, 12791280 (CA11 2001). Inthe other case under review, Banaitis v.Commissioner , 340 F.3d 1074 (2003), theCourt of Appeals for the Ninth Circuitheld that the portion of the recovery paidto the attorney as a contingent fee is ex-cluded from the plaintiffs gross incomeif state law gives the plaintiffs attorneya special property interest in the fee, butnot otherwise. Six Courts of Appeals haveheld the entire litigation recovery, includ-ing the portion paid to an attorney as acontingent fee, is income to the plaintiff.Some of these Courts of Appeals discussstate law, but little of their analysis ap-pears to turn on this factor. Raymond v. United States , 355 F.3d 107, 113116(CA2 2004); Kenseth v. Commissioner ,259 F.3d 881, 883884 (CA7 2001); Baylin v. United States , 43 F.3d 1451,

14541455 (CA Fed. 1995). Other Courtsof Appeals have been explicit that the feeportion of the recovery is always incometo the plaintiff regardless of the nuancesof state law. OBrien v. Commissioner , 38T.C. 707, 712 (1962), affd, 319 F.2d 532(CA3 1963) ( per curiam ); Young v. Com-missioner , 240 F.3d 369, 377379 (CA42001); Hukkanen-Campbell v. Commis-sioner , 274 F.3d 1312, 13131314 (CA102001). We granted certiorari to resolve theconflict. 541 U.S. 958 (2004).

We hold that, as a general rule, when a

litigants recovery constitutes income, thelitigants income includes the portion of the recovery paid to the attorney as a con-tingent fee. We reverse the decisions of theCourts of Appeals for the Sixth and NinthCircuits.

I

A. Commissioner v. Banks

In 1986, respondent John W. Banks, II,was fired from his job as an educational

consultant with the California Departmentof Education. He retained an attorney on acontingent-fee basis and filed a civil suitagainst the employer in a United StatesDistrict Court. The complaint alleged em-ployment discrimination in violation of 42U.S.C. Secs. 1981 and 1983, Title VII of the Civil Rights Act of 1964, as amended,42 U.S.C. Sec. 2000e et seq ., and Cal.Govt. Code Ann. Sec. 12965 (West1986). The original complaint asserted

various additional claims under state law,but Banks later abandoned these. After trial commenced in 1990, the parties set-tled for $464,000. Banks paid $150,000 of this amount to his attorney pursuant to thefee agreement.

Banks did not include any of the$464,000 in settlement proceeds as grossincome in his 1990 federal income taxreturn. In 1997 the Commissioner of In-ternal Revenue issued Banks a notice of deficiency for the 1990 tax year. The TaxCourt upheld the Commissioners deter-mination, finding that all the settlementproceeds, including the $150,000 Bankshad paid to his attorney, must be includedin Banks gross income.

The Court of Appeals for the Sixth Cir-cuit reversed in part. 345 F.3d 373 (2003).It agreed the net amount received by Bankswas included in gross income but not the

amount paid to the attorney. Relying onits prior decision in Estate of Clarks v.Commissioner, 202 F.3d 854 (2000), thecourt held the contingent-fee agreementwas not an anticipatory assignment of Banks income because the litigation re-covery was not already earned, vested, or even relatively certain to be paid whenthe contingent-fee contract was made. Acontingent-fee arrangement, the court rea-soned, is more like a partial assignmentof income-producing property than an as-signment of income. The attorney is not

the mere beneficiary of the clients largess,but rather earns his fee through skill anddiligence. 345 F.3d, at 384385 (quoting Estate of Clarks , supra , at 857858). Thisreasoning, the court held, applies whether or not state law grants the attorney anyspecial property interest ( e.g. , a superior lien) in part of the judgment or settlementproceeds.

B. Commissioner v. Banaitis

After leaving his job as a vice president

and loan officer at the Bank of Califor-nia in 1987, Sigitas J. Banaitis retainedan attorney on a contingent-fee basis andbrought suit in Oregon state court againstthe Bank of California and its successor in ownership, the Mitsubishi Bank. Thecomplaint alleged that Mitsubishi Bank willfully interfered with Banaitis em-ployment contract, and that the Bank of California attempted to induce Banaitis tobreach his fiduciary duties to customers

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and discharged him when he refused. The jury awarded Banaitis compensatory andpunitive damages. After resolution of allappeals and post-trial motions, the partiessettled. The defendants paid $4,864,547to Banaitis; and, following the formula setforth in the contingent-fee contract, thedefendants paid an additional $3,864,012directly to Banaitis attorney.

Banaitis did not include the amountpaid to his attorney in gross income on hisfederal income tax return, and the Com-missioner issued a notice of deficiency.The Tax Court upheld the Commissionersdetermination, but the Court of Appealsfor the Ninth Circuit reversed. 340 F.3d1074 (2003). In contrast to the Court of Appeals for the Sixth Circuit, the Banaitiscourt viewed state law as pivotal. Wherestate law confers on the attorney no spe-cial property rights in his fee, the court

said, the whole amount of the judgmentor settlement ordinarily is included in theplaintiffs gross income. Id ., at 1081.Oregon state law, however, like the lawof some other States, grants attorneys asuperior lien in the contingent-fee portionof any recovery. As a result, the courtheld, contingent-fee agreements under Oregon law operate not as an anticipatoryassignment of the clients income but as apartial transfer to the attorney of some of the clients property in the lawsuit.

IITo clarify why the issue here is of any

consequence for tax purposes, two prelim-inary observations are useful. The firstconcerns the general issue of deductibil-ity. For the tax years in question the le-gal expenses in these cases could havebeen taken as miscellaneous itemized de-ductions subject to the ordinary require-ments, 26 U.S.C. Secs. 6768 (2000 ed.and Supp. I), but doing so would havebeen of no help to respondents because of

the operation of the Alternative MinimumTax (AMT). For noncorporate individualtaxpayers, the AMT establishes a tax lia-bility floor equal to 26 percent of the tax-payers alternative minimum taxable in-come (minus specified exemptions) up to$175,000, plus 28 percent of alternativeminimum taxable income over $175,000.Secs. 55(a), (b) (2000 ed.). Alterna-tive minimum taxable income, unlike or-dinary gross income, does not allow any

miscellaneous itemized deductions. Secs.56(b)(1)(A)(i).

Second, after these cases arose Con-gress enacted the American Jobs CreationAct of 2004, 118 Stat. 1418. Section 703of the Act amended the Code by addingSec. 62(a)(19). Id ., at 1546. The amend-ment allows a taxpayer, in computingadjusted gross income, to deduct attorneyfees and court costs paid by, or on behalf of, the taxpayer in connection with any ac-tion involving a claim of unlawful discrim-ination. Ibid . The Act defines unlawfuldiscrimination to include a number of specific federal statutes, Secs. 62(e)(1) to(16), any federal whistle-blower statute,Sec. 62(e)(17), and any federal, state, or local law providing for the enforcementof civil rights or regulating any aspectof the employment relationship . . . or prohibiting the discharge of an employee,

the discrimination against an employee,or any other form of retaliation or reprisalagainst an employee for asserting rightsor taking other actions permitted by law,Sec. 62(e)(18). Id ., at 15471548. Thesedeductions are permissible even when theAMT applies. Had the Act been in forcefor the transactions now under review,these cases likely would not have arisen.The Act is not retroactive, however, sowhile it may cover future taxpayers inrespondents position, it does not pertainhere.

