Rp 2004-47 (2004-32 Irb)

contingent nonperiodic payments. Some
commentators have argued that CDSs with
periodic payments, among other features,
meet the definition of a notional principal contract; however, commentators disagree about the scope of CDSs that may
fall within the definition of notional principal contract. Payments with respect to
a notional principal contract generally are
not subject to withholding. Trading in such
notional principal contracts may not give
rise to a trade or business within the United
States. Special timing rules may apply to
notional principal contracts.
A CDS has been analogized to a guarantee. Guarantee fees have been analogized
to commissions for letters of credit, which
are sourced in the same manner as interest.
See Centel Communications Co. v. Commissioner, 920 F.2d 1335, 1343–1344 (7th
Cir. 1990) (citing Bank of America). In
addition, guaranteeing obligations and issuing standby letters of credit from within
the United States could constitute engaging in a trade or business within the United
States. Some commentators have distinguished CDSs from guarantees on the basis that a credit event under a CDS requires
performance by the protection seller without regard to whether the protection buyer
sustains an actual loss. A relevant factor in
this regard may be how much of the CDS
protection-buying market consists of persons who do not have or expect to be exposed to credit risk.
A CDS has been analogized to a form
of insurance. Insurance premiums paid to
a foreign person with respect to a U.S. risk
are subject to excise tax. Moreover, insuring risks from within the United States
could constitute engaging in a trade or
business within the United States. Some
commentators have distinguished CDSs
from insurance on the basis, as described
above, that no actual loss need be sustained
in order to give rise to an obligation under
a CDS. Some commentators have noted
the Supreme Court’s opinion in Helvering
v. LeGierse, 312 U.S. 531 (1941), that the
essence of insurance activity is the shifting
and distribution of insurance risk. These
commentators have suggested that many
protection sellers do not shift or distribute
risk with respect to CDSs in this way, and
that it is not clear how a protection buyer
could know how its counterparty manages
risk with respect to a particular CDS.

August 9, 2004

Some commentators have suggested
consideration of an approach to determine the tax treatment of CDSs other than
classification by analogy to other types
of financial transaction. Instead, they
have proposed that the tax treatment of
payments with respect to a CDS could
be determined by analyzing various elements of the CDS transaction, including
the nature of the reference obligation and
whether a party to the CDS provides financial services to customers.
IV. REQUEST FOR COMMENTS
The foregoing brief overview indicates
that the economic similarity of a CDS to
various financial transactions tends to blur
the distinctions between possible analogies and that the various analogies correspond to significantly different tax treatment.
Treasury and the IRS believe that additional information is needed in order to
respond to taxpayer requests for specific
guidance regarding the appropriate tax
treatment of amounts paid and received
with respect to a CDS. Treasury and the
IRS are particularly interested in information regarding:

•

•

CDS contractual terms, both standard
and negotiated, particularly with respect to credit events, subrogation
rights, security interests in collateral,
and collateralization requirements in
general;
CDS pricing, particularly with respect
to guarantees, contingent options, and
insurance;

•

operation of the CDS market, particularly with respect to price quotation
and dissemination;

•

market practice regarding hedging, the
management of basis risk, and the timing of CDS transactions relative to the
assumption and disposition of analogous risks; and

•

the regulatory capital, GAAP, and internal booking treatment of CDSs by
various market participants.

V. SUBMISSION OF COMMENTS
Taxpayers may submit written comments to:
CC:PA:LPD:PR (Notice
2004–52), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (Notice 2004–52),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet by submitting comments electronically via the following e-mail address:
[email protected].
Please include: Notice 2004–52 in the
subject line of any electronic communications.
DRAFTING INFORMATION
The principal authors of this notice
are Paul Epstein, Theodore Setzer, and
Steven Jensen of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Epstein, Mr. Setzer, or Mr. Jensen at
(202) 622–3870 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also, Part I, §§ 2056, 2652; 26.2632–1, 26.2652–1,
26.2652–2, 301.9100–3.)

