Revenue Ruling 2005-37
Rev. Rul. 2005-37
Rev. Rul. 2005-37, 2005-26 I.R.B. 1343
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                    LIFO; PRICE INDEXES; DEPARTMENT STORES
                           Published: June 27, 2005
 Section 472.-Last-in, First-out Inventories, 26 CFR 1.472-1: Last-in, first-out inventories.
 LIFO; price indexes; department stores. The April 2005 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, April 30, 2005.
 LIFO; price indexes; department stores. The April 2005 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, April 30, 2005.
 The following Department Store Inventory Price Indexes for April 2005 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, April 30, 2005.
 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                Apr 2004 Apr 2005  Percent Change
                                                               from Apr 2004
                                                              to Apr 20051
——————————————————————————-
1.  Piece Goods ……………………… 491.0    469.8              -4.3
2.  Domestics and Draperies …………… 539.7    539.1              -0.1
3.  Women’s and Children’s Shoes ………. 654.5    679.7               3.9
4.  Men’s Shoes ……………………… 856.4    876.6               2.4
5.  Infants’ Wear ……………………. 586.1    582.7              -0.6
6.  Women’s Underwear ………………… 493.2    545.2              10.5
7.  Women’s Hosiery ………………….. 336.2    342.9               2.0
8.  Women’s and Girls’ Accessories …….. 564.2    599.6               6.3
9.  Women’s Outerwear and Girls’ Wear ….. 389.2    376.2              -3.3
10. Men’s Clothing …………………… 545.9    565.6               3.6
11. Men’s Furnishings ………………… 592.7    586.6              -1.0
12. Boys’ Clothing and Furnishings …….. 459.4    440.4              -4.1
13. Jewelry …………………………. 893.0    879.9              -1.5
14. Notions …………………………. 799.3    779.0              -2.5
15. Toilet Articles and Drugs …………. 987.5    994.4               0.7
16. Furniture and Bedding …………….. 618.0    604.2              -2.2
17. Floor Coverings ………………….. 598.8    601.0               0.4
18. Housewares ………………………. 715.3    714.1              -0.2
19. Major Appliances …………………. 201.8    202.8               0.5
20. Radio and Television ………………. 42.7     39.5              -7.5
21. Recreation and Education2 ………… 81.2     78.3              -3.6
22. Home Improvements2 ……………… 128.0    136.4               6.6
23. Automotive Accessories2 …………. 112.1    114.4               2.1
 Rev. Rul. 2005-37, 2005-26 I.R.B. 1343
Internal Revenue Service Revenue Ruling
Revenue Ruling 2005-42
Rev. Rul. 2005-42
Rev. Rul. 2005-42
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                            Released: June 20, 2005
 Section 263A Capitalization and Inclusion in Inventory Costs of Certain Expenses
26 CFR 1.263A-1: Uniform capitalization of costs.
ISSUE
 Are environmental remediation costs incurred to clean up land that a taxpayer contaminated with hazardous waste by the operation of the taxpayer’s manufacturing activities properly allocable under s 263A of the Internal Revenue Code to the inventory produced during the taxable year the costs are incurred?
FACTS
 Situation 1. N, a corporation using an accrual method of accounting, owns land and operates a manufacturing plant on Site X that N uses to produce stoves. Stoves are the only property produced by N and are inventory in N’s hands. N’s manufacturing activities discharge hazardous waste. In the past, N buried this waste on portions of Site X in accordance with then applicable law. Site X was not contaminated by hazardous waste when purchased by N.
 In order to comply with federal, state, and local environmental requirements, N incurs costs in 2005 to remediate the contaminated soil and groundwater at Site X. The costs N incurs are not research and experimental expenditures within the meaning of s 174, qualified environmental remediation expenditures within the meaning of s 198(b), or environmental management policy costs. The soil remediation and groundwater treatment restores Site X to essentially the same physical condition that existed prior to the contamination. The soil remediation and groundwater treatment does not materially add to the value of Site X, appreciably prolong its life, or adapt it to a new or different use. During and after the remediation, N continues to manufacture stoves at Site X.
 Situation 2. The facts are the same as in Situation 1, except that N manufactures clothes washers at Site X and no longer manufactures stoves. Clothes washers are the only property produced by N and are inventory in N’s hands. Situation 3. The facts are the same as in Situation 1, except that N temporarily ceases its manufacturing activities at Site X during a part of 2005 while it remediates the contaminated soil and groundwater.
 Situation 4. The facts are the same as in Situation 1, except that N has permanently ceased its manufacturing activities at Site X and manufactures stoves at another site.
