Internal Revenue Bulletin 2012-11 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 201
2-11
March 12, 2012
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2012–9, page 475.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for March 2012.
T.D. 9569, page 465.
REG–145474–11, page 495.
Final, temporary, and proposed regulations under section 482
of the Code address concerns that taxpayers are taking un-
reasonable positions with respect to the determination of dis-
count rates in applying the income method to determine tax-
able income in connection with cost sharing arrangements.
Theregulationsprovideguidanceonadiscountrate-related
best method consideration for evaluating an application of the
income method.
T.D. 9571, page 468.
REG–113903–10, page 486.
Temporary and proposed regulations under section 904 of the
Code provide transition rules regarding the reduction of the
number of separate foreign tax credit limitation categories. A
public hearing on the proposed regulations is scheduled for
April 3, 2012.
T.D. 9572, page 471.
REG–120282–10, page 487.
Temporary and proposed regulations under section 871 of the
Code provide a definition of the term “specified notional princi-
pal contract.” The temporary regulation also amend the provi-
sion of the Code to address the treatment of dividend equiva-
lents. A public hearing on the proposed regulation is scheduled
for April 27, 2012.
Notice 2012–23, page 483.
This notice answers several questions about the federal income
tax consequences related to the receipt of a section 1603 pay-
ment, a cash reimbursement from the Department of Treasury
for a portion of the cost of certain qualifying renewable energy
projects. The section 1603 program was created by the Amer-
ican Recovery and Reinvestment Tax Act of 2009 and was ex-
tended for one year by the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010.
Rev. Proc. 2012–21, page 484.
This procedure provides guidance to individuals who fail to
meet the eligibility requirements of section 911 of the Code
because adverse conditions in a foreign country preclude the
individual from meeting those requirements. A current list of
countries for tax year 2011 and the dates those countries are
subject to the section 911(d)(4) waiver is provided.
ADMINISTRATIVE
T.D. 9570, page 477.
Final regulations under section 6695 of the Code modify exist-
ing regulations related to the tax return preparer penalties.
Finding Lists begin on page ii.

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.
March 12, 20122012–11 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
The adjusted a
pplicable federal short-term, mid-
term, and long
-term rates are set forth for the month
of March 2012.
See Rev. Rul. 2012-9, page 475.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of March 2012. See Rev.
Rul. 2012-9, page 475.
Section 382.—Limitation
on Net Operating Loss
Carryforwa
rds and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of March 2012. See Rev. Rul.
2012-9, page 475.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 468.—Special
Rules for Mining and Solid
Waste
Reclamation and
Closi
ng Costs
The ad
justed applicable federal short-term, mid-
term,
and long-term rates are set forth for the month
of Mar
ch 2012. See Rev. Rul. 2012-9, page 475.
Section 482.—
Allocation
of Income and D
eductions
Among Taxpaye
rs
Federal short
-term, mid-term, and long-term rates
are set forth f
or the month of March 2012. See Rev.
Rul. 2012-9,
page 475.
26 CFR 1.482–7: Methods to determine taxable in-
come in connection with a cost sharing arrangement.
T.D. 9569
DEPARTMENT
OF THE
TREASURY
Internal R
evenue Service
26 CFR Par
t1
Use of Differential Income
Stream as a Consideration in
Assessing the Best Method
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains tem-
porary regulations that implement the use
of the differential income stream as a con-
sideration in assessing the best method in
connection with a cost sharing arrange-
ment. The text of these temporary regu-
lations also serves as part of the text of
proposed regulations contained in a cross-
reference notice of proposed rulemaking
(REG–145474–11) published in this issue
of the Bulletin. This document also con-
tains final regulations that provide cross-
references in the final cost sharing regula-
tions to relevant sections of these tempo-
rary regulations.
DATES:Effective Date:These regulations
are effective on December 19, 2011.
Applicability Dates:For dates of appli-
cability, see §1.482–7T(l).
FO
R FURTHER INFORMATION
CO
NTACT: Joseph L. Tobin or Mumal R.
H
emrajani, (202) 435–5265 (not a toll-free
c
all).
SUPPLEMENTAR
Y INFORMATION:
Background
A notice of pro
posed rulemaking and
notice of publ
ic hearing regarding ad-
ditional guid
ance to improve compli-
ance with, an
d administration of, the
rules in conn
ection with a cost shar-
ing arrangem
ent (CSA) were published
in the Federa
l Register (70 FR 51116)
(REG–144615
–02, 2005–2 C.B. 625) on
August 29, 2
005 (2005 proposed regu-
lations). A
correction to the notice of
proposed ru
lemaking and notice of pub-
lic hearing
was published in the Federal
Register (
70 FR 56611) on September 28,
2005. A pub
lic hearing was held on De-
cember 16,
2005.
The Treasu
ry Department and the IRS
received n
umerous comments on a wide
range of is
sues addressed in the 2005 pro-
posed reg
ulations. In response to these
comments
, temporary and proposed regu-
lations w
ere published in theFederal Reg-
ister(74
FR 340–01 and 74 FR 236–01)
(REG–14
4615–02) on January 5, 2009
(2008 te
mporary regulations). Corrections
to the 20
08 temporary regulations were
publish
ed in theFederal Registeron Feb-
ruary 27
, 2009 (74 FR 8863–01), March 5,
2009 (7
4 FR 9570–01, 74 FR 9570–02,
and74F
R 9577–01), and March 19, 2009
(74 FR 1
1644–01). A public hearing was
held on
April 21, 2009.
The Tre
asury Department and the IRS
receiv
ed comments on a range of issues
addres
sed in the 2008 temporary regula-
tions
. Final regulations were issued in
aprev
ious issue of theFederal Regis-
ter(R
EG–144615–02) (T.D. 9568) in De-
cembe
r 2011 ("final regulations"). Cer-
tain g
uidance regarding discount rates was
reser
ved in the final regulations because
the T
reasury Department and the IRS be-
liev
e it is appropriate to solicit public com-
ment
s on that subject matter. As explained
here
in, these temporary regulations pro-
vide
a portion of that reserved guidance on
dis
count rates. Simultaneous with these
tem
porary regulations, the other portion
of s
uch reserved guidance concerning dis-
cou
nt rates is being provided in proposed
2012–11 I.R.B.465March 12, 2012

regulations elsewhere in this issue of the
Bulletin (proposed regulations).
Explanation of Provisions
The Treasury Department and the IRS
are aware that some taxpayers are taking
unreasonable positions in applying the in-
come method by using relatively low li-
censing discount rates, and relatively high
cost sharing discount rates, without suffi-
ciently considering the appropriate interre-
lationship of the discount rates and finan-
cial projections, thus deriving PCT Pay-
ments that are not in accordance with the
arm’s length standard.
In light of these concerns, the Treasury
Department and the IRS are providing
additional guidanceas follows: (1) in
the final regulations, further guidance
on comparing the financial projections
associated with the cost sharing alterna-
tive discounted at the rate appropriate
for the cost sharing alternative with the
financial projections associated with the
licensing alternative discounted at the
rate appropriate for the licensing alterna-
tive, and evaluating reliability considera-
tions associated with such a comparison
(§1.482–7(g)(4)(vi)(F)(1) (Reflection of
similar risk profiles in cost sharing alterna-
tive and licensing alternative)); (2) in these
temporary regulations, further guidance on
evaluating results of application of the in-
come method (§1.482–7T(g)(2)(v)(B)(2)
(Implied discount rates) and (4)(vi)(F)(2)
(Use of differential income stream as
a consideration in assessing the best
method)); and (3) in proposed regula-
tions, a new specifiedapplication of the
income method for directly determining
the arm’s length charge for PCT Payments
(§1.482–7(g)(4)(v) (Application of in-
come method using differential income
stream)).
As discussed in the Preamble to the
final regulations, any difference, if any,
in market-correlated risks between the li-
censing and cost sharing alternatives is due
solely to the different effects on risks of the
PCT Payor’s making licensing payments
under the licensing alternative on the one
hand, and the PCT Payor’s making cost
contributions and PCT Payments under the
cost sharing alternative on the other hand.
