Revenue Ruling 2005-5
Rev. Rul. 2005-5
Rev. Rul. 2005-5, 2005-5 I.R.B. 445
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                    LIFO; PRICE INDEXES; DEPARTMENT STORES
                          Published: January 31, 2005
 Section 472.–Last-in, First-out Inventories, 26 CFR 1.472-1: Last-in, first-out inventories.
 LIFO; price indexes; department stores. The November 2004 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, November 30, 2004.
 LIFO; price indexes; department stores. The November 2004 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, November 30, 2004.
 The following Department Store Inventory Price Indexes for November 2004 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under s 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, November 30, 2004.
 The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.
   BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY
                              DEPARTMENT GROUPS
                (January 1941 = 100, unless otherwise noted)
                     Groups             Nov. 2003   Nov. 2004    Percent
                                                                     Change
                                                                   from Nov.
                                                                    2003 to
                                                                   Nov. 2004
                                                                     [FN1]
——————————————————————————-
1.        Piece Goods ………………….. 480.5       507.8          5.7
2.        Domestics and Draperies ……….. 548.6       535.3         -2.4
3.        Women’s and Children’s Shoes …… 649.8       656.6          1.0
4.        Men’s Shoes ………………….. 845.3       842.9         -0.3
5.        Infants’ Wear ………………… 598.3       584.3         -2.3
6.        Women’s Underwear …………….. 514.2       518.5          0.8
7.        Women’s Hosiery ………………. 343.3       342.0         -0.4
8.        Women’s and Girls’
            Accessories ………………… 555.8       583.1          4.9
9.        Women’s Outerwear and Girls’
            Wear ………………………. 375.7       376.8          0.3
10.       Men’s Clothing ……………….. 549.5       542.5         -1.3
11.       Men’s Furnishings …………….. 598.3       581.5         -2.8
12.       Boys’ Clothing and
            Furnishings ………………… 451.0       430.1         -4.6
13.       Jewelry ……………………… 866.8       879.0          1.4
14.       Notions ……………………… 797.2       789.1         -1.0
15.       Toilet Articles and Drugs ……… 976.2       998.6          2.3
16.       Furniture and Bedding …………. 612.9       601.7         -1.8
17.       Floor Coverings ………………. 594.5       590.2         -0.7
18.       Housewares …………………… 712.6       711.8         -0.1
19.       Major Appliances ……………… 210.0       201.6         -4.0
20.       Radio and Television …………… 44.3        40.7         -8.1
21.       Recreation and Education
            [FN2] ………………………. 82.2        79.5         -3.3
22.       Home Improvements [FN2] ……….. 124.9       130.6          4.6
23.       Automotive Accessories [FN2] …… 112.0       113.1          1.0
Groups 1-15: Soft Goods …………………. 567.7Â Â Â Â Â Â Â 566.4Â Â Â Â Â Â Â Â Â -0.2
Groups 16-20: Durable Goods ……………… 388.9Â Â Â Â Â Â Â 380.5Â Â Â Â Â Â Â Â Â -2.2
Groups 21-23: Misc. Goods [FN2] …………… 93.9Â Â Â Â Â Â Â Â 92.9Â Â Â Â Â Â Â Â Â -1.1
          Store Total [FN3] …………….. 503.1       499.6         -0.7
FN1. Absence of a minus sign before the percentage change in this column
 significs a price increase.
FN2. Indexes on a January 1986 = 100 base.
FN3. The store total index covers all departments, including some not listed
 separately, except for the following: candy, food, liquor, tobacco and
 contract departments.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622- 7924 (not a toll-free call).
 Rev. Rul. 2005-5, 2005-5 I.R.B. 445
Revenue Ruling 2005-16
Rev. Rul. 2005-16
Rev. Rul. 2005-16, 2005-13 I.R.B. 777
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
    LOW-INCOME HOUSING CREDIT; SATISFACTORY BOND; “BOND FACTOR” AMOUNTS FOR
                     THE PERIOD JANUARY THROUGH JUNE 2005
                           Published: March 28, 2005
 Section 42.–Low-Income Housing Credit
 Low-income housing credit; satisfactory bond; “bond factor” amounts for the period January through June 2005. This ruling announces the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through June 2005.
 Low-income housing credit; satisfactory bond; “bond factor” amounts for the period January through June 2005. This ruling announces the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through June 2005.
 In Rev. Rul. 90-60, 1990-2 C.B. 3, the Internal Revenue Service provided guidance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under s 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month.
 Rev. Proc. 99-11, 1999-1 C.B. 275, established a collateral program as an alternative to providing a surety bond for taxpayers to avoid or defer recapture of the low-income housing tax credits under s 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.
 This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under s 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99-11 for dispositions of qualified low-in-come buildings or interests therein during the period January through June 2005.