III

The Internal Revenue Code definesgross income for federal tax purposesas all income from whatever sourcederived. 26 U.S.C. Sec. 61(a). The def-inition extends broadly to all economicgains not otherwise exempted. Commis-sioner v. Glenshaw Glass Co. , 348 U.S.426, 429430 (1955); Commissioner v. Jacobson, 336 U.S. 28, 49 (1949). Ataxpayer cannot exclude an economic

gain from gross income by assigning thegain in advance to another party. Lucasv. Earl , 281 U.S. 111 (1930); Commis-sioner v. Sunnen, 333 U.S. 591, 604(1948); Helvering v. Horst , 311 U.S. 112,116117 (1940). The rationale for theso-called anticipatory assignment of in-come doctrine is the principle that gainsshould be taxed to those who earn them, Lucas, supra , at 114, a maxim we havecalled the first principle of income tax-

ation, Commissioner v. Culbertson , 33U.S. 733, 739740 (1949). The antici-patory assignment doctrine is meant toprevent taxpayers from avoiding taxationthrough arrangements and contracts how-ever skillfully devised to prevent [income]when paid from vesting even for a secondin the man who earned it. Lucas , 28U.S., at 115. The rule is preventative andmotivated by administrative as well assubstantive concerns, so we do not inquirewhether any particular assignment has adiscernible tax avoidance purpose. As Lucas explained, no distinction can betaken according to the motives leading tothe arrangement by which the fruits areattributed to a different tree from that onwhich they grew. Ibid .

Respondents argue that the anticipatoryassignment doctrine is a judge-made an-tifraud rule with no relevance to contin-

gent-fee contracts of the sort at issue hereThe Commissioner maintains that a con-tingent-fee agreement should be viewed asan anticipatory assignment to the attorneyof a portion of the clients income fromany litigation recovery. We agree with theCommissioner.

In an ordinary case, attribution of in-come is resolved by asking whether a tax-payer exercises complete dominion overthe income in question. Glenshaw GlassCo., supra , at 431; see also Commissioner v. Indianapolis Power & Light Co ., 49

U.S. 203, 209 (1990); Commissioner v.First Security Bank of Utah , N.A., 405 U.S394, 403 (1972). In the context of anticipatory assignments, however, the assignoroften does not have dominion over the in-come at the moment of receipt. In thainstance, the question becomes whetherthe assignor retains dominion over the in-come-generating asset, because the tax-payer who owns or controls the sourceof the income, also controls the disposi-tion of that which he could have receivedhimself and diverts the payment from him-self to others as the means of procuringthe satisfaction of hiswants. Horst, supraat 116117. See also Lucas, supra , a114115; Helvering v. Eubank , 311 U.S122, 124125 (1940); Sunnen, supra , a604. Looking to control over the income-generating asset, then, preserves the prin-ciple that income should be taxed to theparty who earns the income and enjoys theconsequent benefits.

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In the case of a litigation recovery, theincome-generating asset is the cause of ac-tion that derives from the plaintiffs legalinjury. The plaintiff retains dominion over this asset throughout the litigation. We donot understand respondents to argue oth-erwise. Rather, respondents advance twocounterarguments. First, they say that,in contrast to the bond coupons assignedin Horst , the value of a legal claim isspeculative at the moment of assignment,and may be worth nothing at all. Second,respondents insist that the claimants legalinjury is not the only source of the ultimaterecovery. The attorney, according to re-spondents, also contributes income-gener-ating assetseffort and expertisewith-out which the claimant likely could notprevail. On these premises respondentsurge us to treat a contingent-fee agreementas establishing, for tax purposes, some-

thing like a joint venture or partnershipin which the client and attorney combinetheir respective assetsthe clients claimand the attorneys skilland apportionany resulting profits.

We reject respondents arguments.Though the value of the plaintiffs claimmay be speculative at the moment thefee agreement is signed, the anticipatoryassignment doctrine is not limited to in-stances when the precise dollar value of the assigned income is known in advance. Lucas, supra; United States v. Bayse , 410

U.S. 441, 445, 450452 (1973). Though Horst involved an anticipatory assignmentof a predetermined sum to be paid on aspecific date, the holding in that case didnot depend on ascertaining a liquidatedamount at the time of assignment. In thecases before us, as in Horst , the taxpayer retained control over the income-gener-ating asset, diverted some of the incomeproduced to another party, and realizeda benefit by doing so. As Judge Wesleycorrectly concluded in a recent case, therationale of Horst applies fully to a con-tingent-fee contract. Raymond v. United States , 355 F.3d, at 115116. That theamount of income the asset would pro-duce was uncertain at the moment of assignment is of no consequence.

We further reject the suggestion to treatthe attorney-client relationship as a sort of business partnership or joint venture for tax purposes. The relationship betweenclient and attorney, regardless of the vari-ations in particular compensation agree-

ments or the amount of skill and effortthe attorney contributes, is a quintessentialprincipal-agent relationship. Restatement(Second) of Agency Sec. 1, Commente (1957) (hereinafter Restatement); ABAModel Rules of Professional Conduct Rule1.3, Comments 1, 1.7 1 (2002). The clientmay rely on the attorneys expertise andspecial skills to achieve a result the clientcould not achieve alone. That, however, istrue of most principal-agent relationships,and it does not alter the fact that the clientretains ultimate dominion and control over the underlying claim. The control is evi-dent when it is noted that, although the at-torney can make tactical decisions withoutconsulting the client, the plaintiff still mustdetermine whether to settle or proceed to judgment and make, as well, other criticaldecisions. Even where the attorney exer-cises independent judgment without super-

vision by, or consultation with, the client,the attorney, as an agent, is obligated to actsolely on behalf of, and for the exclusivebenefit of, the client-principal, rather thanfor the benefit of the attorney or any other party. Restatement Secs. 13, 39, 387.

The attorney is an agent who is dutybound to act only in the interests of theprincipal, and so it is appropriate to treatthe full amount of the recovery as in-come to the principal. In this respectJudge Posners observation is apt: [T]hecontingent-fee lawyer [is not] a joint

owner of his clients claim in the le-gal sense any more than the commissionsalesman is a joint owner of his employersaccounts receivable. Kenseth , 259 F.3d,at 883. In both cases a principal relieson an agent to realize an economic gain,and the gain realized by the agents effortsis income to the principal. The portionpaid to the agent may be deductible, butabsent some other provision of law it isnot excludable from the principals grossincome.

This rule applies whether or not the at-torney-client contract or state law confersany special rights or protections on the at-torney, so long as these protections do notalter the fundamental principal-agent char-acter of the relationship. Cf. RestatementSec. 13, Comment b, and Sec. 14G, Com-ment a (an agency relationship is createdwhere a principal assigns a chose in ac-tion to an assignee for collection and grantsthe assignee a security interest in the claimagainst the assignors debtor in order to

compensate the assignee for his collectionefforts). State laws vary with respect to thestrength of an attorneys security interestin a contingent fee and the remedies avail-able to an attorney should the client dis-charge or attempt to defraud the attorney.No state laws of which we are aware, how-ever, even those that purport to give attor-neys an ownership interest in their fees,e.g. , 340 F.3d, at 10821083 (discussingOregon law); Cotnam , 263 F.2d, at 125(discussing Alabama law), convert the at-torney from an agent to a partner.

