Internal Revenue Bulletin 2008-39 (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
8-39
September 29, 20
08
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
Rev. Rul. 2008–47, page 760.
Interest rates; underpayments and overpayments.The
rates of interest determined under section 6621 of the Code
for the calendar quarter beginning October 1, 2008, will be 6
percent for overpayments (5 percent in the case of a corpo-
ration), 6 percent for underpayments, and 8 percent for large
corporate underpayments. The rate of interest paid on the por-
tion of a corporate overpayment exceeding $10,000 will be 3.5
percent.
T.D. 9420, page 750.
Final regulations under section 42 of the Code, concerning the
low-income housing tax credit, update the utility allowances
regulations to provide new options for estimating tenant utility
costs.
REG–120844–07, page 770.
Proposed regulations under section 460 of the Code would
amendtheregulationsastheyapplytocertainlong-termcon-
struction contracts that qualify as home construction contracts
under section 460(e)(6) and to certain changes in method of
accounting for long-term contracts. A public hearing is sched-
uled for December 5, 2008.
REG–106251–08, page 774.
Proposed regulations under section 423 of the Code provide
the requirements that must be satisfied in order for a plan to
meet the definition of an employee stock purchase plan. Sec-
tion 423 also addresses the individual income tax treatment
of stock acquired pursuant to an option granted under an em-
ployee stock purchase plan. The regulations update the exist-
ing regulations and provide additional guidance in certain ar-
eas.
Notice 2008–76, page 768.
This notice addresses the application of section 382 of the
Code in the case of certain acquisitions made pursuant to the
Housing and Economic Recovery Act of 2008.
EMPLOYEE PLANS
REG–106251–08, page 774.
Proposed regulations under section 423 of the Code provide
the requirements that must be satisfied in order for a plan to
meet the definition of an employee stock purchase plan. Sec-
tion 423 also addresses the individual income tax treatment
of stock acquired pursuant to an option granted under an em-
ployee stock purchase plan. The regulations update the exist-
ing regulations and provide additional guidance in certain ar-
eas.
EXEMPT ORGANIZATIONS
Rev. Proc. 2008–55, page 768.
This procedure provides guidance with respect to the classifi-
cation of Indian tribal entities that the Service recognizes as In-
dian Tribal Governments under sections 7701(a)(40) and 7871
of the Code. The procedure has been coordinated with a list
of federally recognized tribes published by the Department of
Interior, Bureau of Indian Affairs. Rev. Proc. 2002–64 super-
seded.
(Continued on the next page)
Fi
nding Lists begin on page ii.
Index for July through September begins on page v.

ESTATE TAX
T.D. 9421, page 755.
Final regulations under section 2642(a)(3) of the Code provide
guidance regarding the generation-skipping transfer (GST) tax
consequences of the severance of a trust in a manner that is
effective under state law, but that does not meet the require-
ments of a qualified severance under section 2642(a)(3). The
regulations also provide guidance regarding the GST tax con-
sequences of a qualified severance of a trust with an inclusion
ratio between zero and one into more than two resulting trusts.
In addition, the regulations provide special funding rules appli-
cable to the non-proratadivision of certain assets between or
among resulting trusts.
September 29, 20082008–39 I.R.B.

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.
2008–39 I.R.B.September 29, 2008

September 29, 20082008–39 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
26 CFR 1.42–10: Utility allowances.
T.D. 9420
DEPARTMENT
OF THE
TREASURY
Internal Re
venue Service
26 CFR Part
1
Section 42 Utility Allowance
Regulations Update
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION:
Final Regulations.
SUMMARY: This document contains fi-
nal regulations that amend the utility al-
lowances regulations concerning the low-
income housing tax credit. The final reg-
ulations update the utility allowance regu-
lations to provide new options for estimat-
ing tenant utility costs. The final regula-
tions affect owners of low-income housing
projects who claim the credit, the tenants
in those low-income housing projects, and
the State and local housing credit agencies
that administer the credit.
DATES:Effective Date:These regulations
are effective July 29, 2008.
Applicability Date:For dates of appli-
cability, see §1.42–12(a)(4).
FOR F
URTHER INFORMATION
CONT
ACT: David Selig (202) 622–3040
(no
t a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Thi
s document contains amendments
to
the Income Tax Regulations (26 CFR
Pa
rt 1) relating to the low-income hous-
in
g credit under section 42 of the Internal
Re
venue Code (Code). On June 19, 2007,
th
e IRS and Treasury Department pub-
li
shed in theFederal Registerproposed
regulations u
nder section 42(g)(2)(B)(ii)
(REG–128274–
03, 2007–33 I.R.B. 356
[72 FR 33703])
. Written and electronic
comments res
ponding to the proposed reg-
ulations wer
e received and a public hear-
ing was held o
n the proposed regulations
on October 9,
2007. After consideration
of all the co
mments, the proposed regu-
lations are
adopted as amended by this
Treasury de
cision.
General Ove
rview
Section 42(
a) provides that, for pur-
poses of sec
tion 38, the amount of the
low-incom
e housing credit determined un-
der sectio
n 42 for any taxable year in the
credit per
iod is an amount equal to the ap-
plicable p
ercentage of the qualified basis
of each qu
alified low-income building. A
qualifie
d low-income building is defined
in sectio
n 42(c)(2) as any building that
is part of
a qualified low-income housing
project.
A qualifi
ed low-income housing project
is define
d in section 42(g)(1) as any project
for resi
dential rental property if the project
meets on
e of the following tests elected by
the taxp
ayer: (1) at least 20 percent of the
residen
tial units in the project are rent-re-
stricte
d and occupied by individuals whose
income
is 50 percent or less of area me-
dian gr
oss income; or (2) at least 40 per-
cent of
the residential units in the project
are ren
t-restricted and occupied by indi-
vidual
s whose income is 60 percent or less
of are
a median gross income. If a taxpayer
does n
ot meet the elected test, the project
is not
eligible for the section 42 credit.
Under
section 42(g)(4), section
142(d
)(2)(B) applies when determin-
ing wh
ether any project is a qualified
low-i
ncome housing project under section
42(g
)(1). Section 142(d)(2)(B) provides
that
the income of individuals and area
medi
an gross income is determined by
the S
ecretary in a manner consistent with
dete
rminations of lower income families
and a
rea median gross income under sec-
tio
n 8 of the United States Housing Act
of 1
937. Under Rev. Rul. 94–57, 1994–2
C.B
.5,taxpayersmayrelyonalistofin-
com
e limits released by the Department of
Hou
sing and Urban Development (HUD)
until 45 days a
fter HUD releases a new list
of income limi
ts, or until HUD’s effective
date for the ne
w list, whichever is later.
In order to qua
lify as a rent-restricted
unit within th
e meaning of section
42(g)(2), th
e gross rent for the unit must
not exceed 30
percent of the imputed in-
come limitat
ion applicable to the unit.
Section 42(g
)(2)(B)(ii) requires the inclu-
sion in gros
s rent of a utility allowance
determined
by the Secretary after taking
into accoun
t the determinations under sec-
tion8ofthe
United States Housing Act of
1937.
Section 1.4
2–10(a) provides that if
utility co
sts (other than telephone) for a
residenti
al rental unit are paid directly by
the tenant
, then the gross rent for that unit
includes t
he applicable utility allowance
as determ
ined under § 1.42–10. Section
1.42–10(
b) provides rules for calculating
the appro
priate utility allowance based
upon whet
her (1) the building receives
rental as
sistance from the Farmers Home
Administ
ration (FmHA), now known as
the Rura
l Housing Service; (2) the build-
ing has a
ny tenant that receives FmHA
rental a
ssistance; (3) the building is not
describ
edin(1)or(2)aboveandthe
buildi
ng’s rents and utility allowances are
review
ed by HUD on an annual basis; or
(4) the
building is not described in (1), (2),
or (3) a
bove (other buildings).
Curren
tly, under §1.42–10(b)(4), other
buildi
ngs generally use the applicable Pub-
lic Hou
sing Authority (PHA) utility al-
lowan
ce established for the Section 8 Ex-
istin
g Housing Program or use a local util-
ity co
mpany estimate. The local utility
compa
ny estimate may be obtained by any
inter
ested party (including a low-income
tena
nt, a building owner, or a State or local
hous
ing credit agency (Agency)).
The p
roposed regulations proposed
two a
dditional options for calculating util-
ity a
llowances. The first option would
perm
it a building owner to obtain a util-
ity e
stimate for each unit in a building
from
the Agency that has jurisdiction
ove
r the building (the Agency estimate).
The
Agency estimate must take into ac-
cou
nt the local utility rates data, property
typ
e, climate variables by region in the
Sta
te, taxes and fees on utility charges,
2008–39 I.R.B.750September 29, 2008

and property building materials and me-
chanical systems. An Agency may also
use actual utility company usage data and
rates for the building. The second option
would permit a building owner to calcu-
late utility allowances using the “HUD
Utility Schedule Model” found on the
Low-Income Housing Tax Credits page
atwww.huduser.org/datasets/lihtc.html
(or successor URL). The HUD Utility
Schedule Model is based on data from the
Residential Energy Consumption Survey
(RECS) conducted by the Department
of Energy. RECS data provides energy
consumption by structure for heating, air
conditioning, cooking, water heating, and
other electric (lighting and refrigeration).
The HUD Utility Schedule Model incor-
porates building location and climate.
Summary of Comments and
Explanation of Changes
Exclusions from utility allowance
Prior to these final regulations,
§1.42–10(a) provided for the exclusion of
telephone costs in determining the amount
of the utility allowance to be included
in gross rent. The proposed regulations
excluded cable television costs as well as
telephone costs. The final regulations re-
tain the exclusions for cable television and
telephone costs and also exclude Internet
costs. The IRS and Treasury Department
believe it is appropriate to exclude cable
television and Internet costs as compara-
ble to telephone costs.
Additional option for determining utility
allowances
Commentators stated that the Agency
estimate in the proposed regulations may
be administratively burdensome for some
Agencies. As an alternative, commenta-
torssuggestedaddinganoptionthatwould
allow utility estimates to be calculated by
a state-certified engineer or other qualified
professional. The commentators specified
that, under this option, computer software
could be developed that would estimate the
energy or water and sanitary sewer service
cost for each type of unit in a building. The
estimates would be determined based on
the applicable current local utility billing
rate schedule and would be applied to all
comparable units in the building using spe-
cific information about the design, materi-
als, equipment, and location of the build-
ing.
A computer software model that incor-
porates specific information about the de-
sign and location of the building for which
the utility allowances are being developed,
and that can be updated with actual con-
sumption data and with consumption es-
timates as new efficiency measures and
improvements are undertaken, would pro-
vide more accurate estimates of utility con-
sumption. Therefore, the final regulations
also include a new option allowing build-
ing owners to retain the services of a qual-
ified professional to calculate utility al-
lowancesbasedonanenergyconsumption
model.
The use of this new option is subject to
several special rules. First, the energy con-
sumption model must, at a minimum, take
into account specific factors including, but
not limited to, unit size, building orienta-
tion, design and materials, mechanical sys-
tems, appliances, and characteristics of the
building location. Second, the utility es-
timates must be calculated by either (1) a
properly licensed engineer or (2) a quali-
fied professional approved by the Agency
that has jurisdiction over the building (to-
gether, qualified professional). The qual-
ified professional and the building owner
must not be related within the meaning of
section 267(b) or 707(b). Third, the build-
ing owner must furnish a copy of the es-
timates derived from the energy consump-
tion model to the Agency and make copies
of the estimates available to all tenants in
the building. Finally, the building owner
must pay for all costs incurred in obtain-
ing the utility estimates from the qualified
professional and providing the estimates to
the Agency and tenants.
Default option/option ordering
One commentator suggested that the fi-
nal regulations should provide a default
option because, in the absence of a de-
finitive standard for determining utility al-
lowances, building owners would use the
option that yields the lowest utility esti-
mates. Commentators further requested
clarification as to which option should be
used when multiple options are available,
whether building owners may use different
options for different utilities, and whether
owners may change the options used for
calculating utilities from time to time.
An energy consumption model devel-
oped by a qualified professional that takes
into account specific information about
the design and location of the building for
which the utility allowances are being de-
veloped should produce the most accurate
utility estimates. Itis expected that this
more accurate model will be the model
most commonly used by most building
owners, particularly those with buildings
that are not very old. However, if a build-
ing owner selects an option that yields
higher utility allowances, the building
owner should be free to accept a lower
amount of rent from tenants. Therefore,
there is no need for a stated default option
or option ordering rule. Further, the final
regulations neither prohibit using different
options for different utilities nor prohibit
changing the options used for calculating
utilities. If an Agency determines that a
building owner has understated the util-
ity allowances for the building under the
particular option chosen by the owner
for calculating the utility allowance, and
the building’s units are not rent-restricted
units under section 42(g)(2) as a result, the
Agency must report the noncompliance on
Form 8823,Low-Income Housing Credit
Agencies Report of Noncompliance or
Building Disposition.
Application of newly calculated utility
allowances
Under current §1.42–10(c) of the regu-
lations, if the applicable utility allowance
for units changes, the new utility al-
lowance must be used to compute gross
rent of rent-restricted units due 90 days
after the change (the 90-day period). The
proposed regulations limited the effec-
tive date of any new utility allowances
to the earlier of the date the building
has achieved 90 percent occupancy for
a period of 90 consecutive days or the
end of the first year of the credit period.
The proposed regulations also modified
§1.42–10(c) by requiring that a building
owner must review at least annually the
basis on which utility allowances have
been established and must update the ap-
plicable utility allowance. The review
must take into account any changes to the
building such as any energy conservation
September 29, 20087512008–39 I.R.B.

measures that affect energy consumption
and changes in utility rates.
Commentators suggested that building
owners should be obligated to adjust utility
allowances when utility rates increase by
a stated percentage, for example, 10 per-
cent, which is the rule for revising util-
ity allowance schedules for PHAs under
24 CFR 982.517(c). This HUD rule pro-
vides that a PHA must review its schedule
of utility allowances each year and revise
its allowance for a utility category if the
utility rate has changed by 10 percent or
more since the utility allowance schedule
was last revised. The commentators did
not address decreases in utility rates. A
commentator also suggested that the final
regulations should require an Agency to
review or have owners review local utility
rates quarterly to determine if rates have
increased sufficiently to require an adjust-
ment. A different commentator suggested
limiting reviews to no more than once per
year.
The IRS and Treasury Department do
not believe that fluctuations in utility rates
within a given year should trigger recal-
culations of utility allowances more than
once a year. The IRS and Treasury De-
partment do not believe that the additional
burden of updating the utility allowances
more than once a year is warranted at this
time. Utility rates generally do not change
more than once a year, and yearly updated
utility allowances would reflect average
rates applicable to all tenants in a build-
ing from year to year. Therefore, the fi-
nal regulations require building owners to
calculate new utility allowances once dur-
ing the calendar year regardless of any
percentage change in utility rates. Build-
ing owners may choose, however, to cal-
culate new utility allowances more fre-
quently than once during the calendar year
provided the owner complies with the re-
quirements of these regulations, includ-
ing the notification requirements to the
Agency and tenants.
Another commentator suggested that
new utility allowances should be imple-
mented within 90 days after HUD pub-
lishes its annual income limits (which are
used in determining section 42 rents), but
in no case later than June 30 of any year.
Section 42 rents under section 42(g)(2)
may or may not increase depending on
HUD’s calculation of area median gross
income. Therefore, the IRS and Treasury
Department do not believe that the rules
should require that the effective date of
any new utility allowance coincide with
the section 42 effective date of HUD’s
income lists. Building owners, however,
may choose to implement any new utility
allowances on the section 42 effective date
of HUD’s income lists.
To bring financial stability to a project
during the beginning of its operations, the
final regulations clarify that the building
owner is not required to review the util-
ity allowances, or implement new utility
allowances, until the earlier of the date
the building has achieved 90 percent occu-
pancy for a period of 90 consecutive days
or the end of the first year of the credit pe-
riod.
Procedural safeguards for tenants
One commentator made several rec-
ommendations regarding procedural safe-
guards for tenants including: owners
should be required to give tenants 30 days
notice before the effective date of any util-
ity allowance; tenants should be provided
with all information used in calculating
the utility allowances; tenants should be
given the opportunity to comment on the
proposed allowances; and owners should
be required to review those comments
prior to the utility allowances becoming
effective. The commentator believed that
the new options for determining utility
allowances should be available only after
one full year of occupancy and one full
year after the building is placed in service.
A commentator also recommended that a
building owner should be allowed to use
the new options only if the owner provides
all data to the Agency no later than Febru-
ary 15 and the Agency informs the owner
whether the proposed utility allowances
are approved by March 31.
To provide tenants with the oppor-
tunity to comment on proposed utility
allowances to the Agency and building
owner, the final regulations apply the
existing disclosure requirement under cur-
rent §1.42–10(b)(4)(ii)(B) (regarding the
utility company estimate) to an owner us-
ing a utility company estimate, the HUD
Utility Schedule Model, or an energy con-
sumption model. Therefore, an owner
must submit copies of the proposed utility
allowances to the Agency and make the
proposed utility allowances available to
all tenants in the building at the beginning
of the 90-day period before the utility al-
lowances are used in determining the gross
rents of rent-restricted units. Similarly,
the final regulations require that any util-
ity estimates obtained under the Agency
estimate option must be made available to
all tenants in the building at the beginning
of the 90-day period. An Agency may
continue to require additional information
from the owner during the 90-day period.
Commentators suggested that the fi-
nal regulations should limit the use of
the HUD Utility Schedule Model to data
for a twelve-month period ending in the
most recent calendar year and require
the owner to certify the accuracy of the
data and the calculations of the utility
allowances. However, the HUD Utility
Schedule Model already incorporates con-
sumption data derived from RECS data.
Thus, building owners using this option
need not be required to use consumption
data for any particular twelve-month pe-
riod. These final regulations, however,
provide that the use of the energy con-
sumption model is limited to consumption
data for a twelve-month period ending no
earlier than 60 days prior to the begin-
ning of the 90-day period. In the case of
newly constructed or renovated buildings
with less than twelve months of consump-
tion data, the energy consumption model
allows a qualified professional to use con-
sumption data for the twelve-month period
of units of similar size and construction in
the geographic area in which the building
containing the units is located. Further,
the final regulations require that utility
rates used for the HUD Utility Schedule
Model, the Agency estimate option, and
the energy consumption model must be no
older than the rates in place 60 days prior
to the beginning of the 90-day period.
In addition to these safeguards, if an
Agency determines that a building owner
has understated the utility allowances for
the owner’s building under the particular
option chosen, and, therefore, some or all
of the units in the building are not rent-re-
stricted units under section 42(g)(2), then
the Agency must report the noncompliance
to the Service on Form 8823,Low-Income
Housing Credit Agencies Report of Non-
compliance or Building Disposition.
Commentators requested that building
owners should be required to certify the es-
timate and the accuracy of the data used
2008–39 I.R.B.752September 29, 2008

under the new options. Because Agencies
may request additional information at any
time during their mandatory review of pro-
posed utility allowances, and must report
any noncompliance tothe Service, the final
regulations do not require building owners
to provide such certification.
Utility allowances for tenants with special
needs
One commentator suggested that the
calculation of utility allowances should
take into account any special needs ten-
ants such as people with disabilities who
require high energy consumption equip-
ment. Section 42 does not require that the
owner’s calculation of utility allowances
be based on a tenant’s particular use of
utility services. If such a requirement were
imposed, owners and Agencies would
have to determine the utility allowance
for the tenants in each unit, as opposed
to allowances based on the size of the
unit, which would greatly increase burden.
Additionally, it is unclear whether it is
appropriate to implement rules that might
encourage tenants to be indifferent to their
energy consumption. Such indifference
could lead to cost overruns by owners, and
the viability of low-income housing could
be jeopardized. Therefore, the final reg-
ulations do not require the calculation of
utility allowances based on consumption
by particular tenants.
Calculation of utility company estimate
option for deregulated utilities
Section 1.42–10(b)(4)(ii)(B) currently
provides that any interested party (in-
cluding an owner, low-income tenant, or
Agency) may obtain a local utility com-
pany estimate for a unit. The estimate
is obtained when the interested party re-
ceives, in writing, information from a local
utility company providing the estimated
cost of that utility for a unit of similar size
and construction for the geographic area in
which the building containing the units is
located. In light of utility services deregu-
lation, the proposed regulations proposed
to amend this option by requiring the inter-
ested party to obtain cost estimates from
the local utility company that include com-
bined rate charges from multiple utility
companies.
Commentators thought this proposed
amendment would require the interested
party to obtain utility consumption esti-
mates from every utility company pro-
viding the same utility service and stated
that this would present an unworkable
administrative burden in deregulated juris-
dictions with multiple utility providers. In
some jurisdictions, many utility providers
may be available for a given building. The
proposed amendment was not intended
to require the interested party to obtain
utility consumption estimates from every
utility company providing the same utility
service. The amendment was proposed
to address deregulation by requiring the
interested party to obtain estimates for all
the components of the utility service if the
service is divided between two or more
types of service providers (for example,
electric generation and electric transmis-
sion). The final regulations clarify that,
in the case of deregulated utility services,
the interested party is required to obtain
an estimate from only one utility company
even if multiple companies can provide
the same utility service to a unit. How-
ever, the utility company furnishing the
estimate must offer utility services to the
building in order for that utility company’s
rates to be used in calculating utility al-
lowances. The estimate should include
all component charges for providing the
utility service.
Agency costs/administrative burden
One commentator requested that spe-
cific language be added to address when
Agencies may charge a reasonable fee for
making a determination pursuant to the
Agency estimate option, and who bears the
fee when a particular option is used. The
proposed regulations provided that costs
incurred in obtaining an Agency estimate
are borne by the building owner. The final
regulations adopt this provision, and fur-
ther require building owners to pay for all
costs incurred in obtaining the estimates
under the HUD Utility Schedule Model
and the energy consumption model and in
providing estimates to Agencies and ten-
ants.
Effective/applicability date
The proposed regulations were pro-
posedtobeeffectivefortaxableyears
beginning on or after the date of publica-
tion of the final regulations in theFederal
Register. A commentator suggested that
the final regulations be effective earlier on
the basis that if they are published after
2007, they would not be effective until
2009 for calendar year taxpayers. The IRS
and Treasury Department believe that the
burden associated with an earlier effective
date is not warranted. Therefore, the final
regulations do not adopt this suggestion.
However, in order to allow a building
owner to implement the utility allowances
as of the first day of the owner’s taxable
year beginning on or after July 29, 2008,
the final regulations provide that taxpay-
ers may rely on the rules for determining
utility allowances before the first day of
the owner’s taxable year beginning on or
after July 29, 2008 provided that any util-
ity allowances so calculated are effective
no earlier than the first day of the owner’s
taxable year beginning on or after July 29,
2008.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that the collection
of information in these regulations will
not have a significant economic impact
on a substantial number of small entities.
This certification is based on the fact that
the information has previously been re-
viewed and approved under OMB con-
trol number 1545–1102, and that the in-
formation required by these final regula-
tions adds no new burden to the existing
requirements. Accordingly, a Regulatory
Flexibility Analysis under the provisions
of the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice of
proposed rulemaking was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regula-
tions is David Selig, Office of the Asso-
ciate Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the IRS and Treasury
September 29, 20087532008–39 I.R.B.

Department participated in their develop-
ment.
*****
Adoption of A
mendments to the
Regulation
s
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 1.42–10 is amended by:
1. Revising the firstsentence of para-
graph (a).
2. Revising paragraphs (b)(1), (b)(2),
and (b)(3), and the introductory text of
paragraph (b)(4).
3. Adding two sentences at the end of
paragraph (b)(4)(ii)(A).
4. Adding three sentences after the sec-
ond sentence in paragraph (b)(4)(ii)(B).
5. Adding paragraphs (b)(4)(ii)(C),
(b)(4)(ii)(D), and (b)(4)(ii)(E).
6. Revising paragraph (c).
7. Adding paragraph (d).
The additions and revisions read as fol-
lows:
§1.42–10 Utility allowances.
(a) * * * If the cost of any utility (other
than telephone, cable television, or Inter-
net) for a residential rental unit is paid
directly by the tenant(s), and not by or
through the owner of the building, the
gross rent for that unit includes the appli-
cable utility allowance determined under
this section. * * *
(b)Applicable utility allowances—(1)
Buildings assisted by the Rural Housing
Service. If a building receives assistance
from the Rural Housing Service (RHS-as-
sisted building), theapplicable utility
allowance for all rent-restricted units in
the building is the utility allowance de-
termined under the method prescribed by
the Rural Housing Service (RHS) for the
building (whether or not the building or its
tenants also receive other state or federal
assistance).
(2)Buildings with Rural Housing Ser-
vice assisted tenants. If any tenant in
a building receives RHS rental assistance
payments (RHS tenant assistance), the ap-
plicable utility allowance for all rent-re-
stricted units in the building (including
any units occupied by tenants receiving
rental assistance payments from the De-
partment of Housing and Urban Develop-
ment (HUD)) is the applicable RHS utility
allowance.
(3)Buildings regulated by the Depart-
ment of Housing and Urban Development.
If neither a building nor any tenant in the
building receives RHS housing assistance,
and the rents and utility allowances of the
building are reviewed by HUD on an an-
nual basis (HUD-regulated building), the
applicable utility allowance for all rent-re-
stricted units in the building is the applica-
ble HUD utility allowance.
(4)Other buildings. If a building is nei-
ther an RHS-assisted nor a HUD-regulated
building, and no tenant in the building re-
ceives RHS tenant assistance, the appli-
cable utility allowance for rent-restricted
units in the building is determined under
the following methods.
*****
(ii)***(A)***However,ifalocal
utility company estimate is obtained for
anyunitinthebuildingunderparagraph
(b)(4)(ii)(B) of this section, a State or
local housing credit agency (Agency) pro-
vides a building owner with an estimate
for any unit in a building under paragraph
(b)(4)(ii)(C) of this section, a cost estimate
is calculated using the HUD Utility Sched-
ule Model under paragraph (b)(4)(ii)(D) of
this section, or a cost estimate is calculated
by an energy consumption model under
paragraph (b)(4)(ii)(E) of this section, then
the estimate under paragraph (b)(4)(ii)(B),
(C), (D), or (E) becomes the applicable
utility allowance for all rent-restricted
units of similar size and construction in
the building. Paragraphs (b)(4)(ii)(B), (C),
(D),and(E)ofthissectiondonotapply
to units to which the rules of paragraphs
(b)(1), (2), (3), or (4)(i) of this section
apply.
(B) * * * In the case of deregulated util-
ity services, the interested party is required
to obtain an estimate only from one utility
company even if multiple companies can
provide the same utility service to a unit.
However, the utility company must offer
utility services to the building in order for
that utility company’s rates to be used in
calculating utility allowances. The esti-
mate should include all component dereg-
ulated charges for providing the utility ser-
vice. * * *
(C)Agency estimate. A building owner
may obtain a utility estimate for each
unit in the building from the Agency that
has jurisdiction over the building pro-
vided the Agency agrees to provide the
estimate. The estimate is obtained when
the building ownerreceives, in writing,
information from the Agency providing
the estimated per-unit cost of the utilities
for units of similar size and construc-
tion for the geographic area in which the
building containing the units is located.
The Agency estimate may be obtained
by a building owner at any time during
the building’s extended use period (see
section 42(h)(6)(D)). Costs incurred in
obtaining the estimate are borne by the
building owner. In establishing an ac-
curate utility allowance estimate for a
particular building, an Agency (or an agent
or other private contractor of the Agency
that is a qualified professional within the
meaning of paragraph (b)(4)(ii)(E) of this
section) must take into account, among
other things, local utility rates, property
type, climate and degree-day variables
by region in the State, taxes and fees on
utility charges, building materials, and
mechanical systems. If the Agency uses
an agent or other private contractor to
calculate the utility estimates, the agent or
contractor and the owner must not be re-
lated within the meaning of section 267(b)
or 707(b). An Agency may also use actual
utility company usage data and rates for
the building. However, use of the Agency
estimate is limited to the building’s con-
sumption data for the twelve-month period
ending no earlier than 60 days prior to
the beginning of the 90-day period under
paragraph (c)(1) of this section and utility
rates used for the Agency estimate must
be no older than the rates in place 60 days
prior to the beginning of the 90-day period
under paragraph (c)(1) of this section. In
the case of newly constructed or renovated
buildings with less than 12 months of con-
sumption data, the Agency (or an agent
or other private contractor of the Agency
that is a qualified professional within the
meaning of paragraph (b)(4)(ii)(E) of this
section) may use consumption data for the
12-month period of units of similar size
andconstructioninthegeographicareain
which the building containing the units is
located.
2008–39 I.R.B.754September 29, 2008

(D)HUD Utility Schedule Model.A
building owner may calculate a utility
estimate using the “HUD Utility Sched-
ule Model” that can be found on the
Low-Income Housing Tax Credits page
atwww.huduser.org/datasets/lihtc.html(or
successor URL). Utility rates used for the
HUD Utility Schedule Model must be no
older than the rates in place 60 days prior
to the beginning of the 90-day period un-
der paragraph (c)(1) of this section.
(E)Energy consumption model.A
building owner may calculate utility es-
timates using an energy and water and
sewage consumption and analysis model
(energy consumption model). The energy
consumption model must, at a minimum,
take into account specific factors includ-
ing, but not limited to, unit size, building
orientation, design and materials, mechan-
ical systems, appliances, and characteris-
tics of the building location. The utility
consumption estimates must be calculated
by either a properly licensed engineer
or a qualified professional approved by
the Agency that has jurisdiction over the
building (together, qualified professional),
and the qualified professional and the
building owner must not be related within
the meaning of section 267(b) or 707(b).
Use of the energy consumption model is
limited to the building’s consumption data
for the twelve-month period ending no
earlier than 60 days prior to the begin-
ning of the 90-day period under paragraph
(c)(1) of this section, and utility rates used
for the energy consumption model must
be no older than the rates in place 60 days
prior to the beginning of the 90-day period
under paragraph (c)(1) of this section. In
the case of newly constructed or reno-
vated buildings with less than 12 months
of consumption data, the qualified profes-
sional may use consumption data for the
12-month period of units of similar size
and construction in the geographic area in
which the building containing the units is
located.
(c)Changes in applicable utility al-
lowance—(1)In general. If, at any time
during the building’s extended use pe-
riod (as defined in section 42(h)(6)(D)),
the applicable utility allowance for units
changes, the new utility allowance must
be used to compute gross rents of the units
due90daysafterthechange(the90-day
period). For example, if rent must be
lowered because a local utility company
estimate is obtained that shows a higher
utility cost than the otherwise applica-
ble PHA utility allowance, the lower rent
must be in effect for rent due at the end
of the 90-day period. A building owner
using a utility company estimate under
paragraph (b)(4)(ii)(B) of this section, the
HUD Utility Schedule Model under para-
graph (b)(4)(ii)(D) of this section, or an
energy consumption model under para-
graph (b)(4)(ii)(E) of this section must
submit copies of the utility estimates to
the Agency that has jurisdiction over the
building and make the estimates available
to all tenants in the building at the begin-
ning of the 90-day period before the utility
allowances can be used in determining
the gross rent of rent-restricted units. An
Agency may require additional informa-
tion from the owner during the 90-day
period. Any utility estimates obtained
under the Agency estimate under para-
graph (b)(4)(ii)(C) of this section must
also be made available to all tenants in the
building at the beginning of the 90-day pe-
riod. The building owner must pay for all
costs incurred in obtaining the estimates
under paragraphs (b)(4)(ii)(B), (C), (D),
and (E) of this section and providing the
estimates to the Agency and the tenants.
Thebuildingownerisnotrequiredtore-
view the utility allowances, or implement
new utility allowances, until the building
has achieved 90 percent occupancy for
a period of 90 consecutive days or the
end of the first year of the credit period,
whichever is earlier.
(2)Annual review. A building owner
must review at least once during each cal-
endar year the basis on which utility al-
lowances have been established and must
update the applicable utility allowance in
accordance with paragraph (c)(1) of this
section. The review must take into account
anychangestothebuildingsuchasany
energy conservation measures that affect
energy consumption and changes in utility
rates.
(d)Record retention. The building
owner must retain any utility consump-
tion estimates and supporting data as part
of the taxpayer’s records for purposes of
§1.6001–1(a).
Par. 3. Section 1.42–12 is amended by
adding paragraph (a)(4) to read as follows:
§1.42–12 Effective dates and transitional
rules.
(a) * * *
(4)Utility allowances. The first
sentence in §1.42–10(a), §1.42–10(b)(1),
(2), (3), and (4), the last two sen-
tencesin§1.42–10(b)(4)(ii)(A),
the third, fourth, and fifth sen-
tencesin§1.42–10(b)(4)(ii)(B),
§1.42–10(b)(4)(ii)(C), (D), and (E), and
§1.42–10(c) and (d) are applicable to a
building owner’s taxable years beginning
on or after July 29, 2008. Taxpayers
may rely on these provisions before the
beginning of the building owner’s taxable
year beginning on or after July 29, 2008
provided that any utility allowances
calculated under these provisions are
effective no earlier than the first day of the
building owner’s taxable year beginning
on or after July 29, 2008. The utility al-
lowances provisions that apply to taxable
years beginning before July 29, 2008 are
contained in §1.42–10 (see 26 CFR part 1
revised as of April 1, 2008).
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved July 20, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 28, 2008,
8:45 a.m., and published in the issue of the Federal Register
for July 29, 2008, 73 F.R. 43863)
Section 2642.—Inclusion
Ratio
26 CFR 2642–6: Qualified severance.
T.D. 9421
Department of the Treasury
Internal Revenue Service
26 CFR Part 26
Severance of a Trust for
Generation-Skipping Transfer
(GST) Tax Purposes
AGENCY: Internal Revenue Service
(IRS), Department of the Treasury (Trea-
sury).
September 29, 20087552008–39 I.R.B.

ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance regard-
ing the generation-skipping transfer (GST)
tax consequences of the severance of a
trust in a manner that is effective under
state law, but that does not meet the re-
quirements of a qualified severance under
section 2642(a)(3) of the Internal Revenue
Code (Code). These final regulations also
provide guidance regarding the GST tax
consequences of a qualified severance of a
trust with an inclusion ratio between zero
and one into more than two resulting trusts.
These final regulations also provide spe-
cial funding rules applicable to the non-pro
ratadivision of certain assets between or
among resulting trusts. The regulations
will affect trusts that are subject to the GST
tax.
DATES:Effective Date:The regulations
are effective July 31, 2008.
Applicability Date:For dates of appli-
cability, see §26.2642–6(k)(1).
FOR FURTHER INFORMATION
CONTACT: Mayer R. Samuels, (202)
622–3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 2642(a)(3) was added to the
Code by the Economic Growth and
Tax Relief Reconciliation Act of 2001
(EGTRRA), Public Law 107–16 (115 Stat.
38 (2001). Under section 2642(a)(3), if a
trust is divided into two or more trusts in a
“qualified severance,” the separate trusts
resulting from the severance (resulting
trusts), which may have different inclu-
sion ratios, will be recognized as separate
trusts for GST tax purposes. (As used in
this guidance, “resulting trust” has no re-
lation to a resulting trust recognized under
the common law of trusts and principles
of equity.) Once the resulting trusts are
recognized as separate trusts, the trans-
feror’s lifetime GST tax exemption may
be allocated separately to either trust. In
addition, whether or not a GST taxable
event occurs is determined separately for
each resulting trust.
On August 24, 2004, proposed regula-
tions under section 2642(a)(3) regarding
qualified severances were published in
theFederal Register(REG–145987–03,
2004–2 C.B. 523 [69 FR 51967]). Final
regulations were published on August 2,
2007 (T.D. 9348, 2007–37 I.R.B. 563 [72
FR 42291]). The Treasury Department
and IRS determined that certain comments
received in response to the proposed regu-
lations, and certain additional rules under
section 2642(a)(3), should be addressed in
a separate notice of proposed rulemaking.
On August 2, 2007, theFederal Register
published a notice of proposed rulemaking
(REG–128843–05, 2007–37 I.R.B. 587
[72 FR 42340]) addressing those com-
ments and rules. The IRS received one
submission containing several comments
on the notice of proposed rulemaking. The
comments contained in the submission are
discussed below. No public hearing was
requested or held.
Explanation of Provisions and
Summary of Comments
Section 26.2642–6(d)(4) of the exist-
ing regulations provides that each of the
trusts resulting from a qualified severance
must be funded with a fraction or percent-
age of the original trust, and that the sum
of those fractions or percentages must be
one or one hundred percent, respectively.
The existing regulations provide that this
requirement may be satisfied by the fund-
ing of each resulting trust with that trust’s
fraction or percentage share of each asset
held by the original trust (apro ratadivi-
sion). Section 26.2642–6(d)(4) of the pro-
posed regulations permits the funding of
the resulting trusts on a non-pro rataba-
sis, provided that a special funding rule
is also satisfied. Specifically, this sec-
tion of the proposed regulations provides
that, if the assets of the original trust are
divided between or among the resulting
trusts on a non-pro ratabasis, no discounts
or other reductions from the value of the
asset owned by the original trust, arising by
reason of the division of the original trust’s
interest in the asset between or among the
resulting trusts, are permitted for purposes
of determining the amount used to fund
each resulting trust. Instead, solely for
funding purposes, each resulting trust’s in-
terest in the stock of a closely held cor-
poration, partnership interest, or other as-
set must be valued by multiplying the fair
market value of the asset held in the origi-
nal trust as of the date of severance by the
fractional or percentage interest in that as-
set being distributed to that resulting trust.
Thus, for purposes of the requirements of a
qualified severance, regardless of whether
the funding is done on apro ratabasis,
the cumulative value of the resulting trusts
equals the value of the original trust.
The commentators pointed out that
funding pursuant to this rule would result
in an allocation different from the allo-
cation that would normally be obtained
from funding based on the state law fair
market value standard which would take
the discounts into account. The commen-
tators expressed concern that the resulting
shift in beneficial interests between or
among the resulting trusts could violate
the trustee’s fiduciary duty of impartiality
under applicable state law. Further, the
commentators pointed out that the pro-
posed rule could be avoided through the
post-severance purchase and sale of as-
sets between resulting trusts at fair market
value. The commentators recommended
an alternative funding rule under which
the value of the original trust would be
calculated as the sum of the fair market
value of the assets to be held by the result-
ing trusts.
This recommendation was not adopted
in the final regulations. It is difficult to
see how the fiduciary duty of impartiality
is challenged more by this funding rule
than by apro ratadivision of each asset
of the original trust. The funding rule
in the proposed regulations was intended
to facilitate the funding of the resulting
trusts without the cost or need for review
of appraisals of each severed interest, and
thus to improve the administrability of the
severance provisions. This funding rule
produces a bright line test, the same result
whether or not the trust assets are divided
on apro ratabasis, and recognizes that
in many circumstances, where a trust is
severed for tax purposes into two identical
trusts with the same or related beneficia-
ries, any closely held stock or partnership
units divided between the two resulting
trusts are likely to be sold as a unit without
any actual reduction in value that may be
reflected in the claimed discounts. Any
use of post-severance sales between result-
ing trusts to avoid these funding rules may
constitute mere steps in a pre-arranged
transaction.
The commentators pointed out that
the nonqualified severance illustrated in
2008–39 I.R.B.756September 29, 2008

§26.2642–6(j),Example 3, of the existing
regulations will result in a taxable event
for GST tax purposes (that is, a taxable
termination or taxable distribution) if that
severance occurs on or after the proposed
regulations are adopted as final. This is
because, under the proposed regulations,
the severed trust is treated as a separate
trust for GST tax purposes. Accordingly,
cautionary language has been added to this
example to the effect that a GST taxable
event will result as a consequence of the
severance.
It was determined that §26.2642–6(j),
Example 12of the proposed regulations
addresses the same issue covered inExam-
ple 8of §26.2654–1(a)(5). Therefore,Ex-
ample 12has been removed from the final
regulations and the examples have been
renumbered accordingly.
As requested by the commentators, a
new example, §26.2642–6(j),Example 13,
has been added to confirm that a trust re-
sulting from a nonqualified severance may
subsequently be severed in a qualified sev-
erance.
The commentators noted that
the proposed regulations under
§26.2654–1(a)(1)(iii) address the treat-
ment of severances resulting in separate
trusts that are required under the terms
of a trust instrument (mandatory sever-
ances) but that are neither severances
otherwise recognized under section 2654
nor qualified severances under section
2642. The proposed regulations conclude
that the separate shares or trusts resulting
from such a severance, if recognized as
separate trusts under state law, will be
recognized as separate for GST tax pur-
poses. The commentators questioned why
the proposed changes to the regulations
under section 2654 must address those
severances that result in separate trusts
when this issue is already addressed in
§26.2642–6(h) of the proposed regulations
dealing with nonqualified severances.
Section 26.2654–1(a)(1)(iii) was intended
to address only mandatory severances
that, as with the other types of severances
covered by §26.2654–1(a), are dictated by
the terms of the trust. On the other hand,
§26.2642–6(h) addresses discretionary
severances, that is, severances that are
elective and within the discretion of the
trustee. The severances described in
§26.2654–1 are governed by that section.
Therefore, the proposed addition to this
section has not been removed.
The proposed regulations under sec-
tion 2654 state a general rule that separate
shares or trusts resulting from a mandatory
severance, that are recognized as separate
trusts for GST tax purposes, will not be
treated as separate trusts for purposes of
filing income tax returns or calculating
any other taxes. The comments noted that
this statement shouldnot apply to shares
or trusts that are recognized as separate
trusts under local law. Rather, this state-
ment should apply only to separate shares
created within a single trust that are not
recognized under local law as separate
trusts. The final regulations reflect this
change.
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) applies only to §26.2642–6(d)(7)(iii) of
these regulations. It is hereby certified that
this provision will not have a significant
economic impact on a substantial number
of small entities. Accordingly, a Regula-
tory Flexibility Analysis is not required.
This provision directly affects individuals,
not entities. Because the remaining sec-
tions of 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.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these regulations was submitted to the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these final regu-
lations is Mayer R. Samuels, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. Other person-
nel from the IRS and Treasury participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 26 is
amended as follows:
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Paragraph 1. The authority citation for
part 26 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §26.2600–1, the table of
contents is amended by adding the entry
for §26.2642–6(h) to read as follows:
§26.2600–1 Table of contents.
*****
§26.2642–6 Qualified severance.
*****
(h) Treatment of trusts resulting from a
severance that is not a qualified severance.
*****
Par. 3. Section 26.2642–6 is amended
as follows:
1. Paragraphs (d)(4) and (d)(7) are re-
vised.
2. Paragraph (h) is added.
3. Paragraph (j)Example 3is revised.
4. Paragraph (j)Examples 6,9,12,and
13are added.
5. Paragraph (k)(1) is revised.
The additions and revisions read as fol-
lows:
§26.2642–6 Qualified severance.
*****
(d) * * *
(4) The single trust (original trust) is
severed on a fractional basis, such that
each new trust (resulting trust) is funded
with a fraction or percentage of the orig-
inal trust, and the sum of those fractions
or percentages is one or one hundred per-
cent, respectively. For this purpose, the
fraction or percentage may be determined
by means of a formula (for example, that
fraction of the trust the numerator of which
is equal to the transferor’s unused GST tax
exemption, and the denominator of which
is the fair market value of the original
trust’s assets on the date of severance).
September 29, 20087572008–39 I.R.B.

The severance of a trust based on a pe-
cuniary amount does not satisfy this re-
quirement. For example, the severance of
a trust is not a qualified severance if the
trust is divided into two trusts, with one
trust to be funded with $1,500,000 and the
other trust to be funded with the balance
of the original trust’s assets. With respect
to the particular assets to be distributed to
each separate trust resulting from the sev-
erance, each such trust may be funded with
the appropriate fraction or percentage (pro
rataportion) of each asset held by the orig-
inal trust. Alternatively, the assets may
be divided among the resulting trusts on a
non-pro ratabasis, based on the fair mar-
ket value of the assets on the date of sev-
erance. However, if a resulting trust is
funded on a non-pro ratabasis, each asset
received by a resulting trust must be val-
ued, solely for funding purposes, by mul-
tiplying the fair market value of the as-
set held in the original trust as of the date
of severance by the fraction or percent-
age of that asset received by that result-
ing trust. Thus, the assets must be val-
ued without taking into account any dis-
count or premium arising from the sever-
ance, for example, any valuation discounts
that might arise because the resulting trust
receives less than the entire interest held by
the original trust. See paragraph (j),Exam-
ple 6of this section.
*****
(7)(i) In the case of a qualified sever-
ance occurring after GST tax exemption
has been allocated to the trust (whether by
an affirmative allocation, a deemed alloca-
tion, or an automatic allocation pursuant
to the rules contained in section 2632),
if the trust has an inclusion ratio as de-
fined in §26.2642–1 that is greater than
zero and less than one, then either para-
graph (d)(7)(ii) or (iii) of this section must
be satisfied.
(ii) The trust is severed initially into
only two resulting trusts. One resulting
trust must receive that fractional share of
the total value of the original trust as of the
date of severance that is equal to the appli-
cable fraction, as defined in §26.2642–1(b)
and (c), used to determine the inclusion ra-
tio of the original trust immediately before
the severance. The other resulting trust
must receive that fractional share of the to-
tal value of the original trust as of the date
of severance that is equal to the excess of
one over the fractional share described in
the preceding sentence. The trust receiv-
ing the fractional share equal to the appli-
cable fraction shall have an inclusion ratio
of zero, and the other trust shall have an in-
clusion ratio of one. If the applicable frac-
tion with respect to the original trust is .50,
then, with respect to the two equal trusts re-
sulting from the severance, the trustee may
designate which of the resulting trusts will
have an inclusion ratio of zero and which
will have an inclusion ratio of one. Each
separate trust resulting from the severance
then may be further divided in accordance
with the rules of this section. See para-
graph (j),Example 7, of this section.
(iii) The trust is severed initially into
more than two resulting trusts. One or
more of the resulting trusts in the aggre-
gate must receive that fractional share of
the total value of the original trust as of
the date of severance that is equal to the
applicable fraction used to determine the
inclusion ratio of the original trust imme-
diately before the severance. The trust or
trusts receiving such fractional share shall
have an inclusion ratio of zero, and each
of the other resulting trust or trusts shall
have an inclusion ratio of one. (If, how-
ever, two or more of the resulting trusts
each receives the fractional share of the to-
tal value of the original trust equal to the
applicable fraction, the trustee may des-
ignate which of those resulting trusts will
have an inclusion ratio of zero and which
will have an inclusion ratio of one.) The
resulting trust or trusts with an inclusion
ratio of one must receive in the aggregate
that fractional share of the total value of
the original trust as of the date of sever-
ance that is equal to the excess of one over
the fractional share described in the second
sentence of this paragraph. See paragraph
(j),Example 9, of this section.
*****
(h)Treatment of trusts resulting from a
severance that is not a qualified severance.
Trusts resulting from a severance (other
than a severance recognized for GST tax
purposes under §26.2654–1) that does not
meet the requirements of a qualified sev-
erance under paragraph (b) of this section
will be treated, after the date of sever-
ance, as separate trusts for purposes of the
GST tax, provided that the trusts resulting
from such severance are recognized as sep-
arate trusts under applicable state law. The
post-severance treatment of the resulting
trusts as separate trusts for GST tax pur-
poses generally permits the allocation of
GST tax exemption, the making of various
elections permitted for GST tax purposes,
and the occurrence of a taxable distribu-
tion or termination with regard to a particu-
lar resulting trust, with no GST tax impact
on any other trust resulting from that sev-
erance. Each trust resulting from a sever-
ance described in this paragraph (h), how-
ever, will have the same inclusion ratio im-
mediately after the severance as that of the
original trust immediately before the sev-
erance. (See §26.2654–1for the inclusion
ratio of each trust resulting from a sever-
ance described in that section.) Further,
any trust resulting from a nonqualified sev-
erance may be severed subsequently, pur-
suant to a qualified severance described in
this §26.2642–6.
*****
(j) * * *
Example 3.Severance based on actuarial value of
beneficial interests. In 2004, T establishes Trust, an
irrevocable trust providing that income is to be paid
to T’s child C during C’s lifetime. Upon C’s death,
Trust is to terminate and the assets of Trust are to be
paid to GC, C’s child, if living, or, if GC is not then
living, to GC’s estate. T properly elects, under section
2632(c)(5), not to have the automatic allocation rules
contained in section 2632(c) apply with respect to T’s
transfers to Trust, and T does not otherwise allocate
GST tax exemption with respect to Trust. Thus, Trust
has an inclusion ratio of one. In 2009, the trustee of
Trust, pursuant to applicable state law, divides Trust
into two separate trusts, Trust 1 for the benefit of C
(and on C’s death to C’s estate), and Trust 2 for the
benefit of GC (and on GC’s death to GC’s estate).
The document severing Trust directs that Trust 1 is
to be funded with an amount equal to the actuarial
value of C’s interest in Trust prior to the severance,
determined under section 7520 of the Internal Rev-
enue Code. Similarly, Trust 2 is to be funded with
an amount equal to the actuarial value of GC’s inter-
est in Trust prior to the severance, determined under
section 7520. Trust 1 and Trust 2 do not provide for
the same succession of interests as provided under the
terms of the original trust.Therefore, the severance
is not a qualified severance. Furthermore, because
the severance results in no non-skip person having an
interest in Trust 2, Trust 2 constitutes a skip person
under section 2613 and, therefore, the severance re-
sults in a taxable termination subject to GST tax.
*****
Example 6.Funding of severed trusts on a non-
pro rata basis. (i) T’s will establishes an irrevocable
trust (Trust) for the benefit of T’s descendants. As
a result of the allocation of GST tax exemption, the
applicable fraction with respect to Trust is .60 and
Trust’s inclusion ratio is .40 [1 - .60]. Pursuant to
authority granted under applicable state law, on Au-
gust 1, 2008, the trustee executes a document sever-
ing Trust into two trusts, Trust 1 and Trust 2, each of
2008–39 I.R.B.758September 29, 2008

which is identical to Trust. The instrument of sever-
ance provides that the severance is intended to qualify
as a qualified severance within the meaning of section
2642(a)(3) and designates August 3, 2008, as the date
of severance (within the meaning of paragraph (d)(3)
of this section). The instrument further provides that
Trust1andTrust2aretobefundedonanon-pro rata
basis with Trust 1 funded with assets having a fair
market value on the dateof severance equal to 40%
of the value of Trust’s assets on that date and Trust 2
funded with assets having a fair market value equal to
60% of the value of Trust’s assets on that date. The
fair market value of the assets used to fund each trust
is to be determined in compliance with the require-
ments of paragraph (d)(4) of this section.
(ii) On August 3, 2008, the fair market value
of the Trust assets totals $4,000,000, consisting of
52% of the outstanding common stock in Company,
a closely-held corporation, valued at $3,000,000
and $1,000,000 in cash and marketable securities.
Trustee proposes to divide the Company stock
equally between Trust 1 and Trust 2, and thus transfer
26% of the Company stock to Trust 1 and 26% of the
stock to Trust 2. In addition, the appropriate amount
of cash and marketable securities will be distributed
to each trust. In accordancewith paragraph (d)(4) of
this section, for funding purposes, the interest in the
Company stock distributed to each trust is valued as
apro rataportion of the value of the 52% interest
inCompanyheldbyTrustbeforeseverance,with-
out taking into account, for example, any valuation
discount that might otherwise apply in valuing the
noncontrolling interest distributed to each resulting
trust.
(iii) Accordingly, for funding purposes, each
26% interest in Company stock distributed to Trust 1
and Trust 2 is valued at $1,500,000 (.5 x $3,000,000).
Therefore, Trust 1, which is to be funded with
$1,600,000 (.40 x $4,000,000), receives $100,000
in cash and marketable securities valued as of Au-
gust 3, 2008, in addition to the Company stock,
and Trust 2, which is to be funded with $2,400,000
(.60 x $4,000,000), receives $900,000 in cash and
marketable securities in addition to the Company
stock. Therefore, the severance is a qualified sever-
ance, provided that all other requirements of section
2642(a)(3) and this section are satisfied.
*****
Example 9.Regulatory qualified severance.(i)
In 2004, T establishes aninter vivosirrevocable trust
(Trust) providing that trust income is to be paid annu-
ally in equal shares to T’s children, A and B, for 10
years. Trust provides that the trustee has discretion to
make additional distributions of principal to A and B
during the 10-year term without adjustments to their
shares of income or the trust remainder. If either (or
both) dies prior to the expiration of the 10-year term,
the deceased child’s share of trust income is to be paid
to the child’s then living descendants, per stirpes, for
the balance of the trust term. At the expiration of the
10-year term, the corpus is to be distributed equally to
A and B; if A and B (or either or them) is not then liv-
ing, then such decedent’s share is to be distributed in-
stead to such decedent’s then living descendants, per
stirpes. T allocates GST tax exemption to Trust such
that Trust’s applicable fraction is .25 and its inclusion
ratio is .75.
(ii) In 2006, pursuant to applicable state law, the
trustee severs the trust into three trusts: Trust 1, Trust
2, and Trust 3. The instrument severing Trust pro-
vides that Trust 1 is to receive 50% of Trust’s assets,
Trust 2 is to receive 25% of Trust’s assets, and Trust
3 is to receive 25% of Trust’s assets. All three re-
sulting trusts are identicalto Trust, except that each
has different beneficiaries: A and A’s issue are des-
ignated as the beneficiaries of Trust 1, and B and B’s
issue are designated as the beneficiaries of Trust 2 and
Trust 3. The severance constitutes a qualified sever-
ance, provided that all other requirements of section
2642(a)(3) and this section are satisfied. Trust 1 will
have an inclusion ratio of 1. Because both Trust 2
and Trust 3 have each received the fractional share of
Trust’s assets equal to Trust’s applicable fraction of
.25, trustee designates that Trust 2 will have an inclu-
sionratioofoneandthatTrust3willhaveaninclu-
sion ratio of zero.
*****
Example 12.Other severance that does not meet
the requirements of a qualified severance. (i) In 2004,
T establishes an irrevocableinter vivostrust (Trust)
providing that Trust income is to be paid to T’s chil-
dren, A and B, in equal shares for their joint lives.
Upon the death of the first to die of A and B, all
Trust income will be paid to the survivor of A and B.
At the death of the survivor, the corpus is to be dis-
tributed in equal shares to T’s grandchildren, W and
X (with any then-deceased grandchild’s share being
paid in accordance with that grandchild’s testamen-
tary general power of appointment). W is A’s child
and X is B’s child. T elects under section 2632(c)(5)
not to have the automatic allocation rules contained
in section 2632(c) apply with respect to T’s transfers
to Trust, but T allocates GST tax exemption to Trust
resulting in Trust having an inclusion ratio of .30.
(ii) In 2009, the trustee of Trust, as permitted by
applicable state law, divides Trust into two separate
trusts, Trust 1 and Trust 2. Trust 1 provides that trust
income is to be paid to A for life and, on A’s death,
the remainder is to be distributed to W (or pursuant
to W’s testamentary general power of appointment).
Trust 2 provides that trust income is to be paid to B
for life and, on B’s death, the remainder is to be dis-
tributed to X (or pursuant to X’s testamentary general
power of appointment). Because Trust 1 and Trust 2
do not provide A and B with the contingent survivor
income interests that were provided to A and B under
thetermsofTrust,Trust1andTrust2donotpro-
vide for the same succession of interests in the aggre-
gate as provided by Trust. Therefore, the severance
does not satisfy the requirements of this section and is
not a qualified severance. Provided that Trust 1 and
Trust 2 are recognized as separate trusts under appli-
cable state law, Trust 1 and Trust 2 will be recognized
as separate trusts for GST tax purposes pursuant to
paragraph (h) of this section, prospectively from the
date of the severance. However, Trust 1 and Trust 2
each have an inclusion ratio of .30 immediately after
the severance, the same as the inclusion ratio of Trust
prior to severance.
Example 13.Qualified severance following a
non-qualified severance. Assume the same facts as
inExample 12, except that, as of November 4, 2010,
the trustee of Trust 1 severs Trust 1 into two trusts,
Trust 3 and Trust 4, in accordance with applicable
local law. The instrument severing Trust 1 provides
that both resulting trusts have provisions identical to
Trust 1. The terms of the instrument severing Trust 1
further provide that Trust 3 is to be funded on apro
ratabasis with assets having a fair market value as
of the date of severance equal to 70% of the value
of Trust 1’s assets on that date, and Trust 4 is to be
funded with assets having a fair market value as of
the date of severance equal to 30% of the value of
Trust 1’s assets on that date. The severance consti-
tutes a qualified severance, provided that all other
requirements of section 2642(a)(3) and this section
are satisfied. Trust 3 will have an inclusion ratio of
zero and Trust 4 will have an inclusion ratio of one.
(k) * * *
(1)In general. Except as otherwise pro-
vided in this paragraph (k), this section
applies to severances occurring on or af-
ter August 2, 2007. Paragraph (d)(7)(iii),
paragraph (h), andExamples 9,12and13
of paragraph (j) of this section apply to
severances occurring on or after Septem-
ber 2, 2008.
Par. 4. Section 26.2654–1 is amended
as follows:
1. Paragraph (a)(1)(i) is revised.
2. Paragraph (a)(1)(iii) is added.
3. In paragraph (a)(5),Example 8is
revised.
4. Paragraph (d) is added.
The additions and revisions read as fol-
lows:
§26.2654–1 Certain trusts treated as
separate trusts.
(a)***(1)***(i)***Ifasingle
trust consists solely of substantially sepa-
rate and independent shares for different
beneficiaries, the share attributable to each
beneficiary (or group of beneficiaries) is
treated as a separate trust for purposes
of Chapter 13. The phrase “substantially
separate and independent shares” gener-
ally has the same meaning as provided in
§1.663(c)–3. However, except as provided
in paragraph (a)(1)(iii) of this section, a
portion of a trust is not a separate share un-
less such share exists from and at all times
after the creation of the trust. For purposes
of this paragraph (a)(1), a trust is treated as
created at the date of death of the grantor
if the trust is includible in its entirety in
the grantor’s gross estate for Federal estate
tax purposes. Further, except with respect
to shares or trusts that are treated as sep-
arate trusts under local law, treatment of
a single trust as separate trusts under this
paragraph (a)(1) does not permit treatment
of those portions as separate trusts for pur-
poses of filing returns and payment of tax
or for purposes of computing any other tax
imposed under the Internal Revenue Code.
Also, additions to, and distributions from,
September 29, 20087592008–39 I.R.B.

