us-irs-revenue-rulings-irb-2010-45-pdf•Internal Revenue Bulletin 2010-45 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 2010-45 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-2010-45-pdfInternal Revenue Bulletin 2010-45 (PDF rendition): IRS Revenue RulingsGuidance
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Bulletin No. 201 0-45 November 8, 2010 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. SPECIAL ANNOUNCEMENT Announcement 2010–81, page 638. This announcement delays, until further notice, the enrollment renewal period under section 10.6(d) of the regulations gov- erning practice before the IRS, which are reprinted as Treasury Department Circular No. 230, 31 CFR part 10 (Circular 230), for enrolled agents with social security numbers or tax identifi- cation numbers ending in 4, 5, or 6. INCOME TAX T.D. 9498, page 605. REG–144762–09, page 637. Temporary and proposed regulations under section 108 of the Code provide rules regarding partnerships and S corporations. Section 108(i) allows a taxpayer to defer discharge of indebt- edness income (and in certain cases, deductions for original is- sue discount) arising from a reacquisition of an applicable debt instrument that occurs in 2009 or 2010 for a four or five tax- able-year period (unless an acceleration event occurs earlier). Once the deferral period ends, taxpayers take into account the deferred income and deductions ratably over a five taxable-year period. T.D. 9499, page 622. Final regulations under section 6411 of the Code amend ex- isting regulations relating to the computation and allowance of the tentative carryback adjustments. REG–119921–09, page 626. Proposed regulations under section 7701 of the Code provide whether or not a series of a domestic series LLC, a cell of a domestic cell company, or a foreign series or cell that con- ducts an insurance business is a juridical person for local law purposes, for Federal tax purposes it is treated as an entity formed under local law. Classification of a series or cell that is treated as a separate entity for Federal tax purposes generally is determined under the same rules that govern the classifica- tion of other types of separate entities. EMPLOYEE PLANS Rev. Rul. 2010–27, page 620. This ruling provides guidance, in the form of examples, on what constitutes an unforeseeable emergency distribution under section 457(b) of the Code and regulations section 1.457–6(c). The ruling also applies the same standards to distributions from a nonqualified deferred compensation plan subject to section 409A. EXEMPT ORGANIZATIONS Announcement 2010–80, page 638. The IRS has revoked its determination that the Jeffrey Reiken Johnson Clergy Public Ministry Association, Inc., a Church, of San Francisco, CA; Life Time Transition, Inc., of Robbinsdale, MN; Minnesota StandDown, Inc., of Minneapolis, MN; Ohio Nar- cotic Officers Association of Warren, OH; Owls Nest 1424, Inc., of St. Mary’s, WV; and Task of Rome GA, Inc., of Rome, GA, qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Code. (Continued on the next page) Finding Lists begin on page ii. ADMINISTRATIVE Announcement 2010–81, page 638. This announcement delays, until further notice, the enrollment renewal period under section 10.6(d) of the regulations gov- erning practice before the IRS, which are reprinted as Treasury Department Circular No. 230, 31 CFR part 10 (Circular 230), for enrolled agents with social security numbers or tax identifi- cation numbers ending in 4, 5, or 6. November 8, 20102010–45 I.R.B. The IRS Mission Provide Americ a’s taxpayers top-quality service by helping them understa nd and meet their tax responsibilities and en- force the law wi th 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. 2010–45 I.R.B.November 8, 2010 November 8, 20102010–45 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 108.— Income From Discharge of I ndebtedness 26 CFR 1.108(i)–2T: Application of section 108(k) to partnerships and S corporations (temporary). T.D. 9498 DEPARTMENT O FTHE TREASURY Internal Re venue Service 26 CFR Parts 1and602 Application of Section 108(i) to Partnerships and S Corporations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: T emporary regulations. SUMMARY: This document contains temporary regulationsrelatingtotheap- plication of section 108(i) of the Internal Revenue Code (Code) to partnerships and S corporations and provides rules regarding the deferral of discharge of indebtedness income and original issue discount deductions by a partnership or an S corporation with respect to reacquisi- tions of applicable debt instruments after December 31, 2008, and before January 1, 2011. The regulations affect partnerships and S corporations with respect to reacqui- sitions of applicable debt instruments and their partners and shareholders. The text of these temporary regulations also serves as the text of the proposed regulations (REG–144762–09) set forth in this issue of the Bulletin. DATES:Effective Date:These regulations are effective on August 13, 2010. Applicability Date:For dates of appli- cability, see §1.108(i)–0T(b). FOR F URTHER INFORMATION CON TACT: Megan A. Stoner or Jos eph R. Worst, Office of Associate Chi ef Counsel (Passthroughs and Special Ind ustries), (202) 622–3070 (not a toll-free num ber). SUPPLEMENTAR Y INFORMATION: Paperwork Red uction Act The collectio n of information con- tained in thes e temporary regulations has been revie wed and approved by the Office of Man agement and Budget in accordance w ith the Paperwork Reduc- tion Act of 19 95 (44 U.S.C. 3507) under control numb er 1545–2147. The collec- tion of infor mation in these temporary regulation s is in §1.108(i)–2T(b)(3)(iv). Under §1.10 8(i)–2T(b)(3)(iv), a partner in a partner ship that makes an election under secti on 108(i) is required to provide certain in formation to the partnership so that the pa rtnership can correctly deter- mine the pa rtner’s deferred section 752 amount wit h respect to an applicable debt instrume nt. An agency m ay not conduct or sponsor, and a pers on is not required to respond to, a coll ection of information unless the collecti on of information displays a valid control n umber assigned by the Office of Managem ent and Budget. Books or r ecords relating to a collection of infor mation must be retained as long as their contents may become material in the admi nistration of any internal revenue law. Gen erally, tax returns and return in- formati on are confidential, as required by 26 U.S. C. 6103. Backgr ound Section 1231 of the American Recovery and Rei nvestment Tax Act of 2009, Pub. L. 111– 5 (123 Stat. 338 (2009)), added sectio n 108(i) to the Code. Section 108(i) genera lly provides for an elective defer- ral of d ischarge of indebtedness income (COD i ncome) realized by a taxpayer from a reac quisition of an applicable debt in- strum ent that occurs after December 31, 2008, and before January 1, 2011. COD incom e deferred under section 108(i) is in- clud ed in gross income ratably over a five taxa ble-year period (inclusion period) be- ginn ing with the taxpayer’s fourth or fifth taxa ble year following the taxable year of the r eacquisition. In circumstances where ade bt instrument is issued (or treated as issued) as par t of the reacquisition, some or all of any or iginal issue discount (OID) expense accru ing from the debt instrument in a taxable y ear prior to the first taxable year of the in clusion period may also be requiredtob e deferred (deferred OID de- duction). Th e aggregate amount of de- ferred OID d eductions is limited to the amount of CO D income deferred with re- spect to the applicable debt instrument for which the se ction 108(i) election is made and the aggr egate amount of deferred OID deduction s is taken into account ratably over the in clusion period. In general, COD income def erred under section 108(i) and related de ferred OID deductions with re- spect to a n applicable debt instrument that have not b een previously taken into ac- count (de ferred items) are accelerated and taken int o account in the taxable year in whichana cceleration event occurs. A sec- tion 108 (i) election is irrevocable and, if a sectio n 108(i) election is made, sections 108(a)( 1)(A), (B), (C), and (D) do not ap- plytoth e COD income that is deferred un- der sec tion 108(i). Section 108(i)(7) au- thoriz es the Secretary to prescribe regula- tions a s may be necessary or appropriate for pur poses of applying section 108(i). After s ection 108(i) was enacted, the IRS and the Treasury Department re- ceived a number of comments regarding the ap plication of section 108(i) to part- nersh ips and S corporations. In August 2009, the IRS and the Treasury Depart- ment i ssued Rev. Proc. 2009–37, 2009–36 I.R.B . 309, which provides election pro- cedu res for taxpayers (including part- ners hips and S corporations) and other guid ance under section 108(i). With re- spec t to COD income realized by a part- ners hip or S corporation, the election is made at the entity level. Partnerships and S corporations that make an election und er section 108(i) (electing partnership or e lecting S corporation) must follow the election procedures and reporting req uirements of Rev. Proc. 2009–37. The se temporary regulations address is- sue s relating to partnerships and S corpo- ra tions with respect to section 108(i), in- cl uding issues raised by commenters. 2010–45 I.R.B.605November 8, 2010 Explanation of Provisions A.Applicable Debt Instrument Section 108(i)(3) defines an “applicable debt instrument” as any debt instrument is- sued by a C corporation or by any other person in connection with the conduct of a trade or business by that person. The de- termination of whether a debt instrument is an applicable debt instrument within the meaning of section 108(i)(3) is based on all the facts and circumstances. Section 1.108(i)–2T(d)(1) provides five safe harbors under which a debt instrument issued by a partnership or an S corporation is deemed to be issued in connection with the partnership’s or S corporation’s trade or business for purposes of section 108(i). Thus, a debt instrument issued by a part- nership or an S corporation qualifies as an applicable debt instrument for purposes of section 108(i) if the electing partnership or electing S corporation can establish that it meets the requirements of one of the safe harbors. Some commenters asked whether a debt instrument issued by a non-C corporation taxpayer to acquire an interest in a part- nership or S corporation that is conduct- ing a trade or business qualifies as an ap- plicable debt instrument, where the issuing taxpayer does not conduct a trade or busi- ness. While a debt instrument generally does not qualify as an applicable debt in- strument unless the issuing taxpayer con- ducts a trade or business, one of the safe harbors under §1.108(i)–2T(d)(1) provides that if an electing partnership or an electing S corporation can establish that at least 95 percent of the interest paid or accrued on a debt instrument issued by a partnership or S corporation was allocated to a trade or business expenditure under §1.163–8T for the taxable year of issuance, then the debt instrument qualifies as an applicable debt instrument for purposes of section 108(i). Commenters also asked how a debt instrument issued by a disregarded entity should be treated under section 108(i). Generally, under §301.7701–2 of the Pro- cedure and Administration Regulations, if an entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner. Thus, for purposes of determin- ing whether a debt instrument qualifies as an applicable debt instrument under section 108(i), a debt instrument issued by a disregarded entity is treated as a debt instrument issued by the person treated as owning the assets of the disregarded entity for federal income tax purposes. B.Allocation of COD Income Section 108(i)(6) requires that a part- nership allocate the COD income that is deferred under section 108(i) to the partners that were partners immediately prior to the transaction giving rise to the COD income in the same manner the in- come would be allocated without regard to section 108(i). In addition, section 108(i)(5)(B)(iii) provides that the section 108(i) election is to be made by the part- nership and not its partners separately. The IRS and the Treasury Department recognize that there are instances in which the inclusion of COD income would be beneficial to some partners, but not to others. As a result, the temporary regula- tions, while not changing the general rules under section 704, permit a partnership to determine the portion of each partner’s allocable share of COD income resulting from a reacquisition ofan applicable debt instrument that is deferred under section 108(i) (deferred amount) and the portion that is not deferred (included amount). The temporary regulations therefore re- quire that the electing partnership first allocate all of the COD income with re- spect to an applicable debt instrument to its partners that are partners in the partner- ship immediately before the reacquisition in the manner in which the income would be included in the distributive shares of the partners under section 704 and the regulations under section 704, including §1.704–1(b)(2)(iii), without regard to sec- tion 108(i). The partnership must then determine the portion of each such part- ner’s allocable share of the COD income from the applicable debt instrument that is the deferred amount, and the portion that is the included amount and therefore included in the partner’s distributive share of partnership income for the taxable year of the partnership in which the reacquisi- tion occurs. With respect to S corporations, section 108(i) requires that the election to defer COD income be made at the corporate level. Section 108(i) does not, however, imposeaspecificallocationrulewithre- spect to the COD income realized by an electing S corporation from the reacquisi- tion of an applicable debt instrument as it does for electing partnerships. The IRS and the Treasury Department believe that a rule similar to the partnership alloca- tion rule under section 108(i)(6) should apply to electing S corporations. There- fore, §1.108(i)–2T(c)(1) requires that the deferred COD income of an electing S cor- poration be sharedpro rata, on the basis of stock ownership, among those sharehold- ers that hold stock in the electing S corpo- ration immediately prior to the transaction giving rise to the COD income. C.Basis Adjustments Commenters asked whether a partner is required to adjust the basis in its partner- ship interest under section 705 in the year of the reacquisition to account for the part- ner’s share of deferred COD income, or whether such adjustments occur when the deferred items are recognized. In general, a partner’s basis in its partnership inter- est is increased under section 705(a) to ac- count for the partner’s share of partnership COD income in the taxable year that the COD income is realized by the partnership. If a partnership elects to defer its COD income under section 108(i), however, a partner’s basis in its partnership interest is not increased under section 705(a) to ac- count for the partner’s deferred amount in the taxable year that the COD income is realized, but rather isadjusted in the tax- able year that the partner recognizes the deferred amount. Because a partner does not adjust its basis for deferred COD in- come in the taxable year of a reacquisi- tion, a partner could recognize gain under section 731(a) in that taxable year if the decrease in the partner’s share of partner- ship liabilities exceeds the partner’s basis in its partnership interest. Congress antic- ipated this result and created a special de- ferral rule in section 108(i)(6). Section 108(i)(6) provides that any de- crease in a partner’s share of partnership liabilities as a result of the discharge shall not be taken into account for purposes of section 752 at the time of the discharge to the extent it would cause the partner to rec- ognize gain under section 731. If a partner were to increase the basis in its partnership interest to account for the deferred COD income at the time of the reacquisition, the November 8, 20106062010–45 I.R.B. special deferral rule in section 108(i)(6) would not be needed. Therefore, con- sistent with the rule in section 108(i)(6), §1.108(i)–2T(b)(2) provides that a part- ner’s basis in its partnership interest is not adjusted under section 705(a) to ac- count for the partner’s share of the part- nership’s deferred items at the time of the reacquisition, but is adjusted when the de- ferred items are recognized, either during the recognition period or as a result of an acceleration event. When the partner’s share of the partnership’s deferred items is recognized due to an acceleration event, the partner must adjust the basis in its part- nership interest under section 705 immedi- ately prior to the acceleration event to ac- count for the deferred items that are recog- nized. Like the basis adjustment rules for part- ners, an S corporation shareholder’s stock basis is not adjusted under section 1367 to account for the shareholder’s share of the S corporation’s deferred items at the time of the reacquisition, but is adjusted when the deferred items are recognized. More- over, an S corporation’s accumulated ad- justments account (AAA) is not adjusted to account for the deferred items at the time of the reacquisition, but is adjusted in the taxable year in which the deferred items are recognized. D.Deferred Section 752 Amount Rules Section 2.09 of Rev. Proc. 2009–37 provides general guidelines for a partner- ship to use in determining a partner’s de- ferred section 752 amount (that is, a de- crease in a partner’s share of a partner- ship liability under section 752(b) result- ing from the reacquisition of an applica- ble debt instrument that is not treated as a current distribution of money to the part- ner under section 752(b) by reason of sec- tion 108(i)(6)). The temporary regulations include the same general rules that are set forth in Rev. Proc. 2009–37 and pro- vide additional computational rules for de- termining a partner’s deferred section 752 amount. In computing a partner’s de- ferred section 752 amount, under §1.108(i)–2T(b)(3)(ii), the electing part- nership must determine the amount of gain the partner would recognize in a taxable year of a reacquisition under section 731 as a result of the reacquisition absent the deferral provided in the second sentence of section 108(i)(6). In making this de- termination, the basis ordering rules in section 705(a) apply and the amount of any deemed distribution of money under section 752(b), resulting from the reac- quisition of an applicable debt instrument, that is treated as an advance or drawing under §1.731–1(a)(1)(ii) is determined as if no COD income resulting from the reac- quisition is deferred under section 108(i). See Rev. Rul. 94–4, 1994–1 C.B. 195, and Rev. Rul. 92–97, 1992–2 C.B. 124, for rules regarding when a deemed dis- tribution of money under section 752(b) resulting from a cancellation of debt is treated as an advance or drawing under §1.731–1(a)(1)(ii). If the electing partnership determines that a partner would recognize gain under section 731 absent the deferral provided in the second sentence of section 108(i)(6) and the partnership makes a section 108(i) election to defer COD income from only one applicable debt instrument during the taxable year, then any deferred section 752 amount of the partner relates to that appli- cable debt instrument. If the partnership makes a section 108(i) election to defer COD income from more than one applica- ble debt instrument during the taxable year, §1.108(i)–2T(b)(3)(iii) provides a rule for determining the portion of the partner’s de- ferred section 752 amount that relates to each such applicable debt instrument. Section 4.12(4) of Rev. Proc. 2009–37 provides that the deferred section 752 amount for partners in a partnership mak- ing a section 108(i) election is calculated for the electing partnership’s direct part- ners. In circumstances where a partnership (upper-tier partnership) that is a direct or indirect partner of an electing partnership has a deferred section 752 amount with respect to an applicable debt instrument of the electing partnership, the upper-tier partnership does not need to calculate the deferred section 752 amount of its direct partners in the same manner that the electing partnership does. Instead, the upper-tier partnership that has a de- ferred section 752 amount shall allocate such amount among its direct partners that have a deferred amount with respect to the applicable debt instrument in proportion to the partners’ respective shares of the upper-tier partnership’s deferred amount. Section 1.108(i)–2T(b)(4)(ii) provides that a partner’s share of an upper-tier partner- ship’s deferred section 752 amount may not exceed the partner’s deferred amount with respect to the applicable debt instru- ment to which the deferred section 752 amount relates. The temporary regulations contain examples to illustrate how a partner’s deferred section 752 amount should be computed. One example illustrates order- ing rules in computing apartner’s deferred section 752 amount if the partnership has both gross income and separately stated losses in the year of a reacquisition. Section 1.704–1(d)(2) provides rules for computing the adjusted basis of a partner’s interest for purposes of determining the extent to which a partner’s distributive share of partnership loss is allowed as a deduction. The example illustrates how the deferred section752 computational rule interacts with the rules under section 705(a) and §1.704–1(d)(2). E.Capital Accounts Commenters requested that guid- ance address how a partnership’s cap- ital account should be adjusted under §1.704–1(b)(2)(iv) to account for a part- ner’s share of the partnership’s deferred items. The IRS and the Treasury De- partment believe that, for capital account maintenance purposes, a partnership should treat deferred items as if no election under section 108(i) has been made. Ac- cordingly, §1.108(i)–2T(b)(2)(ii) provides that a partner’s capital account is adjusted under §1.704–1(b)(2)(iv) for the partner’s share of the partnership’s deferred items as if no election undersection 108(i) were made. F.Section 465(e) Recapture Commenters requested that guidance be provided under section 465 to prevent an election under section 108(i) from trig- gering recapture of losses under section 465(e). Under section 465(e)(1)(A), if at the close of any taxable year a taxpayer’s amount at risk in an activity is below zero, the taxpayer generally is required to in- clude the amount of the excess in gross income. The amount required to be in- cluded in gross income, however, is lim- ited to losses allowed in previous years that have not already been recaptured. Section 465(e)(1)(B) treats the recaptured amount 2010–45 I.R.B.607November 8, 2010 as a deduction attributable to the activity in the following taxable year. Although the second sentence of sec- tion 108(i)(6) provides for deferral of a deemed distribution under section 752 to the extent that it triggers gain to a partner under section 731, the statute does not pro- vide a similar rule that defers any amount at risk in an activity required to be recap- tured under section 465(e). Thus, if the discharged debt for which a section 108(i) election is made has been included in a partner’samountatriskinanactivityand a portion of that debt is discharged, there could be recapture under section 465(e) if the amount discharged exceeds the part- ner’s amount at risk in the activity. The same issue may arise with respect to share- holders of an S corporation. The IRS and the Treasury Department believe that the decrease in a partner’s or shareholder’s amount at risk in an activ- ity that results from the discharge of a debt for which a section 108(i) election is made by the partnership or S corpora- tion, as the case may be, should also be deferred to prevent the partner or share- holder from recognizing more recapture income under section 465(e) than the part- ner or shareholder would recognize if the section 108(i) election had not been made. Accordingly, §1.108(i)–2T(d)(3) provides that a decrease in a partner’s or share- holder’s amount at risk in an activity that results from a discharge of a debt for which a section 108(i) election is made is not taken into account in determining the part- ner’s or shareholder’s amount at risk in that activity under section 465 in the taxable year of the reacquisition. The decrease is taken into account at the same time and to the extent remaining in the same amount as the partner or shareholder recognizes the deferred COD income. G.Deferral of Original Issue Discount Under section 108(i)(2), if a debt instru- ment is issued (or treated as issued under section 108(e)(4)) in a debt-for-debt ex- change described in section 108(i)(2)(A) or a deemed debt-for-debt exchange de- scribed in §1.108(i)–3T(a) and there is any OID on the debt instrument, the issuer of the new debt instrument must defer some or all of the deductions for such OID un- der section 108(i). The temporary regula- tions provide that the aggregate amount of deferred OID is allowable as a deduction to the issuer of the debt instrument ratably over the inclusion period, or earlier upon the occurrence of an acceleration event. The OID deferral rule in section 108(i)(2) applies to an issuing entity. An issuing entity includes an electing part- nershiporanelectingScorporationthat issues a debt instrument in a debt-for-debt exchange or a deemed debt-for-debt ex- change and a partnership or an S corpora- tion that is related (within the meaning of section 108(i)(5)(A))to an electing entity (an entity that is a taxpayer that makes an election under section 108(i)) and that issues a debt instrument in a debt-for-debt exchange or a deemed debt-for-debt ex- change. The issuing entity determines whether any OID that accrues on a debt instrument in a taxable year during the deferral period is required to be deferred. For example, an electing partnership that issues a debt in- strument with OID in a debt-for-debt ex- change described in section 108(i)(2)(A) in which the partnership elects to defer $100 of COD income must defer the first $100 of OID that accrues on such debt in- strument during the deferral period, even if a partner’s share of the partnership’s de- ferred OID exceeds the partner’s deferred amount with respect to the applicable debt instrument. The temporary regulations provide rules relating to basis adjustments and adjustments to AAA for deferred OID deductions that apply to the issuing entity. H.Acceleration Events Section 108(i)(5)(D)(i) provides that deferred items must be taken into account upon the occurrence of certain enumer- ated events (acceleration events) with respect to the electing partnership or elect- ing S corporation. These events include the liquidation or sale of substantially all of the assets of the electing partnership or electing S corporation (including in a Title 11 or similar case), the cessation of business, or similar circumstances. If any of these events occurs, all of the deferred items of the electing partnership or electing S corporation are accelerated and must be taken into account by the partners and/or shareholders, as the case may be, in the taxable year of the electing partnership or electing S corporation in which such event occurs. Section 108(i)(5)(D)(ii) contains ad- ditional acceleration events that apply to the partners and/or shareholders of an electing partnership or an electing S corporation, as the case may be, and includes the sale, exchange, or redemption of an interest in the electing partnership or electing S corporation by the holder of such interest. If any of these events occurs, the deferred items allocated to the partner or S corporation shareholder that sells, exchanges, or redeems its interest in the electing partnership or S corporation, as the case may be, are accelerated and must be taken into account by such partner or shareholder in the taxable year in which the event occurs. When an acceleration event occurs under section 108(i)(5)(D)(ii) with respect to a particular partner or an S corporation shareholder, it does not affect the continued deferral of another partner’s or S corporation shareholder’s share of the partnership’s or S corporation’s deferred items. Section 108(i)(7) authorizes the Secre- tary to prescribe such regulations as may be necessary or appropriate for purposes of applying section 108(i), including rules extending the acceleration provisions to other circumstances where appropriate. Therefore, the temporary regulations pro- vide additional rules (and exceptions) that