Respondents and their amici proposeother theories to exclude fees from incomeor permit deductibility. These suggestionsinclude: (1) The contingent-fee agreementestablishes a Subchapter K partnershipunder 26 U.S.C. Secs. 702 704, and761, Brief for Respondent Banaitis inNo. 03907, p. 521; (2) litigation re-

coveries are proceeds from disposition of property, so the attorneys fee should besubtracted as a capital expense pursuantto Secs. 1001, 1012, and 1016, Brief for Association of Trial Lawyers of Americaas Amicus Curiae 2328, Brief for CharlesDavenport as Amicus Curiae 313; and(3) the fees are deductible reimbursedemployee business expenses under Sec.62(a)(2)(A) (2000 ed. and Supp. I), Brief for Stephen Cohen as Amicus Curiae .These arguments, it appears, are beingpresented for the first time to this Court.

We are especially reluctant to entertainnovel propositions of law with broad im-plications for the tax system that were notadvanced in earlier stages of the litiga-tion and not examined by the Courts of Appeals. We decline comment on thesesupplementary theories. In addition, wedo not reach the instance where a relator pursues a claim on behalf of the UnitedStates. Brief for Taxpayers Against FraudEducation Fund as Amicus Curia e 1020.

IV

The foregoing suffices to dispose of Banaitis case. Banks case, however,involves a further consideration. Banksbrought his claims under federal statutesthat authorize fee awards to prevailingplaintiffs attorneys. He contends thatapplication of the anticipatory assignmentprinciple would be inconsistent with thepurpose of statutory fee shifting provi-sions. See Venegas v. Mitchell , 495 U.S.

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82, 86 (1990) (observing that statutoryfees enable plaintiffs to employ reason-ably competent lawyers without cost tothemselves if they prevail). In the federalsystem statutory fees are typically awardedby the court under the lodestar approach, Hensley v. Eckerhart , 461 U.S. 424, 433(1983), and the plaintiff usually has littlecontrol over the amount awarded. Some-times, as when the plaintiff seeks onlyinjunctive relief, or when the statute capsplaintiffs recoveries, or when for other reasons damages are substantially less thanattorneys fees, court-awarded attorneysfees can exceed a plaintiffs monetary re-covery. See, e.g. , Riverside v. Rivera , 477U.S. 561, 564565 (1986) (compensatoryand punitive damages of $33,350; attor-neys fee award of $245,456.25). Treatingthe fee award as income to the plaintiff insuch cases, it is argued, can lead to the per-

verse result that the plaintiff loses moneyby winning the suit. Furthermore, it isurged that treating statutory fee awardsas income to plaintiffs would underminethe effectiveness of fee-shifting statutes indeputizing plaintiffs and their lawyers toact as private attorneys general.

We need not address these claims. After Banks settled his case, the fee paid to hisattorney was calculated solely on the ba-sis of the private contingent-fee contract.There was no court-ordered fee award, nor was there any indication in Banks con-

tract with his attorney, or in the settlementagreementwith thedefendant, that thecon-tingent fee paid to Banks attorney was inlieu of statutory fees Banks might other-wise have been entitled to recover. Also,the amendment added by the AmericanJobs Creation Act redresses the concernfor many, perhaps most, claims governedby fee-shifting statutes.

* * *For the reasons stated, the judgments

of the Courts of Appeals for the Sixth andNinth Circuits are reversed, and the casesare remanded for further proceedings con-sistent with this opinion.

It is so ordered.

THE CHIEF JUSTICE took no part in thedecision of these cases.

Section 42.Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof April 2005. See Rev. Rul. 2005-23, page 864.

Section 163.Interest

26 CFR 1.163(d)1: Time and manner for makingelections under the Omnibus Budget Reconciliation Act of 1993 and the Jobs and Growth Tax Relief Rec-onciliation Act of 2003.

T.D. 9191

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

Time and Manner of Making

163(d)(4)(B) Election to TreatQualified Dividend Income asInvestment Income

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations relating to an election thatmay be made by noncorporate taxpayers to

treat qualified dividend income as invest-ment income for purposes of calculatingthe deduction for investment interest. Theregulations reflect changes to thelaw madeby the Jobs and Growth Tax Relief Rec-onciliation Act of 2003. The regulationsaffect taxpayers making the election under section 163(d)(4)(B) to treat qualified div-idend income as investment income.

DATES: Effective Date : These regulationsare effective March 18, 2005.

Applicability Dates : For dates of appli-

cability, see 1.163(d)1(d).

FOR FURTHER INFORMATIONCONTACT: Amy Pfalzgraf, (202)6224950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 1 under section 163(d) of the

Internal Revenue Code (Code). On Au-gust 5, 2004, temporary regulations (T.D.9147, 200437 I.R.B. 461) were publishedin the Federal Register (69 FR 47364relating to an election that may be made bynoncorporate taxpayers to treat qualifieddividend income as investment income forpurposes of calculating the deduction forinvestment interest. A notice of proposedrulemaking (REG17138603, 200437I.R.B. 477) cross-referencing the tempo-rary regulations also was published in theFederal Register (69 FR 47395) on August 5, 2004. No comments in responseto the notice of proposed rulemaking orrequests to speak at a public hearing werereceived, and no hearing was held. ThisTreasury decision adopts the proposedregulations and removes the temporaryregulations.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause the regulations do not impose acollection of information on small entities,the Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to sec-tion 7805(f) of the Code, the proposed reg-ulations preceding these regulations weresubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on their impact on small busi-ness.

Drafting Information

The principal author of these regula-tions is Amy Pfalzgraf of the Office of As-sociate Chief Counsel (Income Tax & Ac-counting). However, other personnel fromthe IRS and Treasury Department partici-pated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

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9/49

Part 1INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.163(d)1 is revised to

read as follows:

1.163(d)1 Time and manner for making

elections under the Omnibus Budget Reconciliation Act of 1993 and the Jobsand Growth Tax Relief Reconciliation Act of 2003.

(a) Description . Section 163(d)(4)(B)(iii), as added by section 13206(d) of the Omnibus Budget Reconciliation Actof 1993 (Public Law 10366, 107 Stat.467), allows an electing taxpayer to takeall or a portion of certain net capital gainattributable to dispositions of propertyheld for investment into account as in-

vestment income. Section 163(d)(4)(B),as amended by section 302(b) of the Jobsand Growth Tax Relief Reconciliation Actof 2003 (Public Law 10827, 117 Stat.762), allows an electing taxpayer to takeall or a portion of qualified dividend in-come, as defined in section 1(h)(11)(B),into account as investment income. Asa consequence, the net capital gain andqualified dividend income taken into ac-count as investment income under theseelections are not eligible to be taxed at thecapital gains rates. An election may bemade for net capital gain recognized bynoncorporate taxpayers during any taxableyear beginning after December 31, 1992.An election may be made for qualifieddividend income received by noncorpo-rate taxpayers during any taxable year beginning after December 31, 2002, butbefore January 1, 2009.

