Internal Revenue Bulletin 2008-24 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
8-24
June 16, 2008
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9398, page 1143.
Final regulations under section 704 of the Code clarify that
where certain look-through entities (or members of a consol-
idated group) are partners in a partnership, the tax attributes
of the owners of the look-through entities must be taken into
account when testing whether the economic effect of an al-
location is substantial within the meaning of section 704(b).
Through an example, the final regulations also reiterate the ef-
fect of other provisions, such as section 482, upon the tax
treatment of a partner with respect to the partner’s distributive
share under section 704(b).
T.D. 9400, page 1139.
REG–136020–07, page 1154.
Final, temporary, and proposed regulations under section
367 of the Code implement the rules announced in Notices
2006–85, 2006–2 C.B. 677, and 2007–48, 2007–25 I.R.B.
1428. The notices announced that Treasury and the IRS would
issue regulations under section 367(b) to address transactions
where either a parent corporation (P) or its subsidiary (S) (or
both) are foreign, and the corporations seek to avoid treating
as a distribution the amount of property that S transfers to
P or P’s shareholders in exchange for P stock, which S then
uses to acquire the stock or assets of another corporation (T)
in a triangular reorganization. Notices 2006–85 and 2007–48
obsoleted by T.D. 9400.
EXEMPT ORGANIZATIONS
Announcement 2008–54, page 1155.
The IRS has revoked its determination that Community Child
Care of Portland, OR; Camp Meeting of the Assoc. of the
Newark Conf. of the Methodist Episcopal Church of Mount
Tabor, NJ; Berryessa PAL Youth Football Club, Inc., of San
Jose, CA; Rape Survivors Anonymous World Services, Inc., of
Oswego, IL; and Round Rock Band Boosters, Inc., of Round
Rock, TX, qualify as organizations described in sections
501(c)(3) and 170(c)(2) of the Code.
EMPLOYMENT TAX
Rev. Rul. 2008–29, page 1149.
Supplemental wages; income tax.This ruling provides
guidance with respect to income tax withholding in nine differ-
ent situations involving the payment of supplemental wages.
Rev. Ruls. 66–294 and 67–131 obsoleted.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
June 16, 20082008–24 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 367.—Foreign
Corpor
ations
26 CFR 1
.367(b)–14T: Acquisition of parent stock for
proper
ty in triangular reorganizations (temporary).
T.D. 94
00
DEPART
MENT OF THE
TREAS
URY
Inter
nal Revenue Service
26 CF
RPart1
Trea
tment of Property
Used
to Acquire Parent
Sto
ck in Certain Triangular
Reo
rganizations Involving
Fo
reign Corporations
AG
ENCY: Internal Revenue Service
(I
RS), Treasury.
AC
TION: Final and temporary regula-
ti
ons.
SU
MMARY: This document contains
fi
nal and temporary regulations under
se
ction 367(b) of the Internal Revenue
Co
de (Code). The final regulations re-
v
ise an existing final regulation and add
a
cross-reference. The temporary regu-
l
ations implement the rules described in
N
otice 2006–85 and Notice 2007–48. The
r
egulations affect corporations engaged in
certain triangular reorganizations involv-
ing one or more foreign corporations. The
text of the temporary regulations serves
as the text of the proposed regulations
(REG–136020–07) set forth in the notice
of proposed rulemaking on this subject
published in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective May 27, 2008.
Applicability Dates:For dates of ap-
plicability, see §§1.367(a)–3T(b)(2)(i)(C)
and 1.367(b)–14T(e).
FOR FURTHER INFORMATION
CONTACT: Daniel McCall, (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 22, 2006, the IRS
and Treasury Department issued Notice
2006–85, 2006–2 C.B. 677, which an-
nounced that regulations would be issued
under section 367(b) to address certain
triangular reorganizations under section
368(a) involving one or more foreign cor-
porations. On May 31, 2007, the IRS
and Treasury Department issued Notice
2007–48, 2007–25 I.R.B. 1428, which
amplified Notice 2006–85 and announced
that additional regulations would be is-
sued under section 367(b). Each notice
describes transactions the IRS and Trea-
sury Department believe raise significant
policy concerns.
Notice 2006–85 describes triangular re-
organizations in which a subsidiary (S)
purchases stock of its parent corporation
(P) from P in exchange for property, and
then exchanges the P stock for the stock
or assets of a target corporation (T), but
only if P or S (or both) is foreign. Notice
2006–85 announced that regulations to be
issued under section 367(b) would make
adjustments that would have the effect of
a distribution of property from S to P un-
der section 301 (deemed distribution). No-
tice 2006–85 further announced that regu-
lations would address similar transactions
where S acquires the P stock from a related
party that purchased the P stock in a related
transaction.
Notice 2007–48 describes transactions
in which S purchases all or a portion of
the P stock exchanged in the reorganiza-
tion from a person other than P (such as
from public shareholders on the open mar-
ket). Notice 2007–48 announced that reg-
ulations to be issued under section 367(b)
would also make adjustments that would
have the effect of a distribution of prop-
erty from S to P (under section 301) fol-
lowed by a deemed contribution of such
property by P to S. Notice 2007–48 fur-
ther announced that the regulations would
take into account the earnings and profits
of other corporations, as appropriate, if a
principal purpose of creating, organizing,
or funding S is to avoid the adjustments to
be made by the regulations.
These temporary regulations set forth
the regulations described in Notices
2006–85 and 2007–48. The existing fi-
nal regulations under §1.367(b)–13 are
revised to conform the definitions of the
terms P, S, and T in those regulations
to the definitions of such terms in these
temporary regulations. The existing final
regulations under §1.367(b)–2 are revised
to clarify that the definition of earnings
and profits in §1.367(b)–2(l)(8) applies
only for purposes of §§1.367(b)–7 and
1.367(b)–9.
Explanation of Provisions
A.Section 367— In General
Section 367(a)(1) provides that if, in
connection with any exchange described
in section 332, 351, 354, 356, or 361, a
United States person transfers property to
a foreign corporation, such foreign corpo-
ration shall not, for purposes of determin-
ing the extent to which gain shall be rec-
ognized on such transfer, be considered
to be a corporation. However, exceptions
are provided under section 367(a)(2) and
(3), and the Secretary has broad author-
ity under section 367(a)(6) to provide that
section 367(a)(1) will not apply to certain
transfers otherwise described therein.
Section 367(b)(1) provides that in the
case of any exchange described in section
332, 351, 354, 355, 356, or 361 in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the Sec-
retary which are necessary or appropriate
to prevent the avoidance of Federal income
taxes.
Section 367(b)(2) provides that the
regulations prescribed pursuant to section
367(b)(1) shall include (but shall not be
limited to) regulations dealing with the
sale or exchange of stock or securities in
a foreign corporation by a United States
person, including regulations providing
the circumstances under which gain is rec-
ognized, amounts are included in gross in-
come as a dividend, adjustments are made
2008–24 I.R.B.1139June 16, 2008

to earnings and profits, or adjustments are
made to basis of stock or securities.
B.Policies of Section 367(b)
Section 367(b) was enacted to ensure
that international taxconsiderations are
adequately addressed when the nonrecog-
nition provisions of subchapter C of the
Code apply to certain exchanges involving
foreign corporations. Congress further
noted that “it is essential to protect against
tax avoidance in transfers to foreign cor-
porations and upon the repatriation of
previously untaxed foreign earnings....”
H.R. Rep. No. 658, 94th Cong., 1
st
Sess. 241 (1975). Accordingly, Congress
granted the Secretary authority to provide
regulations “necessary or appropriate to
prevent the avoidance of Federal income
taxes” and identified “transfers constitut-
ing a repatriation of foreign earnings” as
a type of transfer to be covered in regula-
tions to be promulgated by the Secretary.
Id. The Secretary has exercised this grant
of authority to address a wide range of
international policy concerns. For fur-
ther discussion, see Notices 2006–85 and
2007–48.
C.Adjustments Made Under Section
367(b)
These temporary regulations apply to
triangular reorganizations where P or S (or
both) is foreign and, in connection with the
reorganization, S acquires, in exchange for
property, all or a portion of the P stock
that is used to acquire the stock or assets
of T. The “in connection with” standard is
a broad standard that includes any trans-
action related to the reorganization even if
the transaction is not part of the plan of re-
organization. For example, the temporary
regulations apply to a triangular reorga-
nization regardless of whether P controls
S (within the meaning of section 368(c))
when S acquires the P stock that is used in
the reorganization.
In a triangular reorganization subject
to the temporary regulations, adjustments
shall be made that have the effect of a dis-
tribution of property from S to P under sec-
tion 301. The amount of the deemed dis-
tribution shall equal the amount of money
plus the fair market value of other property
that S used to acquire P stock. For this pur-
pose, the term property has the meaning set
forth in section 317(a), but includes any li-
ability assumed by S in exchange for the P
stock (notwithstanding the application of
section357(a))andanySstockusedbyS
to acquire the P stock from a person other
than P. Consistent with the rule announced
in Notice 2007–48, these temporary regu-
lations provide that to the extent S buys P
stock from a person other than P, immedi-
ately after taking into account the deemed
distribution to P, P is deemed to contribute
to S the property deemed distributed to P.
These temporary regulations provide
that the deemed distribution shall be
treated as a distribution for all purposes
of the Code. For example, provisions
such as sections 312, 881, 897, 902, 959,
1442, and 1445 apply, as appropriate, to
the deemed distribution. Similarly, the
deemed contribution of property shall be
treated as a contribution of property for
all purposes of the Code. For example,
appropriate adjustments to P’s basis in the
S stock and other affected items shall be
made according to applicable Code provi-
sions.
Ordering rules are provided that gener-
ally require the deemeddistribution and, in
cases where S buys P stock from a person
other than P, the deemed contribution to be
taken into account before the transfers un-
dertaken pursuant to the triangular reorga-
nization. If P does not control S (within the
meaning of section 368(c)) at the time that
S purchases the P stock, the deemed dis-
tribution and deemed contribution shall be
treated as separate transactions occurring
immediately after P acquires control of S.
Thus, in a transaction where S purchases
the P stock from a person other than P, after
taking into account the adjustments made
under these temporary regulations, S’s pur-
chase and transfer of P stock pursuant to
the triangular reorganization are taken into
account under generally applicable Code
provisions, such as sections 304, 354, 356,
358, and 368.
These temporary regulations also pro-
vide that appropriate adjustments will be
made if in connection with a triangular re-
organization described in the regulations,
a transaction is engaged in with a view to
avoid the purpose of the regulations. For
example, if S is a newly formed corpora-
tion and, in connection with the reorgani-
zation, P contributes to S another corpora-
tion with positive earnings and profits (S2)
to facilitate S’s purchase of the P stock or
to facilitate the repayment of an obligation
incurred by S to purchase the P stock, then,
under the temporary regulations, the earn-
ings and profits of S may be deemed to in-
clude the earnings and profits of S2.
Finally, these temporary regulations
contain a coordinationrule that applies to
transactions described in section 367(a)
and §1.367(b)–14T. The IRS and Treasury
Department continue to study transac-
tions that implicate thepolicies of section
367(a) and (b), but that are not subject to
both provisions as a result of the applica-
tion of the coordination rule. Comments
are requested on such transactions.
Availability of IRS Documents
IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing Of-
fice, Washington, DC 20402.
Effective/Applicability Dates
With respect to those rules addressing
transactions described in Notice 2006–85,
these temporary regulations are gener-
ally applicable to transactions occurring
on or after September 22, 2006, with
limited transition relief. With respect to
those rules addressing transactions de-
scribed in Notice 2007–48, these tempo-
rary regulations are generally applicable
to transactions occurring on or after May
31, 2007, with limited transition relief.
Other rules includedin these temporary
regulations are generally applicable to
transactions occurring on or after May 23,
2008, with limited transition relief. See
§1.367(b)–14T(e).
No inference is intended as to the po-
tential applicability of other Code or regu-
latory provisions or judicial doctrines (in-
cluding substance over form) to transac-
tions described in these temporary regula-
tions.
Effect on Other Documents
The following publications are obsolete
as of May 27, 2008:
Notice 2006–85, 2006–2 C.B. 677.
Notice 2007–48, 2007–25 I.R.B. 1428.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
June 16, 200811402008–24 I.R.B.