 Situation 5. The facts are the same as in Situation 1, except that in the past N buried the waste on portions of Site Y, a remote dump site that N did not own or otherwise use in its manufacturing activities. N was not obligated to clean up the site when N buried the waste. In order to comply with federal, state, and local environmental requirements, N incurs costs in 2005 to remediate the contaminated soil and groundwater at Site Y. The soil remediation and groundwater treatment restores Site Y to essentially the same physical condition that existed prior to the contamination. The soil remediation and groundwater treatment does not materially add to the value of any of N’s property, appreciably prolong its life, or adapt it to a new or different use. During and after the remediation, N continues to manufacture stoves at Site X, but has permanently stopped using Site Y to bury waste.
LAW
 Section 263A(a) provides that the direct costs and indirect costs properly allocable to property that is inventory in the hands of the taxpayer are included in inventory costs.
 Section 1.263A-1(a)(3)(ii) of the Income Tax Regulations provides, in part, that taxpayers that produce tangible personal property must capitalize (1) all direct costs of producing the property, and (2) the property’s properly allocable share of indirect costs.
 Section 1.263A-1(c)(1) provides that to determine these capitalizable costs, taxpayers must allocate or apportion costs to various activities, including production activities. Section 1.263A-1(c)(1) further provides that after s 263A costs are allocated to the appropriate production activities, these costs generally are allocated to the items of property produced during the taxable year and capitalized to the items that remain on hand at the end of the taxable year. As a result, costs incurred during the taxable year are either included in the cost of goods sold during the taxable year or are capitalized to the items that remain on hand at the end of the taxable year using a method permitted under s 1.263A-1(f). Section 1.263A-1(c)(2)(ii) provides that the amount of any cost required to be capitalized under s 263A may not be included in inventory or charged to capital accounts or basis any earlier than the taxable year during which the amount is incurred within the meaning of s 1.446-1(c)(1)(ii).
 Section 1.263A-1(c)(3) provides that capitalize means, in the case of property that is inventory in the hands of a taxpayer, to include in inventory costs.
 Section 1.263A-1(c)(4) provides that costs that are capitalized under s 263A are recovered through depreciation, amortization, cost of goods sold, or by an adjustment to basis at the time the property is used, sold, placed in service, or otherwise disposed of by the taxpayer.
 Section 1.263A-1(e)(3)(i) provides, in part, that indirect costs are properly allocable to property produced when the costs directly benefit or are incurred by reason of the performance of production activities. Generally, producers must capitalize direct and indirect costs properly allocable to property produced under s 263A, without regard to whether those costs are incurred before, during, or after production. See s 1.263A-2(a)(3)(i).
 Section 1.263A-1(e)(3)(ii) provides examples of indirect costs that must be capitalized to the extent they are properly allocable to property produced. Indirect costs required to be capitalized include the costs of repairing and maintaining production equipment or facilities. See s 1.263A-1(e)(3)(ii)(O). In addition, costs related to temporarily idle production equipment or facilities,
other than depreciation, amortization and cost recovery allowances, are indirect costs that are required to be capitalized. See s 1.263A-1(e)(3)(iii)(E).
 Rev. Rul. 94-38, 1994-1 C.B. 35, holds that costs incurred to clean up land and to treat groundwater contaminated with hazardous waste from the taxpayer’s business are not capital expenditures under s 263 because these costs do not materially add value to the land, prolong the useful life of the land or adapt the land to a new or different use and, therefore, such costs are deductible by the taxpayer as business expenses under s 162. Costs incurred for constructing groundwater treatment facilities, however, are capital expenditures under s 263.
 Rev. Rul. 2004-18, 2004-1 C.B. 509, considers whether costs incurred to clean up land that a taxpayer contaminated with hazardous waste by the operation of the taxpayer’s manufacturing activities are includible in inventory costs under s 263A. Rev. Rul. 2004-18 states that the holding of Rev. Rul. 94-38 that the costs to construct a groundwater treatment facility must be capitalized under ss 263(a) and 263A, rather than deducted under s 162, demonstrates the distinction between capital expenditures and costs that are more in the nature of repairs than capital improvements. As with other types of deductible business costs, such as labor costs, taxes, rent, and supplies, once repair costs are determined to be deductible under s 162, a taxpayer with inventories still must apply the rules of s 263A to determine whether the repair costs must be included in inventory. Rev. Rul. 2004-18 concludes, therefore, that environmental remediation costs similarly are subject to capitalization under s 263A and are required to be included in inventory costs under the facts of that ruling.