(b) Time and manner for making theelections . The elections for net capitalgain and qualified dividend income mustbe made on or before the due date (includ-ing extensions) of the income tax returnfor the taxable year in which the net capi-tal gain is recognized or the qualified divi-dend income is received. The elections areto be made on Form 4952, Investment In-terest Expense Deduction , in accordancewith the form and its instructions.

(c) Revocability of elections . The elec-tions described in this section are revoca-ble with the consent of the Commissioner.

(d) Effective date . The rules set forthin this section regarding the net capitalgain election apply beginning December 12, 1996. The rules set forth in this sec-tion regarding the qualified dividend in-come election apply to any taxable year be-ginning after December 31, 2002, but be-fore January 1, 2009.

Par. 3. Section 1.1631T is removed.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved March 10, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury .

(Filed by the Office of the Federal Register on March 17,2005, 8:45 a.m., and published in the issue of the FederalRegister for March 18, 2005, 70 F.R. 13100)

Section 280G.GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of April 2005. See Rev.Rul. 2005-23, page 864.

Section 382.Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of April 2005. See Rev. Rul.2005-23, page 864.

Section 412.MinimumFunding Standards


Section 467.CertainPayments for the Use ofProperty or Services


Section 468.SpecialRules for Mining and Solid Waste Reclamation andClosing Costs


Section 482.Allocationof Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-te rm ratesare set forth for the month of April 2005. See Rev.Rul. 2005-23, page 864.

Section 483.Interest onCertain Deferred Payments

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month

of April 2005. See Rev. Rul. 2005-23, page 864.

Section 642.SpecialRules for Credits andDeductions

Federal short-term, mid-term, and long-term ratesare set forth for the month of April 2005. See Rev.Rul. 2005-23, page 864.

Section 664.CharitableRemainder Trusts26 CFR 1.6641: Charitable remainder trusts.

T.D. 9190

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

Charitable Remainder Trusts; Application of Ordering Rule


ACTION: Final regulations.

SUMMARY: This document contains finalregulations on the ordering rules of sec-tion 664(b) of the Internal Revenue Codefor characterizing distributions from char-itable remainder trusts (CRTs). The fi-

April 11, 2005 855 200515 I.R.B.


10/49

nal regulations reflect changes made to in-come tax rates, including the rates applica-ble to capital gains and certain dividends,by the Taxpayer Relief Act of 1997, the In-ternal Revenue Service Restructuring andReform Act of 1998, and the Jobs andGrowth Tax Relief Reconciliation Act of 2003. The final regulations provide guid-ance needed to comply with these changesand affect CRTs and their beneficiaries.

DATES: Effective Date : These regulationsare effective on March 16, 2005.

Applicability Dates : For dates of appli-cability, see 1.6641(d)(1)(ix).

FOR FURTHER INFORMATIONCONTACT: Theresa M. Melchiorre, (202)6227830 (not a toll-free number).


Background

This document contains amendmentsto the Income Tax Regulations (26 CFRpart 1) under section 664(b) of the InternalRevenue Code. On November 20, 2003,the Treasury Department and the IRS pub-lished a notice of proposed rulemaking(REG11089698, 20032 C.B. 1226) inthe Federal Register (68 FR 65419). Thepublic hearing scheduled for March 9,2004, was cancelled because no requeststo speak were received. Several written

comments responding to the notice of pro-posed rulemaking were received. After consideration of the written comments,the proposed regulations are adopted asrevised by this Treasury decision. Therevisions and a summary of the commentsare discussed below.

The proposed regulations reflectedchanges made to income tax rates, includ-ing the rates applicable to capital gains andcertain dividends, by the Taxpayer Relief Act of 1997 (TRA), Public Law 10534(111 Stat. 788), and the Jobs and GrowthTax Relief Reconciliation Act of 2003(JGTRRA), Public Law 10827 (117 Stat.752). These changes affect the orderingrules of section 664(b) for characterizingdistributions from CRTs.

Prior to the TRA, long-term capitalgains were generally subject to the sameFederal income tax rate. The TRA pro-vided, however, that gain from certaintypes of long-term capital assets wouldbe subject to different Federal income tax

rates. Accordingly, after May 6, 1997,a CRT could have at least three classesof long-term capital gains and losses: aclass for 28-percent gain (gains and lossesfrom collectibles and section 1202 gains);a class for unrecaptured section 1250 gain(long-term gains not treated as ordinaryincome that would be treated as ordinaryincome if section 1250(b)(1) included alldepreciation); and a class for all other long-term capital gain. In addition, theTRA provided that qualified 5-year gain(as defined in section 1(h)(9) prior toamendment by the JGTRRA) would besubject to reduced capital gains tax ratesunder certain circumstances for certaintaxpayers. For taxpayers subject to a10-percent capital gains tax rate, qualified5-year gain would be taxed at an 8-percentcapital gains tax rate effective for taxableyears beginning after December 31, 2000.

For taxpayers subject to a 20-percent cap-ital gains tax rate, qualified 5-year gainwould be taxed at an 18-percent capitalgains tax rate provided the holding periodfor the property from which the gain wasderived began after December 31, 2000.As a result, a CRT could also have a classfor qualified 5-year gain.

Prior to the JGTRRA, a CRTs ordinaryincome was generally subject to the sameFederal income tax rate. The JGTRRAprovided, however, that qualified divi-dend income as defined in section 1(h)(11)

would be subject to the Federal incometax rate applicable to the class for all other long-term capital gain. As a result, after December 31, 2002, a CRT could havea qualified dividend income class thatwould be subject to a different Federalincome tax rate than that applicable to theCRTs other types of ordinary income.In addition, the JGTRRA provided thatqualified 5-year gain would cease to existafter May 5, 2003, but that it would returnafter December 31, 2008.

In response to the changes made bythe TRA and the technical correctionsto the TRA made by the Internal Rev-enue Service Restructuring and ReformAct of 1998, Public Law 105206 (112Stat. 685), the IRS issued guidance on thetreatment of capital gains under section664(b)(2) in Notice 9820, 19981 C.B.776, as modified by Notice 9917, 19991C.B. 871. The proposed regulations incor-porated the guidance provided in Notice9820 and Notice 9917. In addition, the

proposed regulations provided additionalguidance on the treatment of qualifieddividend income under section 664(b)(1)and the treatment of a class of incomethat temporarily ceases to exist, like thequalified 5-year gain class.

Explanation of Provisions

The proposed regulations providedthat trusts must maintain separate classeswithin a category of income when twoclasses are only temporarily subject to thesame tax rate (for example, if the currenttax rate applicable to one class sunsetsin a future year). In the preamble to theproposed regulations, comments wererequested on the degree of administra-tive burden and potential tax benefit ordetriment of this requirement. Only onecomment was received in response to this

request. The commentator pointed out thatmaintaining a class during a temporary pe-riod of suspension could be favorable totaxpayers in one situation and unfavorablein another. For example, maintaining thequalified 5-year gain class during a tempo-rary period of suspension would be advan-tageous because when the class is again inexistence, gain distributed from the classprobably would be taxed at a rate lowerthan the rates applicable to other classes oflong-term capital gain. On the other hand,if the 28-percent long-term capital gain

class is taxed at 15 percent during a temporary period, gain distributed from thatclass after the expiration of that temporaryperiod is likely to be taxed at a rate highethan the rates applicable to other classesof long-term capital gain.