——————————————————————————-
   Table 1 Rev. Rul. 2005-16 Monthly Bond Factor Amounts for Dispositions
                 Expressed As a Percentage of Total Credits
——————————————————————————-
             Calendar Year Building Placed in Service or, if Section 42(f)(1)
                      Election Was Made, the Succeeding Calendar Year
——————————————————————————-
 Month of   1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
 Disposition
——————————————————————————-
  Jan ‘05   14.99 27.92 39.03 48.55 56.77 56.71 56.86 57.15 57.52 58.00 58.83
  Feb ‘05   14.99 27.92 39.03 48.55 56.77 56.59 56.74 57.04 57.41 57.89 58.72
  Mar ‘05   14.99 27.92 39.03 48.55 56.77 56.47 56.63 56.93 57.30 57.79 58.61
  Apr ‘05   15.85 29.52 41.27 51.33 60.03 60.18 60.95 61.89 62.92 64.10 65.66
  May ‘05   15.85 29.52 41.27 51.33 60.03 60.05 60.83 61.77 62.80 63.98 65.54
  Jun ‘05   15.85 29.52 41.27 51.33 60.03 59.93 60.71 61.65 62.69 63.87 65.42
——————————————————————————-
——————————————————————————-
Table 1 (cont’d) Rev. Rul. 2005-16 Monthly Bond Factor Amounts for Dispositions
                 Expressed As a Percentage of Total Credits
——————————————————————————-
              Calendar Year Building Placed in Service or, if Section 42(f)(1)
                      Election Was Made, the Succeeding Calendar Year
——————————————————————————-
 Month of      2002      2003     2004     2005
 Disposition
——————————————————————————-
  Jan ‘05      59.92    61.22    62.49    62.68
  Feb ‘05      59.80    61.09    62.33    62.68
  Mar ‘05      59.69    60.97    62.19    62.68
  Apr ‘05      67.52    69.62    71.64    72.55
  May ‘05      67.40    69.48    71.49    72.55
  Jun ‘05      67.28    69.36    71.35    72.55
——————————————————————————-
 For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see: Rev. Rul. 98-3, 1998-1 C.B. 248; Rev. Rul. 2001-2, 2001-1 C.B. 255; Rev. Rul. 2001-53, 2001-2 C.B. 488; Rev. Rul. 2002-72, 2002-2 C.B. 759; Rev. Rul. 2003-117, 2003-2 C.B. 1051; and Rev. Rul. 2004-100, 2004-44 I.R.B. 718.
DRAFTING INFORMATION
 The principal author of this revenue ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. McDonnell at (202) 622- 3040 (not a toll-free call).
 Rev. Rul. 2005-16, 2005-13 I.R.B. 777
Revenue Ruling 2005-6
Rev. Rul. 2005-6
Rev. Rul. 2005-6, 2005-6 I.R.B. 471
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                           LIFE INSURANCE CONTRACTS
                          Released: January 19, 2005
                          Published: February 7, 2005
 Section 7702.–Life Insurance Contract Defined
(Also s 7702A.)
 Life insurance contracts. For purposes of determining whether a contract qualifies as a life insurance contract under section 7702 of the Code, and as a modified endowment contract under section 7702A, charges for qualified additional benefits (QABs) are to be taken into account under the expense charge rule of section 7702(c)(3)(B)(ii) rather than under the mortality charge rule of section 7702(c)(3)(B)(i). Issuers whose compliance systems do not currently account for QABs under the expense charge rule of section 7702(c)(3)(B)(ii) are provided alternatives to correct their compliance systems.
ISSUE
 For purposes of determining whether a contract qualifies as a life insurance contract under s 7702 of the Internal Revenue Code and as a modified endowment contract under s 7702A, should charges for qualified additional benefits (QABs) be taken into account under the mortality charge rule of s 7702(c)(3)(B)(i) or the expense charge rule of s 7702(c)(3)(B)(ii)?
FACTS
 IC is a life insurance company organized and licensed to do business in State. In Year, IC issued a Policy in State with a Rider that provides term life insurance coverage on the life of a family member of the individual insured by the Policy. The Policy is a life insurance contract under the law of State and was designed to qualify as a life insurance contract under s 7702 by meeting the guideline premium requirements of s 7702(c) and falling within the cash value corridor of s 7702(d). IC imposes a charge for the mortality risk that it assumed pursuant to the Rider and subtracts this charge monthly from the Policy’s cash value.
LAW AND ANALYSIS
 Section 7702(a) provides that, for a contract to qualify as a life insurance contract for Federal income tax purposes, the contract must be a life insurance contract under the applicable law and must either (1) satisfy the cash value accumulation test of s 7702(b), or (2) both meet the guideline premium requirements of s 7702(c) and fall within the cash value corridor of s 7702(d).