apply to the acceleration of deferred items under section 108(i)(5)(D). The temporary regulations provide that the deferred items allocated to the direct and indirect partners of the electing part- nership, which includes a shareholder of an S corporation that is a direct/indirect partner of an electing partnership (S cor- poration partner), and to the shareholder of an electing S corporation are accelerated if the electing partnership or the electing S corporation (i) liquidates, (ii) sells, ex- changes, transfers (including contributions and distributions), or gifts substantially all of its assets, (iii) ceases doing business, or (iv) files a petition in a Title 11 or simi- lar case. In addition, the deferred items of the shareholders of an electing S corpora- tion or an S corporation partner are acceler- ated in the taxable year in which the S cor- poration’s or S corporation partner’s elec- tion under section 1362(a) is terminated. Moreover, the acceleration rules and ex- ceptions that apply to an electing corpo- November 8, 20106082010–45 I.R.B. ration under §1.108(i)–1T(b) also apply to a C corporation partner in the same man- ner as if the C corporation partner were an electing corporation. The temporary regulations specify that substantially all of the partnership’s or S corporation’s assets means assets representing at least 90 percent of the fair market value of the partnership’s or S corporation’s net assets and at least 70 percent of the fair market value of the partnership’s or S corporation’s gross assets, as measured immediately prior to the sale, exchange, transfer, or gift in question. If an electing partnership holds only an interest in another partnership (lower-tier partnership) and the lower-tier partnership sells its assets, the sale by the lower-tier partnership would not constitute a sale, exchange, transfer, or gift of the electing partnership’s assets for purposes of applying the acceleration rules. However, the IRS and the Treasury Department believe that if an electing partnership, for example, transfers property to a partnership (transferee partnership) in a transaction governed all or in part by section 721 and the transferee partnership subsequently sells substantially all of its assets, it is appropriate to treat the electing partnership as having sold, exchanged, transferred, or gifted its entire interest in that transferee partnership for purposes of applying the acceleration rules. If, in that situation, the electing partnership’s only asset is its interest in the transferee partnership, the electing partnership will be treated as selling substantially all of its assets and therefore, its deferred items would be accelerated. The principles of the substantially all rules apply to lower-tier partnerships of the electing partnership that receive assets of the electing partnership from a transferee partnership or another lower-tier partnership of the electing partnership in a transaction governed all or in part by section 721. In addition to the electing partner- ship-level or electing Scorporation-level events that triggeracceleration under sec- tion 108(i), certain events that occur at the partner or shareholder level also trigger acceleration of that partner’s or share- holder’s share of the electing partnership’s or electing S corporation’s deferred items. For instance, the deferred items allocated to a direct or indirect partner of an elect- ing partnership are accelerated if: (1) the partner dies or liquidates, (2) the partner sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions and dis- tributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of a separate interest, (3) the part- ner’s separate interest is redeemed, or (4) the partner abandons its separate interest. For this purpose, a distribution by a part- nership to a partner of property other than a separate interest, in a transaction that does not constitute a complete redemption of the partner’s interest, does not constitute an acceleration event, even if, for example, the distribution causes gain to be recog- nized to the partner under section 731(a). Moreover, a shareholder’s share of an electing S corporation’s deferred items is accelerated if the shareholder: (1) dies, (2) sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions and dis- tributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of its interest in the electing S corporation, or (3) abandons its interest in the electing S corporation. For purposes of the temporary regulations, a “separate interest” is defined as any direct interest in an electing partnership or in a partnership or S corporation that is a direct or indirect partner of an electing partnership. If a partner or shareholder sells, ex- changes, transfers, or gifts only a portion of its interest in a partnership or an S cor- poration, only a proportionate amount of the partner’s or shareholder’s share of the partnership’s or S corporation’s deferred items is accelerated. For example, if a part- ner of an electing partnership with a $100 deferred amount from the electing partner- ship sells half of its interest in the elect- ing partnership, $50 of the partner’s $100 share of the partnership’s deferred amount is accelerated. The temporary regulations address when a partner’s separate interest is re- deemed for purposes of section 108(i). Commenters suggested that a non-liqui- dating distribution of cash or other prop- erty by a partnership to a partner should not be treated as a redemption under sec- tion 108(i). The IRS and the Treasury Department agree with the commenters. Difficulties in defining a redemption of a partnership interest for purposes of section 108(i) arise if non-liquidating distributions are treated as redemptions under section 108(i). The IRS and the Treasury Depart- ment believe that, for purposes of section 108(i), redemptions should be limited to cases where a partner’s interest in the part- nership is completely liquidated. There- fore, the temporary regulations provide that a redemption of a partner’s separate interest occurs when a partner receives a distribution of cash and/or property in complete liquidation of such partner’s separate interest. The IRS and the Treasury Department believe that certain events should not cause a partner’s or shareholder’s share of the partnership’s or S corporation’s deferred items to be accelerated. For instance, if an electing partnershipcontributes its assets to another partnership (transferee partner- ship) in a transaction governed by section 721 (generally a non-recognition event to the electing partnership and the transferee partnership), the deferred items of an elect- ing partnership can continue to be allo- cated to its partners under principles simi- lar to section 704(c). Therefore, transac- tions wholly governed by section 721 in which a partner’s or shareholder’s share of the partnership’s or S corporation’s de- ferred items can continue to be allocated to that partner or shareholder are generally not acceleration events for purposes of sec- tion 108(i). These section 721 non-accel- eration events include contributions by an electing partnership or an electing S cor- poration, contributions of an entire sep- arate interest by direct or indirect part- ners of an electing partnership, and sec- tion 708(b)(2)(A) mergers or consolida- tions of an electing partnership or a part- nership that is a direct or indirect partner of an electing partnership. In any of the events listed above, the general acceleration rules apply to any part of the transaction to which section 721(a) does not apply. For example, if an elect- ing partnership merges with another part- nership and one of the partners of the elect- ing partnership elects to apply the partner buy-out rule of §1.708–1(c)(4), such part- ner’s share of the electing partnership’s de- ferred items is accelerated because such partner is treated as selling its interest in the electing partnership immediately be- fore the merger. The other partners’ shares of deferred items of the electing partner- 2010–45 I.R.B.609November 8, 2010 ship are not accelerated as a result of the merger. In addition to the section 721 non-ac- celeration events, like-kind exchanges of property by an electing partnership or an electing S corporation pursuant to sec- tion 1031(a) are generally not acceleration events. As in a transaction governed by section 721, a transaction governed by sec- tion 1031(a) is generally a non-recognition event. The electing partnership or electing S corporation that transfers property in the like-kind exchange can continue to allo- cate the partners’ or shareholders’ shares of the partnership’s or S corporation’s deferred items as if no exchange occurred. To the extent money or property which does not meet the requirements of section 1031(a) (boot) is received in the exchange, however, a portion of the transferred property will be treated as sold. Under §1.108(i)–2T(b)(6)(iii)(B) and §1.108(i)–2T(c)(3)(iii)(B), the portion of the transferred property that is treated assoldisbasedontheratioofthe boot to the total consideration received in the exchange. For example, if an electing partnershipexchanges property with a value of $100 and a basis of $30 for $80 of like-kind property and $20 of non-like kind property, the electing partnership is treated as if it sold 20 percent of the property transferred in the exchange. In such a case, if the portion sold constitutes substantially all of the electing partnership’s assets, the electing partnership’s deferred items would be accelerated under §1.108(i)–2T(b)(6)(i)(A)(2). In addition to the section 721 and sec- tion 1031 non-acceleration events, a tech- nical termination of an electing partnership or a partnership that is a direct or indirect partnerofanelecting partnership under section 708(b)(1)(B) is not an acceleration event for purposes of section 108(i). Sec- tion 708(b)(1)(B) provides that a partner- ship is considered as terminated if within a twelve-month period there is a sale or exchange of 50 percent or more of the to- tal interest in partnership capital and prof- its. Under §1.708–1(b)(4), the terminated partnership is deemed to contribute its as- sets and liabilities to a new partnership in exchange for an interest in the new part- nership and, immediately thereafter, the terminated partnership is deemed to dis- tribute interests in the new partnership to its partners in liquidation of their inter- ests. As in a transaction governed by sec- tion 721, the deferred items of the termi- nated partnership’s partners can continue to be allocated to those partners by the new partnership. The terminated partnership’s business continues in the new partnership and the non-selling partners of the termi- nated partnership remain partners in the new partnership. The terminated partner- ship’s section 108(i) election remains in ef- fect for the new partnership. Therefore, a technical termination of a partnership un- der section 708(b)(1)(B) is not an acceler- ation event for purposes of section 108(i). The transfer that causes a technical termi- nation, however, may be an acceleration event for the transferring partner. In addition to the section 721, section 1031, and section 708(b)(1)(B) non-ac- celeration events, certain distributions of separate interests by a partnership (up- per-tier partnership) that is a direct or indirect partner of an electing partnership are not acceleration events for purposes of section 108(i). If an upper-tier partner- ship distributes its entire separate interest (distributed separate interest) to one or more of its partners (distributee partners) that have a share of the electing part- nership’s deferred items from upper-tier partnership’s distributed separate interest, the partnership, the interest in which was distributed, can continue to allocate the deferred items of any distributee partner with respect to the distributed separate in- terest. As a result, the distributee partner’s share of the electing partnership’s deferred items associated with the distributed sep- arate interest are not accelerated, even if such distribution is in complete liquidation of that partner’s interest in the upper-tier partnership. However, because the up- per-tier partnership no longer holds the separate interest, the upper-tier partner- ship’s share of the electing partnership’s deferred items associated with that sep- arate interest will be accelerated for the non-distributee partners. Further, if the distributee’s partnership interest is re- deemed by the upper-tier partnership, any other share of an electing partnership’s de- ferred items associated with the redeemed separate interest in the upper-tier partner- ship will be accelerated and must be taken into account by the distributee partner. Certain non-acceleration events that applytoanelectingcorporationalsoapply to C corporation partners. The exception in §1.108(i)–1T(b)(2)(ii)(B) relating to transactions governed by section 381 ap- plies to C corporation partners. Section 1.108(i)–2T(b)(6)(iii)(G) contains special rules for certain intercompany transfers made by C corporation partners. The above acceleration events only ap- ply to deferred items allocated to direct or indirect partners of an electing partner- ship or to the shareholders of an electing S corporation. A direct or indirect part- ner’s share of a related partnership’s de- ferred OID deduction or a shareholder’s share of a related S corporation’s deferred OID deduction is only accelerated to the extent the deferred COD income attribut- able to the related partnership’s or related S corporation’s deferred OID deduction is taken into account by the electing entity or its owners. I.Foreign Partners of Electing Partnership Section 1446 and the regulations there- under provide, in general, that if a domes- tic or foreign partnership has effectively connected taxable income allocable under section 704 to a foreign partner, then the partnership must withhold tax under sec- tion 1446 (section 1446 tax) at the time and in the manner prescribed in §§1.1446–1 through 1.1446–6. Section 1.1446–5 pro- vides rules under section 1446 for tiered- partnership structures. These regulations provide a cross reference to the regulations under section 1446 to signal to partner- ships, including tiered partnerships, that they may have an obligation to pay a sec- tion 1446 tax when income deferred under section 108(i) is recognized (either ratably over the inclusion period or as a result of an acceleration event). J.Effective Date These regulations apply to reacquisi- tions of applicable debt instruments in taxable years ending after December 31, 2008. Availability of IRS documents The IRS revenue procedure cited in this preamble is published in the Inter- nal Revenue Bulletin and is available at: http://www.IRS.gov. November 8, 20106102010–45 I.R.B. 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. For applicability of the Regulatory Flexibility Act (5 U.S.C. chap- ter 6), refer to the Special Analyses section of the preamble to the cross-reference no- tice of proposed rulemaking published in this issue of the Bulletin. Pursuant to sec- tion 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Ad- ministration for comment on its impact on small business. Section 108(i) applies to the reacqui- sition of an applicable debt instrument during the brief election period, January 1, 2009 through December 31, 2010. These temporary regulations provide necessary guidance regarding the application of this new section 108(i) in order for partner- ships and S corporations to timely file their tax returns. For this reason, it has been determined pursuant to 5 U.S.C. 553(b)(3)(B), that prior notice and public procedure are impracticable and contrary to the public interest. For the same rea- son, it has been determined pursuant to 5 U.S.C. 553(d)(3) that good cause exists for not delaying the effective date of these temporary regulations. Drafting Information The principal authors of these reg- ulations are Megan A. Stoner and Joseph R. Worst of the Office of the Associate Chief Counsel (Passthroughs and Special Industries).However, other personnel from the IRS and the Treasury Department participated in their development. ***** Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.108(i)–2T also issued under 26 U.S.C. 108(i)(7). * * * Par. 2. Section 1.108(i)–2T is added to read as follows: §1.108(i)–2T Application of section 108(i) to partnerships and S corporations (temporary). (a)Overview. Under section 108(i), a partnership or an S corporation may elect to defer COD income arising in connec- tion with a reacquisition of an applica- ble debt instrument for the deferral pe- riod. COD income deferred under sec- tion 108(i) is included in gross income ratably over the inclusion period, or ear- lier upon the occurrence of any acceler- ation event described in paragraph (b)(6) or (c)(3) of this section. If a debt instru- ment is issued (or treated as issued under section 108(e)(4)) ina debt-for-debt ex- change described in section 108(i)(2)(A) or a deemed debt-for-debt exchange de- scribed in §1.108(i)–3T(a), some or all of the deductions for OID with respect to such debt instrument must be deferred dur- ing the deferral period. The aggregate amount of OID deductions deferred during the deferral period is generally allowed as a deduction ratably over the inclusion pe- riod, or earlier upon the occurrence of any acceleration event described in paragraph (b)(6) or (c)(3) of this section. Paragraph (b) of this section provides rules that apply to partnerships. Paragraph (c) of this sec- tion provides rules that apply to S corpo- rations. Paragraph (d) of this section pro- vides general rules that apply to partner- ships and S corporations. Paragraph (e) of this section provides election procedures and reporting requirements. Paragraph (f) of this section contains the effective/appli- cability date. See §1.108(i)–0T(a) for def- initions that apply to this section. (b)Specific rules applicable to partner- ships—(1)Allocation of COD income and partner’s deferred amounts. An electing partnership that defers any portion of COD income realized from a reacquisition of an applicable debt instrument under section 108(i) must allocate all of the COD income with respect to the applicable debt instru- ment to its direct partners that are partners in the electing partnership immediately before the reacquisition in the manner in which the income would be included in the distributive shares of the partners un- der section 704 and the regulations under section 704, including §1.704–1(b)(2)(iii), without regard to section 108(i). The electing partnership may determine, in any manner, the portion, if any, of a part- ner’s COD income amount with respect to an applicable debt instrument that is the deferred amount, and the portion, if any, that is the included amount. However, no partner’s deferred amount with respect to an applicable debt instrument may exceed that partner’s COD income amount with respect to such applicable debt instrument, and the aggregate amount of the part- ners’ COD income amounts and deferred amounts with respect to each applicable debt instrument must equal the electing partnership’s COD income amount and de- ferred amount, respectively, with respect to each such applicable debt instrument. (2)Basis adjustments and capital account maintenance—(i)Basis adjust- ments. The adjusted basis of a partner’s interest in a partnership is not increased under section 705(a)(1) by the partner’s deferred amount in the taxable year of the reacquisition. The adjusted basis of a partner’s interest in a partnership is not decreased under section 705(a)(2) by the partner’s share of any deferred OID de- duction in the taxable year in which the deferred OID accrues. The adjusted basis of a partner’s interest in a partnership is adjusted under section 705(a) by the part- ner’s share of the electing partnership’s deferred items for the taxable year in which the partner takes into account such deferred items under this section. (ii)Capital account maintenance.For purposes of maintaining a partner’s capi- tal account under §1.704–1(b)(2)(iv) and notwithstanding §1.704–1(b)(2)(iv)(n), the capital account of a partner of a partner- ship is adjusted under §1.704–1(b)(2)(iv) for a partner’s share of an electing part- nership’s deferred items as if no election under section 108(i) were made. (3)Deferred section 752 amount—(i) In general. An electing partnership shall determine, for each of its direct partners with a deferred amount, the partner’s de- ferred section 752 amount, if any, with respect to an applicable debt instrument. A partner’s deferred section 752 amount with respect to an applicable debt instrument equals the decrease in the partner’s share of a partnership liability under section 752(b) resulting from the reacquisition of 2010–45 I.R.B.611November 8, 2010 the applicable debt instrument that is not treated as a current distribution of money under section 752(b) by reason of section 108(i)(6) (deferred section 752 amount). A partner’s deferred section 752 amount is treated as a distribution of money by the partnership to the partner under section 752(b), at the same time and to the extent remaining in the same amount, as the part- ner recognizes the deferred amount with respect to the applicable debt instrument. (ii)Electing partnership’s computa- tion of a partner’s deferred section 752 amount. To compute a partner’s deferred section 752 amount, the electing partner- ship must first determine the amount of gain that its direct partner would recognize in the taxable year ofa reacquisition under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the deferral provided in the second sentence of section 108(i)(6) (the section 108(i)(6) deferral). If a direct partner of an electing partner- ship would not recognize any gain under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the section 108(i)(6) deferral, the partner will not have a deferred section 752 amount with respect to any applicable debt instrument that is reacquired during the taxable year. If a direct partner of an electing partner- ship would recognize gain under section 731 as a result of the reacquisition of one or more applicable debt instruments dur- ing the taxable year absent the section 108(i)(6) deferral, the partner’s deferred section 752 amount for all applicable debt instruments that are reacquired during the taxable year is equal to the lesser of the partner’s aggregate deferred amounts from the electing partnership for all applicable debt instruments reacquired during the taxable year, or the gain that the partner would recognize in the taxable year of the reacquisitions under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral. In determining the amount of gain that the direct partner would recognize in the taxable year of a reacquisition under section 731 as a result of the reacquisition of one or more appli- cable debt instruments during the taxable year absent the section 108(i)(6) deferral, the rule under §1.731–1(a)(1)(ii) applies to any deemed distribution of money under section 752(b) resulting from a decrease in the partner’s share of a reacquired ap- plicable debt instrument that is treated as an advance or drawing of money. The amount of any deemed distribution of money under section 752(b) resulting from a decrease in the partner’s share of a reac- quired applicable debt instrument that is treated as an advance or drawing of money under §1.731–1(a)(1)(ii) is determined as if no COD income resulting from the reac- quisition of the applicable debt instrument is deferred under section 108(i). (iii)Multiple section 108(i) elections. If a direct partner of an electing partner- ship has a deferred section 752 amount under paragraph (b)(3)(ii) of this section for the taxable year of a reacquisition and the partner has a deferred amount with re- spect to more than one applicable debt in- strument from the electing partnership for which a section 108(i) election is made in that taxable year, the partner’s deferred section 752 amount with respect to each such applicable debt instrument equals the partner’s deferred section 752 amount as determined under paragraph (b)(3)(ii) of this section, multiplied by a ratio, the nu- merator of which is the partner’s deferred amount with respect to such applicable debt instrument, and the denominator of which is the partner’s aggregate deferred amounts from the electing partnership for all applicable debt instruments reacquired during the taxable year. (iv)Electing partnership’s request for information. At the request of an elect- ing partnership, each direct partner of the electing partnership that has a deferred amount with respect to such partnership must provide to the electing partnership a written statement containing information requested by the partnership that is nec- essary to determine the partner’s deferred section 752 amount (such as the partner’s adjusted basis in the partner’s interest in the electing partnership). The written statement must be signed under penalties of perjury and provided to the requesting partnership within 30 days of the date of the request by the electing partnership. (v)Examples. The following examples illustrate the rules under paragraph (b)(3) of this section: Example 1. (i) A and B each hold a 50 percent in- terest in Partnership, a calendar-year partnership. As of January 1, 2009, A and B each have an adjusted basis of $50 in their partnership interests. Partnership has two applicable debt instruments outstanding, debt one of $300 and debt two of $200. On March 1, 2009, debt one is cancelled and Partnership realizes $300 of COD income. On December 1, 2009, debt two is can- celled and Partnership realizes $200 of COD income. The Partnership has no other income or loss items for 2009. A and B are each allocated $150 of COD in- come from debt one and$100 of COD income from debt two. Partnership makes an election under sec- tion 108(i) to defer $225 of the $300 of COD income realized from the reacquisition of debt one, $150 of which is A’s deferred amount, and $75 of which is B’s deferred amount. Partnership also makes an elec- tion under section 108(i) to defer $125 of the $200 of COD income realized from the reacquisition of debt two, $100 of which is A’s deferred amount, and $25 of which is B’s deferred amount. A has no included amount for either debt. B has an included amount of $75 with respect to debt one and an included amount of $75 with respect to debt two for 2009. (ii) Under paragraph (b)(3)(ii) of this section, the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral is $200. Thus, A’s deferred sec- tion 752 amount with respect to debt one and debt two equals $200 (the lesser of A’s aggregate deferred amounts with respect to debt one and debt two of $250, or gain that A would recognize under section 731 in 2009, as a result of the reacquisitions absent the section 108(i)(6) deferral, of $200). Under para- graph (b)(3)(iii) of this section, $120 of A’s $200 de- ferred section 752 amount relates to debt one ($200 x $150/$250) and $80 relates to debt two ($200 x $100/$250). (iii) Under paragraph (b)(3)(ii) of this section, the amount of gain that B would recognize under section 731 as a result of the reacquisitions absent the sec- tion 108(i)(6) deferral is $50. Thus, B’s deferred sec- tion 752 amount with respect to debt one and debt two equals $50 (the lesser of B’s aggregate deferred amounts with respect to debt one and debt two of $100, or gain that B would recognize under section 731 in 2009, as a result of the reacquisitions absent the section 108(i)(6) deferral, of $50). Under para- graph (b)(3)(iii) of this section, $37.50 of B’s $50 de- ferred section 752 amount relates to debt one ($50 x $75/$100) and $12.50 relates to debt two ($50 x $25/$100). Example 2. (i) The facts are the same as inEx- ample 1, except that Partnership has gross income for the year (including the $500 of COD income) of $700 and other separately stated losses of $500. A’s and B’s distributive share of each item is 50 percent. (ii) In determining the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral, Partnership first increases A’s $50 adjusted basis in his interest in Partnership by A’s distributive share of Partnership income (other than the deferred amounts relating to debt one and debt two) of $100, and then decreases A’s adjusted basis in Partnership by deemed distributions under section 752(b) of $250 and, thereafter, by A’s distributive share of Partner- ship losses of $250, but only to the extent that A’s basis is not reduced below zero. Under paragraph (b)(3)(ii) of this section, the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent section 108(i)(6) deferral is $100. Thus, A’s deferred section 752 