ANALYSIS
 Environmental remediation costs incurred to clean up land and to treat groundwater that a taxpayer contaminated with hazardous waste from its production activities do not materially add to the value of the land, appreciably prolong its life, or adapt it to a new or different use. Rev. Rul. 94-38. Thus, these costs are more in the nature of repairs than capital improvements and, under s 263A, are indirect costs that must be included in inventory costs to the extent allocable to inventory. Rev. Rul. 2004-18. Generally, repair costs incurred to keep equipment or facilities used in production activities in an ordinarily efficient operating condition directly benefit or are incurred by reason of the performance of the production activities and, therefore, are properly allocable to inventory, without regard to whether those costs are incurred before, during, or after production. See ss 1.263A-1(e)(3)(i), 1.263A-1(e)(3)(ii)(O) and 1.263A-2(a)(3)(i). Under ss 1.263A-1(c)(1) and 1.263A-1(c)(2), these repair costs are allocable to the property produced during the taxable year in which the costs are incurred, even though the repairs may have been necessitated by the use of the equipment or facilities in the production of property in prior taxable periods.
 Like repair costs, environmental remediation costs incurred by a taxpayer to clean up land and to treat groundwater that the taxpayer contaminated with hazardous waste from its production activities are costs that directly benefit or are incurred by reason of the performance of the production activities even if the condition that necessitated the remediation arose during prior taxable periods. See s 1.263A-2(a)(3)(i). As with repair costs, environmental remediation costs are properly allocable to inventory without regard to whether those costs are incurred before, during, or after production. See s 1.263A-1(c)(2). Likewise, remediation costs are allocable under s 1.263A-1(c)(1) to the property produced during the taxable year in which the costs are incurred.
 In Situation 1, during 2005, N manufactures stoves at Site X. The costs N incurs in 2005 to clean up Site X are incurred by reason of N’s production activities, within the meaning of s 1.263A-1(e)(3)(i). Because the environmental remediation costs to clean up Site X are incurred in 2005, they are properly allocable to the inventory produced by N in 2005, in accordance with ss 1.263A-1(c)(1) and 1.263A-1(c)(2). Therefore, the environmental remediation costs are allocable to the stoves produced by N during 2005, using an allocation method permitted under s 1.263A-1(f).
 In Situation 2, during 2005, N manufactures clothes washers at Site X. The costs N incurs in 2005 to clean up Site X are incurred by reason of N’s production activities, within the meaning of s 1.263A-1(e)(3)(i). Because the environmental remediation costs to clean up Site X are incurred in 2005, they are properly allocable to the inventory produced by N in 2005, in accordance with ss 1.263A-1(c)(1) and 1.263A-1(c)(2). Therefore, the environmental remediation costs are allocable to the clothes washers produced by N during 2005, using an allocation method permitted under s 1.263A-1(f).
 In Situation 3, during a part of 2005, Site X is temporarily idle. Nevertheless, the costs N incurs in 2005 to clean up Site X are incurred by reason of N’ s production activities, within the meaning of s 1.263A-1(e)(3)(i). See s 1.263A-2(a)(3)(i). Because the environmental remediation costs to clean up Site X are incurred in 2005, they are properly allocable to the inventory produced by N in 2005, in accordance with ss 1.263A-1(c)(1) and 1.263A-1(c)(2). Therefore, the environmental remediation costs are allocable to the stoves produced by N during 2005, using an allocation method permitted under s 1.263A-1(f).
 In Situation 4, N has permanently ceased its manufacturing activities at Site X. Nevertheless, the costs N incurs in 2005 to clean up Site X are incurred by reason of N’s production activities, within the meaning of s 1.263A-1(e)(3)(i). See s 1.263A-2(a)(3)(i). Because the environmental remediation costs to clean up Site X are incurred in 2005, they are properly allocable to the inventory produced by N in 2005, in accordance with ss 1.263A-1(c)(1) and 1.263A-1(c)(2). Therefore, the environmental remediation costs are allocable to the stoves produced by N during 2005, using an allocation method permitted under s 1.263A-1(f).
 In Situation 5, N has permanently ceased burying waste from its manufacturing activities on Site Y. Nevertheless, the costs N incurs in 2005 to clean up Site Y are incurred by reason of N’s production activities, within the meaning of s 1.263A-1(e)(3)(i). See s 1.263A-2(a)(3)(i). Because the environmental remediation costs to clean up Site Y are incurred in 2005, they are properly allocable to the inventory produced by N in 2005, in accordance with ss 1.263A-1(c)(1) and 1.263A-1(c)(2). Therefore, the environmental remediation costs are allocable to the stoves produced by N during 2005, using an allocation method permitted under s 1.263A-1(f).