 A contract meets the guideline premium requirements of s 7702(c) if the sum of the premiums paid under the contract does not at any time exceed the guideline premium limitation as of that time. The guideline premium limitation as of any date is the greater of (A) the guideline single premium, or (B) the sum of the guideline level premiums to that date. The guideline single premium is the premium that would be required on the date the contract is issued to fund the future benefits under the contract, based on the following three elements enumerated in section 7702(c)(3)(B):
 (i) reasonable mortality charges that meet the requirements (if any) prescribed in regulations and that (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners’ standard tables (as defined in section 807(d)(5)) as of the time the contract is issued;
 (ii) any reasonable charges (other than mortality charges) that (on the basis of the company’s experience, if any, with respect to similar contracts) are reasonably expected to be actually paid; and
 (iii) interest at the greater of an annual effective rate of six percent or the rate or rates guaranteed on issuance of the contract.
 The guideline level premium is the level annual amount, payable over a period not ending before the insured attains age 95, computed on the same basis but using a minimum interest rate of four percent, rather than six percent.
 A contract meets the cash value accumulation test of s 7702(b) if, by the terms of the contract, the cash surrender value of the contract may not at any time exceed the net single premium that would have to be paid at that time to fund future benefits under the contract. This determination is made, in part, on the basis of the mortality charge rule of s 7702(c)(3)(B)(i) and, in the case of QABs, the expense charge rule of s 7702(c)(3)(B)(ii).
 Section 7702(f)(4) defines the term “future benefits” to mean death benefits and endowment benefits. Section 7702(f)(5)(A)(iii) characterizes family term riders as QABs. Section 7702(f)(5)(B) provides that QABs are not treated as future benefits under the contract, but the charges for such benefits are treated as future benefits. Accordingly, charges for the Rider should be accounted for as future benefits under the Policy.
 Under the mortality charge rule of s 7702(c)(3)(b)(i), reasonable mortality charges are taken into account if they meet the requirements (if any) prescribed in regulations and do not exceed the mortality charges specified in the prevailing commissioners’ standard tables as of the time the contract is issued. There is no requirement that the charges taken into account be charges that are expected to be paid. In contrast, under the expense charge rule of s 7702(c)(3)(B)(ii), reasonable charges other than mortality charges are taken into account only if they are reasonably expected to be actually paid. For this reason, accounting for charges for the Rider under the mortality charge rule, rather than the expense charge rule, would in some cases produce a higher net single premium and higher guideline level premiums for purposes of testing a contract’s compliance with s 7702.
 Section 7702A defines a modified endowment contract (MEC) generally as a contract that meets the requirement of s 7702 but fails to meet the 7-pay test set forth in s 7702A(b) (or that is received in exchange for a contract that is otherwise a MEC). Under s 7702A(b), a contract fails to meet the 7-pay test if the accumulated amount paid under the contract at any time during the first seven contract years exceeds the sum of the net level premiums that would have been paid on or before that time if the contract provided for paid-up future benefits after the payment of seven level annual premiums. For this purpose, s 7702A(c)(1) provides that determinations under the 7-pay test are made by applying the cash value accumulation test rules of s 7702(b)(2). Under that provision, charges for QABs are accounted for under the expense charge rule of s 7702(c)(3)(B)(ii).
 Section 7702 is silent on the treatment of charges for QABs for purposes of determining whether a contract satisfies the guideline premium requirements. Under s 7702(b)(2)(B), however, charges for QABs are subject to the expense charge rule of s 7702(c)(3)(B)(ii) for purposes of determining whether a contract satisfies the cash value accumulation test. The same rule applies under s 7702A(c)(1) for purposes of determining whether a contract satisfies the 7-pay test and therefore is not a MEC. There is no indication that Congress intended charges for QABs to be accounted for under one rule for purposes of the cash value accumulation test of s 7702(b) and the 7-pay test of s 7702A(b), and under a different rule for purposes of the guideline premium requirements of s 7702(c). Moreover, there is no indication that Congress intended to take into account charges with respect to QABs that exceed amounts reasonably expected to be actually paid. Accordingly, charges taken into account with respect to QABs are subject to the expense charge rule of s 7702(c)(3)(B)(ii) for purposes of the guideline premium requirements.
HOLDING
 Charges for QABs should be taken into account under the expense charge rule of s 7702(c)(3)(B)(ii) for purposes of determining whether a contract qualifies as a life insurance contract under s 7702 or as a MEC under s 7702A.
EFFECTIVE DATE
 This revenue ruling is effective February 7, 2005.
APPLICATION
 The following alternatives are available to issuers whose compliance systems do not currently account for charges for QABs under the expense charge rule of s 7702(c)(3)(B)(ii):
 A. If an issuer’s compliance system does not properly account for charges for QABs but no contracts have failed to satisfy the requirements of s 7702(a) as a result of the system’s deficiency, the issuer may correct its compliance system to account for those charges using the expense charge rule without contacting the Service.