12866. Therefore, a regulatory assessment
is not required. A delayed effective date
would be inappropriate because the pur-
pose of this regulation is to address trans-
actions that the IRS and Treasury Depart-
ment believe raise serious policy concerns.
Accordingly, good cause is found for dis-
pensing with notice and public comment
pursuant to 5 U.S.C. 553(b) and (c) and
with a delayed effectivedatepursuantto
5 U.S.C. 553(d). Furthermore, under sec-
tion 7805(b)(1)(C) of the Code, an effec-
tive date earlier than the date this regula-
tion is filed with theFederal Registeris
appropriate because prior notices substan-
tially described the rules contained in this
regulation. For applicability of the Regu-
latory Flexibility Act, see the cross-refer-
enced notice of proposed rulemaking pub-
lished elsewhere in this Bulletin. Pursuant
to section 7805(f) of the Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Request for Comments
For information on how to submit com-
ments or request a public hearing, see the
section “Comments and Requests for a
Public Hearing,” set forth in the notice of
proposed rulemaking published elsewhere
in this issue of the Bulletin.
Drafting Information
The principal author of these regula-
tions is Daniel McCall of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding new entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3T(b)(2)(i)(C) also
issued under 26 U.S.C. 367(a) and (b).
***
Section 1.367(b)–14T also issued under
26 U.S.C. 367(b). * * *
Par. 2. Section 1.367(a)–3 is amended
by revising the first sentence in para-
graph (b)(2)(i) and adding new paragraph
(b)(2)(i)(C) to read as follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*****
(b) * * *
(2) * * *
(i)***Atransferofstockorsecu-
rities described in section 367(a) or the
regulations thereunder as well as in sec-
tion 367(b) or the regulations thereunder
shall be subject concurrently to sections
367(a) and (b) and the respective regu-
lations thereunder, except as provided in
paragraph (b)(2)(i)(A) through (C) of this
section. * * *
(C) [Reserved]. For further guidance,
see §1.367(a)–3T(b)(2)(i)(C).
*****
Par. 3. Section 1.367(a)–3T is amended
by revising paragraphs (a) through (d) and
(f)(3), to read as follows:
§1.367(a)–3T Treatment of transfers of
stock or securities to foreign corporations
(temporary).
(a) through (b)(2)(i)(B) [Reserved].
For further guidance, see §1.367(a)–3(a)
through (b)(2)(i)(B).
(C) If in connection with a transaction
described in §1.367(b)–14T, one or more
U.S. persons transfer stock of T, as defined
in §1.358–6(b)(1)(iii), to a corporation in
a transfer described in section 367(a), and
the amount of gain in the T stock that
would otherwise be recognized under sec-
tion 367(a) is less than the deemed distri-
bution that would result from the adjust-
ments made under §1.367(b)–14T and that
would be treated as a dividend under sec-
tion 301(c)(1), then section 367(b), and not
section 367(a), shall apply to such trans-
action. This paragraph (b)(2)(i)(C) applies
to transfers occurring on or after May 23,
2008.
(b)(2)(ii) through (d) [Reserved]. For
further guidance, see §1.367(a)–3(b)(2)(ii)
through (d).
*****
(f) * * *
(3)Expiration date. The applicabil-
ity of §1.367(a)–3T(b)(2)(i)(C) expires
on May 23, 2011. The applicability of
§1.367(a)–3T(e) and (f)(1) and (f)(2) ex-
pires on February 1, 2010.
Par. 4. Section 1.367(b)–2 is amended
by revising paragraph (l)(8) to read as fol-
lows:
§1.367(b)–2 Definitions and special rules.
*****
(l) * * *
(8)Earnings and profits. For purposes
of §§1.367(b)–7 and 1.367(b)–9, the term
earnings and profitsmeans post-1986
undistributed earnings, pre-1987 accumu-
lated profits, and pre-1987 section 960
earnings and profits.
*****
Par. 5. Section 1.367(b)–13 is amended
by redesignating paragraph (a)(2)(ii) as
paragraph (a)(2)(iii), revising newly des-
ignated paragraph (a)(2)(iii), and adding
a new paragraph (a)(2)(ii) to read as fol-
lows:
§1.367(b)–13 Special rules for
determining basis and holding period.
(a) * * *
(2) * * *
(ii) The termsP,S,andThave the
meanings set forth in §1.358–6(b)(1)(i),
(ii), and (iii), respectively.
(iii) A triangular reorganization
is a reorganization described in
§1.358–6(b)(2)(i), (ii), or (iii) or in sec-
tions 368(a)(1)(G) and (a)(2)(D) (a for-
ward triangular merger, triangular C reor-
ganization, reverse triangular merger, or
triangular G reorganization, respectively).
*****
Par. 6. Section 1.367(b)–14T is added
to read as follows:
§1.367(b)–14T Acquisition of parent stock
for property in triangular reorganizations
(temporary).
(a)In general—(1)Scope and purpose.
This section applies to triangular reorgani-
zations where P or S (or both) is foreign
and, in connection with the reorganization,
S acquires, in exchange for property (as de-
fined in this section), all or a portion of the
P stock that is used to acquire the stock
or assets of T. This section may apply to
2008–24 I.R.B.1141June 16, 2008

a reorganization regardless of whether P
controls S (within the meaning of section
368(c)) at the time S acquires the P stock
that is used to acquire the stock or assets of
T. The purpose of this section is to prevent
what is in effect a distribution of property
to P without the application of provisions
otherwise applicable to property distribu-
tions, when in connection with a triangu-
lar reorganization S acquires, in exchange
for property, all or a portion of the P stock
used in the reorganization.
(2)Definitions. For purposes of this
section, the following definitions apply:
(i) The termsP,S,andThave the mean-
ings set forth in §1.358–6(b)(1)(i), (ii), and
(iii), respectively.
(ii) In general, the termpropertyhas
the meaning set forth in section 317(a).
Notwithstanding section 357(a), such term
includes any liability assumed by S in ex-
change for the P stock used to acquire the
stock or assets of T. Such term also in-
cludes any S stock used by S to acquire P
stock from a person other than P.
(iii) The termtriangular reorganiza-
tionmeans a reorganization described in
§1.358–6(b)(2) or in section 368(a)(1)(G)
and (a)(2)(D).
(b)General rules—(1)Deemed distri-
bution. If this section applies, adjustments
shall be made that have the effect of a
distribution of property from S to P un-
der section 301 (deemed distribution). The
amount of the deemed distribution shall
equal the amount of money plus the fair
market value of other property transferred,
in connection with the reorganization, by S
in exchange for the P stock used to acquire
the stock or assets of T in the triangular re-
organization. Additional adjustments shall
be made under paragraph (b)(3) of this sec-
tion to the extent S acquires, in exchange
for property, P stock from a person other
than P.
(2)Timing in the case of acquisitions
from P. To the extent S acquires P stock
from P in exchange for property, the
deemed distribution described in para-
graph (b)(1) of this section shall be treated
as a transaction separate from, and occur-
ring immediately before, the triangular
reorganization. Therefore, P shall not be
treated as receiving the property from S
in exchange for P stock. The transfers of
P stock in the triangular reorganization
shall be subject to generally applicable
provisions. See, for example, §1.1032–2.
(3)Timing and deemed contribution
in the case of acquisitions from persons
other than P. To the extent S acquires P
stock from a person other than P in ex-
change for property (the purchase), then
immediately following the deemed dis-
tribution described in paragraph (b)(1) of
this section, adjustments shall be made
that have the effect of a contribution by P
to S (deemed contribution) of the property
deemed distributed by S to P under para-
graph (b)(1) of this section. If P controls
S (within the meaning of section 368(c))
at the time of the purchase, the deemed
distribution and deemed contribution shall
be treated as separate transactions occur-
ring immediately before the purchase. If
P does not control S (within the mean-
ing of section 368(c)) at the time of the
purchase, the deemed distribution and
deemed contribution shall be treated as
separate transactions occurring immedi-
ately after P acquires control of S. Other
provisions, such as sections 304, 354, 358
and 368, shall apply after the adjustments
made pursuant to paragraph (b)(1) of this
section and this paragraph.
(4)Example. The rules of this para-
graph (b) are illustrated by the following
example:
(i)Facts. P, a publicly traded domestic corpora-
tion, owns all of the outstanding stock of FS, a for-
eign corporation, and all of the outstanding stock of
US1, a domestic corporation that is a member of the
P consolidated group. US1 owns all of the outstand-
ing stock of FT, a foreign corporation, the fair market
value of which is $100x. FS purchases $100x of P
stock on the open market for cash. Pursuant to for-
eign law, FT merges with and into FS in a triangular
reorganization described in section 368(a)(1)(A) by
reason of section 368(a)(2)(D). US1 exchanges all the
outstanding stock of FT for the stock of P purchased
by FS on the open market for $100x cash.
(ii)Analysis. The triangular reorganization is de-
scribed in paragraph (a)(1) of this section. Therefore,
pursuant to paragraphs (b)(1) and (b)(3) of this sec-
tion, FS is treated as distributing $100x to P under
section 301. Immediately after such deemed distribu-
tion, P is deemed to contribute to FS the $100x that
was deemed distributed to P. The deemed distribution
and deemed contribution are treated as separate trans-
actions occurring immediately before FS’s purchase
of the P stock used in the triangular reorganization.
(c)Collateral adjustments. This para-
graph (c) provides rules for the treatment
of a deemed distribution or deemed contri-
bution resulting under paragraph (b)(1) or
(b)(3) of this section.
(1)Deemed distribution. A deemed
distribution of property described in para-
graph (b)(1) of this section shall be treated
as a distribution of property for all pur-
poses of the Internal Revenue Code. For
example, under section 301(c) the distribu-
tion may constitute a dividend to the extent
of the earnings and profits of S, a return of
basis, or gain from the sale or exchange of
property, as appropriate. In addition, sec-
tions 902 and 959 may apply when S is
foreign, and sections 897, 1442, and 1445
may apply when S is domestic.
(2)Deemed contribution. A deemed
contribution of property described in para-
graph (b)(3) of this section shall be treated
as a contribution of property for all pur-
poses of the Internal Revenue Code. For
example, appropriate adjustments to P’s
basis in the S stock and other affected items
shall be made according to applicable pro-
visions.
(d)Special rule. Appropriate adjust-
ments shall be made pursuant to this sec-
tion if, in connection with a triangular re-
organization, a transaction is engaged in
with a view to avoid the purpose of this
section as described in paragraph (a)(1) of
this section. For example, if S is formed or
availed of with a view to avoid the purpose
of this section, the earnings and profits of S
may be deemed to include the earnings and
profits of a corporation related to S (within
the meaning of section 267(b)).
(e)Effective/applicability date—(1)
Acquisitions of P stock from P or related
persons. Except as otherwise provided
in this paragraph (e), this section applies
to triangular reorganizations described in
paragraph (a)(1) of this section, to the ex-
tent S acquires the P stock from P or from a
person related to P or S within the meaning
of section 267(b) or 707(b), occurring on
or after September 22, 2006. This section,
however, shall not apply to triangular reor-
ganizations described in paragraph (a)(1)
of this section, to the extent S acquires the
P stock from P or from a person related
to P or S within the meaning of section
267(b) or 707(b), completed on or after
September 22, 2006, pursuant to a written
agreement that was (subject to customary
conditions) binding before September 22,
2006, and all times afterward.
(2)Acquisitions of P stock from persons
other than P—(i)General rule. Except as
otherwise provided in this paragraph (e),
this section applies to triangular reorga-
nizations described in paragraph (a)(1) of
this section, to the extent S acquires the P
stock from a person other than P that is not
June 16, 200811422008–24 I.R.B.

relatedtoPorSwithinthemeaningofsec-
tion 267(b) or 707(b) (unrelated person),
occurring on or after May 31, 2007.
(ii)Binding commitment exception.
This section shall not apply to triangular
reorganizations described in paragraph
(a)(1) of this section, to the extent S
acquires the P stock from an unrelated
person, pursuant to a written agreement
that was (subject to customary conditions)
binding before May 31, 2007, and all times
afterward, but only to the extent that—
(A) S acquired the P stock from an un-
related person before May 31, 2007; or
(B) S had a commitment to acquire the
P stock from an unrelated person pursuant
to a written agreement that was (subject to
customary conditions) binding before May
31, 2007, and all times afterward, or pur-
suant to a tender offer announced before
May 31, 2007, that is subject to section
14(d) of the Securities and Exchange Act
of 1934 (15 U.S.C. 78n(d)(1)) and Regu-
lation 14(D) (17 CFR 240.14d–1 through
240.14d–101) or that is subject to compa-
rable foreign laws.
(3)Application of special rule—(i)
General rule. Except as provided in para-
graph (e)(3)(ii) of this section, paragraph
(d) of this section applies to triangular
reorganizations described in paragraph
(a)(1) of this section occurring on or after
May 31, 2007.
(ii)Binding commitment exception.
Paragraph (d) of this section shall not ap-
ply to triangular reorganizations described
in paragraph (a)(1) of this section entered
into pursuant to a written agreement that
was (subject to customary conditions)
binding before May 31, 2007, and all times
afterward, but only to the extent that—
(A) S acquired the P stock before May
31, 2007; or
(B) S had a commitment to acquire the
P stock from an unrelated person pursuant
to a written agreement that was (subject to
customary conditions) binding before May
31, 2007, and all times afterward, or pur-
suant to a tender offer announced before
May 31, 2007, that is subject to section
14(d) of the Securities and Exchange Act
of 1934 (15 U.S.C. 78n(d)(1)) and Regu-
lation 14(D) (17 CFR 240.14d–1 through
240.14d–101) or that is subject to compa-
rable foreign laws.
(4)Treatment of S stock as prop-
erty—(i)General rule. Except as provided
in paragraph (e)(4)(ii) of this section, the
treatment of S stock as property under
paragraph (a)(2)(ii) of this section applies
to triangular reorganizations described in
paragraph (a)(1) of this section occurring
on or after May 23, 2008.
(ii)Binding commitment exception.
The treatment of S stock as property under
paragraph (a)(2)(ii) of this section shall
not apply to triangular reorganizations de-
scribed in paragraph (a)(1) of this section
occurring on or after May 23, 2008 en-
tered into pursuant to a written agreement
that was (subject to customary conditions)
binding before May 23, 2008 and all times
afterward, but only to the extent that—
(A) S acquired the P stock before May
23, 2008; or
(B) S had a commitment to acquire the
P stock from an unrelated person pursuant
to a written agreement that was (subject to
customary conditions) binding before May
23, 2008 and all times afterward, or pur-
suant to a tender offer announced before
May 23, 2008, that is subject to section
14(d) of the Securities and Exchange Act
of 1934 (15 U.S.C. 78n(d)(1)) and Regu-
lation 14(D) (17 CFR 240.14d–1 through
240.14d–101) or that is subject to compa-
rable foreign laws.
(5)Expiration. The applicability of this
section expires on May 23, 2011.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved May 16, 2008.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on May 23, 2008,
8:45 a.m., and published in the issue of the Federal Register
for May 27, 2008, 73 F.R. 30301)
Section 704.—Partner’s
Distributive Share
26 CFR 1.704–1: Partner’s distributive share.
T.D. 9398
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Partner’s Distributive Share
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing rules for testing
whether the economic effect of an allo-
cation is substantial within the meaning
of section 704(b) where partners are look-
through entities or members of a consoli-
dated group. The final regulations clarify
the application of section 704(b) to part-
nerships the interests of which are owned
by look-through entities and members of
consolidated groups and, through an exam-
ple, reiterate the effect of other provisions
of the Internal Revenue Code (Code) on
partnership allocations. The final regula-
tions affect partnerships and their partners.
DATES:Effective Date:The final regula-
tions are effective on May 19, 2008.
Applicability Date:The final regula-
tions apply to partnership taxable years be-
ginning on or after May 19, 2008.
FOR FURTHER INFORMATION
CONTACT: Jonathan E. Cornwell and
Kevin I. Babitz at (202) 622–3050 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 under section 704 of
the Internal Revenue Code (Code). On
November 18, 2005, proposed regulations
(REG–144620–04, 2005–2 C.B. 1141)
regarding the substantiality of allocations
to partners that are look-through entities
or members of a consolidated group were
published in theFederal Register(70
FR 69919). Because no requests to speak
2008–24 I.R.B.1143June 16, 2008