Thus, the difference in risk between the
two scenarios should reflect solely (1) the
incremental risk, if any, associated with
the cost contributions taken on by the PCT
Payor in developing cost shared intangi-
bles under the cost sharing alternative, and
(2) any difference in risk associated with
the particular payment forms of the licens-
ing payments and the PCT Payments, in
light of the fact that the licensing payments
in the licensing alternative are partially re-
placed by cost contributions and partially
replaced by PCT Payments in the cost shar-
ing alternative, each with its own pay-
ment form. Accordingly, the final regula-
tions added §1.482–7(g)(4)(vi)(F)(1)(Re-
flection of similar risk profiles in cost shar-
ing alternative and licensing alternative),
which provides that an analysis under the
income method that uses a different dis-
count rate for the cost sharing alternative
than the licensing alternative will be more
reliable the greater the extent to which any
difference between the two discount rates
reflects solely those differences in risk pro-
files of these two alternatives.
These temporary regulations build
upon §1.482–7(g)(4)(vi)(F)(1)ofthefi-
nal regulations by providing additional
guidance relating to analysis of the in-
terrelationship between the discount rate
for the cost sharing alternative and the
discount rate for the licensing alternative,
and evaluation of the reasonableness of
the implied discount rate that may be de-
rived from the differential income stream
between the licensing alternative and the
cost sharing alternative. The differential
income stream is the difference between
the PCT Payor’s undiscounted operating
income under the cost sharing alterna-
tive (before PCT Payments) and the PCT
Payor’s undiscounted operating income
under the licensing alternative. This dif-
ference equals the licensing payments to
be made under the licensing alternative
minus the PCT Payor’s cost contributions
to be made under the cost sharing alter-
native. The differential income stream
should be discounted at an appropriate
rate in order to evaluate the reliability
of a determination of the arm’s length
charge for the PCT Payment. Accord-
ingly, these temporary regulations add
§1.482–7T(g)(4)(vi)(F)(2), which pro-
vides that an analysis under the income
method that uses a different discount rate
for the cost sharing alternative than for
thelicensingalternativewillbemorere-
liable the greater the extent to which the
implied discount rate for the projected
present value of the differential income
stream is consistent with reliable direct
evidence of the appropriate discount rate
applicable for activities reasonably an-
ticipated to generate an income stream
with a similar risk profile to the differ-
ential income stream (such as those of
the uncontrolled companies described in
§1.482–7T(g)(4)(viii)Example 8). The
Treasury Department and the IRS have
added §1.482–7T(g)(4)(viii)Example 8to
illustrate how §1.482–7T(g)(4)(vi)(F)(2)
maybeusedtoevaluatethereliability
of a particular application of the income
method.
The Treasury Department and the
IRS are also proposing a new speci-
fied application of the income method in
§1.482–7(g)(4)(v), which provides that the
determination of the arm’s length charge
for the PCT Payment can be derived by
discounting the differential income stream
at an appropriate rate. The differential
income stream approach to determining
PCT Payments depends on reliably deter-
mining the discount rate associated with
the differential income stream. This, in
turn, requires an understanding of the eco-
nomic meaning of the differential income
stream. For example, assume a CSA in
which the PCT Payor does not contribute
any platform or operating contributions,
and undertakes only routine exploitation
activities for which it anticipates a routine
return. In such case, the total undiscounted
anticipated profits (before PCT Payments)
to the CSA in the PCT Payor’s territory
can be thought of as comprising the an-
ticipated routine exploitation profits plus
the anticipated profits associated with the
development of the cost shared intangi-
bles in the PCT Payor’s territory. Under
the licensing alternative, on the other
hand, the PCT Payor’s total undiscounted
anticipated profits consist solely of the
anticipated routine exploitation profits.
Thus, the differential income stream con-
ceptually corresponds to the anticipated
development profits of the cost shared
intangibles. For these reasons, an appro-
priate discount rate for the differential
income stream might be determined based,
for example, on the weighted average
cost of capital of uncontrolled companies
whose activities consist primarily of de-
veloping intangibles similar to the cost
shared intangibles, and whose resources,
capabilities, or rights are similar to the
March 12, 20124662012–11 I.R.B.

platform contributions and cost shared
intangibles under the CSA. The proposed
regulations also add §1.482–7(g)(4)(viii)
Example 9to illustrate this newly speci-
fied application of the income method.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to this regulation, and because the
regulation does not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration (CCASBA) for com-
ment on their impact on small business.
CCASBAhadnocomments.
Drafting Information
The principal authors of these reg-
ulations are Joseph L. Tobin and
Mumal R. Hemrajani, Office of the
Associate Chief Counsel (International).
However, other personnel from the
Internal Revenue Service and the
Treasury Department participated in the
development of the regulations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.482–7 and 1.482–7T also is-
sued under 26 U.S.C. 482. * * *
Par. 2. Section 1.482–7 is amended
by revising paragraphs (g)(2)(v)(B)(2)and
(g)(4)(vi)(F)(2), and addingExample 8to
paragraph (g)(4)(viii), to read as follows:
§1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
*****
(g)* * *
(2)* * *
(v)* * *
(B)***
(2) [Reserved]. For further guidance,
see §1.482–7T(g)(2)(v)(B)(2).
*****
(4) * * *
(vi) * * *
(F) * * *
(2) [Reserved]. For further guidance,
see §1.482–7T(g)(4)(vi)(F)(2).
*****
(viii) * * *
Example 8. [Reserved]. For further
guidance, see §1.482–7T(g)(4)(viii),Ex-
ample 8.
*****
Par. 3. Section 1.482–7T is added to
read as follows:
§1.482–7T Methods to determine taxable
income in connection with a cost sharing
arrangement (temporary).
(a) through (g)(2)(v)(B)(1) [Reserved].
For further guidance, see §1.482–7(a)
through (g)(2)(v)(B)(1).
(2)Implied discount rates.Insomecir-
cumstances, the particular discount rate or
rates used for certain activities or transac-
tions logically imply that certain other ac-
tivities will have a particular discount rate
or set of rates (implied discount rates). To
the extent that an implied discount rate is
inappropriate in light of the facts and cir-
cumstances, which may include reliable
direct evidence of the appropriate discount
rate applicable for such other activities, the
reliability of any method is reduced where
such method is based on the discount rates
from which such an inappropriate implied
discount rate is derived. See paragraphs
(g)(4)(vi)(F)(2) and (g)(4)(viii),Example 8
of this section.
(g)(2)(v)(B)(3) through (g)(4)(vi)(F)(1)
[Reserved].For further guidance,
see §1.482–7(g)(2)(v)(B)(3) through
(g)(4)(vi)(F)(1).
(2)Use of differential income stream
as a consideration in assessing the best
method. An analysis under the income
method that uses a different discount rate
for the cost sharing alternative than for the
licensing alternative will be more reliable
the greater the extent to which the implied
discount rate for the projected present
value of the differential income stream is
consistent with reliable direct evidence of
the appropriate discount rate applicable for
activities reasonably anticipated to gener-
ate an income stream with a similar risk
profile to the differential income stream.
Such differential income stream is defined
as the stream of the reasonably anticipated
residuals of the PCT Payor’s licensing
payments to be made under the licensing
alternative, minus the PCT Payor’s cost
contributions to be made under the cost
sharing alternative. See, for example,Ex-
ample 8of this paragraph (g)(4)(viii).
(g)(4)(vii) through (viii) (Example 7
)
[Reserved]. For further guidance, see
§1.482–7(g)(4)(vii) through (g)(4)(viii)
(Example 7).
(viii)Example 8. (i) The facts are the same as in
Example 1, except that the taxpayer determines that
the appropriate discount rate for the cost sharing al-
ternative is 20%. In addition, the taxpayer determines
that the appropriate discount rate for the licensing al-
ternative is 10%. Accordingly, the taxpayer deter-
mines that the appropriate present value of the PCT
Payment is $146 million.