 B. If an issuer’s compliance system does not properly account for charges for QABs and, as a result, some life insurance contracts do not meet the definition of life insurance contract under s 7702(a), the issuer may request a closing agreement on or before February 7, 2006, under the procedures set forth in Rev. Proc. 2005-1, 2005-1 I.R.B. 1. In addition to the modifications to the ruling process provided by Rev. Proc. 2001-42, 2001-2 C.B. 212 (concerning inadvertent MECs), and Rev. Rul. 91-17, 1991-1 C.B. 190, as supplemented by Notice 99-48, 1999-2 C.B. 429 (concerning failures under s 7702(a)), the following modifications will apply to a closing agreement requested under this revenue ruling:
   1. the issuer must identify all contracts administered under the compliance system, but need not identify which contracts fail to meet the requirements of s 7702(a) or are inadvertent MECs under s 7702A;
   2. the contracts identified in the closing agreement will not be treated as failing the requirements of s 7702(a) or as MECs under s 7702A by reason of improperly accounting for charges for existing QABs, including future charges resulting from an increase in an existing QAB or the addition of a new QAB pursuant to the exercise of a right that existed in the contract before April 8, 2005; relief under the closing agreement will not extend to improper accounting for charges for an increase in an existing QAB or the addition of a new QAB that are not pursuant to the exercise of a right that existed in the contract before that date;
   3. no corrective action need be taken with respect to the compliance system or with respect to contracts identified in the closing agreement;
   4. in lieu of an amount based on the tax and interest that would have been owed by the policyholders if they were treated as receiving the income on the contract, the amount due under the closing agreement will be based on the aggregate number of contracts for which relief is requested, as set forth in the following schedule:
Number of Contracts Amount due
——————————-
20 or fewer         $1,500.00
——————————-
21 to 50Â Â Â Â Â Â Â Â Â Â Â Â $2,000.00
——————————-
51 to 100Â Â Â Â Â Â Â Â Â Â Â $5,000.00
——————————-
101 to 500Â Â Â Â Â Â Â Â Â Â $10,000.00
——————————-
501 to 1,000Â Â Â Â Â Â Â Â $16,000.00
——————————-
1,001 to 5,000Â Â Â Â Â Â $30,000.00
——————————-
5,001 to 10,000Â Â Â Â Â $40,000.00
——————————-
Over 10,000Â Â Â Â Â Â Â Â Â $50,000.00
——————————-
   5. the request for a closing agreement must be submitted to the appropriate address and with the appropriate user fee set forth
in Rev. Proc. 2005-1; in addition, the closing agreement should reflect the following address for mailing the closing agreement and amount due, after the closing agreement has been executed by the Service: Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington, KY 41011.
 C. After February 7, 2006, an issuer whose compliance system does not properly account for charges for QABs may request a closing agreement under the terms and conditions set forth above, except that (1) the closing agreement must identify the contracts that fail to meet the requirements of s 7702(a) or are inadvertent MECs under s 7702A; and (2) the closing agreement must require the issuer to correct its compliance system and to bring the identified contracts into compliance with s 7702(a) or s 7702A, as appropriate.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Melissa S. Luxner of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Melissa S. Luxner at (202) 622-3970 (not a toll-free call).
 Rev. Rul. 2005-6, 2005-6 I.R.B. 471
Revenue Ruling 2005-7
Rev. Rul. 2005-7
Rev. Rul. 2005-7, 2005-6 I.R.B. 464
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                           SEGREGATED ASSET ACCOUNT
                          Released: January 19, 2005
                          Published: February 7, 2005
 Section 817.–Treatment of Variable Contracts, 26 CFR 1.817-5(f): Look-through rule for assets held through certain investment companies, partnerships, or trusts.
 Segregated asset account. For purposes of determining whether a segregated asset account held by an insurance company is adequately diversified pursuant to section 817(h) of the Code, a segregated asset account that invests in a regulated investment company which in turn, holds an interest in another regulated investment company, may look through to the individual assets of both regulated investment companies.
ISSUE
 For purposes of determining whether a segregated asset account is adequately diversified under section 817(h), how does the look-through rule of s 817(h)(4) of the Internal Revenue Code and s 1.817-5(f) of the Income Tax Regulations apply to an investment in a regulated investment company that, in turn, owns an interest in another regulated investment company?
FACTS
 IC is a life insurance company subject to tax under s 801. In states where it is authorized to do so, IC offers variable life and variable annuity contracts (the “Contracts”) that qualify as variable contracts under s 817(d). The assets that fund the Contracts are segregated from the assets that fund IC’s traditional life insurance products. IC maintains a separate account for the assets funding the Contracts, and the income and liabilities associated with the separate account are maintained separately from IC’s other accounts. The separate account is composed of several sub-accounts, one of which (the “Segregated Asset Account”) is invested exclusively in Fund 1. No holder of a variable contract supported by the Segregated Asset Account possesses sufficient incidents of ownership over the assets of the account to be treated as the owner of those assets for federal income tax purposes. See Rev. Rul. 2003-91, 2003-2 C.B. 347.