amount with respect to debt one and debt two equals $100 (the lesser of A’s aggregate deferred amounts with respect November 8, 20106122010–45 I.R.B. to debt one and debt two of $250, or gain that A would recognize under section 731 as a result of the reacquisitions absent the deferral section 108(i)(6) deferral of $100). Under paragraph (b)(3)(iii) of this section, A’s deferred section 752 amount with re- spect to debt one is $60 ($100 x $150/$250), and A’s deferred section 752 amount with respect to debt two is $40 ($100 x $100/$250). A’s $250 of Partnership losses are suspended under section 704(d). (iii) In determining the amount of gain that B would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral, Partnership first increases B’s $50 adjusted basis in his interest in Partnership by B’s distributive share of Partnership income (other than the deferred amounts relating to debt one and debt two) of $250 ($100 other income plus $150 included amount with respect to debt one and debt two), and then decreases B’s ad- justed basis in Partnership by deemed distributions under section 752(b) of $250 and, thereafter, by B’s distributive share of Partnership losses of $250, but only to the extent that B’s basis is not reduced be- low zero. Under paragraph (b)(3)(ii) of this section, B would not recognize any gain under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral. Thus, B has no deferred section 752 amount with respect to either debt one or debt two. B may deduct his distributive share of Partner- ship losses to the extent of $50, with the remaining $200 suspended under section 704(d). (4)Tiered partnerships—(i)In general. If a partnership (upper-tier partnership) is a direct or indirect partner of an elect- ing partnership and directly or indirectly receives an allocation of a COD income amount from the electing partnership, all or a portion of which is deferred under section 108(i), the upper-tier partnership must allocate its COD income amount to its partners that are partners in the upper-tier partnership immediately be- fore the reacquisition in the manner in which the income would be included in the distributive shares of the partners un- der section 704 and the regulations under section 704, including §1.704–1(b)(2)(iii), without regard to section 108(i). The up- per-tier partnership may determine, in any manner, the portion, if any, of a partner’s COD income amount with respect to an applicable debt instrument that is the de- ferred amount, and the portion, if any, that is the included amount. However, no partner’s deferred amount with respect to an applicable debt instrument may exceed that partner’s COD income amount with respect to such applicable debt instrument, and the aggregate amount of the part- ners’ COD income amounts and deferred amounts with respect to each applicable debt instrument must equal the upper-tier partnership’s COD income amount and de- ferred amount, respectively, with respect to each such applicable debt instrument. (ii)Deferred section 752 amount.The computation of a partner’s deferred sec- tion 752 amount, as described in paragraph (b)(3)(ii) of this section, is calculated only for direct partners of the electing partner- ship. An upper-tier partnership’s deferred section 752 amount with respect to an ap- plicable debt instrument of the electing partnership is allocated only to those part- ners of the upper-tier partnership that have a deferred amount with respect to that ap- plicable debt instrument, and in proportion to such partners’ share of the upper-tier partnership’s deferred amount with respect to that applicable debt instrument. A part- ner’s share of the upper-tier partnership’s deferred section 752 amount with respect to an applicable debt instrument must not exceed that partner’s share of the upper- tier partnership’s deferred amount with re- spect to the applicable debt instrument to which the deferred section 752 amount re- lates. The deferred section 752 amount of a partner of an upper-tier partnership is treated as a distribution of money by the upper-tier partnership to the partner under section 752(b), at the same time and to the extent remaining in the same amount, as the partner recognizesthe deferred amount with respect to the applicable debt instru- ment. (iii)Examples. The following examples illustrate the rules under paragraph (b)(4) of this section: Example 1. (i) PRS, a calendar-year partnership, has two equal partners, A, an individual, and XYZ, a partnership. As of January 1, 2009, A and XYZ each have an adjusted basis of $50 in their partnership interests. PRS has a $500 applicable debt instrument outstanding. On June 1, 2009, the creditor agrees to cancel the $500 indebtedness. PRS realizes $500 of COD income as a result of the reacquisition. PRS has no other income or loss items for 2009. PRS makes an election under section 108(i) to defer $200 of the $500 of COD income. PRS allocates the $500 of COD income equally between its partners ($250 each). PRS determines that, for each partner, $100 of the COD income amount is the deferred amount, and $150 is the included amount. For 2009, each of A’s and XYZ’s share of the decrease in PRS’s reacquired applicable debt instrument is $250. (ii) XYZ has two equal partners, individuals X and Y. X and Y share equally in XYZ’s liabilities. XYZ allocates the $250 COD income amount from PRS equally between X and Y ($125 each). XYZ determines that X has a deferred amount of $100 and an included amount of $25. All $125 of Y’s COD income amount is Y’s included amount. For 2009, each of X’s and Y’s share of XYZ’s $250 decrease in liability with respect to the reacquired applicable debt instrument of PRS is $125. (iii) Under paragraph (b)(3)(ii) of this section, PRS determines that XYZ has a deferred section 752 amount of $50. Therefore, for 2009, of XYZ’s $250 share of the decrease in PRS’s reacquired applicable debt instrument, $200 is treated as a deemed distri- bution under section 752(b) and $50 is the deferred section 752 amount. (iv) Under paragraph (b)(4)(ii) of this section, none of XYZ’s $50 deferred section 752 amount is allocated to Y because Y does not have a deferred amount with respect to the reacquired applicable debt interest. XYZ’s entire $50 of deferred section 752 amount is allocated to X. Therefore, of X’s $125 share of the XYZ’s decrease in liability with respect to the reacquired applicable debt instrument of PRS, $75 is treated as a deemed distribution under section 752(b) and $50 is X’s deferred section 752 amount. Y’s $125 share of XYZ’s decrease in liability with respect to the reacquired applicable debt instrument of PRS is treated as a deemed distribution under section 752(b) and none is a deferred section 752 amount. Example 2. (i) The facts are the same as inEx- ample 1, except for the following: XYZ has three partners, X, Y, and Z. The profits and losses of XYZ are shared 25 percent by X, 25 percent by Y, and 50 percent by Z. XYZ allocates its $250 COD income amount from PRS $62.50 to each of X and Y, and $125 to Z. XYZ determines that X has a deferred amount of $50 and an included amount of $12.50, Y has a deferred amount of $0 and an included amount of $62.50, and Z has a deferred amount of $50 and an included amount of $75 with respect to the applica- ble debt instrument. X’s, Y’s, and Z’s share of XYZ’s decrease in liability with respect to the reacquired ap- plicable debt instrument of PRS is $62.50, $62.50 and $125, respectively. (ii) Under paragraph (b)(4)(ii) of this section, none of XYZ’s $50 deferred section 752 amount is allocated to Y because Y does not have a deferred amount with respect to the reacquired applicable debt instrument. XYZ’s $50 deferred section 752 amount is allocated to X and Z in proportion to X’s and Z’s share of XYZ’s deferred amount, or $25 each ($50 x ($50/$100)). Therefore, of X’s $62.50 share of XYZ’s decrease in liability with respect to the reacquired applicable debt instrument, $37.50 is treated as a deemed distribution under section 752(b) and $25 is X’s deferred section 752 amount. All of Y’s $62.50 share of XYZ’s decrease in liability with respect to the reacquired applicable debt instrument is treated as a deemed distribution under section 752(b). Of Z’s $125 share of XYZ’s decrease in lia- bility with respect to the reacquired applicable debt instrument, $100 is treated as a deemed distribution under section 752(b) and $25 is Z’s deferred section 752 amount. (5)S corporation partner—(i)In gen- eral. If an S corporation partner has a de- ferred amount with respect to an applica- ble debt instrument of an electing partner- ship, such deferred amount is sharedpro rataonly among those shareholders that are shareholders of the S corporation part- 2010–45 I.R.B.613November 8, 2010 ner immediately before the reacquisition of the applicable debt instrument. (ii)Basis adjustments. The adjusted basis of a shareholder’s stock in an S cor- poration partner is not increased under sec- tion 1367(a)(1) by the shareholder’s share of the S corporation partner’s deferred amount in the taxable year of the reacquisi- tion. The adjusted basis of a shareholder’s stockinanScorporationpartnerisnot decreased under section 1367(a)(2) by the shareholder’s share of the S corporation partner’s deferred OID deduction in the taxable year in which the deferred OID accrues. The adjusted basis of a share- holder’sstockinanScorporation partner is adjusted under section 1367(a) by the shareholder’s share of the S corporation partner’s share of the electing partnership’s deferred items for the taxable year in which the shareholder takes into account its share of such deferred items under this section. (iii)Accumulated adjustments account. The accumulated adjustments account (AAA), as defined in section 1368(e)(1), of an S corporation partner that has a de- ferred amount with respect to an applicable debt instrument of an electing partnership is not increased by its deferred amount in the taxable year of the reacquisition. The AAA of an S corporation partner is not decreased by its share of any deferred OID deduction in the taxable year in which the deferred OID accrues. The AAA of an S corporation partner is adjusted under section 1368(e) by a shareholder’s share of the S corporation partner’s share of the electing partnership’s deferred items for the S period (as defined in section 1368(e)(2)) in which the shareholder of the S corporation partner takes into ac- count its share of the deferred items under this section. (6)Acceleration of deferred items—(i) Electing partnership-level events—(A) General rules. Except as provided in para- graph (b)(6)(iii) of this section, a direct or indirect partner’s share of an electing partnership’s deferred items is accelerated and must be taken into account by such partner— (1) In the taxable year in which the electing partnership liquidates; (2) In the taxable year in which the electing partnership sells, exchanges, transfers (including contributions and dis- tributions), or gifts substantially all of its assets; (3) In the taxable year in which the electing partnershipceases doing business; or (4) In the taxable year that includes the day before the day on which the electing partnershipfilesapetitioninaTitle11or similar case. (B)Substantially all requirement.For purposes of this paragraph (b)(6), substan- tially all of a partnership’s assets means as- sets representing at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the partnership immediately prior to the sale, exchange, transfer, or gift. For purposes of applying the rule in paragraph (b)(6)(i)(A)(2)ofthis section, a sale, exchange, transfer, or gift by any direct or indirect lower-tier partner- ship of the electing partnership (lower-tier partnership) of all or part of its assets is not treated as a sale, exchange, transfer, or gift of the assets of any partnership that holds, directly or indirectly, an interest in such lower-tier partnership. However, for purposes of applying the rule in paragraph (b)(6)(i)(A)(2) of this section, a sale, ex- change, transfer, or gift of substantially all of the assets of a transferee partnership (as described in paragraph (b)(6)(iii)(A)(1)of this section), or of a lower-tier partnership that received assets of the electing partner- ship from a transferee partnership or an- other lower-tier partnership in a transac- tion governed all or in part by section 721, is treated as a sale, exchange, transfer, or gift by the holder of an interest in such transferee partnership or lower-tier part- nership of its entire interest in that trans- feree partnership or lower-tier partnership. (ii)Direct or indirect partner-level events—(A)General rules. Except as provided in paragraph (b)(6)(iii) of this section, a direct or indirect partner’s share of an electing partnership’s deferred items with respect to a separate interest is accel- erated and must be taken into account by such partner in the taxable year in which— (1) The partner dies or liquidates; (2) The partner sells, exchanges (in- cluding redemptions treated as exchanges under section 302), transfers (including contributions and distributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of its sepa- rate interest; (3) The partner’s separate interest is re- deemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section; or (4) The partner abandons its separate interest. (B)Meaning of terms; special rules—(1)Partial transfers.Forpur- poses of paragraph (b)(6)(ii)(A)(2)ofthis section, if a partner sells, exchanges (in- cluding redemptionstreated as exchanges under section 302), transfers (including contributions and distributions), or gifts (including transfers treated as gifts under section 1041) a portion of its separate in- terest, such partner’s share of the electing partnership’s deferred items with respect to the separate interest proportionate to the separate interest sold, exchanged, trans- ferred, or gifted is accelerated and must be taken into account by such partner. (2)Redemptions. For purposes of para- graph (b)(6)(ii)(A)(3) of this section, a partner’s separate interest is redeemed if the partner receives adistribution of cash and/or property in complete liquidation of such separate interest. (3)S corporation partners.Inaddi- tion to the rules in paragraphs (b)(6)(i) and (ii) of this section, an S corporation part- ner’s share of the electing partnership’s de- ferred items is accelerated and the share- holders of the S corporation partner must take into account their respective shares of the S corporation partner’s share of the electing partnership’s deferred items in the taxable year in which the S corporation partner’s election under section 1362(a) terminates. (4)C corporation partners. In addition to the rules in paragraphs (b)(6)(i), (ii), and (iii) of this section, the acceleration rules in §1.108(i)–1T(b) and the earnings and profits rules in §1.108(i)–1T(d) apply to partners that are electing corporations. (iii)Events not constituting accelera- tion. Notwithstanding the rules in para- graphs (b)(6)(i) and (ii) of this section, a di- rect or indirect partner’s share of an elect- ing partnership’s deferred items with re- spect to a separate interest is not acceler- ated by any of the events described in this paragraph (b)(6)(iii). (A)Section 721 contributions—(1) Electing partnership contributions.A direct or indirect partner’s share of an electing partnership’s deferred items is not accelerated if the electing partnership contributes all or a portion of its assets November 8, 20106142010–45 I.R.B. in a transaction governed all or in part by section 721(a) to another partnership (transferee partnership) in exchange for an interest in the transferee partnership pro- vided that the electing partnership does not terminate under section 708(b)(1)(A) or transfer its assets and liabilities in a trans- action described in section 708(b)(2)(A) or section 708(b)(2)(B). See paragraph (b)(6)(iii)(D) of this section for transac- tions governed by section 708(b)(2)(A). Notwithstanding the rules in this para- graph (b)(6)(iii)(A)(1), the rules in para- graphs (b)(6)(i)(A) and (b)(6)(ii)(A) of this section apply to any part of the trans- action to which section 721(a) does not apply. (2)Partner contributions. A direct or indirect partner’s share of an electing partnership’s deferred items with respect to a separate interest is not accelerated if the holder of such interest (contribut- ing partner) contributes its entire separate interest (contributed separate interest) in a transaction governed all or in part by section 721(a) to another partnership (transferee partnership) in exchange for an interest in the transferee partnership provided that the partnership in which the separate interest is held does not terminate undersection708(b)(1)(A)ortransferits assets and liabilities in a transaction de- scribed in section 708(b)(2)(A) or section 708(b)(2)(B). See paragraph (b)(6)(iii)(D) of this section for transactions governed by section 708(b)(2)(A). The transferee partnership becomes subject to section 108(i), including all reporting require- ments under this section, with respect to the contributing partner’s share of the electing partnership’s deferred items as- sociated with the contributed separate interest. The transferee partnership must allocate and report the share of the elect- ing partnership’s deferred items that is associated with the contributed separate interest to the contributing partner to the same extent that such share of the electing partnership’s deferred items would have been allocated and reported to the con- tributing partner in the absence of such contribution. Notwithstanding the rules in this paragraph (b)(6)(iii)(A)(2), the rules in paragraph (b)(6)(ii)(A) of this section apply to any part of the transaction to which section 721(a) does not apply. (B)Section 1031 exchanges. A direct or indirect partner’s share of the elect- ing partnership’s deferred items is not accelerated if the electing partnership transfers property held for productive use in a trade or business or for investment in exchange for property of like kind which is to be held either for productive use in a trade or business or for investment in a transaction to which section 1031(a)(1) applies. Notwithstanding the rules in this paragraph (b)(6)(iii)(B), to the extent the electing partnership receives money or other property which does not meet the requirements of section 1031(a) (boot) in the exchange, a proportionate amount of the property transferred by the electing partnership equal to the proportion of the boot to the total consideration received in the exchange shall be treated as sold for purposes of paragraph (b)(6)(i)(A)(2)of this section. (C)Section 708(b)(1)(B) terminations. A direct or indirect partner’s share of the deferred items of an electing partnership with respect to a separate interest is not accelerated if the electing partnership or a partnership that is a direct or indi- rect partner of the electing partnership terminates under section 708(b)(1)(B). Notwithstanding the rules in this para- graph (b)(6)(iii)(C), the rules in paragraph (b)(6)(ii)(A) of this section apply to the event that causes the termination un- der section 708(b)(1)(B) to the extent not otherwise excepted under paragraph (b)(6)(iii) of this section. (D)Section 708(b)(2)(A) mergers or consolidations. A direct or indirect part- ner’s share of the deferred items of an electing partnership with respect to a separate interest is not accelerated if the partnership in which the separate interest is held (the merger transaction partner- ship) merges into or consolidates with another partnership in a transaction to which section 708(b)(2)(A) applies. The resulting partnership or new partnership, as determined under §1.708–1(c)(1), be- comes subject to section 108(i), including all reporting requirements under this sec- tion, to the same extent that the merger transaction partnership was so subject prior to the transaction, and must allo- cate and report any merger transaction partnership’s deferred items to the same extent and to the same partners that the merger transaction partnership allocated and reported such items prior to such trans- action. Notwithstanding the rules in this paragraph (b)(6)(iii)(D), the rules in para- graphs (b)(6)(i)(A)(2) and (b)(6)(ii)(A)(2) of this section apply to that portion of the transaction that is treated as a sale, and the rules of (b)(6)(ii)(A)(3) apply if, as part of the transaction, the partner’s separate interest is redeemed and the partner does not receive an interest in the resulting partnership with respect to such separate interest. (E)Certain distributions of separate in- terests. If a partnership (upper-tier partner- ship) that is a direct or indirect partner of an electing partnership distributes its en- tire separate interest (distributed separate interest) to one or more of its partners (dis- tributee partners) that have a share of the electing partnership’s deferred items from upper-tier partnership with respect to the distributed separate interest, the distribu- tee partners’ shares of the electing partner- ship’s deferred items with respect to such distributed separate interest are not accel- erated. The partnership, the interest in which was distributed, must allocate and report the share of the electing partner- ship’s deferred items associated with the distributed separate interest only to such distributee partners that had a share of the electing partnership’s deferred items from the upper-tier partnership with respect to the distributed separate interest prior to the distribution. (F)Section 381 transactions.ACcor- poration partner’s share of an electing part- nership’s deferred items is not accelerated if, as part of a transaction described in paragraph (b)(6)(ii)(A) of this section, the assets of the C corporation partner are ac- quired by another C corporation (acquir- ing C corporation) in a transaction that is treated, under §1.108(i)–1T(b)(2)(ii)(B), as a transaction to which section 381(a) applies. An S corporation partner’s share of an electing partnership’s deferred items is not accelerated if, as part of a transac- tion described in paragraph (b)(6)(ii)(A) of this section, the assets of the S cor- poration partner are acquired by another S corporation (acquiring S corporation) in a transaction to which section 381(a) ap- plies. In such cases, the acquiring C cor- poration or acquiring S corporation, as the case may be, succeeds to the C corporation partner’s or the S corporation partner’s re- maining share of the electing partnership’s deferred items and becomes subject to sec- tion 108(i), including all reporting require- 2010–45 I.R.B.615November 8, 2010 ments under this section, as if the acquiring C corporation or acquiring S corporation were the C corporation partner or the S cor- poration partner, respectively. The acquir- ing S corporation must allocate and report the S corporation partner’s deferred items to the same extent and only to those share- holders of the S corporation partner who had a share of the S corporation partner’s deferred items from the electing partner- ship prior to the transaction. (G)Intercompany transfers.AC corporation partner’s share of an elect- ing partnership’s deferred items is not accelerated if, as part of a transaction described in paragraph (b)(6)(ii)(A) of this section, the C corporation partner transfers its entire separate interest in an intercompany transaction, as described in §1.1502–13(b)(1)(i), and the electing part- nership does not terminate under section 708(b)(1)(A) as a result of the intercom- pany transaction. (H)Retirement of a debt instrument. See §1.108(i)–3T(c)(1) for rules regarding the retirement of a debt instrument that is subject to section 108(i). (I)Other non-acceleration events.A direct or indirect partner’s share of an electing partnership’s deferred items is not accelerated with respect to any transaction if the Commissioner makes a determi- nation by published guidance that such transaction is not an acceleration event under the rules of this paragraph (b)(6). (iv)Related partnerships. A direct or indirect partner’s share of a related partner- ship’s deferred OID deduction (as deter- mined in paragraph (d)(2) of this section) that has not previously been taken into ac- count is accelerated and taken into account by the direct or indirect partner in the tax- able year in which, and to the extent that, deferred COD income attributable to the related partnership’s deferred OID deduc- tion is taken into account by the electing entity or its owners. (v)Examples. The following examples illustrate the rules under this paragraph (b)(6): Example 1.Meaning of “separate interest.”(i) Electing partnership (EP) has three partners, MT1, MT2, and UT, each of which is a partnership. The partners of MT1 are X and UT. The partners of MT2 are Y, UT, and B. The partners of UT are A, B, and C. In addition to their interests in the partnerships noted, MT1, MT2, and UT own other assets. (ii) Within the meaning of paragraph (a)(29) of §1.108(i)–0T, A and C each hold one separate interest (their interests in UT), B holds two separate interests (its interests in UT and MT2), UT holds three separate interests (its interests in MT1, MT2, and EP), MT1 and MT2 each hold one separate interest (their inter- ests in EP), and X and Y eachhold one separate in- terest (their interests in MT1 and MT2, respectively) with respect to EP. Example 2.Distributions of separate interests in an electing partnership. (i) The facts are the same as inExample 1, except that A, as a direct partner of UT, has a share of EP’s deferred items with respect to UT’s interests in MT1 and EP. A does not have a share of EP’s deferred items with respect to UT’s interest in MT2. B, as a direct partner of UT, has a share of EP’s deferred items with respect to UT’s interest in MT1 and MT2, but not with respect to UT’s interest in EP. B also has a share of EP’s deferred items with respect to its separate interest in MT2. C does not have any share of EP’s deferred items with respect to UT’s interest in MT1, MT2, or EP. (ii) UT distributes 40 percent of its separate interest in MT1 to A in redemption of A’s inter- est in UT. Under paragraphs (b)(6)(ii)(A)(2)and (b)(6)(ii)(B)(1) of this section, a portion of UT’s interest in MT1 has been transferred and a cor- responding portion (40 percent) of UT’s share of EP’s deferred items from MT1 is accelerated. Thus, 40 percent of A’s and B’s share of EP’s deferred items from UT with respect to UT’s interest in MT1 is accelerated. Further, because A’s interest in UT is redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of A’s shares of EP’s deferred items from UT are accelerated under paragraph (b)(6)(ii)(A)(3) of this section. UT contin- ues to allocate and report to B its remaining share of EP’s deferred items from its separate interest in MT1 that was not distributed to A. (iii) UT distributes its entire separate interest in MT1 to B (other than in redemption of B’s interest in UT). Under paragraph (b)(6)(ii)(A)(2) of this section, UT’s share of EP’s deferred items from MT1 would be accelerated. However, because UT distributes its entire separate interest in MT1 to B, B’s share of EP’s deferred items from UT with respect to UT’s separate interest in MT1 is not accelerated under paragraph (b)(6)(iii)(E) of this section. MT1 allocates and re- ports to B B’s share of EP’s deferred items from UT’s separate interest in MT1 that was distributed to B. (iv) UT distributes its entire separate interest in MT1 to A and B (other than in redemption of their interests in UT). Under paragraph (b)(6)(iii)(E) of this section, none of A’s or B’s shares of EP’s deferred items from UT with respect to UT’s separate interest in MT1 is accelerated, and MT1 allocates and reports to A and B their respective share of EP’s deferred items from UT’s separate interest in MT1 that was distributed to A and B. Example 3.Partial sale of interest by an indirect partner. (i) Individual A holds a 50 percent partner- ship interest in UTP, a partnership that holds a 50 per- cent interest in EP, a partnership that makes an elec- tion to defer COD income under section 108(i). A’s share of UTP’s deferred amount with respect to EP’s election under section 108(i) is $100. During a tax- able year within the deferral period, A sells 25 percent of his partnership interest in UTP to an unrelated third party. (ii) Under paragraphs (b)(6)(ii)(A)(2)and (b)(6)(ii)(B)(1) of this section, 25 percent of A’s $100 deferred amount is accelerated as a result of A’s partial sale of his interest in UTP. Thus, A must recognize $25 of his deferred amount in the taxable year of the sale. A’s remaining deferred amount is $75. Example 4.Section 708(b)(1)(B) termination of electing partnership. (i) A and B are equal partners in partnership AB. On January 1, 2009, AB reacquires an applicable debt instrument and makes an election under section 108(i) to defer $400 of COD income. A and B each have a deferred amount with respect to the applicable debt instrument of $200. On January 1, 2010, A sells its entire 50 percent interest in AB to C in a transfer that terminates the partnership under section 708(b)(1)(B). (ii) Under paragraph (b)(6)(iii)(C) of this sec- tion, the technical termination of AB under section 708(b)(1)(B) does not cause A’s or B’s shares of AB’s deferred items to be accelerated. However, A’s $200 deferred amount is accelerated under paragraph (b)(6)(ii)(A)(2) of this section as a result of the sale. Example 5.Section 708(b)(2)(A) mergers.