(ii) Based on the best method analysis described
inExample 2, the Commissioner determines that
the taxpayer’s calculation of the present value of the
PCT Payments is outside of the interquartile range
(as shown in the sixth column ofExample 2), and
thus warrants an adjustment. Furthermore, in eval-
uating the taxpayer’s analysis, the Commissioner
undertakes an analysis based on the difference in
the financial projections between the cost sharing
and licensing alternatives (as shown in column 11
ofExample 1). This column shows the anticipated
differential income stream of additional positive
or negative income for FS over the duration of the
CSA Activity that would result from undertaking the
cost sharing alternative (before any PCT Payments)
rather than the licensing alternative. This anticipated
differential income stream thus reflects the antici-
pated incremental undiscounted profits to FS from
the incremental activity of undertaking the risk of de-
veloping the cost shared intangibles and enjoying the
value of its divisional interests. Taxpayer’s analysis
logically implies that the present value of this stream
must be $146 million, since only then would FS have
the same anticipated value in both the cost sharing
and licensing alternatives. A present value of $146
million implies that the discount rate applicable to
this stream is 34.4%. Based on a reliable calculation
of discount rates applicable to the anticipated income
streams of uncontrolled companies whose resources,
capabilities, and rights consist primarily of software
applications intangibles and research and develop-
ment teams similar to USP’s platform contributions
to the CSA, and which income streams, accordingly,
may be reasonably anticipated to reflect a similar risk
2012–11 I.R.B.467March 12, 2012

profile to the differential income stream, the Com-
missioner concludes that an appropriate discount rate
for the anticipated income stream associated with
USP’s platform contributions (that is, the additional
positive or negative income over the duration of the
CSA Activity that would result, before PCT Pay-
ments, from switching from the licensing alternative
to the cost sharing alternative) is 16%, which is sig-
nificantly less than 34.4%. This conclusion further
suggests that Taxpayer’s analysis is unreliable. See
paragraphs (g)(2)(v)(B)(2) and (4)(vi)(F)(1)and(2)
of this section.
(iii) The Commissioner makes an adjustment of
$296 million, so that the present value of the PCT
Payments is $442 million (the median results as
shownincolumn6ofExample 2).
(g)(5) through (k) [Reserved]. For fur-
ther guidance, see §1.482–7(g)(5) through
(k).
(l)Effective/Applicability Date.
Treas. Reg. §1.482–7T(g)(2)(v)(B)(2),
(g)(4)(vi)(F)(2) and (g)(4)(viii),Example
8apply to taxable years beginning on or
after December 19, 2011.
(m) [Reserved]. For further guidance,
see §1.482–7(m).
(n)Expiration date. The applicability
of this section expires on December 19,
2014.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 8, 2011.
Emily S. M
cMahon,
Acting As
sistant Secretary
of the Tr
easury (Tax Policy).
(Filed by the Office of the Federal Register on December 19,
2011, 11:15 a.m., and published in the issue of the Federal
Register for December 23, 2011, 76 F.R. 80249)
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of March 2012. See Rev.
Rul. 2012-9, page 475.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 861.—
Income
From Sources W
ithin the
United States
26 CFR 1.861–9
T: Allocation and apportionment of
interest expe
nse (temporary).
T.D. 9571
Department o
ftheTreasury
Internal Rev
enue Service
26 CFR Part 1
Allocation
and Apportionment
of Interest
Expense
AGENCY: Int
ernal Revenue Service
(IRS), Trea
sury.
ACTION: Tem
porary regulations.
SUMMARY: Th
is document contains
temporary
regulations that provide guid-
ance regar
ding the allocation and ap-
portionme
nt of interest expense. These
temporary
regulations provide guidance
concernin
g the allocation and apportion-
ment of in
terest expense by corporations
owning a 1
0 percent or greater interest
in a partn
ership, as well as the allocation
and appor
tionment of interest expense us-
ing the fa
ir market value method. These
tempora
ry regulations also update the in-
terest a
llocation regulations to conform
to the st
atutory changes made by sec-
tion 216
of the legislation commonly
referre
dtoastheEducationJobsand
Medica
id Assistance Act (EJMAA), en-
acted o
n August 10, 2010, affecting the
affili
ation of certain foreign corporations
for pur
poses of section 864(e). These
regula
tions affect taxpayers that allocate
and ap
portion interest expense. The text
of the
se temporary regulations also serves
as the text of the proposed regulations
(REG–113903–10) set forth in the notice
of proposed rulemaking on this subject
published elsewhere in this issue of the
Bulletin.
DATES:Effective Date:These regulations
are effective on January 17, 2012.
Applicability Dates:For dates of
applicability, see §§1.861–9T(k) and
1.861–11T(h).
FOR FURTHER INFORMATION
CONTACT: Jeffrey L. Parry, (202)
622–3850 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
I. Interest Expense Allocation by Partners
Section 1.861
–9T(e) provides rules
governing the
apportionment of interest
expense by a pa
rtner in a partnership.
In general, §1
.861–9T(e) adopts an ag-
gregate, or lo
ok-through, approach to
apportionin
g a partner’s distributive share
of interest e
xpense incurred by the part-
nership. Sec
tion 1.861–9T(e)(1) provides
the general r
ule that a partner’s distribu-
tive share o
f the interest expense of a
partnershi
p is considered related to all
income-pro
ducing activities and assets of
the partner
. Similarly, §1.861–9T(e)(2)
requires t
hat a corporate partner whose
direct or i
ndirect interest in the partner-
ship is 10 p
ercent or more apportion its
distribut
ive share of partnership interest
expense by
reference to the partner’s as-
sets, incl
uding the partner’spro ratashare
of the par
tnership’s assets.
By contra
st, limited partners (whether
individu
al or corporate) and corporate
general p
artners with a less-than-10-per-
cent part
nership interest are excepted
from aggr
egate treatment.Under
§1.861–9
T(e)(4)(i), such partners must
directl
y allocate their distributive share
of partn
ership interest expense to their
distrib
utive share of partnership gross in-
come. In
addition, for purposes of allocat-
ing othe
r interest expense incurred directly
by such
a partner, §1.861–9T(e)(4)(ii) pro-
vides t
hat the relevant asset is the partner’s
intere
st in the partnership, and not the
partne
r’s share of the partnership assets.
March 12, 20124682012–11 I.R.B.

This approach for such minority partners
avoids the potential administrative burden
that an aggregate approach would impose
on such minority partners.
These temporary regulations revise
§1.861–9T(e)(2) to clarify that a corporate
partner with a 10 percent or greater inter-
est in a partnership must allocate its direct
interest expense to all of its assets, includ-
ing its proportionate share of partnership
assets. The IRS and the Treasury Depart-
ment believe that an aggregate approach
for corporate partners with a 10 percent
or greater interest in the partnership is
appropriate and consistent with the aggre-
gate approach applicable to apportioning
such partner’s distributive share of interest
expense incurred by the partnership.
These temporary regulations also re-
vise §1.861–9T(e)(2) to provide that when
a corporate partner with a 10 percent or
greater interest in a partnership uses the tax
book value or alternative tax book value
method, and therefore must use the part-
nership’s inside basis in its assets when al-
locating interest expense, the partnership’s
inside basis includes any section 734(b)
adjustments and any section 743(b) adjust-
ments of the corporate partner for this pur-
pose. Section 1.861–9T(e)(3) is also re-
vised to provide a similar rule for indi-
vidual partners who are general partners
or limited partners with a 10 percent or
greater interest in the partnership.
II. Fair Market Value Method
Section 864(e)(2) requires that the al-
location and apportionment of interest ex-
pensebemadeonthebasisofassetsand
not gross income (the asset method). Un-
der the asset method, interest expense is
apportioned between (or among) statutory
and residual groupings of gross income in
proportion to the average total values of
assets within each such grouping for the
taxable year. For this purpose, taxpayers
mayelecttovalueassetsbasedontheir
fair market value (the FMV method), tax
book value, or alternative tax book value.
§§1.861–8T(c)(2) and 1.861–9(i).
The temporary regulations set forth a
multi-step methodology for determining
the fair market value of a taxpayer’s assets.