 Fund 1 is a regulated investment company within the meaning of s 851. Fund 1 owns shares in Fund 2, also a regulated investment company within the meaning of s 851, the value of which is greater than 55 percent of the value of the total assets of Fund 1. Except for Fund 1’s investment in Fund 2 (and except as permitted by s 1.817-5(f)(3) of the Income Tax Regulations), all the beneficial interests in Fund 1 and Fund 2 are held by one or more segregated asset accounts of one or more insurance companies, and public access to the funds is available exclusively through the purchase of a variable contract. Pursuant to s 817(h)(1) and s 1.817-5(b) of the regulations, the investments of Fund 2 are adequately diversified. The investments of Fund 1 are likewise diversified, but only if, instead of treating its interest in Fund 2 as a single investment, Fund 1 is permitted to take into account a pro rata portion of each asset of Fund 2.
LAW AND ANALYSIS
 Section 817(d) defines the term “variable contract” for purposes of part I of subchapter L of the Code (ss 801-818). For a life insurance contract or an annuity contract to be a variable contract, it must provide for the allocation of all or a part of the amounts received under the contract to an account that, pursuant to state law or regulation, is segregated from the general asset accounts of the issuing insurance company. In addition, for a life insurance contract to be a variable contract, it must qualify as a life insurance contract for federal income tax purposes, and the amount of the death benefit (or the period of coverage) must be adjusted on the basis of the investment return and the market value of the segregated asset account; for an annuity contract to be a variable contract, it must provide for the payment of annuities, and the amounts paid in, or the amount paid out, must reflect the investment return and the market value of the segregated asset account.
 Section 817(h)(1) of the Code provides generally that a variable contract (other than a pension plan contract) that is otherwise described in s 817 and that is based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract for any period (and for any subsequent period) for which the investments made by such account are not adequately diversified.
 Section 1.817-5(e) of the regulations provides that for purposes of section 817(h) of the Code a segregated asset account shall consist of all assets the investment return and market value of each of which must be allocated in an identical manner to any variable contract invested in any of such assets.
 Section 1.817-5(b) of the regulations sets forth the diversification requirements for variable contracts based on segregated asset accounts. Generally, the investments of a segregated asset account are considered to be adequately diversified for purposes of s 817(h) of the Code and s 1.817- 5(b) of the regulations if no more than 55 percent of the value of the total assets of the account is represented by any one investment; no more than 70 percent by any two investments; no more than 80 percent by any three investments; and no more than 90 percent by any four investments.
 Section 817(h)(4) and s 1.817-5(f) of the regulations provide a look-through rule for purposes of testing the diversification of a segregated asset account that invests in a regulated investment company, partnership, or trust. Section 1.817-5(f)(1) provides, in part, that if the look-through rule applies, a beneficial interest in an investment company shall not be treated as a single
investment of a segregated asset account; instead, a pro rata portion of each asset of the investment company shall be treated, for purposes of s 1.817-5, as an asset of the segregated asset account.
 Section 817-5(f)(2)(i) of the regulations provides that the look-through rule of s 1.817-5(f) shall apply to an investment company if (A) all the beneficial interests in the investment company (other than those described in s 1.817-5(f)(3)) are held by one or more segregated asset accounts of one or more insurance companies; and (B) public access to such investment company is available exclusively (except as otherwise permitted under s 1.817-5(f)(3)) through the purchase of a variable contract.
 The beneficial interests described in s 1.817-5(f)(3) are interests that are held by (i) the general account of a life insurance company or a corporation related in a manner specified in s 267(b) of the Code to a life insurance company, but only if the return on those interests is computed in the same manner as the return on an interest held by a segregated asset account, there is no intent to sell the interests to the public, and a segregated asset account of the life insurance company also holds or will hold a beneficial interest in the investment company; (ii) the manager or a corporation related in a manner specified in s 267(b) to the manager of the investment company, provided similar requirements are met concerning the computation of return on the interests and intent to sell the interests to the public; (iii) the trustee of a qualified pension or retirement plan; or (iv) the public or policyholders that are treated as owners of beneficial interests in the investment company under Rev. Rul. 81-225, 1981-2 C.B. 12, but only if (A) the investment company was closed to the public in accordance with Rev. Rul. 82-55, 1982-1 C.B. 12; or (B) all the assets of the segregated asset account are attributable to premium payments made by policyholders prior to September 26, 1981, to premium payments made in connection with a qualified pension or retirement plan, or to any combination of such premium payments.