(i)A, B, and C are equal partners in partnership X, which has made an election under section 108(i) to defer $150 of COD income. The fair market value of each interest in partnership X is $100. A, B, and C each has a deferred amount of $50 with respect to partnership X’s election under section 108(i). E, F, and G are part- ners in partnership Y. Partnership X and partnership Y merge in a taxable year during the deferral period of partnership X’s election under section 108(i). Un- der section 708(b)(2)(A), the resulting partnership is considered a continuation of partnership Y and part- nership X is considered terminated. Under state law, partnerships X and Y undertake the assets-over form of §1.708–1(c)(3)(i) to accomplish the merger. C does not want to become a partner in partnership Y, and partnership X does nothave the resources to re- deem C’s interest before the merger. C, partnership X, and partnership Y enter into a merger agreement that satisfies the requirements of §1.708–1(c)(4) and specifies that partnership Y will purchase C’s interest in partnership X for $100 before the merger, and as part of the agreement, C consents to treat the trans- action in a manner that is consistent with the agree- ment. As part of the merger, partnership X receives from partnership Y $100 (which will be distributed to C immediately before the merger), $100 (which will be distributed equally to A and B ($50 each)), and in- terests in partnership Y with a value of $100 (which will be distributed equally to A and B) in exchange for partnership X’s assets and liabilities. (ii) Under the general rule of paragraph (b)(6)(iii)(D) of this section, and except as provided below, the deferred items of partnership X are not accelerated as a result of the merger with partnership Y. Partnership Y, the resulting partnership that is con- sidered the continuation of partnership X, becomes subject to section 108(i), including all reporting requirements under section 108(i), to the same extent that partnership X was subject to such rules. Under paragraph (b)(6)(iii)(D) of this section, partnership Y must allocate and report partnership X’s deferred items to A and B in the same manner as partnership X had prior to the merger transaction. (iii) Under §1.708–1(c)(4), C is treated as selling its interest in partnership X immediately before the merger. As a result, C’s $50 deferred amount is ac- November 8, 20106162010–45 I.R.B. celerated under paragraph (b)(6)(ii)(A)(2) of this sec- tion. (iv) Under section 707(a)(2)(B), partnership X is deemed to have sold a portion of its assets to partnership Y. Because partnership X is not treated as selling substantially all of its assets under paragraph (b)(6)(i)(B) of this section, A’s and B’s de- ferred amounts are not accelerated under paragraph (b)(6)(i)(A)(2)ofthissection. (v) Because A’s and B’s interests in partnership X are redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of their shares of partnership X’s deferred items would be accel- erated under paragraph (b)(6)(ii)(A)(3). However, because they receive an interest in partnership Y in the merger, none of A’s and B’s share of partnership X’s deferred items is accelerated. (7)Withholding under section 1446. See section 1446 regarding withholding by a partnership on a foreign partner’s share of income effectively connected with a U.S. trade or business. (c)Specific rules applicable to S corpo- rations—(1)Deferred COD income.An electing S corporation’s COD income de- ferred under section 108(i) (an S corpo- ration’s deferred COD income) is shared pro rataamong those shareholders that are shareholders of the electing S corpora- tion immediately before the reacquisition of the applicable debt instrument. Any COD income deferred under section 108(i) is taken into account under section 1366(a) by those shareholders in the inclusion pe- riod, or earlier upon the occurrence of an acceleration event described in paragraph (c)(3) of this section. (2)Basis adjustments and accumulated adjustments account—(i)Basis adjust- ments. The adjusted basis of a share- holder’s stock in an electing S corporation is not increased under section 1367(a)(1) by the shareholder’s share of the S cor- poration’s deferred COD income in the taxable year of the reacquisition. The adjusted basis of a shareholder’s stock in an electing S corporation or a related S corporation is not decreased under section 1367(a)(2) by the shareholder’s share of the S corporation’s deferred OID deduction in the taxable year in which the deferred OID accrues. The adjusted basis of a shareholder’s stock in an electing S corporation or a related S corporation is adjusted under section 1367(a) by the shareholder’s share of the S corporation’s deferred items for the taxable year in which the shareholder takes into account its share of the deferred items under this section. (ii)Accumulated adjustments account. The AAA of an electing S corporation is not increased by the S corporation’s de- ferred COD income in the taxable year of a reacquisition. The AAA of an electing S corporation or a related S corporation is not decreased by the S corporation’s de- ferred OID deduction in the taxable year in which the deferred OID accrues. The AAA of an electing S corporation or a re- lated S corporation is adjusted under sec- tion 1368(e) by a shareholder’s share of the S corporation’s deferred items for the S pe- riod (as defined in section 1368(e)(2)) in which a shareholder of the S corporation takes into account its share of the deferred items under this section. (3)Acceleration of deferred items—(i) Electing S corporation-level events—(A) General rules. Except as provided in para- graph (c)(3)(iii) of this section, a share- holder’s share of an electing S corpora- tion’s deferred items is accelerated and must be taken into account by such share- holder— (1) In the taxable year in which the electing S corporation liquidates; (2) In the taxable year in which the electing S corporation sells, exchanges, transfers (including contributions and dis- tributions), or gifts substantially all of its assets; (3) In the taxable year in which the electing S corporation ceases doing busi- ness; (4) In the taxable year in which the electing S corporation’s election under section 1362(a) terminates; or (5) In the taxable year that includes the day before the day on which the electing S corporation files a petition in a Title 11 or similar case. (B)Substantially all requirement.For purposes of this paragraph (c)(3), substan- tially all of an electing S corporation’s or partnership’s assets means assets rep- resenting at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the S corporation or partnership immediately prior to the sale, exchange, transfer, or gift. For pur- poses of applying the rule in paragraph (c)(3)(i)(A)(2) of this section, a sale, ex- change, transfer, or gift by any direct or indirect lower-tier partnership of the elect- ing S corporation (lower-tier partnership) of all or part of its assets is not treated as a sale, exchange, transfer, or gift of the assets of any person that holds, directly or indirectly, an interest in such lower-tier partnership. However, for purposes of ap- plying the rule in paragraph (c)(3)(i)(A)(2) of this section, a sale, exchange, transfer, or gift of substantially all of the assets of a transferee partnership (as described in paragraph (c)(3)(iii)(A) of this section), or of a lower-tier partnership that re- ceived assets of the electing S corporation from a transferee partnership of the elect- ing S corporation or another lower-tier partnershipinatransactiongovernedallor in part by section 721, is treated as a sale, exchange, transfer, or gift by the holder of an interest in such transferee partnership or lower-tier partnership of its entire interest in that transferee partnership or lower-tier partnership. (ii)Shareholder events—(A)General rules. Except as provided in paragraph (c)(3)(iii) of this section, a shareholder’s share of an electing S corporation’s de- ferred items is accelerated and must be taken into account by such shareholder in the taxable year in which— (1) The shareholder dies; (2) The shareholder sells, exchanges (including redemptions treated as ex- changes under section 302), transfers (in- cluding contributions and distributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of its interest in the electing S corporation; or (3) The shareholder abandons its inter- est in the electing S corporation. (B)Partial transfers. For purposes of paragraph (c)(3)(ii)(A)(2) of this section, if a shareholder of an electing S corpora- tion sells, exchanges (including redemp- tions treated as exchanges under section 302), transfers, or gifts (including transfers treated as gifts under section 1041) a por- tion of its interest in the electing S corpora- tion, such shareholder’s share of the elect- ing S corporation’s deferred items propor- tionate to the interest that was sold, ex- changed, transferred, or gifted is acceler- ated and must be taken into account by such shareholder. (iii) Events not constituting accelera- tion. Notwithstanding the rules in para- graphs (c)(3)(i) and (ii) of this section, a shareholder’s share of an electing S cor- poration’s deferred items is not accelerated by any of the events described in this para- graph (c)(3)(iii). 2010–45 I.R.B.617November 8, 2010 (A)Electing S corporation’s contri- butions. A shareholder’s share of an electing S corporation’s deferred items is not accelerated if the electing S corpo- ration contributes all or a portion of its assets in a transaction governed all or in part by section 721(a) to a partnership (transferee partnership) in exchange for an interest in the transferee partnership. Notwithstanding the rules in this para- graph (c)(3)(iii)(A), the rules in paragraph (c)(3)(i)(A) of this section apply to any part of the transaction to which section 721(a) does not apply. (B)Section 1031 exchanges. A share- holder’s share of an electing S corpora- tion’s deferred items is not accelerated if the electing S corporation transfers property held for productive use in a trade or business or for investment in ex- change for property of like kind which is to be held either for productive use in a trade or business or for investment in a transaction to whichsection 1031(a)(1) applies. Notwithstanding the rules in this paragraph (c)(3)(iii)(B), to the extent the electing S corporation receives money or other property which does not meet the requirements of section 1031(a) (boot) in the exchange, a proportionate amount of the property transferred by the electing S corporation equal to the proportion of the boot to the total consideration received in the exchange shall be treated as sold for purposes of paragraph (c)(3)(i)(A)(2)of this section. (C)Section 381 transactions. A share- holder’s share of an electing S corpora- tion’s deferred items is not accelerated if, as part of a transaction described in para- graph (c)(3)(i)(A) of this section, the elect- ing S corporation’s assets are acquired by another S corporation (acquiring S corpo- ration) in a transaction to which section 381(a) applies. In such a case, the acquir- ing S corporation succeeds to the electing S corporation’s remaining deferred items and becomes subject to section 108(i), in- cluding all reporting requirements under this section, as if the acquiring S corpora- tion were the electing S corporation. The acquiring S corporation must allocate and report the electing S corporation’s deferred itemstothesameextentandonlytothose shareholders who had a share of the elect- ing S corporation’s deferred items prior to the transaction. (D)Retirement of a debt instrument. See §1.108(i)–3T(c)(1) for rules regarding the retirement of a debt instrument that is subject to section 108(i). (E)Other non-acceleration events.A shareholder’s share of an electing S cor- poration’s deferred items is not accelerated with respect to any transaction if the Com- missioner makes a determination by pub- lished guidance that such transaction is not an acceleration event under the rules of this paragraph (c)(3). (iv)Related S corporations. A share- holder’s share of a related S corporation’s deferred OID deduction (as determined in paragraph (d)(2) of this section) that has not previously been taken into account is accelerated and taken into account by the shareholder in the taxable year in which, and to the extent that, deferred COD in- come attributable to the related S corpora- tion’s deferred OID deduction is taken into account by the electing entity or its owners. (d)General rules applicable to partner- ships and S corporations—(1)Applicable debt instrument (trade or business require- ment). The determination of whether a debt instrument issued by a partnership or an S corporation is treated as a debt instru- ment issued in connection with the conduct of a trade or business by the partnership or S corporation for purposes of this sec- tion is based on all the facts and circum- stances. However, a debt instrument is- sued by a partnership or an S corporation shall be treated as an applicable debt in- strument for purposes of this section if the electing partnership or electing S corpora- tion can establish that— (i) The gross fair market value of the trade or business assets of the partnership or S corporation that issued the debt in- strument represented at least 80 percent of the gross fair market value of that partner- ship’s or S corporation’s total assets on the date of issuance; (ii) The trade or business expenditures of the partnership or S corporation that issued the debt instrument represented at least 80 percent of the partnership’s or S corporation’s total expenditures for the taxable year of issuance; (iii) At least 95 percent of interest paid or accrued on the debt instrument issued by the partnership or S corporation was al- located to one or more trade or business expenditures under §1.163–8T for the tax- able year of issuance; (iv) At least 95 percent of the proceeds from the debt instrument issued by the partnership or S corporation were used by the partnership or S corporation to acquire one or more trades or businesses within six months from the date of issuance; or (v) The partnership or S corporation is- sued the debt instrument to a seller of a trade or business to acquire the trade or business. (2)Deferral of OID at entity level—(i) In general. For each taxable year during the deferral period, anissuingentitydeter- mines the amount of its deferred OID de- duction with respect toa debt instrument, if any. An issuing entity’s deferred OID de- duction for a taxable year is the lesser of: (A) The OID that accrues in a current taxable year during the deferral period with respect to the debt instrument (less any of such OID that is allowed as a de- duction in the current taxable year as a result of an acceleration event), or (B) The excess, if any, of the electing entity’s deferred COD income (less the ag- gregate amount of such deferred COD in- come that has been included in income in the current taxable year and any pre- vious taxable year during the deferral pe- riod) over the aggregate amount of OID that accrued in previous taxable years dur- ing the deferral period with respect to the debt instrument (less the aggregate amount of such OID that has been allowed as a de- duction in the current taxable year and any previous taxable year during the deferral period). (ii)Excess deferred OID deduction.If, as a result of an acceleration event during a taxable year in the deferral period, an is- suing entity’s aggregate deferred OID de- duction for previous taxable years with re- spect to a debt instrument (less the aggre- gate amount of such deferred OID deduc- tion that has been allowed as a deduction in a previous taxable year during the defer- ral period) exceeds theamount of the elect- ing entity’s deferred COD income (less the aggregate amount of such deferred COD income that has been included in income in the current taxable year and any pre- vious taxable year during the deferral pe- riod), the excess deferred OID deduction shall be allowed as a deduction in the tax- able year in which the acceleration event occurs. November 8, 20106182010–45 I.R.B. (iii)Examples. The following examples illustrate the rules under paragraph (d)(2) of this section: Example 1.Partner joins partnership during de- ferral period. (i) A and B each hold a 50 percent in- terest in AB partnership, a calendar-year partnership. On January 1, 2009, AB partnership issues a new debt instrument with OID and uses all of the proceeds to reacquire an outstanding applicable debt instrument of AB partnership, realizing $100 of COD income, and makes an election undersection 108(i) to defer $50 of the COD income. During the deferral period, a total of $150 of OID accrues on the new debt in- strument issued as part of the reacquisition. A and B each have a deferred amount of $25 with respect to the applicable debt instrument reacquired by AB part- nership. For 2009, $28 of OID accrues on the new debt instrument and A and B are each allocated $14 of accrued OID with respect to the new debt instru- ment. On January 1, 2010, C contributes cash to AB partnership in exchange for a 1/3 partnership inter- est. For 2010, $29 of OID accrues on the new debt instrument, and A, B, and C are each allocated $9.67 of accrued OID. (ii) Under paragraph (d)(2) of this section, AB partnership’s deferred OID deduction for 2009 is the lesser of: $28 of OID that accrues on the new debt instrument in 2009, or the excess of AB partnership’s deferred COD income of $50 over the aggregate amount of OID that accrued on the debt instrument in previous taxable years during the deferral period of $0, or $50. Thus, all $28 of the OID that accrues on the debt instrument in 2009 is deferred under section 108(i). (iii) Under paragraph (d)(2) of this section, AB partnership’s deferred OID deduction for 2010 is the lesser of: $29 of OID that accrues on the new debt instrument in 2010, or the excess of AB partnership’s deferred COD income of $50 over the aggregate amount of OID that accrued on the debt instrument in previous taxable years during the deferral period of $28, or $22. Thus, $22 of the $29 of OID that accrues in 2010 is deferred under section 108(i). A, B, and C will each defer $7.33 of the $9.67 of accrued OID that was allocated to each of them. Example 2.Acceleration of deferred items during deferral period. (i) On January 1, 2009, ABC part- nership, a calendar-year partnership with three part- ners, issues a new debt instrument with OID and uses all of the proceeds to reacquire an outstanding ap- plicable debt instrument of ABC partnership. ABC partnership realizes $150 of COD income and makes an election under section 108(i) to defer the $150 of COD income. A’s deferred amount with respect to the applicable debt instrument is $75, while B and C each have a deferred amount of $37.50. In 2009, $28 of OID accrues on the new debt instrument and is al- located $7.00 to A and $10.50 to each of B and C. In 2010, $29 of OID accrues on the new debt instrument and is allocated $7.25 to A and $10.87 to each of B and C. In 2011, $30 of OID accrues on the new debt instrument and is allocated $7.50 to A and $11.25 to each of B and C. In 2012, $31 of OID accrues on the new debt instrument and is allocated $7.75 to A and $11.62 to each of B and C. On December 31, 2012, A’s entire share of ABC partnership’s deferred items is accelerated under paragraph (b)(6) of this section. For 2012, A includes $75 of COD income in income and is allowed a deduction of $21.75 for A’s share of ABC partnership’s deferred OID deduction for tax- able years 2009 through 2011, and a deduction of $7.75 for A’s share of ABC partnership’s OID that accrues on the debt instrument in 2012. (ii) Under paragraph (d)(2) of this section, ABC partnership’s deferred OID deduction for 2012 is the lesser of: $23.35 ($31 of OID that accrues on the new debt instrument in 2012 less $7.75 of this OID that is allowed as a deduction to A in 2012) or $9.75 (the excess of $75 (ABC partnership’s deferred COD in- come of $150 less A’s share of ABC partnership’s de- ferred COD income that is included in A’s income for 2012 of $75) over $65.25 (the aggregate amount of OID that accrued in previous taxable years of $87 less the aggregate amount of such OID that has been al- lowed as a deduction by A in 2012 of $21.75)). Thus, of the $31 of OID that accrues in 2012, $9.75 is de- ferred under section 108(i). (3)Effect of an election under section 108(i) on recapture amounts under sec- tion 465(e)—(i)In general.Totheex- tent that a decrease in a partner’s or share- holder’s amount at risk (as defined in sec- tion 465) in an activity as a result of a reacquisition of an applicable debt instru- ment would cause a partner with a deferred amount or a shareholder with a share of the S corporation’s deferred COD income to have income under section 465(e) in the taxable year of the reacquisition, such decrease (not to exceed the partner’s de- ferred amount or the shareholder’s share of the S corporation’s deferred COD income with respect to that applicable debt instru- ment) (deferred section 465 amount) shall not be taken into account for purposes of determining the partner’s or shareholder’s amount at risk in an activity under section 465 as of the close of the taxable year of the reacquisition. A partner’s or shareholder’s deferred section 465 amount is treated as a decrease in the partner’s or shareholder’s amount at risk in an activity at the same time, and to the extent remaining in same amount, as the partner recognizes its de- ferred amount or the S corporation share- holder recognizes its share of the S corpo- ration’s deferred COD income. (ii)Example. The following example illustrates the rules in paragraph (d)(3) of this section: Example. (i) PRS is a calendar-year partnership with two equal partners, individuals A and B. PRS is engaged in an activity described in section 465(c) (Activity). PRS has a $500 recourse applicable debt instrument outstanding. Each partner’s amount at risk on January 1, 2009 is $50. On June 1, 2009, the cred- itor agrees to cancel the $500 indebtedness. PRS re- alizes $500 of COD income as a result of the reacqui- sition. The partners’ share of the liabilities of PRS decreases by $500 under section 752(b), and each partner’s amount at risk is decreased by $250. Other than the $500 of COD income, PRS’s income and ex- penses for 2009 are equal. PRS makes an election under section 108(i) to defer $200 of the $500 COD income realized in connection with the reacquisition. PRS allocates the $500 of COD income equally be- tween its partners, A and B. A and B each have a COD income amount of $250 with respect to the applica- ble debt instrument. PRS determines that, for both partners A and B, $100 of the $250 COD income amount is the deferred amount, and $150 is the in- cluded amount. Beginning in each taxable year 2014 through 2018, A and B each include $20 of the de- ferred amount in gross income. (ii) Under paragraph (d)(3)(i) of this section, $50 of the $250 decrease in A’s and B’s amount at risk in Activity is the deferred section 465 amount for each of A and B and is not taken into account for purposes of determining A’s and B’s amount at risk in Activ- ity at the close of 2009. In taxable year 2014, A’s and B’s amount at risk in Activity is decreased by $20 (deferred section 465 amount that equals the de- ferred amount included in A’s and B’s gross income in 2014). In taxable year 2015, A’s and B’s amount at risk in Activity is decreased by $20 for the deferred section 465 amount that equals the deferred amount included in A’s and B’s gross income in 2015. In tax- able year 2016, A’s and B’s amount at risk in Activity is decreased by $10 (the remaining amount of the de- ferred section 465 amount). (e)Election procedures and reporting requirements—(1)Partnerships—(i)In general. A partnership makes an election under section 108(i) by following proce- dures outlined in guidance and applicable forms and instructions issued by the Com- missioner. An electing partnership (or its successor) must provide to its partners certain information as required by guid- ance and applicable forms and instructions issued by the Commissioner. (ii)Tiered pass-through entities.A partnership that is a direct or indirect partner of an electing partnership (or its successor) or a related partnership or an S corporation partner must provide to its partners or shareholders, as the case may be, certain information as required by guidance and applicable forms and in- structions issued bythe Commissioner. (iii)Related partnerships.Arelated partnership must provide to its partners certain information as required by guid- ance and applicable forms and instructions issued by the Commissioner. (2)S corporations—(i)In general.An S corporation makes an election under sec- tion 108(i) by following procedures out- lined in guidance and applicable forms and instructions issued by the Commissioner. An electing S corporation (or its successor) must provide to its shareholders certain in- formation as required by guidance and ap- 2010–45 I.R.B.619November 8, 2010 plicable forms and instructions issued by the Commissioner. (ii)Related S corporations.Arelated S corporation must provide to its share- holders certain information as required by guidance and applicable forms and instruc- tionsissuedbytheCommissioner. (f)Effective/applicability date.For the applicability dates of this section, see §1.108(i)–0T(b). (g)Expiration date. This section ex- pires on August 9, 2013. PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 3. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 4. In §602.101, paragraph (b) is amended by adding the following entry in numerical order to the table to read as fol- lows: §602.101 OMB Control numbers. ***** (b) * * * CFR part or section where identified and described Current OMB control No. ***** 1.108(i)–2T........................................................... 1545–2147 ***** Steven T. Miller, Deputy Commissioner for Services and Enforcement. Approved August 6, 2010. Michael F. Mundaca, Assistant Secretary of theTreasury(TaxPolicy). (Filed by the Office of the Federal Register on August 11, 2010, 11:15 a.m., and published in the issue of the Federal Register for August 13, 2010, 75 F.R. 49380) Section 409 A.—Inclusion in Gross Incom e of Deferred Compensati on Under Nonqualified Deferred Compensation Plans 26 CFR 1.409A–3: Permissible payments. The revenue ruling provides guidance, in the form of examples, on what constitutes an unforeseeable emergency distribution under section 457(b) of the Code and section 1.457–6(c) of the regulations. The revenue ruling also applies the same standards to dis- tributions from a nonqualified deferred compensation plan subject to section 409A. See Rev. Rul. 2010-27, page 620. Section 457.