HOLDING
 Environmental remediation costs that are incurred to clean up land that a taxpayer contaminated with hazardous waste by the operation of the taxpayer’s manufacturing activities are incurred by reason of the taxpayer’s production activities and are properly allocable under s 263A to the inventory produced during the taxable year the costs are incurred.
CHANGE IN METHOD OF ACCOUNTING
 A taxpayer using a method of accounting that does not comply with this revenue ruling is using an impermissible method of accounting. Any change in a taxpayer’s treatment of environmental remediation costs to conform with this revenue ruling is a change
in method of accounting to which the provisions of s s 446 and 481 and the regulations thereunder apply.
 A taxpayer changing its method of accounting to comply with this revenue ruling must file a Form 3115 in accordance with the automatic change in method of accounting provisions of Rev. Proc. 2002-9, 2002-1 C.B. 327, as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432, except that the scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply to a taxpayer that makes the change for its first or second taxable year ending after February 6, 2004. A taxpayer that files Form 3115 to comply with Rev. Rul. 2004-18 and this revenue ruling for its first taxable year ending after February 6, 2004, may effect the change using either a s 481(a) adjustment as provided in sections 5.03 and 5.04 of Rev. Proc. 2002-9 or a cut-off method. See Rev. Rul. 2004-18. Additionally, a taxpayer that (1) files a Form 3115 on or before July 20, 2005, to comply with Rev. Rul. 2004-18, for its first taxable year ending after February 6, 2004, or was not required to change its method of accounting to comply with Rev. Rul. 2004-18, and (2) files Form 3115 to comply with this revenue ruling for its first taxable year ending after June 20, 2005, may effect the change using either a s 481(a) adjustment or a cut-off method.
 For purposes of Line 1a of Form 3115 (revised December 2003), the designated number for the automatic accounting method change authorized by this revenue ruling is “92.” A taxpayer making the automatic change in method of accounting authorized by this revenue ruling and another automatic change in method of accounting under s 263A for the same taxable year may file one Form 3115 to make both changes, but must comply with the ordering rules of s 1.263A-7(b)(2) and must enter the automatic accounting method change numbers for both changes on Line 1a of Form 3115 (revised December 2003).
EFFECT ON OTHER DOCUMENTS
 Rev. Proc. 2002-9 is modified and amplified to include in the APPENDIX the automatic change provided in this revenue ruling.
DRAFTING INFORMATION
 The principal author of this revenue ruling is John Roman Faron of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Mr. Faron at 202-622-4930 (not a toll-free call).
 Rev. Rul. 2005-42
Revenue Ruling 2005-36
Rev. Rul. 2005-36
Rev. Rul. 2005-36, 2005-26 I.R.B. 1368
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
    INDIVIDUAL RETIREMENT ACCOUNT (IRA); DECEDENT; BENEFICIARY’S DISCLAIMER
                           Published: June 27, 2005
 Section 401.–Qualified Pension, Profit-Sharing, and Stock Bonus Plans, 26 CFR 1.401(a)(9)-5: Required minimum distributions from defined contribution plans.
 Where a beneficiary accepts the required minimum distribution from a decedent’s individual retirement account (IRA), the beneficiary is not precluded from making a qualified disclaimer under section 2518 of the Code of a beneficial interest in the IRA.
Section 2518.–Disclaimers, 26 CFR 25.2518: Qualified disclaimers of property.
 Individual Retirement Account (IRA); decedent; beneficiary’s disclaimer. This ruling discusses whether a beneficiary’s disclaimer of a beneficial interest in a decedent’s IRA is a qualified disclaimer under section 2518 of the Code even though prior to making the disclaimer, the beneficiary receives from the IRA the required minimum distribution for the year of the decedent’s death.
 Individual Retirement Account (IRA); decedent; beneficiary’s disclaimer. This ruling discusses whether a beneficiary’s disclaimer of a beneficial interest in a decedent’s IRA is a qualified disclaimer under section 2518 of the Code even though prior to making the disclaimer, the beneficiary receives from the IRA the required minimum distribution for the year of the decedent’s death.
ISSUE
 Is a beneficiary’s disclaimer of a beneficial interest in a decedent’s individual retirement account (IRA) a qualified disclaimer under s 2518 of the Internal Revenue Code even though, prior to making the disclaimer, the beneficiary receives the required minimum distribution for the year of the decedent’s death from the IRA?