such trusts are allocatedpro rataamong
the separate trusts, unless the governing
instrument expressly provides otherwise.
See §26.2642–6 and paragraph (b) of this
section regarding the treatment, for pur-
poses of Chapter 13, of separate trusts
resulting from the discretionary severance
ofasingletrust.
*****
(iii)Mandatory severances. For pur-
poses of this section, if the governing in-
strument of a trust requires the division
or severance of a single trust into sepa-
rate trusts upon the future occurrence of a
particular event not within the discretion
of the trustee or any other person, and if
the trusts resulting from such a division or
severance are recognized as separate trusts
under applicable state law, then each re-
sulting trust is treated as a separate trust
for purposes of Chapter 13. For this pur-
pose, the rules of paragraph (b)(1)(ii)(C) of
this section apply with respect to the sev-
erance and funding of the trusts. Similarly,
if the governing instrument requires the di-
vision of a single trust into separate shares
under the circumstances described in this
paragraph, each such share is treated as a
separate trust for purposes of Chapter 13.
The post-severance treatment of the result-
ing shares or trusts as separate trusts for
GST tax purposes generally permits the al-
location of GST tax exemption, the making
of various elections permitted for GST tax
purposes, and the occurrence of a taxable
distribution or termination with regard to
a particular resulting share or trust, with
no GST tax impact on any other trust or
share resulting from that severance. The
treatment of a single trust as separate trusts
under this paragraph (a)(1), however, does
not permit treatment of those portions as
separate trusts for purposes of filing re-
turns and payment of tax or for purposes
of computing any other tax imposed under
the Internal Revenue Code, if those por-
tions are not treated as separate trusts un-
der local law. Also, additions to, and distri-
butions from, such trusts are allocatedpro
rataamong the separate trusts, unless the
governing instrument expressly provides
otherwise. Each separate share and each
trust resulting from a mandatory division
or severance described in this paragraph
will have the same inclusion ratio immedi-
ately after the severance as that of the orig-
inal trust immediately before the division
or severance.
*****
(5) * * *
Example 8.Subsequent mandatory division into
separate trusts. T creates an irrevocable trust that
provides the trustee with the discretionary power to
distribute income or corpus to T’s children and grand-
children. The trust provides that, when T’s youngest
child reaches age 21, the trust will be divided into
separate shares, one share for each child of T. The
income from a respective child’s share will be paid
to the child during the child’s life, with the remainder
passing on the child’s death to such child’s children
(grandchildren of T). The separate shares that come
into existence when the youngest child reaches age
21 will be recognized as of that date as separate trusts
for purposes of Chapter 13. The inclusion ratio of the
separate trusts will be identical to the inclusion ra-
tio of the trust before the severance. Any allocation
of GST tax exemption to the trust after T’s youngest
child reaches age 21 may be made to any one or more
of the separate shares. The result would be the same
if the trust instrument provided that the trust was to be
divided into separate trusts when T’s youngest child
reached age 21, provided that the severance and fund-
ing of the separate trusts meets the requirements of
this section.
*****
(d)Effective date. Paragraph (a)(1)(i),
paragraph (a)(1)(iii), andExample8of
paragraph (a)(5) apply to severances oc-
curring on or after September 2, 2008.
*****
Sherri L. Brown,
(Acting) Deputy Commissioner for
Services and Enforcement.
Approved July 20, 2008.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 30, 2008,
8:45 a.m., and published in the issue of the Federal Register
for July 31, 2008, 73 F.R. 44649)
Section 6621.—Determina-
tion of Rate of Interest
26 CFR 301.6621–1: Interest rate.
Interest rates; underpayments and
overpayments.The rates of interest deter-
mined under section 6621 of the Code for
the calendar quarter beginning October 1,
2008, will be 6 percent for overpayments
(5 percent in the case of a corporation), 6
percent for underpayments, and 8 percent
for large corporate underpayments. The
rate of interest paid on the portion of a
corporate overpayment exceeding $10,000
will be 3.5 percent.
Rev. Rul. 2008–47
Section 6621 of the Internal Revenue
Code establishes the rates for interest
on tax overpayments and tax underpay-
ments. Under section 6621(a)(1), the
overpayment rate is the sum of the federal
short-term rate plus 3 percentage points
(2 percentage points in the case of a cor-
poration), except the rate for the portion
of a corporate overpayment of tax exceed-
ing $10,000 for a taxable period is the
sum of the federal short-term rate plus
0.5 of a percentage point. Under section
6621(a)(2), the underpayment rate is the
sum of the federal short-term rate plus 3
percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
“5 percentage points” for “3 percentage
points.” See section 6621(c) and section
301.6621–3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and
for the rules for determining the appli-
cable date. Section 6621(c) and section
301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in each
calendar quarter.
Section 6621(b)(2)(A) provides that the
federal short-term rate determined under
section 6621(b)(1) for any month applies
during the first calendar quarter beginning
after that month. Section 6621(b)(3) pro-
vides that the federal short-term rate for
any month is the federal short-term rate de-
termined during that month by the Secre-
tary in accordance with section 1274(d),
rounded to the nearest full percent (or, if
a multiple of
1
/2of 1 percent, the rate is in-
creased to the next highest full percent).
Notice 88–59, 1988–1 C.B. 546, an-
nounced that, in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
2008–39 I.R.B.760September 29, 2008

pursuant to section 6622, is subject to daily
compounding.
Rounded to the nearest full percent, the
federal short-term rate based on daily com-
pounding determined during the month of
July 2008 is 3 percent. Accordingly, an
overpayment rate of 6 percent (5 percent
in the case of a corporation) and an under-
payment rate of 6 percent are established
for the calendar quarter beginning October
1, 2008. The overpayment rate for the por-
tion of a corporate overpayment exceeding
$10,000 for the calendar quarter beginning
October 1, 2008, is 3.5 percent. The un-
derpayment rate for large corporate under-
payments for the calendar quarter begin-
ning October 1, 2008, is 8 percent. These
rates apply to amounts bearing interest dur-
ing that calendar quarter.
Interest factors for daily compound in-
terest for annual rates of 3.5 percent, 5 per-
cent, 6 percent, and 8 percent are published
in Tables 12, 63, 65, and 69 of Rev. Proc.
95–17, 1995–1 C.B. 556, 566, 617, 619,
and 623.
Annual interest rates to be compounded
daily pursuant to section 6622 that apply
for prior periods are set forth in the tables
accompanying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Deborah Colbert-James of the Of-
fice of Associate Chief Counsel (Proce-
dure & Administration). For further infor-
mation regarding this revenue ruling, con-
tact Ms. Colbert-James at (202) 622–8143
(not a toll-free call).
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIODRATE
In 1995–1 C.B.
DAILY RATE TABLE
Before Jul. 1, 1975
6%
Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 1976
9%
Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%
Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%
Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%
Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%
Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%
Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%
Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%
Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%
Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 1985
13%
Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 1985
11%
Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%
Table 25, pg. 579
Jul. 1, 1986—Dec. 31, 19869%
Table 23, pg. 577
TABLE OF INTEREST RATES
FROM JAN. 1, 1987 — DEC. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 1987—Mar. 31, 19878%21
575
9%23
577
Apr. 1, 1
987—Jun. 30, 1987
8%21
575
9%23
577
Jul. 1, 1987—Sep. 30, 19878%21
575
9%23
577
Oct. 1, 1987—Dec. 31, 19879%23
577
10%
25579
Jan. 1,
1988—Mar. 31, 1988
10%7362711%
75
629
Apr. 1, 1988—Jun. 30, 19889%71
625
10%73627
Jul. 1, 1988—Sep. 30, 19889%71
625
10%73627
Oct. 1,
1988—Dec. 31, 1988
10%7362711%
75
629
Jan. 1, 1989—Mar. 31, 198910%
25579
11%27
581
Apr. 1, 1989—Jun. 30, 198911%27
581
12%29
583
Jul. 1
, 1989—Sep. 30, 1989
11%27
581
12%29
583
Oct. 1, 1989—Dec. 31, 198910%
25579
11%27
581
Jan. 1, 1990—Mar. 31, 199010%
25579
11%27
581
Apr.
1, 1990—Jun. 30, 1990
10%
25579
11%27
581
September 29, 20087612008–39 I.R.B.

TABLE OF INTEREST RATES
FROM JAN. 1, 1987 — DEC. 31, 1998 – Continued
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jul. 1, 1990—Sep. 30, 199010%
25579
11%27
581
Oct. 1, 1990—Dec
. 31, 1990
10%
25579
11%27
581
Jan. 1, 1991—Mar. 31, 199110%
25579
11%27
581
Apr. 1, 1991—Jun. 30, 19919%23
577
10%
25579
Jul. 1, 1991—Se
p. 30, 1991
9%23
577
10%
25579
Oct. 1, 1991—Dec. 31, 19919%23
577
10%
25579
Jan. 1, 1992—Mar. 31, 19928%696239%71
625
Apr. 1, 1992—J
un. 30, 1992
7%676218%69623
Jul. 1, 1992—Sep. 30, 19927%676218%69623
Oct. 1, 1992—Dec. 31, 19926%
65
6197%67621
Jan. 1, 1993—
Mar. 31, 1993
6%17
571
7%19
573
Apr. 1, 1993—Jun. 30, 19936%17
571
7%19
573
Jul. 1, 1993—Sep. 30, 19936%17
571
7%19
573
Oct. 1, 1993
—Dec. 31, 1993
6%17
571
7%19
573
Jan. 1, 1994—Mar. 31, 19946%17
571
7%19
573
Apr. 1, 1994—Jun. 30, 19946%17
571
7%19
573
Jul. 1, 199
4—Sep. 30, 1994
7%19
573
8%21
575
Oct. 1, 1994—Dec. 31, 19948%21
575
9%23
577
Jan. 1, 19
95—Mar. 31, 1995
8%21
575
9%23
577
Apr. 1, 1995—Jun. 30, 1995
9%23
577
10%
25579
Jul. 1, 1995—Sep. 30, 1995
8%21
575
9%23
577
Oct. 1, 1
995—Dec. 31, 1995
8%21
575
9%23
577
Jan. 1, 1
996—Mar. 31, 1996
8%696239%71
625
Apr. 1, 1996—Jun. 30, 19967%676218%69623
Jul. 1, 1996—Sep. 30, 19968%696239%71
625
Oct. 1,
1996—Dec. 31, 1996
8%696239%71
625
Jan. 1, 1997—Mar. 31, 19978%21
575
9%23
577
Apr. 1, 1997—Jun. 30, 19978%21
575
9%23
577
Jul. 1,
1997—Sep. 30, 1997
8%21
575
9%23
577
Oct. 1, 1997—Dec. 31, 19978%21
575
9%23
577
Jan. 1, 1998—Mar. 31, 19988%21
575
9%23
577
Apr. 1
, 1998—Jun. 30, 1998
7%19
573
8%21
575
Jul. 1, 1998—Sep. 30, 19987%19
573
8%21
575
Oct. 1, 1998—Dec. 31, 19987%19
573
8%21
575
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995
–1 C.B.
RATETABL
E
PG
Jan. 1
, 1999—Mar. 31, 1999
7%19
573
Apr. 1, 1999—Jun. 30, 19998%21
575
Jul. 1, 1999—Sep. 30, 19998%21
575
Oct.
1, 1999—Dec. 31, 1999
8%21
575
Jan. 1, 2000—Mar. 31, 20008%69623
Apr. 1, 2000—Jun. 30, 20009%71
625
Jul
. 1, 2000—Sep. 30, 2000
9%71
625
Oct. 1, 2000—Dec. 31, 20009%71
625
Jan. 1, 2001—Mar. 31, 20019%23
57
7
Ap
r. 1, 2001—Jun. 30, 2001
8%21
575
Jul. 1, 2001—Sep. 30, 20017%19
573
2008–39 I.R.B.762September 29, 2008

TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT – Continued
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995–1 C.B.
RATETABLEPG
Oct. 1, 2001—Dec. 31, 20017%19
573
Jan. 1, 2002—Mar. 31, 20026%17
571
Apr. 1, 2002—Jun. 30, 20026%17
571
Jul. 1, 2002—Sep. 30, 20026%17
571
Oct. 1, 2002—Dec. 31, 20026%17
571
Jan. 1, 2003—Mar. 31, 2003
5%15569
Apr. 1, 2003—Jun. 30, 2003
5%15569
Jul. 1, 2003—Sep. 30, 2003
5%15569
Oct. 1, 2003—Dec. 31, 20034%13
567
Jan. 1, 2004—Mar. 31, 20044%61
615
Apr. 1, 2004—Jun. 30, 2004
5%
63617
Jul. 1, 2004—Sep. 30, 20044%61
615
Oct. 1, 2004—Dec. 31, 2004
5%
63617
Jan. 1, 2005—Mar. 31, 20055%15569
Apr. 1, 2005—Jun. 30, 2005
6%17
571
Jul. 1, 2005—Sep. 30, 2005
6%17
571
Oct. 1, 2005—Dec. 31, 2005
7%19
573
Jan. 1, 2006—Mar. 31, 20067%19
573
Apr. 1, 2006—Jun. 30, 20067%19
573
Jul. 1, 2006—Sep. 30, 20068%21
575
Oct. 1, 2006—Dec. 31, 20068%21
575
Jan. 1, 2007—Mar. 31, 20078%21
575
Apr. 1, 2007—Jun. 30, 20078%21
575
Jul. 1, 2007—Sep. 30, 20078%21
575
Oct. 1, 2007—Dec. 31, 20078%21
575
Jan. 1, 2008—Mar. 31, 20087%67621
Apr. 1, 2008—Jun. 30, 20086%
65
619
Jul. 1, 2008—Sep. 30, 2008
5%
63617
Oct. 1, 2008—Dec. 31, 20086%
65
619
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 1999—Mar. 31, 19996%17
571
7%19
573
Apr. 1, 1999—Jun. 30, 19997%19
573
8%21
575
Jul. 1,
1999—Sep. 30, 1999
7%19
573
8%21
575
Oct. 1, 1999—Dec. 31, 19997%19
573
8%21
575
Jan. 1, 2000—Mar. 31, 20007%676218%69623
Apr. 1
, 2000—Jun. 30, 2000
8%696239%71
625
Jul. 1, 2000—Sep. 30, 20008%696239%71
625
Oct. 1, 2000—Dec. 31, 20008%696239%71
625
Jan.
1, 2001—Mar. 31, 2001
8%21
575
9%23
577
Apr. 1, 2001—Jun. 30, 20017%19
573
8%21
575
Jul. 1, 2001—Sep. 30, 20016%17
571
7%19
573
Oct
. 1, 2001—Dec. 31, 2001
6%17
571
7%19
573
Jan. 1, 2002—Mar. 31, 2002
5%15569
6%17
571
Apr. 1, 2002—Jun. 30, 2002
5%15569
6%17
571
Jul
. 1, 2002—Sep. 30, 2002
5%15569
6%17
571
September 29, 20087632008–39 I.R.B.

TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT – Continued
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Oct. 1, 2002—Dec. 31, 2002
5%15569
6%17
571
Jan. 1, 2003—Mar. 31, 20034%13
5675%15569
Apr. 1, 2003—Ju
n. 30, 2003
4%13
5675%15569
Jul. 1, 2003—Sep. 30, 20034%13
5675%15569
Oct. 1, 2003—Dec. 31, 20033%11
565
4%13
567
Jan. 1, 2004—M
ar. 31, 2004
3%
59
6134%61
615
Apr. 1, 2004—Jun. 30, 20044%61
6155%
63617
Jul. 1, 2004—Sep. 30, 20043%
59
6134%61
615
Oct. 1, 2004—
Dec. 31, 2004
4%61
6155%
63617
Jan. 1, 2005—Mar. 31, 2005
4%13
5675%15569
Apr. 1, 2005—
Jun. 30, 2005
5%15569
6%17
571
Jul. 1, 2005—Sep. 30, 20055%15569
6%17
571
Oct. 1, 2005—Dec. 31, 2005
6%17
571
7%19
573
Jan. 1, 2006—Mar. 31, 20066%17
571
7%19
573
Apr. 1, 2006
—Jun. 30, 2006
6%17
571
7%19
573
Jul. 1, 2006—Sep. 30, 20067%19
573
8%21
575
Oct. 1, 2006—Dec. 31, 20067%19
573
8%21
575
Jan. 1, 200
7—Mar. 31, 2007
7%19
573
8%21
575
Apr. 1, 2007—Jun. 30, 20077%19
573
8%21
575
Jul. 1, 2007—Sep. 30, 20077%19
573
8%21
575
Oct. 1, 20
07—Dec. 31, 2007
7%19
573
8%21
575
Jan. 1, 2008—Mar. 31, 20086%
65
6197%67621
Apr. 1, 2008—Jun. 30, 2008
5%
636176%
65
619
Jul. 1, 2
008—Sep. 30, 2008
4%61
6155%
63617
Oct. 1, 2008—Dec. 31, 2008
5%
636176%
65
619
TABLE OF INTEREST RATES FOR
LARGE CO
RPORATE UNDERPAYMENTS
FROM JAN
UARY 1, 1991 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1991—Mar. 31, 199113%31
585
Apr. 1, 1991—Jun. 30, 199112%29
583
Jul. 1,
1991—Sep. 30, 1991
12%29
583
Oct. 1, 1991—Dec. 31, 199112%29
583
Jan. 1, 1992—Mar. 31, 199211%
75
629
Apr. 1
, 1992—Jun. 30, 1992
10%73627
Jul. 1, 1992—Sep. 30, 199210%73627
Oct. 1, 1992—Dec. 31, 19929%71
625
Jan. 1
, 1993—Mar. 31, 1993
9%23
577
Apr. 1, 1993—Jun. 30, 19939%23
577
Jul. 1, 1993—Sep. 30, 19939%23
577
Oct.
1, 1993—Dec. 31, 1993
9%23
577
Jan. 1, 1994—Mar. 31, 19949%23
577
Apr. 1, 1994—Jun. 30, 19949%23
577
Jul
. 1, 1994—Sep. 30, 1994
10%
25579
Oct. 1, 1994—Dec. 31, 199411%27
581
Ja
n. 1, 1995—Mar. 31, 1995
11%27
58
1
Apr. 1, 1995—Jun. 30, 1995
12%29
583
Jul. 1, 1995—Sep. 30, 1995
11%27
581
Oc
t. 1, 1995—Dec. 31, 1995
11%27
58
1
2008–39 I.R.B.764September 29, 2008

TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT – Continued
1995–1 C.B.
RATETABLEPG
Jan. 1, 1996—Mar. 31, 199611%
75
629
Apr. 1, 1996—Jun. 30, 199610%73627
Jul. 1, 1996—Sep. 30, 199611%
75
629
Oct. 1, 1996—Dec. 31, 199611%
75
629
Jan. 1, 1997—Mar. 31, 199711%27
581
Apr. 1, 1997—Jun. 30, 199711%27
581
Jul. 1, 1997—Sep. 30, 199711%27
581
Oct. 1, 1997—Dec. 31, 199711%27
581
Jan. 1, 1998—Mar. 31, 199811%27
581
Apr. 1, 1998—Jun. 30, 199810%
25579
Jul. 1, 1998—Sep. 30, 199810%
25579
Oct. 1, 1998—Dec. 31, 199810%
25579
Jan. 1, 1999—Mar. 31, 19999%23
577
Apr. 1, 1999—Jun. 30, 199910%
25579
Jul. 1, 1999—Sep. 30, 199910%
25579
Oct. 1, 1999—Dec. 31, 199910%
25579
Jan. 1, 2000—Mar. 31, 200010%73627
Apr. 1, 2000—Jun. 30, 200011%
75
629
Jul. 1, 2000—Sep. 30, 200011%
75
629
Oct. 1, 2000—Dec. 31, 200011%
75
629
Jan. 1, 2001—Mar. 31, 200111%27
581
Apr. 1, 2001—Jun. 30, 200110%
25579
Jul. 1, 2001—Sep. 30, 20019%23
577
Oct. 1, 2001—Dec. 31, 20019%23
577
Jan. 1, 2002—Mar. 31, 20028%21
575
Apr. 1, 2002—Jun. 30, 20028%21
575
Jul. 1, 2002—Sep. 30, 20028%21
575
Oct. 1, 2002—Dec. 30, 20028%21
575
Jan. 1, 2003—Mar. 31, 20037%19
573
Apr. 1, 2003—Jun. 30, 20037%19
573
Jul. 1, 2003—Sep. 30, 20037%19
573
Oct. 1, 2003—Dec. 31, 20036%17
571
Jan. 1, 2004—Mar. 31, 20046%
65
619
Apr. 1, 2004—Jun. 30, 20047%67621
Jul. 1, 2004—Sep. 30, 20046%
65
619
Oct. 1, 2004—Dec. 31, 20047%67621
Jan. 1, 2005—Mar. 31, 2005
7%19
573
Apr. 1, 2005—Jun. 30, 2005
8%21
575
Jul. 1, 2005—Sep. 30, 2005
8%21
575
Oct. 1, 2005—Dec. 31, 2005
9%23
577
Jan. 1, 2006—Mar. 31, 20069%23
577
Apr. 1, 2006—Jun. 30, 20069%23
577
Jul. 1, 2006—Sep. 30, 200610%
25579
Oct. 1, 2006—Dec. 31, 200610%
25579
Jan. 1, 2007—Mar. 31, 200710%
25579
Apr. 1, 2007—Jun. 30, 200710%
25579
Jul. 1, 2007—Sep. 30, 200710%
25579
Oct. 1, 2007—Dec. 31, 200710%
25579
Jan. 1, 2008—Mar. 31, 20089%71
625
Apr. 1, 2008—Jun. 30, 20088%69623
Jul. 1, 2008—Sep. 30, 20087%67621
Oct. 1, 2008—Dec. 31, 20088%69623
September 29, 20087652008–39 I.R.B.

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1995—Mar. 31, 19956.5%
18
572
Apr. 1, 1995—Jun. 30, 19957.5%
20
574
Jul. 1, 1995—Sep. 30, 19956.5%
18
572
Oct. 1, 1995—Dec. 31, 19956.5%
18
572
Jan. 1, 1996—Mar. 31, 1996
6.5%
66620
Apr. 1, 1996—Jun. 30, 1996
5.5%
64618
Jul. 1, 1996—Sep. 30, 1996
6.5%
66620
Oct. 1, 1996—Dec. 31, 1996
6.5%
66620
Jan. 1, 1997—Mar. 31, 1997
6.5%
18
572
Apr. 1, 1997—Jun. 30, 1997
6.5%
18
572
Jul. 1, 1997—Sep. 30, 1997
6.5%
18
572
Oct. 1, 1997—Dec. 31, 1997
6.5%
18
572
Jan. 1, 1998—Mar. 31, 1998
6.5%
18
572
Apr. 1, 1998—Jun. 30, 1998
5.5%
16
570
Jul. 1, 1998—Sep. 30, 1998
5.5%
16
570
Oct. 1, 1998—Dec. 31, 1998
5.5%
16
570
Jan. 1, 1999—Mar. 31, 1999
4.5%
14
568
Apr. 1, 1999—Jun. 30, 1999
5.5%
16
570
Jul. 1, 1999—Sep. 30, 1999
5.5%
16
570
Oct. 1, 1999—Dec. 31, 1999
5.5%
16
570
Jan. 1, 2000—Mar. 31, 2000
5.5%
64618
Apr. 1, 2000—Jun. 30, 2000
6.5%
66620
Jul. 1, 2000—Sep. 30, 2000
6.5%
66620
Oct. 1, 2000—Dec. 31, 2000
6.5%
66620
Jan. 1, 2001—Mar. 31, 2001
6.5%
18
572
Apr. 1, 2001—Jun. 30, 2001
5.5%
16
570
Jul. 1, 2001—Sep. 30, 2001
4.5%
14
568
Oct. 1, 2001—Dec. 31, 2001
4.5%
14
568
Jan. 1, 2002—Mar. 31, 2002
3.5%
12
566
Apr. 1, 2002—Jun. 30, 2002
3.5%
12
566
Jul. 1, 2002—Sep. 30, 2002
3.5%
12
566
Oct. 1, 2002—Dec. 31, 2002
3.5%
12
566
Jan. 1, 2003—Mar. 31, 2003
2.5%
10
564
Apr. 1, 2003—Jun. 30, 2003
2.5%
10
564
Jul. 1, 2003—Sep. 30, 2003
2.5%
10
564
Oct. 1, 2003—Dec. 31, 2003
1.5%
8
562
Jan. 1, 2004—Mar. 31, 2004
1.5%56
610
Apr. 1, 2004—Jun. 30, 2004
2.5%58
612
Jul. 1, 2004—Sep. 30, 2004
1.5%56
610
Oct. 1, 2004—Dec. 31, 2004
2.5%58
612
Jan. 1, 2005—Mar. 31, 20052.5%
10
564
Apr. 1, 2005—Jun. 30, 20053.5%
12
566
Jul. 1, 2005—Sep. 30, 20053.5%
12
566
Oct. 1, 2005—Dec. 31, 20054.5%
14
568
Jan. 1, 2006—Mar. 31, 2006
4.5%
14
568
Apr. 1, 2006—Jun. 30, 2006
4.5%
14
568
Jul. 1, 2006—Sep. 30, 2006
5.5%
16
570
Oct. 1, 2006—Dec. 31, 2006
5.5%
16
570
Jan. 1, 2007—Mar. 31, 2007
5.5%
16
570
Apr. 1, 2007—Jun. 30, 2007
5.5%
16
570
Jul. 1, 2007—Sep. 30, 2007
5.5%
16
570
Oct. 1, 2007—Dec. 31, 2007
5.5%
16
570
2008–39 I.R.B.766September 29, 2008

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT – Continued
1995–1 C.B.
RATETABLEPG
Jan. 1, 2008—Mar. 31, 2008
4.5%
62616
Apr. 1, 2008—Jun. 30, 2008
3.5%
60614
Jul. 1, 2008—Sep. 30, 2008
2.5%58
612
Oct. 1, 2008—Dec. 31, 2008
3.5%
12
566
September 29, 20087672008–39 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Application of Section 382
intheCaseofCertain
Acquisitions Made Pursuant
to the Housing and Economic
Recovery Act of 2008
Notice 2008–76
SECTION 1. OVERVIEW
This notice announces that the Internal
Revenue Service (IRS) and the Treasury
Department (Treasury) will issue regula-
tions under section 382(m) of the Inter-
nal Revenue Code (Code) that address the
application of section 382 in the case of
certain acquisitions made pursuant to the
Housing and Economic Recovery Act of
2008.
Pursuant to section 1117(a) and (b) of
the Housing and Economic Recovery Act
of 2008, Pub. L. No. 110–289 (2008), the
Secretary of the Treasury is authorized to
purchase any obligations and other secu-
rities issued by certain entities under the
Housing and Economic Recovery Act of
2008. A purchase that is made pursuant to
this authority is hereinafter referred to as a
“Housing Act Acquisition.”
SECTION 2. REGULATIONS TO BE
ISSUED UNDER SECTION 382(m)
The IRS and Treasury will issue reg-
ulations under section 382(m) providing
that notwithstanding any other provision
of the Code or the regulations thereunder,
for purposes of section 382 and the regu-
lations thereunder, with respect to a corpo-
ration as to which there is a Housing Act
Acquisition, the term “testing date” (as de-
fined in § 1.382–2(a)(4)) shall not include
any date on or after the date on which the
United States (or any agency or instrumen-
tality thereof) (United States) acquires, in
a Housing Act Acquisition, stock (includ-
ing stock described in section 1504(a)(4))
or an option to acquire stock in the corpo-
ration.
SECTION 3. EFFECTIVE DATE
The regulations to be issued under sec-
tion 382(m) that are described in section 2
of this notice will apply on or after Septem-
ber 7, 2008, and will apply unless and until
there is additional guidance.
26 CFR 601.201: Rulings and determination letters.
(Also Part I. Sections 103(c), 105(e), 117(b)(2)(A),
164, 170, 403(b)(1)(A)(ii), 454(b)(2), 511(a)(2)(B),
2055, 2106(a)(2), 2522, 4041(g), 4216, 4253(i),
4483(a), 4911, 4940(c), 4941(d), 4942(f), 4945(f),
4946(c).)
Rev. Proc. 2008–55
SECTION 1. GENERAL
.01 PURPOSE
The purpose of this revenue procedure
is to designate the Indian tribal entities that
appear on the current or future lists of fed-
erally recognized Indian tribes published
annually by the Department of the Inte-
rior, Bureau of Indian Affairs, as Indian
tribal governments for purposes of section
7701(a)(40). Indian tribal governments
are treated as States for certain purposes
under section 7871(a).
.02 BACKGROUND
(1) Internal Revenue Code and Trea-
sury Regulations. The Indian Tribal Gov-
ernmental Tax Status Act of 1982 (Title
II of Pub. L. No. 97–473, 1983–1 C.B.
510, 511, as amended by Pub. L. No.
98–21, 1983–2 C.B. 309, 315) added sec-
tions 7701(a)(40) and 7871 to the Code.
Section 7871(a) provides that Indian tribal
governments (or subdivisions thereof) will
be treated as states for certain enumerated
federal tax purposes. For example, charita-
ble contributions to or for the use of a tribal
government may be deductible under the
federal income, gift, and estate tax laws; a
tribal government is entitled to exemption
from certain excise taxes; taxes imposed
by a tribe may be deductible; and public
activity bonds may be tax exempt obliga-
tions. §§ 7871(a)(1), (a)(3), (a)(4). As
originally enacted in 1982, the provisions
of section 7871 were temporary. These
provisions were made permanent by sec-
tion 1065 of the Tax Reform Act of 1984,
Pub. L. 98–369, 1984–3 (Vol. 1) C.B. 556.
Section 7701(a)(40) defines the term In-
dian tribal government to mean the gov-
erning body of any tribe, band, commu-
nity, village, or group of Indians, or (if ap-
plicable) Alaska Natives, which is deter-
mined by the Secretary, after consultation
with the Secretary of the Interior, to exer-
cise governmental functions.
TemporaryRegulationsection
305.7701–1(a) provides that a governing
body of a tribe, band, pueblo, community,
village, or group of native American In-
dians, or Alaska Natives, qualifies as an
Indian tribal government upon determina-
tion by the Internal Revenue Service that
the governing body exercises governmen-
tal functions. Designation of a governing
body as an Indian tribal government will
be by revenue procedure. The temporary
regulation further provides that if a gov-
erning body is not currently designated
by revenue procedure as an Indian tribal
government, and such governing body be-
lieves that it qualifies for such designation,
the governing body may apply for a ruling
from the Internal Revenue Service.
(2) Federally Recognized Indian Tribe
List Act and Associated Regulations. Un-
der the Federally Recognized Indian Tribe
List Act of 1994, Pub. L. 103–454, 108
Stat. 4791 (“List Act”), the Secretary of
the Interior is required to publish annually
a list of all federally recognized Indian
tribes. The list must reflect all of the tribes
that the Secretary of the Interior recog-
nizes to be eligible for the programs and
services provided by the United States to
Indians because of their status as Indi-
ans. 25 USC § 479a–1(b). The United
States has a government-to-government
relationship with and recognizes the
sovereignty of recognized Indian tribes.
List Act § 103(2). The Secretary
of the Interior recognizes the entities
on the list as Indian tribes with a
government-to-government relationship
with the United States. See 44 Fed.
Reg. 7,235 (Feb. 6, 1979); 58 Fed.
Reg. 54,364 (Oct. 21, 1993); and 60
Fed. Reg. 9,250 (Feb. 16, 1995). The
government-to-government relationship
of a tribe that is on this list may not be
terminated except by an Act of Congress.
List Act § 103(4).
The Department of the Interior pub-
lishes its list annually in the Federal Reg-
ister. The most recent list was published in
73 Fed. Reg. 18,553 (April 4, 2008).
(3) Previous Revenue Procedures. The
Internal Revenue Service has issued three
2008–39 I.R.B.768September 29, 2008