were submitted by January 25, 2006, no
public hearing was held (see 71 FR 7453).
The IRS did receive a number of written
comments responding to the proposed
regulations, and, after consideration of
the comments, the proposed regulations
are adopted as revised by this Treasury
decision.
Section 704(a) provides that a partner’s
distributive share of partnership income,
gain, loss, deduction, or credit shall, ex-
cept as otherwise provided, be determined
by the partnership agreement. Section
704(b) provides that a partner’s distribu-
tive share of income, gain, loss, deduction,
or credit (or item thereof) shall be deter-
mined in accordance with the partner’s
interest in the partnership (determined by
taking into account all facts and circum-
stances) if the allocation to the partner
under the partnership agreement of in-
come, gain, loss, deduction, or credit (or
item thereof) does not have substantial
economic effect.
In order for an allocation to have sub-
stantial economic effect, it must have
economic effect and such economic effect
must be substantial. For an allocation to
have economic effect, it must be consistent
with the underlying economic arrange-
ment of the partners. This means that,
in the event there is an economic benefit
or burden that corresponds to the alloca-
tion, the partner to whom the allocation
is made must receive the economic ben-
efit or bear such economic burden. See
§1.704–1(b)(2)(ii).
Allocations to a partner will have eco-
nomic effect if, and only if, throughout
the full term of the partnership, the part-
nership agreement provides for: (i) the
proper maintenance of the partners’ cap-
ital accounts, (ii) upon liquidation of the
partnership (or any partner’s interest in the
partnership) liquidating distributions are
required to be made in accordance with
the positive capital account balances of
the partners, as determined after taking
into account all necessary adjustments
for the partnership’s taxable year during
which the liquidation occurs, by the end
of such taxable year, or if later, 90 days
after the date of such liquidation, and (iii)
if such partner has a deficit balance in
the partner’s capital account following the
liquidation of the interest after taking into
account all necessary adjustments for the
partnership taxable year during which the
liquidation occurs, the partner is uncon-
ditionally obligated to restore the deficit
balance by the end of such taxable year
(or, if later, within 90 days after the date
of the liquidation), which amount is paid
to the partnership’s creditors or distributed
to the other partners in accordance with
their positive capital account balances.
See §1.704–1(b)(2)(ii)(b).
Even if the partnership agreement does
not require an unlimited deficit restora-
tion obligation of a partner, the allocation
may still have economic effect to the ex-
tent such allocation does not cause or
increase a deficit balance in the partner’s
capital account (in excess of any limited
dollar amount of such partner’s deficit
restoration obligation) if requirements (1)
and (2) of §1.704–1(b)(2)(ii)(b) are satis-
fied and the partnership agreement con-
tains a “qualified income offset.” Section
1.704–1(b)(2)(ii)(d). Finally, allocations
that do not otherwise have economic ef-
fect under the foregoing rules shall be
deemed to have economic effect if at the
end of each partnership taxable year a
liquidation of the partnership at the end
of such year or at the end of any future
year would produce the same economic
results to the partners if such rules had
been satisfied regardless of the economic
performance of the partnership. Section
1.704–1(b)(2)(ii)(i).
As a general rule, the economic effect
of an allocation (or allocations) is sub-
stantial if there is a reasonable possibility
that the allocation (or allocations) will
affect substantially the dollar amounts to
be received by the partners from the part-
nership, independent of tax consequences.
See §1.704–1(b)(2)(iii). Even if the al-
location affects substantially the dollar
amounts to be received by the partners
from the partnership, the economic effect
of the allocation (or allocations) is not
substantial if, at the time the allocation (or
allocations) becomes part of the partner-
ship agreement, (1) the after-tax economic
consequences of at least one partner may,
in present value terms, be enhanced com-
pared to such consequences if the alloca-
tion (or allocations) were not contained in
the partnership agreement, and (2) there is
a strong likelihood that the after-tax eco-
nomic consequences of no partner will, in
present value terms, be substantially di-
minished compared to such consequences
if the allocation (or allocations) were not
contained in the partnership agreement.
See §1.704–1(b)(2)(iii). This test is com-
monly referred to as the after-tax test. In
determining the after-tax economic benefit
or detriment of an allocation to a partner,
the tax consequences that result from the
interaction of the allocation with such
partner’s tax attributes that are unrelated
to the partnership will be taken into ac-
count. Finally, the economic effect of an
allocation is not substantial in two situa-
tions described in §1.704–1(b)(2)(iii)(b)
and (b)(2)(iii)(c). The latter two situations
are generally described as “shifting” and
“transitory” allocations, respectively.
If the partnership agreement provides
for an allocation of income, gain, loss,
deduction, or credit (or item thereof) to
a partner that does not have substantial
economic effect, then the partner’s dis-
tributive share of the income, gain, loss,
deduction, or credit (or item thereof) is
determined in accordance with the part-
ner’s interest in the partnership. Refer-
ences in section 704(b) or §1.704–1 to a
partner’s interest in the partnership, or to
the partners’ interests in the partnership,
signify the manner in which the partners
have agreed to share the economic bene-
fit or burden (if any) corresponding to the
income, gain, loss, deduction, or credit (or
item thereof) that is allocated, taking into
account all facts and circumstances relat-
ing to the economic arrangement of the
partners. See §1.704–1(b)(3).
Section 1.704–1(b)(1)(iii) provides that
an allocation that is respected under sec-
tion 704(b) nevertheless may be reallo-
cated under other provisions, such as sec-
tion 482, section 704(e)(2), section 706(d)
(and related assignment of income princi-
ples), and §1.751–1(b)(2)(ii).
The proposed regulations clarify sev-
eral aspects of the regulations under sec-
tion 704. The proposed regulations gen-
erally provide a “look-through rule” for
purposes of testing the substantiality of
an allocation. The proposed regulations
provide that in determining the after-tax
economic benefit or detriment of a part-
nership allocation to any partner that is a
look-through entity, the look-through rule
takes into account the tax consequences
that result from the interaction of the allo-
cation with the tax attributes of any owner
of the look-through entity. Similarly, in
determining the after-tax economic ben-
efit or detriment to any partner that is a
June 16, 200811442008–24 I.R.B.

member of a consolidated group, the pro-
posed regulations generally provide that
the tax consequences that result from the
interaction of the allocation with the tax at-
tributes of the consolidated group and with
the tax attributes of another member with
respect to a separate return year must be
taken into account. The proposed regu-
lations provide that a look-through entity
means a partnership, subchapter S corpo-
ration, trust, an entity disregarded for Fed-
eral tax purposes, or certain controlled for-
eign corporations (CFCs).
The proposed regulations clarify that,
for purposes of §1.704–1(b)(2)(iii)(a), the
after-tax economic consequences of an
allocation contained in the partnership
agreement was compared to the after-tax
economic consequences of the allocation
made in accordance with the partners’ in-
terest in the partnership (within the mean-
ing of §1.704–1(b)(3)). For that purpose,
the partners’ interest in the partnership
was determined as if the allocations tested
were not contained in the partnership
agreement. Also, the proposed regulations
remove theper capitapresumption in
§1.704–1(b)(3)(i). Finally, the proposed
regulations include an example illustrat-
ing one circumstance where a provision
other than section 704(b) may be used to
reallocate partnership items.
Summary of Comments and
Explanation of Provisions
The final regulations adopt the pro-
posed regulations with clarification of
certain aspects in response to the com-
ments received.
A.Look-Through Entities and Members
of a Consolidated Group
For purpose of applying the after-tax,
shifting, and transitory tests to a partner
that is a look-through entity, the final reg-
ulations provide that the tax consequences
that result from the interaction of an allo-
cation with the tax attributes of any person
that is an owner, or in the case of a trust
or estate, the beneficiary, of an interest in
such partner must be taken into account.
The final regulations define a
look-through entity as a partnership, sub-
chapter S corporation, trust, estate, an en-
tity disregarded for Federal tax purposes,
or certain controlled foreign corporations
(CFCs). The final regulations change
the look-through rule for CFCs (CFC
look-through rule) to provide an owner-
ship threshold that must be met in order
to trigger look-through treatment. One
comment suggested that, for administra-
tive reasons, the look-through rule should
apply only in cases involving partnerships
(whether U.S. or foreign) that meet the
control test in section 6038. The IRS and
the Treasury Department agree that ad-
ministrative concerns justify limiting the
CFC look-through rule but are concerned
that limiting the application of the rule as
suggested would provide opportunities for
abuse. Accordingly,the final regulations
limit application of the CFC look-through
rule to cases in which United Stated share-
holders (within the meaning of section
951(b)) of the CFC in the aggregate own,
directly or indirectly, at least 10 percent
of the capital or profits interests of the
partnership.
In addition, the final regulations clar-
ify that a CFC is treated as a look-through
entity, but only with respect to allocations
of items of income, gain, loss, or deduc-
tion that enter into the computation of a
United States shareholder’s inclusion un-
der section 951(a) with respect to the con-
trolled foreign corporation, enter into any
person’s income attributable to a United
States shareholder’s inclusion under sec-
tion 951(a) with respect to the controlled
foreign corporation, or would enter into the
computations described in this paragraph
if such items were allocated to the con-
trolled foreign corporation. The Treasury
Department and the IRS are further con-
sidering whether a CFC partner should be
treated as a look-through entity in all cases
and how any impact on the tax liability of
a direct or indirect owner of the CFC part-
ner resulting from actual or anticipated dis-
tributions of property by the CFC partner
under section 301 should be taken into ac-
count in testing the substantiality of an al-
location.
Comments were also received on other
aspects of the look-through rule. One
comment suggested that the definition of
look-through entity be expanded to include
estates. Because estates generally pass
through attributes in the same manner as
trusts, this comment is adopted. Another
comment questioned the inclusion of dis-
regarded entities in the list of look-through
entities. The proposed regulations in-
cluded disregarded entities because such
entities are the actual state law partners
in the partnership. The final regulations
include disregarded entities in the list of
look-through entities for this reason only.
Several comments requested modifica-
tions to the look-through rule based upon
their contention that the rule was burden-
some. One comment suggested the aban-
donment of the look-through rule entirely,
believing the application of §1.701–2
would protect the concerns underlying
the proposed regulations and would be
less burdensome. Another comment sug-
gested that a five year presumption be
included with respect to the after-tax test
in §1.704–1(b)(2)(iii)(a), such that the
economic effect of any allocation occur-
ring five years after the date upon which
the allocation became a part of the part-
nership agreement would be presumed to
be substantial. Finally, several comments
requested either that the look-through rule
applyonlytopartnersowningmorethan
20 percent of the profits or capital of the
partnership or that the look-through rule
provide procedures to help partnerships
ease the burden of considering the tax
attributes of their partners and indirect
owners.
One proposal to simplify the applica-
tion of the look-through rule was to include
a presumption that the partnership did not
know and would not be required to inves-
tigate the tax attributes of any partner un-
less that partner directly or indirectly owns
more than a 25 percent interest in the part-
nership’s capital or profits. Alternatively,
it was suggested that the final regulations
provide certification procedures pursuant
to which a partnership would be entitled to
rely on a statement from its direct or indi-
rect owner regarding such person’s tax at-
tributes.
The substantiality test in its present
form was adopted in 1986. The Trea-
sury Department and the IRS believe that
the final regulations merely confirm the
proper application of the substantiality test
in those instances in which the partnership
is owned by one or more look-through
entities. In that respect, the look-through
rule in the final regulations is not a change
to the substantiality test. The Treasury
Department and the IRS do not believe
that it is necessary at this time to simplify
the application of the substantiality test as
suggested by the comments. However, to
address the concernsexpressed regarding
2008–24 I.R.B.1145June 16, 2008