Section 1.861–9T(h)(1) provides rules for
determining the fair market value of the
taxpayer’s intangible assets. First, the tax-
payer determines the aggregate value of
assets that it and its subsidiaries own (Step
1); second, the taxpayer values its tangible
assets, excluding any stock or indebted-
ness in a related person (Step 2); and third,
it subtracts the amount determined in Step
2 from the amount determined in Step 1 to
arrive at total intangible asset value (Step
3). The intangible assets owned by the tax-
payer are then apportioned among the tax-
payer’s affiliates under §1.861–9T(h)(2)
on the basis of net income (Step 4).
Once a taxpayer has determined the fair
market value of its intangible assets, those
assets must be characterized as provided
in §1.861–9T(h)(3) (Step 5). Finally, the
rules of §1.861–9T(h)(4) apply to deter-
mine the value of stock in a related per-
son held by the taxpayer (or by another
person related to the taxpayer) (Step 6).
Under those rules, §1.861–9T(h)(4) states
that the value of such stock is equal to the
sum of the following amounts, less the tax-
payer’spro ratashare of liabilities of such
related person: (i) the intangible assets ap-
portionedtotherelatedpersoninStep4,
above; (ii) the tangible assets (as deter-
minedinStep2)heldbytherelatedper-
son; and (iii) the total value of stock held
in all other related persons held by the re-
lated person.
The IRS and the Treasury Department
have become aware that certain taxpayers
are taking the position that the language
of Step 2 of the FMV method, which re-
quires related party debt to be excluded
as an asset as part of the process for de-
termining total intangible asset value,
means that such debt also is not treated
as an asset in the hands of the taxpayer
for the broader purpose of applying the
asset method. In addition, for purposes
of valuing the stock in related persons
under Step 6, some taxpayers are tak-
ing the position that those rules exclude
related party debt as an asset (because
of the reference in §1.861–9T(h)(4) to
§1.861–9T(h)(1)(ii)), but permit reduction
of the value of the stock of the related
person obligor by the amount of the re-
lated party debt as a liability (because the
language of §1.861–9T(h)(4)(ii) does not
limit the reduction for liabilities to unre-
lated party liabilities).
The IRS and the Treasury Department
believe that interpreting the regulations to
require that the related party debt be taken
into account as a liability for purposes of
valuing stock in the related person with-
out also treating the related party debt as
an asset in the creditor’s hands distorts the
relative values of assets assigned to each
statutory grouping. This result is contrary
to the general principles of the §1.861–9
regulations, which are based on the con-
cept that interest expense must be appor-
tioned on the basis of the value of all assets.
Accordingly, these temporary regulations
amend §1.861–9T(h)(4) to reflect the fact
that related party debt is an asset that must
be taken into account whether held by the
taxpayer or a related person.
These temporary regulations first revise
§1.861–9T(h)(4) by adding a new para-
graph §1.861–9T(h)(4)(i) to provide for
the valuation of related party debt. Prior
to its revision by these temporary regu-
lations, §1.861–9T(h)(4) provided for the
valuation of the stock of a related person,
but the regulations did not provide any ex-
planation of how the related party debt is
to be valued. As revised by these tempo-
rary regulations, §1.861–9T(h)(4)(i) pro-
vides that a related party debt obligation
held by a taxpayer or another person re-
lated to the taxpayer has a value equal to
the amount of the liability of the obligor re-
lated person. These temporary regulations
also revise §1.861–9T(h)(4) by providing
that the value of stock in a related per-
son includes the taxpayer’spro ratashare
of related party debt held by the related
person. Finally, these temporary regula-
tions provide a new example illustrating
the changes made to §1.861–9T(h)(4).
These amendments make clear that re-
lated party debt is an asset in the hands of
the creditor for purposes of applying the
asset method and is included in the valu-
ation of stock of a related person. Very
broadly, these changes ensure that both the
receivable and the payable sides of related
party debt are included for valuation pur-
poses under the FMV method, and that the
value of each side is determined in a con-
sistent manner. No inference is intended
regarding the interpretation of prior regu-
lations as a result of these modifications.
III. Affiliated Groups
The interest expense of each member
of an affiliated group is allocated and
apportioned as if all members of such
group were a single corporation. Section
864(e)(1). Prior to its amendment by the
EJMAA, section 864(e)(5)(A) defined the
2012–11 I.R.B.469March 12, 2012

term “affiliated group” by reference to
the rules under section 1504 for deter-
mining whether corporations are eligible
to file consolidated returns. The sec-
tion 1504 rules generally exclude foreign
corporations from anaffiliated group.
Section 1.861–11T(d)(6)(ii) provides that
certain foreign corporations are neverthe-
less treated as affiliated corporations for
purposes of allocating and apportioning
interest expense if (1) at least 80 percent
of either the vote or value of the corpora-
tion’s outstanding stock is owned directly
or indirectly by members of an affiliated
group, and (2) more than 50 percent of the
corporation’s gross income for the taxable
year is effectively connected with the con-
duct of a trade or business in the United
States (effectively connected income).
In the case of a foreign corporation that
is treated as an affiliated corporation for
interest allocation and apportionment pur-
poses, §1.861–11T(d)(6)(ii) provides that
the percentage of assets and income that is
taken into account for purposes of apply-
ing the affiliated group interest apportion-
ment rules depends on the percentage of
the corporation’s gross income that is ef-
fectively connected income. If 80 percent
or more of the foreign corporation’s gross
income is effectively connected income,
then all of the corporation’s assets and in-
terest expense are taken into account. If,
instead, between 50 percent and 80 percent
of the foreign corporation’s gross income
is effectively connected income, then only
the corporation’s assets that generate effec-
tively connected income and a percentage
of its interest expenseequal to the percent-
age of its assets that generate effectively
connected income are taken into account.
Section 864(e)(5)(A), as amended by
the EJMAA, provides that a foreign cor-
poration will be treated as a member of
an affiliated group for interest allocation
and apportionment purposes if (1) more
than 50 percent of the gross income of
such foreign corporation for the taxable
year is effectively connected income, and
(2) at least 80 percent of either the vote or
value of all outstanding stock of such for-
eign corporation is owned directly or indi-
rectly by members of the affiliated group.
In such event, all of the qualifying for-
eign corporation’s assets and interest ex-
pense are taken into account for purposes
of applying the affiliated group interest ap-
portionment rules. These temporary regu-
lations revise §1.861–11T(d)(6) to reflect
these statutory changes.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act(5 U.S.C. chapter 5)
does not apply to these regulations, and be-
cause the regulations do not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f), these regulations have been sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tions is Jeffrey L. Parry of the Office of
Chief Counsel (International). However,
other personnel from the IRS and the Trea-
sury Department participated in their de-
velopment.
*****
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 1.861–9T is amended
by:
1. Revising the first two sentences
of paragraph (e)(2), the fifth sentence of
(e)(3), and paragraph (h)(4);
2. Adding four sentences before the last
sentence of paragraph (k); and
3. Adding paragraph (l).
The revisions and additions read as fol-
lows:
§1.861–9T Allocation and apportionment
of interest expense (temporary).
*****
(e) * * *
(2)Corporate partners whose interest
in the partnership is 10 percent or more.
A corporate partner shall apportion its in-
terest expense (including the partner’s dis-
tributive share of partnership interest ex-
pense) by reference to the partner’s as-
sets, including the partner’spro ratashare
of partnership assets, under the rules of
paragraph (f) of this section if the cor-
porate partner’s direct and indirect inter-
est in the partnership (as determined un-
der the attribution rules of section 318) is
10 percent or more. A corporation us-
ing the tax book value method or alter-
native tax book value method of appor-
tionment shall use the partnership’s inside
basis in its assets, including adjustments
under sections 734(b) and 743(b), if any,
and adjusted to the extent required under
§1.861–10T(d)(2). * * *
(3)Individual partners who are general
partners or who are limited partners with
an interest in the partnership of 10 percent
or more. * * * An individual using the tax
book value or alternative tax book value
method of apportionment shall use the
partnership’s inside basis in its assets, in-
cluding adjustments under sections 734(b)
and 743(b), if any, and adjusted to the
extent required under §1.861–10T(d)(2).