The IRS and Treasury Department con-tinue to believe that it is appropriate forCRTs to maintain separate classes for in-come only temporarily taxed at the samerate, and no comment received indicatedthat this requirement would be unduly bur-densome. Therefore, this requirement re-mains unchanged in the final regulations.

The proposed regulations provided that,to be eligible for inclusion in the class ofqualified dividend income, dividends mustmeet the definition of section 1(h)(11) andmust be received by the trust after December 31, 2002. Several commentatorssuggested that the final regulations shouldprovide that undistributed dividends re-ceived by a CRT prior to January 1, 2003,that would otherwise meet the definition of

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11/49

qualified dividends under section 1(h)(11),be treated as qualified dividends.

Subsequent to the issuance of the pro-posed regulations, a technical correctionwas made to the JGTRRA by the Work-ing Families Tax Relief Act of 2004, Pub-lic Law 108311 (118 Stat. 1166), to pro-vide that dividends received by a trust onor before December 31, 2002, shall not betreated as qualified dividend income as de-fined in section 1(h)(11). Accordingly, thissuggestion has not been adopted in the fi-nal regulations.

The proposed regulations providedthat, in netting capital gains and losses, anet short-term capital loss is first nettedagainst the net long-term capital gain ineach class before the long-term capitalgains and losses in each class are nettedagainst each other. One commentator suggested that this netting rule be revised

to provide that the gains and losses of the long-term capital gain classes be net-ted prior to netting short-term capital lossagainst any class of long-term capital gain.

The IRS and Treasury Department be-lieve that the netting rules for CRTs shouldbe consistent with the netting rules appli-cable generally to other noncorporate tax-payers. Accordingly, the final regulationsadopt this suggested change.

The proposed regulations provided thatitems of income within the ordinary in-come and capital gains categories are as-

signed to different classes based on theFederal income tax rate applicable to eachtype of income in that category in the year the items are required to be taken into ac-count by the CRT. One commentator sug-gested that the assignment of items of in-come to different classes in the year theitems are required to be taken into accountby the CRT should be based on the Fed-eral income tax rate that is likely to applyto that item in the hands of the recipient(for example, depending on the recipientsmarginal income tax rate bracket) in theyear in which the item is distributed.

The final regulations do not adopt thischange. It is not feasible in many instancesfor trustees to determine the tax bracket of beneficiaries. The IRS and Treasury De-partment believe that the assignment of anitem to a particular class should be basedupon the tax rate applicable to each classwhen the item is received by the CRT, andnot the various tax rates applicable to the

classes at the time of a distribution to thebeneficiary.

The proposed regulations provided thatthe determination of the tax character of amounts distributed by a CRT shall bemade as of the end of the taxable year of the CRT. One commentator recommendedthat the language in the proposed regula-tions be reworded to make it clear that thisrule applies to all distributions made by theCRT to recipients throughout the calendar year. In response to the comment, the sec-ond sentence in 1.6641(d)(1)(ii)( a)isre-vised in the final regulations to read, [t]hedetermination of the character of amountsdistributed or deemed distributed at anytime during the taxable year of the trustshall be made as of the end of that taxableyear.

The proposed regulations provided thatthe annuity or unitrust recipient is taxed

on the distribution from the CRT based onthe tax rates applicable in the year of thedistribution to the classes of income thatare deemed distributed from the trust. Onecommentator suggested that the languagein the proposed regulations be rewordedto make it clear that the tax rates appli-cable to a distribution or deemed distribu-tion from a CRT to a recipient are the taxrates applicable to the classes of incomefrom which the distribution is derived inthe year of distribution, and not the taxrates applicable to the income in the year

it is received by the CRT. This suggestionhas been adopted. In the final regulations,the third sentence in 1.6641(d)(1)(ii)( a )is revised to read as follows:

The tax rate or rates to be used in com-puting the recipients tax on the distri-bution shall be the tax rates that are ap-plicable, in the year in which the dis-tribution is required to be made, to theclasses of income deemed to make upthat distribution, and not the tax ratesthat are applicable to those classes of in-come in the year the income is receivedby the trust.One commentator suggested that a

cross-reference to 1.6641(d)(4) shouldbe made following the above sentence.This suggestion has not been adopted be-cause the IRS and Treasury Departmentdo not believe that a cross reference isneeded. Section 1.6641(d)(1)(ii)( a ) con-firms that a class of income will be taxedto the beneficiary at the tax rate applicableto that class in the year the distribution

is made. Section 1.6641(d)(4) identifiesthe year of the distribution.

One commentator proposed that thefinal regulations specifically address thetreatment of municipal bond income andthe effect of the alternative minimum tax(AMT) provisions and section 469 onCRT income. The final regulations do notaddress these issues, because the IRS andTreasury Department believe they are be-yond the scope of these regulations. Theseregulations are intended to address onlythe income tax rates applicable to classesof income and the order in which thoseclasses of income are to be applied to de-termine the character of a distribution inthe hands of a recipient. The issues raisedby the commentator are more appropri-ately addressed in separate guidance.

One commentator requested clarifica-tion of whether the ordering rules in the

proposed regulations apply to a CRT thathas lost its tax-exempt status under section664(c) in the year income is distributed.Section 1.6641(d)(1)(ii) of the proposedregulations provides that the categoriesand classes of income determined under 1.6641(d)(1)(i) are used to determinethe character of an annuity or unitrustdistribution from the trust in the hands of the recipient, irrespective of whether thetrust is exempt from taxation under section664(c) for the year of the distribution. Thefinal regulations retain this provision.

One commentator recommended thatthe IRS provide a detailed worksheet thatwould include all of the possible classesof income a CRT could have so that thetrustees can track a CRTs income fromyear to year. Because the types of incomethat each CRT may have can vary widely,the IRS and Treasury Department havedetermined that such a worksheet is notadministratively feasible at this time.

One commentator recommended that aprovision similar to 1.6641(d)(4)(ii) beadded to the final regulations to permitthe trustee to make corrections when thetrustee has made incorrect distributions asa result of mistakes in fiduciary accountingpractices, suggesting that such a provisionwould allow the CRT to receive the benefitof any correction in the year during whichthe correction is made. The IRS and Trea-sury Department believe that the proper method to remedy such errors is the filingof amended returns, rather than a currentyear adjustment and, therefore, such a pro-

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vision is not included in the final regula-tions.

One commentator requested that exam-ples addressing the following situations beprovided in the final regulations:

Situation 1 . The e nd r esult o f ashort-term capital loss and a combina-tion of long-term capital gains and lossesthat net to a long-term capital loss;

Situation 2 . The end result when a classof income has a net-loss amount that iscarried forward without affecting the taxcharacter of distributions;

Situation 3 . The applicability of thepassive loss rules under section 469 to theordering rules of section 664(b);

Situation 4 . The applicability of the al-ternative minimum tax (AMT) provisionsunder section 55 to the ordering rules un-der section 664(b); and

Situation 5 . The treatment of the dis-

tribution of qualified 5-year gain betweenJanuary 1, 2004, and December 31, 2008.In response to this request, Examples 4

and 5 have been added to the final regu-lations. Example 4 addresses situations 1and 2. Example 5 addresses situation 5.Examples will not be added to address sit-uations 3 and 4 because they involve issuesbeyond thescope of these final regulations.