the burden of the substantiality test as it
applies to partnerships with look-through
entity partners, the final regulations in-
clude ade minimisrule that provides that,
for purposes of determining substantiality,
the tax attributes ofde minimispartners
need not be taken into account. Ade
minimispartner is any partner, including
a look-through entity, that owns less than
10 percent of the capital and profits of a
partnership, and who is allocated less than
10 percent of each partnership item. Be-
cause of the inclusion of thisde minimis
rule, the final regulations do not provide
for a certification procedure.
Some comments requested that the final
regulations clarify what constitutes a “tax
attribute” and an “interaction.” The IRS
and the Treasury Department believe that
this issue is sufficiently addressed under
the current regulations, and, therefore, no
further guidance is provided in the final
regulations.
Finally, one comment requested that the
final regulations provide guidance for situ-
ations in which the interaction of an alloca-
tion to a look-through entity, such as a trust
or estate, and the tax attributes of the bene-
ficiary of the entity are dependent on other
factors such as the timing and amount of
distributions from the trust or estate to the
beneficiary. For example, it may be diffi-
cult to evaluate an allocation to a partner
that is a trust where it is not known what
distributions the trust will make. The IRS
and the Treasury Department believe that
this issue is addressed by the “strong like-
lihood” language of the substantiality test
and, therefore, the final regulations do not
provide additional guidance.
B.The Baseline for Comparison in
§1.704–1(b)(2)(iii)
Section 1.704–1(b)(2)(iii)(a)provides
that the economic effect of an allocation is
not substantial if, at the time the allocation
becomes part of the partnership agreement,
the after-tax economic consequences of
at least one partner may, in present value
terms, be enhanced compared to such
consequences if the allocation were not
contained in the partnership agreement,
and there is a strong likelihood that the
after-tax economic consequences of no
partner will, in present value terms, be
substantially diminished compared to such
consequences if the allocation were not
contained in the partnership agreement.
Because taxpayers have suggested that
the baseline comparison required by this
provision is unclear, the proposed regu-
lations clarified this rule, consistent with
the provisions of §1.704–1(b)(1)(i), by
explaining that the after-tax economic con-
sequences that result from the allocation
must be compared to such consequences
that would result if the allocations were
not contained in the partnership agreement
and were determined in accordance with
the partners’ interests in the partnership.
One comment suggested that an in-
consistency existed between identifying
the partners’ interests in the partner-
ship as the baseline for comparison in
§1.704–1(b)(2)(iii)(a)(1)and(2)andthe
conclusions reachedby §1.704–1(b)(5)
Example 5. According to this comment,
paragraph (ii) of §1.704–1(b)(5)Example
5provides that the sharing percentages
under the partners’ interests in the part-
nership standard was 36 percent for one
partner and 64 percent for the other partner.
Comparing the after-tax economic con-
sequences of the allocations contained in
the partnership agreement with the 36/64
sharing percentages results in the after-tax
economic consequences of one partner
being enhanced and those of the other
partner being substantially diminished.
Thus, according to the comment, the con-
clusion in paragraph (i) of §1.704–1(b)(5)
Example 5cannot be correct. The after-tax
test, however, is applied by comparing the
allocations contained in the partnership
agreement with the consequences deter-
mined in accordance with the partners’
interests in the partnership had the allo-
cations not been part of the partnership
agreement. InExample 5, aside from
the allocations being tested, the partners
shared all other items equally and made
equal capital contributions. To apply the
substantiality test to the special allocations
in that example, the results were compared
to what would have occurred if the part-
ners had 50/50 sharing percentages. This
comparison revealed that one partner’s
after-tax economic return was enhanced
and no partner’s after-tax return was sub-
stantially diminished. Thus, the specially
allocated items had to be reallocated under
the partners’ interests in the partnership.
Under the facts ofExample5, the partners’
interests in the partnership were the 36/64
sharing percentages, which were the same
percentages in which they actually shared
the partnership’s total income for the year.
The reallocation did not change the per-
centages in which the partners shared total
income, but rather, required that each item
of income (that is, tax-exempt income and
taxable interest and dividends included in
total income) be shared in those same per-
centages. Thus, inExample 5the partners’
interests in the partnership for purposes of
reallocating the items that lacked substan-
tial economic effect was determined to be
different than the partners’ interests in the
partnership used to test substantiality.
One comment suggested that the com-
parison to the partners’ interests in the
partnership is equally applicable when
testing shifting and transitory alloca-
tions under §1.704–1(b)(2)(iii)(b)and
(c) as it is to the after-tax test under
§1.704–1(b)(2)(iii)(a), and suggested that
the final regulations so provide. This
comment is adopted and, in order to fur-
ther clarify that the partners’ interests
in the partnership (determined without
regard to the allocation or allocations be-
ing tested) is the baseline for comparison
when testing the substantiality of an allo-
cation, whether under the after-tax test or
the shifting or transitory allocation test,
the final regulations remove the paren-
thetical clauses inserted by the proposed
regulations and add a sentence to the end
of §1.704–1(b)(2)(iii)(a)(1) that provides
that references in §1.704–1(b)(2)(iii) to an
allocation (or allocations) not contained in
the partnership agreement mean that the
allocation (or allocations) is determined
in accordance with the partners’ interests
in the partnership (within the meaning of
paragraph §1.704–1(b)(3)), disregarding
the allocation (or allocations) being tested
under §1.704–1(b)(2)(iii).
C.Removal of Per Capita Presumption in
§1.704–1(b)(3)
The proposed regulations removed the
per capitapresumption in §1.704–1(b)(3).
Because this section generally does not
contain mechanical rules to determine the
partners’ interests in the partnership, one
comment suggested that the presumption
was necessary to reduce complexity, and
therefore recommended that the final regu-
lations reinsert the presumption. However,
because theper capitapresumption failed
to consider factors relevant to a determi-
June 16, 200811462008–24 I.R.B.

nation of the manner in which the part-
ners agreed to share the economic benefits
or burdens corresponding to the allocation
of partnership items, the correct result was
reached in very few cases. Accordingly,
the Treasury Department and IRS believe
that any benefits of the presumption are
outweighed by the potential for incorrect
determinations.
D.Example 29
InExample 29of the proposed regula-
tions, B, a domestic corporation, and C, a
controlled foreign corporation, form BC,
a partnership organized under the laws of
a foreign jurisdiction, with equal capital
contributions. B and C are both wholly
owned by A, a domestic corporation. Sub-
stantially all of BC’s income would not be
subpart F income if earned directly by C.
For the first fifteen years of the partner-
ship, gross income is allocated 10 percent
to B and 90 percent to C, and all deductions
and losses will be allocated 90 percent to B
and 10 percent to C. After the initial fifteen
year period, BC’s gross income will be al-
located 90 percent to B and 10 percent to C,
and all deductions and losses will be allo-
cated 10 percent to B and 90 percent to C.
The example concludes that, apart from the
application of section 704(b), the Commis-
sioner may reallocate or otherwise not re-
spect the allocations under other Code sec-
tions.
One comment questioned whyExample
29did not contain a substantial economic
effect analysis. Another comment in-
ferred from the absence of a citation to
§1.701–2 inExample 29that the part-
nership anti-abuse rule did not apply and
would not be asserted by the IRS.Ex-
ample 29was included in the proposed
regulations only to reiterate the provisions
contained in §1.704–1(b)(1)(iii) regard-
ing the effect other sections may have
on partnership allocations. Accordingly,
the Treasury Department and IRS do not
believe that any further analysis is neces-
sary. Moreover the list of other sections
that can affect the validity of a partner-
ship allocation in §1.704–1(b)(1)(iii) is
not an exhaustive list and, accordingly,
the absence of a citation to §1.701–2 or
other potentially applicable sections does
not preclude the applicability of those
provisions of law in the appropriate cir-
cumstances. The Treasury Department
and IRS continue to consider issuing ad-
ditional guidance addressing the proper
treatment of special allocations of items of
a partnership that is owned primarily by
related parties.Examples 29and30in the
proposed regulations have been renum-
bered asExamples 28and29, respectively,
in these final regulations.
Effective/Applicability Date
The amendments made by these final
regulations apply to partnership taxable
years beginning on or after May 19, 2008.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because these regulations do not impose
on small entities a collection of informa-
tion requirement, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Code, the notice of rulemak-
ing preceding these regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal authors of this reg-
ulation are Jonathan E. Cornwell and
Kevin I. Babitz, Office of the Associate
Chief Counsel (Passthroughs & Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in its development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.704–1 is amended as
follows:
1. A sentence is added at the end of the
paragraph (b)(1)(ii)(a).
2. A sentence is added at the end of the
paragraph (b)(2)(iii)(a).
3. Paragraphs (b)(2)(iii)(d)and(e)are
added.
4. The last two sentences of paragraph
(b)(3)(i) are removed.
5. Paragraph (b)(5)Examples 28,29
and30are added.
The additions and revisions read as fol-
lows:
§1.704–1 Partner’s distributive share.
*****
(b) * * *
(1) * * *
(ii)Effective/applicability dates.(a)
***Paragraphs(b)(2)(iii)(a)(last
sentence), (b)(2)(iii)(d), (b)(2)(iii)(e),
and (b)(5)Example 28,Example 29,
andExample 30
of this section apply to
partnership taxable years beginning on or
after May 19, 2008.
(2) * * *
(iii)***(a) * * * References in this
paragraph (b)(2)(iii) to a comparison to
consequences arising if an allocation (or
allocations) were not contained in the part-
nership agreement mean that the alloca-
tion (or allocations) is determined in ac-
cordance with the partners’ interests in the
partnership (within the meaning of para-
graph (b)(3) of this section), disregarding
the allocation (or allocations) being tested
under this paragraph (b)(2)(iii).
*****
(d)Partners that are look-through enti-
ties or members of a consolidated group—
(1)In general. For purposes of apply-
ing paragraphs (b)(2)(iii)(a), (b), and (c)
of this section to a partner that is a look-
through entity, the tax consequences that
result from the interaction of the allocation
with the tax attributes of any person that is
an owner, or in the case of a trust or es-
tate, the beneficiary, of an interest in such
a partner, whether directly or indirectly
through one or more look-through entities,
must be taken into account. For purposes
of applying paragraphs (b)(2)(iii)(a), (b),
and (c) of this section to a partner that is
a member of a consolidated group (within
the meaning of §1.1502–1(h)), the tax con-
sequences that result from the interaction
2008–24 I.R.B.1147June 16, 2008