—Deferred Compensation Plans of State and Local Governments and Tax- Exempt Organizations (Also Section 409A—Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans) 26 CFR 1.457–6(c): Timing of distributions under eligible plans. (Also 26 CFR 1.409A–3: Permissible payments). This ruling provides guidance, in the form of examples, on what constitutes an unforeseeable emergency distribution un- der section 457(b) of the Code and regula- tions section 1.457–6(c). The ruling also applies the same standards to distributions from a nonqualified deferred compensa- tion plan subject to section 409A. Rev. Rul. 2010–27 ISSUE Whether a plan is permitted to make an unforeseeable emergency distribution to a participant under § 457(d)(1)(A)(iii) of the Internal Revenue Code in the following factual situations? FACTS State X maintains Plan Y, an eligible de- ferred compensation plan under § 457(b) and § 1.457–2(f) of the Income Tax Regu- lations. Under the terms of Plan Y, a partic- ipant who has an unforeseeable emergency before retirement or other severance from employment may request an unforeseeable emergency distribution. The provisions of Plan Y governing unforeseeable emergency distributions are substantiallysimilartoSection5.10of the Model Amendment contained in the Appendix to Rev. Proc. 2004–56, 2004–2 C.B. 376. Specifically, an unforeseeable emergency is defined in Plan Y as a se- vere financial hardship of the participant resulting from any of the following: an illness or accident of the participant, the participant’s spouse, or the participant’s dependent (as defined in § 152(a)); loss of the participant’s property due to ca- sualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s insur- ance,e.g., as a result of a natural disaster); the need to pay for the funeral expenses of the participant’s spouse or dependent (as defined in § 152(a)); or other similar extraordinary and unforeseeable circum- stances arising as a result of events beyond the control of the participant. The plan document provides various examples of an unforeseeable emergency, including the imminent foreclosure of, or eviction from, the participant’s primary residence. The plan document states that, except as otherwise specifically provided, neither the purchase of a home nor the payment of college tuition is an unforeseeable emer- gency. The plan document limits the amount of a distribution on account of an unfore- seeable emergency to the extent that such emergency is or may be relieved either: November 8, 20106202010–45 I.R.B. through reimbursement or compensation from insurance or otherwise; by liquida- tion of the participant’s assets, to the ex- tent the liquidation of such assets would not itself cause severe financial hardship; or by cessation of deferrals under Plan Y. While distributions because of an un- foreseeable emergency may not exceed the amount reasonably necessary to satisfy the emergency need, Plan Y allows any dis- tribution to include the amount necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. In each of the situations below, the plan participant requests a distribution to pay certain expenses, as well as an additional amount to pay federal, state, or local in- come taxes that will result from the dis- tribution, and the participant provides ad- equate documentation under the facts and circumstances regarding the claimed ex- pense, including the amount (if any) of in- surance that will cover the expense and that the participant has no other source of funds to pay the expense. Situation 1. Participant A requests an unforeseeable emergency distribution from Plan Y to pay for the cost of hav- ing A’s principal residence repaired after significant water damage from a water leak, that was discovered in the basement. Participant A provides written estimates of the repair cost. Situation 2. Participant B requests an unforeseeable emergency distribution from Plan Y to pay for funeral expenses for B’s adult son, who is not a dependent (as defined in § 152(a)) of B. B provides a bill from the funeral home that itemizes the cost of the funeral expenses. Situation 3. Participant C requests an unforeseeable emergency distribution from Plan Y to pay accumulated credit card debt, which is not due to any events that are extraordinary and unforeseeable circumstances arising as a result of events beyond the control of C. LAW AND ANALYSIS In order to be an eligible deferred com- pensation plan under § 457(b), a plan must satisfy the distribution requirements of § 457(d). Section 457(d)(1)(A) allows distributions to be made available only in certain events, which include when the participant is faced with an unforeseeable emergency. An unforeseeable emergency is defined in § 1.457–6(c)(2)(i)as a severe financial hardship of the participant or beneficiary resulting from: an illness or accident of the participant or beneficiary, the par- ticipant’s or beneficiary’s spouse, or the participant’s or beneficiary’s dependent (as defined in § 152(a)); loss of the par- ticipant’s or beneficiary’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s insur- ance,e.g., as a result of a natural disaster); or other similar extraordinary and unfore- seeable circumstances arising as a result of events beyond the control of the partic- ipant or the beneficiary. For example, the imminent foreclosure of or eviction from the participant’s or beneficiary’s primary residence may constitute an unforeseeable emergency. In addition, the need to pay for medical expenses, including non-re- fundable deductibles, as well as for the cost of prescription drug medication, may constitute an unforeseeable emergency. Finally, the need to pay for the funeral expenses of a spouse or a dependent (as definedin§152(a))mayalsoconstitutean unforeseeable emergency. However, the purchase of a home and the payment of college tuition are not considered unfore- seeable emergencies. Under § 1.457–6(c)(2)(ii), whether a participant or beneficiary is faced with an unforeseeable emergency permitting a dis- tribution under § 457(d)(1)(A) is deter- mined based on the relevant facts and cir- cumstances of each case. In any case, how- ever, a distribution on account of an un- foreseeable emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or other- wise, by liquidation of the participant’s as- sets, to the extent the liquidation of such assets would not itself cause severe finan- cial hardship, or by cessation of deferrals under the plan. Under § 1.457–6(c)(2)(iii), a distribu- tion due to an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the emergency need. However, the distribution may include any amount necessary to pay any federal, state, or local income taxes or penalties reason- ably anticipated to result from the distribu- tion. A plan is not required to provide for dis- tributions in all of the events permitted un- der § 457(d)(1)(A) in order to constitute an eligible deferred compensation plan un- der § 457(b). Further, if a plan provides for distributions due to an unforeseeable emergency under § 457(d)(1)(A)(iii), it is not required to include all of the events for which distributions are permitted under § 457(d)(1)(A)(iii) and § 1.457–6(c)(2)(i). Section 5.10 of the Model Amendment published in the Appendix to Rev. Proc. 2004–56 provides for distributions under all of the conditions for which unforesee- able emergency distributions are permitted under the regulations, including not only a number of specific examples but also any other similar extraordinary and unforesee- able circumstances arising as a result of events beyond the control of the partici- pant or the beneficiary. The terms of Plan Y are substantially the same as those in Section 5.10 of the Model Amendment. The facts inSituation 1do not fit within any of the specific examples that are listed in § 1.457–6(c)(2)(i) or Plan Y as consti- tuting an unforeseeable emergency. Nev- ertheless, § 1.457–6(c)(2)(i) and Plan Y also authorize distribution in other similar extraordinary and unforeseeable circum- stances arising as a result of events beyond the control of the participant. The need to repair the principal residence because of significant water damage, that is not cov- ered by insurance is an extraordinary and unforeseeable circumstance that arises as a result of events beyond the control of the participant and is substantially similar to the need to pay for damage to a home as a result of a natural disaster. The facts inSituation 2also do not fit within any of the specific examples that are listed in § 1.457–6(c)(2)(i) or Plan Y as constituting an unforeseeable emergency. The need to pay for funeral expenses of a spouse or dependent is one of the ex- amples that is listed in the regulation and the plan document as constituting an un- foreseeable emergency, but the facts in Situation 2involve the death of an adult son who is not a dependent (as defined in § 152(a)) of the participant. Neverthe- less, § 1.457–6(c)(2)(i) and Plan Y also authorize payment in other similar extra- ordinary and unforeseeable circumstances arising as a result of events beyond the 2010–45 I.R.B.621November 8, 2010 control of the participant. The need to pay for the funeral expenses of a non-depen- dent adult son is an extraordinary and un- foreseeable circumstance that arises as a result of events beyond the control of the participant and that is substantially similar to the need to pay for the funeral expenses of a dependent. The facts inSituation 3do not fit within any of the specific examples set forth in § 1.457–6(c)(2)(i) or Plan Y as constituting an unforeseeable emergency, nor do they present facts indicating that an unforesee- able emergency circumstance has arisen as a result of events beyond the control of the participant. HOLDINGS InSituation 1andSituation 2,PlanYis permitted to provide unforeseeable emer- gency distributions to Participant A and Participant B under § 457(d)(1)(A)(iii). InSituation 3, Plan Y is not permit- ted to provide an unforeseeable emer- gency distribution to Participant C under § 457(d)(1)(A)(iii). APPLICATION OF ANALYSIS TO PLANS SUBJECT TO § 409A Section 409A(a) applies to amounts deferred under a nonqualified deferred compensation plan. If such a plan fails to meet the requirements of § 409A(a), all amounts deferred under the plan for that taxable year and all previous tax- able years are includible in income and subject to additional taxes. As provided in § 409A(a)(2)(A), one of the require- ments of § 409A(a) is that the nonquali- fied deferred compensation plan provide that amounts deferred under the plan are payable only upon one or more of the specified events listed in the statute, which include the occurrence of an unforeseeable emergency. Although a plan described in § 457(b) is not subject to § 409A, the definition of “unforeseeable emergency” under § 1.409A–3(i)(3) is substantially similar to the definition of “unforesee- able emergency” under § 1.457–6(c)(2)(i). Accordingly, the principles and rulings set forth in this revenue ruling apply to an amount deferred under a nonquali- fied deferred compensation plan subject to § 409A(a) that may be paid under the terms of the plan upon the occurrence of an event constituting an unforeseeable emergency that complies with § 409A(a) and § 1.409A–3(i)(3). DRAFTING INFORMATION The principal author of this revenue rul- ing is Vernon S. Carter of the Office of Division Counsel/Associate Chief Coun- sel (Tax Exempt & Government Entities). For further information regarding this rev- enue ruling, contactVernon S. Carter at (202) 622–6060 (not a toll-free call). Section 6411.—Tentative Carryback and Refund Adjustments 26 CFR 1.6411–2: Computation of tentative carry- back adjustments. T.D. 9499 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Clarification to Section 6411 Regulations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations amending existing regulations under section 6411 of the Internal Rev- enue Code (Code) relating to the computa- tion and allowance ofthe tentative carry- back adjustment. These regulations adopt without change the rules of the temporary regulations, which clarify that, for pur- poses of allowing a tentative adjustment, the IRS may credit or reduce the tentative adjustment by both assessed and certain unassessed tax liabilities. These final reg- ulations affect taxpayers that file an appli- cation for a tentative carryback allowance. DATES:Effective Date:These regulations are effective on August 24, 2010. Applicability Date:These regulations apply with respect to applications for ten- tative refund filed on or after August 24, 2010. FOR FURTHER INFORMATION CONTACT: Contact ElizabethMezheritsky at (202) 622–3600 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background and Explanation of Revisions This document contains final regula- tions amending the Income Tax Regula- tions (26 CFR part 1) under section 6411 relating to the computation and allowance of the tentative carryback adjustment. On August 24, 2007, temporary regula- tions (T.D. 9355, 2007–2 C.B. 577 [72 FR 48933]) and a notice of proposed rulemak- ing by cross-reference to temporary reg- ulations (REG–118886–06, 2007–2 C.B. 591 [72 FR 48952]) were published in the Federal Register. On October 4, 2007, corrections to the temporary regulations were published in theFederal Register (72 FR 56619). Only one set of writ- ten comments responding to the notice of proposed rulemaking was received, and the same commenter was the sole speaker at a public hearing on the notice of pro- posed rulemaking, which was held on Feb- ruary 5, 2008. After consideration of the comments, the temporary regulations are adopted without change by this Treasury decision. The comments are discussed in the preamble. Explanation of Provisions and Summary of Comments In general, section 6411(a) provides that, in the case of certain loss or credit carrybacks, a taxpayer may file an appli- cation for a tentative carryback adjustment of the tax for a prior taxable year. Under section 6411(b), any resulting decrease in tax attributable to the carryback must be credited against any tax or installment “then due” from the taxpayer, or refunded to the taxpayer. Existing regulations at section 1.6411–3(d)(1)(iii) further provide that the decrease in tax is first applied against any unpaid amount of tax that is “due and payable” on the date the decrease is allowed. These regulations amend existing reg- ulations under section 6411 to clarify the computation and allowance of the tentative carryback adjustment. The ten- tative allowance is computed pursuant to §1.6411–2 but applied pursuant to November 8, 20106222010–45 I.R.B. §1.6411–3. The regulations provide that, for purposes of computing the tentative allowance under section 6411, the Com- missioner will not consider amounts to which the taxpayer and the Commissioner are in disagreement. For purposes of ap- plying the tentative allowance, however, the regulations provide that the Commis- sioner may credit or reduce the tentative adjustment by any assessed tax liabili- ties, unassessed liabilities determined in a statutory notice of deficiency, unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding, and other unassessed liabilities in rare and unusual circumstances. Regarding unassessed li- abilities determined in a statutory notice of deficiency, see Rev. Rul. 2007–51. Regarding unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding, see Rev. Rul. 2007–52. See also §601.601(d)(2). The sole commenter asserted that the IRS lacks the authority to credit a tax de- crease due to a tentative carryback adjust- ment against a tax liability unless the li- ability has been assessed against the tax- payer. According to the commenter, an assessed liability is the only proper inter- pretation of the terms “due and payable” and “then due” for purposes of section 6411(b). The Treasury Department and the IRS disagree with this position. The gen- eral authority to apply credits is provided by section 6402, which permits the IRS to credit the amount of any overpayment, including interest, against any tax liabil- ity of the person who made the overpay- ment. Nothing in section 6402 or the ap- plicable regulations specifies when a lia- bility arises for purposes of crediting over- payments. The Treasury Department and IRS have determined that both assessed and certain unassessed liabilities are ap- propriately considered “then due” for pur- poses of section 6411. Accordingly, the temporary regulations are adopted as final regulations without change. Special Analyses It has been determined that this Trea- sury decision is not a significant reg- ulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these final regulations and because these final 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, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small businesses and no comments were received. Drafting Information The principal author of these final regu- lations is Elizabeth K. Mezheritsky, Office of the Associate ChiefCounsel (Procedure and Administration). ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR Part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.6411–2 is amended by: 1. Revising paragraph (a). 2. Revising paragraph (b). The revisions read as follows: §1.6411–2 Computation of tentative carryback adjustment. (a)Tax previously determined.Thetax- payer is to determine the amount of de- crease, attributable to the carryback, in tax previously determined for each tax- able year before the taxable year of the net operating loss, net capital loss, or un- used investment credit. The tax previously determined is to be ascertained in accor- dance with the method prescribed in sec- tion 1314(a). Thus, the tax previously de- termined will be the tax shown on the re- turn as filed, increased by any amounts as- sessed (or collected without assessment) as deficiencies before the date of the filing of the application for a tentative carryback adjustment, and decreased by any amounts abated, credited, refunded, or otherwise re- paid prior to that date. Any items as to which the Commissioner and the taxpayer are in disagreement at the time of the fil- ing of the application shall, for purposes of §1.6411–2, be taken into account in as- certaining the tax previously determined only if, and to the extent that, they were reported on the return, or were reflected in any amounts assessed (or collected with- out assessment) as deficiencies, or in any amounts abated, credited, refunded, or oth- erwise repaid, before the date of filing the application. The tax previously deter- mined, therefore, will reflect the foreign tax credit and the credit for tax withheld at source provided in section 33. (b)Decrease attributable to carryback. After ascertaining the tax previously de- termined in the manner described in para- graph (a) of this section, the taxpayer shall determine the decrease in tax previously determined attributable to the carryback and any related adjustments on the basis of the items of tax taken into account in computing the tax previously determined. In determining any decrease attributable to the carryback or any related adjustment, items shall be taken into account under this subsection only to the extent that they were reported on the return, or were re- flected in amounts assessed (or collected without assessment) as deficiencies, or in amounts abated, credited, refunded, or oth- erwise repaid, before the date of filing the application for a tentative carryback ad- justment. If the Commissioner and the tax- payer are in disagreement as to the proper treatment of any item, it shall be assumed, for purposes of determining the decrease in the tax previously determined, that the item was reported correctly by the tax- payer unless, and to the extent that, the dis- agreement has resulted in the assessment of a deficiency (or the collection of an amount without an assessment), or the al- lowing or making of an abatement, credit, refund, or other repayment, before the date of filing the application. Thus, if the tax- payer claimed a deduction on its return of $50,000 for salaries paid its officers but the Commissioner proposes that the deduction should not exceed $20,000, and the Com- missioner and the taxpayer have not agreed on the amount properly deductible before the date the application for a tentative car- ryback adjustment is filed, $50,000 shall be considered as the amount properly de- ductible for purposes of determining the 2010–45 I.R.B.623November 8, 2010 decrease in tax previously determined in respect of the application for a tentative carryback adjustment. In determining the decrease in tax previously determined, any items that are affected by the carryback must be adjusted to reflect the carryback. Thus, unless otherwise provided, any de- duction limited, for example, by adjusted gross income, such as the deduction for medical, dental, etc., expenses, is to be re- computed on the basis of the adjusted gross income as affected by the carryback. See §1.6411–3(d) for rules on the application of the decrease in tax to any tax liability. ***** §1.6411–2T [Removed]. Par. 3. Section 1.6411–2T is removed. Par. 4. Section 1.6411–3 is amended by: 1. Revising paragraph (b). 2. Revising paragraph (c). 3. Revising paragraph (d)(1) introduc- tory text. 4. Revising paragraph (d)(1)(ii). 5. Revising paragraph (d)(1)(iii). 6. Revising paragraph (d)(2). 7. Revising paragraph (d)(3). The revisions read as follows: §1.6411–3 Allowance of adjustments. ***** (b)Examination. Within the 90-day pe- riod described in paragraph (a) of this sec- tion, the Commissioner shall make, to the extent deemed practicable within this pe- riod, an examination of the application to discover omissions and errors of compu- tation. The Commissioner shall determine within this period the decrease in tax pre- viously determined, affected by the car- ryback or any related adjustments, upon the basis of the application and examina- tion. The decrease shall be determined in the same manner as that provided in sec- tion 1314(a) for the determination by the taxpayer of the decrease in taxes previ- ously determined, which must be set forth in the application for a tentative carryback adjustment. The Commissioner may cor- rect any errors of computation or omis- sions discovered upon examination of the application. In determining the decrease in tax previously determined which is af- fected by the carryback or any related ad- justment, the Commissioner may correct any mathematical error appearing on the application and may correct any modifi- cation required by the law and incorrectly made by the taxpayer in computing the net operating loss, net capital loss, or un- used investment credit, the resulting car- rybacks, or the net operating loss deduc- tion, capital loss deduction, or investment credit allowable. If the required modifica- tion has not been made by the taxpayer and the Commissioner has the necessary infor- mation to make the modification within the 90-day period, the Commissioner may, in the Commissioner’s discretion, make the modification. In determining the decrease, the Commissioner will not, for example, change the amount claimed on the return as a deduction for depreciation because the Commissioner believes that the taxpayer has claimed an excessive amount; and the Commissioner will not include in gross in- come any amount not so included by the taxpayer, even though the Commissioner believes that the amount is subject to tax andproperlyshouldbeincludedingross income. (c)Disallowance in whole or in part.If the Commissioner finds that an application for a tentative carryback adjustment con- tains material omissions or errors of com- putation, the Commissioner may disallow the application in whole or in part with- out further action. If the Commissioner deems that any error of computation can be corrected within the 90-day period, the Commissioner may do so and allow the ap- plication in whole or in part. The Com- missioner’s determination as to whether the Commissioner can correct any error of computation within the 90-day period shall be conclusive. The Commissioner’s action in disallowing, in whole or in part, any ap- plication for a tentative carryback adjust- ment shall be final and may not be chal- lenged in any proceeding. The taxpayer may, however, file a claim for credit or re- fund under section 6402, and may maintain a suit based on the claim if the claim is dis- allowed or if the Commissioner does not act upon the claim within 6 months from thedateitisfiled. (d)Application of decrease. (1) Each decrease determined by the Commissioner in any previously determined tax that is affected by the carryback or any related adjustments shall first be applied against any unpaid amount of the tax with respect to which such decrease was determined. The unpaid amount of tax may include one or more of the following: ***** (ii) An amount the time for payment of which has been extended under section 6164 and which is due and payable on or after the date of the allowance of the de- crease. (iii) An amount (not including an amount the time for payment of which has been extended under section 6164) which is due and payable on or after the date of the allowance of the decrease, including any assessed liabilities, unassessed liabil- ities determined in a statutory notice of deficiency, unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding, and other unassessed liabili- ties in rare and unusual circumstances. (2) If the unpaid amount of tax includes more than one unpaid amount, the Com- missioner may determine against which amount or amounts, and in what propor- tion, the decrease is to be applied. In gen- eral, however, the decrease will be applied against any amounts described in para- graphs (d)(1)(i) through (iii) of this section in the order named. If there are several amounts of the type described in paragraph (d)(1)(iii) of this section, any amount of the decrease that is to be applied against the amount will be applied by assuming that the tax previously determined minus the amount of the decrease to be so applied is “the tax” and that the taxpayer had elected to pay the tax in installments. The unpaid amount of tax against which a decrease may be applied under paragraph (d)(1) of this section may not include any amount of tax for any taxable year other than the year of the decrease. After making the application, the Commissioner will credit any remainder of the decrease against any unsatisfied amount of any tax for the tax- able year immediately preceding the tax- able year of the net operating loss, capital loss, or unused investment credit, the time for payment of which has been extended under section 6164. (3) Any remainder of the decrease after the application and credits may, within the 90-day period, in the discretion of the Commissioner, be credited against any tax liability or installment thereof then due from the taxpayer (including assessed liabilities, unassessed liabilities deter- mined in a statutory notice of deficiency, November 8, 20106242010–45 I.R.B. unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding, and other unassessed liabilities in rare and unusual circumstances), and, if not so credited, shall be refunded to the taxpayer within the 90-day period. ***** §1.6411–3T [Removed]. Par. 5. Section 1.6411–3T is removed. Steven T. Miller, Deputy Commissioner for Services and Enforcement. Approved August 11, 2010. Michael Mundaca, Assistant Secretary of theTreasury(TaxPolicy). (Filed by the Office of the Federal Register on August 23, 2010, 8:45 a.m., and published in the issue of the Federal Register for August 24, 2010, 75 F.R. 51934) 2010–45 I.R.B.625November 8, 2010 Part IV. Items o fGeneralInterest Notice of Prop osed Rulemaking Series LLCs an dCell Companies REG–119921–09 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Noti ce of proposed rulemaking. SUMMARY: This document contains pro- posed regulations regarding the classifica- tion for Federal tax purposes of a series of a domestic series limited liability com- pany (LLC), a cell of a domestic cell com- pany, or a foreign series or cell that con- ducts an insurance business. The proposed regulations provide that, whether or not a series of a domestic series LLC, a cell of a domestic cell company, or a foreign se- ries or cell that conducts an insurance busi- ness is a juridical person for local law pur- poses, for Federal tax purposes it is treated as an entity formed under local law. Clas- sification of a series or cell that is treated as a separate entity for Federal tax pur- poses generally is determined under the same rules that govern the classification of other types of separate entities. The pro- posed regulations provide examples illus- trating the application of the rule. The pro- posed regulations willaffect domestic se- ries LLCs; domestic cell companies; for- eign series, or cells that conduct insurance businesses; and their owners. DATES: Written or electronic comments and requests for a public hearing must be received by December 13, 2010. ADDRE SSES: Send submissions to: CC:P A:LPD:PR(REG–119921–09), Room 5203, Internal Revenue Service, PO Bo x 7604, Ben Franklin Station, Wash ington, DC 20044. Submissions may be ha nd-delivered Monday through Friday betw een the hours of 8 a.m. and 4 p.m. to C C:PA:LPD:PR (REG–119921–09), Cou rier’s Desk, Internal Revenue Ser vice, 1111 Constitution Avenue, NW, Was hington, DC, or sent electronically, via theFederaleRulemaking portal atwww. regulations.gov(IRS REG–119921–0 9) FOR FURTHER IN FORMATION CONTACT: Conc erning the proposed regulations, Joy Spies, (202) 622–3050; concerning su bmissions of comments, Oluwafunmil ayo (Funmi) Taylor, (202) 622–7180 (no t toll-free numbers). SUPPLEMENTA RY INFORMATION: Background 1.Introduc tion A number of s tates have enacted statutes pr oviding for the creation of en- tities that may establish series, including limited lia bility companies (series LLCs). In general , series LLC statutes provide that a limi ted liability company may es- tablish se parate series. Although series of a series LLC generally are not treated as separat e entities for state law purposes and, thus, cannot have members, each series ha s “associated” with it specified members, assets, rights, obligations, and investme nt objectives or business pur- poses. Me mbers’ association with one or more p articular series is comparable to direc t ownership by the members in such ser ies, in that their rights, duties, and powe rs with respect to the series are direct a nd specifically identified. If the condit ions enumeratedin the relevant statut e are satisfied, the debts, liabilities, and obl igations of one series generally are enforc eable only against the assets of that series and not against assets of other series or of t he series LLC. Certai n jurisdictions have enacted statu tes providing for entities similar to the serie s LLC. For example, certain statutes provi de for the chartering of a legal en- tity ( or the establishment of cells) under astru cture commonly known as a pro- tect ed cell company, segregated account comp any or segregated portfolio company (cel l company). A cell company may es- tabl ish multiple accounts, or cells, each of whic h has its own name and is identified with a specific participant, but generally is not treated under local law as a legal entity dis tinct from the cell company. The assets of e ach cell are statutorily protected from the creditors of any other cell and from the creditors of t he cell company. Under current law, there is little spe- cific guidanc e regarding whether for Fed- eral tax purpo ses a series (or cell) is treated as an entity se parate from other series or the series LLC (or other cells or the cell company, as t he case may be), or whether the company a nd all of its series (or cells) should be tre ated as a single entity. Notice 2008– 19, 2008–1 C.B. 366 re- quested comm ents on proposed guidance concerning i ssues that arise if arrange- ments enter ed into by a cell constitute insurance f or Federal income tax purposes. The notice a lso requested comments on the need for guidance concerning simi- lar segreg ated arrangements that do not involve in surance. The IRS received a number of c omments requesting guidance for simila r arrangements not involving insuranc e, including series LLCs and cell companie s. These comments generally recommen ded that series and cells should be treate d as separate entities for Federal tax purpo ses if they are established under a statute with provisions similar to the series LLC stat utes currently in effect in several states. The IRS and Treasury Department general ly agree with these comments. See §601.60 1(d)(2)(ii)(b ). 