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 assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and,because these regulations do not imposeon small entities a collection of informa-tion requirement, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Inter-nal Revenue Code, the notice of proposedrulemaking preceding this regulation wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Drafting Information

The principal author of these regula-tions is Theresa M. Melchiorre, Office of Chief Counsel, IRS. Other personnel from

the IRS and Treasury Department partici-pated in their development.

* * * * *

Adoption of A mendments to theRegulation s

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1INCOME TAXES

Paragraph 1. The authority for part 1continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.6641 is amended as

follows:1. Paragraph (d)(1) is revised.2. Paragraph (d)(2) is amended by:a. Removing the language or to cor-

pus (determined under subparagraph (1)(i)

of this paragraph) in the first sentenceand adding (determined under paragraph(d)(1)(i)(a ) of this section) or to corpus inits place.

b. Removing the language subpara-graph (1)(i)(c) of this paragraph fromthe fifth sentence and adding paragraph(d)(1)(i)(a )(3) of this section in its place.

c. Removing the language or to cor-pus in the categories described in subpara-graph (1) of this paragraph from the lastsentence and adding described in para-graph (d)(1)(i)( a ) of this section or to cor-pus in its place.

3. Paragraph (e)(1) is amended by re-moving the language paragraph (d)(1)from the first sentence and adding para-graph (d)(1)(i)( a ) in its place.

The revision reads as follows:

1.6641 Charitable remainder trusts.

* * * * *(d) Treatment of annual distributions

to recipients (1) Character of distribu-tions (i) Assignment of income to cate-gories and classes at the trust level . (a ) Atrusts income, including income includi-ble in gross income and other income, isassigned to one of three categories in theyear in which it is required to be takeninto account by the trust. These categoriesare

(1) Gross income, other than gains andamounts treated as gains from the sale or other disposition of capital assets (referredto as the ordinary income category);

(2) Gains and amounts treated as gainsfrom the sale or other disposition of capitalassets (referred to as the capital gains cat-egory); and

(3) Other income (including income ex-cluded under part III, subchapter B, chap-ter 1, subtitle A of the Internal RevenueCode).

(b) Items within the ordinary incomeand capital gains categories are assigned todifferent classes based on the Federal in-come tax rate applicable to each type of in-come in that category in the year the itemsare required to be taken into account by thetrust. For example, for a trust with a taxable year ending December 31, 2004, theordinary income category may include aclass of qualified dividend income as de-fined in section 1(h)(11) and a class ofall other ordinary income, and the capital gains category may include separate

classes for short-term and long-term cap-ital gains and losses, such as a short-termcapital gain class, a 28-percent long-termcapital gain class (gains and losses fromcollectibles and section 1202 gains), an un-recaptured section 1250 long-term capitalgain class (long-term gains not treated asordinary income that would be treated asordinary income if section 1250(b)(1) in-cluded all depreciation), a qualified 5-yearlong-term capital gain class as defined insection 1(h)(9) prior to amendment by theJobs and Growth Tax Relief Reconcilia-

tion Act of 2003 (JGTRRA), Public Law10827 (117 Stat. 752), and an all othelong-term capital gain class. After itemsare assigned to a class, the tax rates maychange so that items in two or more classeswould be taxed at the same rate if distributed to the recipient during a particu-lar year. If the changes to the tax rateare permanent, the undistributed items inthose classes are combined into one classIf, however, the changes to the tax rates areonly temporary (for example, the new ratefor one class will sunset in a future year)the classes are kept separate.

(ii) Order of distributions . (a ) The categories and classes of income (determinedunder paragraph (d)(1)(i) of this section)are used to determine the character of anannuity or unitrust distribution from thetrust in the hands of the recipient irre-spective of whether the trust is exempfrom taxation under section 664(c) for theyear of the distribution. The determinationof the character of amounts distributed or

200515 I.R.B. 858 April 11, 2005


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deemed distributed at any time during thetaxable year of the trust shall be made asof the end of that taxable year. The taxrate or rates to be used in computing therecipients tax on the distribution shall bethe tax rates that are applicable, in the year in which the distribution is required to bemade, to the classes of income deemed tomake up that distribution, and not the taxrates that are applicable to those classes of income in the year the income is receivedby the trust. The character of the distri-bution in the hands of the annuity or uni-trust recipient is determined by treating thedistribution as being made from each cate-gory in the following order:

(1) First, from ordinary income to theextent of the sum of the trusts ordinaryincome for the taxable year and its undis-tributed ordinary income for prior years.

(2) Second, from capital gain to the ex-

tent of the trusts capital gains determinedunder paragraph (d)(1)(iv) of this section.(3) Third, from other income to the ex-

tent of the sum of the trusts other incomefor the taxable year and its undistributedother income for prior years.

(4) Finally, from trust corpus (with cor-pus defined for this purpose as the net fair market value of the trust assets less the to-tal undistributed income (but not loss) inparagraphs (d)(1)(i)( a )(1) through (3) of this section).

(b) If the trust has different classes of in-

come in the ordinary income category, thedistribution from that category is treated asbeing made from each class, in turn, un-til exhaustion of the class, beginning withthe class subject to the highest Federal in-come tax rate and ending with the classsubject to the lowest Federal income taxrate. If the trust has different classes of net gain in the capital gains category, thedistribution from that category is treated asbeing made first from the short-term cap-ital gain class and then from each class of long-term capital gain, in turn, until ex-haustion of the class, beginning with theclass subject to the highest Federal incometax rate and ending with the class subjectto the lowest rate. If two or more classeswithin the same category are subject to thesame current tax rate, but at least one of those classes will be subject to a differenttax rate in a future year (for example, if the current rate sunsets), the order of thatclass in relation to other classes in the cat-egory with the same current tax rate is de-

termined based on the future rate or ratesapplicable to those classes. Within eachcategory, if there is more than one type of income in a class, amounts treated as dis-tributed from that class are to be treated asconsisting of the same proportion of eachtype of income as the total of the currentand undistributed incomeof that type bearsto the total of the current and undistributedincome of all types of income included inthat class. For example, if rental incomeand interest income are subject to the samecurrent and future Federal income tax rateand, therefore, are in the same class, adistribution from that class will be treatedas consisting of a proportional amount of rental income and interest income.

(iii) Treatment of losses at the trust level (a ) Ordinary income category . Anet ordinary loss for the current year isfirst used to reduce undistributed ordinary

income for prior years that is assigned tothe same class as the loss. Any excessloss is then used to reduce the current andundistributed ordinary income from other classes, in turn, beginning with the classsubject to the highest Federal income taxrate and ending with the class subject tothe lowest Federal income tax rate. If any of the loss exists after all the currentand undistributed ordinary income fromall classes has been offset, the excess iscarried forward indefinitely to reduce or-dinary income for future years and retains

its class assignment. For purposes of thissection, the amount of current income andprior years undistributed income shall becomputed without regard to the deductionfor net operating losses provided by sec-tion 172 or 642(d).

(b) Other income category . A net lossin the other income category for the cur-rent year is used to reduce undistributed in-come in this category for prior years andany excess is carried forward indefinitelyto reduce other income for future years.