revenue procedures listing Indian tribal en-
tities recognized as Indian tribal govern-
ments for purposes of section 7701(a)(40).
SeeRev. Proc. 83–87, 1983–2 C.B. 606;
Rev. Proc. 2001–15, 2001–1 C.B. 465;
Rev. Proc. 2002–64, 2002–2 C.B. 717.
For each of the 2001 and 2002 revenue
procedures, the Indian tribal entities listed
were also the Indian tribes on the most re-
cent annual list published by the Depart-
ment of the Interior pursuant to the List
Act.
SECTION 2. APPLICATION
.01 In general, an Indian tribal entity
that appears on the most recent list pub-
lished by the Department of the Interior
in the Federal Register pursuant to the re-
quirements of the List Act is designated an
Indian tribal government for purposes of
section 7701(a)(40). Tribal entities not ap-
pearing on the list that believe they qual-
ify to be recognized as Indian tribes may
contact the Office of Federal Acknowledg-
ment in the Department of the Interior for
information on how to apply for recogni-
tion pursuant to Department of the Inte-
rior procedures. Tribal entities not appear-
ingonthelistmayapplyforarulingon
whether they qualify as Indian tribal gov-
ernments under section 7701(a)(40) pur-
suant to all applicable rules set forth in the
Statement of Procedural Rules (26 CFR
Part 601), and guidelines set forth in Rev.
Proc. 84–37, 1984–1 C.B. 513, as mod-
ified by Rev. Proc. 86–17, 1986–1 C.B.
550, and Rev. Proc. 2008–1, 2008–1
I.R.B. 1.
.02 A tribe that does not appear on the
most recent list published by the Depart-
ment of the Interior in the Federal Regis-
ter pursuant to the requirements of the List
Act will nonetheless be treated as an In-
dian tribal government for purposes of sec-
tion 7701(a)(40) if the tribe has been ac-
knowledged as a federally recognized In-
dian tribe, as stated in a letter from the De-
partment of the Interior.
.03 Qualification as an Indian tribal
government does not necessarily establish
that a tribe qualifies for a particular tax
benefit. For example, when a tribal en-
tity seeks exemption from excise taxes,
the entity must be able to demonstrate
that the underlying transaction involves
the exercise of an essential governmental
function of the Indian tribal government.
§ 7871(b).
SECTION 3. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–64 is superseded.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective on
the date of publication.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Carol Cook of the Office
of the Division Counsel/Associate Chief
Counsel (Tax Exempt & Government En-
tities). For further information regarding
this revenue procedure, contact Ms. Cook
at (202) 622–1124 (not a toll-free call).
September 29, 20087692008–39 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking an
dNoticeof
Public Hearin
g
Rules for Home
Construction
Contracts
REG–120844–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Not
ice of proposed rulemaking
and notice o
f public hearing.
SUMMARY: This document contains
proposed regulations amending the regu-
lations under §1.460 to provide guidance
to taxpayers in the home construction in-
dustry regarding accounting for certain
long-term construction contracts that qual-
ify as home construction contracts under
section 460(e)(6) of the Internal Revenue
Code (Code) and to provide guidance to
taxpayers with long-term contracts under
section 460(f) regarding certain changes
in method of accounting for long-term
contracts. This document also provides a
notice of a public hearing on these pro-
posed regulations.
DATES: Written comments must be re-
ceived by November 3, 2008. Outlines of
topics to be discussed at the public hear-
ing scheduled for December 5, 2008, at
10:00 a.m. must be received by November
13, 2008.
ADDRES
SES: Send submissions to
CC:PA:
LPD:PR(REG–120844–07),
room 52
03, Internal Revenue Service,
POB 760
4, Ben Franklin Station, Wash-
ingto
n, DC 20224. Submissions may be
hand d
elivered Monday through Friday
betwe
en the hours of 8 a.m. and 4 p.m.
to CC:
PA:LPD:PR (REG–120844–07),
Couri
er’s Desk, Internal Revenue
Serv
ice, 1111 Constitution Avenue, NW,
Wash
ington, DC. Alternatively, taxpayers
may s
ubmit comments electronically
viat
heFederaleRulemaking
Port
al atwww.regulations.gov(IRS
REG–
120844–07). The public hearing
wil
l be held in the auditorium, Internal
Rev
enue Service Building, 1111
Constitution
Avenue, NW, Washington,
DC.
FOR FURTHER IN
FORMATION
CONTACT: Conc
erning the proposed
regulations,
Brendan P. O’Hara, (202)
622–4920; con
cerning submission of com-
ments, the he
aring, or to be placed on
the building
access list to attend the hear-
ing, Richard
Hurst, (202) 622–7180 (not
toll-free nu
mbers).
SUPPLEMENTA
RY INFORMATION:
Background
and Explanation of
Provisions
This docume
nt contains a proposed
amendment t
o the Income Tax Regula-
tions, 26 CF
R Part 1, under section 460
and §§1.460
–3, 1.460–4, 1.460–5 and
1.460–6 of
the Income Tax Regulations.
In general
, section 460(a) requires taxpay-
ers to use t
he percentage of completion
method (PC
M) to account for taxable
income fro
m any long-term contract. Sec-
tion 460(
e) exempts home construction
contract
s from the general requirement to
use the pe
rcentage of completion method
of accoun
ting. Section 460(e)(6) defines
ahomeco
nstruction contract to be any
constru
ction contract if 80 percent or more
of the to
tal estimated contract costs are
reasona
bly expected to be attributable to
the cons
truction of (i) dwelling units con-
tained
in buildings containing 4 or fewer
dwelli
ng units, and (ii) improvements
to real
propertydirectlyrelatedtosuch
dwelli
ng units and located on the site of
such dw
elling units. Section 460(e)(4)
defin
es a construction contract to be any
contr
act for the building, construction,
recon
struction, or rehabilitation of, or the
insta
llation of any integral component to,
or imp
rovement of, real property.
These
proposed regulations expand
the ty
pes of contracts eligible for the
home
construction contract exemption and
amen
d the rules for how taxpayer-initiated
chan
ges in methods of accounting to com-
ply w
ith the regulations under section 460
may b
eimplemented.
Definition of
aHomeConstruction
Contract
Improvements
to real property
The definitio
nofaconstruction con-
tractunder se
ction 460(e) includes many
transactions
involving land developers and
constructio
n service providers in the home
constructio
n industry. For example, a con-
struction co
ntract under section 460(e) in-
cludes a cont
ract for the provision of land
by the taxpay
er if the estimated total allo-
cable contr
act costs attributable to the tax-
payer’s con
struction activities (not includ-
ing the cost
of the land provided to the cus-
tomer) are 1
0 percent or more of the con-
tract’s to
tal contract price.
As noted, se
ction 460(a) requires that
the income
from any long-term contract
be recogni
zed using the percentage of
completio
n method. However, taxpayers
with contr
acts that meet the definition of
a“homeco
nstruction contract” are not
required
to use the percentage of comple-
tion meth
od for those contracts and may
use an exe
mpt method. Exempt methods
commonly
used to account for home con-
structi
on contracts include the completed
contrac
t method (CCM) and the accrual
method.
Under se
ction 460, a home construction
contrac
t includes any construction contract
if 80 per
cent of the total estimated contract
costs ar
e reasonably expected to be attrib-
utable
to the construction of improvements
to real
property directly related to qualify-
ing dwe
lling units and located on the site of
such dw
elling units. Commentators have
sugges
ted that many contracts entered into
by lan
d developers in the home construc-
tion i
ndustry should fall within the defini-
tion o
f a home construction contract.
The pr
oposed regulations expand the
scope
of the home construction contract
exemp
tion by providing that a contract
for th
e construction of common improve-
ment
s is considered a contract for the con-
stru
ction of improvements to real property
dire
ctly related to the dwelling unit(s) and
loca
ted on the site of such dwelling unit(s),
even
if the contract is not for the con-
str
uction of any dwelling unit. Therefore,
und
er the proposed regulations, a land de-
vel
oper that is selling individual lots (and
its
contractors and subcontractors) may
2008–39 I.R.B.770September 29, 2008

have long-term construction contracts that
qualify for the home construction contract
exemption.
Townhouses, rowhouses, and
condominiums
Under section 460, a home construction
contract also includes any construction
contract if 80 percent of the total contract
costs are reasonably expected to be attrib-
utable to the construction of dwelling units
contained in buildings containing four or
fewer dwelling units. Section 460(e)(6)
states that each townhouse or rowhouse
shall be treated as a separate building,
regardless of the number of townhouses
or rowhouses physically attached to each
other. In certain circumstances, the terms
condominium and townhouse are used
interchangeably to describe similar struc-
tures. Individual condominium units
possess many of the characteristics gen-
erally associated with townhouses and
rowhouses such as private ownership,
shared portions of their structures, resi-
dential housing, and the economics of the
underlying purchase transactions.
The proposed regulations expand what
is considered a townhouse or rowhouse,
for purposes of the home construction con-
tract exemption, to include an individual
condominium unit. This will have the ef-
fect of allowing each condominium unit to
be treated as a separate building for pur-
poses of determining whether the underly-
ing contract qualifies as a home construc-
tion contract.
Completed contract method
Under the current regulations under
section 460, the appropriate severing of a
home construction contract requires a facts
and circumstances analysis based upon
certain factors that are neither specific
nor always relevant to home construction
contracts. Likewise, the date a home con-
struction contract is considered completed
and accepted is determined using a facts
and circumstances analysis.
The IRS and Treasury Department
are aware of controversies related to the
application of the existing facts and cir-
cumstances analyses for determining the
appropriate severance and final comple-
tion and acceptance of home construction
contracts accounted for using the com-
pleted contract method. Expanding the
definition of a home construction contract
as provided in these proposed regulations
may heighten the significance of these
issues. As a result, the IRS and Treasury
Department expect to propose specific
severing and completion rules for home
construction contracts accounted for using
the completed contract method. Taxpayers
are encouraged to submit comments on
the types of severing and completion rules
that would result in the clear reflection of
income for home construction contracts
accounted for using the completed con-
tract method. Specifically, the IRS and the
Treasury Department request comments
on the circumstances (if any) in which it
would not be appropriate to require sever-
ing and completion of a home construction
contract to be determined on a dwelling
unit by dwelling unit or lot by lot basis
or, when a contract is not for the sale of a
dwelling unit or lot, on the basis of when
the taxpayer receives payment(s) under
the contract.
Method of accounting
Currently, the regulations under section
460 provide that a taxpayer that uses the
percentage-of-completion method (PCM),
the exempt-contract percentage-of-com-
pletion method (EPCM), or elects the
10-percent method or special alterna-
tive minimum taxable income (AMTI)
method, or that adopts or elects a cost al-
location method of accounting (or changes
to another method of accounting with
the Commissioner’s consent) must ap-
ply the method(s) consistently for all
similarly classified contracts until the tax-
payer obtains the Commissioner’s consent
under section 446 to change to another
method of accounting. The regulations
further provide that a taxpayer-initiated
change in method of accounting will be
permitted only on a cut-off basis (that
is, for contracts entered into on or after
the year of change), and thus, a section
481(a) adjustment will not be permitted
nor required. The proposed regulations
continue this cut-off method of imple-
mentation but only for taxpayer-initiated
changes from a permissible PCM method
to another permissible PCM method for
long-term contracts for which PCM is re-
quired and for taxpayer-initiated changes
from a cost allocation method of account-
ing that complies with the cost allocation
rules of §1.460–5 to another cost allocation
method of accounting that complies with
the cost allocation rules of §1.460–5. Un-
der the proposed regulations all other
taxpayer-initiated changes in method of
accounting under section 460 will be made
with a section 481(a) adjustment.
The proposed regulations provide that
in determining the hypothetical under-
payment or overpayment of tax for any
year as part of the look-back computa-
tion, amounts reported as section 481(a)
adjustments shall generally be taken into
account in the tax year or years they are
reported. For purposes of determining
whether there is a hypothetical under-
payment or overpayment of tax under
the look-back computation, a taxpayer
would use amounts reported under its old
method for the years the old method was
used and would use amounts reported
under its new method for the years the
new method was used, netted against the
amount of any section 481(a) adjustments
required to be taken into account. Thus,
a look-back computation would not be
required upon contract completion sim-
ply because the taxpayer has changed
its method of accounting. However, a
look-back computation would be required
upon contract completion if actual costs or
the contract price differ from the estimated
amounts notwithstanding the fact a change
in method of accounting occurred. For
example, if a taxpayer using PCM changed
its method of accounting for construction
costs incurred in a contract reported under
PCM, the section 460 look-back would
be computed using the costs recognized
prior to the year of change (reported under
the taxpayer’s old method of accounting)
and the costs recognized in subsequent
years using the new method of account-
ing, netted against any applicable section
481(a) adjustment. Similarly, for changes
in methods of accounting where no costs
were recognized under the old method
of accounting (for example, a change
in method of accounting from CCM to
PCM), look-back would effectively only
apply to years in which the taxpayer’s
new method of accounting was used to
the extent that no costs were recognized
prior to the year of change under the old
method of accounting. This approach to
the look-back computation is consistent
with the underlying purpose of look-back
as well as the general accounting method
September 29, 20087712008–39 I.R.B.

change procedures. Comments are specif-
ically requested with respect to issues
that taxpayers may foresee with respect
to the rules provided in these proposed
regulations for taking into account section
481(a) adjustments in the year reported for
purposes of the look-back computation.
Proposed Effective/Applicability Date
These regulations are proposed to ap-
ply to taxable years beginning on or af-
ter the date the final regulations are pub-
lished in theFederal Register.Thefinal
regulations will provide rules applicable to
taxpayers that seek to change a method of
accounting to comply with the rules con-
tained in the final regulations. Taxpayers
may not change or otherwise use a method
of accounting in reliance upon the rules
contained in these new proposed regula-
tions until the rules are published as final
regulations in theFederal Register.
Special Analyses
It has been determined that this pro-
posed regulation isnot a significant regu-
latory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It has also been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
does not apply, and because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
nesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original with eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand.
All comments will be available for public
inspection and copying.
A public hearing has been sched-
uled for December 5, 2008, beginning
at 10:00 a.m., in the auditorium of
the Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the Constitution
Avenue entrance. In addition, all visitors
must present photo identification to
enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER
INFORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments and
an outline of the topics to be discussed and
the time to be devoted to each topic (signed
original and eight (8) copies) by Novem-
ber 13, 2008. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Brendan P. O’Hara, Office of Asso-
ciate Chief Counsel (Income Tax and Ac-
counting). However, other personnel from
the IRS and 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.460–3 is amended by:
1. Revising paragraph (b)(1)(ii).
2. Redesignating paragraphs (b)(2)(ii),
(b)(2)(iii) and (b)(2)(iv) as paragraphs
(b)(2)(iii), (b)(2)(iv) and (b)(2)(v), respec-
tively, and revising them.
3. Adding a new paragraph (b)(2)(ii).
The revisions and addition read as fol-
lows:
§1.460–3 Long-term construction
contracts.
*****
(b) * * *
(1) * * *
(ii) Construction contract, other than a
home construction contract, that a taxpayer
estimates (when entering into the contract)
will be completed within 2 years of the
contract commencement date, provided
the taxpayer satisfies the $10,000,000
gross receipts test described in paragraph
(b)(3) of this section.
(2) * * *
(ii)Land improvements. For purposes
of paragraph (b)(2)(i)(B) of this section,
improvements to real property directly
related to, and located on the site of, the
dwelling units consist of improvements to
land on which dwelling units (as described
in paragraph (b)(2)(i)(A) of this section)
are constructed, and common improve-
ments as defined in paragraph (b)(2)(iv)
of this section. A long-term construction
contract is a home construction contract
if a taxpayer (including a subcontractor
working for a generalcontractor) meets
the 80% test in paragraph (b)(2)(i) of
this section as applied to either paragraph
(b)(2)(i)(A) of this section or paragraph
(b)(2)(i)(B) of this section, or both para-
graphs (b)(2)(i)(A) and (b)(2)(i)(B) of this
section, collectively.
(iii)Townhouses and rowhouses.For
purposes of determining whether a long-
term construction contract is a home con-
struction contract under paragraph (b)(2)
of this section, each townhouse or row-
house is a separate building. For this pur-
pose, the term townhouse and rowhouse
includes an individual condominium unit.
(iv)Common improvements—(A)In
general. A taxpayer includes in the cost of
a dwelling unit or land its allocable share
of the cost that the taxpayer incurs for any
common improvements that benefit the
dwelling unit or land.
(B)Definition. For purposes of this
section,a common improvementis an im-
provement that the taxpayer is contractu-
ally obligated, or required by law, to con-
struct within the tract or tracts of land con-
taining the dwelling units (or the land on
which dwelling units are to be constructed)
2008–39 I.R.B.772September 29, 2008

and that benefits the dwelling units (or the
land on which dwelling units are to be con-
structed). In general, a common improve-
ment does not solely benefit any particular
dwelling unit or any particular lot on which
a dwelling unit is constructed. However,
land clearing and grading are common im-
provements, even when performed on a
particular lot. Other examples of com-
mon improvements are sidewalks, sewers,
roads and clubhouses.
(v)Mixed use costs. If a contract in-
volves the construction of both commer-
cial units and dwelling units, a taxpayer
must allocate the costs among the commer-
cial units and dwelling units using a rea-
sonable method or combination of reason-
able methods. In general, the reasonable-
ness of an allocation method will be based
on facts and circumstances. Examples of
methods that may be reasonable are spe-
cific identification, square footage, or fair
market value.
*****
Par. 3. Section 1.460–4 is amended by:
1. Revising the third sentence in para-
graph (c)(1).
2. Redesignating paragraph (g) as para-
graph (g)(1) and revising newly redesig-
nated paragraph (g)(1).
3. Adding a paragraph (g)(2).
4. RevisingExample 5. of paragraph
(h).
The revisions and additions read as fol-
lows:
§1.460–4 Methods of accounting for
long-term contracts.
*****
(c) * * *
(1)***Permissibleexemptcontract
methods are the PCM, the EPCM de-
scribed in paragraph (c)(2) of this section,
the CCM described in paragraph (d) of
this section, the accrual method, and any
other permissible method. * * *
*****
(g)Method of accounting—(1)In gen-
eral. A taxpayer must apply its method(s)
of accounting for long-term contracts con-
sistently for all similarly classified long-
term contracts untilthe taxpayer obtains
the Commissioner’s consent under section
446(e) to change to another method of ac-
counting.
(2)Taxpayer-initiated change in
method of accounting—(i)Change to
PCM for long-term contracts for which
PCM is required. A taxpayer-initiated
change in method of accounting for
long-term contracts (or portion thereof)
for which income must be determined us-
ing the PCM described in paragraph (b) of
this section and the costs allocation rules
described in §1.460–5(b) or (c) (required
PCM contracts) from a method of account-
ing that does not comply with paragraph
(b) of this section and §1.460–5(b) or (c)
to a method that complies with paragraph
(b) of this section and §1.460–5(b) or
(c) must be applied to all required PCM
contracts entered into before the year of
change and not reported as completed as
of the beginning of the year of change.
Accordingly, a section 481(a) adjustment
will be required.
(ii)Change from a permissible PCM
method to another permissible PCM
method for long-term contracts for which
PCM is required. A taxpayer initiated
change in method of accounting for re-
quired PCM contracts, as defined in para-
graph (g)(2)(i) of this section (or a portion
thereof), from a method of accounting that
complies with paragraph(b)ofthissection
and §1.460–5(b) or (c) to another method
of accounting that complies with para-
graph (b) of this section and §1.460–5(b)
or (c) must be made on a cut-off basis
and applied only to contracts entered into
during and after the year of change. Ac-
cordingly, a section 481(a) adjustment will
be neither permitted nor required.
(iii)Change to an exempt contract
method for home construction contracts.
A taxpayer-initiated change in method of
accounting for home construction con-
tracts, as defined in §1.460–3(b)(2), to
a permissible exempt contract method,
as described in paragraph (c)(1) of this
section, must be applied to all home con-
struction contracts entered into before the
year of change and not reported as com-
pleted as of the beginning of the year of
change. Accordingly, a section 481(a)
adjustment will be required.
(iv)Change to an exempt contract
method for exempt contracts other than
home construction contracts.Atax-
payer-initiated change in method of ac-
counting for long-term contracts (or por-
tion thereof) not described in paragraphs
(g)(2)(i), (ii) and (iii) of this section to a
permissible exempt contract method as
described in paragraph (c)(1) of this sec-
tion must be applied to all contracts that
are eligible to use the exempt contract
method entered into before the year of
change and not reported as completed as
of the beginning of the year of change.
Accordingly, a section 481(a) adjustment
will be required.
(h) * * *
*****
Example 5.PCM—contract terminated.C,
whose taxable year endsDecember 31, determines
the income from long-term contracts using the PCM.
During 2001, C buys land and begins constructing
a building that will contain 50 apartment units on
that land. C enters into a contract to sell the building
to B for $2,400,000. B gives C a $50,000 deposit
toward the purchase price. By the end of 2001, C
has incurred $500,000 of allocable contract costs on
the building and estimates that the total allocable
contract costs on the building will be $1,500,000.
Thus, for 2001, C reports gross receipts of $800,000
($500,000 / $1,500,000 x $2,400,000), current-year
costs of $500,000, and gross income of $300,000
($800,000 - $500,000). In 2002, after C has incurred
an additional $250,000 of allocable contract costs on
the building, B files for bankruptcy protection and
defaults on the contract with C, who is permitted
to keep B’s $50,000 deposit as liquidated damages.
In 2002, C reverses the transaction with B under
paragraph (b)(7) of this section and reports a loss
of $300,000 ($500,000 - $800,000). In addition, C
obtains an adjusted basis in the building sold to B of
$700,000 ($500,000 (current-year costs deducted in
2001) - $50,000 (B’s forfeited deposit) + $250,000
(current-year costs incurred in 2002). C may not
apply the look-back method to this contract in 2002.
*****
Par. 4. Section 1.460–5 is amended by:
1. Adding a new sentence to the end of
paragraph (c)(2).
2. Revising paragraph (g).
The revision and addition read as fol-
lows:
§1.460–5 Cost allocation rules.
*****
(c) * * *
(2) * * * Further, this election is not
available if a taxpayer is changing from a
cost allocation method other than as pre-
scribed in paragraph (b) of this section,
in which case the taxpayer must follow
the procedures under §1.446–1(e) for ob-
taining the Commissioner’s consent for the
change in method of accounting.
*****
(g)Method of accounting. A taxpayer
that adopts, elects, or otherwise changes
September 29, 20087732008–39 I.R.B.

to a cost allocation method of account-
ing (or changes to another cost allocation
method of accounting with the Commis-
sioner’s consent) must apply that method
consistently for all similarly classified
contracts, until the taxpayer obtains the
Commissioner’s consent under section
446 to change to another cost allocation
method. A taxpayer-initiated change in
cost allocation methodfromamethodthat
does not comply with the cost allocation
rules of this section to a method that com-
plies with the cost allocation rules of this
section must be applied to all long-term
contracts to which the rules of this section
apply, including contracts entered into be-
fore the year of change and not reported
as completed as of the beginning of the
year of change. Accordingly, a section
481(a) adjustment is required. Any other
taxpayer-initiated change in cost alloca-
tion method to a method permitted under
the rules of this section must be made on a
cut-off basis and applied only to contracts
entered into during and after the year of
change, in which case a section 481(a)
adjustment will be neither permitted nor
required.
Par. 5. Section 1.460–6 is amended by:
1. Adding paragraph (c)(3)(vii).
2. Redesignating paragraph (d)(2)(iv)
as paragraph (d)(2)(v).
3. Adding a new paragraph (d)(2)(iv).
The additions and revision read as fol-
lows:
§1.460–6 Look-back method.
*****
(c) * * *
(3) * * *
(vii)Section 481(a) adjustments.For
purposes of determining the hypotheti-
cal underpayment or overpayment of tax
for any year, amounts reported as section
481(a) adjustments shall be taken into
account in the tax year or years they are
reported. However, any portion of a sec-
tion 481(a) adjustment not yet reported
as of the tax year in which the contract is
completed shall be taken into account in
the tax year the contract is completed for
purposes of determining the hypothetical
underpayment or overpayment of tax.
*****
(d) * * *
(2) * * *
(iv)Section 481(a) adjustments.For
purposes of determining the hypothetical
underpayment or overpayment of tax for
any year under the simplified marginal im-
pact method, amounts reported as section
481(a) adjustments shall be taken into ac-
count in the tax year or years they are re-
ported. However, any portion of a section
481(a) adjustment not yet reported as of
the tax year in which the contract is com-
pleted shall be taken into account in the tax
year the contract is completed for purposes
of determining the hypothetical underpay-
ment or overpayment of tax.
*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 1,
2008, 8:45 a.m., and published in the issue of the Federal
Register for August 4, 2008, 73 F.R. 45180)
Notice of Proposed
Rulemaking
Employee Stock Purchase
Plans Under Internal Revenue
Code Section 423
REG–106251–08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to options
granted under an employee stock pur-
chase plan as defined in section 423 of
the Internal Revenue Code (Code). These
proposed regulations affect certain tax-
payers who participate in the transfer of
stock pursuant to the exercise of options
granted under an employee stock purchase
plan. These proposed regulations provide
guidance to assist taxpayers in complying
with section 423 in addition to clarifying
certain rules regarding options granted
under an employee stock purchase plan.
This document also contains proposed
regulations under sections 421 and 422 of
the Code.
DATES: Written or electronic comments
must be received by October 27, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–106251–08), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, 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–106251–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal
athttp://www.regulations.gov/(IRS
REG–106251–08).
FOR FURTHER INFORMATION
CONTACT: Concerning these proposed
regulations, Thomas Scholz at (202)
622–6030; concerning submissions of
comments, and/or to request a hear-
ing, Oluwafunmilayo Taylor, at (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 423 of the Code. This document also
contains minor proposed amendments to
26 CFR part 1 under sections 421 and 422
of the Code.
Section 423 was added to the Code by
section 221(a) of the Revenue Act of 1964,
Public Law 88–272 (78 Stat. 63 (1964)).
Changes to the applicable law concern-
ing section 423 were made by sections
1402(b)(1)(C) and 1402(b)(2) of the Tax
Reform Act of 1976, Public Law 94–455
(90 Stat. 1731 and 1732–1733 (1976));
section 1001(b)(5) of the Deficit Reduc-
tion Act of 1984, Public Law 98–369
(98 Stat. 1011 (1984)); section 1114
of the Tax Reform Act of 1986, Public
Law 99–514 (100 Stat. 2451 (1986));
and sections 11801(c)(9)(D)(i)-(ii) and
11801(c)(9)(E) of the Omnibus Budget
Reconciliation Act of 1990, Public Law
101–508 (104 Stat. 1388–525 (1990)).
Regulations under section 423 were
published in theFederal Registeron
June 23, 1966 (T.D. 6887, 1966–2 C.B.
129). These regulations were amended on
September 27, 1979 (T.D. 7645, 1979–2
C.B. 198), October 31, 1980 (T.D. 7728,
1980–2 C.B. 236), and December 1, 1988
(T.D. 8235, 1989–1 C.B. 117). In Notice
2004–55, 2004–2 C.B. 319 (August 23,
2008–39 I.R.B.774September 29, 2008

2004), (see §601.601(d)(2)(ii)(b)), the IRS
and the Treasury Department requested
comments concerning whether the exist-
ing regulations under section 423 should
be amended, and if so, what issues should
be addressed. Two comment letters were
submitted in response to Notice 2005–55
and the suggestions in those letters are
addressed in this preamble.
In general, the income tax treatment of
the grant of an option to purchase stock
in connection with the performance of ser-
vices and of the transfer of stock pursuant
to the exercise of the option is determined
under section 83 and the regulations there-
under. However, section 421 provides spe-
cial rules for determining the income tax
treatment of the transfer of shares of stock
pursuant to the exercise of an option if the
requirements of sections 422(a) or 423(a),
as applicable, are met. Section 422 ap-
plies to incentive stock options and sec-
tion 423 applies to options granted under
an employee stock purchase plan (collec-
tively, statutory options).
Under section 421, if a share of stock
is transferred to an individual pursuant to
the exercise of a statutory option, there is
no income at the time of exercise of the
option with respect to the transfer and no
deduction under section 162 is allowed to
the employer corporation with respect to
the transfer.
Section 423(a) provides that section
421appliestothetransferofstocktoan
individual pursuant to the exercise of an
option granted under an employee stock
purchase plan if: (i) no disposition of the
stock is made within two years from the
date of grant of the option or within one
year from the date of transfer of the share,
and (ii) at all times during the period be-
ginning on the date of grant and ending on
the day three months before the exercise
of the option, the individual is an em-
ployee of either the corporation granting
the option or a parent or subsidiary of such
corporation, or a corporation (or a parent
or subsidiary of such corporation) issuing
or assuming a stock option in a transaction
to which section 424(a) applies. Section
423(b) sets forth several requirements that
mustbemetforaplantoqualifyasan
employee stock purchase plan. Section
423(c) provides a special rule that is ap-
plicable where the option exercise price
is between 85 and 100 percent of the fair
market value of the stock at the time the
option was granted.
Section 424 provides special rules
applicable to statutory options, includ-
ing rules concerning the modification of
statutory options and the substitution or
assumption of an option by reason of a
corporate merger, consolidation, acqui-
sition of property or stock, separation,
reorganization, or liquidation. Section 424
also contains definitions of certain terms,
including disposition, parent corporation,
and subsidiary corporation. Finally, sec-
tion 424 provides special rules related to
attribution of stock ownership and the ef-
fect of stockholder approval on the date of
grant of a statutory option.
Explanation of Provisions
These proposed regulations would
provide a comprehensive set of rules
governing stock options issued under an
employee stock purchase plan and would
incorporate substantially all of the rules
contained in the existing regulations under
section 423. These proposed regulations
are comprised of two sections: Section
1.423–1, applicability of section 421(a);
and §1.423–2, employee stock purchase
plan defined. These proposed regula-
tions would amend the existing regula-
tions under section 423 in several ways.
First, these proposed regulations would
update the existing regulations to incorpo-
rate statutory changes and to make them
consistent, where appropriate, with the
regulations under section 422 related to
incentive stock options. The regulations
under section 422 were last updated in
2004. See T.D. 9144, 2004–2 C.B. 413.
Second, these proposed regulations would
update the existing regulations to provide
additional guidance in certain areas as
discussed below. Finally, these proposed
regulations would also update the existing
regulations to remove obsolete rules.
1. General requirements
Under §1.423–2(a)(1) of these pro-
posed regulations, an employee stock
purchase plan must meet the require-
ments of paragraphs (i) through (ix) of
§1.423–2(a)(2). The terms of the plan, or
an offering under the plan, must satisfy the
requirements of paragraphs (iii) through
(ix) of §1.423–2(a)(2). Consistent with
§1.422–2(b)(1), §1.423–2(a)(1) of these
proposed regulations would provide that
the plan and the terms of an offering must
be in writing or electronic form, provided
that such writing or electronic form is ad-
equate to establish the terms of the plan or
offering.
Section 1.423–2(a)(2) of these pro-
posed regulations lists the requirements
that must be met for qualification as an em-
ployee stock purchase plan and provides
cross references to the specific section
of these regulations that addresses each
requirement.
Under §1.423–2(a)(3) of these pro-
posed regulations, if the terms of an option
are inconsistent with the terms of the em-
ployee stock purchase plan or an offering
under the plan, then the option will not be
treated as granted under an employee stock
purchase plan. (Section 1.423–2(a)(2) of
the existing regulations has been re-num-
bered as §1.423–2(a)(3) of these proposed
regulations.) If an option with terms that
are inconsistent with the terms of the plan
or an offering under the plan is granted
to an employee who is entitled to the
grant of an option under the terms of the
plan or offering, and the employee is not
granted an option under the offering that
qualifies as an option granted under an
employee stock purchase plan, then the
offering will not meet the requirements of
§1.423–2(e) of these proposed regulations,
which generally requires that options be
granted to all employees of any corpora-
tion whose employees are granted options
under an employee stock purchase plan.
As a result, none of the options granted
under the offering will be eligible for the
special tax treatment of section 421.Ex-
ample 1in §1.423–2(a)(4) illustrates this
principle. Section 1.423–2(a)(4) of these
proposed regulations contains additional
examples to illustrate the principles of
§1.423–2(a)(3).
If an option with terms that are incon-
sistent with the terms of the plan or an of-
fering under the plan is granted to an indi-
vidual who is not entitled to the grant of an
option under the terms of the plan or offer-
ing, then the option will not be treated as
an option granted under an employee stock
purchase plan, and the grant of the op-
tion will not disqualify the options granted
under the offering.Examples 2 and 3in
§1.423–2(a)(4) of these proposed regula-
tions illustrate this principle.
September 29, 20087752008–39 I.R.B.