 Under the look-through rule of s 817(h)(4) and s 1.817-5(f), a pro rata portion of each asset of Fund 1 is treated as an asset of the Segregated Asset Account for purposes of determining whether the Segregated Asset Account is adequately diversified. Because the value of Fund 1’s investment in Fund 2 is greater than 55 percent of the value of the total assets of Fund 1, however, the Segregated Asset Account is not adequately diversified unless its investment in Fund 1 is treated as including an investment in a pro rata portion of each of the assets of Fund 2.
 In order for the look-through rule to apply to a beneficial interest in a regulated investment company, all the beneficial interests in the investment company must be held by one or more segregated asset accounts of one or more insurance companies (except as otherwise permitted pursuant to s 1.817- 5(f)(3) of the regulations), and public access to the investment company must be available solely through the purchase of a variable contract. These two requirements are met with respect to both Fund 1 and Fund 2. Except as otherwise permitted under s 1.817-5(f)(3), all the beneficial interests in Fund 1 are held by segregated asset accounts that invested directly in Fund 1; all the beneficial interests in Fund 2 are held either by segregated asset accounts that invested directly in Fund 2, or by segregated asset accounts that invested directly in Fund 1 (and thus indirectly in Fund 2). Likewise, except as otherwise permitted under s 1.817-5(f)(3), public access to both Fund 1 and Fund 2 is available exclusively through the purchase of a variable contract funded by a segregated asset account that invests in Fund 1 or Fund 2. Accordingly, under the look-through rule of s 817(h), the Segregated Asset Account is treated as owning a pro rata portion of each asset of Fund 1, including a pro rata portion of each asset of Fund 2.
HOLDING
 Under the facts set forth above, the look-through rule of s 817(h)(4) and s 1.817-5(f) of the regulations requires that the Segregated Asset Account be treated as owning a pro rata portion of each asset of Fund 1 and Fund 2 for purposes of satisfying the diversification requirements of s 817(h).
DRAFTING INFORMATION
 The principal author of this revenue ruling is Thomas M. Preston of the Office of Chief Counsel Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Mr. Preston at (202) 622-3970 (not a toll-free call).
 Rev. Rul. 2005-7, 2005-6 I.R.B. 464
Revenue Ruling 2005-8
Rev. Rul. 2005-8
Rev. Rul. 2005-8, 2005-6 I.R.B. 466
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
     FEDERAL RATES; ADJUSTED FEDERAL RATES; ADJUSTED FEDERAL LONG-TERM RATE
                         AND THE LONG-TERM EXEMPT RATE
                          Released: January 19, 2005
                          Published: February 7, 2005
 Section 42.–Low-Income Housing Credit
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 280G.–Golden Parachute Payments
 Federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 382.–Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
 The adjusted applicable federal long-term rate is set forth for the month of February 2005.
Section 412.–Minimum Funding Standards
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 467.–Certain Payments for the Use of Property or Services
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 468.–Special Rules for Mining and Solid Waste Reclamation and Closing Costs
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 482.–Allocation of Income and Deductions Among Taxpayers
 Federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 483.–Interest on Certain Deferred Payments
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 642.–Special Rules for Credits and Deductions
 Federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 807.–Rules for Certain Reserves
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 846.–Discounted Unpaid Losses Defined
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 1288.–Treatment of Original Issue Discount on Tax-Exempt Obligations
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 7520.–Valuation Tables
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 7872.–Treatment of Loans With Below-Market Interest Rates
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of February 2005.
Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
 Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for February 2005.
 Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for February 2005.
 This revenue ruling provides various prescribed rates for federal income tax purposes for February 2005 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
——————————————————–
               REV. RUL. 2005-8 TABLE 1
   Applicable Federal Rates (AFR) for February 2005
                Period for Compounding
           Annual     Semiannual Quarterly Monthly
Short-Term
      AFR 2.92%      2.90%      2.89%     2.88%
 110% AFR 3.22%      3.19%      3.18%     3.17%
 120% AFR 3.51%      3.48%      3.46%     3.46%
 130% AFR 3.81%      3.77%      3.75%     3.74%
 Mid-Term
      AFR 3.83%      3.79%      3.77%     3.76%
 110% AFR 4.21%      4.17%      4.15%     4.13%
 120% AFR 4.60%      4.55%      4.52%     4.51%
 130% AFR 4.99%      4.93%      4.90%     4.88%
 150% AFR 5.77%      5.69%      5.65%     5.62%
 175% AFR 6.74%      6.63%      6.58%     6.54%
 Long-Term
      AFR 4.72%      4.67%      4.64%     4.63%
 110% AFR 5.21%      5.14%      5.11%     5.09%
 120% AFR 5.68%      5.60%      5.56%     5.54%
 130% AFR 6.16%      6.07%      6.02%     5.99%
——————————————————–
————————————————————-
                 REV. RUL. 2005-8 TABLE 2
              Adjusted AFR for February 2005
                  Period for Compounding
                      Annual Semiannual Quarterly Monthly
Short-term adjusted   2.11%  2.10%      2.09%     2.09%
AFR
Mid-term adjusted AFRÂ 2.89%Â Â 2.87%Â Â Â Â Â Â 2.86%Â Â Â Â Â 2.85%
Long-term adjusted    4.20%  4.16%      4.14%     4.12%
AFR
————————————————————-
——————————————————————————-
                          REV. RUL. 2005-8 TABLE 3
                  Rates Under Section 382 for February 2005
Adjusted federal long-term rate for the current month                    4.20%
Long-term tax-exempt rate for ownership changes during the current month 4.27%
 (the highest of the adjusted federal long-term rates for the current
 month and the prior two months.)