2.Entit y Classification for Federal Tax Purpos es A.Regu latory framework Sectio ns301.7701–1through 301.77 01–4 of the Procedure and Admin- istrat ion Regulations provide the frame- work fo r determining an organization’s en- tity cl assification for Federal tax purposes. Class ification of an organization depends on whe ther the organization is treated as: (i) a s eparate entity under §301.7701–1, (ii) a “business entity” within the mean- ing of §301.7701–2(a) or a trust under §301 .7701–4, and (iii) an “eligible entity” unde r §301.7701–3. Sect ion 301.7701–1(a)(1) provides that the d etermination of whether an entity is sepa rate from its owners for Federal tax purp oses is a matter of Federal tax law and d oes not depend on whether the or- gani zation is recognized as an entity un- der local law. Section 301.7701–1(a)(2) November 8, 20106262010–45 I.R.B. provides that a joint venture or other con- tractual arrangement may create a separate entity for Federal tax purposes if the par- ticipants carry on a trade, business, finan- cial operation, or venture and divide the profits therefrom. However, a joint un- dertaking merely to share expenses does not create a separate entity for Federal tax purposes, nor does mere co-owner- ship of property where activities are lim- ited to keeping property maintained, in re- pair, and rented or leased.Id. Section 301.7701–1(b) provides that the tax classification of an organiza- tion recognized as a separate entity for tax purposes generally is determined under §§301.7701–2, 301.7701–3, and 301.7701–4. Thus, for example, an organ- ization recognized as an entity that does not have associates or an objective to carry on a business may be classified as a trust under §301.7701–4. Section 301.7701–2(a) provides that a business entity is any entity recognized for Federal tax purposes (including an entity with a single owner that may be disre- garded as an entity separate from its owner under §301.7701–3) that is not properly classified as a trustor otherwise subject to special treatment under the Internal Revenue Code (Code). A business entity with two or more members is classified for Federal tax purposes as a corporation or a partnership. See §301.7701–2(a). A business entity with one owner is clas- sified as a corporation or is disregarded. See §301.7701–2(a). If the entity is dis- regarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner. However, §301.7701–2(c)(2)(iv) and (v) provides foranotherwisedisregardedentitytobe treated as a corporation for certain Federal employment tax and excise tax purposes. Section 301.7701–3(a) generally pro- vides that an eligible entity, which is a business entity that is not a corporation un- der §301.7701–2(b), may elect its classifi- cation for Federal tax purposes. B.Separate entity classification The threshold question for determining the tax classification of a series of a se- ries LLC or a cell of a cell company is whether an individual series or cell should be considered an entity for Federal tax pur- poses. The determination of whether an organization is an entity separate from its owners for Federal tax purposes is a mat- ter of Federal tax law and does not de- pend on whether the organization is rec- ognized as an entity under local law. Sec- tion 301.7701–1(a)(1). InMoline Proper- ties, Inc. v. Commissioner,319U.S.436 (1943), the Supreme Court noted that, so long as a corporation was formed for a pur- pose that is the equivalent of business ac- tivity or the corporation actually carries on a business, the corporation remains a tax- able entity separate from its shareholders. Although entities that are recognized un- der local law generally are also recognized for Federal tax purposes, a state law entity may be disregarded if it lacks business pur- pose or any business activity other than tax avoidance. SeeBertoli v. Commissioner, 103 T.C. 501 (1994);Aldon Homes, Inc. v. Commissioner, 33 T.C. 582 (1959). The Supreme Court inCommissioner v. Culbertson, 337 U.S. 733 (1949), and Commissioner v. Tower, 327 U.S. 280 (1946), set forth the basic standard for de- termining whether a partnership will be respected for Federal tax purposes. In general, a partnership will be respected if, considering all the facts, the parties in good faith and acting with a business pur- pose intended to join together to conduct an enterprise and share in its profits and losses. This determination is made consid- ering not only the stated intent of the par- ties, but also the terms of their agreement and their conduct.Madison Gas & Elec. Co.v.Commissioner, 633 F.2d 512, 514 (7 th Cir. 1980);Luna v. Commissioner,42 T.C. 1067, 1077–78 (1964). Conversely, under certain circum- stances, arrangements that are not recog- nized as entities under state law may be treated as separate entities for Federal tax purposes. Section 301.7701–1(a)(2). For example, courts have found entities for tax purposes in some co-ownership situa- tions where the co-owners agree to restrict their ability to sell, lease or encumber their interests, waive their rights to par- tition property, or allow certain manage- ment decisions to be made other than by unanimous agreement among co-owners. Bergford v. Commissioner,12F.3d166 (9 th Cir. 1993);Bussing v. Commissioner, 89 T.C. 1050 (1987);Alhouse v. Commis- sioner, T.C. Memo. 1991–652. However, the Internal Revenue Service (IRS) has ruled that a co-ownership does not rise to the level of an entity for Federal tax pur- poses if the owner employs an agent whose activities are limited to collecting rents, paying property taxes, insurance premi- ums, repair and maintenance expenses, and providing tenants with customary ser- vices. Rev. Rul. 75–374, 1975–2 C.B. 261. See also Rev. Rul. 79–77, 1979–1 C.B. 448, (see §601.601(d)(2)(ii)(b). Rev. Proc. 2002–22, 2002–1 C.B. 733, (see §601.601(d)(2)(ii)(b)), specifies the conditions under which the IRS will consider a request for a private letter rul- ing that an undivided fractional interest in rental real property is not an interest in a business entity under §301.7701–2(a). A number of factors must be present to ob- tain a ruling under the revenue procedure, including a limit on the number of co-own- ers, a requirement that the co-owners not treat the co-ownership as an entity (that is, that the co-ownership may not file a partnership or corporate tax return, con- duct business under a common name, exe- cute an agreement identifying any or all of the co-owners as partners, shareholders, or members of a business entity, or otherwise hold itself out as a partnership or other form of business entity), and a requirement that certain rights with respect to the prop- erty (including the power to make certain management decisions) must be retained by co-owners. The revenue procedure pro- vides that an organization that is an entity for state law purposes may not be charac- terized as a co-ownership under the guid- ance in the revenue procedure. The courts and the IRS have addressed the Federal tax classification of investment trusts with assets divided among a number of series. InNational Securities Series-In- dustrial Stocks Series v. Commissioner,13 T.C. 884 (1949),acq., 1950–1 C.B. 4, sev- eral series that differed only in the nature of their assets were created within a statu- tory open-end investment trust. Each se- ries regularly issued certificates represent- ingsharesinthepropertyheldintrustand regularly redeemed the certificates solely from the assets and earnings of the individ- ual series. The Tax Court stated that each series of the trust was taxable as a sepa- rate regulated investment company. See also Rev. Rul. 55–416, 1955–1 C.B. 416, (see §601.601(d)(2)(ii)(b)). But seeUnion Trusteed Funds v. Commissioner,8T.C. 1133 (1947), (series funds organized by a state law corporation could not be treated 2010–45 I.R.B.627November 8, 2010 as if each fund were a separate corpora- tion). In 1986, Congress added section 851(g) to the Code. Section 851(g) contains a special rule for series funds and provides that, in the case of a regulated investment company (within the meaning of section 851(a)) with more than one fund, each fund generally is treated as a separate corpora- tion. For these purposes, a fund is a segre- gated portfolio of assets the beneficial in- terests in which are owned by holders of interests in the regulated investment com- pany that are preferred over other classes or series with respect to these assets. C.Insurance company classification Section7701(a)(3)and §301.7701–2(b)(4) provide that an ar- rangement that qualifies as an insurance company is a corporation for Federal income tax purposes. Sections 816(a) and 831(c) define an insurance company as any company more than half the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwrit- ten by insurance companies. See also §1.801–3(a)(1), (“[T]hough its name, charter powers, and subjection to State insurance laws are significant in deter- mining the business which a company is authorized and intends to carry on, it is the character of the business actually done in the taxable year which determines whether a company is taxable as an insurance company under the Internal Revenue Code.”). Thus, an insurance company includes an arrangement that conducts insurance business, whether or not the arrangement is a state law entity. 3.Overview of Series LLC Statutes and Cell Company Statutes A.Domestic statutes Although §301.7701–1(a)(1) provides that state classification of an entity is not controlling for Federal tax purposes, the characteristics of series LLCs and cell companies under their governing statutes are an important factor in ana- lyzing whether series and cells generally should be treated as separate entities for Federal tax purposes. Series LLC statutes have been enacted in Delaware, Illinois, Iowa, Nevada, Okla- homa, Tennessee, Texas, Utah and Puerto Rico. Delaware enacted the first series LLC statute in 1996. Del. Code Ann. Tit. 6, section 18–215 (the Delaware statute). Statutes enacted subsequently by other states are similar, butnot identical, to the Delaware statute. All of the statutes pro- vide a significant degree of separateness for individual series within a series LLC, but none provides series with all of the attributes of a typical state law entity, such as an ordinary limited liability company. Individual series generally are not treated as separate entities for state law purposes. However, in certain states (currently Illi- nois and Iowa), a series is treated as a separate entity to the extent provided in the series LLC’s articles of organization. The Delaware statute provides that a limited liability company may establish, or provide for the establishment of, one or more designated series of members, man- agers, LLC interests or assets. Under the Delaware statute, any such series may have separate rights, powers, or duties with re- spect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations, and any such series may have a separate busi- ness purpose or investment objective. Ad- ditionally, the Delaware statute provides that the debts, liabilities, obligations, and expenses of a particular series are enforce- able against the assets of that series only, and not against the assets of the series LLC generally or any other series of the LLC, and, unless the LLC agreement pro- vides otherwise, none of the debts, liabil- ities, obligations, and expenses of the se- ries LLC generally or of any other series of the series LLC are enforceable against the assets of the series, provided that the fol- lowing requirements are met: (1) the LLC agreement establishes or provides for the establishment of one or more series; (2) records maintained for any such series ac- count for the assets of the series separately from the other assets of the series LLC, or of any other series of the series LLC; (3) the LLC agreement so provides; and (4) notice of the limitation on liabilities of a series is set forth in the series LLC’s cer- tificate of formation. Unless otherwise provided in the LLC agreement, a series established under Delaware law has the power and capacity to, in its own name, contract, hold title to assets, grant liens and security interests, and sue and be sued. A series may be managed by the members of the series or by a manager. Any event that causes a manager to cease to be a manager with respect to a series will not, in itself, cause the manager to cease to be a manager of the LLC or of any other series of the LLC. Under the Delaware statute, unless the LLC agreement provides otherwise, any event that causes a member to cease to be associated with a series will not, in itself, cause the member to cease to be associ- ated with any other series or with the LLC, or cause termination of the series, even if there are no remaining members of the se- ries. Additionally, the Delaware statute al- lows a series to be terminated and its affairs wound up without causing the dissolution of the LLC. However, all series of the LLC terminate when the LLC dissolves. Fi- nally, under the Delaware statute, a series generally may not make a distribution to the extent that the distribution will cause the liabilities of the series to exceed the fair market value of the series’ assets. The series LLC statutes of Illinois, 805 ILCS 180/37–40 (the Illinois statute), and Iowa, I.C.A. §489.1201 (the Iowa statute) provide that a series with limited liability will be treated as a separate entity to the ex- tent set forth in the articles of organization. The Illinois statute provides that the LLC and any of its series may elect to consoli- date their operations as a single taxpayer to the extent permitted under applicable law, elect to work cooperatively, elect to con- tract jointly, or elect to be treated as a sin- gle business for purposes of qualification to do business in Illinois or any other state. In addition, under the Illinois statute, a series’ existence begins upon filing of a certificate of designation with the Illinois secretary of state. A certificate of designa- tion must be filed for each series that is to have limited liability. The name of a se- ries with limited liability must contain the entire name of the LLC and be distinguish- able from the names of the other series of the LLC. If different from the LLC, the cer- tificate of designation for each series must list the names of the members if the se- ries is member-managed or the names of the managers if the series is manager-man- aged. The Iowa and Illinois statutes both provide that, unless modified by the se- ries LLC provisions, the provisions gen- erally applicable to LLCs and their man- November 8, 20106282010–45 I.R.B. agers, members, and transferees are appli- cable to each series. Some states have enacted series pro- visions outside of LLC statutes. For example, Delaware has enacted series limited partnership provisions (6 Del. C. §17–218). In addition, Delaware’s statu- tory trust statute permits a statutory trust to establish series (12 Del. C. §3804). Both of these statutes contain provisions that are nearly identical to the corresponding provisions of the Delaware series LLC statute with respect to the ability of the limited partnership or trust to create or establish separate series with the same liability protection enjoyed by series of a Delaware series LLC. All of the series LLC statutes con- tain provisions that grant series certain attributes of separate entities. For exam- ple, individual series may have separate business purposes, investment objectives, members, and managers. Assets of a par- ticular series are not subject to the claims of creditors of other series of the series LLC or of the series LLC itself, provided that certain record-keeping and notice re- quirements are observed. Finally, most series LLC statutes provide that an event that causes a member to cease to be as- sociated with a series does not cause the member to cease to be associated with the series LLC or any other series of the series LLC. However, all of the state statutes limit the powers of series of series LLCs. For example, a series of a series LLC may not convert into another type of entity, merge with another entity, or domesticate in an- other state independent from the series LLC. Several of the series LLC statutes do not expressly address a series’ ability to sue or be sued, hold title to property, or contract in its own name. Ordinary LLCs and series LLCs generally may ex- ercise these rights. Additionally, most of the series LLC statutes provide that the dissolution of a series LLC will cause the termination of each of its series. B.Statutes with respect to insurance The insurance codes of a number of states include statutes that provide for the chartering of a legal entity commonly known as a protected cell company, seg- regated account company, or segregated portfolio company. See, for example, Vt. Stat. Ann. tit. 8, chap.141, §§6031–6038 (sponsored captive insurance companies and protected cells ofsuch companies); S.C. Code Ann. tit. 38, chap. 10, §§38–10–10 through 39–10–80 (protected cell insurance companies). Under those statutes, as under the series LLC statutes described above, the assets of each cell are segregated from the assets of any other cell. The cell may issue insurance or an- nuity contracts, reinsure such contracts, or facilitate the securitization of obliga- tions of a sponsoring insurance company. Rev. Rul. 2008–8, 2008–1 C.B. 340, (see §601.601(d)(2)(ii)(b)), analyzes whether an arrangement entered into between a protected cell and its owner possesses the requisite risk shifting and risk distribution to qualify as insurance for Federal income tax purposes. Under certain domestic insurance codes, the sponsor may be orga- nized under a corporate or unincorporated entity statute. Series or cell company statutes in a number of foreign jurisdictions allow series or cells to engage in insurance businesses. See, for example, The Com- panies (Guernsey) Law, 2008 Part XXVII (Protected Cell Companies), Part XXVIII (Incorporated Cell Companies); The Com- panies (Jersey) law, 1991, Part 18D; Companies Law, Part XIV (2009 Revi- sion) (Cayman Isl.) (Segregated Portfolio Companies); and Segregated Accounts Companies Act (2000) (Bermuda). Explanation of Provisions 1.In General The proposed regulations provide that, for Federal tax purposes, a domestic series, whether or not a juridical person for local law purposes, is treated as an entity formed under local law. With one exception, the proposed regu- lations do not apply to series or cells or- ganized or established under the laws of a foreign jurisdiction. The one exception is that the proposed regulations apply to a foreign series that engages in an insurance business. Whether a series that is treated as a local law entity under the proposed reg- ulations is recognized as a separate en- tity for Federal tax purposes is determined under §301.7701–1 and general tax prin- ciples. The proposed regulations further provide that the classification of a series that is recognized as a separate entity for Federal tax purposes is determined under §301.7701–1(b), which provides the rules for classifying organizations that are rec- ognized as entities for Federal tax pur- poses. The proposed regulations define ase- ries organizationas a juridical entity that establishes and maintains, or under which is established and maintained, a series. A series organization includes a series lim- ited liability company, series partnership, series trust, protected cell company, seg- regated cell company, segregated portfolio company, or segregated account company. The proposed regulations define ase- ries statuteas a statute of a State or foreign jurisdiction that explicitly provides for the organization or establishment of a series of a juridical person and explicitly permits (1) members or participants of a series or- ganization to have rights, powers, or du- ties with respect to the series; (2) a se- ries to have separate rights, powers, or du- ties with respect to specified property or obligations; and (3) the segregation of as- sets and liabilities such that none of the debts and liabilities of the series organiza- tion (other than liabilities to the State or foreign jurisdiction related to the organ- ization or operation of the series organi- zation, such as franchise fees or adminis- trativecosts)orofanyotherseriesofthe series organization are enforceable against the assets of a particular series of the series organization. For purposes of this defini- tion, a “participant” of a series organiza- tion includes an officer or director of the series organization who has no ownership interest in the series or series organization, but has rights, powers, or duties with re- spect to the series. The proposed regulations define a se- ries as a segregated group of assets and liabilities that is established pursuant to a series statute by agreement of a series or- ganization. A series includes a cell, seg- regated account, or segregated portfolio, including a cell, segregated account, or segregated portfolio that is formed under the insurance code of a jurisdiction or is engaged in an insurance business. How- ever, the term “series” does not include a segregated asset account of a life insur- ance company, which consists of all assets the investment return and market value of which must be allocated in an identical 2010–45 I.R.B.629November 8, 2010 manner to any variable life insurance or annuity contract invested in any of the as- sets. See §1.817–5(e). Such an account is accorded special treatment under subchap- ter L. See generally section 817(a) through (c). Certain series statutes provide that the series liability limitation provisions do not apply if the series organization or se- ries does not maintain records adequately accounting for the assets associated with each series separately from the assets of the series organization or any other series of the series organization. The IRS and the Treasury Department considered whether a failure to elect or qualify for the liability limitations under the series statute should affect whether a series is a separate entity for Federal tax purposes. However, limita- tions on liability of owners of an entity for debts and obligations of the entity and the rights of creditors to hold owners liable for debts and obligations of the entity gen- erally do not alter the characterization of the entity for Federal tax purposes. There- fore, the proposed regulations provide that an election, agreement, or other arrange- ment that permits debts and liabilities of other series or the series organization to be enforceable against the assets of a par- ticular series, or a failure to comply with the record keeping requirements for the limitation on liability available under the relevant series statute, will not prevent a series from meeting the definition of “series” in the proposed regulations. For example, a series generally will not cease to be an entity under the proposed regu- lations simply because it guarantees the debt of another series within the series organization. The proposed regulations treat a series as created or organized under the laws of the same jurisdiction in which the series is established. Because a series may not be a separate juridical entity for local law purposes, this rule provides the means for establishing the jurisdiction of the series for Federal tax purposes. Under§301.7701–1(b), §301.7701–2(b) applies to a series that is recognized as a separate entity for Federal tax purposes. Therefore, a series that is itself described in §301.7701–2(b)(1) through (8) would be classified as a corporation regardless of the classification of the series organization. The proposed regulations also provide that, for Federal tax purposes, ownership of interests in a series and of the assets associated with a series is determined un- der general tax principles. A series or- ganization is not treated as the owner of a series or of the assets associated with a series merely because the series organiza- tion holds legal title to the assets associated with the series. For example, if a series or- ganization holds legal title to assets asso- ciated with a series because the statute un- der which the series organization was or- ganized does not expressly permit a series to hold assets in its own name, the series will be treated as the owner of the assets for Federal tax purposes if it bears the eco- nomic benefits and burdens of the assets under general Federal tax principles. Sim- ilarly, for Federal tax purposes, the obligor for the liability of a series is determined under general tax principles. In general, the same legal principles that apply to determine who owns inter- ests in other types of entities apply to de- termine the ownership of interests in series and series organizations. These principles generally look to who bears the economic benefits and burdens of ownership. See, for example, Rev. Rul. 55–39, 1955–1 C.B. 403, (see §601.601(d)(2)(ii)(b)). Fur- thermore, common law principles apply to the determination of whether a person is a partner in a series that is classified as a partnership for Federal tax purposes un- der §301.7701–3. See, for example,Com- missioner v. Culbertson, 337 U.S. 733 (1949);Commissioner v. Tower, 327 U.S. 280 (1946). The IRS and the Treasury Department considered other approaches to the classi- fication of series for Federal tax purposes. In particular, the IRS and the Treasury De- partment considered whether series should be disregarded as entities separate from the series organization for Federal tax pur- poses. This approach would be supported by the fact that series are not generally considered entitiesfor local law purposes (except, for example, potentially under the statutes of Illinois and Iowa, where a series may be treated as a separate entity to the extent set forth in the articles of organiza- tion). Additionally, while the statutes en- abling series organizations grant series sig- nificant autonomy, under no current statute do series possess all