If, at the time of grant, an option qual-
ifies as an option granted under an em-
ployee stock purchase plan, but the terms
of the option are not satisfied, then the op-
tion will not be treated as granted under
an employee stock purchase plan. How-
ever, this failure tocomply with the terms
of the option will not disqualify the options
granted under the plan or offering.Exam-
ple 4in §1.423–2(a)(4) of these proposed
regulations illustrates this principle.
2. Stockholder approval of the employee
stock purchase plan
To qualify as an employee stock pur-
chase plan, section 423(b)(2) requires
that the plan be approved by the stock-
holders of the granting corporation within
12 months before or after the date the
plan is adopted. These proposed reg-
ulations would provide the same basic
requirements for stockholder approval
as those included in the existing regula-
tions. Consistent with §1.422–2(b)(2),
these proposed regulations would pro-
vide additional guidance concerning the
circumstances under which stockholder
approval is required.
These proposed regulations, like the
existing regulations, would require stock-
holder approval if there is a change in the
aggregate number of shares or in the em-
ployees eligible to be granted options un-
der the plan. The standard for determining
when stockholder approval is required un-
der these proposed regulations generally is
the same as under the existing regulations.
These proposed regulations would clarify
the requirements for stockholder approval
and would provide a more comprehensive
list of situations that require new stock-
holder approval of the plan. In particular,
these proposed regulations would clarify
that new stockholder approval is required
if there is a change in the shares with
respect to which options are issued or a
change in the granting corporation.
For example, assume that S, a wholly
owned subsidiary of P, adopts an employee
stock purchase plan under which options
for S stock will be granted to S employ-
ees, and the plan is approved by the stock-
holder of S (in this case, P) within the
applicable 24-month period. If S later
amends the plan to provide for the grant
of options to acquire P stock (rather than
S stock), S must obtain approval from the
stockholders of S (in this case, P) within
12 months before or after the date of the
amendment of the plan because the amend-
ment of the plan to allow the grant of op-
tions for P stock is considered the adoption
of a new plan. See paragraph (iii) ofExam-
ple 1in §1.423–2(c)(5) of these proposed
regulations. This conclusion differs from
that in paragraph (iii) ofExample 1un-
der §1.422–2(b)(6), which concludes that
the stockholders of P rather than the stock-
holders of S must approve the plan as a
result of its amendment to provide for the
grant of options to acquire P stock. The
IRS and the Treasury Department invite
comment on this result and are proposing
a conforming change toExample 1, para-
graph (iii) under §1.422–2(b)(6).
These proposed regulations also would
provide additional guidance regarding the
application of the stockholder approval
requirements where an employee stock
purchase plan is assumed in connection
with a corporate transaction.Example 3in
§1.423–2(c)(5) of these proposed regula-
tions illustrates this principle.
3. Maximum aggregate number of shares
Section 1.423–2(c)(3) of the existing
regulations provides that an employee
stock purchase plan must designate the
maximum aggregate number of shares that
may be issued under the plan. Consistent
with §1.422–2(b)(3)(ii), these proposed
regulations would provide that the plan
may specify that the maximum aggregate
number of shares available for grants un-
der the plan may increase annually by a
specified percentageof the authorized,
issued, or outstanding shares at the date of
the adoption of the plan. Further, a plan
providing that the maximum aggregate
number of shares issued subject to options
under the plan may change based on any
other specific circumstances will satisfy
the requirements of §1.423–2(c)(3) only if
the stockholders approve an immediately
determinable maximum number of shares
that may be issued under the plan in any
event.Examples 4 and 5in §1.423–2(c)(5)
of these proposed regulations illustrate
these principles.
4. Employees covered by the plan
Section 423(b)(4) permits an employer
to exclude from participation one or more
of the following categories of employ-
ees: Employees who have been employed
less than two years; Employees who cus-
tomarily work 20 hours or less per week;
Employees who customarily work not
more than five months in any calendar
year; and Highly compensated employees
(HCEs) within the meaning of section
414(q). Section 1.423–1(e)(1) of these
proposed regulations has been updated
to reflect the 1986 amendment of section
423(b)(4)(D) to substitute “highly com-
pensated employees(within the meaning
of section 414(q))” for “officers, persons
whose principal duties consist of supervis-
ing the work of other employees, or highly
compensated employees.” See Public Law
99–514, section 1114(b)(13).
One commentator suggested that the
regulations clarify that an employer may
exclude from participation a subset of one
of the groups set forth in section 423(b)(4).
For example, an employer should be per-
mitted to exclude a subset of HCEs, such
as officers, from participation in the plan.
The commentator further suggested that
the regulations clarify that an employer
may impose shorter service requirements
than those permitted. For example, an
employer should be permitted to exclude
employees who have been employed less
than one year from participation in the
plan.
The IRS and the Treasury Department
agree that a more inclusive application of
the rules of section 423(b)(4) is consistent
with the intent of section 423. Accord-
ingly, §1.423–2(e)(2) of these proposed
regulations would provide that an em-
ployee stock purchase plan does not fail
to satisfy the coverage provision of sec-
tion 423(b)(4) merely because the plan
excludes employees who have completed
a shorter period of service or whose cus-
tomary employment is for fewer hours per
week or fewer months in a calendar year
than is specified in subparts (A), (B) and
(C) of section 423(b)(4), provided the ex-
clusion is applied in an identical manner to
all employees of every corporation whose
employees are granted options under the
plan. In addition, these proposed regula-
tions would provide that the terms of an
employee stock purchase plan may ex-
clude HCEs: (a) with compensation above
a certain level, or (b) who are officers or
subject to the disclosure requirements of
section 16(a) of the Securities Exchange
2008–39 I.R.B.776September 29, 2008

Act of 1934, provided the exclusion is
applied in an identical manner to all HCEs
of every corporation whose employees are
granted options under the plan.Exam-
ples 3, 4, 5, 6, and 7in §1.423–2(e)(6)
of these proposed regulations illustrate
these principles. (The examples under
§1.423–2(e)(3) of the existing regulations
have been re-numbered as §1.423–2(e)(6)
of these proposed regulations.)
Another commentator suggested that
the regulations permit employers to ex-
clude from plan participation employees
who are nonresident aliens and who re-
ceive no earned income that constitutes
income from sources within the United
States. The IRS and the Treasury De-
partment agree that it may be appropriate
to exclude foreign employees from plan
participation in certain limited circum-
stances. However, unlike section 410(b),
section 423 does not provide an exclusion
for such nonresident aliens. Accordingly,
the IRS and the Treasury Department
are constrained by statutory authority
from providing a general exclusion from
plan participation for employees who are
nonresident aliens and who receive no
United States source income. Therefore,
§1.423–2(e)(3) of these proposed regula-
tions would provide that employees who
are citizens or residents of a foreign ju-
risdiction (without regard to whether they
are also citizens of the United States or
resident aliens (within the meaning of
§7701(b)(1)(A))) may be excluded from
the coverage of an employee stock pur-
chase plan only if the grant of an option
under the plan to a citizen or resident of the
foreign jurisdiction is prohibited under the
laws of such jurisdiction or if compliance
with the laws of the foreign jurisdiction
would cause the plan to violate the re-
quirements of section 423.Example 8in
§1.423–2(e)(6) of these proposed regula-
tions illustrates this principle.
Another commentator suggested that
the regulations permit employers to ex-
clude collectively bargained employees
from plan participation. However, un-
like section 410(b), section 423 does not
provide an exclusion for collectively bar-
gained employees. Accordingly, the IRS
and the Treasury Department are again
constrained by statutory authority from
providing a general exclusion from plan
participation for collectively bargained
employees.
One commentator suggested that the
regulations be amended to provide that
an offering will not lose its tax-favored
status due to the inadvertent exclusion
of employees from plan participation.
Rather, the commentator suggested that
the granting corporation be permitted to
correct certain errors in plan administra-
tion through a corrections program that
would permit the excluded employees to
participate in past offerings under a plan.
Such a corrections program is beyond the
scope of these regulations. However, the
IRS and the Treasury Department invite
comments on whether such a program
is appropriate (including the statutory
authority for such a program) and sugges-
tions for the types of violations that might
be covered and the methods of correction.
Section 1.423–2(e)(4) of these pro-
posed regulations includes language that
appears under §1.423–2(e)(1) of the exist-
ing regulations. Section 1.423–2(e)(2) of
the existing regulations has been re-num-
bered as §1.423–2(e)(5) of these proposed
regulations.
5. Equal rights and privileges
Section 423(b)(5) requires that, subject
to certain exceptions, an employee stock
purchase plan, by its terms, provide that all
employees granted options under the plan
have the same rights and privileges.
Section 1.423–2(f)(3) of these pro-
posed regulations includes language that
appears in §1.423–2(f)(1) of the ex-
isting regulations. (The examples in
§1.423–2(f)(2) of the existing regulations
have been relocated toExamples 1 and 2
of §1.423–2(f)(7) of these proposed regu-
lations. The example in §1.423–2(f)(4) of
the existing regulations has been relocated
toExample 3of §1.423–2(f)(7). Section
1.423–2(f)(4) of the existing regulations is
re-numbered under these proposed regula-
tions as §1.423–2(f)(6)).
One commentator suggested that a plan
or offering should not fail to satisfy the
equal rights and privileges provision of
section 423(b)(5) if the provisions of the
plan or offering applied to foreign em-
ployees are reasonably designed to avoid
adverse consequences for such employee
under foreign law as a result of plan par-
ticipation. The IRS and the Treasury
Department agree that in certain limited
circumstances it may be appropriate for the
terms of an employee stock purchase plan
to be less favorable with respect to foreign
employees than those terms are with re-
spect to employees resident in the United
States. Accordingly, §1.423–2(f)(4) of
these proposed regulations would provide
that a plan or offering will not fail to satisfy
the requirements of section 423(b)(5) if, in
order to comply with the laws of a foreign
jurisdiction, the terms of an option granted
under a plan or offering to citizens or resi-
dents of such foreign jurisdiction (without
regard to whether they are also citizens
of the United States or resident aliens
(within the meaning of §7701(b)(1)(A)))
are less favorable than the terms of options
granted under the same plan or offering to
employees resident in the United States.
Example 4in §1.423–2(f)(7) of these pro-
posed regulations illustrates this principle.
A plan or offering will not satisfy the re-
quirements of section 423(b)(5), however,
if, in order to comply with the laws of a
foreign jurisdiction, the terms of the plan
or offering are more favorable with respect
to citizens or residents of such foreign ju-
risdiction than the terms of the plan or of-
fering are with respect to employees resi-
dent in the United States.
Another commentator suggested that
the regulations addressing the carryover
of amounts from one offering to another
be clarified. In response to this com-
ment, these proposed regulations would
clarify §1.423–2(f)(3) of the existing reg-
ulations (which has been re-numbered as
§1.423–2(f)(5)). Generally, a plan per-
mitting one or more employees to carry
forward amounts that were withheld but
not applied toward the purchase of stock
under an earlier plan or offering and ap-
ply such amounts toward the purchase
of additional stock under a subsequent
plan or offering will be a violation of the
equal rights and privileges requirement
under section 423(b)(5). However, the
carry forward of amounts withheld but
not applied toward the purchase of stock
under an earlier plan or offering will not
violate the equal rights and privileges re-
quirement of section 423(b)(5) if all other
employees participating in the current
plan or offering are permitted to make
direct payments toward the purchase of
shares under a subsequent plan or offering
in an amount equal to the excess of: (a)
the greatest amount that any employee is
allowed to carry forward from an earlier
September 29, 20087772008–39 I.R.B.

plan or offering over (b) the amount, if
any, the employee will carry forward from
an earlier plan or offering.Example 5in
§1.423–2(f)(7) of these proposed regula-
tions illustrates this principle.
Further, a plan will not fail to satisfy the
equal rights and privileges requirement of
section 423(b)(5) merely because employ-
ees are permitted to carry forward amounts
representing a fractional share which were
withheld but not applied toward the pur-
chase of stock under an earlier plan or of-
fering and apply such amounts toward the
purchase of additional stock under a sub-
sequent plan or offering.
6. Option price
Under section 423(b)(6), the option
price must not be less than the lesser
of: (a) an amount equal to 85 percent
of the fair market value of the stock at
the time the option is granted, and (b) an
amount not less than 85 percent of the
fair market value of the stock at the time
the option is exercised. Consistent with
§1.422–2(e)(1), §1.423–2(g)(1) of these
proposed regulations would provide that
theoptionpricemaybedeterminedinany
reasonable manner, including the valua-
tion methods permitted under §20.2031–2
(Estate Tax Regulations), so long as the
option price meets the minimum pricing
requirements of section 423(b)(6).
7. Date of grant
Section 1.421–1(c) provides, that for
purposes of §§1.421–2 through 1.424–1,
thelanguage“thedateofthegrantingof
the option” and “the time such option is
granted” and similar phrases refer to the
date or time when the granting corporation
completes the corporate action constitut-
ing an offer of stock for sale to an indi-
vidual under the terms and conditions of
a statutory option. The date of grant for
an option granted under an employee stock
purchase plan is important for several rea-
sons. First, the favorable tax consequences
under section 421 apply to the shares ac-
quired pursuant to the exercise of an option
granted under an employee stock purchase
plan if the shares are not disposed of within
two years from the date of grant of the op-
tion or within one year from the date of ex-
ercise of the option. Second, the $25,000
limitation under section 423(b)(8) is deter-
mined based on the fair market value of the
stock measured on the date of grant of the
option. The date of grant is also important
for purposes of determining the employ-
ees eligible to participate in the plan and,
in certain cases, determining the purchase
price of stock under the plan.
Section 1.421–1(c) further provides that
a corporate action constituting an offer of
stock for sale is not considered complete
until the date on which the maximum num-
ber of shares that can be purchased under
the option and the minimum option price
are fixed or determinable. Because op-
tions under an employee stock purchase
plan may be priced at the lesser of an
amount equal to 85 percent of the fair mar-
ket value of the stock at the time the option
is granted, and an amount not less than 85
percent of the fair market value of the stock
at the time the option is exercised, it is not
always possible to determine the minimum
option price on the first day of an offering.
However, many granting corporations in-
tend for the first day of an offering to be
thedateofgrant.
Accordingly, §1.423–2(h)(2) of these
proposed regulations would provide that,
for purposes of options granted under an
employee stock purchase plan, the princi-
ples of §1.421–1(c) shall be applied with-
out regard to the requirement that the mini-
mum option price be fixed or determinable
in order for the corporate action constitut-
ing an offer of stock to be considered com-
plete. As a result, the first day of an of-
fering could be the date of grant for an op-
tion issued under an employee stock pur-
chase plan even though the minimum op-
tion price is not fixed or determinable on
the first day of the offering. These pro-
posed regulations include an amendment
to §1.421–1(c).
One commentator questioned whether
it is necessary for a plan to contain a limit
on the number of shares that can be pur-
chased by each participant during an offer-
ing in order for the date of grant of the op-
tion to be the first day of an offering. Sec-
tion 1.423–2(h)(3) of these proposed regu-
lations would provide that the date of grant
will be the first day of an offering if the
terms of an employee stock purchase plan
or offering designate a maximum number
of shares that may be purchased by each
participant during the offering. Similarly,
thedateofgrantwillbethefirstdayof
an offering if the terms of the plan or of-
fering require the application of a formula
to establish, on the first day of the offer-
ing, the maximum number of shares that
may be purchased by each participant dur-
ing the offering.
However, §1.423–2(h)(3) of these pro-
posed regulations does not require that an
employee stock purchase plan or offering
designate a maximum number of shares
that may be purchased by each participant
during the offering or incorporate a for-
mula to establish a maximum number of
shares that may be purchased by each par-
ticipant during the offering. If the max-
imum number of shares that can be pur-
chased under an option is not fixed or de-
terminable until the date the option is exer-
cised, then the date of exercise will be the
date of grant of the option. The $25,000
limit under section 423(b)(8) and the limit
on the aggregate number of shares that
may be issued under an employee stock
purchase plan are not sufficient to estab-
lish the maximum number of shares that
can be purchased under an option so that
the date of grant will be the first day of
the offering.Examples 1, 2, 3 and 4in
§1.423–2(h)(4) of these proposed regula-
tions illustrate these principles.
Section 1.423–2(h) of the existing reg-
ulations is re-numbered as §1.423–2(h)(1)
of these proposed regulations.
8. Annual $25,000 limitation
Section 423(b)(8) provides that an
employee stock purchase plan must, by
its terms, provide that no employee may
be permitted to purchase stock under all
the employee stock purchase plans of his
or her employer corporation and its re-
lated corporations at a rate which exceeds
$25,000 in fair market value of the stock
(determined on the date of grant) for each
calendar year in which an option granted to
the employee is outstanding and exercis-
able. Section 1.423–2(i) of these proposed
regulations would provide guidance on the
operation of the $25,000 limitation that
incorporates and clarifies the guidance
provided in the existing regulations.
One commentator suggested that the
calculation of the amount of stock that may
be purchased under an employee stock
purchase plan be determined in a manner
consistent with the $100,000 limitation
for incentive stock options described in
§1.422–4. The proposed regulations gen-
erally adopt this suggestion and would
2008–39 I.R.B.778September 29, 2008

provide that the $25,000 limit for em-
ployee stock purchase plans is, to the
extent possible, calculated in a manner
consistent with the $100,000 limitation
for incentive stock options. The timing
of both measures is based on when the
option first becomes exercisable and both
measures are made based on the fair mar-
ket value of the stock determined at the
date of grant. Section 1.423–2(i) of these
proposed regulations emphasizes that an
employee may purchase up to $25,000
of stock (based on the fair market value
of such stock on the date of grant) in
each calendar year during which an op-
tion granted to the employee under an
employee stock purchase plan is not only
outstanding, but also exercisable.Exam-
ple 5in §1.423–2(i)(5) of these proposed
regulations illustrates this principle.
For clarification,Example 1in
§1.423–2(i)(4) of the existing regulations
has been separated intoExample 1and
Example 4in §1.423–2(i)(5) of these pro-
posed regulations.
9. Special rule where option price is
between 85 percent and 100 percent of the
value of the stock
Section 423(c) provides a special rule
for calculating the timing and amount of
compensation income that must be recog-
nized when the option price for a share is
between 85 and 100 percent of the value of
the share on the date of grant. Generally,
the income recognized is the lesser of: (a)
the excess of the fair market value of the
share on the date of grant over the option
price, and (b) the excess of the fair market
value of the share at the time of disposition
(or death) over the option price. The flush
language of section 423(c) provides that if
the exercise price is not known on the date
of grant, the exercise price shall be deter-
mined as if the option were exercised on
the date of grant.
One commentator suggested that it is
unclear how this special rule and the flush
language of section 423(c) apply when the
option price is determined based on some
percentage of the value of a share on the
lastdayofanoffering.Example 3of
§1.423–2(k)(3) of the existing regulations
specifically addresses this issue and has
been retained in §1.423–2(k)(3) of these
proposed regulations.Example 4has been
added under §1.423–2(k)(3) to illustrate
the tax consequences under an employee
stock purchase plan that uses a look-back
feature to determine the exercise price of
the option.
Proposed Effective Date
These regulations under section 423 are
proposed to apply as of January 1, 2010,
and will apply to anyoptionissuedunder
an employee stock purchase plan that is
granted on or after that date. Taxpayers
may rely on these proposed regulations for
the treatment of any option issued under
an employee stock purchase plan that is
granted after publication of these proposed
regulations in theFederal Register.
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
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these reg-
ulations, and because the regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
these regulations have been submitted
to the Chief Counsel for Advocacy
of the Small Business Administration
for comment on their impact on small
business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are timely submitted to the IRS.
The IRS and the Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
if requested in writing by any person that
timely submits written or electronic com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
hearing will be published in theFederal
Register.
Drafting Information
The principal author of these proposed
regulations is Thomas Scholz, Office of
the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and the Treasury Department par-
ticipated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 is pro-
posed to be 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 1.421–1, paragraphs
(c)(1) and (j)(1) are revised to read as fol-
lows:
§1.421–1 Meaning and use of certain
terms.
*****
(c)Time and date of granting op-
tion. (1) For purposes of this section and
§§1.421–2 through 1.424–1, the language
“the date of the granting of the option”
and “the time such option is granted,” and
similar phrases refer to the date or time
when the granting corporation completes
the corporate action constituting an offer
of stock for sale to an individual under the
terms and conditions of a statutory option.
Except as set forth in §1.423–2(h)(2), a
corporate action constituting an offer of
stock for sale is not considered complete
until the date on which the maximum
number of shares that can be purchased
under the option and the minimum option
price are fixed or determinable.
*****
(j)Effective/applicability date—(1)
In general. Except for paragraph (c)(1),
these regulations are effective on August
3, 2004. Upon the date of publication of
the Treasury decision adopting paragraph
(c)(1) of this section as a final regulation
in theFederal Register, paragraph (c)(1)
will apply as of January 1, 2010.
*****
September 29, 20087792008–39 I.R.B.

Par. 3. Section 1.422–2, paragraph
(b)(6),Example 1(iii) is revised to read as
follows:
§1.422–2 Incentive stock options defined.
*****
(b) * * *
(6) * * *
Example (1).***
(iii) Assume the same facts as in paragraph (i) of
this Example 1. Assume further that the plan was
approved by the stockholders of S (in this case, P)
on March 1, 2006. On January 1, 2008, S changes
the plan to provide that incentive stock options for P
stock will be granted to S employees under the plan.
Because there is a change in the stock available for
grant under the plan, the change is considered the
adoption of a new plan that must be approved by the
stockholder of S (in this case, P) within 12 months
before or after January 1, 2008.
*****
Par. 4. Section 1.422–5, paragraph
(f)(1) is revised to read as follows:
§1.422–5 Permissible provisions.
*****
(f)Effective/applicability date—(1)In
general. Except for §1.422–2(b)(6),Ex-
ample 1(iii), these regulations are effec-
tive on August 3, 2004. Upon the date of
publication of the Treasury decision adopt-
ing Section 1.422–2(b)(6),Example 1(iii)
of this section as a final regulation in the
Federal Register, Section 1.422–2(b)(6),
Example 1(iii) will apply as of January 1,
2010.
*****
Par. 5. Section 1.423–1 is revised to
read as follows:
§1.423–1 Applicability of section 421(a).
(a)General rule. Subject to the provi-
sions of section 423(c) and paragraph (k)
of §1.423–2, the special rules of income
tax treatment provided in section 421(a)
apply with respect to the transfer of a share
of stock to an individual pursuant to the
individual’s exercise of an option granted
under an employee stock purchase plan if
the following conditions are satisfied—
(1) The individual makes no disposition
of such share before the later of the expi-
ration of the two-year period from the date
of the grant of the option pursuant to which
such share was transferred or the expira-
tion of the one-year period from the date
of transfer of such share to the individual;
and
(2) At all times during the period begin-
ning on the date of the grant of the option
and ending on the day three months before
the date of exercise, the individual was an
employee of the corporation granting the
option, a related corporation, or a corpora-
tion (or a related corporation) substituting
or assuming the stock option in a transac-
tion to which section 424(a) applies.
(b)Cross-references. For rules relating
to the requisite employment relationship,
see paragraph (h) of §1.421–1. For rules
relating to the effect of a disqualifying dis-
position, see section 421(b) and paragraph
(b) of §1.421–2. For the definition of the
termdisposition, see section 424(c) and
paragraph (c) of §1.424–1. For the defi-
nition of the termrelated corporation,see
paragraph (i) of §1.421–1.
(c)Effective/applicability date.Upon
the date of publication of the Treasury de-
cision adopting the rules of this section as
a final regulation in theFederal Regis-
ter, these rules will apply as of January 1,
2010.
Par. 6. Section 1.423–2 is revised to
read as follows:
§1.423–2 Employee stock purchase plan
defined.
(a)In general—(1) The termem-
ployee stock purchase planmeans a plan
that meets the requirements of paragraph
(a)(2)(i) through (ix) of this section. If the
terms of the plan do not satisfy the require-
ments of paragraph (a)(2)(iii) through (ix)
of this section, such requirements may
be satisfied by the terms of an offering
made under the plan. However, where
the requirements of paragraph (a)(2)(iii)
through (ix) of this section are satisfied
by the terms of an offering, such require-
ments will be treated as satisfied only with
respect to options exercised under that
offering. The plan and the terms of an
offering must be in writing or electronic
form, provided that such writing or elec-
tronic form is adequate to establish the
terms of the plan or offering, as applicable.
(2) To qualify as an employee stock
purchase plan under this section and
§1.423–1, the plan must meet all of the
following requirements—
(i) The plan must provide that options
can be granted only to employees of the
employer corporation or of a related cor-
poration (as defined in paragraph (i) of
§1.421–1) to purchase stock in any such
corporation (see paragraph (b) of this sec-
tion);
(ii) The plan must be approved by the
stockholders of the granting corporation
within 12 months before or after the date
the plan is adopted (see paragraph (c) of
this section);
(iii) Under the terms of the plan, an em-
ployee cannot be granted an option if, im-
mediately after the option is granted, the
employee owns stock possessing 5 per-
cent or more of the total combined voting
power or value of all classes of stock of the
employer corporation or of a related corpo-
ration (see paragraph (d) of this section);
(iv) Under the terms of the plan, options
must be granted to all employees of any
corporation whose employees are granted
any options by reason of their employment
by the corporation (see paragraph (e) of
this section);
(v) Under the terms of the plan, all
employees granted options must have the
same rights and privileges (see paragraph
(f)ofthissection);
(vi) Under the terms of the plan, the
option price cannot be less than the lesser
of—
(A) An amount equal to 85 percent of
the fair market value of the stock at the
time the option is granted, or
(B) An amount not less than 85 percent
of the fair market value of the stock at the
time the option is exercised (see paragraph
(g)ofthissection);
(vii) Under the terms of the plan, op-
tions cannot be exercised after the expira-
tion of—
(A) Five years from the date the option
is granted if, under the terms of such plan,
the option price cannot be less than 85 per-
cent of the fair market value of the stock at
the time the option is exercised, or
(B) Twenty-seven months from the date
the option is granted, if the option price
is not determined in the manner described
in paragraph (A) (see paragraph (h) of this
section);
(viii) Under the terms of the plan, no
employee may be granted an option that
permits the employee’s rights to purchase
stock under all employee stock purchase
plans of the employer corporation and its
related corporations to accrue at a rate that
exceeds $25,000 of fair market value of the
stock (determined at the time the option is
granted) for each calendar year in which
2008–39 I.R.B.780September 29, 2008

the option is outstanding at any time (see
paragraph (i) of this section); and
(ix) Under the terms of the plan, options
are not transferable by the optionee other
than by will or the laws of descent and dis-
tribution, and are exercisable, during the
lifetime of the optionee, only by the op-
tionee (see paragraph (j) of this section).
(3) The determination of whether a par-
ticular option is an option granted under
an employee stock purchase plan is made
at the time the option is granted. If the
terms of an option are inconsistent with the
terms of the employee stock purchase plan
or an offering under the plan, the option
will not be treated as granted under an em-
ployee stock purchase plan. If an option
with terms that are inconsistent with the
terms of the plan or an offering under the
plan is granted to an employee who is en-
titled to the grant of an option under the
terms of the plan or offering, and the em-
ployee is not granted an option under the
offering that qualifies as an option granted
under an employee stock purchase plan,
the offering will not meet the requirements
of paragraph (e) of this section. Accord-
ingly, none of the options granted under the
offering will be eligible for the special tax
treatment of section 421. However, if an
option with terms that are inconsistent with
the terms of the plan or an offering under
the plan is granted to an individual who is
not entitled to the grant of an option under
the terms of the plan or offering, the option
will not be treated as an option granted un-
der an employee stock purchase plan, and
the grant of the option will not disqualify
the options granted under the plan or of-
fering. If, at the time of grant, an option
qualifies as an option granted under an em-
ployee stock purchase plan, but the terms
of the option are not satisfied, the option
will not be treated as granted under an em-
ployee stock purchase plan and this fail-
ure to comply with the terms of the option
will not disqualify the options granted un-
der the plan or offering.
(4)Examples. The following exam-
ples illustrate the principles of paragraph
(a)(3):
Example 1. Corporation A operates an employee
stock purchase plan under which options for A stock
are granted to employees of A. The terms of an of-
fering provide that the option price will be 90 per-
cent of the fair market value of A stock on the date
of exercise. A grants an option under the offering to
Employee Z, an employee of A. The terms of the op-
tion provide that the option price will be 85 percent of
the fair market value of A stock on the date of exer-
cise. Because the terms of Z’s option are inconsistent
with the terms of the offering, the option granted to
Z will not be treated as an option granted under the
employee stock purchase plan. Further, unless Z is
granted an option under the offering that qualifies as
an option granted under the employee stock purchase
plan, the offering will not meet the requirements of
paragraph (e) of this section and none of the options
granted under the offering will be eligible for the spe-
cial tax treatment of section 421.
Example 2. Corporation B operates an employee
stock purchase plan that provides that options for B
stock may only be granted to employees of B. Under
the terms of the plan, options may not be granted to
consultants and other non-employees. B grants an
option under the plan to Consultant Y, a consultant of
B. Because Y is ineligibleto receive an option under
the plan by reason of Y’s status as a non-employee,
the grant of the option to Y is inconsistent with the
terms of the plan and the option granted to Y will not
be treated as an option granted under the employee
stock purchase plan. However, the grant of the option
to Y will not disqualify the options granted under the
plan or offering because Y was not entitled to the
grant of an option under the plan.
Example 3. Corporation C operates an employee
stock purchase plan under which options for C stock
are granted to employees of C. C grants an option un-
der the plan to Employee X, an employee of C who
is a highly compensated employee. The terms of the
employee stock purchase plan exclude highly com-
pensated employees from participation in the plan.
Because X is ineligible toreceive an option under the
plan by reason of X’s exclusion from participation in
the plan, the option granted to X will not be treated as
an option granted under the employee stock purchase
plan. However, the grant of the option to X will not
disqualify the options granted under the plan or of-
fering because X was not entitled to the grant of an
option under the plan.
Example 4. Corporation D operates an employee
stock purchase plan under which options for D stock
are granted to employees of D. D grants an option
under the plan to Employee W, an employee of D.
The terms of the option provide that the option price
will be 90 percent of the fair market value of D stock
onthedateofexercise. Onthedateofexercise,W
pays only 85 percent of the fair market value of D
stock. Because the terms of W’s option are not sat-
isfied, the option granted to W will not be treated as
an option granted under the employee stock purchase
plan. However, the failure to comply with the terms
of the option granted to W will not disqualify the op-
tions granted under the plan or offering.
(b)Options restricted to employees.An
employee stock purchase plan must pro-
vide that options can be granted only to
employees of the employer corporation (or
employees of its related corporations) to
purchase stock in the employer corpora-
tion (or one of its related corporations).
If such a provision is not included in the
terms of the plan, the plan will not be an
employee stock purchase plan and options
granted under the plan will not qualify for
the special tax treatment of section 421.
For rules relating to the employment re-
quirement, see paragraph (h) of §1.421–1.
(c)Stockholder approval—(1) An em-
ployee stock purchase plan must be ap-
proved by the stockholders of the grant-
ing corporation within 12 months before
or after the date such plan is adopted. The
approval of the stockholders must comply
with all applicable provisions of the cor-
porate charter, bylaws and applicable State
law prescribing the method and degree of
stockholder approval required for the is-
suance of corporate stock or options. If
the applicable State law does not prescribe
a method and degree of stockholder ap-
proval, then an employee stock purchase
plan must be approved—
(i) By a majority of the votes cast at a
duly held stockholder’s meeting at which a
quorum representing a majority of all out-
standing voting stock is, either in person or
by proxy, present and voting on the plan; or
(ii) By a method and in a degree that
would be treated as adequate under appli-
cable State law in the case of an action re-
quiring stockholder approval (such as, an
action on which stockholders would be en-
titled to vote if the action were taken at a
duly held stockholders’ meeting).
(2) For purposes of the stockholder
approval required by this paragraph (c),
ordinarily, a plan is adopted when it is ap-
proved by the granting corporation’s board
of directors, and the date of the board’s
action is the reference point for determin-
ing whether stockholder approval occurs
within the applicable 24-month period.
However, if the board’s action is subject to
a condition (such as stockholder approval)
or the happening of a particular event, the
plan is adopted on the date the condition is
met or the event occurs, unless the board’s
resolution fixes the date of approval as the
date of the board’s action.
(3) An employee stock purchase plan,
as adopted and approved, must designate
the maximum aggregate number of shares
that may be issued under the plan, and
the corporations or class of corporations
whose employees may be offered options
under the plan. A plan that merely pro-
vides that the number of shares that may
be issued under the plan may not exceed
a stated percentage of the shares outstand-
ing at the time of each offering or grant un-
der the plan does not satisfy the require-
ments of this paragraph (c)(3). However,
the maximum aggregate number of shares
September 29, 20087812008–39 I.R.B.