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2005-8 TABLE 4
      Appropriate Percentages Under Section 42(b)(2) for February 2005
Appropriate percentage for the 70% present value low-income housing      7.99%
 credit
Appropriate percentage for the 30% present value low-income housing      3.43%
 credit
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2005-8 TABLE 5
                  Rate Under Section 7520 for February 2005
Applicable federal rate for determining the present value of an annuity, 4.60%
 an interest for life or a term of years, or a remainder or
 reversionary interest
——————————————————————————-
 Rev. Rul. 2005-8, 2005-6 I.R.B. 466
Revenue Ruling 2005-10
Rev. Rul. 2005-10
Rev. Rul. 2005-10, 2005-7 I.R.B. 492
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                              PARTNERSHIP MERGERS
                          Released: January 19, 2005
                         Published: February 14, 2005
 Section 704.–Partner’s Distributive Share
 Partnership mergers. This ruling informs taxpayers that the Treasury Department and the Service intend to issue regulations under sections 704(c)(1)(B) and 737 of the Code implementing the principles of Rev. Rul. 2004-43. Rev. Rul. 2004-43 revoked.
 Rev. Rul. 2004-43, 2004-18 I.R.B. 842, issued on April 12, 2004, addresses the application of ss 704(c)(1)(B) and 737 to s 704(c) gain or loss that is created in an assets-over partnership merger. Rev. Rul. 2004-43 holds that s 704(c)(1)(B) applies to newly created s 704(c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over partnership merger, but does not apply to newly created reverse s 704(c) gain or loss resulting from a revaluation of property in the continuing partnership. The revenue ruling also holds that for purposes of s 737(b), net precontribution gain includes newly created s 704(c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over partnership merger, but does not include newly created reverse s 704(c) gain or loss resulting from a revaluation of property in the continuing partnership.
 Some commentators have argued that Rev. Rul. 2004-43 is not consistent with the current regulations under ss 704(c)(1)(B) and 737, and that the conclusions in the ruling should not be applied retroactively. In response to these comments, the Treasury Department and the Service intend to issue regulations under ss 704(c)(1)(B) and 737 implementing the principles of Rev. Rul. 2004-43. The regulations will be effective for distributions occurring after January 19, 2005. See Notice 2005-15, published in this issue of the Internal Revenue Bulletin.
EFFECT ON OTHER REVENUE RULING(S)
 Rev. Rul. 2004-43 is revoked.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Laura Fields of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Fields at (202) 622- 3050 (not a toll-free call).
 Rev. Rul. 2005-10, 2005-7 I.R.B. 492
Revenue Ruling 2005-4
Rev. Rul. 2005-4
Rev. Rul. 2005-4, 2005-4 I.R.B. 366
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                 INTEREST SUSPENSION; TIME SENSITIVE PENALTIES
                           Released: January 7, 2005
                          Published: January 24, 2005
 Section 6404(g).–Suspension of Interest and Certain Penalties Where Secretary Fails to Contact Taxpayer
 Interest suspension; time sensitive penalties. Section 6404(g) of the Code suspends interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual’s amended income tax return filed more than 18 months after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return.
ISSUES
 Does section 6404(g) suspend interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual’s amended income tax return (or other written notice to the Service of additional liability not listed on the original return) that is filed after the individual files a timely return? If so, when does the accrual of interest and time sensitive penalties, additions to tax and additional amounts begin and end with respect to the additional amount?
FACTS
 Situation 1. TP, an individual taxpayer, files an income tax return for the 2002 taxable year on the due date of April 15, 2003. On October 4, 2004, within 18 months after the due date of TP’s return, TP files an amended income tax return that reports additional tax due for 2002. TP files the amended return before the Service notifies TP of the amount or the basis for the additional tax reported on the amended return. TP does not pay the additional tax due with the amended return.
 Situation 2. The facts are the same as in Situation 1, except that TP files the amended return on November 26, 2004, more than 18 months after the due date of TP’s return, and TP remits payment with the amended return.
 Situation 3. The facts are the same as Situation 2, except that TP does not remit payment with the amended return.