(iv) Netting of capital gains and lossesat the trust level . Capital gains of the trustare determined on a cumulative net ba-sis under the rules of this paragraph (d)(1)without regard to the provisions of section1212. For each taxable year, current andundistributed gains and losses within eachclass are netted to determine the net gain or loss for that class, and the classes of capi-tal gains and losses are then netted againsteach other in the following order. First,a net loss from a class of long-term capi-

tal gain and loss (beginning with the classsubject to the highest Federal income taxrate and ending with the class subject tothe lowest rate) is used to offset net gainfrom each other class of long-term capitalgain and loss, in turn, until exhaustion of the class, beginning with the class subjectto the highest Federal income tax rate andending with the class subject to the lowestrate. Second, either

(a ) A net loss from all the classes of long-term capital gain and loss (beginningwith the class subject to the highest Federalincome tax rate and ending with the classsubject to the lowest rate) is used to offsetany net gain from the class of short-termcapital gain and loss; or

(b) A net loss from the class of short-term capital gain and loss is used to offsetany net gain from each class of long-termcapital gain and loss, in turn, until exhaus-

tion of the class, beginning with the classsubject to the highest Federal income taxrate and ending with the class subject to thelowest Federal income tax rate.

(v) Carry forward of net capital gainor loss by the trust . If, at the end of ataxable year, a trust has, after the appli-cation of paragraph (d)(1)(iv) of this sec-tion, any net loss or any net gain that isnot treated as distributed under paragraph(d)(1)(ii)(a )(2) of this section, the net gainor loss is carried over to succeeding tax-able years and retains its character in suc-

ceeding taxable years as gain or loss fromits particular class.

(vi) Special transitional rules . To beeligible to be included in the class of qual-ified dividend income, dividends mustmeet the definition of section 1(h)(11) andmust be received by the trust after De-cember 31, 2002. Long-term capital gainor loss properly taken into account by thetrust before January 1, 1997, is includedin the class of all other long-term capi-tal gains and losses. Long-term capitalgain or loss properly taken into accountby the trust on or after January 1, 1997,and before May 7, 1997, if not treatedas distributed in 1997, is included in theclass of all other long-term capital gainsand losses. Long-term capital gain or loss(other than 28-percent gain (gains andlosses from collectibles and section 1202gains), unrecaptured section 1250 gain(long-term gains not treated as ordinaryincome that would be treated as ordinaryincome if section 1250(b)(1) included all

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depreciation), and qualified 5-year gain asdefined in section 1(h)(9) prior to amend-ment by JGTRRA), properly taken into ac-count by the trust before January 1, 2003,and distributed during 2003 is treated asif it were properly taken into account bythe trust after May 5, 2003. Long-termcapital gain or loss (other than 28-percentgain, unrecaptured section 1250 gain, andqualified 5-year gain), properly taken intoaccount by the trust on or after January1, 2003, and before May 6, 2003, if nottreated as distributed during 2003, is in-cluded in the class of all other long-termcapital gain. Qualified 5-year gain prop-erly taken into account by the trust after

December 31, 2000, and before May 6,2003, if not treated as distributed by thetrust in 2003 or a prior year, must be main-tained in a separate class within the capitalgains category until distributed. Qualified5-year gain properly taken into accountby the trust before January 1, 2003, anddeemed distributed during 2003 is subjectto the same current tax rate as deemeddistributions from the class of all other long-term capital gain realized by the trustafter May 5, 2003. Qualified 5-year gainproperly taken into account by the trust onor after January 1, 2003, and before May6, 2003, if treated as distributed by thetrust in 2003, is subject to the tax rate in

effect prior to the amendment of section1(h)(9) by JGTRRA.

(vii) Application of section 643(a)(7)For application of the anti-abuse ruleof section 643(a)(7) to distributionsfrom charitable remainder trusts, see1.643(a)8.

(viii) Examples . The following examples illustrate the rules in this paragraph(d)(1):

Example 1 . (i) X, a charitable remainder annuity trust described in section 664(d)(1), is created onJanuary 1, 2003. The annual annuity amount is $100.Xs income for the 2003 tax year is as follows:

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80Qualified dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Capital gains and losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

(ii) In 2003, the year this income is received bythe trust, qualified dividend income is subject to adiffere nt rate of Federal income tax than interest in-come and is, therefore, a separate class of income inthe ordinary income category. The annuity amount is

deemed to be distributed from the classes within theordinary income category, beginning with the classsubject to the highest Federal income tax rate andending with the class subject to the lowest rate. Be-cause during 2003 qualified dividend income is taxed

at a lower rate than interest income, the interest income is deemeddistributedpriorto thequalifieddivi-dend income. Therefore, in the handsof the recipient,the 2003 annuity amount has the following character-istics:

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80Qualified dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

(iii) The remaining $30 of qualified dividend in-come that is not treated as distributed to the recipient

in 2003 is carried forward to 2004 as undistributedqualified dividend income.

Example 2 . (i) The facts are the same as in Example 1 , and at the end of 2004, X has the followingclasses of income:

Interest income class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5Qualified dividend income class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

($10 from 2004 and $30 carried forward from 2003)Net short-term capital gain class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Net long-term capital loss in 28-percent class . . . . . . . . . . . . . . . . . . . . . . . . . . . (325)

Net long-term capital gain in unrecaptured section 1250 gain class . . . . . . . . . . 175Net long-term capital gain in all other long-term capital gain class . . . . . . . . . . 350

(ii)In 2004, gainin theunrecaptured section1250gain class is subject to a 25-percent Federal incometax rate, and gain in the all other long-term capitalgain class is subjectto a lower rate. Thenet long-termcapital loss in the 28-percent gain class is used tooffset the net capital gains in the other classes of long-term capital gain and loss, beginning with theclass subject to the highest Federal income tax rate

and ending with the class subject to the lowest rate.The $325 net loss in the 28-percent gain class reducesthe $175 net gain in the unrecaptured section 1250gain class to $0. The remaining $150 loss from the28-percent gain class reduces the $350 gain in theall other long-term capital gain class to $200. As in Example 1 , qualified dividend income is taxed at alower rate than interest income during 2004. The an-

nuity amount is deemed to be distributed from all theclassesin theordinaryincome category andthen fromthe classes in the capital gains category, beginningwith the class subject to the highest Federal incometaxrate andending with theclass subjectto thelowestrate. In the hands of the recipient, the 2004 annuityamount has the following characteristics:

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Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5Qualified dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Net short-term capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Net long-term capital gain in all other long-term capital gain class . . . . . . . . . . 40

(iii) Theremaining $160 gain in theall other long-termcapital gain class that is not treatedas distributed

to the recipient in 2004 is carried forward to 2005 asgain in that same class.