***
*****
(h) * * *
(4)Valuing related party debt and stock
in related persons—(i)Related party
debt. For purposes of this section, the
value of a debt obligation of a related per-
son held by the taxpayer or another person
related to the taxpayer equals the amount
of the liability of the obligor related per-
son.
(ii)Stock in related persons.Thevalue
ofstockinarelatedpersonheldbythe
taxpayer or by another person related to
the taxpayer equals the sum of the follow-
ing amounts reduced by the taxpayer’spro
ratashare of liabilities of such related per-
son:
(A) The portion of the value of intangi-
ble assets of the taxpayer and related per-
sons that is apportioned to such related per-
son under paragraph (h)(2) of this section;
(B) The taxpayer’spro ratashare of
tangible assets held by the related person
(as determined under paragraph (h)(1)(ii)
of this section);
March 12, 20124702012–11 I.R.B.

(C) The taxpayer’spro ratashare of
debt obligations of any related person held
by the related person (as valued under
paragraph (h)(4)(i) of this section); and
(D) The total value of stock in all re-
lated persons held by the related person as
determined under this paragraph (h)(4).
(iii)Example.(A)Facts. USP, a domestic corpo-
ration, wholly owns CFC1 and owns 80% of CFC2,
both foreign corporations. The aggregate trading
value of USP’s stock traded on established securities
markets at the end of Year 1 is $700 and the amount
of USP’s liabilities to unrelated persons at the end
of Year 1 is $400. Neither CFC1 nor CFC2 has
liabilities to unrelated persons at the end of Year
1. USP owns plant and equipment valued at $500,
CFC1 owns plant and equipment valued at $400,
and CFC2 owns plant and equipment valued at $250.
The value of these assets has been determined using
generally accepted valuation techniques, as required
by §1.861–9T(h)(1)(ii). There is an outstanding loan
from CFC2 to CFC1 in an amount of $100. There
is also an outstanding loan from USP to CFC1 in an
amount of $200.
(B)Valuation of group assets.Pursuantto
§1.861–9T(h)(1)(i), the aggregate value of USP’s as-
sets is $1100 (the $700 trading value of USP’s stock
increased by $400 of USP’s liabilities to unrelated
persons).
(C)Valuation of tangible assets. Pursuant to
§1.861–9T(h)(1)(ii), the value of USP’s tangible
assets andpro ratashare of assets held by CFC1
and CFC2 is $1100 (the plant and equipment held
directly by USP, valued at $500, plus USP’s 100%
pro ratashare of the plant and equipment held by
CFC1 valued at $400 and USP’s 80%pro ratashare
oftheplantandequipmentheldbyCFC2valuedat
$200 (80% of $250)).
(D)Computation of intangible asset value.Pur-
suant to §1.861–9T(h)(1)(iii), the value of the intan-
gibleassetsofUSP,CFC1,andCFC2is$0(totalag-
gregate group asset value ($1100) determined in para-
graph (B) less total tangible asset value ($1100) deter-
mined in paragraph (C)). Because the intangible asset
value is zero, the provisions of §1.861–9T(h)(2) and
(3) relating to the apportionment and characterization
of intangible assets do not apply.
(E)Valuing related party debt obligations.Pur-
suant to §1.861–9T(h)(4)(i), the value of the debt
obligationofCFC1heldbyCFC2isequaltothe
amount of the liability, $100. The value of the debt
obligationofCFC1heldbyUSPisequaltothe
amount of the liability, $200.
(F)Valuing the stock of CFC1 and CFC2.Pur-
suant to §1.861–9T(h)(4)(ii), the value of the stock
of CFC2 held by USP is $280 (USP’s 80%pro rata
share of tangible assets of CFC2 included in para-
graph (C) ($200) plus USP’s 80%pro ratashare of
thedebtobligationofCFC1heldbyCFC2valuedin
paragraph (E) ($80). The value of the stock of CFC1
held by USP is $100 (USP’s 100%pro ratashare of
tangible assets of CFC1 included in paragraph (C)
($400) less USP’s 100%pro ratashare of the liabili-
ties of CFC1 to USP and CFC2 ($300)).
*****
(k)***Paragraphs(e)(2)and(3)
apply to taxable years beginning af-
ter January 17, 2012. See 26 CFR
§1.861–9T(e)(2) and (3) (revised as of
April 1, 2011) for rules applicable to
taxable years beginning on or before
January 17, 2012. Paragraph (h)(4)
applies to taxable years ending on or after
January 17, 2012. See §1.861–9T(h)(4)
(revised as of April 1, 2011) for rules
applicable to taxable years ending before
January 17, 2012.* * *
(l)Expiration date. The applicability
date of paragraphs (e)(2), (e)(3), and (h)(4)
expires on January 13, 2015.
Par. 4. Sec 1.861–11T is amended by
revising paragraphs (d)(6)(ii) and (h) and
adding paragraph (i) to read as follows:
§1.861–11T Special rules for allocating
and apportioning interest expense of
an affiliated group of corporations
(temporary).
*****
(6) * * *
(ii) Any foreign corporation if more
than 50 percent of the gross income of
such foreign corporation for the taxable
year is effectively connected with the
conduct of a trade or business within the
United States and at least 80 percent of
either the vote or value of all outstanding
stock of such foreign corporation is owned
directly or indirectly by members of the
affiliated group (determined with regard
to this sentence).
*****
(h)Effective/applicability date.Ingen-
eral, the rules of this section apply for tax-
able years beginning after December 31,
1986. Paragraph (d)(6)(ii) applies to
taxable years beginning after August 10,
2010. See 26 CFR §1.861–11T(d)(6)(ii)
(revised as of April 1, 2010) for rules
applicable to taxable years beginning on
or before August 10, 2010.
(i)Expiration date. The applicability
date of paragraph (d)(6)(ii) expires on Jan-
uary 13, 2015.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 6, 2011.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on January 13,
2012, 8:45 a.m., and published in the issue of the Federal
Register for January 17, 2012, 77 F.R. 2225)
Section 871.—Tax
on Nonresident Alien
Individuals
26 CFR 1.871–16T: Specified notional principal con-
tracts (temporary).
T.D. 9572
Dividend Equivalents From
Sources Within the United
States
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to dividend
equivalents for purposes of section 871(m)
of the Internal Revenue Code (Code). The
regulations provide guidance to nonresi-
dent aliens and foreign corporations that
hold notional principal contracts (NPCs)
providing for payments determined by
reference to payments of dividends from
sources within the United States. The text
of the temporary regulations also serves
as the text of the proposed regulations
(REG–120282–10) set forth in the notice
of proposed rulemaking on this subject in
this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective January 23, 2012.
Applicability Date:For dates
of applicability, see §§1.863–7T(f),
1.871–16T(g),1.881–2T(f),
1.1441–2T(g),1.1441–3T(k),
1.1441–4T(h), 1.1441–7T(h), and
1.1461–1T(j).
FOR FURTHER INFORMATION
CONTACT: Mark E. Erwin or D. Peter
Merkel at (202) 622–3870 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary reg-
ulations under section 871(m). Congress
enacted section 871(m) (originally desig-
nated as section 871(l)) on March 18, 2010
2012–11 I.R.B.471March 12, 2012

in section 541 of the Hiring Incentives
to Restore Employment Act (HIRE Act),
Public Law 111–147 (124 Stat. 71).
Section 871(m) applies to securities
loans, sale-repurchase transactions (re-
pos), certain NPCs defined as “specified
notional principal contracts” (specified
NPCs), and any similar transactions that
provide for a payment contingent upon or
determined by reference to a U.S. source
dividend (dividend equivalent). Section
871(m) treats a dividend equivalent as a
dividend from sources within the United
States for purposes of sections 871(a),
881, and 4948(a), and chapters 3 and 4 of
subtitle A of the Code. Section 871(m)
generally applies to any dividend equiva-
lent made after September 14, 2010. With
respect to payments made after March 18,
2012, section 871(m)(3)(B) provides that
any NPC will be a specified NPC unless
the Secretary determines that such con-
tract is of a type which does not have the
potential for tax avoidance.