that may be issued under the plan may
be stated in terms of a percentage of the
authorized, issued, or outstanding shares
on the date of the adoption of the plan.
The plan may specify that the maximum
aggregate number of shares available for
grants under the plan may increase annu-
ally by a specified percentage of the au-
thorized, issued, or outstanding shares on
the date of the adoption of the plan. A
plan that provides that the maximum ag-
gregate number of shares that may be is-
sued as options under the plan may change
based on any other specific circumstances
satisfies the requirements of this paragraph
only if the stockholders approve an imme-
diately determinable maximum number of
shares that may be issued under the plan in
any event. If there is more than one em-
ployee stock purchase plan under which
options may be granted and stockholders
of the granting corporation merely approve
a maximum aggregate number of shares
that are available for issuance under the
plans, the stockholder approval require-
ments described in paragraph (c)(1) of this
section are not satisfied. A separate maxi-
mum aggregate number of shares available
for issuance pursuant to options must be
specified and approved for each plan.
(4) Once an employee stock purchase
plan is approved by the stockholders of
the granting corporation, the plan need
not be reapproved by the stockholders of
the granting corporation within the pre-
scribed 24-month period unless the plan
is amended or changed in a manner that
is considered the adoption of a new plan.
Any increase in the aggregate number of
shares that may be issued under the plan
(other than an increase merely reflecting
a change in the number of outstanding
shares, such as a stock dividend or stock
split) will be considered the adoption of a
new plan requiring stockholder approval
within the prescribed 24-month period.
Similarly, a change in the designation of
corporations whose employees may be
offered options under the plan will be
considered the adoption of a new plan
requiring stockholder approval within the
prescribed 24-month period unless the
plan provides that designations of partic-
ipating corporations may be made from
time to time from among a group consist-
ing of the granting corporation and its re-
lated corporations. The group from among
which such changes and designations are
permitted without additional stockholder
approval may include corporations hav-
ing become parents or subsidiaries of the
granting corporation after the adoption and
approval of the plan. In addition, a change
in the granting corporation or the stock
available for purchase under the plan will
be considered the adoption of a new plan
requiring stockholder approval within the
prescribed 24-month period. Any other
changes in the terms of an employee stock
purchase plan are not considered the adop-
tion of a new plan and, thus, do not require
stockholder approval.
(5)Examples. The following examples
illustrate the principles of this paragraph
(c):
Example 1—(i) Corporation E is a subsidiary of
Corporation F, a publicly traded corporation. On Jan-
uary 1, 2010, E adopts an employee stock purchase
plan under which options for E stock are granted to E
employees.
(ii) To meet the requirements of paragraph (c)(1)
of this section, the plan must be approved by the
stockholders of E (in this case, F) within 12 months
before or after January 1, 2010.
(iii) Assume the same facts as in paragraph (i) of
thisExample 1, except that the plan was approved
by the stockholders of E (in this case, F) on March
1, 2010. On January 1, 2012, E changes the plan
to provide that options for F stock will be granted
to E employees under the plan. Because there is a
change in the stock available for grant under the plan,
under paragraph (c)(4) of this section, the change is
considered the adoption of a new plan that must be
approved by the stockholders of E (in this case, F)
within 12 months before or after January 1, 2012.
Example 2—(i) Assume the same facts as in
paragraph (i) ofExample 1, except that on March
15, 2011, F completely disposes of its interest in E.
Thereafter, E continues to grant options for E stock
to E employees under the plan.
(ii) The new E options are granted under a plan
that meets the stockholder approval requirements
of paragraph (c)(1) of this section without regard
to whether E seeks approval of the plan from the
stockholders of E after F disposes of its interest in E.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2, except that under the plan as adopted
on January 1, 2010, only options for F stock are
granted to E employees. Assume further that, after
F disposes of its interest in E, E changes the plan
to provide for the grant of options for E stock to E
employees. Because there is a change in the stock
available for purchase or grant under the plan, under
paragraph (c)(4) of this section, the stockholders of
E must approve the plan within 12 months before or
after the change to the plan to meet the stockholder
approval requirements of paragraph (c) of this sec-
tion.
Example 3—(i) Corporation G maintains an em-
ployee stock purchase plan. Corporation H does not
maintain an employee stock purchase plan. On May
15, 2010, G and H consolidate under State law to form
one corporation. The new corporation is named Cor-
poration H. The consolidation agreement describes
the G plan, including the maximum aggregate num-
ber of shares available for issuance under the plan af-
ter the consolidation. Additionally, the consolidation
agreement states that the plan will be continued by
H after the consolidation. The consolidation agree-
ment is unanimously approved by the stockholders
of G and H on May 1, 2010. H assumes the plan for-
merly maintained by G and continues to grant options
under the plan to all eligible employees.
(ii) Because there is a change in the granting cor-
poration (from G to H), under paragraph (c)(4) of
this section, H is considered to have adopted a new
plan. Because the plan is fully described in the con-
solidation agreement, including the maximum aggre-
gate number of shares available for issuance under
the plan, the approval of the consolidation agreement
by the stockholders constitutes approval of the plan.
Thus, the stockholder approval of the consolidation
agreement satisfies the stockholder approval require-
ments of paragraph (c)(1) of this section, and the plan
is considered to be adopted by H and approved by its
stockholders on May 1, 2010.
Example 4. Corporation I adopts an employee
stockpurchaseplanonNovember1,2010. Onthat
date, there are two million shares of I stock outstand-
ing. The plan provides that the maximum aggregate
number of shares that may be issued under the plan
may not exceed 15 percent of the number of shares of
I stock outstanding on November 1, 2010. Because
the maximum aggregate number of shares that may
be issued under the plan is designated in the plan, the
requirements of paragraph (c)(3) of this section are
met.
Example 5—(i) Corporation J adopts an em-
ployee stock purchase plan on March 15, 2010. The
plan provides that the maximum aggregate number
of shares of J stock available for issuance under the
plan is 50,000, increased on each anniversary date
of the adoption of the plan by 5 percent of the then
outstanding shares. Because the maximum aggregate
number of shares is not designated under the plan,
the requirements of paragraph (c)(3) of this section
are not met.
(ii) Assume the same facts as in paragraph (i) of
thisExample 5, except that the plan provides that
the maximum aggregate number of shares available
under the plan is the lesser of (a) 50,000 shares, in-
creased each anniversary date of the adoption of the
plan by 5 percent of the then-outstanding shares, or
(b) 200,000 shares. Becausethe maximum aggregate
number of shares that may be issued under the plan is
designated as the lesser of two numbers, one of which
provides an immediately determinable maximum ag-
gregate number of shares that may be issued under
the plan in any event, the requirements of paragraph
(c)(3) of this section are met.
(d)Options granted to certain share-
holders—(1) An employee stock purchase
plan must by its terms provide that an
employee cannot be granted an option if
the employee, immediately after the option
is granted, owns stock possessing 5 per-
cent or more of the total combined voting
power or value of all classes of stock of
the employer corporation or a related cor-
poration. In determining whether the stock
ownership of an employee equals or ex-
2008–39 I.R.B.782September 29, 2008

ceeds this 5 percent limit, the rules of sec-
tion 424(d) (relating to attribution of stock
ownership) shall apply, and stock that the
employee may purchase under outstanding
options (whether or not the options qual-
ify for the special tax treatment afforded
by section 421(a)) shall be treated as stock
owned by the employee. An option is out-
standing for purposes of this paragraph (d)
although under its terms it may be exer-
cised only in installments or after the ex-
piration of a fixed period of time. If an op-
tion is granted to an employee whose stock
ownership (as determined under this para-
graph (d)) exceeds the limitation set forth
in this paragraph (d), no portion of the op-
tion will be treated as having been granted
under an employee stock purchase plan.
(2) The determination of the percent-
age of the total combined voting power
or value of all classes of stock of the em-
ployer corporation (or a related corpora-
tion) that is owned by the employee is
made by comparing the voting power or
value of the shares owned (or treated as
owned) by the employee to the aggregate
voting power or value of all shares actually
issued and outstanding immediately after
the grant of the option to the employee.
The aggregate voting power or value of all
shares actually issued and outstanding im-
mediately after the grant of the option does
not include the voting power or value of
treasury shares or shares authorized for is-
sue under outstanding options held by the
employee or any other person.
(3)Examples. The following examples
illustrate the principles this paragraph (d):
Example 1. Employee V, an employee of Cor-
poration K, owns 6,000 shares of K common stock,
the only class of K stock outstanding. K has 100,000
shares of its common stock outstanding. Because
V owns 6 percent of the combined voting power or
value of all classes of K stock, K cannot grant an op-
tion to V under K’s employee stock purchase plan.
If V’s father and brother each owned 3,000 shares
of K stock and V did not own any K stock, then
the result would be the same because, under section
424(d), an individual is treated as owning stock held
by the person’s father and brother. Similarly, the re-
sult would be the same if, instead of actually own-
ing 6,000 shares, V merely held an option on 6,000
shares of K stock, irrespective of whether the transfer
of stock under the option could qualify for the special
tax treatment of section 421, because this paragraph
(d) provides that stock the employee may purchase
under outstanding options is treated as stock owned
by such employee.
Example 2. Assume the same facts as inExam-
ple 1, except that K is a subsidiary corporation of
Corporation L. Irrespective of whether V owns any
L stock, V cannot receive an option from L under
L’s employee stock purchase plan because he owns
5 percent of the total combined voting power of all
classes of stock of a subsidiary of L, in this example,
K. An employee who owns (or is treated as owning)
stock in excess of the limitation of this paragraph (d),
in any corporation in a group of related corporations,
consisting of a parent and its subsidiary corporations,
cannot receive an option under an employee stock
purchase plan from any corporation in the group.
Example 3. Employee U is an employee of Cor-
poration M. M has only one class of stock, of which
100,000 shares are issued and outstanding. Assum-
ing U does not own (and is not treated as owning)
any stock in M or in any related corporation of M, M
may grant an option to U under its employee stock
purchase plan for 4,999 shares, because immediately
after the grant of the option, U would not own 5 per-
cent or more of the combined voting power or value
of all classes of M stock actually issued and outstand-
ing at such time. The 4,999 shares that U would be
treated as owning under this paragraph (d) would not
be added to the 100,000 shares actually issued and
outstanding immediately after the grant for purposes
of determining whether U’s stock ownership exceeds
the limitation of this paragraph (d).
Example 4. Assume the same facts as inExample
3but instead of an option for 4,999 shares, M grants U
an option, purportedly under its employee stock pur-
chase plan, for 5,000 shares. No portion of this option
will be treated as granted under an employee stock
purchase plan because U’s stock ownership exceeds
the limitation of this paragraph (d).
(e)Employees covered by plan—(1)
Subject to the provisions of this paragraph
(e) and the limitations of paragraphs (d),
(f) and (i) of this section, an employee
stock purchase plan must, by its terms,
provide that options are to be granted to
all employees of any corporation whose
employees are granted any of such options
by reason of their employment by the cor-
poration, except that one or more of the
following categories of employees may be
excluded from the coverage of the plan—
(i) Employees who have been employed
less than two years;
(ii) Employees whose customary em-
ployment is 20 hours or less per week;
(iii) Employees whose customary em-
ployment is for not more than five months
in any calendar year; and
(iv) Highly compensated employees
(within the meaning of section 414(q)).
(2) An employee stock purchase plan
does not fail to satisfy the coverage provi-
sion of paragraph (e)(1) of this section in
the following circumstances—
(i) The plan excludes employees who
have completed a shorter period of ser-
vice or whose customary employment is
for fewer hours per week or fewer months
in a calendar year than is specified in para-
graph (e)(1)(i), (ii) and (iii), provided the
exclusion is applied in an identical man-
ner to all employees of every corporation
whose employees are granted options un-
der the plan.
(ii) The plan excludes highly compen-
sated employees (within the meaning of
section 414(q)) with compensation above
a certain level or who are officers or sub-
ject to the disclosure requirements of sec-
tion 16(a) of the Securities Exchange Act
of 1934, provided the exclusion is applied
in an identical manner to all highly com-
pensated employees of every corporation
whose employees are granted options un-
der the plan.
(3) Notwithstanding paragraph (e)(1) of
this section, employees who are citizens or
residents of a foreign jurisdiction (without
regard to whether they are also citizens of
the United States or resident aliens (within
the meaning of section 7701(b)(1)(A)))
may be excluded from the coverage of an
employee stock purchase plan under the
following circumstances—
(i) The grant of an option under the plan
to a citizen or resident of the foreign juris-
diction is prohibited under the laws of such
jurisdiction; or
(ii) Compliance with the laws of the
foreign jurisdiction would cause the plan
to violate the requirements of section 423.
(4) No option granted under a plan or
offering that excludesfrom participation
any employees, other than those who may
be excluded under this paragraph (e), and
those barred from participation by reason
of paragraphs (d), (f) and (i) of this section,
can be regarded as having been granted un-
der an employee stock purchase plan. If
an option is not granted to any employee
whoisentitledtothegrantofanoptionun-
der the terms of the plan or offering, none
of the options granted under such offer-
ing will be treated as having been granted
under an employee stock purchase plan.
However, a plan that, by its terms, per-
mits all eligible employees to elect to par-
ticipate in an offering will not violate the
requirements of this paragraph solely be-
cause eligible employees who elect not to
participate in the offering are not granted
options pursuant to such offering.
(5) For purposes of this paragraph (e),
the existence of the employment rela-
tionship between an individual and the
corporation participating under the plan
will be determined under paragraph (h) of
§1.421–1.
September 29, 20087832008–39 I.R.B.

(6)Examples. The following examples
illustrate the principles of this paragraph
(e):
Example 1. Corporation N has a stock purchase
plan that meets all the requirements of paragraph
(a)(2) of this section except that options are not re-
quired to be granted to employees whose weekly rate
of pay is less than $1,000. As a matter of corporate
practice, however, N grants options under its plan
to all employees, irrespective of their weekly rate of
pay. Even though N’s plan is operated in compliance
with the requirements of this paragraph (e), N’s plan
is not an employee stock purchase plan because the
terms of the plan exclude a category of employees
that is not permitted under this paragraph (e).
Example 2. Assume the same facts as inExample
1, except that the first offering under N’s plan pro-
vides that options will be granted to all employees of
N. The terms of the first offering will be treated as
part of the terms of N’s plan, but only for purposes
of the first offering. Because the terms of the first of-
fering satisfy the requirements of this paragraph (e),
stock transferred pursuant to options exercised under
the first offering will be treated as stock transferred
pursuant to the exercise ofoptions granted under an
employee stock purchase plan for purposes of section
421.
Example 3. Corporation O has a stock purchase
plan that excludes from participation all employees
who have been employed less than one year. As-
suming all other requirements of paragraph (a)(2) of
this section are satisfied, O’s plan qualifies as an em-
ployee stock purchase plan under section 423.
Example 4. Corporation P has a stock purchase
plan that excludes from participation clerical employ-
ees who have been employed less than two years.
However, non-clerical employees with less than two
years of service are permitted to participate in the
plan. P’s plan is not an employee stock purchase plan
because the exclusion of employees who have been
employed less than two years applies only to certain
employees of P and is not applied in an identical man-
ner to all employees of P. If, instead, P’s plan excludes
from participation all employees (both clerical and
non-clerical) who have been employed less than two
years, then P’s plan would qualify as an employee
stock purchase plan under section 423 assuming all
other requirements of paragraph (a)(2) of this section
are satisfied.
Example 5. Corporation Q has a stock purchase
plan that excludes from participation all officers who
are highly compensated employees (within the mean-
ingofsection414(q)). Assumingallotherrequire-
ments of paragraph (a)(2) of this section are satisfied,
Q’s plan qualifies as an employee stock purchase plan
under section 423.
Example 6. Corporation R maintains an em-
ployee stock purchase plan that excludes from
participation all highly compensated employees
(within the meaning of section 414(q)), except highly
compensated employees who are officers of R. R’s
plan is not an employee stock purchase plan because
the exclusion of all highly compensated employ-
ees except highly compensated employees who are
officers of R is not a permissible exclusion under
paragraph (e)(2)(ii) of this section.
Example 7. Corporation S is the parent corpora-
tion of Subsidiary YY and Subsidiary ZZ. S maintains
an employee stock purchase plan with both YY and
ZZ participating under the plan. Under the terms of
the plan, all employees of YY and ZZ are permitted
to participate in the plan with the exception of ZZ’s
highly compensated employees with annual compen-
sation greater than $300,000. S’s plan is not an em-
ployee stock purchase plan because the exclusion of
highly compensated employees with annual compen-
sation greater than $300,000 is not applied in an iden-
tical manner to all employees of YY and ZZ.
Example 8. The laws of Country A require
that options granted to residents of Country A be
transferable during the lifetime of the option recip-
ient. Corporation T has a stock purchase plan that
excludes residents of Country A from participation
in the plan. Because compliance with the laws of
Country A would cause options granted to residents
of Country A to violate paragraph (j) of this section,
T may exclude residents of Country A from partici-
pation in the plan. Assuming all other requirements
of paragraph (a)(2) of this section are satisfied, T’s
plan qualifies as an employee stock purchase plan
under section 423.
(f)Equal rights and privileges—(1) Ex-
cept as otherwise provided in paragraphs
(f)(2) through (f)(6) of this section, an em-
ployee stock purchase plan must, by its
terms, provide that all employees granted
options under the plan shall have the same
rights and privileges. Thus, the provi-
sions applying to one option under an of-
fering (such as the provisions relating to
the method of payment for the stock and
the determination of the purchase price per
share) must apply to all other options un-
der the offering in the same manner. If all
the options granted under a plan or offering
do not, by their terms, give the respective
optionees the same rights and privileges,
none of the options will be treated as hav-
ing been granted under an employee stock
purchase plan for purposes of section 421.
(2) The requirements of this paragraph
(f) do not prevent the maximum amount of
stock that an employee may purchase from
being determined on the basis of a uniform
relationship to the total compensation, or
the basic or regular rate of compensation,
of all employees.
(3) A plan or offering will not fail to
satisfy the requirements of this paragraph
(f) because the plan or offering provides
that no employee may purchase more than
a maximum amount of stock fixed under
the plan.
(4) A plan or offering will not fail to
satisfy the requirements of this paragraph
(f) if, in order to comply with the laws of
a foreign jurisdiction, the terms of an op-
tion granted under a plan or offering to cit-
izens or residents of such foreign jurisdic-
tion (without regard to whether they are
also citizens of the United States or resi-
dent aliens (within the meaning of section
7701(b)(1)(A))) are less favorable than the
terms of options granted under the same
plan or offering to employees resident in
the United States.
(5)(i) Except as provided in this para-
graph and paragraph (f)(5)(ii) of this
section, a plan permitting one or more
employees to carry forward amounts that
were withheld but not applied toward the
purchase of stock under an earlier plan or
offering and apply the amounts towards
the purchase of additional stock under a
subsequent plan or offering will be a vi-
olation of the equal rights and privileges
under paragraph (f)(1) of this section.
However, the carry forward of amounts
withheld but not applied toward the pur-
chase of stock under an earlier plan or
offering will not violate the equal rights
and privileges requirement of paragraph
(f)(1) of this section if all other employees
participating in the current plan or offer-
ing are permitted to make direct payments
toward the purchase of shares under a
subsequent plan or offering in an amount
equal to the excess of the greatest amount
which any employee is allowed to carry
forward from an earlier plan or offering
over the amount, if any, the employee
will carry forward from an earlier plan or
offering.
(ii) A plan will not fail to satisfy the re-
quirements of this section merely because
employees are permitted to carry forward
amounts representing a fractional share,
that were withheld but not applied toward
the purchase of stock under an earlier plan
or offering and apply the amounts toward
the purchase of additional stock under a
subsequent plan or offering.
(6) Paragraph (f) does not prohibit
the delaying of the grant of an option to
any employee who is barred from being
granted an option solely by reason of the
employee’s failing to meet a minimum
service requirement set forth in paragraph
(e)(1) of this section until the employee
meets such requirement.
(7)Examples. The following examples
illustrate the principles of this paragraph
(f):
Example 1. Corporation U has an employee
stock purchase plan that provides that the maximum
amount of stock that each employee may purchase
under the offering is one share for each $100 of
annual gross pay. The plan meets the requirements
of this paragraph (f).
2008–39 I.R.B.784September 29, 2008

Example 2. Corporation V has an employee
stock purchase plan that provides that the maximum
amount of stock that each employee may purchase
under the offering is one share for each $100 of an-
nual gross pay up to and including $10,000, and two
shares for each $100 of annual gross pay in excess of
$10,000. The plan will not meet the requirements of
this paragraph (f) because the amount of stock that
may be purchased under the plan is not based on a
uniform relationship to the total compensation of all
employees.
Example 3. Corporation W has an employee
stock purchase plan that provides that options to
purchase stock in an amount equal to ten percent of
an employee’s annual salary at a price equal to 85
percent of the fair market value on the first day of the
offering will be granted to all employees other than
those who have been employed less than 18 months.
In addition, the plan provides that employees who
have not yet met the minimum service requirements
on the first day of the offering will be granted similar
options on the date the 18 month service requirement
has been attained. The plan meets the requirements
of this paragraph (f).
Example 4. Corporation X has an employee stock
purchase plan that provides that options to purchase
stock at a price equal to 90 percent of the fair mar-
ket value at the time the option is exercised will be
granted to all employees. The laws of Country B pro-
vide that options granted to employees who are res-
idents of Country B must have a purchase price not
less than 95 percent of the fair market value at the
time the option is exercised. The plan will not fail to
satisfy the requirements of this paragraph (f) merely
because the residents of Country B are granted op-
tions under the plan to purchase stock at a price equal
to 95 percent of the fair market value at the time the
option is exercised.
Example 5. Corporation Y maintains an em-
ployee stock purchase plan. Employee T is employed
by Y. T is granted an option under the current offering
to purchase a maximum of 100 shares of Y stock at
an option price equal to 85 percent of the fair market
value of the stock at exercise. The plan permits the
carry forward of withheld but unused amounts from
an earlier offering. Prior to the exercise date, $2000
of T’s salary has been withheld and is available to
be applied toward the purchase of Y stock. On the
exercise date, the fair market value of Y stock is
$20 per share. T is able to purchase 100 shares of
Y stock at $17 per share for an aggregate purchase
price of $1700. T can carry forward $300 to the sub-
sequent offering. Each employee in the subsequent
offering other than T will be permitted to make direct
payments toward the purchase of shares under the
subsequent offering in a maximum amount of $300
less any amount the employee has carried forward
from an earlier offering. The plan does not violate
the equal rights and privileges requirement of this
paragraph (f).
(g)Option price—(1) An employee
stock purchase plan must, by its terms,
provide that the option price will not be
less than the lesser of—
(i) An amount equal to 85 percent of the
fair market value of the stock at the time
the option is granted, or
(ii) An amount that under the terms of
the option may not be less than 85 percent
of the fair market value of the stock at the
time the option is exercised.
(2) The option price may be deter-
mined in any reasonable manner, including
the valuation methods permitted under
§20.2031–2, so long as the option price
meets the minimum pricing requirements
of this paragraph (g). For general rules
relating to the option price, see paragraph
(e) of §1.421–1. For rules relating to
the determination of when an option is
granted, see paragraph (c) of §1.421–1 and
§1.423–2(h)(2). Any option that does not
meet the minimum pricing requirements
of this paragraph (g) will not be treated as
an option granted under an employee stock
purchase plan irrespective of whether the
plan or offering satisfies those require-
ments. If an option that does not meet the
minimum pricing requirements is granted
to an employee who is entitled to the grant
of an option under the terms of the plan or
offering, and the employee is not granted
an option under such offering that qualifies
as an option granted under an employee
stock purchase plan, the offering will not
meet the requirements of paragraph (e)
of this section. Accordingly, none of the
options granted under the offering will be
eligible for the special tax treatment of
section 421.
(3)Theoptionpricemaybestatedei-
ther as a percentage or as a dollar amount.
If the option price is stated as a dollar
amount, then the requirement of this para-
graph (g) can only be met by a plan or of-
fering in which the price is fixed at not less
than 85 percent of the fair market value of
the stock at the time the option is granted.
If the fixed price is less than 85 percent of
the fair market value of the stock at grant,
then the option cannot meet the require-
ment of this paragraph (g) even if a decline
in the fair market value of the stock results
in such fixed price being not less than 85
percent of the fair market value of the stock
at the time the option is exercised, because
that result was not certain to occur under
the terms of the option.
(4)Examples. The following examples
illustrate the principles of this paragraph
(g):
Example 1. Corporation Z has an employee stock
purchase plan that provides that the option price will
be 85 percent of the fair market value of the stock
on the first day of the offering (which is the date of
grant in this case), or 85 percent of the fair market
value of the stock at exercise, whichever amount is
the lesser. Upon the exercise of an option issued un-
der Z’s plan, Z agrees to accept an option price that
is less than the minimum amount allowable under the
terms of such plan. Notwithstanding that the option
was issued under an employee stock purchase plan,
the transfer of stock pursuant to the exercise of such
option does not satisfy the requirement of this para-
graph (g) and cannot qualify for the special tax treat-
ment of section 421.
Example 2. Corporation AA has an employee
stock purchase plan that provides that the option price
is set at 85 percent of the fair market value of AA
stock at exercise, but not less than $80 per share. On
the first day of the offering (which is the date of grant
in this case), the fair market value of AA stock is $100
per share. The option satisfies the requirement of this
paragraph (g), and can qualify for the special tax treat-
ment of section 421.
Example 3.AssumethesamefactsasinExample
2, except that the option price is set at 85 percent of
the fair market value of AA stock at exercise, but not
more than $80 per share. This option cannot satisfy
the requirement of this paragraph (g) irrespective of
whether, at the time the option is exercised, 85 per-
cent of the fair market value of AA stock is $80 or
less.
(h)Option period—(1) An employee
stock purchase plan must, by its terms, pro-
vide that options granted under the plan
cannot be exercised after the expiration of
27 months from the date of grant unless,
under the terms of the plan, the option price
is not less than 85 percent of the fair mar-
ket value of the stock at the time of the ex-
ercise of the option. If the option price is
not less than 85 percent of the fair market
value of the stock at the time the option is
exercised, then the option period provided
under the plan must not exceed five years
from the date of grant. If the requirements
of this paragraph (h) are not met by the
terms of the plan or offering, then options
issued under such plan or offering will not
be treated as options granted under an em-
ployee stock purchase plan irrespective of
whether the options, by their terms, are ex-
ercisable beyond the period allowable un-
der this paragraph (h). An option that pro-
vides that the option price is not less than
85 percent of the fair market value of the
stock at exercise may have an option pe-
riod of 5 years irrespective of whether the
fair market value of the stock at exercise is
more or less than the fair market value of
the stock at grant. However, if the option
provides that the option price is 85 percent
of the fair market value of the stock at ex-
ercise, but not more than some other fixed
amount determined in accordance with the
provisions of paragraph (g) of this section,
September 29, 20087852008–39 I.R.B.