Example 3 . (i) The facts are the same as in Ex-amples 1 and 2, and at the end of 2005, X has thefollowing classes of income:


Net loss in short-term capital gain class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50)Net long-term capital gain in 28-percent gain class. . . . . . . . . . . . . . . . . . . . . . . 10

Net long-term capital gain in unrecaptured section 1250 gain class . . . . . . . . . . 135Net long-term capital gain in all other long-term capital gain class

(carried forward from 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

(ii) There are no long-term capital losses to netagainst the long-term capital gains. Thus, the netshort-term capital loss is used to offset the net cap-ital gains in the classes of long-term capital gain andloss, in turn, until exhaustion of the class, beginningwith the class subject to the highest Federal incometaxrate andending with theclass subjectto thelowestrate. The $50 net short-term loss reduces the $10 net

gain in the28-percent gain class to $0. The remaining$40 net loss reduces the $135 net gain in the unrecap-tured section 1250 gain class to $95. As in Exam- ples 1 and 2, during 2005, qualified dividend incomeis taxed at a lower rate than interest income; gain inthe unrecaptured section 1250 gain class is taxed at25 percent; and gain in the all other long-term capitalgainclass istaxed at a rate lower than25 percent. The

annuity amount is deemed to be distributed from allthe classes in the ordinary income category and thenfrom the classes in the capital gains category, begin-ning with the class subject to the highest Federal in-come tax rate and ending with the class subject to thelowest rate. Therefore, in the hands of the recipient,the 2005 annuity amount has the following character-istics:

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5Qualified dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Unrecaptured section 1250 gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

(iii) The remaining $20 gain in the unrecapturedsection 1250 gain class and the $160 gain in the allother long-term capital gain class that are not treated

as distributed to the recipient in 2005 are carried for-ward to 2006 as gains in their respective classes.

Example 4 . (i) The facts are the same as in Ex-amples 1 , 2 and 3, and at the end of 2006, X has thefollowing classes of income:


Net loss in short-term capital gain class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20)

Net long-term capital loss in 28-percent class. . . . . . . . . . . . . . . . . . . . . . . . . . . (350)

Net long-term capital gain in unrecaptured section 1250 gain class(carried forward from 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Net long-term capital gain in all other long-term capital gain class(carried forward from 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

(ii) A net long-term capital los s in one class isused to offset the net capital gains in the other classesof long-term capital gain and loss, in turn, until ex-haustion of the class, beginnin g with the class subject

to thehighest Federal incometax rate andending withthe class subject to the lowest rate. The $350 net lossin the 28-percent gain class re duces the $20 net gain

in theunrecaptured section125 0 gainclass to$0. Theremaining $330 net loss reduces the $160 net gain inthe all other long-term capital gain class to $0. As in Examples 1 , 2 and 3, during 2006, qualified dividend

income is taxed at a lower rate than interest income.The annuity amount is deemed to be distributed fromall the classes in the ordinary income category and

then from theclasses in the capi tal gains category, be-ginning with the class subject to the highest Federalincome tax rate and ending with the class subject tothe lowest rate. In the hands of t he recipient, the 2006

annuity amount has the following characteristics:

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95Qualified dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

(iii) The remaining $5 of qualified dividend in-come that is not treated as distributed to the recipientin 2006 is carried forward to 2007 as qualified divi-dend income. The $20 net loss in the short-term cap-ital gain class and the $170 net loss in the 28-percent

gain class are carried forward to 2007 as net losses intheir respective classes.

Example 5 . (i) X, a charitable remainder annu-ity trust described in section 664(d)(1), is created onJanuary 1, 2002. The annual annuity amount is $100.

Except for qualified 5-year gain of $200 realized be-fore May 6, 2003, but not distributed, X has no other gains or losses carried over from former years. Xsincome for the 2007 tax year is as follows:

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Interest income class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10Net gain in short-term capital gain class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Net long-term capital gain in 28-percent gain class. . . . . . . . . . . . . . . . . . . . . . . 5

Net long-term capital gain in unrecaptured section 1250 gain class . . . . . . . . . . 10

Net long-term capital gain in all other long-term capital gain class . . . . . . . . . . 10

(ii) The annuity amount is deemed to be dis-tributed from all the classes in the ordinary incomecategory and then from the classes in the capitalgains category, beginning with the class subject tothe highest Federal income tax rate and ending withthe class subject to the lowest rate. In 2007, gains

distributed to a recipient from both the qualified5-year gain class and the all other long-term capitalgains class are taxed at a 15/5 percent tax rate. Sinceafter December 31, 2008, gains distributed from thequalified 5-year gain class will be taxed at a lower rate than gains distributed from the other classes of

long-term capital gain and loss, distributions fromthe qualified 5-year gain class are made after distri-butions from the other classes of long-term capitalgain and loss. In the hands of the recipient, the 2007annuity amount has the following characteristics:

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10Short-term capital gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528-percent gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Unrecaptured section 1250 gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

All other long-term capital gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Qualified 5-year gain (taxed as all other long-term capital gain) . . . . . . . . . . . . 60

(iii) The remaining $140 of qualified 5-year gainthat is not treated as distributed to the recipient in2007 is carried forward to 2008 as qualified 5-year gain.

(ix) Effective dates . The rules in thisparagraph (d)(1) that require long-termcapital gains to be distributed in the fol-lowing order: first, 28-percent gain (gainsand losses from collectibles and section1202 gains); second, unrecaptured section1250 gain (long-term gains not treatedas ordinary income that would be treatedas ordinary income if section 1250(b)(1)included all depreciation); and then, allother long-term capital gains are appli-cable for taxable years ending on or after December 31, 1998. The rules in this para-graph (d)(1) that provide for the netting of capital gains and losses are applicable for taxable years ending on or after December 31, 1998. The rule in the second sentenceof paragraph (d)(1)(vi) of this section isapplicable for taxable years ending on or after December 31, 1998. The rule in thethird sentence of paragraph (d)(1)(vi) of this section is applicable for distributionsmade in taxable years ending on or after December 31, 1998. All other provisionsof this paragraph (d)(1) are applicable for taxable years ending after November 20,2003.

* * * * *

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved March 10, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury .

(Filed by the Office of the Federal Register on March 15,2005, 8:45 a.m., and published in the issue of the FederalRegister for March 16, 2005, 70 F.R. 12793)

Section 704.PartnersDistributive Share

26 CFR 1.7043: Contributed property.

T.D. 9193DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

Section 704(c), InstallmentObligations and ContributedContracts


ACTION: Final regulations.

SUMMARY: Thisdocument contains finalregulations under sections 704(c) and 737relating to the tax treatment of installmentobligations and property acquired pursuantto a contract. The regulations affect part-ners and partnerships and provide guid-ance necessary to comply with the law.

DATES: Effective Date: These regulationsare effective November 23, 2003.

Applicability Date: For dates of applicability, see 1.7043(f), 1.7044(g) and1.7375.

FOR FURTHER INFORMATIONCONTACT: Christopher L. Trump, (202)6223070 (not a toll-free number).


Background

This document contains amendmentsto 26 CFR part 1 under sections 704 and737. On November 24, 2003, a notice oproposed rulemaking (REG16033002,20032 C.B. 1230) relating to the taxtreatment of installment obligations andproperty acquired pursuant to a contractunder sections 704(c) and 737 was pub-lished in the Federal Register (68 FR65864). A notice of correction was pub-lished in the Federal Register (69 FR5797) on February 6, 2004. No comments

were received from the public in responseto the notice of proposed rulemaking. Nopublic hearing was requested, and accord-ingly, no hearing was held. This Treasurydecision adopts the language of the pro-posed regulations without change.

Special Analyses

It has been determined that this Trea-sury decision is not a signi

US Internal Revenue Service: irb05-15

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