Rev. Proc. 2004–47
SECTION 1. PURPOSE
This revenue procedure provides a simplified alternate method for certain executors of estates and trustees of trusts to request relief to make a late reverse qualified
terminable interest property (QTIP) election under § 2652 of the Internal Revenue
Code. This alternate method may be used
in lieu of the normal letter ruling process.
No user fee is charged for requests filed under this revenue procedure.
SECTION 2. BACKGROUND

Treasury and the IRS also welcome any
other information that market participants
believe may be relevant.

169

.01 Under § 2001(a), the estate tax is
imposed on the transfer of the taxable
estate of every decedent who is a citizen
or resident of the United States. Section 2056(a) provides that for purposes
of § 2001, the value of the taxable estate

2004–32 I.R.B.

shall, except as limited by § 2056(b), be
determined by deducting from the value
of the gross estate the value of any interest
in property that passes or has passed from
the decedent to the decedent’s surviving
spouse. Section 2056(b) generally provides that no deduction is allowed for an
interest passing to the surviving spouse
if, on the lapse of time, on the occurrence
of an event or contingency, or on the failure of an event or contingency to occur,
the interest will terminate or fail. Section 2056(b)(7) provides an exception for
property meeting the QTIP requirements
in § 2056(b)(7)(B).
.02 Section 2056(b)(7)(B)(i) defines
“qualified terminable interest property” as
property: (1) that passes from the decedent; (2) in which the surviving spouse has
a qualifying income interest for life; and
(3) to which an election under § 2056(b)(7)
applies. Property for which a QTIP election is made is treated as passing to the
surviving spouse for purposes of determining the decedent’s taxable estate. The
value of any property that was deducted
under § 2056(b)(7) from the decedent’s
gross estate and that remains on the surviving spouse’s death will be included in
the surviving spouse’s gross estate under
§ 2044. If the surviving spouse makes a
lifetime disposition of all or a portion of
the qualifying income interest, § 2519 provides that the surviving spouse is treated
for estate and gift tax purposes as transferring all interests in the property other
than the qualifying income interest. Furthermore, the transfer of the qualifying
income interest is subject to the gift tax
under § 2511 and § 25.2511–2.
.03 Chapter 13 imposes a generationskipping transfer (GST) tax on all transfers, whether made directly or indirectly,
to skip persons. Under § 2613(a), a skip
person is a person who is two or more generations younger than the transferor or is a
trust if all of the interests are held by skip
persons. Under § 2652, the transferor generally is the individual who transfers property in a transaction subject to the federal
gift or estate tax. Under § 2611(a), transfers that are subject to the GST tax include
direct skips, taxable distributions, and taxable terminations.
.04 Section 2631 allows every transferor a GST tax exemption of $1,000,000
that may be allocated by the individual (or
the individual’s executor) to any property

2004–32 I.R.B.

with respect to which the individual is the
transferor. For calendar years after 1998,
this exemption amount has been indexed
for inflation. For transfers made between
January 1, 2004, and December 31, 2009
(inclusive), the GST exemption will equal
the amount that is exempted from transfer tax by the applicable credit amount described in § 2010. With respect to transfers made at death, the allocation of a decedent’s GST tax exemption is made on the
decedent’s Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return. A decedent’s unused GST
tax exemption is automatically allocated
on the due date for filing the decedent’s
Form 706 to the extent not otherwise allocated by the decedent’s executor on or
before that date.
.05 Section 2632(e) and § 26.2632–
1(d)(2) of the Generation-Skipping Transfer Tax Regulations supply the method
for the automatic allocation of any unused
GST tax exemption. The exemption is first
allocated pro rata to direct skips treated
as occurring on death on the basis of the
value of property as finally determined for
federal estate tax purposes. The balance,
if any, is then allocated pro rata, on the
basis of estate tax value, to trusts with respect to which a taxable termination may
occur or from which a taxable distribution
may be made. In the case of trusts that are
not included in the gross estate, the GST
tax exemption is allocated on the basis of
the date of death value of the trust. No
automatic allocation is made to a trust that
will have a new transferor with respect to
the entire trust prior to the occurrence of
any GST with respect to the trust. The automatic allocation of GST tax exemption
is irrevocable.
.06 With respect to QTIP, the decedent’s surviving spouse will become the
new transferor with respect to the entire
trust before the occurrence of any GST
from the trust. Accordingly, a decedent’s
GST tax exemption is not automatically
allocated to property for which a QTIP
election was made. Section 2652(a)(3)
provides, however, that if an election is
made to treat property as QTIP under
§ 2056(b)(7), the person making the election may, for purposes of chapter 13, elect
to treat the property as if the QTIP election had not been made (reverse QTIP
election). As a result of the reverse QTIP
election, the decedent remains, for GST