then irrespective of the price paid on ex-
ercise, the option period must not be more
than 27 months.
(2) Section 1.421–1(c) provides that,
for purposes of §§1.421–1 through
1.424–1, the languagethe date of the
granting of the optionandthe time such
option is granted, and similar phrases
refer to the date or time when the grant-
ing corporation completes the corporate
action constituting an offer of stock for
sale to an individual under the terms and
conditions of a statutory option. With
respect to options granted under an em-
ployee stock purchase plan, the principles
of §1.421–1(c) shall be applied without re-
gard to the requirement that the minimum
option price must be fixed or determinable
in order for the corporate action consti-
tuting an offer of stock to be considered
complete.
(3) The date of grant will be the first
dayofanofferingifthetermsofanem-
ployee stock purchase plan or offering des-
ignate a maximum number of shares that
may be purchased by each employee dur-
ing the offering. Similarly, the date of
grant will be the first day of an offering
if the terms of the plan or offering require
the application of a formula to establish,
on the first day of the offering, the max-
imum number of shares that may be pur-
chased by each employee during the offer-
ing. It is not required that an employee
stock purchase plan or offering designate
a maximum number of shares that may be
purchased by each employee during the of-
fering or incorporate a formula to establish
a maximum number of shares that may be
purchased by each employee during the of-
fering. If the maximum number of shares
that can be purchased under an option is
not fixed or determinable until the date the
option is exercised, then the date of exer-
cise will be the date of grant of the option.
(4)Examples. The following examples
illustrate the principles of this paragraph
(h):
Example 1—(i) Corporation BB has an employee
stock purchase plan that provides that the option price
will be the lesser of 85 percent of the fair market
value of the stock on the first day of an offering or
85 percent of the fair market value of the stock on the
last day of the offering. Options are exercised on the
last day of the offering. One million shares of BB
stock are reserved for issuance under the plan. The
plan provides that no employee may be permitted to
purchase stock under the plan at a rate that exceeds
$25,000 in fair market value of the BB stock (deter-
mined on the date of grant) for each calendar year dur-
ing which an option granted to the employee is out-
standing and exercisable. The terms of each option
granted under an offering provide that a maximum of
500 shares may be purchasedby the option recipient
during the offering. Because the maximum number
of shares that can be purchased under the option is
fixed and determinable on the first day of the offer-
ing, the date of grant for the option is the first day of
the offering.
(ii) Assume the same facts as in paragraph (i) of
Example 1except that BB’s plan excludes all employ-
ees who have been employed less than 18 months.
The plan provides that employees who have not yet
met the minimum service requirements on the first
dayofanofferingwillbegrantedanoptiononthe
date the 18-month service requirement has been at-
tained. With respect to those employees who have
been employed less than 18 months on the first day
of an offering, the date of grant for the option is the
date the 18-month service requirement has been at-
tained.
Example 2. Assume the same facts as in para-
graph (i) ofExample 1except that the terms of each
option granted do not provide that a maximum of 500
shares may be purchased by the option recipient dur-
ing the offering. Notwithstanding the fixed number
of shares reserved for issuance under the plan and the
$25,000 limitation set forth in the plan, the maximum
number of shares that can be purchased under the op-
tion is not fixed or determinable until the last day of
the offering when the option is exercised. Therefore
the date of grant for the option is the last day of the
offering when the option is exercised.
Example 3. Corporation CC has an employee
stock purchase plan that provides that the option price
will be 85 percent of the fair market value of the stock
on the last day of the offering. Options are exercised
on the last day of the offering. Each offering under
the plan begins on January 1 and ends on December
31 of the same calendar year. The terms of each op-
tion granted under an offering provide that the maxi-
mum number of shares that may be purchased by any
employee during the offering equals $25,000 divided
by the fair market value of the stock on the first day
of the offering. The maximum number of shares that
can be purchased under the option is fixed and deter-
minable on the first day of the offering and therefore
the date of grant for the option is the first day of the
offering.
Example 4. Assume the same facts as inExam-
ple 3except that the terms of each option granted un-
der an offering provide that the maximum number of
shares that may be purchased by any employee dur-
ing the offering equals 10 percent of the employee’s
annual salary (determined as of January 1 of the year
in which the offering commences) divided by the fair
market value of the stock on the first day of the of-
fering. The maximum number of shares that can be
purchased under the option is fixed and determinable
on the first day of the offering and therefore the date
of grant for the option is the first day of the offering.
(i)Annual $25,000 limitation—(1) An
employee stock purchase plan must, by its
terms, provide that no employee may be
permitted to purchase stock under all the
employee stock purchase plans of the em-
ployer corporation and its related corpora-
tions at a rate that exceeds $25,000 in fair
market value of the stock (determined at
the time the option is granted) for each cal-
endar year in which any option granted to
the employee is outstanding at any time. In
applying the foregoing limitation—
(i) The right to purchase stock under an
option is deemed toaccrue when the op-
tion (or any portion thereof) first becomes
exercisable during the calendar year;
(ii) The right to purchase stock under an
option accrues at the rate provided in the
option, but in no case may such rate ex-
ceed $25,000 of fair market value of such
stock (determined at the time such option
is granted) for any one calendar year; and
(iii) A right to purchase stock that has
accrued under one option granted pursuant
to the plan may not be carried over to any
other option.
(2) If an option is granted under an em-
ployee stock purchase plan that satisfies
the requirement of this paragraph (i), but
the option gives the optionee the right to
buy stock in excess of the maximum rate
allowable under this paragraph (i), then no
portion of the option will be treated as hav-
ing been granted under an employee stock
purchase plan. Furthermore, if the option
was granted to an employee entitled to the
grant of an option under the terms of the
plan or offering, and the employee is not
granted an option under the offering that
qualifies as an option granted under an em-
ployee stock purchase plan, then the of-
fering will not meet the requirements of
paragraph (e) of this section. Accordingly,
none of the options granted under the of-
fering will be eligible for the special tax
treatment of section 421.
(3) The limitation of this paragraph (i)
applies only to options granted under em-
ployee stock purchase plans and does not
limit the amount of stock that an employee
may purchase under incentive stock op-
tions (as defined in section 422(b)) or any
other stock options except those to which
section 423 applies. Stock purchased un-
der options to which section 423 does not
apply will not limit the amount that an em-
ployee may purchase under an employee
stock purchase plan, except for purposes of
the 5-percent stock ownership provision of
paragraph (d) of this section.
(4) Under the limitation of this para-
graph (i), an employee may purchase up to
$25,000 of stock (based on the fair mar-
ket value of the stock at the time the op-
tion was granted) in each calendar year
2008–39 I.R.B.786September 29, 2008

during which an option granted to the em-
ployee under an employee stock purchase
plan is outstanding and exercisable. Alter-
natively, an employee may purchase more
than $25,000 of stock (based on the fair
market value of such stock at the time the
option was granted) in a calendar year,
so long as the total amount of stock that
the employee purchases does not exceed
$25,000 in fair market value of the stock
(determined at the time the option was
granted) for each calendar year in which
the option was outstanding and exercis-
able. If, in any calendar year, the employee
holds two or more outstanding and exercis-
able options granted under employee stock
purchase plans of the employer corpora-
tion, or a related corporation, then the em-
ployee’s purchases of stock attributable to
that year under all options granted under
employee stock purchase plans must not
exceed $25,000 in fair market value of
the stock (determined at the time the op-
tions were granted). Under an employee
stock purchase plan, an employee may not
purchase stock in anticipation that the op-
tion will be outstanding and exercisable
in some future year. Thus, the employee
may purchase only the amount of stock
that does not exceed the limitation of this
paragraph (i) for the year of the purchase
and for preceding years during which the
option was outstanding and exercisable.
Thus, the amount of stock that may be
purchased under an option depends on the
number of years in which the option is ac-
tually outstanding and exercisable. The
amount of stock that may be purchased un-
der an employee stock purchase plan may
not be increased by reason of the failure
to grant an option in an earlier year un-
der such plan, or by reason of the failure
to exercise an earlier option. For exam-
ple, if an option is granted to an individ-
ual and expires without having been ex-
ercised at all, then the failure to exercise
the option does not increase the amount of
stock which such individual may be per-
mitted to purchase under an option granted
in a year following the year of such expi-
ration. If an option granted under an em-
ployee stock purchase plan is outstanding
and exercisable in more than one calen-
dar year, then stock purchased pursuant to
the exercise of such an option will be ap-
plied first, to the extent allowable under
this paragraph (i), against the $25,000 lim-
itation for the earliest year in which the op-
tion was outstanding and exercisable, then,
against the $25,000 limitation for each suc-
ceeding year, in order.
(5)Examples. The following examples
illustrate the principles of this paragraph
(i):
Example 1. Assume that Corporation DD main-
tains an employee stock purchase plan and that Em-
ployee S is employed by DD. On June 1, 2010, DD
grants S an option under the plan to purchase a total of
750 shares of DD stock at $85 per share. On that date,
the fair market value of DD stock is $100 per share.
The option provides that it may be exercised at any
time but cannot be exercised after May 31, 2012. Un-
der this paragraph (i), the option must not permit S to
purchase more than 250 shares of DD stock during the
calendar year 2010, because 250 shares are equal to
$25,000 in fair market value of DD stock determined
at the time of grant. During the calendar year 2011,
S may purchase under the option an amount of DD
stock equal to the difference between $50,000 in fair
market value of DD stock (determined at the time the
option was granted) and the fair market value of DD
stock (determined at the time of grant of the option)
purchased during the year 2010. During the calendar
year 2012, S may purchase an amount of DD stock
equal to the difference between $75,000 in fair mar-
ket value of the stock (determined at the time of grant
of the option) and the total amount of the fair market
value of the stock (determined at the time of grant of
the option) purchased under the option during the cal-
endar years 2010 and 2011. S may purchase $25,000
of stock for the year 2010, and $25,000 of stock for
the year 2012, although the option was outstanding
and exercisable for only a part of each of such years.
However, S may not be granted another option under
an employee stock purchase plan of DD or a related
corporation to purchase stock of DD or a related cor-
poration during the calendar years 2010, 2011, and
2012, so long as the option granted June 1, 2010, is
outstanding.
Example 2. Assume the same facts as inExample
1, except that the option granted to S in 2010 is termi-
nated in 2011 without any part of the option having
been exercised, and that subsequent to the termina-
tion and during 2011, S is granted another option un-
der DD’s employee stock purchase plan. Under that
option, S may be permitted to purchase $25,000 of
stock for 2011. The failure of S to exercise the option
granted to S in 2010, does not increase the amount of
stock that S may be permitted to purchase under the
option granted to S in 2011.
Example 3. Assume the same facts as inExample
1, except that, on May 31, 2012, S exercised the op-
tion granted to S in 2010, and purchased 600 shares
of DD stock. Five hundred shares, the maximum
amount of stock that could have been purchased in
2011, under the option, are treated as having been pur-
chased for the years 2010 and 2011. Only 100 shares
of the stock are treated as having been purchased for
2012. After S’s exercise of the option on May 31,
2012, S is granted another option under DD’s em-
ployee stock purchase plan. S may be permitted un-
der the new option to purchase for 2012 stock having
a fair market value of no more than $15,000 at the
time the new option is granted.
Example 4. Corporation EE maintains an em-
ployee stock purchase plan and Employee R is em-
ployed by EE. On August 1, 2010, EE grants R an
option under the plan to purchase 150 shares of EE
stock at $85 per share during each of the calendar
years 2010, 2011, and 2012. On that date, the fair
market value of EE stock is $100 per share. The op-
tion provides that it may be exercised at any time dur-
ing years 2010, 2011, and 2012. Because this option
permits R to purchase only $15,000 of EE’s stock for
each year the option is outstanding and exercisable,
R could be granted another option by EE, or by a re-
lated corporation, in year 2010, permitting R to pur-
chase an additional $10,000 of stock during each of
the calendar years 2010, 2011, and 2012.
Example 5. Corporation FF maintains an em-
ployee stock purchase plan and Employee Q is em-
ployed by FF. On September 1, 2010, FF grants Q an
option under the plan that will be automatically exer-
cised on August 31, 2011, and August 31, 2012. On
August 31, 2011, Q may purchase under the option
an amount of FF stock equal to $25,000 in fair market
value of FF stock (determined at the time the option
was granted). On August 31, 2012, Q may purchase
under the option an amount of FF stock equal to the
difference between $50,000 in fair market value of Q
stock (determined at the time the option was granted)
and the fair market value of Q stock (determined at
the time of grant of the option) purchased during year
2011.
(j)Restriction on transferability.An
employee stock purchase plan must, by its
terms, provide that options granted under
the plan are not transferable by the op-
tionee other than by will or the laws of de-
scent and distribution, and must be exercis-
able, during the optionee’s lifetime, only
by the optionee. For general rules relating
to the restriction on transferability required
by this paragraph (j), see paragraph (b)(2)
of §1.421–1. For a limited exception to the
requirement of this paragraph (j), see sec-
tion 424(h)(3).
(k)Special rule where option price is
between 85 percent and 100 percent of
value of stock—(1)(i) If all the conditions
necessary for the application of section
421(a) exist, this paragraph (k) provides
additional rules that are applicable in cases
where, at the time the option is granted,
the option price per share is less than 100
percent (but not less than 85 percent) of
the fair market value of the share. In that
case, upon the disposition of the share by
the employee after the expiration of the
two-year and the one-year holding periods,
or upon the employee’s death while own-
ing the share (whether occurring before or
after the expiration of such periods), there
shall be included in the employee’s gross
income as compensation (and not as gain
upon the sale or exchange of a capital as-
set) the lesser of—
September 29, 20087872008–39 I.R.B.

(A) The amount, if any, by which the
price paid under the option was exceeded
by the fair market value of the share at the
time the option was granted, or
(B) The amount, if any, by which the
price paid under the option was exceeded
by the fair market value of the share at the
time of such disposition or death.
(ii) For purposes of applying the rules
of this paragraph (k), if the option price is
not fixed or determinable at the time the
option is granted, the option price will be
computed as if the option had been exer-
cised at such time. The amount of compen-
sation resulting from the application of this
paragraph (k) shall be included in the em-
ployee’s gross income for the taxable year
in which the disposition occurs, or for the
taxable year closing with the employee’s
death, whichever event results in the ap-
plication of this paragraph (k).
(iii) The application of the special rules
provided in this paragraph (k) shall not af-
fect the rules provided in section 421(a)
with respect to the employee exercising the
option, the employer corporation, or a re-
lated corporation. Thus, notwithstanding
the inclusion of an amount as compensa-
tion in the gross income of an employee,
as provided in this paragraph (k), no in-
come results to the employee at the time
the stock is transferred to the employee,
and no deduction under section 162 is al-
lowable at any time to the employer corpo-
ration or a related corporation with respect
to such amount.
(iv) If, during the employee’s lifetime,
the employee exercises an option granted
under an employee stock purchase plan,
but the employee dies before the stock is
transferred to the employee pursuant to the
exercise of the option, then the transfer of
the stock to the employee’s executor, ad-
ministrator, heir, or legatee is deemed, for
the purpose of sections 421 and 423, to be a
transfer of the stock to the employee exer-
cising the option and a further transfer by
reason of death from the employee to the
employee’s executor, administrator, heir,
or legatee.
(2) If the special rules provided in this
paragraph (k) are applicable to the dis-
position of a share of stock by an em-
ployee, then the basis of the share in the
employee’s hands at the time of the dis-
position, determined under section 1011,
shall be increased by an amount equal to
the amount includibleas compensation in
the employee’s gross income under this
paragraph (k). However, the basis of a
share of stock acquired after the death of
an employee by the exercise of an op-
tion granted to the employee under an em-
ployee stock purchase plan shall be deter-
mined in accordance with the rules of sec-
tion 421(c) and paragraph (c) of §1.421–2.
If the special rules provided in this para-
graph (k) are applicable to a share of stock
upon the death of an employee, then the
basis of the share in the hands of the es-
tate or the person receiving the stock by
bequest or inheritance shall be determined
under section 1014, and shall not be in-
creased by reason of the inclusion upon
the decedent’s death of any amount in the
decedent’s gross income under this para-
graph (k). SeeExample (9)of this para-
graph with respect to the determination of
basis of the share in the hands of a surviv-
ing joint owner.
(3)Examples. The following examples
illustrate the principles of this paragraph
(k):
Example 1. On June 1, 2010, the Corporation
GG grants to Employee P, an employee of GG, an
option under GG’s employee stock purchase plan to
purchase a share of GG stock for $85. The fair market
value of GG stock on such date is $100 per share. On
June 1, 2011, P exercises the option and on that date
GG transfers the share of stock to P. On January 1,
2013, P sells the share for $150, its fair market value
on that date. P’s income tax return is filed on the basis
of the calendar year. The income tax consequences to
P and GG are as follows—
(i) Compensation in the amount of $15 is includi-
ble in P’s gross income for the year 2013, the year
of the disposition of the share. The $15 represents
the difference between the option price ($85) and the
fair market value of the share on the date the option
was granted ($100), because the value is less than the
fair market value of the share on the date of disposi-
tion ($150). For the purpose of computing P’s gain or
loss on the sale of the share, P’s cost basis of $85 is
increased by $15, the amount includible in P’s gross
income as compensation. Thus, P’s basis for the share
is $100. Because the share was sold for $150, P real-
izes a gain of $50, which is treated as long-term cap-
ital gain; and
(ii) GG is not entitled to any deduction under sec-
tion 162 at any time with respect to the share trans-
ferred to P.
Example 2. Assume the same facts as inExample
1, except that P sells the share of GG stock on Jan-
uary 1, 2014, for $75, its fair market value on that
date. Because $75 is less than the option price ($85),
no amount in respect of the sale is includible as com-
pensation in P’s gross income for the year 2014. P’s
basis for determining gain or loss on the sale is $85.
Because P sold the share for $75, P realized a loss of
$10 on the sale that is treated as a long-term capital
loss.
Example 3. Assume the same facts as inExam-
ple 1, except that the option provides that the option
price shall be 90 percent of the fair market value of
the stock on the day the option is exercised. On June
1, 2011, when the option is exercised, the fair mar-
ket value of the stock is $120 per share so that P pays
$108 for the share of the stock. Compensation in the
amount of $10 is includible in P’s gross income for
the year 2013, the year of the disposition of the share.
This is determined in the following manner: the ex-
cess of the fair market value of the stock at the time of
the disposition ($150) over the price paid for the share
($108) is $42; and the excess of the fair market value
of the stock at the time the option was granted ($100)
over the option price, computed as if the option had
been exercised at such time ($90), is $10. Accord-
ingly, $10, the lesser, is includible in gross income.
In this situation, P’s cost basis of $108 is increased
by $10, the amount includible in P’s gross income as
compensation. Thus, P’s basis for the share is $118.
Because the share was sold for $150, P realizes a gain
of $32 that is treated as long-term capital gain.
Example 4. Assume the same facts as inExam-
ple 1, except that the option provides that the option
price shall be the lesser of 95 percent of the fair mar-
ket value of the stock on the first day of the offering
period and 95 percent of the fair market value of the
stock on the day the option is exercised. On June 1,
2011, when the option is exercised, the fair market
value of the stock is $120 per share. P pays $95 for
the share of the stock. Compensation in the amount
of $5 is includible in P’s gross income for the year
2013, the year of the disposition of the share. This is
determined in the following manner: the excess of the
fair market value of the stock at the time of the dispo-
sition ($150) over the price paid for the share ($95)
is $55; and the excess of the fair market value of the
stock at the time the option was granted ($100) over
the option price, computed as if the option had been
exercised at such time ($95), is $5. Accordingly, $5,
the lesser, is includible in gross income. In this sit-
uation, P’s cost basis of $95 is increased by $5, the
amount includible in P’s gross income as compensa-
tion. Thus, P’s basis for the share is $100. Because
the share was sold for $150, P realizes a gain of $50
that is treated as long-term capital gain.
Example 5.AssumethesamefactsasinExample
1, except that instead of selling the share on January 1,
2013, P makes a gift of the share on that day. In that
case $15 is includible as compensation in P’s gross
income for 2013. P’s cost basis of $85 is increased
by $15, the amount includible in P’s gross income as
compensation. Thus, P’s basis for the share is $100,
which becomes the donee’s basis, as of the time of the
gift, for determining gain or loss.
Example 6.AssumethesamefactsasinExample
2, except that instead of selling the share on January
1, 2014, P makes a gift of the share on that date. Be-
cause the fair market value of the share on that day
($75) is less than the option price ($85), no amount
in respect of the disposition by way of gift is includi-
ble as compensation in P’s gross income for 2014. P’s
basis for the share is $85, which becomes the donee’s
basis, as of the time of the gift, for the purpose of de-
termining gain. The donee’s basis for the purpose of
determining loss, determined under section 1015(a),
is $75 (fair market value of the share at the date of
gift).
2008–39 I.R.B.788September 29, 2008

Example 7. Assume the same facts as inExam-
ple 1, except that after acquiring the share of stock on
June 1, 2011, P dies on August 1, 2012, at which time
the share has a fair market value of $150. Compensa-
tion in the amount of $15 is includible in P’s gross in-
come for the taxable year closing with P’s death, $15
being the difference between the option price ($85)
and the fair market value of the share when the op-
tion was granted ($100), because such value is less
than the fair market value at date of death ($150). The
basis of the share in the hands of P’s estate is deter-
mined under section 1014 without regard to the $15
includible in the decedent’s gross income.
Example 8. Assume the same facts as inExample
7, except that P dies on August 1, 2011, at which time
the share has a fair market value of $150. Although
P’s death occurred within six months after the transfer
of the share to P, the income tax consequences are the
same as inExample 7.
Example 9. Assume the same facts as inExam-
ple 1, except that the share of stock was issued in the
names of P and P’s spouse jointly with right of sur-
vivorship, and that P and P’s spouse sold the share on
June 15, 2012, for $150, its fair market value on that
date. Compensation in the amount of $15 is includi-
ble in P’s gross income for the year 2012, the year of
the disposition of the share. The basis of the share in
the hands of P and P’s spouse for the purpose of de-
termining gain or loss on the sale is $100, that is, the
cost of $85 increased by the amount of $15 includi-
ble as compensation in P’s gross income. The gain
of $50 on the sale is treated as long-term capital gain,
and is divided equally between P and P’s spouse.
Example 10. Assume the same facts as inExam-
ple 1, except that the share of stock was issued in the
names of P and P’s spouse jointly with right of sur-
vivorship, and that P predeceased P’s spouse on Au-
gust 1, 2012, at which time the share had a fair mar-
ket value of $150. Compensation in the amount of
$15 is includible in P’s gross income for the taxable
year closing with his death. SeeExample 7. The basis
of the share in the hands of P’s spouse as survivor is
determined under section 1014 without regard to the
$15 includible in the decedent’s gross income.
Example 11. Assume the same facts as inExam-
ple 10, except that P’s spouse predeceased P on July
1, 2012. Section 423(c) does not apply in respect of
the death of P’s spouse. Upon the subsequent death
of P on August 1, 2012, the income tax consequences
in respect of P’s taxable year closing with the date of
P’s death, and in respect of the basis of the share in
the hands of P’s estate, are the same as inExample
7. If P had sold the share on July 15, 2012 (after the
death of P’s spouse), for $150, its fair market value at
that time, the income tax consequences would be the
same as inExample 1.
(l)Effective/applicability date.Upon
the date of publication of the Treasury de-
cision adopting the rules of this section as
a final regulation in theFederal Regis-
ter, these rules will apply as of January 1,
2010.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 28, 2008,
8:45 a.m., and published in the issue of the Federal Register
for July 29, 2008, 73 F.R. 43875)
September 29, 20087892008–39 I.R.B.

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.
2008–39 I.R.B.iSeptember 29, 2008

Numerical Finding List
1
Bulletins 2008–27 through 2008–39
Announcements:
2008-62, 2008-27 I.R.B.74
2008-63, 2008-28 I.R.B.114
2008-64, 2008-28 I.R.B.114
2008-65, 2008-31 I.R.B.279
2008-66, 2008-29 I.R.B.164
2008-67, 2008-29 I.R.B.164
2008-68, 2008-30 I.R.B.244
2008-69, 2008-32 I.R.B.318
2008-70, 2008-32 I.R.B.318
2008-71, 2008-32 I.R.B.321
2008-72, 2008-32 I.R.B.321
2008-73, 2008-33 I.R.B.391
2008-74, 2008-33 I.R.B.392
2008-75, 2008-33 I.R.B.392
2008-76, 2008-33 I.R.B.393
2008-77, 2008-33 I.R.B.394
2008-78, 2008-34 I.R.B.453
2008-79, 2008-35 I.R.B.568
2008-80, 2008-37 I.R.B.706
2008-81, 2008-37 I.R.B.706
2008-82, 2008-37 I.R.B.708
2008-83, 2008-37 I.R.B.709
2008-84, 2008-38 I.R.B.748
2008-85, 2008-38 I.R.B.749
Notices:
2008-55, 2008-27 I.R.B.11
2008-56, 2008-28 I.R.B.79
2008-57, 2008-28 I.R.B.80
2008-58, 2008-28 I.R.B.81
2008-59, 2008-29 I.R.B.123
2008-60, 2008-30 I.R.B.178
2008-61, 2008-30 I.R.B.180
2008-62, 2008-29 I.R.B.130
2008-63, 2008-31 I.R.B.261
2008-64, 2008-31 I.R.B.268
2008-65, 2008-30 I.R.B.182
2008-66, 2008-31 I.R.B.270
2008-67, 2008-32 I.R.B.307
2008-68, 2008-34 I.R.B.418
2008-69, 2008-34 I.R.B.419
2008-70, 2008-36 I.R.B.575
2008-71, 2008-35 I.R.B.462
2008-73, 2008-38 I.R.B.717
2008-74, 2008-38 I.R.B.718
2008-75, 2008-38 I.R.B.719
2008-76, 2008-39 I.R.B.768
Proposed Regulations:
REG-161695-04, 2008-37 I.R.B.699
REG-164965-04, 2008-34 I.R.B.450
Proposed Regulations— Continued:
REG-143453-05, 2008-32 I.R.B.310
REG-146895-05, 2008-37 I.R.B.700
REG-155087-05, 2008-38 I.R.B.726
REG-142680-06, 2008-35 I.R.B.565
REG-120476-07, 2008-36 I.R.B.679
REG-120844-07, 2008-39 I.R.B.770
REG-129243-07, 2008-27 I.R.B.32
REG-138355-07, 2008-32 I.R.B.311
REG-142040-07, 2008-34 I.R.B.451
REG-149405-07, 2008-27 I.R.B.73
REG-100464-08, 2008-32 I.R.B.313
REG-101258-08, 2008-28 I.R.B.111
REG-102122-08, 2008-31 I.R.B.278
REG-102822-08, 2008-38 I.R.B.744
REG-103146-08, 2008-37 I.R.B.701
REG-106251-08, 2008-39 I.R.B.774
REG-115457-08, 2008-33 I.R.B.390
REG-121698-08, 2008-29 I.R.B.163
Revenue Procedures:
2008-32, 2008-28 I.R.B.82
2008-33, 2008-28 I.R.B.93
2008-34, 2008-27 I.R.B.13
2008-35, 2008-29 I.R.B.132
2008-36, 2008-33 I.R.B.340
2008-37, 2008-29 I.R.B.137
2008-38, 2008-29 I.R.B.139
2008-39, 2008-29 I.R.B.143
2008-40, 2008-29 I.R.B.151
2008-41, 2008-29 I.R.B.155
2008-42, 2008-29 I.R.B.160
2008-43, 2008-30 I.R.B.186
2008-44, 2008-30 I.R.B.187
2008-45, 2008-30 I.R.B.224
2008-46, 2008-30 I.R.B.238
2008-47, 2008-31 I.R.B.272
2008-48, 2008-36 I.R.B.586
2008-49, 2008-34 I.R.B.423
2008-50, 2008-35 I.R.B.464
2008-51, 2008-35 I.R.B.562
2008-52, 2008-36 I.R.B.587
2008-53, 2008-36 I.R.B.678
2008-54, 2008-38 I.R.B.722
2008-55, 2008-39 I.R.B.768
Revenue Rulings:
2008-32, 2008-27 I.R.B.6
2008-33, 2008-27 I.R.B.8
2008-34, 2008-28 I.R.B.76
2008-35, 2008-29 I.R.B.116
2008-36, 2008-30 I.R.B.165
2008-37, 2008-28 I.R.B.77
2008-38, 2008-31 I.R.B.249
2008-39, 2008-31 I.R.B.252
2008-40, 2008-30 I.R.B.166
Revenue Rulings— Continued:
2008-41, 2008-30 I.R.B.170
2008-42, 2008-30 I.R.B.175
2008-43, 2008-31 I.R.B.258
2008-44, 2008-32 I.R.B.292
2008-45, 2008-34 I.R.B.403
2008-46, 2008-36 I.R.B.572
2008-47, 2008-39 I.R.B.760
2008-48, 2008-38 I.R.B.713
Treasury Decisions:
9401, 2008-27 I.R.B.1
9402, 2008-31 I.R.B.254
9403, 2008-32 I.R.B.285
9404, 2008-32 I.R.B.280
9405, 2008-32 I.R.B.293
9406, 2008-32 I.R.B.287
9407, 2008-33 I.R.B.330
9408, 2008-33 I.R.B.323
9409, 2008-29 I.R.B.118
9410, 2008-34 I.R.B.414
9411, 2008-34 I.R.B.398
9412, 2008-37 I.R.B.687
9413, 2008-34 I.R.B.404
9414, 2008-35 I.R.B.454
9415, 2008-36 I.R.B.570
9417, 2008-37 I.R.B.693
9418, 2008-38 I.R.B.713
9420, 2008-39 I.R.B.750
9421, 2008-39 I.R.B.755
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin
2008–26, dated June 30, 2008.
September 29, 2008ii2008–39 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–27 through 2008–39
Announcements:
2008-64
Corrected by
Ann. 2008-71, 2008-32 I.R.B.321
2008-72
Corrected by
Ann. 2008-78, 2008-34 I.R.B.453
Notices:
99-48
Superseded by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2000-9
Obsoleted by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
2004-2
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2004-50
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2006-88
Modified and superseded by
Notice 2008-60, 2008-30 I.R.B.178
2007-22
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2007-36
Clarified, modified, and amplified by
Rev. Proc. 2008-54, 2008-38 I.R.B.722
Proposed Regulations:
REG-129243-07
Corrected by
Ann. 2008-75, 2008-33 I.R.B.392
REG-151135-07
Hearing scheduled by
Ann. 2008-64, 2008-28 I.R.B.114
REG-101258-08
Corrected by
Ann. 2008-73, 2008-33 I.R.B.391
Revenue Procedures:
92-25
Superseded by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
92-83
Obsoleted by
Rev. Proc. 2008-37, 2008-29 I.R.B.137
Revenue Procedures— Continued:
2001-10
Section 6.02(1)(a) modified and amplified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2001-42
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2002-9
Clarified, modified, amplified, and superseded by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
Modified and amplified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
2002-28
Section 7.02(1)(a) modified and amplified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2002-64
Superseded by
Rev. Proc. 2008-55, 2008-39 I.R.B.768
2005-29
Superseded by
Rev. Proc. 2008-49, 2008-34 I.R.B.423
2006-27
Modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B.464
2006-29
Superseded by
Rev. Proc. 2008-34, 2008-27 I.R.B.13
2006-34
Superseded by
Rev. Proc. 2008-44, 2008-30 I.R.B.187
2007-14
Superseded by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2007-19
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2007-42
Superseded by
Rev. Proc. 2008-32, 2008-28 I.R.B.82
2007-43
Superseded by
Rev. Proc. 2008-33, 2008-28 I.R.B.93
2007-49
Section 3 modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B.464
2007-50
Superseded by
Rev. Proc. 2008-36, 2008-33 I.R.B.340
2007-66
Modified and superseded by
Rev. Proc. 2008-54, 2008-38 I.R.B.722
Revenue Procedures— Continued:
2007-70
Modified by
Ann. 2008-63, 2008-28 I.R.B.114
2007-72
Amplified and superseded by
Rev. Proc. 2008-47, 2008-31 I.R.B.272
2008-12
Modified and superseded by
Rev. Proc. 2008-35, 2008-29 I.R.B.132
2008-43
Modified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2008-52
Modified by
Ann. 2008-84, 2008-38 I.R.B.748
Revenue Rulings:
67-213
Amplified by
Rev. Rul. 2008-40, 2008-30 I.R.B.166
71-234
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
76-273
Obsoleted by
T.D. 9414, 2008-35 I.R.B.454
77-480
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
82-105
Obsoleted by
T.D. 9414, 2008-35 I.R.B.454
91-17
Amplified by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
Rev. Proc. 2008-42, 2008-29 I.R.B.160
Superseded in part by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2005-6
Amplified by
Rev. Proc. 2008-38, 2008-29 I.R.B.139
2006-57
Modified by
Notice 2008-74, 2008-38 I.R.B.718
2008-12
Amplified by
Rev. Rul. 2008-38, 2008-31 I.R.B.249
Clarified by
Ann. 2008-65, 2008-31 I.R.B.279
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.
2008–39 I.R.B.iiiSeptember 29, 2008

Treasury Decisions:
9391
Corrected by
Ann. 2008-74, 2008-33 I.R.B.392
September 29, 2008iv2008–39 I.R.B.