FACTS
 Decedent dies in 2004. At the time of death, Decedent is the owner of an IRA described in s 408(a) with assets having a fair market value of $2,000x. Decedent’s “required beginning date,” as described in s 401(a)(9)(A), occurred prior to 2004, and accordingly Decedent was receiving annual distributions from the IRA prior to the time of death. However, at the time of death, Decedent had not received the required minimum distribution for the 2004 calendar year.
 Situation 1: Under the terms of the IRA beneficiary designation pursuant to the IRA governing instrument, Decedent’s spouse, Spouse, is designated as the sole beneficiary of the IRA after Decedent’s death. A, the child of Decedent and Spouse, is designated as the beneficiary in the event Spouse predeceases Decedent. Three months after Decedent’s death, in accordance with s 1.401(a)(9)-5, A-4, of the Income Tax Regulations, the IRA custodian pays Spouse $100x, the required minimum distribution for 2004. No other amounts have been paid from the IRA since Decedent’s date of death.
 Seven months after Decedent’s death, Spouse executes a written instrument pursuant to which Spouse disclaims the pecuniary amount of $600x of the IRA account balance plus the income attributable to the $600x amount earned after the date of death. The income earned by the IRA between the date of Decedent’s death and the date of Spouse’s disclaimer is $40x. The disclaimer is valid and effective under applicable state law. Under applicable state law, as a result of the disclaimer, Spouse is treated as predeceasing Decedent with respect to the disclaimed property. As soon as the disclaimer is made, in accordance with the IRA beneficiary designation, A, as successor beneficiary is paid the $600x amount disclaimed, plus that portion of IRA income earned between the date of death and the date of the disclaimer attributable to the $600x amount ($12x).
 Situation 2: The facts are the same as in Situation 1, except that, instead of disclaiming a pecuniary amount, Spouse validly disclaims, in the written instrument, 30 percent of Spouse’s entire interest in the principal and income of the balance of the IRA account remaining after the $100x required minimum distribution for 2004 and after reduction for the pre-disclaimer income attributable to the $100x required minimum distribution ($2x). As soon as the disclaimer is made, in accordance with the beneficiary designation, A is paid 30 percent of the excess of the remaining account balance over $2x.
 Situation 3: The facts are the same as in Situation 1, except that A is designated as the sole beneficiary of the IRA after Decedent’s death, Spouse is designated as the beneficiary in the event A predeceases Decedent, and the $100x required minimum distribution for 2004 is paid to A 3 months after Decedent’s death. Seven months after Decedent’s death, A disclaims the entire remaining balance of the IRA account except for $2x, the income attributable to the $100x required minimum distribution paid to A. As soon as the disclaimer is made, in accordance with the IRA beneficiary designation, the balance of the IRA account, less $2x, is distributed to Spouse as successor beneficiary. A receives a total of $102x.
LAW AND ANALYSIS
 Section 408(a) provides that the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his or her beneficiaries, but only if the written governing instrument creating the trust meets certain specified requirements.
 Section 408(a)(6) provides that, under regulations prescribed by the Secretary, rules similar to the rules of s 401(a)(9) and the incidental death benefit requirements of s 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit an IRA trust is maintained.
 Under s 401(a)(9)(A), a trust will not constitute a qualified trust unless the plan provides that the entire interest of each employee (i) will be distributed to such employee not later than the required beginning date, or (ii) will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).
 Under s 1.408-8, A-1, an IRA is subject to the required minimum distribution rules of s 401(a)(9) and must satisfy the
requirements of ss 1.401(a)(9)-1 through 1.401(a)(9)-9 in the same manner as a plan, except as otherwise specified in s 1.408-8. Under s 1.408-8, A-1, for purposes of applying the rules of ss 1.401(a)(9)-1 through 1.401(a)(9)-9, the IRA owner is substituted for the employee. Under s 1.408-8, A-3, the term “required beginning date” means April 1 of the calendar year following the calendar year in which the IRA owner attains age 70 1/2.
 Under s 1.401(a)(9)-4, A-1, a designated beneficiary is an individual who is designated as a beneficiary either by the terms of the plan or by an affirmative election by the employee (or the employee’s surviving spouse) specifying the beneficiary. A beneficiary designated as such under the plan is an individual who is entitled to a portion of an employee’s benefit, contingent on the employee’s death or another specified event.