of the allocation with the tax attributes of
the consolidated group and with the tax at-
tributes of another member with respect to
a separate return year must be taken into
account. See paragraph (b)(5)Example 29
of this section.
(2)Look-through entity.For pur-
poses of this paragraph (b)(2)(iii)(d), a
look-through entitymeans—
(i) A partnership;
(ii) A subchapter S corporation;
(iii) A trust or an estate;
(iv) An entity that is disregarded for
Federal tax purposes, such as a qualified
subchapter S subsidiary under section
1361(b)(3), an entity that is disregarded
as an entity separate from its owner under
§§301.7701–1 through 301.7701–3 of this
chapter, or a qualified REIT subsidiary
within the meaning of section 856(i)(2); or
(v) A controlled foreign corporation
if United States shareholders of the con-
trolled foreign corporation in the aggre-
gate own, directly or indirectly, at least
10 percent of the capital or profits of
the partnership on any day during the
partnership’s taxable year. In such case,
the controlled foreign corporation shall
be treated as a look-through entity, but
only with respect to allocations of in-
come, gain, loss, or deduction (or items
thereof) that enter into the computation
of a United States shareholder’s inclu-
sion under section 951(a) with respect to
the controlled foreign corporation, enter
into any person’s income attributable to
a United States shareholder’s inclusion
under section 951(a) with respect to the
controlled foreign corporation, or would
enter into the computations described in
this paragraph if such items were allocated
to the controlled foreign corporation. See
paragraph (b)(2)(iii)(d)(6) for the defini-
tion of indirect ownership.
(3)Controlled foreign corporations.
For purposes of this section, the term
controlled foreign corporationmeans a
controlled foreign corporation as defined
in section 957(a) or section 953(c). In
the case of a controlled foreign corpo-
ration that is a look-through entity, the
tax attributes to be taken into account
are those of any person that is a United
States shareholder (as defined in para-
graph (b)(2)(iii)(d)(5) of this section)
of the controlled foreign corporation,
or, if the United States shareholder is a
look-through entity, a United States person
that owns an interest in such shareholder
directly or indirectly through one or more
look-through entities.
(4)United States person. For purposes
of this section, aUnited States personis a
person described in section 7701(a)(30).
(5)United States shareholder. For pur-
poses of this section, aUnited States share-
holderis a person described in section
951(b) or section 953(c).
(6)Indirect ownership. For purposes of
this section, indirect ownership of stock or
another equity interest (such as an interest
in a partnership) shall be determined in
accordance with the principles of section
318, substituting the phrase “10 percent”
for the phrase “50 percent” each time it
appears.
(e)De minimisrule. For purposes of
applying this paragraph (b)(2)(iii), the
tax attributes ofde minimispartners need
not be taken into account. For purposes
of this paragraph (b)(2)(iii)(e), ade min-
imispartner is any partner, including a
look-through entity that owns, directly
or indirectly, less than 10 percent of the
capital and profits of a partnership, and
who is allocated less than 10 percent of
each partnership item of income, gain,
loss, deduction, and credit. See paragraph
(b)(2)(iii)(d)(6) of this section for the def-
inition of indirect ownership.
*****
(5) * * *
Example 28.(i) B, a domestic corporation, and
C, a controlled foreign corporation, form BC, a part-
nership organized under the laws of country X. B and
C each contribute 50 percent of the capital of BC. B
and C are wholly-owned subsidiaries of A, a domestic
corporation. Substantially all of BC’s income would
not be subpart F income if earned directly by C. The
BC partnership agreement provides that, for the first
fifteen years, BC’s gross income will be allocated 10
percent to B and 90 percent to C, and BC’s deduc-
tions and losses will be allocated 90 percent to B and
10 percent to C. The partnership agreement also pro-
vides that, after the initial fifteen year period, BC’s
gross income will be allocated 90 percent to B and 10
percent to C, and BC’s deductions and losses will be
allocated10percenttoBand90percenttoC.
(ii) Apart from the application of section 704(b),
the Commissioner may reallocate or otherwise not re-
spect the allocations under other sections. See para-
graph (b)(1)(iii) of this section. For example, BC’s
allocations of gross income, deductions, and losses
may be evaluated and reallocated (or not respected),
as appropriate, if it is determined that the allocations
result in the evasion of tax or do not clearly reflect
income under section 482.
Example 29.PRS is a partnership with three equal
partners, A, B, and C. A is a corporation that is a
member of a consolidated group within the mean-
ing of §1.1502–1(h). B is a subchapter S corpora-
tion that is wholly owned by D, an individual. C is
a partnership with two partners, E, an individual, and
F, a corporation that is a member of a consolidated
group within the meaning of §1.1502–1(h). For pur-
poses of paragraph (b)(2)(iii) of this section, in de-
termining the after-tax economic benefit or detriment
ofanallocationtoA,thetaxconsequencesthatresult
from the interaction of the allocation to A with the
tax attributes of the consolidated group of which A is
a member must be taken into account. In determin-
ing the after-tax economic benefit or detriment of an
allocation to B, the tax consequences that result from
the interaction of the allocation with the tax attributes
of D must be taken into account. In determining the
after-tax economic benefit or detriment of an alloca-
tion to C, the tax consequences that result from the
interaction of the allocation with the tax attributes of
E and the consolidated group of which F is a member
must be taken into account.
Example 30.(i) A, a controlled foreign corpora-
tion, and B, a foreign corporation that is not a con-
trolled foreign corporation, form AB, a partnership
organized under the laws of country X. The part-
nership agreement contains the provisions necessary
to comply with the economic effect safe harbor of
paragraph (b)(2)(ii)(b) of this section. A is wholly-
owned by C, a domestic corporation that is not a
member of a consolidated group within the meaning
of §1.1502–1(h). B is wholly owned by an individ-
ual who is a citizen and resident of country X and is
not related to A. Neither A, B, nor AB, is engaged
in a trade or business in the United States. A and B
each contribute 50 percent of the capital of AB. There
is a strong likelihood that in each of the next several
years AB will realize equal amounts of gross income
that would constitute subpart F income if allocated to
A, and gross income that would not constitute subpart
F income if allocated to A (“non-subpart F income”).
A and B agree to share bottom-line net income from
AB equally; however, rather than share all items of
gross income equally, A and B agree that B will be
allocated all of AB’s subpart F income to the extent
of its 50 percent share of bottom-line net income. In
year 1, AB earns $60x of income, $30x of which is
subpart F income and is allocated to B, and $30x of
which is non-subpart F income and is allocated to A.
(ii) Although neither A nor B is subject to U.S. tax
with respect to its distributive share of the income of
AB, under paragraph (b)(2)(iii)(d) of this section, the
tax attributes of C must be taken into account with
respect to A for purposes of applying the tests de-
scribed in paragraphs (b)(2)(iii)(a), (b), and (c)ofthis
section. The allocations in year 1 have economic ef-
fect. However, the economic effect of the allocations
is not substantial under the test described in para-
graph (b)(2)(iii)(b) of this section because there was a
strong likelihood, at the time the allocations became
part of the AB partnership agreement, that the net in-
creases and decreases to A’s and B’s capital accounts
in year 1 would not differ substantially when com-
pared to the net increases and decreases to A’s and B’s
capital accounts for year 1 if the allocations were not
contained in the partnership agreement, and the total
tax liability from the income earned by AB in year 1
(taking into account the tax attributes of the alloca-
tions to C) would be reduced as a result of such al-
locations. Under paragraph (b)(3) of this section, the
subpart F income and non-subpart F income earned
June 16, 200811482008–24 I.R.B.

by AB in year 1 must each be reallocated 50 percent
to A and 50 percent to B.
*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved May 8, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on May 16, 2008,
8:45 a.m., and published in the issue of the Federal Register
for May 19, 2008, 73 F.R. 28699)
Section 3402.—Income Tax
Collected at Source
26 CFR 31.3402(g)–1: Supplemental wage pay-
ments.
(Also: § 31.3401(b)–1(a).)
Supplemental wages; income tax.
This ruling provides guidance with respect
to income tax withholding in nine differ-
ent situations involving the payment of
supplemental wages. Rev. Ruls. 66–294
and 67–131 obsoleted.
Rev. Rul. 2008–29
ISSUE
How does an employer determine the
amount of income tax required to be with-
held under section 3402 of the Internal
Revenue Code with respect to certain sup-
plemental wages the employer pays to an
employee.
FACTS
In this revenue ruling nine different
situations are described: (1) commissions
paid at fixed intervals with no regular
wages paid to the employee; (2) commis-
sions paid at fixed intervals in addition
to regular wages paid at different inter-
vals; (3) draws paid in connection with
commissions; (4) commissions paid to
the employee only when the accumu-
lated commission credit of the employee
reaches a specific numerical threshold;
(5) a signing bonus paid prior to the com-
mencement of employment; (6) severance
pay paid after the termination of employ-
ment; (7) lump sum payments of accumu-
lated annual leave; (8) annual payments of
vacation and sick leave; and (9) sick pay
paid at a different rate than regular pay. In
these situations, it is assumed, for income
tax and income tax withholding purposes,
that there is no constructive receipt or
constructive payment of wages before the
actual payment of wages, that no amounts
are required to be included in income
under section 409A before the actual pay-
ment of wages, and that all payments are
made on or after January 1, 2007. Except
for EmployeeFin Situation 5, none of
the employees below is paid more than
$1,000,000 of supplemental wages during
any calendar year.
Situation 1.EmployeeAworks as a
salesperson for employerX.DuringA’s ca-
reer as an employee withX,Xhas paidA
only commissions as compensation for ser-
vices.Xpays the commissions credited to
Aon a monthly basis.
Situation 2.EmployeeBworks as a
salesperson for employerY.YpaysBa
monthly salary of $10,000, which it pays
on the first business day of the month. In
addition to the salary,YpaysBacommis-
sion equal to 5 percent of sales.Ypays the
amount of accumulated commissions toB
each Monday unless the Monday is a fed-
eral holiday, in which case the amount is
paid on the next business day.Ywithholds
income tax from the monthly salary paid to
B.
Situation 3.EmployeeCworks as a
salesperson for employerZ. UnderC’s em-
ployment arrangement,Zpays a $5,000
draw toCon a semimonthly basis. To-
gether with the second $5,000 draw pay-
ment for a month,ZpaysCthe amount of
commissions credited to him less the total
amount of draws ($10,000) thatZpaysC
during that month. IfC’s draws exceed the
amount of commissions earned byCdur-
ing that month,Zreduces the amount of
the draws paid toCduring the next month.
IfCterminates employment withZ,heis
obligated to repay any draws received in
excess of commissions earned.Creceives
no wage payments other than the semi-
monthly draw payments and the monthly
commission payments.
Situation 4.EmployeeDhas worked as
a salesperson for employerMfor a num-
ber of years, and has been compensated
solely by commission.MpaysDthe com-
missions credited toDwhenever her accu-
mulated net commissions equal $1,000 or
more. On January 13,Dhas $1,350 in ac-
cumulated commissions. This is the first
day of the year the amount of commissions
credited to her has equaled or exceeded
$1,000, andMpays the full accumulated
amount ($1,350) toDon January 14. This
payment is the first payment of wages to
Dfor the calendar year.Dhas $2,125 in
accumulated commissions credited to her
account on January 31, which is the next
day in the calendar year that the amount of
commissions credited to her has exceeded
$1,000.Mpays the full amount of accu-
mulated commissions ($2,125) on Febru-
ary 1. This payment is the second payment
of wages toDfor the calendar year.
Situation 5.Under an employment con-
tract entered into on May 1 of Year 1, Em-
ployeeFis scheduled to begin performing
services for employerPon October 1 of
Year 1.Fwill receive regular wages of
$75,000 per month for his services as an
employee ofP, and will have a monthly
payroll period. On June 1 of Year 1,Ppays
F$2,100,000 as a bonus for signing the
employment contract.Fhas received no
wage payments in any year fromPprior to
the payment on June 1 of Year 1.Fhas re-
ceived no wage payments from agents ofP
or any other person treated as the same em-
ployer asPunder § 31.3402(g)–1(a)(3)(i)
of the Employment Tax Regulations.
Situation 6.EmployeeGperforms ser-
vices for employerS, which has a sever-
ance pay plan for its employees. The plan
provides that, generally, if an employee
is involuntarily terminated, the employee
will receive weekly severance pay equal to
his or her ending regular weekly pay. The
severance pay will continue after termina-
tion for the number of weeks that is equal
to the number of full years the employee
performed services as an employee for the
employer multiplied by 3.Gis involuntar-
ily terminated bySon June 30 of Year 1,
afterGhas performed services as an em-
ployee ofSfor 17 years. Thus,Gwill re-
ceive 51 weeks of severance pay, which
will be paid weekly starting in July of Year
1 and continuing into Year 2.
Situation 7.In general, Civil Service
employees of the Federal Government
earn specified hours of annual leave each
80-hour biweekly pay period, depending
on the length of the employee’s service.
Employees, under usual circumstances,
are permitted to accumulate earned but
unused annual leave from year to year, up
to a specified maximum number of hours.
2008–24 I.R.B.1149June 16, 2008

When an employee leaves the service of
the Federal Government, the employee re-
ceives his or her final payment of regular
wages and, either in the same check or in a
separate check, receives payment for any
unused accumulated annual leave, com-
puted at the employee’s former regular
pay rate. The terminating employee re-
ceives a report from the agency for which
the employee works, or the agency’s des-
ignated agent, specifying the amount of
the payment of the accumulated annual
leave. Federal agencyTpays EmployeeH
a lump sum payment for unused accumu-
lated annual leave uponH’s termination of
employment.
Situation 8.EmployerUmaintains a
plan that pays its employees at the end
of approximately each 12-month period a
lump sum payment known as a vacation
and sick leave allowance. An employee re-
ceives this payment whether or not he or
she has been absent from work because of
vacation or illness. However, in the event
of absenteeism because of vacation or ill-
ness, the employee receives no regular pay
for the period of absence.Umakes a lump
sum payment under the plan to employee
J.
Situation 9.EmployerVpays its em-
ployees at one rate when the employee is
present and working and at another rate
when the employee is absent because of
sickness. The employer maintains payroll
records that separately state the amount
of wages paid for working days and the
amount of wages paid for sick pay.V
makes a single payment of wages to em-
ployeeKfor a payroll period, and the pay-
ment includes an amount for working days
and an amount for sick pay.
LAW AND ANALYSIS
Section 31.3402(g)–1(a) of the regula-
tions, as amended by T.D. 9276, 2006–2
C.B. 423, provides rules for determining
whether wages paid to an employee are
regular wages or supplemental wages. The
amendments to the regulations are effec-
tive with respect to wages paid on or af-
ter January 1, 2007. Whether wages are
classified as regular wages or supplemen-
tal wages may have significance in deter-
mining the amount of income tax required
to be withheld.
Section 31.3402(g)–1(a)(1)(i) of the
regulations provides that supplemental
wages are all wages paid by an employer
that are not regular wages. Supplemental
wages include wage payments made with-
out regard to an employee’s payroll period,
but also may include payments made for
a payroll period. The regulations provide
many examples of supplemental wages
including commissions, bonuses, nonqual-
ified deferred compensation includible in
wages, and back pay. The regulations also
provide that amounts that are described as
supplemental wages in the definition in
the regulations are supplemental wages re-
gardless of whether the employer has paid
the employee any regular wages during
either the calendar year of the payment or
any prior calendar year.
Section 31.3402(g)–1(a)(1)(ii) of the
regulations provides that, as distinguished
from supplemental wages, regular wages
are amounts that are paid at a regular
hourly, daily, or similar periodic rate (and
not an overtime rate) for the current pay-
roll period or at a predetermined fixed
determinable amount for the current pay-
roll period.
Section 31.3402(g)–1(a)(2) of the reg-
ulations provides that if a supplemental
wage payment, when added to all supple-
mental wage payments previously made
by one employer (as defined under the
regulations) to an employee during the
calendar year, exceeds $1,000,000, the
rate used in determining the amount of
withholding on the excess (including any
excess which is a portion of a supplemen-
tal wage payment) shall be equal to the
highest rate of tax applicable under section
1 of the Code for such taxable years begin-
ning in such calendar year. This flat rate
shall be applied without regard to whether
income tax has been withheld from the
employee’s regular wages, without al-
lowance for the number of withholding
allowances claimed by the employee on
Form W–4, “Employee’s Withholding Al-
lowance Certificate,” without regard to
whether the employee has claimed exempt
status on Form W–4, without regard to
whether the employee has requested ad-
ditional withholding on Form W–4, and
without regard to the withholding method
used by the employer. Withholding un-
der § 31.3402(g)–1(a)(2) is referred to as
mandatory flat rate withholding.
If the supplemental wages paid to an
employee by an employer (as defined
in the regulations) during a calendar
year do not exceed $1,000,000, then
the amount of income tax withholding
is determined under the rules provided
in § 31.3402(g)–1(a)(6) and (7). These
paragraphs describe two procedures for
withholding on supplemental wages: the
aggregate procedure and optional flat rate
withholding.
An employer applies the aggregate pro-
cedure described in § 31.3402(g)–1(a)(6)
by using the withholding tables applicable
to the payroll period with respect to which
the employer is calculating the income tax
withholding liability on the supplemental
wages. The supplemental wages, if paid
concurrently with wages for a payroll pe-
riod, are aggregated with the wages paid
for such payroll period. If not paid con-
currently, the supplemental wages are ag-
gregated with the wages paid or to be paid
within the same calendar year for the last
preceding payroll period or for the current
payroll period, if any. The amount of tax
to be withheld is determined as if the ag-
gregate of the supplemental wages and the
regular wages constituted a single wage
payment for the regular payroll period.
The aggregate procedure can be used
to determine the amount of income tax to
be withheld with respect to any payment
of supplemental wages, except to the ex-
tent that mandatory flat rate withholding
applies. See § 31.3402(g)–1(a)(6) of the
regulations. However, optional flat rate
withholding may only be used under cer-
tain conditions.
Under § 31.3402(g)–1(a)(7)(i) of the
regulations, an employer must meet the
following conditions at the time of pay-
ment to use optional flat rate withholding
with respect to a supplemental wage pay-
ment or portion of a payment:
(A) The wage payment or por-
tion of the payment is not subject to
mandatory flat rate withholding under
§ 31.3402(g)–1(a)(2) of the regulations;
(B) The supplemental wages are either
not paid concurrently with regular wages
or are separately stated on the payroll
records of the employer; and
(C) Income tax has been withheld from
regular wages of the employee during the
calendar year of the payment of the sup-
plemental wages or the preceding calendar
year.
In determining the amount of income
tax withholding applicable under the ag-
gregate procedure, it is necessary to deter-
June 16, 200811502008–24 I.R.B.