170

tax purposes, the transferor of the QTIP
trust or property. The decedent’s GST tax
exemption, accordingly, may be allocated
to the QTIP trust or property, either by an
affirmative allocation or by the automatic
allocation of the decedent’s remaining
GST tax exemption. The reverse QTIP
election is made on the same return on
which the QTIP election is made.
.07 To date, the Internal Revenue Service has issued several private letter rulings providing relief to taxpayers who
failed to make a reverse QTIP election
on a timely filed Form 706 and who have
satisfied the requirements of § 301.9100–3
of the Procedure and Administration Regulations. Section 301.9100–3(a) generally provides that requests for extensions
of time for regulatory elections will be
granted when the taxpayer provides evidence to establish to the satisfaction of
the Commissioner that the taxpayer acted
reasonably and in good faith, and that the
grant of relief will not prejudice the interests of the Government.
SECTION 3. SCOPE
.01 In General. Except as otherwise
provided in sections 3.02 and 3.03 of this
revenue procedure, the alternate simplified
procedure authorized in this revenue procedure for obtaining permission to file a
late reverse QTIP election is available if
the requirements of sections 4.02 and 4.03
of this revenue procedure are met.
.02 Certain Late Reverse QTIP Elections. This revenue procedure does not apply to intervivos transfers to or for the benefit of a spouse, or to transfers to or for the
benefit of a non-citizen spouse in the form
of a qualified domestic trust. Relief under
this revenue procedure does not include or
grant permission to make a late severance
of a trust included in the gross estate or
to allocate GST exemption. Accordingly,
permission to file a late reverse QTIP election in conjunction with a late severance or
an allocation of GST exemption must be
requested through the letter ruling process
as described in section 3.03 of this revenue
procedure.
.03 Failure to Qualify for Relief Under This Revenue Procedure. An executor
who is denied relief or is otherwise outside the scope of this revenue procedure
may request relief under § 301.9100–3 by
requesting a letter ruling. The procedural

August 9, 2004

requirements for requesting a letter ruling are described in Rev. Proc. 2004–1,
2004–1 I.R.B. 1 (or its successor). If a letter ruling is requested after relief has been
denied under this revenue procedure, the
letter ruling request must indicate that relief was requested and denied under this
revenue procedure. Rev. Proc. 2004–1,
Appendix C, 2004–1 I.R.B. 1, 70.
SECTION 4. RELIEF FOR UNTIMELY
REVERSE QTIP ELECTIONS
.01 Definitions.
(1) Executor. Solely for purposes of
this revenue procedure, the term executor includes: an executor of an estate as
defined in § 2203 and §§ 20.2203–1 and
§ 20.2056(b)–7(b)(3) of the Estate Tax
Regulations; the trustee of the QTIP trust;
or any other person in actual or constructive possession of the property, for which
the reverse QTIP election will be made.
(2) Decedent. For purposes of this revenue procedure, the term decedent refers to
the individual for whose estate the reverse
QTIP election was not timely made.
(3) Reverse QTIP Election. For purposes of this revenue procedure, a reverse
QTIP election refers to the affirmative indication on Schedule R of Form 706 by the
executor to treat the decedent as the transferor for GST purposes of the QTIP trust
or property to which the election pertains.
As a result of this election, the decedent’s
GST tax exemption may be allocated to
the QTIP trust or property. This is the
case even though the surviving spouse or
the surviving spouse’s estate will be subject to the gift or estate tax with respect to
the property before the property passes to
a skip person.
(4) Due Date of the Reverse QTIP
Election. Section 26.2652–2(b) provides
that the reverse QTIP election is made
on the return on which the QTIP election
is made. Section 20.2056(b)–7(b)(4)(i)
provides that the QTIP election under
§ 2056(b)(7) must be made on the last estate tax return filed by the executor on or
before the due date of the return, including
extensions (if any). If a timely return is
not filed, the election must be made on the
first estate tax return filed by the executor
after the due date. Estate tax returns must
be filed within 9 months after the date of
the decedent’s death, not including extensions.