Notice 2010–46, 2010–24 I.R.B. 757,
outlined a proposed framework for lim-
iting withholding in the case of a series
of securities lending or sale-repurchase
transactions. While the Treasury De-
partment and the IRS anticipate issuing
proposed regulations addressing the issues
raised in Notice 2010–46, these regula-
tions do not address these concerns. See
§601.601(d)(2).
Explanation of Provisions
Section 1.871–16T(b) of these tempo-
rary regulations incorporates the definition
of a specified NPC as provided in sec-
tion 871(m)(3)(A). These temporary regu-
lations extend the applicability of the sec-
tion 871(m)(3)(A) statutory definition of
a specified NPC through December 31,
2012. Proposed regulations set forth in the
notice of proposed rulemaking in this issue
of the Bulletin outline the proposed treat-
ment of dividend equivalents under section
871(m) beginning January 1, 2013. The
Treasury Department and the IRS believe
that an extension of the statutory definition
of the term specified NPC is necessary to
allow taxpayers and withholding agents to
modify their systems and other operating
procedures to comply with the rules de-
scribed in the notice of proposed rulemak-
ing.
These temporary regulations also
amend several regulations to clarify the ap-
plication of section 871(m). For example,
temporary regulations modify §1.863–7
to provide that that section does not apply
to a dividend equivalent under section
871(m). Section 1.881–2T(b)(3) provides
that section 871(m) and §1.871–16T ap-
ply to dividend equivalents received by
foreign corporations. Certain regulations
under section 1441 have been amended to
require a withholding agent to withhold
tax owed with respect to a dividend equiv-
alent.
Notwithstanding these temporary regu-
lations, the Commissioner may challenge
transactions that are designed to avoid the
application of these rules under applicable
judicial doctrines. Nothing in these rules
precludes the Commissioner from assert-
ing that a contract labeled as an NPC or
other equity derivative is in fact an owner-
ship interest in the equity referenced in the
contract.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6), refer to
the special analyses section of the pream-
ble to the cross-reference notice of pro-
posedrulemakingpublishedinthisissueof
the Bulletin. Pursuant to section 7805(f)
of the Code, these temporary regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on the impact on
small businesses.
Drafting Information
The principal author of these regula-
tions is D. Peter Merkel, the Office of
Associate Chief Counsel (International).
Other personnel from the Treasury
Department and the IRS participated in
their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1— INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 871(m) and 7805
***
Par. 2. Section 1.863–7 is amended
by revising paragraph (a)(1) to read as fol-
lows:
§1.863–7 Allocation of income
attributable to certain notional principal
contracts under section 863(a).
(a)Scope—(1)Introduction.[Re-
served]. For further guidance, see
§1.863–7T(a)(1).
*****
Par. 3. Section 1.863–7T is added as
follows:
§1.863–7T Allocation of income
attributable to certain notional
principal contracts under section 863(a)
(temporary).
(a)Scope—(1)Introduction. This sec-
tion provides rules relating to the source
and, in certain cases, the character of no-
tional principal contract income. How-
ever, this section does not apply to income
from a section 988 transaction within the
meaning of section 988 and the regulations
thereunder, relating to the treatment of cer-
tain nonfunctional currency transactions.
Further, this section does not apply to a
dividend equivalent as defined in section
871(m) or §1.871–15. Notional principal
contract income is income attributable to
a notional principal contract as defined in
§1.446–3(c). An agreement between a tax-
payer and a qualified business unit (as de-
fined in section 989(a)) of the taxpayer, or
among qualified business units of the same
taxpayer, is not a notional principal con-
tract, because a taxpayer cannot enter into
a contract with itself.
(a)(2) through (e) [Reserved]. For fur-
ther guidance, see §1.863–7(a)(2) through
(e).
(f)Effective/applicability date.This
section applies to payments made on or af-
ter January 23, 2012.
March 12, 20124722012–11 I.R.B.

(g)Expiration date. This section ex-
pires January 16, 2015.
Par. 4. Section 1.871–15T is added and
reserved to read as follows:
§1.871–15T Treatment of dividend
equivalents (temporary).[Reserved]
Par. 5. Section
1.871–16T is added to
read as follow
s:
§1.871–16T Specified notional principal
contracts (temporary).
(a) [Reserved].
(b)Specified notional principal con-
tracts between March 18, 2012 and Jan-
uary 1, 2013. With respect to payments
made after March 18, 2012 and before Jan-
uary 1, 2013, the term specified notional
principal contract means any notional
principal contract (as defined in §1.446–3)
if—
(1)Inconnectionwithenteringinto
such contract, any long party to the con-
tract transfers the underlying security to
any short party to the contract;
(2) In connection with the termination
of such contract, any short party to the
contract transfers theunderlying security
to any long party to the contract;
(3) The underlying security is not read-
ily tradable on an established securities
market; or
(4)Inconnectionwithenteringinto
such contract, the underlying security is
posted as collateral by any short party to
the contract with any long party to the
contract.
(c) through (f) [Reserved].
(g)Effective/applicability date.This
section applies to payments made on or af-
ter January 23, 2012.
(h)Expiration date. This section ex-
pires on January 16, 2015.
Par. 6. Section 1.881–2 is amended by
adding paragraph (b)(3) to read as follows:
§1.881–2 Taxation of foreign corporations
not engaged in U.S. business.
*****
(b) * * *
(3) [Reserved]. For further guidance,
see §1.881–2T(b)(3).
*****
Par. 7. Section 1.881–2T is added as
follows:
§1.881–2T Taxation of foreign
corporations not engaged in U.S.
business (temporary).
(a) through (b)(2) [Reserved]. For fur-
ther guidance, see §1.881–2(a) through
(b)(2).
(3)Dividend Equivalents.Forrules
applicable to a foreign corporation’s re-
ceipt of a dividend equivalent, see section
871(m) and §1.871–16T.
(c) through (e) [Reserved]. For further
guidance, see §1.881–2(c) through (e).
(f)Effective/applicability date.This
section applies on or after January 23,
2012.
(g)Expiration date. The applicability
of this section expires on January 16, 2015.
Par. 8. Section 1.1441–2 is amended by
adding paragraphs (b)(6) and (e)(7) to read
as follows:
§1.1441–2 Amounts subject to
withholding.
*****
(b) * * *
(6) [Reserved]. For further guidance,
see §1.1441–2T(b)(6).
*****
(e) * * *
(7) [Reserved]. For further guidance,
see §1.1441–2T(e)(7).
*****
Par. 9. Section 1.1441–2T is added to
read as follows:
§1.1441–2T Amounts subject to
withholding (temporary).
(a) through (b)(5) [Reserved]. For fur-
ther guidance, see §1.1441–2(a) through
(b)(5).
(6)Dividend equivalents.Amounts
subject to withholding include the pay-
ment of a dividend equivalent described in
section 871(m). For this purpose, the term
payment includes any gross amount that is
used in computing any net amount that is
transferred to or from the taxpayer under
the terms of the contract.
(c) through (e)(6) [Reserved]. For fur-
ther guidance, see §1.1441–2(c) through
(e)(6).
(7)Rules for dividend equivalents.
With respect to a dividend equivalent de-
scribed in section 871(m), a payment is
considered made to a person when any
gross amount is used in computing any net
amount that is transferred to or from the
person under the terms of the contract pur-
suant to a transaction described in section
871(m)(2). When a dividend equiva-
lent is used to determine a net payment,
the person entitled to the gross dividend
equivalent is considered to have received
a payment even if that person receives no
payment because the net payment equals
zero or that person makes a net payment.
(f) [Reserved]. For further guidance,
see §1.1441–2(f).
(g)Effective/applicability date.This
section applies on or after January 23,
2012.
(h)Expiration date. The applicability
of this section expires on January 16, 2015.
Par. 10. Section 1.1441–3 is amended
by redesignating paragraph (h) as para-
graph (j) and adding new paragraphs (h)
and (i) to read as follows:
§1.1441–3 Determination of amounts to
be withheld.
*****
(h) [Reserved]. For further guidance,
see §1.1441–3T(h).
(i) [Reserved]. For further guidance,
see §1.1441–3T(i).