mine the payroll period of the employee so
that the correct withholding table can be
applied. Withholding tables are updated
each year and are found in Publication 15,
(Circular E), Employer’s Tax Guide.
Section 31.3401(b)–1(a) of the regula-
tions provides that the term “payroll pe-
riod” means the period of service for which
a payment of wages is ordinarily made to
an employee by his or her employer. It is
immaterial that the wages are not always
paid at regular intervals.
Section 31.3401(b)–1(b) of the regula-
tions provides that for purposes of section
3402, an employee can have only one pay-
roll period with respect to wages paid by
any one employer. Thus, if an employee
is paid a regular wage for a weekly payroll
period and in addition thereto is paid sup-
plemental wages (for example, bonuses)
determined with respect to a different pe-
riod, the payroll period is the weekly pay-
roll period.
Section 31.3401(b)–1(d) of the regu-
lations provides that the term “miscella-
neous payroll period” means a payroll pe-
riod other than a daily, weekly, biweekly,
semimonthly, monthly, quarterly, semian-
nual, or annual payroll period.
Employers may elect to use either
the percentage method of withholding or
the wage bracket method of withholding
in withholding on regular wages of an
employee. In applying the aggregate pro-
cedure applicable to supplemental wages,
the employer will ordinarily apply the
method of withholding used with respect
to regular wages if the employer pays
regular wages to the employee. Section
31.3402(b)–1 of the regulations provides
that the amount of tax to be deducted and
withheld under the percentage method of
withholding shall be determined under
the applicable percentage method of with-
holding table contained in Publication 15,
according to the instructions contained
therein. Similarly, § 31.3402(c)–1(a)(1)
of the regulations provides that the correct
amount of withholding under the wage
bracket method shall be determined under
the applicable wage bracket withholding
table contained in Publication 15 issued
for use with respect to the period in which
such wages are paid.
Section 3402(c)(3) and § 31.3402(c)–
1(c)(3) of the regulations provide, with
respect to wage bracket withholding,
that if wages are paid to an employee
without regard to any particular period,
as, for example, commissions paid to a
salesperson upon consummation of a sale,
the amount of tax to be deducted and
withheld shall be determined in the same
manner as in the case of a miscellaneous
payroll period containing a number of
days (including Saturdays, Sundays,
and holidays) equal to the number of
days (including Saturdays, Sundays, and
holidays) which have elapsedbeginning
withthe latest of the following days:
(i) The first day after the last payment of
wagestosuchemployeebysuchemployer
in the calendar year, or
(ii) The date on which such individual’s
employment with such employer began in
the calendar year, or
(iii) January 1 of such calendar year,
andending with(and including) the date
on which such wages are paid.
Situation 1. Section 31.3402(g)–
1(a)(1)(i) of the regulations specifically
includes commissions as an example of
supplemental wages. Amounts included as
supplemental wages under the definition
in the regulations are supplemental wages
regardless of whether the employer has
paid the employee any regular wages
during either the calendar year of the
payment or any prior calendar year.
Because the commission payments are
supplemental wages,Xhas paidAonly
supplemental wages and no regular wages.
An employer determines income tax
withholding on a payment of supplemental
wages under either the aggregate proce-
dure or optional flat rate withholding.X
may not use the optional flat rate method
with respect to the wages paid toAbe-
cause one of the three requirements set
forth in § 31.3402(g)–1(a)(7)(i) has not
been met.Xhas not withheld income tax
from regular wages paid toAduring the
calendar year or the preceding calendar
year. Therefore,Xmust use the aggregate
procedure to determine the amount of in-
come tax withholding on the commissions
paid toA.
The payroll period of any particular em-
ployee is the period of service for which
a payment of wages is ordinarily made
to an employee by the employer. See
§ 31.3401(b)–1(a).Areceives no regular
wages; therefore, the payroll period can-
not be determined with respect to regular
wage payments made byXbut is deter-
mined by the period of service for which
the payments of supplemental wages are
ordinarily paid byXtoA. BecauseXmakes
payments of the commissions toAon a
monthly basis,Ahas a monthly payroll pe-
riod. Therefore,Xdetermines withhold-
ing on the commissions by using the ap-
plicable table for a monthly payroll period
found in Publication 15.
Situation 2.Yis payingBboth reg-
ular wages (the salary) and supplemental
wages (the commissions). Because the
regular wages are paid on a monthly ba-
sis,Bhas a monthly payroll period. The
frequency of payment of the supplemental
wages has no effect on the determination
ofB’s payroll period becauseBreceives
periodic regular wage payments during the
calendar year.
Ymay use either the aggregate proce-
dure or optional flat rate withholding to
determine income tax withholding on the
commissions paid toB. Under the facts
here,Ydid not pay the supplemental wages
concurrently with the wages for the pay-
roll period. Therefore, ifYuses the aggre-
gate procedure,Ymay include, in the cal-
culation of the aggregate of regular wages
and supplemental wages, the regular wage
payments for either the current or the last
preceding payroll period. In calculating
the aggregate wages, the employer would
also include any other supplemental wage
payments made for such payroll period.
Thus, for example, in determining the cor-
rect withholding on the fourth commission
payment during a month under the aggre-
gate procedure,Yneeds to aggregate reg-
ular wages paid for the payroll period plus
the three prior commission payments for
the payroll period (and any other supple-
mental wage payments paid for that pay-
roll period) and then apply the applicable
monthly payroll table in Publication 15.
BecauseYhas withheld income tax from
regular wages paid toB,Ymayalsouse
optional flat rate withholding to determine
the amount of withholding on the supple-
mental wage payments toB.
Situation 3.Under this wage structure,
the draws represent payments of commis-
sions that are supplemental wages. The
draws are debited against commissions,
and the employer reduces the amount of
the draws if they exceed commissions.
Thus, the payment of the draw is a pay-
ment of commissions and not a payment
of salary, and constitutes supplemental
wages not regular wages. Therefore,Zis
2008–24 I.R.B.1151June 16, 2008

paying only supplemental wages toC,and,
as in situation 1, the employer must use the
aggregate procedure in determining the
amount of withholding on the payments of
wages to the employee. BecauseZordi-
narily paysCher supplemental wages on
a semimonthly basis,Chas a semimonthly
payroll period. Thus,Zshould use the ap-
plicable semimonthly withholding table in
Publication 15 in determining withholding
on payments toC.
Situation 4.Under the facts of this sit-
uation,Dis receiving only supplemental
wages, and thusMmust use the aggre-
gate procedure in determining income tax
withholding required under section 3402.
However, the wages are not paid at regu-
lar intervals. Because the wages are not
paid based on a period of service, but on
some other basis (i.e., the date the amount
of unpaid commissions credited to the em-
ployee equals or exceeds $1,000), the in-
come tax withheld from the wages paid
toDis based on the rules applicable to
wages paid without regard to any period
provided in § 31.3402(c)–1(c)(3) or Pub-
lication 15. Under these rules, the income
tax to be withheld is determined based on
the applicable table for a miscellaneous
payroll period. The first payment to the
employee is treated as a payment for a mis-
cellaneous payroll period of 15 days, and
the employer determines the income tax
withholding based on that period. The 15
days is derived from a beginning date of
January 1, which is the latest of (a) the first
day after the last payment of wages to such
employee by such employer in the calen-
dar year, (b) the date on which the em-
ployee began employment with such em-
ployer in the calendar year, and (c) Jan-
uary 1 of the calendar year, and an end-
ing date of January 15, the date on which
the wages were paid. Similarly, the with-
holding on the second wage payment is de-
terminedbasedonamiscellaneous payroll
period of 17 days, from January 16 (the day
after the last payment of wages) to Febru-
ary 1, the date on which the wages were
paid.
Situation 5.The bonus payment on
June 1 of Year 1 is supplemental wages.
See Rev. Rul. 2004–109, 2004–2 C.B.
958, and § 31.3402(g)–1(a)(1). To the
extent the bonus exceeds $1,000,000,P
is required to apply mandatory flat rate
withholding under § 31.3402(g)–1(a)(2)
because the supplemental wages paid toF
byPexceed $1,000,000 for the calendar
year. Thus,Pis required to apply manda-
tory flat rate withholding with respect to
$1,100,000 of the bonus.
With respect to the first $1,000,000
portion of the signing bonus,Phas the
choice of either applying the aggregate
procedure or treating the amount as sub-
ject to mandatory flat rate withholding.
See § 31.3402(g)–1(a)(4)(iv) of the regu-
lations, which provides that, in the case of
a supplemental wage payment that, when
added to all supplemental wage payments
previously made by the employer to the
employee in the calendar year, results in
the employee having received in excess
of $1,000,000 supplemental wages for the
calendar year, the employer may subject
the entire amount of such supplemental
wage payment to mandatory flat rate with-
holding. IfPuses the aggregate procedure,
the payroll period to be applied with re-
spect to determining the amount of income
tax to be withheld on the first $1,000,000
portion of the bonus is the monthly payroll
period, because the regular wage payments
to be paid toFduring the calendar year are
scheduledtobepaidonamonthlybasis.P
may not use optional flat rate withholding
to determine income tax withholding on
F’s signing bonus because at the time the
bonus is paidPhas not withheld income
tax from regular wages paid during year 1
or the preceding year.
Situation 6.Severance pay is supple-
mental wages because it is not a payment
for services in the current payroll period
but a payment made upon or after termi-
nation of employment for an employment
relationship that has terminated. Thus, al-
though the payments in this situation are
for a fixed determinable amount for 51
weeks, they are not fixed payments for the
current payroll period and thus are not reg-
ular wages.
Because the severance pay is supple-
mental wages, the usual rules for determin-
ing income tax withholding with respect
to supplemental wages apply.Scan use
the aggregate procedure to determine with-
holding on the payments. Alternatively,
ifShas withheld income tax on regular
wages paid toGin Year 1,Scan use op-
tional flat rate withholding to determine
the withholding with respect to the supple-
mental wage payments in Year 1 and Year
2.
Situation 7.The lump sum payment of
accumulated annual leave is a supplemen-
tal wage payment, because it is not a pay-
ment at a regular rate for the current pay-
roll period.Tcan use the aggregate proce-
dure in determining income tax withhold-
ing with respect to the amount of the ac-
cumulated annual leave payment.Tsepa-
rately states the amount of the supplemen-
tal wages on its payroll records. Thus, if
Thas withheld income tax from regular
wages paid toHduring the calendar year
or the preceding calendar year,T
can use
optional flat rate withholding to determine
the withholding with respect to the supple-
mental wage payment.
Situation 8. The annual payment of
the vacation and sick leave allowance is
a supplemental wage payment, because it
is not a payment at a regular rate for the
current payroll period.Ucan use the ag-
gregate procedure to determine the income
tax withholding with respect to the leave
allowance payment. The supplemental
wages are not paid concurrently with reg-
ular wages, and thusUmeets one of the
requirements for use of optional flat rate
withholding, that the supplemental wage
payment must be either not paid concur-
rently with regular wages or separately
stated on the payroll records of the em-
ployer. IfUhas withheld income tax from
regular wages paid toJduring the calen-
dar year or the preceding calendar year,
Ucan use optional flat rate withholding
to determine the withholding on the leave
allowance payment.
Situation 9.The portion of the wage
payment for sick days is supplemental
wages, because the sick pay is paid at a
different rate than the regular wages paid
the employee.Vcan use the aggregate
procedure to determine withholding with
respect to the sick pay.Vseparately states
the amount of the sick pay on its payroll
records. Thus, ifVhas withheld income
tax from regular wages paid toKduring
the calendar year or the preceding calendar
year,Vcan use optional flat rate withhold-
ingtodeterminethewithholdingonthe
sick pay.
HOLDINGS
Situation 1.Xmust use the
aggregate procedure described in
§ 31.3402(g)–1(a)(6) in determining the
amount of income tax withholding on the
June 16, 200811522008–24 I.R.B.