August 9, 2004

.02 Eligibility for Relief. Relief is available under section 4.02 of this revenue procedure if, on the date of the filing of the
request described in 4.03 of this revenue
procedure, the following requirements are
met:
(1) A valid QTIP election under
§ 2056(b)(7) was made for the property or
trust on the federal estate tax return filed
for the decedent’s estate;
(2) The reverse QTIP election was not
made on the estate tax return as filed because the taxpayer relied on the advice and
counsel of a qualified tax professional and
that qualified tax professional failed to advise the taxpayer of the need, advisability,
or proper method to make a reverse QTIP
election;
(3) The decedent has a sufficient
amount of unused GST exemption,
after the automatic allocation of the
GST exemption under § 2632(e) and
§ 26.2632–1(d)(2), to result in a zero-inclusion ratio for the reverse QTIP trust or
property;
(4) The estate is not eligible under
§ 301.9100–2(b) for an automatic 6-month
extension;
(5) The surviving spouse has not made
a lifetime disposition of all or any part of
the qualifying income interest for life in
the QTIP trust or property;
(6) The surviving spouse is alive or no
more than 6 months have passed since the
death of the surviving spouse; and
(7) Relief is requested by the executor
in accordance with section 4.03 of this revenue procedure.
.03 Procedural Requirements for Relief.
(1) The estate must file with the Internal Revenue Service a request for an
extension of time to make a reverse QTIP
election. The request should have a cover
sheet requesting relief that states at the top
of the document “REQUEST FOR EXTENSION FILED PURSUANT TO REV.
PROC. 2004–47.” The following items
must be attached to the request for relief:
(a) Copies of Parts 1 through 5
and Schedule M of the original estate tax
return filed with the Service;
(b) A properly completed Schedule R as required to make the reverse QTIP
election;
(c) A statement describing why
the reverse QTIP election was not made
on the estate tax return as filed;

171

(d) A statement affirming that all
of the requirements in section 4.02 of this
revenue procedure have been met;
(e) A dated declaration, signed
by the executor of the estate (as defined
above), that states: “Under penalties of
perjury, I declare that, to the best of my
knowledge and belief, the facts presented
in support of this election are true, correct,
and complete. In addition, all attachments
provided in support of this request for
relief are true and correct copies of the
original documents.”; and
(f) A signed statement from the
qualified tax professional on whom the
taxpayer relied when preparing the original estate tax return. The statement should
establish the tax professional’s qualifications as a qualified tax professional
and must include a dated declaration that
states: “Under penalties of perjury, I declare that, to the best of my knowledge
and belief, the facts presented in support
of this request for relief are true, correct,
and complete.”
(2) Subject to any contrary instructions in future forms, instructions, or
guidance published by the Service, the
request should be sent to the Cincinnati
Service Center for processing.
(a) If a private delivery service is
used, the request should be sent to:
Internal Revenue Service Center
201 W. Rivercenter Blvd.
Covington, KY 41012;
(b) If a private delivery service is
not used, the request should be sent to:
Internal Revenue Service Center
Cincinnati, OH 45999.
.04 Relief for Late Reverse QTIP Election. Upon receipt of a request for relief under section 4.03 of this revenue procedure, the Service Center will determine
whether the requirements for granting additional time to file the reverse QTIP election under this revenue procedure have
been satisfied and will notify the executor
of the result of this determination.
.05 Effect of Relief. An extension of
time to make the reverse QTIP election under § 2652(a)(3) does not extend the time
to make an allocation of any remaining
GST exemption. However, once the election is made, the decedent remains, for
GST tax purposes, the transferor of the

2004–32 I.R.B.