*****
Par. 11. Section 1.1441–3T is added to
read as follows:
§1.1441–3T Determination of amounts to
be withheld (temporary).
(a) through (g) [Reserved]. For further
guidance, see §1.1441–3(a) through (g).
(h)Dividend equivalents—(1)In gen-
eral. The gross amount of a dividend
equivalent described in section 871(m) is
subject to withholding in an amount equal
to the gross amount of the dividend equiva-
lent used in computing any net amount that
is transferred to or from the taxpayer.
(2)Procedures for withholding with re-
spect to a dividend equivalent paid prior
to a notional principal contract (NPC) be-
coming a specified NPC. [Reserved].
(i)Estimate or other determination of
the portion of a distribution attributable
to a dividend equivalent—(1)In general.
In determining the amount subject to with-
holding as a dividend equivalent, a with-
holding agent may use a distributing cor-
poration’s estimate or other determination
2012–11 I.R.B.473March 12, 2012

with respect to the underlying security (as
defined in section 871(m)(4)(C)) in ap-
plying the provisions of paragraphs (c)(2)
through (c)(4) of this section. However,
a withholding agent that elects to use any
such estimate will be liable for the amount
by which the actual amount required to
be withheld exceeds the amount actually
withheld and applicable penalties and in-
terest resulting from its reliance on such
estimate or determination. Failure of the
withholding agent to withhold the required
amount shall not be attributed to the dis-
tributing corporation.
(2) [Reserved]
(j) [Reserved]. For further guidance,
see §1.1441–3(j).
(k)Effective/applicability date.This
section applies on or after January 23,
2012.
(l)Expiration date. The applicability of
this section expires on January 16, 2015.
Par. 12. Section 1.1441–4 is amended
by revising paragraph (a)(3)(i) and adding
paragraph (a)(3)(iii) to read as follows:
§1.1441–4 Exemptions from withholding
for certain effectively connected income
and other amounts.
(a)***
(3) * * *
(i) [Reserved]. For further guidance,
see §1.1441–4T(a)(3)(i).
*****
(iii) [Reserved]. For further guidance,
see §1.1441–4T(a)(3)(iii).
*****
Par. 13. Section 1.1441–4T is added to
read as follows:
§1.1441–4T Exemptions from withholding
for certain effectively connected income
and other amounts (temporary).
(a)(1) through (a)(2) [Reserved]. For
further guidance, see §1.1441–4(a)(1)
through (a)(2).
(3)Income on notional principal con-
tracts—(i)General rule. Except as oth-
erwise provided in paragraph (a)(3)(iii) of
this section, a withholding agent that pays
amounts attributable to a notional princi-
pal contract described in §1.863–7T(a) or
§1.988–2(e) shall have no obligation to
withhold on the amounts paid under the
terms of the notional principal contract re-
gardless of whether a withholding certifi-
cate is provided. However, a withholding
agent must file returns under §1.1461–1(b)
and (c) reporting the income that it must
treat as effectively connected with the con-
duct of a trade or business in the United
States under the provisions of this para-
graph (a)(3). Except as otherwise provided
in paragraph (a)(3)(ii) of this section, a
withholding agent must treat the income
as effectively connected with the conduct
of a U.S. trade or business if the income
is paid to, or to the account of, a qualified
business unit of a foreign person located
in the United States or, if the payment is
paid to, or to the account of, a qualified
business unit of a foreign person located
outside the United States, the withholding
agent knows, or has reason to know, the
payment is effectively connected with the
conduct of a trade or business within the
United States. Income on a notional prin-
cipal contract does not include the amount
characterized as interest under the provi-
sions of §1.446–3(g)(4).
(ii) [Reserved]. For further guidance,
see §1.1441–4(a)(3)(ii).
(iii)Exception for specified notional
principal contracts. A withholding agent
that makes a payment attributable to a
specified notional principal contract de-
scribed in section 871(m), or §1.871–16T
that is not treated as effectively connected
with the conduct of a trade or business
within the United States shall have an obli-
gation to withhold on the amount of such
payment that is a dividend equivalent.
(b) through (g) [Reserved]. For further
guidance, see §1.1441–4(b) through (g).
(h)Effective/applicability date.This
section applies on or after January 23,
2012.
(i)Expiration date. The applicability of
this section expires on January 16, 2015.
Par. 14. Section 1.1441–7 is amended
by:
1. Redesignating paragraph (a)(2) as
paragraph (a)(3) and revising newly des-
ignated paragraph (a)(3).
2. Adding a new paragraph (a)(2).
The revision and addition reads as fol-
lows:
§1.1441–7 General provisions relating to
withholding agents.
(a) * * *
(2) [Reserved]. For further guidance,
see §1.1441–7T(a)(2).
(3)Examples. The following examples
illustrate the rules of paragraph (a) of this
section:
*****
Example 6. [Reserved]. For further
guidance, see §1.1441–7T(a)(3)Example
6.
*****
Par. 15. Section 1.1441–7T is added to
read as follows:
§1.1441–7T General provisions relating
to withholding agents (temporary).
(a)(1) [Reserved]. For further guid-
ance, see §1.1441–7(a)(1).
(2)Withholding agent with respect to
dividend equivalents. Each person that is
a party to any contract or arrangement that
provides for the payment of a dividend
equivalent, as defined in section 871(m),
shall be treated as having control and cus-
tody of such payment.
(3)Examples
. The following examples
illustrate the rules of paragraphs (a)(1) and
(a)(2) of this section:
Example 1throughExample 5[Re-
served]. For further guidance, see
§1.1441–7(a)(3),Example 1throughEx-
ample 5.
Example 6. FC, a foreign corporation, enters into
a notional principal contract (NPC) with Bank X, a
bank organized in the United States. The NPC is a
specified NPC for purposes of section 871(m). FC
is the long party to the contract and Bank X is the
short party. The NPC references a specified num-
ber of shares of dividend-paying common stock is-
sued by a domestic corporation. As the long party,
FC receives payments from Bank X based on any ap-
preciation in the value of the common stock and div-
idends paid with respect to the common stock. As
the short party, Bank X receives payment from FC
based on any depreciation in the value of the com-
mon stock and a payment based on LIBOR. Bank X
is a withholding agent because Bank X is deemed to
have control and custody of a dividend equivalent as
a party to the NPC. If FC’s tax liability under section
881 has not been satisfied in full by Bank X as with-
holdingagent,FCisrequiredtofileareturnonForm
1120–F (U.S. Income Tax Return of a Foreign Corpo-
ration).
(b)(1) through (g) [Reserved]. For
further guidance, see §1.1441–7(b)(1)
through (g).
(h)Effective/applicability date.This
section applies on or after January 23,
2012.
(i)Expiration date. The applicability of
this section expires on January 16, 2015.
March 12, 20124742012–11 I.R.B.

Par. 16. Section 1.1461–1 is amended
by:
1.Redesignating paragraphs
(c)(2)(i)(L) and (c)(2)(i)(M) as
(c)(2)(i)(M) and (c)(2)(i)(N), respectively.
3. Adding a new paragraph (c)(2)(i)(L).
The addition reads as follows:
§1.1461–1 Payment and returns of tax
withheld.
*****
(c) * * *
(2) * * *
(i) * * *
(L) [Reserved]. For further guidance,
see §1.1461–1T(c)(2)(L).
*****
Par. 17. Section 1.1461–1T is added as
follows:
§1.1461–1T Payment and returns of tax
withheld (temporary).
(a) through (c)(2)(i)(K) [Reserved].
For further guidance, see §1.1461–1(a)
through (c)(2)(i)(K).
(L) Dividend equivalents as defined in
section 871(m) and the regulations there-
under;
(c)(2)(i)(M) through (i) [Re-
served]. For further guidance, see
§1.1461–1(c)(2)(i)(M) through (i).
(j)Effective/applicability date.This
section applies on or after January 23,
2012.
(k)Expiration date. The applicability
of this section expires on January 16, 2015.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved January 3, 2012.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on January 19,
2012, 11:15 a.m., and published in the issue of the Federal
Register for January 23, 2012, 77 F.R. 3108)
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for March 2012.