payments of commissions toA. Because
the supplemental wages are ordinarily
paid for a monthly period of service,X
should use the applicable withholding ta-
ble for a monthly payroll period found in
Publication 15 in applying the aggregate
procedure.
Situation 2. Yis permitted to use ei-
ther optional flat rate withholding or the
aggregate procedure. IfYis applying the
aggregate procedure,Ymust aggregate all
wages paid toBfor the monthly payroll pe-
riod, including all payments of supplemen-
tal wages for that payroll period.
Situation 3.The payments of the draws
are supplemental wages. Therefore,Zis
paying only supplemental wages toC,and,
as in Situation 1,Zmust use the aggregate
procedure in determining the amount of
withholding on the wages paid toC.
Situation 4. Mis required to use the
aggregate procedure in determining the
amount of income tax to be withheld. Fur-
thermore, becauseDis paid supplemental
wages without regard to any particular
period of service, income tax withhold-
ing on the payments of the supplemental
wages is determined under the rules ap-
plicable for wages paid without regard to
any period under § 31.3402(c)–1(c)(3), if
the employer is using the wage bracket
method, or under Publication 15, if the
employer is using the percentage method
of withholding.
Situation 5. The signing bonus is a sup-
plemental wage payment. To the extent
the signing bonus exceeds $1,000,000,P
is required to apply mandatory flat rate
withholding under § 31.3402(g)–1(a)(2)
becauseFwill have received in excess
of $1,000,000 in supplemental wages
fromPduring the calendar year. Thus,
$1,100,000 of the signing bonus is subject
to mandatory flat rate withholding. In
determining the payroll period applicable
with respect to the payment of the signing
bonus,Puses the payroll period for which
regular wages will be paid the employee.
With respect to the first $1,000,000 of the
bonus,Pmay either treat the amount as
subject to mandatory flat rate withholding
or withhold using the aggregate procedure
based on a monthly payroll period.
Situation 6.The severance pay paid
toGis supplemental wages. Therefore,S
should withhold on the payments under the
rules applicable in determining withhold-
ing on supplemental wages.
Situation 7.The lump sum annual
leave payment is a supplemental wage
payment. Therefore,Tshould withhold on
the payment under the rules applicable in
determining withholding on supplemental
wages.
Situation 8.The lump sum annual pay-
ment for vacation and sick leave is a sup-
plemental wage payment. Therefore,U
should withhold on the payment under the
rules applicable in determining withhold-
ing on supplemental wages.
Situation 9.The amount paid for sick
pay is supplemental wages. Therefore,V
should withhold on the payment under the
rules applicable in determining withhold-
ing on supplemental wages.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 67–131, 1967–1 C.B. 291,
and Rev. Rul. 66–294, 1966–2 C.B.
459, are obsolete. This revenue ruling
and § 31.3402(g)–1(a) of the regulations,
as amended by T.D. 9276, provide rules
with respect to the types of payments de-
scribed in Rev. Rul. 66–294 and Rev. Rul.
67–131.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Alfred G. Kelley of the Office of
Associate Chief Counsel (Tax Exempt &
Government Entities). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Kelley at (202) 622–6040 (not a
toll-free call).
2008–24 I.R.B.1153June 16, 2008

Part IV. Items o
fGeneralInterest
Not
ice of Proposed
Rul
emaking by
Cr
oss-Reference to
Te
mporary Regulations
Tr
eatment of Property
Us
ed to Acquire Parent
S
tock in Certain Triangular
R
eorganizations Involving
Foreign Corporations
REG–136020–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9400) under section 367(b) of the In-
ternal Revenue Code (Code) regarding cer-
tain triangular reorganizations. The regu-
lations implement rules described in No-
tice 2006–85, 2006–2 C.B. 677, and No-
tice 2007–48, 2007–25 I.R.B. 1428. The
regulations primarily affect corporations
engaged in certain triangular reorganiza-
tions involving one or more foreign corpo-
rations. The text of those regulations also
serves as the text of these proposed regu-
lations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 25, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–136020–07),
room 5203, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–136020–07),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–136020–07).
FOR
FURTHER INFORMATION
CON
TACT: Concerning the proposed reg-
ula
tions, Daniel McCall, (202) 622–3860;
con
cerning submissions of comments,
re
quests for a public hearing, and/or to
be
placed on the building access list to
at
tend a hearing, contact Richard Hurst
(R
ichard.A.Hurst@irscounsel.treas.gov)
or
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Tem
porary regulations in this issue of
the
Bulletin amend the Income Tax Reg-
ula
tions (26 CFR part 1) relating to sec-
ti
on 367(b) of the Code and certain trian-
gu
lar reorganizations. The text of those
re
gulations also serves as the text of these
pr
oposed regulations. The preamble to the
te
mporary regulations explains the tempo-
r
ary regulations and the proposed regula-
t
ions.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required.
It is hereby certified that these regu-
lations will not have a significant eco-
nomic impact on a substantial number
of small entities. Accordingly, a regula-
tory flexibility analysis is not required.
This certification is based on the fact that
the regulations will primarily affect large
multi-national corporations that engage
in triangular reorganizations subject to
the regulations. The regulations apply to
triangular reorganizations, involving one
or more foreign corporations, to the extent
that, in connection with the reorganization,
the acquiring corporation purchases, in ex-
change for property, all or a portion of the
stock used to acquire the stock or assets
of the target corporation. Therefore, the
IRS and Treasury Department expect only
ade minimisnumber of small business
entities to be subject to the regulations.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Bus
iness Administration for comment on
its
impact on small business.
Com
ments and Requests for a Public
Hea
ring
Bef
ore these proposed regulations are
ado
pted as final regulations, consideration
wi
ll be given to any written comments
(a
signed original and eight (8) copies)
or
electronic comments that are submitted
ti
mely to the IRS. The IRS and Treasury
De
partment request comments on the clar-
i
ty of the proposed rules and how they can
b
e made easier to understand. All com-
m
ents will be available for public inspec-
t
ion and copying. A public hearing will be
s
cheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled, no-
tice of the date, time,and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal author of these proposed
regulations is Daniel McCall of the Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding new entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3(b)(2)(i)(C) also is-
sued under 26 U.S.C. 367(a) and (b). * * *
Section 1.367(b)–14 also issued under
26 U.S.C. 367(b). * * *
Par. 2. Section 1.367(a)–3 is amended
by adding new paragraph (b)(2)(i)(C) to
read as follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*****
June 16, 200811542008–24 I.R.B.

(b) * * *
(2) * * *
(i) * * *
(C) [The text of this proposed
amendment to §1.367(a)–3(b)(2)(i)(C)
is the same as the text of
§1.367(a)–3T(b)(2)(i)(C) published else-
where in this issue of the Bulletin].
*****
Par. 3. Section 1.367(b)–14 is added to
read as follows:
§1.367(b)–14 Acquisition of parent stock
for property in triangular reorganizations.
[The text of proposed §1.367(b)–14 is
the same as the text of §1.367(b)–14T(a)
through (e)(5) published elsewhere in this
issue of the Bulletin.]
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 23, 2008,
8:45 a.m., and published in the issue of the Federal Register
for May 27, 2008, 73 F.R. 30330)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2008–54
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on June 16, 2008, and
would end on the date the court first deter-
mines that the organization is not described
in section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For indi-
vidual contributors, the maximum deduc-
tion protected is $1,000, with a husband
and wife treated as one contributor. This
benefit is not extended to any individual, in
wholeorinpart,fortheactsoromissions
of the organization that were the basis for
revocation.
Community Child Care
Portland, OR
Camp Meeting of the Assoc. of the
Newark Conf. of the Methodist
Episcopal Church
Mount Tabor, NJ
Berryessa PAL Youth Football Club, Inc.
San Jose, CA
Rape Survivors Anonymous World
Services, Inc.
Oswego, IL
Round Rock Band Boosters, Inc.
Round Rock, TX
2008–24 I.R.B.1155June 16, 2008

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
June 16, 2008i2008–24 I.R.B.

Numerical Finding List
1
Bulletins 2008–1 through 2008–24
Announcements:
2008-1, 2008-1 I.R.B.246
2008-2, 2008-3 I.R.B.307
2008-3, 2008-2 I.R.B.269
2008-4, 2008-2 I.R.B.269
2008-5, 2008-4 I.R.B.333
2008-6, 2008-5 I.R.B.378
2008-7, 2008-5 I.R.B.379
2008-8, 2008-6 I.R.B.403
2008-9, 2008-7 I.R.B.444
2008-10, 2008-7 I.R.B.445
2008-11, 2008-7 I.R.B.445
2008-12, 2008-7 I.R.B.446
2008-13, 2008-8 I.R.B.480
2008-14, 2008-8 I.R.B.481
2008-15, 2008-9 I.R.B.511
2008-16, 2008-9 I.R.B.511
2008-17, 2008-9 I.R.B.512
2008-18, 2008-12 I.R.B.667
2008-19, 2008-11 I.R.B.624
2008-20, 2008-11 I.R.B.625
2008-21, 2008-13 I.R.B.691
2008-22, 2008-13 I.R.B.692
2008-23, 2008-14 I.R.B.731
2008-24, 2008-13 I.R.B.692
2008-25, 2008-14 I.R.B.732
2008-26, 2008-13 I.R.B.693
2008-27, 2008-15 I.R.B.751
2008-28, 2008-14 I.R.B.733
2008-29, 2008-15 I.R.B.786
2008-30, 2008-16 I.R.B.825
2008-31, 2008-15 I.R.B.787
2008-32, 2008-16 I.R.B.826
2008-33, 2008-16 I.R.B.826
2008-34, 2008-17 I.R.B.849
2008-35, 2008-17 I.R.B.849
2008-36, 2008-16 I.R.B.827
2008-37, 2008-17 I.R.B.850
2008-38, 2008-17 I.R.B.851
2008-39, 2008-18 I.R.B.867
2008-40, 2008-19 I.R.B.941
2008-41, 2008-19 I.R.B.943
2008-42, 2008-19 I.R.B.943
2008-43, 2008-19 I.R.B.944
2008-44, 2008-20 I.R.B.982
2008-45, 2008-20 I.R.B.982
2008-46, 2008-20 I.R.B.983
2008-47, 2008-20 I.R.B.983
2008-48, 2008-20 I.R.B.983
2008-49, 2008-21 I.R.B.1024
2008-50, 2008-21 I.R.B.1024
2008-51, 2008-22 I.R.B.
1040
2008-52, 2008-22 I.R.B.1040
Announcements— Continued:
2008-53, 2008-23 I.R.B.1137
2008-54, 2008-24 I.R.B.1155
Court Decisions:
2085, 2008-17 I.R.B.828
2086, 2008-19 I.R.B.905
Notices:
2008-1, 2008-2 I.R.B.251
2008-2, 2008-2 I.R.B.252
2008-3, 2008-2 I.R.B.253
2008-4, 2008-2 I.R.B.253
2008-5, 2008-2 I.R.B.256
2008-6, 2008-3 I.R.B.275
2008-7, 2008-3 I.R.B.276
2008-8, 2008-3 I.R.B.276
2008-9, 2008-3 I.R.B.277
2008-10, 2008-3 I.R.B.277
2008-11, 2008-3 I.R.B.279
2008-12, 2008-3 I.R.B.280
2008-13, 2008-3 I.R.B.282
2008-14, 2008-4 I.R.B.310
2008-15, 2008-4 I.R.B.313
2008-16, 2008-4 I.R.B.315
2008-17, 2008-4 I.R.B.316
2008-18, 2008-5 I.R.B.363
2008-19, 2008-5 I.R.B.366
2008-20, 2008-6 I.R.B.406
2008-21, 2008-7 I.R.B.431
2008-22, 2008-8 I.R.B.465
2008-23, 2008-7 I.R.B.433
2008-24, 2008-8 I.R.B.466
2008-25, 2008-9 I.R.B.484
2008-26, 2008-9 I.R.B.487
2008-27, 2008-10 I.R.B.543
2008-28, 2008-10 I.R.B.546
2008-29, 2008-12 I.R.B.637
2008-30, 2008-12 I.R.B.638
2008-31, 2008-11 I.R.B.592
2008-32, 2008-11 I.R.B.593
2008-33, 2008-12 I.R.B.642
2008-34, 2008-12 I.R.B.645
2008-35, 2008-12 I.R.B.647
2008-36, 2008-12 I.R.B.650
2008-37, 2008-12 I.R.B.654
2008-38, 2008-13 I.R.B.683
2008-39, 2008-13 I.R.B.684
2008-40, 2008-14 I.R.B.725
2008-41, 2008-15 I.R.B.742
2008-42, 2008-15 I.R.B.747
2008-43, 2008-15 I.R.B.748
2008-44, 2008-16 I.R.B.799
2008-45, 2008-17 I.R.B.835
2008-46, 2008-18 I.R.B.868
2008-47, 2008-18 I.R.B.869
Notices— Continued:
2008-48, 2008-21 I.R.B.1008
2008-49, 2008-20 I.R.B.979
2008-50, 2008-21 I.R.B.1010
Proposed Regulations:
REG-208199-91, 2008-21 I.R.B.1017
REG-168745-03, 2008-18 I.R.B.871
REG-147290-05, 2008-10 I.R.B.576
REG-100798-06, 2008-23 I.R.B.1135
REG-141998-06, 2008-19 I.R.B.911
REG-147775-06, 2008-19 I.R.B.916
REG-153589-06, 2008-14 I.R.B.730
REG-104713-07, 2008-6 I.R.B.409
REG-104946-07, 2008-11 I.R.B.596
REG-110136-07, 2008-17 I.R.B.838
REG-111583-07, 2008-4 I.R.B.319
REG-112196-07, 2008-21 I.R.B.1021
REG-114126-07, 2008-6 I.R.B.410
REG-114942-07, 2008-18 I.R.B.901
REG-119518-07, 2008-17 I.R.B.844
REG-124590-07, 2008-16 I.R.B.801
REG-127391-07, 2008-13 I.R.B.689
REG-136020-07, 2008-24 I.R.B.1154
REG-136701-07, 2008-11 I.R.B.616
REG-137573-07, 2008-15 I.R.B.750
REG-139236-07, 2008-9 I.R.B.491
REG-141399-07, 2008-8 I.R.B.470
REG-143468-07, 2008-17 I.R.B.848
REG-147832-07, 2008-8 I.R.B.472
REG-149475-07, 2008-9 I.R.B.510
REG-151135-07, 2008-16 I.R.B.815
REG-108508-08, 2008-19 I.R.B.923
Revenue Procedures:
2008-1, 2008-1 I.R.B.1
2008-2, 2008-1 I.R.B.90
2008-3, 2008-1 I.R.B.110
2008-4, 2008-1 I.R.B.121
2008-5, 2008-1 I.R.B.164
2008-6, 2008-1 I.R.B.192
2008-7, 2008-1 I.R.B.229
2008-8, 2008-1 I.R.B.233
2008-9, 2008-2 I.R.B.258
2008-10, 2008-3 I.R.B.290
2008-11, 2008-3 I.R.B.301
2008-12, 2008-5 I.R.B.368
2008-13, 2008-6 I.R.B.407
2008-14, 2008-7 I.R.B.435
2008-15, 2008-9 I.R.B.489
2008-16, 2008-10 I.R.B.547
2008-17, 2008-10 I.R.B.549
2008-18, 2008-10 I.R.B.573
2008-19, 2008-11 I.R.B.594
2008-20, 2008-20 I.R.B.980
2008-21, 2008-12 I.R.B.657
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin
2007–52, dated December 26, 2007.
2008–24 I.R.B.iiJune 16, 2008