LAW AND ANALYSIS
 Section 6601 requires the payment of interest on any amount of tax imposed by Title 26 that is not paid on or before the last date prescribed for payment of the tax. Interest is computed using the underpayment rate established under section 6621. Section 6151 provides that the date for payment of tax is the date a taxpayer must file the return reporting the tax due (determined without regard to any extension for filing the return). Section 6072(a) provides that individuals shall file income tax returns made on a calendar year basis on or before April 15th of the year following the calendar year for which the tax is due. Accordingly, interest is imposed on individual calendar year taxpayers under section 6601 on any underpayment that is not paid on or before April 15th of the year following the calendar year for which the tax is due for the period from April 15th until the date on which the tax is paid.
 Section 6404(g) requires the Secretary to suspend the accrual of interest and time sensitive penalties if the Secretary does not provide a notice specifically stating the amount and basis for the taxpayer’s liability within 18 months following the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return (the “notification period”). The suspension of the accrual of interest and penalties begins upon the expiration of the notification period and ends 21 days after the date on which the Service provides the notice to the taxpayer (the “suspension period”). Section 6404(g)(3). The legislative history to section 6404(g) states that section 6404(g) was enacted to limit the period during which interest and penalties accrue because the IRS should promptly inform taxpayers of their obligations with respect to tax deficiencies and additional amounts due. S. Rep. No. 174, 105th Cong., 2d Sess., at 64-65, 1998-3 C.B. 537, 600-01.
 Section 6404(g)(1) provides that the suspension of the accrual of interest and penalties under section 6404(g) only applies to taxpayers who file an income tax return “on or before the due date for the return (including extensions).” (Emphasis added.) Section 6404(g)(2)(C) provides that “any tax liability shown on the return” is excluded from the suspension provisions of section 6404(g)(1). (Emphasis added.) Because section 6404(g)(2) provides exceptions to 6404(g)(1), “the return” referred to in section 6404(g)(2)(C) is the timely filed return described in section 6404(g)(1), i.e., the original return.
 An amended return (or other written notice to the Service of additional liability not listed on the original return) filed after the due date (including extensions) is not “the return” described in sections 6404(g)(1) and 6404(g)(2)(C). Accordingly, interest and time sensitive penalties are suspended under section 6404(g) with respect to any tax shown on an amended return (or other written notice to the Service of additional liability not listed on the original return) if the Service does not provide to the taxpayer the notice described under section 6404(g)(1) within the notification period.
 When a taxpayer files an amended return (or other written notice to the Service of additional liability not listed on the original return), the taxpayer knows the amount and the basis for the additional tax reported on the amended return. The filing of the amended return (or other written notice to the Service of additional liability not listed on the original return), therefore, renders unnecessary notice to the taxpayer under section 6404(g)(1).
 In Situation 1, TP filed an amended return on October 4, 2004, within 18 months of filing the income tax return. TP’s amended
return renders unnecessary notice of the amount and the basis for the additional tax reported on the amended return prior to the termination of the notification period. Section 6404(g)(1) will not suspend interest and time sensitive penalties with respect to the additional tax liability reported on the amended return. Interest and time sensitive penalties will accrue on the additional tax liability from the due date of the original return.
 In Situation 2, TP filed an amended return on November 26, 2004, more than 18 months after the filing of an income tax return. The Service did not provide TP with the notice required to be provided under section 6404(g) prior to October 14, 2004, the date on which the notification period expired. Section 6404(g) suspends the imposition of interest and time sensitive penalties beginning on October 15, 2004, until November 26, 2004, the date on which TP filed the amended return and paid the additional tax due.
 In Situation 3, TP filed an amended return on November 26, 2004, more than 18 months after the filing of an income tax return, but did not pay the additional tax due. The Service did not provide TP with the notice required to be provided under section 6404(g) before October 14, 2004, the date on which the notification period expired. Section 6404(g) suspends the imposition of interest and time sensitive penalties beginning on October 15, 2004, and ending on December 17, 2004, the date that is 21 days after November 26, 2004, the date that TP filed an amended return.
HOLDINGS
 Section 6404(g) suspends interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual’s amended income tax return filed more than 18 months after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return. The suspension of the accrual of interest and time sensitive penalties, additions to tax and additional amounts begins 18 months and one day after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the individual timely filed the return. The suspension of the accrual of interest and time sensitive penalties, additions to tax and additional amounts ends (1) on the date on which the individual files an amended return if the individual pays the additional tax due with the amended return or (2) on the date that is 21 days after the date on which the individual files the amended return if the individual does not pay the additional tax due with the amended return.
EFFECTIVE DATE
 This revenue ruling is effective for tax years ending after July 22, 1998, for which the period of limitations on filing a claim for refund has not expired.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Julie A. Jebe of the Office of Associate Chief Counsel (Procedure & Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact Julie A. Jebe at (202) 622-7950 (not a toll-free call).
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