 Section 1.401(a)(9)-4, A-4, provides that the employee’s designated beneficiary generally will be determined based on the beneficiaries designated as of the employee’s date of death who remain beneficiaries as of September 30th of the calendar year following the calendar year of the employee’s death. Generally, any person who was a beneficiary as of the employee’s date of death, but is not a beneficiary as of that September 30th (e.g., because the person receives the entire benefit to which the person is entitled before that September 30th), is not taken into account in determining the employee’s designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee’s death. Accordingly, if a person disclaims entitlement to the employee’s benefit by a disclaimer that satisfies s 2518 by that September 30th, thereby allowing other beneficiaries to receive the disclaimed benefit instead, the disclaimant is not taken into account in determining the employee’s designated beneficiary.
 Under s 2518(a), if a person makes a qualified disclaimer with respect to any interest in property, then for estate, gift, and generation-skipping transfer tax purposes, the disclaimed interest will be treated as if the interest had never been transferred to the disclaimant. Instead, the interest will be considered as having passed directly from the decedent to the person entitled to receive the property as a result of the disclaimer.
 Under s 2518(b), the term “qualified disclaimer” means an irrevocable and unqualified refusal by a person to accept an interest in property, but only if: (1) the refusal is in writing; (2) the writing is received by the transferor of the interest, his or her legal representative, or the holder of the legal title to the property to which the interest relates, not later than the date that is 9 months after the later of — (A) the date on which the transfer creating the interest in the person is made, or (B) the day on which the person attains the age of 21; (3) the person has not accepted the interest or any of its benefits; and (4) as a result of the refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either–(A) to the spouse of the decedent, or (B) to a person other than the person making the disclaimer.
 Section 25.2518-2(d)(1) of the Gift Tax Regulations provides that a qualified disclaimer cannot be made with respect to an interest in property if the disclaimant has accepted the interest or any of its benefits, expressly or impliedly, prior to making the disclaimer. Acceptance is manifested by an affirmative act that is consistent with ownership of the interest in the property. Acts indicative of acceptance include: using the property or the interest in the property; accepting dividends, interest, or rents from the property; and directing others to act with respect to the property or interest in the property. However, a disclaimant is not considered to have accepted the property merely because, under applicable local law, title to the property vests immediately on the decedent’s death in the disclaimant.
 Section 25.2518-3 provides rules regarding the circumstances under which an individual may make a qualified disclaimer of less than the individual’s entire interest in property and may accept the balance of the property. Section 25.2518-3(b) provides that a disclaimer of an undivided portion of a separate interest in property that meets the other requirements of a qualified disclaimer under s 2518(b) and the corresponding regulations is a qualified disclaimer. Under the regulations, each interest in property that is separately created by the transferor is treated as a separate interest in property. An undivided portion of a disclaimant’s separate interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in the property and must extend over the entire term of the disclaimant’s interest in the property and in other property into which the property is converted.
 Section 25.2518-3(c) provides that the disclaimer of a specific pecuniary amount out of a pecuniary or nonpecuniary bequest or gift can be a qualified disclaimer provided that no income or other benefit of the disclaimed amount inures to the benefit of the disclaimant either prior to or subsequent to the disclaimer. Following the disclaimer, the amount disclaimed and any income attributable to that amount must be segregated based on the fair market value of the assets on the date of the disclaimer or on a basis that is fairly representative of the value changes that may have occurred between the date of transfer and the date of the disclaimer. The regulation further provides that a pecuniary amount that is distributed to the disclaimant from the bequest prior to the disclaimer is treated as a distribution of corpus from the bequest that does not preclude a disclaimer with respect to the balance of the bequest. However, the acceptance of a distribution from the bequest is considered an acceptance of a proportionate amount of the income earned by the bequest. That income must be similarly segregated from the disclaimed amount and cannot be disclaimed. The regulation provides a formula to determine the proportionate share of the income considered to be accepted by the disclaimant, and thus, not eligible to be disclaimed, as follows:
——————————————————————————-
Total amount of distributions received by       Total amount of income earned
 the disclaimant out of gift or bequest          by the bequest
____________________________________________Â XÂ between the date of
Total value of the gift or bequest on the       transfer and the date of
 date of the transfer                            disclaimer
——————————————————————————-
See s 25.2518-3(d), Example 17 (illustrating a beneficiary’s qualified disclaimer of an interest in a brokerage account passing to the beneficiary when, prior to the disclaimer, the beneficiary withdrew a pecuniary amount from the account); see also s 25.2518-3(d), Example 19 (regarding a pecuniary disclaimer funded on a basis that is fairly representative of value changes that
occurred between the date of transfer and the date of the disclaimer).