of the attributes of independence that entities recognized un- der local law generally possess. For ex- ample, series generally cannot convert into another type of entity, merge with another entity, or domesticate in another jurisdic- tion independent of the series organization. In addition, the dissolution of a series or- ganization generally will terminate all of its series. The IRS and the Treasury Department believe that, notwithstanding that series differ in some respects from more tradi- tional local law entities, domestic series generally should be treated for Federal tax purposes as entities formed under local law. Because Federal tax law, and not lo- cal law, governs the question of whether an organization is an entity for Federal tax purposes, it is not dispositive that domes- tic series generally are not considered en- tities for local law purposes. Additionally, the IRS and the Treasury Department be- lieve that, overall, the factors supporting separate entity status for series outweigh the factors in favor ofdisregarding series as entities separate from the series organ- ization and other series of the series or- ganization. Specifically, managers and eq- uity holders are “associated with” a se- ries, and their rights, duties, and powers with respect to the series are direct and specifically identified. Also, individual se- ries may (but generally are not required to) have separate business purposes and investment objectives. The IRS and the Treasury Department believe these factors are sufficient to treat domestic series as en- tities formed under local law. Although some statutes creating series organizations permit an individual series to enter into contracts, sue, be sued, and/or hold property in its own name, the IRS and the Treasury Department do not believe that the failure of a statute to explicitly pro- vide these rights should alter the treatment of a domestic series as an entity formed un- der local law. These attributes primarily involve procedural formalities and do not appear to affect the substantive economic rights of series or their creditors with re- spect to their property and liabilities. Even in jurisdictions where series may not pos- sess these attributes, the statutory liability shields would still apply to the assets of a particular series, provided the statutory re- quirements are satisfied. Furthermore, the rule provided in the proposed regulations would provide greater certainty to both taxpayers and the November 8, 20106302010–45 I.R.B. IRS regarding the tax status of domestic series and foreign series that conduct in- surance businesses. In effect, taxpayers that establish domestic series are placed in the same position as persons that file a certificate of organization for a state law entity. The IRS and the Treasury De- partment believe that the approach of the proposed regulations is straightforward and administrable, and is preferable to engaging in a case by case determination of the status of each series that would re- quire a detailed examination of the terms of the relevant statute. Finally, the IRS and the Treasury Department believe that a rule generally treating domestic series as local law entities would be consistent with taxpayers’ current ability to create similar structures using multiple local law entities that can elect their Federal tax classifica- tion pursuant to §301.7701–3. The IRS and the Treasury Department believe that domestic series should be classified as separate local law entities based on the characteristics granted to them under the various series statutes. However, except as specifically stated in the proposed regulations, a particular series need not actually possess all of the attributes that its enabling statute permits it to possess. The IRS and the Treasury Department believe that a domestic series should be treated as a separate local law entity even if its business purpose, in- vestment objective, or ownership overlaps with that of other series or the series organ- ization itself. Separate state law entities may have common or overlapping busi- ness purposes, investment objectives and ownership, but generally are still treated as separate local law entities for Federal tax purposes. The proposed regulations do not ad- dress the entity status for Federal tax pur- poses of a series organization. Specifi- cally, the proposed regulations do not ad- dress whether a series organization is rec- ognized as a separate entity for Federal tax purposes if it has no assets and engages in no activities independent of its series. Until further guidance is issued, the en- tity status of a foreign series that does not conduct an insurancebusiness will be de- termined under applicable law. Foreign series raise novel Federal income tax is- sues that continue tobe considered and ad- dressed by the IRS and the Treasury De- partment. 2.Classification of a Series that is Treated as a Separate Entity for Federal Tax Purposes If a domestic series or a foreign se- ries engaged in an insurance business is treated as a separate entity for Federal tax purposes, then §301.7701–1(b) applies to determine the proper tax classification of the series. However, the proposed regula- tions do not provide how a series should be treated for Federal employment tax pur- poses. If a domestic series is treated as a separate entity for Federal tax purposes, then the series generally is subject to the same treatment as any other entity for Fed- eral tax purposes. For example, a se- ries that is treated as a separate entity for Federal tax purposes may make any Fed- eral tax elections it is otherwise eligible to make independently of other series or the series organization itself, and regardless of whether other series (or the series organ- ization) do not make certain elections or make different elections. 3.Entity Status of Series Organizations The proposed regulations do not ad- dress the entity status or filing require- ments of series organizations for Federal tax purposes. A series organization gen- erally is an entity for local law purposes. An organization that is an entity for lo- cal law purposes generally is treated as an entity for Federal tax purposes. How- ever, an organization characterized as an entity for Federal income tax purposes may not have an income or informa- tion tax filing obligation. For example, §301.6031(a)-(1)(a)(3)(i) provides that a partnership with no income, deductions, or credits for Federal income tax purposes for a taxable year is not required to file a partnership return for that year. Generally, filing fees of a series organization paid by series of the series organization would be treated as expenses of the series and not as expenses of the series organization. Thus, a series organization characterized as a partnership for Federal tax purposes that does not have income, deductions, or credits for a taxableyear need not file a partnership return for the year. 4.Continuing Applicability of Tax Law Authority to Series Notwithstanding that a domestic series or a foreign series engaged in an insurance business is treated as an entity formed un- der local law under the proposed regula- tions, the Commissioner may under appli- cable law, including common law tax prin- ciples, characterize aseries or a portion of a series other than as a separate entity for Federal tax purposes. Series covered by the proposed regulations are subject to ap- plicable law to the same extent as other en- tities. Thus, a series may be disregarded under applicable law even if it satisfies the requirements of the proposed regula- tions to be treated as an entity formed un- der local law. For example, if a series has no business purpose or business activity other than tax avoidance, it may be dis- regarded under appropriate circumstances. SeeBertoli v. Commissioner, 103 T.C. 501 (1994);Aldon Homes, Inc. v. Commis- sioner, 33 T.C. 582 (1959). Furthermore, the anti-abuse rule of §1.701–2 is applica- ble to a series or series organization that is classified as a partnership for Federal tax purposes. 5.Applicability to Organizations that Qualify as Insurance Companies Notice 2008–19 requested comments on proposed guidance setting forth con- ditions under which a cell of a protected cell company would be treated as an in- surance company separate from any other entity for Federal income tax purposes. Those who commented on the notice gen- erally supported the proposed guidance, and further commented that it should ex- tend to non-insurance arrangements as well, including series LLCs. Rather than provide independent guidance for insur- ance company status setting forth what is essentially the same standard, the pro- posed regulations define the termseries to include a cell, segregated account, or segregated portfolio that is formed under the insurance code of a jurisdiction or is engaged in an insurance business (other than a segregated asset account of a life insurance company). Although the proposed regulations do not apply to a series organized or established under the laws of a foreign jurisdiction, an exception is provided for 2010–45 I.R.B.631November 8, 2010 certain series conducting an insurance business. Under thisexception, a series that is organized or established under the laws of a foreign jurisdiction is treated as an entity if the arrangements and other activities of the series, if conducted by a domestic company,would result in its being classified as an insurance company. Thus, a foreign series would be treated as an entity if more than half of the series’ business is the issuing or reinsuring of insurance or annuity contracts. The IRS and the Treasury Department believe it is appropriate to provide this rule even though the proposed regulations otherwise do not apply to a foreign series because an insurance company is classified as a per se corporation under section 7701(a)(3) regardless of how it otherwise would be treated under §§301.7701–1, 301.7701–2, or 301.7701–3. The IRS and the Treasury Department are aware that insurance-specific guidance may still be needed to address the issues identified in §3.02 of Notice 2008–19 and insurance-specific transition issues that may arise for protected cell compa- nies that previously reported in a manner inconsistent with the regulations. See §601.601(d)(2)(ii)(b). 6.Effect of Local Law Classification on Tax Collection The IRS and Treasury Department un- derstand that there are differences in local law governing series (for example, rights to hold title to property and to sue and be sued are expressly addressed in some statutes but not in others) that may affect how creditors of series, including state tax- ing authorities, may enforce obligations of a series. Thus, the proposed regulations provide that, to the extent Federal or lo- cal law permits a creditor to collect a li- ability attributable to a series from the se- ries organization or other series of the se- ries organization, the series organization and other series of the series organization may also be considered the taxpayer from whom the tax assessed against the series may be collected pursuant to administra- tive or judicial means. Further, when a creditor is permitted to collect a liability at- tributable to a series organization from any series of the series organization, a tax lia- bility assessed against the series organiza- tion may be collected directly from a series of the series organization by administrative or judicial means. 7.Employment Tax and Employee Benefits Issues A.In general The domestic statutes authorizing the creation of series contemplate that a series may operate a business. If the operating business has workers, it will be necessary to determine how the business satisfies any employment tax obligations, whether it has the ability to maintain any employee benefit plans and, if so, whether it com- plies with the rules applicable to those plans. Application of the employment tax requirements will depend principally on whether the workers are employees, and, if so, who is considered the employer for Federal income and employment tax pur- poses. In general, an employment relation- ship exists when the person for whom ser- vices are performed has the right to control and direct the individual who performs the services, not only as to the result to be ac- complished by the work but also as to the details and means by which that result is accomplished. See §§31.3121(d)–1(c)(2), 31.3306(i)–1(b), and 31.3401(c)–1(b). B.Employment tax An entity must be a person in order to be an employer for Federal employ- ment tax purposes. See sections 3121(b), 3306(a)(1), 3306(c), and 3401(d) and §31.3121(d)–2(a). However, status as a person, by itself, is not enough to make an entity an employer for Federal employ- ment tax purposes. The entity must also satisfy the criteria to be an employer un- der Federal employment tax statutes and regulations for purposes of the determina- tion of the proper amount of employment taxes and the party liable for reporting and paying the taxes. Treatment of a series as a separate person for Federal employment tax purposes would create the possibility that the series could be an “employer” for Federal employment tax purposes, which would raise both substantive and adminis- trative issues. The series structure would make it diffi- cult to determine whether the series or the series organization is the employer under the relevant criteria with respect to the ser- vices provided. For example, if workers perform all of their services under the di- rection and control of individuals who own the interests in a series, but the series has no legal authority to enter into contracts or to sue or be sued, could the series nonethe- less be the employer of the workers? If workers perform services under the direc- tion and control of the series, but they are paid by the series organization, would the series organization, as the nominal owner of all the series assets, have control over the payment of wages such that it would be liable as the employer under section 3401(d)? The structure of a series organization could also affect the type of employment tax liability. For example, if a series were recognized as a distinct person for Federal employment tax purposes, a worker pro- viding services as an employee of one se- ries and as a member of another series or the series organization would be subject to FICA tax on the wages paid for services as an employee and self-employment tax on the member income. Note further that, if a domestic series were classified as a sep- arate entity that is a business entity, then, under §301.7701–3, the series would be classified as either a partnership or a cor- poration. While a business entity with one owner is generally classified as a corpora- tion or is disregarded for Federal tax pur- poses, such an entity cannot be disregarded for Federal employment tax purposes. See §301.7701–2(c)(2)(iv). Once the employer is identified, addi- tional issues arise, including but not lim- ited to the following: How would the wage base be determined for employees, partic- ularly if they work for more than one se- ries in a common line of business? How would the common paymaster rules apply? Who would be authorized to designate an agent under section 3504 for reporting and payment of employment taxes, and how would the authorization be accomplished? How would the statutory exceptions from the definitions of employment and wages apply given that they may be based on the identity of the employer? Which entity would be eligible for tax credits that go to the employer such as the Work Opportu- nity Tax Credit under section 51 or the tip credit under section 45B? If a series organ- ization handles payroll for a series and is also the nominal owner of the series assets, would the owners or the managers of the series organization be responsible persons November 8, 20106322010–45 I.R.B. for the Trust Fund Recovery Penalty under section 6672? Special administrative issues might arise if the series were to be treated as the employer for Federal employment tax pur- poses but not for state law purposes. For example, if the series were the employer for Federal employment tax purposes and filed a Form W–2, “Wage and Tax State- ment,” reporting wages and employment taxes withheld, but the series were not recognized as a juridical person for state law purposes, then administrative prob- lems might ensue unless separate Forms W–2 were prepared for state and local tax purposes. Similarly, the IRS and the states might encounter challenges in awarding the FUTA credit under section 3302 to the appropriate entity and certifying the amount of state unemployment tax paid. In light of these issues, the proposed regulations do not currently provide how a series should be treated for Federal em- ployment tax purposes. C.Employee benefits Various issues arise with respect to the ability of a series to maintain an employee benefit plan, including issues related to those described above with respect to whether a series may be an employer. The proposed regulations do not address these issues. However, to the extent that a series can maintain an employee benefit plan, the aggregation rules under section 414(b),(c),(m),(o)and(t),aswellas the leased employee rules under section 414(n), would apply. In this connection, the IRS and Treasury Department ex- pect to issue regulations under section 414(o) that would prevent the avoidance of any employee benefit plan requirement through the use of the separate entity sta- tus of a series. 8.Statement Containing Identifying Information about Series As the series organization or a series of the series organization may be treated as a separate entity for Federal tax and re- lated reporting purposes but may not be a separate entity under local law, the IRS and Treasury Department believe that a new statement may need to be created and required to be filed annually by the se- ries organization and each series of the se- ries organization to provide the IRS with certain identifying information to ensure the proper assessment and collection of tax. Accordingly, these regulations pro- pose to amend the Procedure and Admin- istration Regulations under section 6011 to include this requirement and a cross-refer- ence to those regulations is included under §301.7701–1. The IRS and Treasury De- partment are considering what information should be required by these statements. In- formation tentatively being considered in- cludes (1) the name, address, and taxpayer identification number of the series organ- ization and each of its series and status of each as a series of a series organiza- tion or as the series organization; (2) the jurisdiction in which the series organiza- tion was formed; and (3) an indication of whether the series holds title to its assets or whether title is held by another series or the series organization and, if held by another series or the series organization, the name, address, and taxpayer identifica- tion number of the series organization and each series holding title to any of its as- sets. The IRS and Treasury Department are also considering the best time to re- quire taxpayers to file the statement. For example, the IRS and Treasury Depart- ment are considering whether the state- ment should be filed when returns, such as income tax returns and excise tax returns, are required to be filed or whether it should be a stand-alone statement filed separately by a set date each year, as with information returns such as Forms 1099. A cross-refer- ence to these regulations was added to the Procedure and Administration regulations under section 6071 for the time to file re- turns and statements. The proposed reg- ulations under section 6071 provide that the statement will be a stand-alone state- ment due March 15 th of each year. In ad- dition, the IRS and Treasury Department are considering revising Form SS–4, “Ap- plication for Employer Identification Num- ber,” to include questions regarding series organizations. Proposed Effective Date These regulations generally apply on the date final regulations are published in theFederal Register. Generally, when fi- nal regulations become effective, taxpay- ers that are treating series differently for Federal tax purposes than series are treated under the final regulations will be required to change their treatment of series. In this situation, a series organization that previ- ously was treated as one entity with all of its series may be required to begin treating each series as a separate entity for Federal tax purposes. General tax principles will apply to determine the consequences of the conversion from one entity to multiple en- tities for Federal tax purposes. See, for example, section 708 for rules relating to partnership divisions in the case of a series organization previously treated as a part- nership for Federal tax purposes convert- ing into multiple partnerships upon recog- nition of the series organization’s series as separate entities. While a division of a partnership may be tax-free, gain may be recognized in certain situations under section 704(c)(1)(B) or section 737. Sec- tions 355 and 368(a)(1)(D) provide rules that govern certain divisions of a corpora- tion. The division of a series organization into multiple corporations may be tax-free to the corporation and to its shareholders; however, if the corporate division does not satisfy one or more of the requirements in section 355, the division may result in tax- able events to the corporation, its share- holders, or both. The regulations include an exception for series established prior to publication of the proposed regulations that treat all series and the series organization as one entity. If the requirements for this excep- tion are satisfied, after issuance of the fi- nal regulations the series may continue to be treated together with the series organ- ization as one entity for Federal tax pur- poses. Specifically, these requirements are satisfied if (1) The series was established prior to September 14, 2010; (2) The series (independent of the series organization or other series of the series organization) con- ducted business or investment activity or, in the case of a foreign series, more than half the business of the series was the issu- ing of insurance or annuity contracts or the reinsuring of risks underwritten by insur- ance companies, on and prior to Septem- ber 14, 2010; (3) If the series was estab- lished pursuant to a foreign statute, the series’ classification was relevant (as de- fined in §301.7701–3(d)), and more than half the business of the series was the is- suing of insurance or annuity contracts or the reinsuring of risks underwritten by in- surance companies for all taxable years be- ginning with the taxable year that includes 2010–45 I.R.B.633November 8, 2010 September 14, 2010; (4) No owner of the series treats the series as an entity sepa- rate from any other series of the series or- ganization or from the series organization for purposes of filing any Federal income tax returns, information returns, or with- holding documents for any taxable year; (5) The series and series organization had a reasonable basis (within the meaning of section 6662) for their claimed classifica- tion; and (6) Neither the series nor any owner of the series nor the series organi- zation was notified in writing on or before the date final regulations are published in theFederal Registerthat classification of the series was under examination (in which case the series’ classification will be deter- mined in the examination). This exception will cease to apply on the date any person or persons who were not owners of the series organization (or series) prior to September 14, 2010, own, in the aggregate, a 50 percent or greater in- terest in the series organization (or series). For this purpose, the terminterestmeans (i) in the case of a partnership, a capital or profits interest and (ii) in the case of a cor- poration, an equity interest measured by vote or value. This transition rule does not apply to any determination other than the entity status of a series, for example, tax ownership of a series or series organization or qualification of a series or series organi- zation conducting an insurance business as a controlled foreign corporation. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory as- sessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations. Pursuant to the Regulatory Flexibility Act (5.U.S.C. chapter 6), it is hereby cer- tified that the regulations will not have a significant economic impact on a substan- tial number of small entities. The regula- tions require that series and series organi- zations file a statement to provide the IRS with certain identifying information to en- sure the proper assessment and collection of tax. The regulations affect domestic se- ries LLCs, domestic cell companies, and foreign series and cells that conduct insur- ance businesses, and their owners. Based on information available at this time, the IRS and the Treasury Department believe that many series and series organizations are large insurance companies or invest- ment firms and, thus, are not small entities. Although a number of small entities may be subject to the information reporting re- quirement of the new statement, any eco- nomic impact will be minimal. The infor- mation that the IRS and the Treasury De- partment are considering requiring on the proposed statement should be known by or readily available to the series or the se- ries organization. Therefore, it should take minimal time and expense to collect and report this information. For example, the IRS and the Treasury Department are con- sidering requiring the following informa- tion: (1) The name, address, and taxpayer identification number of the series organ- ization and each of its series and status of each as a series of a series organization or as the series organization; (2) The jurisdic- tion in which the series organization was formed; and (3) An indication of whether the series holds title to its assets or whether title is held by another series or the series organization and, if held by another series or the series organization, the name, ad- dress, and taxpayer identification number of the series organization and each series holding title to any of its assets. The IRS and the Treasury Department request com- ments on the accuracy of the statement that the regulations in this document will not have a significant economic impact on a substantial number of small entities. Pur- suant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advo- cacy of the Small Business Administration for comment on its impact on small busi- nesses. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, con- sideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. Alternatively, taxpayers may submit comments electronically directly to the Federal eRulemaking portal at www.regulations.gov. The IRS and the Treasury Department request comments on the proposed regula- tions. In addition, the IRS and the Treasury Department request comments on the fol- lowing issues: (1) Whether a series organization should be recognized asa separate entity for Federal tax purposes if it has no assets and engages in no activities independent of its series; (2) The appropriate treatment of a se- ries that does not terminate for local law purposes when it has no members associ- ated with it; (3) The entity status for Federal tax pur- poses of foreign cells that do not conduct insurance businesses and other tax conse- quences of establishing, operating, and ter- minating all foreign cells; (4) How the Federal employment tax is- sues discussed and similar technical issues should be resolved; (5) How series and series organizations will be treated for state employment tax purposes and other state employment-re- lated purposes and how that treatment should affect the Federal employment tax treatment of series and series organiza- tions (comments from the states would be particularly helpful); (6) What issues could arise with respect to the provision of employee benefits by a series organization or series; and (7) The requirement for the series or- ganization and each series of the series or- ganization to file a statement and what in- formation should be included on the state- ment. All comments will be available for pub- lic inspection and copying. A public hear- ing may be scheduled if requested in writ- ingbyapersonwhotimelysubmitscom- ments. If a public hearing is scheduled, no- tice of the date, time and place for the hear- ing will be published in theFederal Reg- ister. Drafting Information The principal author of these proposed regulations is Joy Spies, IRS Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their develop- ment. ***** November 8, 20106342010–45 I.R.B. Proposed Amendments to the Regulations Accordingly, 26 CFR part 301 is pro- posedtobeamendedasfollows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 is amended by adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 301.6011–6 also issued under 26 U.S.C. 6011(a). * * * Section 301.6071–2 also issued under 26 U.S.C. 6071(a). * * * Par. 2. Section 301.6011–6 is added to read as follows: §301.6011–6 Statements of series and series organizations. (a)Statement required. Each series and series organization (as defined in paragraph (b) of this section) shall file a statement for each taxable year containing the identifying information with respect to the series or series organization as pre- scribed by the Internal Revenue Service for this purpose and shall include the in- formation required by the statement and its instructions. (b)Definitions—(1)Series.The termserieshas the same meaning as in §301.7701–1(a)(5)(viii)(C). (2)Series organization.Thetermseries organizationhas the same meaning as in §301.7701–1(a)(5)(viii)(A). (c)Effective/applicability date.This section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final reg- ulations in theFederal Register. Par. 3. Section 301.6071–2 is added to read as follows: §301.6071–2 Time for filing statements of series and series organizations. (a)In general. Statements required by §301.6011–6 must be filed on or before March 15 of the year following the period for which the return is made. (b)Effective/applicability date.This section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final reg- ulations in theFederal Register. Par. 4. Section 301.7701–1 is amended by: 1. Adding paragraph (a)(5). 