Revenue Procedures— Continued:
2008-22, 2008-12 I.R.B.658
2008-23, 2008-12 I.R.B.664
2008-24, 2008-13 I.R.B.684
2008-25, 2008-13 I.R.B.686
2008-26, 2008-21 I.R.B.1014
2008-27, 2008-21 I.R.B.1014
2008-28, 2008-23 I.R.B.1054
2008-29, 2008-22 I.R.B.1039
2008-30, 2008-23 I.R.B.1056
2008-31, 2008-23 I.R.B.1133
Revenue Rulings:
2008-1, 2008-2 I.R.B.248
2008-2, 2008-2 I.R.B.247
2008-3, 2008-2 I.R.B.249
2008-4, 2008-3 I.R.B.272
2008-5, 2008-3 I.R.B.271
2008-6, 2008-3 I.R.B.271
2008-7, 2008-7 I.R.B.419
2008-8, 2008-5 I.R.B.340
2008-9, 2008-5 I.R.B.342
2008-10, 2008-13 I.R.B.676
2008-11, 2008-10 I.R.B.541
2008-12, 2008-10 I.R.B.520
2008-13, 2008-10 I.R.B.518
2008-14, 2008-11 I.R.B.578
2008-15, 2008-12 I.R.B.633
2008-16, 2008-11 I.R.B.585
2008-17, 2008-12 I.R.B.626
2008-18, 2008-13 I.R.B.674
2008-19, 2008-13 I.R.B.669
2008-20, 2008-14 I.R.B.716
2008-21, 2008-15 I.R.B.734
2008-22, 2008-16 I.R.B.796
2008-23, 2008-18 I.R.B.852
2008-24, 2008-18 I.R.B.861
2008-25, 2008-21 I.R.B.986
2008-26, 2008-21 I.R.B.985
2008-28, 2008-22 I.R.B.1029
2008-29, 2008-24 I.R.B.1149
Tax Conventions:
2008-8, 2008-6 I.R.B.403
2008-39, 2008-18 I.R.B.867
Treasury Decisions:
9368, 2008-6 I.R.B.382
9369, 2008-6 I.R.B.394
9370, 2008-7 I.R.B.428
9371, 2008-8 I.R.B.447
9372, 2008-8 I.R.B.462
9373, 2008-8 I.R.B.463
9374, 2008-10 I.R.B.521
9375, 2008-5 I.R.B.344
9376, 2008-11 I.R.B.587
9377, 2008-11 I.R.B.578
9378, 2008-14 I.R.B.720
Treasury Decisions— Continued:
9379, 2008-14 I.R.B.715
9380, 2008-14 I.R.B.718
9381, 2008-14 I.R.B.694
9382, 2008-9 I.R.B.482
9383, 2008-15 I.R.B.738
9384, 2008-16 I.R.B.792
9385, 2008-15 I.R.B.735
9386, 2008-16 I.R.B.788
9387, 2008-16 I.R.B.789
9388, 2008-17 I.R.B.832
9389, 2008-18 I.R.B.863
9390, 2008-18 I.R.B.855
9391, 2008-20 I.R.B.945
9392, 2008-19 I.R.B.903
9393, 2008-20 I.R.B.975
9394, 2008-21 I.R.B.988
9395, 2008-22 I.R.B.1031
9396, 2008-22 I.R.B.1026
9397, 2008-22 I.R.B.1025
9398, 2008-24 I.R.B.1143
9400, 2008-24 I.R.B.1139
June 16, 2008iii2008–24 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–1 through 2008–24
Announcements:
2006-88
Clarified and superseded by
Notice 2008-35, 2008-12 I.R.B.647
Notice 2008-36, 2008-12 I.R.B.650
2008-6
Superseded by
Ann. 2008-19, 2008-11 I.R.B.624
Notices:
2001-16
Modified by
Notice 2008-20, 2008-6 I.R.B.406
2001-60
Modified and superseded by
Notice 2008-31, 2008-11 I.R.B.592
2002-44
Superseded by
Notice 2008-39, 2008-13 I.R.B.684
2003-51
Superseded by
Rev. Proc. 2008-24, 2008-13 I.R.B.684
2006-27
Clarified and superseded by
Notice 2008-35, 2008-12 I.R.B.647
2006-28
Clarified and superseded by
Notice 2008-36, 2008-12 I.R.B.650
2006-52
Clarified and amplified by
Notice 2008-40, 2008-14 I.R.B.725
2006-77
Clarified and amplified by
Notice 2008-25, 2008-9 I.R.B.484
2006-85
Obsoleted by
T.D. 9400, 2008-24 I.R.B.1139
2006-107
Modified by
Notice 2008-7, 2008-3 I.R.B.276
2007-30
Modified and superseded by
Notice 2008-14, 2008-4 I.R.B.310
2007-45
Modified by
Notice 2008-49, 2008-20 I.R.B.979
Notices— Continued:
2007-48
Obsoleted by
T.D. 9400, 2008-24 I.R.B.1139
2007-54
Clarified by
Notice 2008-11, 2008-3 I.R.B.279
2008-13
Supplemented by
Notice 2008-46, 2008-18 I.R.B.868
2008-27
Clarified, amended, supplemented, and
superseded by
Notice 2008-41, 2008-15 I.R.B.742
Proposed Regulations:
REG-209020-86
Corrected by
Ann. 2008-11, 2008-7 I.R.B.445
REG-107592-00
Partial withdrawal by
Ann. 2008-25, 2008-14 I.R.B.732
REG-149856-03
Hearing scheduled by
Ann. 2008-26, 2008-13 I.R.B.693
REG-143397-05
Corrected by
Ann. 2008-53, 2008-23 I.R.B.1137
REG-147290-05
Hearing scheduled by
Ann. 2008-43, 2008-19 I.R.B.944
REG-109367-06
Withdrawn by
Ann. 2008-41, 2008-19 I.R.B.943
REG-104946-07
Hearing scheduled by
Ann. 2008-47, 2008-20 I.R.B.983
REG-113891-07
Hearing scheduled by
Ann. 2008-4, 2008-2 I.R.B.269
REG-114126-07
Corrected by
Ann. 2008-36, 2008-16 I.R.B.827
REG-127770-07
Hearing scheduled by
Ann. 2008-24, 2008-13 I.R.B.692
REG-133300-07
Hearing scheduled by
Ann. 2008-34, 2008-17 I.R.B.849
Proposed Regulations— Continued:
REG-139236-07
Hearing scheduled by
Ann. 2008-42, 2008-19 I.R.B.943
REG-141399-07
Hearing cancelled by
Ann. 2008-31, 2008-15 I.R.B.787
Revenue Procedures:
97-36
Modified by
Rev. Proc. 2008-23, 2008-12 I.R.B.664
2001-23
Modified by
Rev. Proc. 2008-23, 2008-12 I.R.B.664
2002-9
Modified by
Rev. Proc. 2008-18, 2008-10 I.R.B.573
Modified and amplified by
Rev. Proc. 2008-25, 2008-13 I.R.B.686
2006-9
Modified by
Rev. Proc. 2008-31, 2008-23 I.R.B.1133
2007-1
Superseded by
Rev. Proc. 2008-1, 2008-1 I.R.B.1
2007-2
Superseded by
Rev. Proc. 2008-2, 2008-1 I.R.B.90
2007-3
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-4
Superseded by
Rev. Proc. 2008-4, 2008-1 I.R.B.121
2007-5
Superseded by
Rev. Proc. 2008-5, 2008-1 I.R.B.164
2007-6
Superseded by
Rev. Proc. 2008-6, 2008-1 I.R.B.192
2007-7
Superseded by
Rev. Proc. 2008-7, 2008-1 I.R.B.229
2007-8
Superseded by
Rev. Proc. 2008-8, 2008-1 I.R.B.233
2007-26
Obsoleted in part by
Rev. Proc. 2008-17, 2008-10 I.R.B.549
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26,
2007.
2008–24 I.R.B.ivJune 16, 2008

Revenue Procedures— Continued:
2007-31
Obsoleted in part by
Rev. Proc. 2008-19, 2008-11 I.R.B.594
2007-39
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-51
Superseded by
Rev. Proc. 2008-30, 2008-23 I.R.B.1056
2007-52
Superseded by
Rev. Proc. 2008-9, 2008-2 I.R.B.258
2008-13
Corrected by
Ann. 2008-15, 2008-9 I.R.B.511
Revenue Rulings:
56-127
Obsoleted by
T.D. 9391, 2008-20 I.R.B.945
58-612
Clarified and amplified by
Rev. Rul. 2008-15, 2008-12 I.R.B.633
64-250
Amplified by
Rev. Rul. 2008-18, 2008-13 I.R.B.674
66-294
Obsoleted by
Rev. Rul. 2008-29, 2008-24 I.R.B.1149
67-131
Obsoleted by
Rev. Rul. 2008-29, 2008-24 I.R.B.1149
89-42
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
92-19
Supplemented in part by
Rev. Rul. 2008-19, 2008-13 I.R.B.669
97-31
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
2001-48
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
2005-28
Clarified and superseded by
Rev. Rul. 2008-26, 2008-21 I.R.B.985
2007-4
Supplemented and superseded by
Rev. Rul. 2008-3, 2008-2 I.R.B.249
Revenue Rulings— Continued:
2008-22
Modified by
Ann. 2008-46, 2008-20 I.R.B.983
Treasury Decisions:
8697
Corrected by
Ann. 2008-38, 2008-17 I.R.B.851
9273
Corrected by
Ann. 2008-33, 2008-16 I.R.B.826
9362
Corrected by
Ann. 2008-9, 2008-7 I.R.B.444
Ann. 2008-12, 2008-7 I.R.B.446
9363
Corrected by
Ann. 2008-10, 2008-7 I.R.B.445
9368
Corrected by
Ann. 2008-29, 2008-15 I.R.B.786
Ann. 2008-30, 2008-16 I.R.B.825
9375
Corrected by
Ann. 2008-16, 2008-9 I.R.B.511
9386
Corrected by
Ann. 2008-35, 2008-17 I.R.B.849
June 16, 2008v2008–24 I.R.B.

2008–24 I.R.B.June 16, 2008

June 16, 20082008–24 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under
related topics, select More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE INTERNAL
REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224
Internal Revenue Service
W
ashington,DC20224
Official Business
Penalty for Private Use, $300