 In Situations 1, 2, and 3, the beneficiary’s receipt of the $100x distribution from the IRA constitutes an acceptance of $100x of corpus, plus the income attributable to that amount. Based on the formula contained in s 25.2518-3(c), the amount of income attributable to the $100x distribution that the beneficiary is deemed to have accepted, and therefore cannot disclaim, is $2x computed as follows:
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$100x (distribution)
___________________________________
$2000x (date of death value of IRA)Â XÂ $40x (IRA income from date of death to
                                         date of disclaimer)
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 However, the beneficiary’s acceptance of these amounts does not preclude the beneficiary from making a qualified disclaimer with respect to all or a portion of the balance of the IRA.
 Accordingly, in Situation 1, assuming the other requirements of s 2518(b) are satisfied, Spouse’s disclaimer constitutes a qualified disclaimer under s 2518(b) of the $600x pecuniary amount, plus $12x (the IRA income attributable to the disclaimed amount ($600x/$2000x X $40x)).
 In Situation 2, Spouse disclaims, in accordance with s 25.2518-3(b), an undivided portion (30 percent) of Spouse’s principal and income interest in the remaining IRA account balance, rather than a pecuniary amount as in Situation 1. However, as in Situation 1, Spouse’s receipt of the $100x distribution also constitutes acceptance of $2x of income deemed attributable to the amount distributed. Spouse may not disclaim any portion of the $2x. Therefore, in Situation 2, assuming the other requirements of s 2518(b) are satisfied, Spouse’s disclaimer of 30 percent of Spouse’s entire interest in the principal and income of the balance of the IRA account remaining after the $100x required minimum distribution for 2004 and after reduction for the pre-disclaimer income attributable to that amount ($2x), constitutes a qualified disclaimer to the extent of 30 percent of the remaining IRA account balance after reduction for the $2x of income Spouse is deemed to have accepted (that is, .30 X [value of remaining account balance on date of disclaimer - $2x]).
 The results in Situations 1 and 2 would be the same if the amount disclaimed, plus that portion of the post-death IRA income attributable to the disclaimed amount, is not distributed outright to A, but instead is segregated and maintained in a separate IRA account of which A is the beneficiary as described in s 1.401(a)(9)-8, A-3. See also, s 1.401(a)(9)-8, A-2(a)(2). Separate accounts for A and Spouse may be made effective as of the date of Decedent’s death in 2004, and the 2004 required minimum distribution does not have to be allocated among the beneficiaries of the separate accounts for purposes of the separate account rules under s 1.401(a)(9)-8, A-3.
 In Situation 3, A disclaims A’s entire principal and income interest in the remaining IRA account balance after the payment of the required minimum distribution for 2004, except for $2x. As in Situations 1 and 2, A’s receipt of the $100x required minimum distribution also constitutes an acceptance of the $2x of income that is deemed attributable to the required minimum distribution that is distributed. A may not disclaim any portion of the $2x. Therefore, in Situation 3, assuming the other requirements of s 2518(b) are satisfied, A’s disclaimer of the entire principal and income balance of the IRA remaining after the payment of the required minimum distribution for 2004, except for $2x (that is, 100% of value of the remaining account balance on the date of the disclaimer, less $2x) constitutes a qualified disclaimer.
 In addition, under s 1.401(a)(9)-4, A-4, any person who was a beneficiary of the employee’s benefit as of the date of the employee’s death, but is not a beneficiary as of September 30th of the calendar year following the calendar year of the employee’s death, is not considered a designated beneficiary for purposes of s 401(a)(9). In Situation 3, A both received the required minimum distribution amount and timely disclaimed entitlement to the entire balance of the IRA account on or before September 30, 2005. Accordingly, if A is paid the $2x of income attributable to the required minimum distribution amount on or before September 30, 2005, A will be treated as not entitled to any further benefit as of September 30, 2005, and therefore, A will not be considered a designated beneficiary of the IRA for purposes of s 401(a)(9).
HOLDINGS
 A beneficiary’s disclaimer of a beneficial interest in a decedent’s IRA is a qualified disclaimer under s 2518 (if all of the requirements of that section are met), even though, prior to making the disclaimer, the beneficiary receives the required minimum distribution for the year of the decedent’s death from the IRA. The beneficiary may make a qualified disclaimer under s 2518 with respect to all or a portion of the balance of the account, other than the income attributable to the required minimum distribution that the beneficiary received, provided that at the time the disclaimer is made, the disclaimed amount and the income attributable to the disclaimed amount are paid to the beneficiary entitled to receive the disclaimed amount, or are segregated in a separate account.