INDEX
Internal Revenue Bulletins 2008–27 through
2008–39
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parenthesis refers to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Accrual rule for defined benefit plans under section 411(b)(1)(B),
application (REG–100464–08) 32,313
Application of section 457(f) tocertain arrangements regarding
part-year compensation (Notice 62) 29,130
Closing agreements, Employee Plans Compliance Resolution
System (EPCRS) (RP 50) 35,464
Definition of “outside director” (RR 32) 27,6
Employee stock purchase plans, rules (REG–106251–08) 39,
774
Full funding limitations, weighted average interest rates, seg-
ment rates for:
July 2008 (Notice 65) 30,182
August 2008 (Notice 69) 34,419
September 2008 (Notice 75) 38,719
Individual Retirement Accounts (IRAs), converting amounts to
Roth IRAs (TD 9418) 38,713
Multiemployer plan funding guidance, hearing scheduled for
REG–151135–07 (Ann 64) 28,114;correction(Ann71)32,
321
Proposed Regulations:
26 CFR 1.401(a)(9)–1, –6, amended; 1.403(b)–6,
amended; reasonable good faith interpretation of re-
quired minimum distribution rules by governmental plans
(REG–142040–07) 34,451
26 CFR 1.411(b)–1, amended; accrual rules for defined ben-
efit plans (REG–100464–08) 32,313
26 CFR 1.421–1, amended; 1.422–2, –5, amended; 1.423–1,
–2, revised; employee stockpurchase plans under section
423 (REG–106251–08) 39,774
26 CFR 1.432; multiemployer planfunding guidance, hearing
scheduled for REG–151135–07 (Ann 64) 28,114; correc-
tion (Ann 71) 32,321
EMPLOYEE PLANS—Cont.
26 CFR 1.6039–1, revised; 1.6039–2, added; infor-
mation reporting requirements under section 6039
(REG–103146–08) 37,701
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4,
amended; 1.6695–1, revised; 1.6695–2, amended;
1.6696–1, revised; 301.7701–15, amended; tax re-
turn preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Regulations:
26 CFR 1.408A–4, amended; 1.408–4T, removed; converting
an IRA annuity to a Roth IRA (TD 9418) 38,713
Qualified retirement plans, qualification, plan sponsorship (RR
45) 34,403
Reasonable good faith interpretation of required minimum dis-
tribution rules by governmental plans (REG–142040–07) 34,
451
Stocks, information reporting requirements for statutory stock
options (REG–103146–08) 37,701
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Transition relief, funding, expanding availability (Notice 73) 38,
717
Trusts, qualification, Puerto Rico (RR 40) 30,166
EMPLOYMENT TAX
Interest-free adjustments and claims for refund of employment
taxes (TD 9405) 32,293
Proposed Regulations:
31.6060–1, added; 31.6107–1, added; 31.6109–2, added;
31.6694–1 thru –4, added; 31.6695–1, added; 31.6696–1,
added; 31.7701–1, added; tax return preparer penalties
under sections 6694 and 6695 (REG–129243–07) 27,32
Publications:
1141, General Rules and Specifications for Substitute Forms
W-2 and W-3, revised (RP 33) 28,93
4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), revised (RP 32) 28,82
Regulations:
26 CFR 31.6011(a)–1, –4, –5, amended; 31.6205–1,
amended; 31.6302–0, –1, amended; 31.6402(a)–1,
–2, amended; 31.6413(a)–1, –2, amended; 31.6414–1,
amended; 602.101, amended; employment tax adjustments
(TD 9405) 32,293
Substitute forms:
W-2 and W-3, general rules and specifications (RP 33) 28,93
941 and Schedule B (Form 941), general rules and specifica-
tions (RP 32) 28,82
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
2008–39 I.R.B.vSeptember 29, 2008

ESTATE TAX
Charitable lead unitrust (CLUT):
Inter vivos, sample forms (RP 45) 30,225
Testamentary, sample form (RP 46) 30,238
Interest rates for 2008, farm real property, special use value (RR
44) 32,292
Proposed Regulations:
20.6060–1, added; 20.6107–1, added; 20.6109–1, added;
20.6694–1 thru –4, added; 20.6695–1, added; 20.6696–1,
added; 20.7701–1, added; tax return preparer penalties
under sections 6694 and 6695 (REG–129243–07) 27,32
Regulations:
26 CFR 20.2036–1, amended; 20.2039–1, amended; grantor
retained interest trusts, application of sections 2036 and
2039 (TD 9414) 35,454
26 CFR 26.2600–1, amended; 26.2642–6, amended;
26.2654–1, amended; severance of a trust for genera-
tion-skipping transfer (GST) tax purposes (TD 9421) 39,
755
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Transfer tax valuation of interest in a restricted management ac-
count (RMA) (RR 35) 29,116
Trusts:
Grantor retained interest trusts, application of sections 2036
and 2039 (TD 9414) 35,454
Private trust company (Notice 63) 31,261
Severance of a trust for GST tax purposes (TD 9421) 39,755
EXCISE TAX
Charitable remainder trusts (CRTs), division into two or more
separate and equal CRTs (RR 41) 30,170
Credits, alcohol fuel, biodiesel, alternative fuel
(REG–155087–05) 38,726
Health Savings Accounts (HSAs), employer comparable contri-
butions to HSAs under section 4980G and excise tax under sec-
tions 4980B, 4980D, 4980E, and 4980G (REG–120476–07)
36,680
Proposed Regulations:
26 CFR 1.40–1, revised; 1.40–2, added; 1.40A–1,
added; 40.0–1, amended; 40.6302(c)–1, amended;
48.0–1, amended; 48.0–4, added; 48.4041–0, amended;
48.4041–18, –20, removed and reserved; 48.4041–19,
revised; 48.4081–1, –2, –3, amended; 48.4081–6, re-
moved and reserved; 48.4082–4, amended; 48.4101–1,
amended; 48.6426–1 thru –7, added; 48.6427–8, amended;
48.6427–12, added; alcohol fuel and biodiesel, renewable
diesel, alternative fuel, diesel-water fuel emulsion, taxable
fuel definitions, excise tax returns (REG–155087–05) 38,
726
26 CFR 54.4980B–0, B–2, G–1, G–3, G–4, amended;
54.4980D–1, E–1, G–6, G–7, added; employer com-
parable contributions to health savings accounts under
section 4980G, and requirement of return for filing the
EXCISE TAX—Cont.
excise tax under section 4980B, 4980D, 4980E or 4980G
(REG–120476–07) 36,680
40.6060–1, added; 40.6107–1, added; 40.6109–1, added;
40.6694–1 thru –4, added; 40.6695–1, added; 40.6696–1,
added; 40.7701–1, added; 41.6060–1, added; 41.6107–1,
added; 41.6109–2, added; 41.6694–1 thru –4, added;
41.6695–1, added; 41.6696–1, added; 41.7701–1,
added; 44.6060–1, added; 44.6107–1, added; 44.6109–1,
added; 44.6694–1 thru –4, added; 44.6695–1, added;
44.6696–1, added; 44.7701–1, added; 53.6060–1, added;
53.6107–1, added; 53.6109–1, added; 53.6694–1 thru –4,
added; 53.6695–1, added; 53.6696–1, added; 53.7701–1,
added; 54.6060–1, added; 54.6107–1, added; 54.6109–1,
added; 54.6694–1 thru –4, added; 54.6695–1, added;
54.6696–1, added; 54.7701–1, added; 55.6060–1, added;
55.6107–1, added; 55.6109–1, added; 55.6694–1 thru –4,
added; 55.6695–1, added; 55.6696–1, added; 55.7701–1,
added; 56.6060–1, added; 56.6107–1, added; 56.6109–1,
added; 56.6694–1 thru –4, added; 56.6695–1, added;
56.6696–1, added; 56.7701–1, added; 156.6060–1, added;
156.6107–1, added; 156.6109–1, added; 156.6694–1
thru –4, added; 156.6695–1, added; 156.6696–1, added;
156.7701–1, added; 157.6060–1, added; 157.6107–1,
added; 157.6109–1, added; 157.6694–1 thru –4, added;
157.6695–1, added; 157.6696–1, added; 157.7701–1,
added; 301.7701–15, amended; tax return preparer penal-
ties under sections 6694 and 6695 (REG–129243–07) 27,
32
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
EXEMPT ORGANIZATIONS
Declaratory judgment suits (Ann 67)29, 164;(Ann72)32,321;
correction (Ann 78) 34,453; (Ann 82) 37,708; (Ann 85) 38,
749
Indian tribal governments treated as states (RP 55) 39,768
List of organizations classifiedas private foundations (Ann 70)
32,318;(Ann81)37,706
Proposed Regulations:
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4,
amended; 1.6695–1, revised; 1.6695–2, amended;
1.6696–1, revised; 301.7701–15, amended; tax re-
turn preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Regulations
26 CFR 1.664–1, amended; 602.101, amended; guidance un-
der section 664 regarding the effect of unrelated business
taxable income on charitable remainder trusts (TD 9403)
32,285
Revocations (Ann 62) 27,74; (Ann 66) 29,164; (Ann 69) 32,
318; (Ann 76) 33,393; (Ann 79) 35,568; (Ann 80) 37,706
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
September 29, 2008vi2008–39 I.R.B.

EXEMPT ORGANIZATIONS—Cont.
Trusts:
Charitable remainder trusts (CRTs):
Calculation of excise tax on unrelated business taxable in-
come (UBTI) (TD 9403) 32,285
Division into two or more separate and equal CRTs (RR
41) 30,170
GIFT TAX
Charitable lead unitrust (CLUT),inter vivos, sample forms (RP
45) 30,225
Proposed Regulations:
25.6060–1, added; 25.6107–1, added; 25.6109–1, added;
25.6694–1 thru –4, added; 25.6695–1, added; 25.6696–1,
added; 25.7701–1, added; 26.6060–1, added; 26.6107–1,
added; 26.6109–1, added; 26.6694–1 thru –4, added;
26.6695–1, added; 26.6696–1, added; 26.7701–1, added;
tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32
Transfer tax valuation of interest in a restricted management ac-
count (RMA) (RR 35) 29,116
Trust, private trust company (Notice 63) 31,261
INCOME TAX
Accounting methods:
Automatic changes in methods of accounting (RP 52) 36,587
Consent procedures, changesin method of accounting (Ann
84) 38,748
Rolling average inventory (RP 43) 30,186
Acquisitions, application of section 382 in the case of certain ac-
quisitions made pursuant to the Housing and Economic Recov-
ery Act of 2008 (Notice 76) 39,768
Bonds:
Procedures for requesting a refund of arbitrage rebate and sim-
ilar payments on tax-exempt bonds (RP 37) 29,137
Solicitation of applications from qualified issuers for alloca-
tion of qualified forestry conservation bonds (QFCBs) lim-
itation and application requirements (Notice 70) 36,575
Bonus depreciation for the Kansas disaster area (Notice 67) 32,
307
Capital costs incurred to comply with EPA sulfur regulations (TD
9404) 32,280; (REG–143453–05) 32,310
Certain financing commitments and applicable high yield dis-
count obligations (RP 51) 35,562
Change to office to which notices of nonjudicial sale and re-
quests for return of wrongfully levied property must be sent
(TD 9410) 34,414
Charitable lead unitrust (CLUT):
Inter vivos, sample forms (RP 45) 30,225
Testamentary, sample form (RP 46) 30,238
Charitable remainder trusts (CRTs), division into two or more
separate and equal CRTs (RR 41) 30,170
INCOME TAX—Cont.
Child of parents who are divorced, separated or living apart as
the dependent of both parents (RP 48) 36,586
Corporations:
Accumulated adjustments account (AAA) and key-man life
insurance (RR 42) 30,175
Section 108 reduction of tax attributes for S corporations
(REG–102822–08) 38,744
Credits:
Alcohol fuel, biodiesel, alternative fuel (REG–155087–05)
38,726
Electricity produced from certain renewable resources, sec-
tion 45 tax credit (Notice 60) 30,178
Increasing research activities (TD 9401) 27,1;
(REG–149405–07) 27,73
Low-income housing credit:
Emergency housing relief, Wisconsin severe storms, tor-
nadoes, and flooding (Notice 61) 30,180
Indiana severe storms and flooding (Notice 56) 28,79
Iowa severe storms, tornadoes, and flooding (Notice 58)
28,81
Missouri severe storms and flooding, disaster relief (Notice
66) 31,270
Utility allowance, new options for estimating (TD 9420)
39,750
Satisfactory bond, “bond factor” amounts for the period:
January through September 2008 (RR 36) 30,165
Section 48 tax credit for qualifying fuel cell property and qual-
ifying microturbine property (Notice 68) 34,418
Declaratory judgment suits (Ann 67)29, 164;(Ann72)32,321;
correction (Ann 78) 34,453; (Ann 82) 37,708; (Ann 85) 38,
749
Definition of “outside director” (RR 32) 27,6
Dependent child of divorced or separated parents or parents who
live apart (TD 9408) 33,323
Disaster relief, China earthquake, qualified disaster (Notice 57)
28,80
Disciplinary actionsinvolving attorneys,certified public accoun-
tants, enrolled agents, and enrolled actuaries (Ann 68) 30,245;
(Ann 77) 33,394; (Ann 83) 37,709
Disclosure of taxpayer groupings for purposes of the passive ac-
tivity loss provisions under section 469 (Notice 64) 31,268
Disclosure or use of information by preparers of returns (TD
9409) 29,118; (REG–121698–08) 29,163
Economic Stimulus Act of 2008, bonus depreciation, section 179
expensing (RP 54) 38,722
Election to expense certain refineries (TD 9412) 37,687;
(REG–146895–05) 37,700
Employee stock purchase plans, rules (REG–106251–08) 39,
774
Escrow accounts used in like-kind exchanges (TD 9413) 34,404
Expenses:
Elections regarding start-up expenditures, corporation orga-
nizational expenditures, and partnership organizational ex-
penses (TD 9411) 34,398; (REG–164965–04) 34,450
Optional standard mileage rates, update (Ann 63) 28,114
2008–39 I.R.B.viiSeptember 29, 2008

INCOME TAX—Cont.
Extension of time for filing returns (TD 9407) 33,330;
(REG–115457–08) 33,390
Farmer and fisherman income averaging (TD 9417) 37,693;
(REG–161695–04) 37,699
Forms:
1042-S, Foreign Person’s U.S. Source Income Subject to
Withholding, specifications for filing electronically (RP
44) 30,187
1096, 1098, 1099, 5498, W-2G, and 1042-S, substitute form
specifications (RP 36) 33,340
8027, Employer’s Annual Information Return of Tip Income
and Allocated Tips, specifications for filing electronically
(RP 34) 27,13
8596, Information Return for Federal Contracts, specifica-
tions for filing electronically (RP 49) 34,423
Guidance to tax return preparers:
Consents to disclose and consents to use tax return in-
formation in the Form 1040 series (TD 9409) 29,118;
(REG–121698–08) 29,163
Consents to disclose and consents to use tax return informa-
tion in the Form 1040 series, update to Rev. Proc. 2008-12
(RP 35) 29,132
Guidance under section 956 for determining the basis of property
acquired in certain nonrecognition transactions (TD 9402) 31,
254; (REG–102122–08) 31,278
Health Savings Accounts (HSAs), additional guidance (Notice
59) 29,123
Insurance companies:
Effectively connected income (RP 53) 36,678
Life insurance contracts:
Automatic waiver (RP 42) 29,160
Closing agreement (RP 40) 29,151
Modified endowment contracts (MECs), closing agree-
ments (RP 39) 29,143
Qualified additional benefits (QABs), closing agreement
(RP 38) 29,139
Variable contracts, closing agreement (RP 41) 29,155
Interest:
Characterization of management fees paid by an upper tier
investment partnership and lower tier trader partnerships
(RR 39) 31,252
Investment:
Federal short-term, mid-term, and long-term rates for:
July 2008 (RR 33) 27,8
August 2008 (RR 43) 31,258
September 2008 (RR 46) 36,572
Rates:
Underpayments and overpayments, quarter beginning:
October 1, 2008 (RR 47) 39,760
Treatment of interest expense attributable to indebtedness al-
locable to property held for investment described in section
163(d)(5)(A)(ii):
Investment interest deduction (RR 38) 31,249
Trader partnership (Ann 65) 31,279
Law school Loan Repayment Assistance Program (LRAP), ex-
clusion from gross income (RR 34) 28,76
INCOME TAX—Cont.
Liens, return of wrongfully levied property and discharge of
liens, special rules (TD 9410) 34,414
Life insurance:
Premiums by S corporation, effect on accumulated adjust-
ments account (AAA) (RR 42) 30,175
Statutory reserves, meaning formulti-state taxpayers (RR 37)
28,77
Presidentially declared disaster or terroristic or military
actions, postponement of certain tax-related deadlines
(REG–142680–06) 35,565
Private foundations, organizations now classified as (Ann 70) 32,
318; (Ann 81) 37,706
Proposed Regulations:
26 CFR 1.40–1, revised; 1.40–2, added; 1.40A–1,
added; 40.0–1, amended; 40.6302(c)–1, amended;
48.0–1, amended; 48.0–4, added; 48.4041–0, amended;
48.4041–18, –20, removed and reserved; 48.4041–19,
revised; 48.4081–1, –2, –3, amended; 48.4081–6, re-
moved and reserved; 48.4082–4, amended; 48.4101–1,
amended; 48.6426–1 thru –7, added; 48.6427–8, amended;
48.6427–12, added; alcohol fuel and biodiesel, renewable
diesel, alternative fuel, diesel-water fuel emulsion, taxable
fuel definitions, excise tax returns (REG–155087–05) 38,
726
26 CFR 1.41–6, –8, amended; 1.41–9, added; alternative sim-
plified credit under section 41(c)(5) (REG–149405–07) 27,
73
26 CFR 1.108–7, amended; section 108 reduction of tax at-
tributes for S corporations (REG–102822–08) 38,744
26 CFR 1.179B–1, added; capital costs incurred to comply
with EPA sulfur regulations (REG–143453–05) 32,310
26 CFR 1.179C–1, added; election to expense certain refiner-
ies (REG–146895–05) 37,700
26 CFR 1.195–1, revised; 1.248–1, amended; 1.709–1,
amended; elections regarding start-up expenditures, cor-
poration organizational expenditures, and partnership
organizational expenses (REG–164965–04) 34,450
26 CFR 1.367(a)–2, –4, –5, added; 1.954–2(c), revised;
1.956–2(b), –2(e), revised, modifications to subpart
F treatment of aircraft and vessel leasing income
(REG–138355–07) 32,311
26 CFR 1.401(a)(9)–1, –6, amended; 1.403(b)–6,
amended; reasonable good faith interpretation of re-
quired minimum distribution rules by governmental plans
(REG–142040–07) 34,451
26 CFR 1.421–1, amended; 1.422–2, –5, amended; 1.423–1,
–2, revised; employee stock purchase plans under section
423 (REG–106251–08) 39,774
26 CFR 1.460–3 thru –6, amended; rules for home construc-
tion contracts (REG–120844–07) 39,770
26 CFR 1.642(c)–3, amended; 1.643(a)–5, amended; guid-
ance under sections 642 and 643 (income ordering rules)
(REG–101258–08) 28,111; correction (Ann 73) 33,391
26 CFR 1.956–1, amended; guidance under section 956 for
determining the basis of property acquired in certain non-
recognition transactions (REG–102122–08) 31,278
September 29, 2008viii2008–39 I.R.B.

INCOME TAX—Cont.
26 CFR 1.1301–1, amended; farmer and fisherman income
averaging (REG–161695–04) 37,699
26 CFR 1.6039–1, revised; 1.6039–2, added; infor-
mation reporting requirements under section 6039
(REG–103146–08) 37,701
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4,
amended; 1.6695–1, revised; 1.6695–2, amended;
1.6696–1, revised; 301.7701–15, amended; tax re-
turn preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32; corrections (Ann 75) 33,392
26 CFR 1.6081–2, –6, added; 54.6081–1, added; extension of
time for filing returns (REG–115457–08) 33,390
26 CFR 301.7216–3, amended; disclosure or use of informa-
tion by preparers of returns (REG–121698–08) 29,163
26 CFR 301.7508A–1, amended; postponement of certain
tax-related deadlines by reasonof Presidentially declared
disaster or terroristic or military actions (REG–142680–06)
35,565
Publications:
1141, General Rules and Specifications for Substitute Forms
W-2 and W-3, revised (RP 33) 28,93
1179, General Rules and Specifications for Substitute Forms
1096, 1098, 1099, 5498, W-2G, and 1042-S, update (RP
36) 33,340
1187, Specifications for Filing Form 1042-S, Foreign Per-
son’s U.S. Source Income Subject to Withholding, Elec-
tronically, revised (RP 44) 30,187
1239, Specifications for Filing Form 8027, Employer’s An-
nual Information Return of Tip Income and Allocated Tips,
Electronically (RP 34) 27,13
1516, Specifications for Filing Form 8596, Information Re-
turn for Federal Contracts,Electronically (RP 49) 34,423
4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), revised (RP 32) 28,82
Real Estate Mortgage Investment Conduit (REMIC), allocation
of income to foreign persons by certain entites (TD 9415) 36,
570
Reasonable good faith interpretation of required minimum dis-
tribution rules by governmental plans (REG–142040–07) 34,
451
Regulations:
26 CFR 1.41–0, –1, –6, –8, amended; 1.41–0T, –6T, –8T,
–9, –9T added; alternative simplified credit under section
41(c)(5) (TD 9401) 27,1
26 CFR 1.42–10, –12, amended; section 42 utility allowance
regulations update (TD 9420) 39,750
26 CFR 1.152–4, revised; 1.152–4T, removed; dependent
child of divorced or separated parents or parents who live
apart (TD 9408) 33,323
26 CFR 1.179B–1T, added; 602.101, amended; capital costs
incurred to comply with EPA sulfur regulations (TD 9404)
32,280
26 CFR 1.179C–1T, added; 602.101, amended; election to
expense certain refineries (TD 9412) 37,687
INCOME TAX—Cont.
26 CFR 1.195–1, revised; 1.195–1T, added; 1.248–1,
amended; 1.248–1T, added; 1.709–1, amended; 1.709–1T,
added; elections regarding start-up expenditures, cor-
poration organizational expenditures, and partnership
organizational expenses (TD 9411) 34,398
26 CFR 1.367(a)–2T, –4T, –5T, amended; 1.954–2, amended;
1.954–2T, added; 1.956–2, –2T, amended; modifications to
subpart F treatment of aircraft and vessel leasing income
(TD 9406) 32,287
26 CFR 1.468B–0, amended; 1.468B–6, added; 1.1031(k)–1,
amended; 1.7872–5, –16, added; escrow accounts, trusts,
and other funds used during deferred exchanges of like-kind
property (TD 9413) 34,404
26 CFR 1.664–1, amended; 602.101, amended; guidance un-
der section 664 regarding the effect of unrelated business
taxable income on charitable remainder trusts (TD 9403)
32,285
26 CFR 1.860A–0, –1, amended; 1.860A–1T, removed;
1.860G–3, amended; 1.860G–3T, removed; 1.863–0, –1,
amended; 1.863–1T, removed; 1.1441–0, –2, amended;
1.1441–2T, removed; REMIC residual interests–ac-
counting for REMIC net income (including any excess
inclusions) (foreign holders) (TD 9415) 36,570
26 CFR 1.881–5T, removed; correction to TD 9391 (Ann 74)
33,392
26 CFR 1.911–7, amended; 1.6081–1, –3, –5, amended;
1.6081–2T, –6T, revised; 1.6081–3T, –4T, –5T, –7T,
–10T, –11T, removed; 1.6081–4, –7, –10, –11, added;
25.6081–1, added; 25.6081–1T, removed; 26.6081–1,
added; 26.6081–1T, removed; 53.6081–1, added;
53.6081–1T, removed; 55.6081–1, added; 55.6081–1T,
removed; 156.6081–1, added; 156.6081–1T, removed;
157.6081–1, added; 157.6081–1T, removed; 301.6081–2,
added; 301.6081–2T, removed; extension of time for filing
returns (TD 9407) 33,330
26 CFR 1.956–1, –1T, amended; guidance under section 956
for determining the basis ofproperty acquired in certain
nonrecognition transactions (TD 9402) 31,254
26 CFR 1.1301–1, amended; 1.1301–1T, added; farmer and
fisherman income averaging (TD 9417) 37,693
26 CFR 301.6343–2, amended; 301.6343–2T, removed;
301.7425–3, amended; 301.7425–3T, removed; change to
office to which notices of nonjudicial sale and requests
for return of wrongfully levied property must be sent (TD
9410) 34,414
26 CFR 301.7216–3, amended; 301.7216–3T, added; disclo-
sure or use of information by preparers of returns (TD 9409)
29,118
Revocations, exempt organizations (Ann 62) 27,74; (Ann 66)
29,164;(Ann69)32,318; (Ann 76) 33,393;(Ann79)35,
568; (Ann 80) 37,706
Rules for certain long-term construction contracts
(REG–120844–07) 39,770
Smartcards, debit cards, etc., used to provide qualified trans-
portation fringes under section 132(f), delayed effective date
of Rev. Rul. 2006–57 (Notice 74) 38,718
2008–39 I.R.B.ixSeptember 29, 2008

INCOME TAX—Cont.
Standard Industry Fare Level (SIFL) formula (RR 48) 38,713
Stocks:
Auction rate preferred stock, regulated investment companies
RICs), debt instruments (Notice 55) 27,11
Information reporting requirements for statutory stock options
(REG–103146–08) 37,701
Subprime mortgage loans, modifications held by certain securi-
tization vehicles (RP 47) 31,272
Substitute forms:
W-2 and W-3, general rules and specifications (RP 33) 28,93
941 and Schedule B (Form 941), general rules and specifica-
tions (RP 32) 28,82
1096, 1098, 1099, 5498, W-2G, and 1042-S, rules and speci-
fications (RP 36) 33,340
Tax return preparer penalties under sections 6694 and 6695
(REG–129243–07) 27,32; corrections (Ann 75) 33,392
Treatment of aircraft and vessel leasing income (TD 9406) 32,
287; (REG–138355–07) 32,311
Trusts:
Charitable remainder trust, calculation of excise tax on unre-
lated business taxable income (UBTI) (TD 9403) 32,285
Ordering of distributions from charitable lead trusts
(REG–101258–08) 28,111; correction (Ann 73) 33,391
Private trust company (Notice 63) 31,261
U.S. territories, American Samoa, Guam, The Northern Mariana
Islands, Puerto Rico, U.S. Virgin Islands, source of income,
filing requirements; correction to TD 9391 (Ann 74) 33,392
Valuation safe harbor under section 475 (Notice 71) 35,462
September 29, 2008x2008–39 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