QTIP trust or property. As a result, the
decedent’s remaining GST tax exemption
will be automatically allocated pursuant to
§ 2632(e) and § 26.2632–1(d)(2) to the
QTIP trust or property for which the reverse QTIP election was made, based on
the value of the trust or property as finally
determined for federal estate tax purposes.
The relief provided by this revenue procedure does not include or grant permission
to allocate retroactively the decedent’s remaining GST exemption or to make a late
severance of a trust included in the gross
estate.
SECTION 5. EFFECTIVE DATE
.01 In General. This revenue procedure
is effective August 9, 2004.
.02 Transition Rule for Pending Letter
Ruling Requests. If an executor has filed
a request for a letter ruling seeking relief to file a reverse QTIP election under
§ 301.9100–3 and that letter ruling request
is pending in the national office on August 9, 2004, the executor may withdraw
the letter ruling request and receive a refund of its user fee if prior to September
23, 2004, the executor notifies the national
office that it will withdraw the letter ruling
request. If the executor does not so notify
the national office by September 23, 2004,
the national office will process letter ruling requests pending on August 9, 2004,
and will retain the user fee paid.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1898.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in section 4. This
information is required to be submitted to
the applicable service center in order to obtain an extension of time to make a late reverse QTIP election. This information will
be used to determine whether the eligibil-

2004–32 I.R.B.

ity requirements for obtaining relief have
been met. The collection of information is
required to obtain a benefit. The likely respondents are estates and trusts.
The estimated total annual reporting
burden is 54 hours.
The estimated average annual burden
per respondent is 9 hours to complete the
statements required under this revenue
procedure. The estimated number of respondents is 6.
There is no estimated annual frequency
of responses as the reverse QTIP election
is a one-time election.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is DeAnn K. Malone of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact DeAnn K. Malone at
(202) 622–7830 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement.
(Also §§ 1361, 1362; 301.7701–1, 301.7701–2,
301.7701–3, 301.9100–1, 301.9100–3.)

Rev. Proc. 2004–48
SECTION 1. PURPOSE
This revenue procedure provides a simplified method for taxpayers to request relief for a late S corporation election and a
late corporate classification election which
was intended to be effective on the same
date that the S corporation election was intended to be effective. Generally, this revenue procedure provides that certain eligible entities may be granted relief if the entity satisfies the requirements of section 4
of this revenue procedure.
SECTION 2. BACKGROUND
.01 S Corporation Elections.
(1) In general. Section 1361(a)(1) of
the Internal Revenue Code provides that

172

the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for that year.
Section 1362(b)(1) provides that a
corporation may make an election to be
treated as an S corporation for any taxable
year (A) at any time during the preceding
taxable year, or (B) at any time during the
taxable year and on or before the 15th day
of the 3rd month of the taxable year.
Section 1362(b)(3) provides that if (A)
a small business corporation makes an
election under § 1362(a) for any taxable
year, and (B) the election is made after the
15th day of the 3rd month of the taxable
year and on or before the 15th day of the
3rd month of the following taxable year,
then the election shall be treated as made
for the following taxable year.
(2) Late S corporation elections. Section 1362(b)(5) provides that if (A) an
election under § 1362(a) is made for any
taxable year (determined without regard
to § 1362(b)(3)) after the date prescribed
by § 1362(b) for making the election for
the taxable year or no election is made for
any taxable year, and (B) the Secretary determines that there was reasonable cause
for the failure to timely make the election, the Secretary may treat the election
as timely made for the taxable year (and
§ 1362(b)(3) shall not apply).
.02 Entity Classification Elections.
(1) In general. Section 301.7701–2(a)
of the Procedure and Administration Regulations defines a “business entity” as any
entity recognized for federal tax purposes
that is not properly classified as a trust under § 301.7701–4 or otherwise subject to
special treatment under the Code.
Section 301.7701–3(a) provides that a
business entity that is not classified as a
corporation under § 301.7701–2(b)(1), (3),
(4), (5), (6), (7), or (8) (an “eligible entity”)
can elect its classification for federal tax
purposes as provided in this section.
Section 301.7701–3(b)(1) provides
that, except as otherwise provided in paragraph (b)(3) of that section, unless the
entity elects otherwise, a domestic eligible
entity is (i) a partnership if it has two or
more members; or (ii) disregarded as an
entity separate from its owner if it has a
single owner.
Section 301.7701–3(c)(1) provides that
an eligible entity may elect to be classified
other than as provided in § 301.7701–3(b)

August 9, 2004