 Further, a person disclaiming his or her entire remaining interest in an IRA will not be considered a designated beneficiary of the IRA for purposes of s 401(a)(9), if the qualified disclaimer is made on or before September 30th of the calendar year following the calendar year of the employee’s death, and if, on or before that September 30th, the disclaimant is paid the income attributable to the required minimum distribution amount, so that the disclaimant is not entitled to any further benefit in the IRA after September 30th of the calendar year following the calendar year of the employee’s death.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Susan H. Levy of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Susan H. Levy at (202) 622- 3090 (not a toll-free call).
 Rev. Rul. 2005-36, 2005-26 I.R.B. 1368
Revenue Ruling 2005-38
Rev. Rul. 2005-38
Rev. Rul. 2005-38, 2005-27 I.R.B. 6
                      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: June 17, 2005
                            Published: July 5, 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 July 2005.
Section 280G.–Golden Parachute Payments
 Federal short-term, mid-term, and long-term rates are set forth for the month of July 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 July 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 July 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 July 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 July 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 July 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 July 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 July 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 July 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 July 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 July 2005.
Section 7520.–Valuation Tables
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 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 July 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 July 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 July 2005.
 This revenue ruling provides various prescribed rates for federal income tax purposes for July 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. 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. Finally, Table 6 contains the blended annual rate for 2005 for purposes of section 7872.
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            REV. RUL. 2005-38 TABLE 1
   Applicable Federal Rates (AFR) for July 2005
              Period for Compounding
           Annual   Semiannual Quarterly Monthly
Short-Term
      AFR 3.45%    3.42%      3.41%     3.40%
 110% AFR 3.80%    3.76%      3.74%     3.73%
 120% AFR 4.14%    4.10%      4.08%     4.07%
 130% AFR 4.50%    4.45%      4.43%     4.41%
 Mid-Term
      AFR 3.86%    3.82%      3.80%     3.79%
 110% AFR 4.24%    4.20%      4.18%     4.16%
 120% AFR 4.63%    4.58%      4.55%     4.54%
 130% AFR 5.03%    4.97%      4.94%     4.92%
 150% AFR 5.81%    5.73%      5.69%     5.66%
 175% AFR 6.80%    6.69%      6.63%     6.60%
 Long-Term
      AFR 4.35%    4.30%      4.28%     4.26%
 110% AFR 4.79%    4.73%      4.70%     4.68%
 120% AFR 5.23%    5.16%      5.13%     5.11%
 130% AFR 5.67%    5.59%      5.55%     5.53%
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                  REV. RUL. 2005-38 TABLE 2
                 Adjusted AFR for July 2005
                   Period for Compounding
                        Annual Semiannual Quarterly Monthly
Short-term adjusted AFRÂ 2.82%Â Â 2.80%Â Â Â Â Â Â 2.79%Â Â Â Â Â 2.78%
Mid-term adjusted AFRÂ Â Â 3.06%Â Â 3.04%Â Â Â Â Â Â 3.03%Â Â Â Â Â 3.02%
Long-term adjusted AFRÂ Â 4.09%Â Â 4.05%Â Â Â Â Â Â 4.03%Â Â Â Â Â 4.02%
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                          REV. RUL. 2005-38 TABLE 3
                    Rates Under Section 382 for July 2005
Adjusted federal long-term rate for the current month                    4.09%
Long-term tax-exempt rate for ownership changes during the current month 4.37%
 (the highest of the adjusted federal long-term rates for the current
 month and the prior two months.)
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                          REV. RUL. 2005-38 TABLE 4
        Appropriate Percentages Under Section 42(b)(2) for July 2005
Appropriate percentage for the 70% present value low-income housing      7.95%
 credit
Appropriate percentage for the 30% present value low-income housing      3.41%
 credit
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                          REV. RUL. 2005-38 TABLE 5
                    Rate Under Section 7520 for July 2005
Applicable federal rate for determining the present value of an annuity,  4.6%
 an interest for life or a term of years, or a remainder or reversionary
 interest
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             REV. RUL. 2005-38 TABLE 6
       Rate Under Section 7520 for July 2005
            Blended Annual Rate for 2005
Section 7872(e)(2) blended annual rate for 2005Â 3.11%
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 Rev. Rul. 2005-38, 2005-27 I.R.B. 6