2. Revising paragraphs (e) and (f). The additions and revisions read as fol- lows: §301.7701–1 Classification of organizations for Federal tax purposes. (a) * * * (5)Series and series organizations—(i) Entity status of a domestic series.ForFed- eral tax purposes, except as provided in paragraph (a)(5)(ix) of this section, a series (as defined in paragraph (a)(5)(viii)(C) of this section) organized or established un- der the laws of the United States or of any State, whether or not a juridical person for local law purposes, is treated as an entity formed under local law. (ii)Certain foreign series conducting an insurance business. For Federal tax purposes, except as provided in paragraph (a)(5)(ix) of this section, a series orga- nized or established under the laws of a foreign jurisdiction is treated as an entity formed under local law if the arrangements and other activities of the series, if con- ducted by a domestic company, would re- sult in classification as an insurance com- pany within the meaning of section 816(a) or section 831(c). (iii)Recognition of entity status. Whether a series that is treated as a local law entity under paragraph (a)(5)(i) or (ii) of this section is recognized as a separate entity for Federal tax purposes is deter- mined under this section and general tax principles. (iv)Classification of series. The clas- sification of a series that is recognized as a separate entity for Federal tax purposes is determined under paragraph (b) of this section. (v)Jurisdiction in which series is orga- nized or established. A series is treated as created or organized under the laws of a State or foreign jurisdiction if the series is established under the laws of such jurisdic- tion. See §301.7701–5 for rules that deter- mine whether a business entity is domestic or foreign. (vi)Ownership of series and the assets of series. For Federal tax purposes, the ownership of interests in a series and of the assets associated with a series is deter- mined under general tax principles. A se- ries organization is not treated as the owner for Federal tax purposes of a series or of the assets associated with a series merely because the series organization holds legal title to the assets associated with the series. (vii)Effect of Federal and local law treatment. To the extent that, pursuant to the provisions of this paragraph (a)(5), a series is a taxpayer against whom tax may be assessed under Chapter 63 of Title 26, then any tax assessed against the se- ries may be collected by the Internal Rev- enue Service from the series in the same manner the assessment could be collected by the Internal Revenue Service from any other taxpayer. In addition, to the ex- tent Federal or local law permits a debt attributable to the series to be collected from the series organization or other series of the series organization, then, notwith- standing any other provision of this para- graph (a)(5), and consistent with the provi- sions of Federal or local law, the series or- ganization and other series of the series or- ganization may also be considered the tax- payer from whom the tax assessed against the series may be administratively or judi- cially collected. Further, when a creditor is permitted to collect a liability attributable to a series organization from any series of the series organization, a tax liability as- sessed against the series organization may be collected directly from a series of the series organization by administrative or ju- dicial means. (viii)Definitions—(A)Series organiza- tion.Aseries organizationis a juridi- cal entity that establishes and maintains, or under which is established and main- tained, a series (as defined in paragraph (a)(5)(viii)(C) of this section). A series organization includes a series limited lia- bility company, series partnership, series trust, protected cell company, segregated cell company, segregated portfolio com- pany, or segregated account company. (B)Series statute.Aseries statuteis a statute of a State or foreign jurisdiction that explicitly provides for the organization or establishment of a series of a juridical per- son and explicitly permits— (1) Members or participants of a series organization to have rights, powers, or du- ties with respect to the series; (2) A series to have separate rights, powers, or duties with respect to specified property or obligations; and 2010–45 I.R.B.635November 8, 2010 (3) The segregation of assets and lia- bilities such that none of the debts and li- abilities of the series organization (other than liabilities to the State or foreign juris- diction related to the organization or op- eration of the series organization, such as franchise fees or administrative costs) or of any other series of the series organization are enforceable against the assets of a par- ticular series of the series organization. (C)Series.Aseriesis a segregated group of assets and liabilities that is es- tablished pursuant to a series statute (as defined in paragraph (a)(5)(viii)(B) of this section) by agreement of a series organization (as defined in paragraph (a)(5)(viii)(A) of this section). A series includes a series, cell, segregated account, or segregated portfolio, including a cell, segregated account, or segregated port- folio that is formed under the insurance code of a jurisdiction or is engaged in an insurance business. However, the term seriesdoes not include a segregated asset account of a life insurance company. See section 817(d)(1); §1.817–5(e). An elec- tion, agreement, or other arrangement that permits debts and liabilities of other series or the series organization to be enforceable against the assets of a particular series, or a failure to comply with the record keeping requirements for the limitation on liability available under the relevant series statute, will be disregarded for purposes of this paragraph (a)(5)(viii)(C). (ix)Treatment of series and series orga- nizations under Subtitle C — Employment Taxes and Collection of Income Tax (Chap- ters 21, 22, 23, 23A, 24 and 25 of the In- ternal Revenue Code). [Reserved.] (x)Examples. The following examples illustrate the principles of this paragraph (a)(5): Example 1. Domestic Series LLC.(i)Facts.Se- ries LLC is a series organization (within the mean- ing of paragraph (a)(5)(viii)(A) of this section). Se- ries LLC has three members (1, 2, and 3). Series LLC establishes two series (A and B) pursuant to the LLC statute of state Y, a series statute within the meaning of paragraph (a)(5)(viii)(B) of this sec- tion. Under general tax principles, Members 1 and 2 are the owners of Series A, and Member 3 is the owner of Series B. Series A and B are not described in §301.7701–2(b) or paragraph (a)(3) of this section and are not trusts within the meaning of §301.7701–4. (ii)Analysis. Under paragraph (a)(5)(i) of this section, Series A and Series B are each treated as an entity formed under local law. The classification of Series A and Series B is determined under paragraph (b) of this section. The default classification under §301.7701–3 of Series A is a partnership and of Series B is a disregarded entity. Example 2. Foreign Insurance Cell.(i)Facts. Insurance CellCo is a series organization (within the meaning of paragraph (a)(5)(viii)(A) of this section) organized under the laws of foreign Country X. In- surance CellCo has established one cell, Cell A, pur- suant to a Country X law that is a series statute (within the meaning of paragraph (a)(5)(viii)(B) of this sec- tion). More than half the business of Cell A during the taxable year is the issuing of insurance or annu- ity contracts or the reinsuring of risks underwritten by insurance companies. If the activities of Cell A were conducted by a domestic company, that com- pany would qualify as an insurance company within the meaning of sections 816(a) and 831(c). (ii)Analysis. Under paragraph (a)(5)(ii) of this section, Cell A is treated as an entity formed under lo- cal law. Because Cell A is an insurance company, it is classified as a corporation under §301.7701–2(b)(4). ***** (e)State. For purposes of this section and §§301.7701–2 and 301.7701–4, the termStateincludes the District of Colum- bia. (f)Effective/applicability dates—(1)In general. Except as provided in paragraphs (f)(2) and (f)(3) of this section, the rules of this section are applicable as of January 1, 1997. (2)Cost sharing arrangements.The rules of paragraph (c) of this section are applicable on January 5, 2009. (3)Series and series organizations—(i) In general. Except as otherwise provided in this paragraph (f)(3), paragraph (a)(5) of this section applies on and after the date final regulations are published in theFed- eral Register. (ii)Transition rule—(A)In gen- eral. Except as provided in paragraph (f)(3)(ii)(B) of this section, a taxpayer’s treatment of a series in a manner incon- sistent with the final regulations will be respected on and after the date final reg- ulations are published in theFederal Register, provided that— (1) The series was established prior to September 14, 2010; (2) The series (independent of the series organization or other series of the series or- ganization) conducted business or invest- ment activity, or, in the case of a series established pursuant to a foreign statute, more than half the business of the series was the issuing of insurance or annuity contracts or the reinsuring of risks under- written by insurance companies, on and prior to September 14, 2010; (3) If the series was established pur- suant to a foreign statute, the series’ classification was relevant (as defined in §301.7701–3(d)), and more than half the business of the series was the issuing of insurance or annuity contracts or the rein- suring of risks underwritten by insurance companies for all taxable years begin- ning with the taxable year that includes September 14, 2010; (4) No owner of the series treats the se- ries as an entity separate from any other se- ries of the series organization or from the series organization for purposes of filing any Federal income tax returns, informa- tion returns, or withholding documents in any taxable year; (5) The series and series organization had a reasonable basis (within the meaning of section 6662) for their claimed classifi- cation; and (6) Neither the series nor any owner of the series nor the series organization was notified in writing on or before the date final regulations are published in the Federal Registerthat classification of the series was under examination (in which case the series’ classification will be deter- mined in the examination). (B)Exception to transition rule. Para- graph (f)(3)(ii)(A) of this section will not apply on and after the date any per- son or persons who were not owners of the series organization (or series) prior to September 14, 2010, own, in the aggregate, a fifty percent or greater interest in the series organization (or series). For purposes of the preceding sentence, the terminterestmeans— (1) In the case of a partnership, a capital or profits interest; and (2) In the case of a corporation, an eq- uity interest measured by vote or value. Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on September 13, 2010, 8:45 a.m., and published in the issue of the Federal Register for September 14, 2010, 75 F.R. 55699) November 8, 20106362010–45 I.R.B. Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations Application of Section 108(i) to Partnerships and S Corporations REG–144762–09 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regula- tions. SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9498) relating to the application of section 108(i) of the Internal Revenue Code (Code) to partnerships and S cor- porations. The temporary regulations provide rules regarding the deferral of discharge of indebtedness income and original issue discount deductions by a partnership or an S corporation with re- spect to reacquisitions of applicable debt instruments after December 31, 2008, and before January 1, 2011. The regulations affect partnerships and S corporations with respect to reacquisitions of applicable debt instruments and their partners and shareholders. The text of the temporary regulations published in this issue of the Bulletin also serves as the text of these proposed regulations. DATES: Written or electronic comments and requests for a public hearing must be received November 12, 2010. ADDRESSES: Send submissions to: CC:PA:LPD:PR(REG–144762–09), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–144762–09), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Avenue, NW, Washington, DC, or sent electroni- cally, via the Federal eRulemaking Por- talathttp://www.regulations.gov(IRS REG–144762–09). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Megan A. Stoner and Joseph R. Worst, Office of Associate Chief Counsel (Passthroughs and Special Industries) (202) 622–3070; concerning submissions of comments or a request for a public hearing, Richard Hurst, (202) 622–7180 (not toll-free numbers) and his e-mail address isRichard.A.Hurst@irscounsel.treas.gov. SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information con- tained in these proposed regulations has been reviewed and approved by the Of- fice of Management and Budget in ac- cordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545–2147. The col- lection of information in these regula- tions are in §1.108(i)–2(b)(3)(iv). Under §1.108(i)–2(b)(3)(iv), a partner in a part- nership that makes an election under section 108(i) is required to provide cer- tain information to the partnership so that the partnership can correctly determine the partner’s deferred section 752 amount with respect to an applicable debt instru- ment. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Of- fice of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background and Explanation of Provisions Temporary regulations in this issue of the Bulletin amend the Income Tax Reg- ulations (26 CFR part 1) relating to sec- tion 108(i). The temporary regulations set forth rules for applying section 108(i) to partnerships and S corporations. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations ex- plains the temporary regulations and these proposed regulations. Special Analyses It has been determined that this notice of proposed rulemaking is not a signifi- cant regulatory action as defined in Ex- ecutive Order 12866. Therefore, a reg- ulatory assessment is not required. It is hereby certified that the collection of in- formation contained in these regulations will not have a significant economic im- pact on a substantial number of small enti- ties. This certification is based on the fact that the collection of information imposed on partners of partnerships is minimal in that it requires partners to share informa- tion with partnerships that partners already maintain. Moreover, it should take a part- ner no more than one hour to satisfy the information-sharing requirement in these regulations. Therefore, a regulatory flex- ibility analysis under the Regulatory Flex- ibility Act (5 U.S.C. chapter 6) is not re- quired. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for com- ment on its impact on small business. Comments and 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)orelectroniccom- ments that are submitted timely 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 ifrequestedinwritingbyanypersonthat timely submits written or electronic com- ments. If a public hearing is scheduled, no- tice of the date, time,and place for the pub- lic hearing will be published in theFederal Register. Drafting Information The principal authors of these reg- ulations are Megan A. Stoner and Joseph R. Worst, Office of the Associate Chief Counsel (Passthroughs and Special 2010–45 I.R.B.637November 8, 2010 Industries). However, other personnel from the IRS and the Treasury Department participated in their development. ***** Proposed Amendment to the Regulations Accordingly, 26 CFR Part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.108(i)–2 also issued under 26 U.S.C. 108(i)(7). * * * Par. 2. Section 1.108(i)–2 is added to read as follows: §1.108(i)–2 Application of section 108(i) to partnerships and S corporations. [The text of proposed §1.108(i)–2 is the same as the text of §1.108(i)–2T(a) through (f) published elsewhere in this is- sue of the Bulletin]. Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on August 11, 2010, 11:15 a.m., and published in the issue of the Federal Register for August 13, 2010, 75 F.R. 49427) Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code Announcement 2010–80 The Internal Revenue Service has re- voked its determination that the organi- zations listed below qualify as organiza- tions described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an or- ganization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation. If on the other hand a suit for declara- tory judgment has been timely filed, con- tributions from individuals and organiza- tions described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on October 18, 2010, andwouldendonthedatethecourtfirst determines that the organization is not de- scribed in section 170(c)(2) as more partic- ularly set forth in section 7428(c)(1). For individual contributors, the maximum de- duction protected is $1,000, with a hus- band and wife treated as one contributor. This benefit is not extended to any indi- vidual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation. The Jeffrey Reiken Johnson Clergy Public Ministry Association, Inc. A Church, San Francisco, CA Life Time Transition, Inc., Robbinsdale, MI Minnesota StandDown, Inc. Minneapolis, MN Ohio Narcotic Officers Association, Warren, OH Owls Nest 1424, Inc. St. Mary’s, WV Task of Rome GA, Inc. Rome, GA Delay of Renewal Period for Enrolled Agents Whose Tax Identification Numbers End in 4, 5, OR 6 Announcement 2010–81 This announcement delays until further notice the renewal period under section 10.6(d) of the regulations governing prac- tice before the IRS, Treasury Department Circular No. 230, 31 CFR part 10 (Circular 230), for enrolled agents with social secu- rity numbers or tax identification numbers ending in 4, 5, or 6. Circular 230 requires that, to maintain active enrollment to practice before the IRS, enrolled agentsmust renew enroll- ment every third yearafter initial enroll- ment is granted. An enrolled agent’s re- newal schedule is determined by the last digit of the individual’s social security or tax identification number as provided in section 10.6(d) of Circular 230. The re- newal schedules are staggered with ap- proximately one third of enrolled agents renewing every year. To apply for renewal, individuals file a Form 8554,“Applica- tion for Renewal of Enrollment to Practice Before the Internal Revenue Service.”The Form must be filed between November 1 and January 31 of the appropriate year, and renewal is effective on April 1. The re- newal period for enrolled agents whose so- cial security numbers or tax identification numbers end in 4, 5, or 6 is scheduled to begin on November 1, 2010, and end on January 31, 2011. The IRS is currently implementing the recommendations inPublication 4832, “Return Preparer Review,”which was published on January 4, 2010. As part of the implementation, the IRS published regulations that require all individuals who apply for or renew a PTIN to pay a $50 user fee, plus a separate fee of $14.25 to the vendor (T.D. 9503). A portion of the costs to the government to process a PTIN application or renewal, which are recov- ered by the $50 user fee, overlaps with the costs to the government to process an initial enrollment or renewal of enrollment application. The Treasury Department and the IRS anticipate that the enrolled agent initial enrollment and renewal of enrollment user fees may be substantially reduced in the future. November 8, 20106382010–45 I.R.B. To ensure that the revised user fee to renew enrollment as an enrolled agent is effective before the start of the next renewal period, the IRS is delaying the upcoming renewal period for enrolled agents whose social security numbers or tax identification numbers end in 4, 5, or 6 until further notice. When a date for the renewal period is determined, the IRS will publish a schedule for affected enrolledagentstorenew their enrollment in the Internal Revenue Bulletin and on the IRS Office of Professional Responsibility (OPR) webpage at http://www.irs.gov/taxpros/agents/index.html. This schedule will be published at least 30 days prior to the beginning of the revised period for enrollment. Affected enrolled agents will have at least 60 calendar days but no more than 120 calendar days under the revised renewal of enrollment schedule to submit the required applications for renewal. OPR will not accept or process appli- cations for renewal of enrollment until the period for renewal of enrollment is an- nounced in the Internal Revenue Bulletin and on the OPR webpage. This delay will not impact an affected enrolled agent’s cur- rent status as an enrolled agent in good standing. Also, this delay will not affect the number of hours of continuing profes- sional education required for renewal or the time period within which these hours must be completed. The principal author of this announce- ment is Emily M. Lesniak of the Office of Associate Chief Counsel (Procedure & Administration). For further infor- mation regarding this notice, contact Emily M. Lesniak at (202) 622–4570 (not a toll-free call). 2010–45 I.R.B.639November 8, 2010 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. November 8, 2010i2010–45 I.R.B. Numerical Finding List 1 Bulletins 2010–27 through 2010–45 Announcements: 2010-43, 2010-27 I.R.B.42 2010-44, 2010-28 I.R.B.54 2010-45, 2010-29 I.R.B.87 2010-46, 2010-29 I.R.B.87 2010-47, 2010-30 I.R.B.173 2010-48, 2010-32 I.R.B.234 2010-49, 2010-34 I.R.B.272 2010-50, 2010-33 I.R.B.260 2010-51, 2010-33 I.R.B.261 2010-52, 2010-36 I.R.B.315 2010-53, 2010-36 I.R.B.323 2010-54, 2010-38 I.R.B.386 2010-55, 2010-37 I.R.B.346 2010-56, 2010-39 I.R.B.398 2010-57, 2010-38 I.R.B.386 2010-58, 2010-38 I.R.B.387 2010-59, 2010-39 I.R.B.399 2010-60, 2010-40 I.R.B.417 2010-61, 2010-40 I.R.B.417 2010-62, 2010-40 I.R.B.417 2010-63, 2010-40 I.R.B.417 2010-64, 2010-40 I.R.B.418 2010-65, 2010-40 I.R.B.418 2010-66, 2010-40 I.R.B.418 2010-67, 2010-40 I.R.B.418 2010-68, 2010-40 I.R.B.418 2010-69, 2010-40 I.R.B.418 2010-70, 2010-40 I.R.B.418 2010-71, 2010-40 I.R.B.418 2010-72, 2010-40 I.R.B.419 2010-73, 2010-40 I.R.B.419 2010-74, 2010-40 I.R.B.419 2010-75, 2010-41 I.R.B.428 2010-76, 2010-41 I.R.B.432 2010-77, 2010-41 I.R.B.433 2010-78, 2010-41 I.R.B.433 2010-79, 2010-42 I.R.B.475 2010-80, 2010-45 I.R.B.638 2010-81, 2010-45 I.R.B.638 2010-82, 2010-42 I.R.B.476 2010-84, 2010-44 I.R.B.603 2010-85, 2010-44 I.R.B.604 2010-86, 2010-44 I.R.B.604 2010-87, 2010-43 I.R.B.557 Notices: 2010-48, 2010-27 I.R.B.9 2010-49, 2010-27 I.R.B.10 2010-50, 2010-27 I.R.B.12 2010-51, 2010-29 I.R.B.83 2010-52, 2010-30 I.R.B.88 Notices— Continued: 2010-53, 2010-31 I.R.B.182 2010-54, 2010-40 I.R.B.403 2010-55, 2010-33 I.R.B.253 2010-56, 2010-33 I.R.B.254 2010-57, 2010-34 I.R.B.267 2010-58, 2010-37 I.R.B.326 2010-59, 2010-39 I.R.B.396 2010-60, 2010-37 I.R.B.329 2010-61, 2010-40 I.R.B.408 2010-62, 2010-40 I.R.B.411 2010-63, 2010-41 I.R.B.420 2010-64, 2010-41 I.R.B.421 2010-65, 2010-41 I.R.B.424 2010-66, 2010-42 I.R.B.437 2010-67, 2010-43 I.R.B.529 2010-68, 2010-44 I.R.B.576 2010-69, 2010-44 I.R.B.576 2010-70, 2010-44 I.R.B.576 Proposed Regulations: REG-138637-07, 2010-44 I.R.B.581 REG-139343-08, 2010-33 I.R.B.256 REG-119921-09, 2010-45 I.R.B.626 REG-142800-09, 2010-44 I.R.B.580 REG-144762-09, 2010-45 I.R.B.637 REG-151605-09, 2010-31 I.R.B.184 REG-153340-09, 2010-42 I.R.B.469 REG-112841-10, 2010-27 I.R.B.41 REG-118412-10, 2010-29 I.R.B.85 REG-119046-10, 2010-40 I.R.B.415 REG-120391-10, 2010-35 I.R.B.310 REG-120399-10, 2010-32 I.R.B.239 REG-125592-10, 2010-43 I.R.B.556 Revenue Procedures: 2010-25, 2010-27 I.R.B.16 2010-26, 2010-30 I.R.B.91 2010-27, 2010-31 I.R.B.183 2010-28, 2010-34 I.R.B.270 2010-29, 2010-35 I.R.B.309 2010-30, 2010-36 I.R.B.316 2010-31, 2010-40 I.R.B.413 2010-32, 2010-36 I.R.B.320 2010-33, 2010-38 I.R.B.347 2010-34, 2010-41 I.R.B.426 2010-35, 2010-42 I.R.B.438 2010-36, 2010-42 I.R.B.439 2010-37, 2010-42 I.R.B.440 2010-38, 2010-43 I.R.B.530 2010-39, 2010-42 I.R.B.459 Revenue Rulings: 2010-18, 2010-27 I.R.B.1 2010-19, 2010-31 I.R.B.174 2010-20, 2010-36 I.R.B.312 Revenue Rulings— Continued: 2010-21, 2010-39 I.R.B.388 2010-22, 2010-39 I.R.B.388 2010-23, 2010-39 I.R.B.388 2010-24, 2010-40 I.R.B.400 2010-25, 2010-44 I.R.B.571 2010-26, 2010-44 I.R.B.573 2010-27, 2010-45 I.R.B.620 Tax Conventions: 2010-48, 2010-32 I.R.B.234 2010-52, 2010-36 I.R.B.315 Treasury Decisions: 9486, 2010-27 I.R.B.3 9487, 2010-28 I.R.B.48 9488, 2010-28 I.R.B.51 9489, 2010-29 I.R.B.55 9490, 2010-31 I.R.B.176 9491, 2010-32 I.R.B.186 9492, 2010-33 I.R.B.242 9493, 2010-35 I.R.B.273 9494, 2010-43 I.R.B.500 9495, 2010-43 I.R.B.477 9496, 2010-43 I.R.B.484 9497, 2010-44 I.R.B.558 9498, 2010-45 I.R.B.605 9499, 2010-45 I.R.B.622 1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin 2010–26, dated June 28, 2010. 2010–45 I.R.B.iiNovember 8, 2010 Finding List of Current Actions on Previously Published Items 1 Bulletins 2010–27 through 2010–45 Notices: 96-53 Modified by Notice 2010-59, 2010-39 I.R.B.396 2003-19 Revoked by Notice 2010-53, 2010-31 I.R.B.182 2004-2 Modified by Notice 2010-59, 2010-39 I.R.B.396 2004-50 Modified by Notice 2010-59, 2010-39 I.R.B.396 2005-90 Supplemented by Notice 2010-65, 2010-41 I.R.B.424 2006-69 Amplified by Notice 2010-59, 2010-39 I.R.B.396 2008-51 Modified by Notice 2010-59, 2010-39 I.R.B.396 2008-52 Modified by Notice 2010-59, 2010-39 I.R.B.396 2009-47 Obsoleted by Rev. Proc. 2010-28, 2010-34 I.R.B.270 2009-80 Corrected by Ann. 2010-59, 2010-39 I.R.B.399 2009-90 Superseded by Notice 2010-54, 2010-40 I.R.B.403 Proposed Regulations: REG-115037-00 Withdrawn by Ann. 2010-60, 2010-40 I.R.B.417 REG-146893-02 Withdrawn by Ann. 2010-60, 2010-40 I.R.B.417 Revenue Procedures: 81-18 Obsoleted by Rev. Proc. 2010-27, 2010-31 I.R.B.183 Revenue Procedures— Continued: 2007-44 Modified by Notice 2010-48, 2010-27 I.R.B.9 2008-49 Superseded by Rev. Proc. 2010-38, 2010-43 I.R.B.530 2009-18 Obsoleted in part by Rev. Proc. 2010-25, 2010-27 I.R.B.16 2009-30 Superseded by Rev. Proc. 2010-26, 2010-30 I.R.B.91 2009-35 Superseded by Rev. Proc. 2010-33, 2010-38 I.R.B.347 2009-46 Superseded by Rev. Proc. 2010-37, 2010-42 I.R.B.440 2009-47 Superseded by Rev. Proc. 2010-39, 2010-42 I.R.B.459 2009-50 Modified by Rev. Proc. 2010-35, 2010-42 I.R.B.438 2010-3 Modified by Notice 2010-62, 2010-40 I.R.B.411 Revenue Rulings: 2003-102 Obsoleted by Rev. Rul. 2010-23, 2010-39 I.R.B.388 Treasury Decisions: 9487 Corrected by Ann. 2010-50, 2010-33 I.R.B.260 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin 2010–26, dated June 28, 2010. November 8, 2010iii2010–45 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. Select Businesses. Under Businesses 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 email 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
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