Rev. Rul. 2012–9
This revenue ruling provides various
prescribed rates for federal income tax pur-
poses for March 2012 (the current month).
Table 1 contains the short-term, mid-term,
and long-term applicable federal rates
(AFR) for the current month for purposes
of section 1274(d) of the Internal Revenue
Code. Table 2 contains the short-term,
mid-term, and long-term adjusted appli-
cable federal rates (adjusted AFR) for
the current month for purposes of section
1288(b). Table 3 sets forth the adjusted
federal long-term rate and the long-term
tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-in-
come housing credit described in section
42(b)(1) for buildings placed in service
during the current month. However, under
section 42(b)(2), the applicable percentage
for non-federally subsidized new build-
ings placed in service after July 30, 2008,
and before December 31, 2013, shall not
be less than 9%. Finally, Table 5 contains
the federal rate for determining the present
value of an annuity, an interest for life
or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520.
2012–11 I.R.B.475March 12, 2012

REV. RUL. 2012–9 TABLE 1
Applicable Federal Rates (AFR) for March 2012
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR.19%.19%.19%.19%
110% AFR.21%.21%.21%.21%
120% AFR.23%.23%.23%.23%
130% AFR
.25%.25%.25%.25%
Mid-term
AFR1.08%1.08%1.08%1.08%
110% AFR1.19%1.19%1.19%1.19%
120% AFR1.30%1.30%1.30%1.30%
130% AFR1.40%1.40%1.40%1.40%
150% AFR
1.63%1.62%1.62%1.61%
175% AFR
1.90%1.89%1.89%1.88%
Long-term
AFR
2.65%
2.63%2.62%2.62%
110% AFR2.91%2.89%2.88%2.87%
120% AFR3.18%3.16%
3.15%
3.14%
130% AFR
3.45%
3.42%3.41%3.40%
REV. RUL. 2012–9 TABLE 2
Adjusted AFR for March 2012
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
.26%.26%.26%.26%
Mid-term adjusted AFR
1.05%1.05%1.05%1.05%
Long-term adjusted
AFR
3.47%
2.95%
2.94%2.93%
REV. RUL. 2012–9 TABLE 3
Rates Under Section 382 for March 2012
Adjusted federal long-term rate for the current month2.97%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)3.55%
REV. RUL. 2012–9 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for March 2012
Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, and before December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.43%
Appropriate percentage for the 30% present value low-income housing credit3.18%
March 12, 20124762012–11 I.R.B.

REV. RUL. 2012–9 TABLE 5
Rate Under Section 7520 for March 2012
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest1.4%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 6695.—Other
Assessable Penalties With
Respect to the Preparation
of Tax Returns for Other
Persons
26 CFR 1.6695–2: Tax return preparer due diligence
requirements for determining earned income credit
eligibility.
T.D. 9570
Tax Return Preparer Penalties
Under Section 6695
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that modify existing reg-
ulations related to the tax return preparer
penalties under section 6695 of the Inter-
nal Revenue Code (Code). The final regu-
lations are necessary to monitor and to im-
prove compliance with the tax return pre-
parer due diligence requirements of sec-
tion 6695(g). The final regulations affect
paid tax return preparers.
DATES:Effective Date:The final regula-
tions are effective on December 20, 2011.
Applicability Date:For date of applica-
bility, see §1.6695–2(e).
FOR FURTHER INFORMATION
CONTACT: Spence Hanemann, (202)
622–4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in the final regulations was previously
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1570. The collection of information
is in §1.6695–2(b)(1) and (b)(4) of the
final regulations, and is an increase in the
total annual burden from the burden in the
prior regulations. The collection of this
information will improve the IRS’ ability
to enforce compliance with the due dili-
gence requirements under section 6695(g)
with respect to determining eligibility for,
or the amount of, the earned income credit
(EIC) under section 32.
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.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under section 6695 of the Code.
The Treasury Department and the IRS
published a notice of proposed rulemaking
(REG–140280–09, 2011–45 I.R.B. 709) in
theFederal Register,76 FR 62689, on
October 11, 2011 (the NPRM). A public
hearing was scheduled for November 7,
2011. The IRS did not receive any re-
quests to testify at the public hearing, and
the public hearing was cancelled. Written
comments responding to the NPRM were
received and are available for public in-
spection athttp://www.regulations.govor
upon request. After consideration of all the
comments, the proposed regulations are
adopted as amended by this Treasury de-
cision. The revisions tothe regulations are
discussed in this preamble.
Summary of Comments and
Explanation of Revisions
The IRS received nine written com-
ments in response to the NPRM, and this
section addresses those public comments.
This section also describes the significant
differences between the rules proposed in
the NPRM and those adopted in the final
regulations.
1.2011 Amendment to Section 6695(g)
On October 21, 2011, section 501 of the
United States-Korea Free Trade Agree-
ment Implementation Act, Public Law
112–41, 125 Stat 428, amended section
6695(g) of the Code by increasing the
amount of the penalty from $100 to $500.
To account for this change in the law,
§1.6695–2(a) of the final regulations has
been conformed to the statutory language
of section 6695(g), as amended.
2.Necessity of These Regulations
Two commenters stated that the pro-
posed amendments to the due diligence
standards in the NPRM were unneces-
sary in light of recent regulatory changes
requiring tax return preparers to register
with the IRS and comply with the ethical
standards governing practice before the
IRS (Circular 230), as well as the tax re-
turn preparer penalties under section 6694.
They suggested that the IRS can apply
these existing provisions to address mis-
conduct by tax return preparers, including
improper determination of eligibility for,
and amount of, EIC by both individual tax
return preparers and firms.
As reflected in section 6695(g), Con-
gress has determined that noncompliance
with the EIC rules poses a sufficiently sig-
nificant problem to merit imposing unique
due diligence requirements on tax return
preparers involved in determining eligibil-
ity for, or amount of, the EIC. By recently
quintupling the amount of the penalty for
2012–11 I.R.B.477March 12, 2012

failure to comply with these requirements,
Congress reaffirmed the need for specific
rules to reduce EIC noncompliance. In
order to address noncompliance with the
EIC rules, the final regulations modify the
due diligence requirements under section
6695(g) that have been in place for over a
decade. Treasury and the IRS concluded
that these regulations are consistent with
section 6695(g), and no modification is
made in the final regulations in response
to these comments.
3.Submission of Form 8867
Section 1.6695–2(b)(1)(i) of the pro-
posed regulations required that the Form
8867, “Paid Preparer’s Earned Income
Credit Checklist,” be submitted to the IRS
in the manner required by forms, instruc-
tions, or other appropriate guidance. One
commenter noted, in part, that tax return
preparers sometimes provide a paper copy
of the completed tax return or claim for re-
fund to the taxpayer for submission by the
taxpayer. A tax returnpreparer’s ability to
provide a paper copy, as opposed to filing
the tax return electronically, is subject to
the rules and limitations in §301.6011–7
and related guidance. Another commenter
stated that the proposed regulations were
unclear in how they apply to nonsigning
tax return preparers. The due diligence
requirements and the penalty for failure to
comply with them apply to any tax return
preparer, including a nonsigning tax return
preparer, who determines eligibility for, or
amount of, the EIC.
After consideration of these comments,
Treasury and the IRS have concluded that
the rules in the regulations should be clar-
ified to provide how tax return preparers
who prepare a tax return or claim for re-
fund but do not submit it directly to the IRS
can satisfy the requirement under proposed
§1.6695–2(b)(1)(i) to submit the com-
pleted Form 8867 to the IRS. In response
to these comments, §1.6695–2(b)(1)(i)
of the final regulations provides that tax
return preparers who prepare a tax return
or claim for refund but do not submit it
directly to the IRS may satisfy this as-
pect of their due diligence obligation by
providing the form to the taxpayer or the
signing tax return preparer, as appropriate,
for submission with the tax return or claim
for refund.
One commenter suggested that the
Form 8867 be a stand-alone form that the
taxpayer signs and submits as an affidavit
of EIC eligibility. After consideration
of this comment, Treasury and the IRS
have concluded that imposing such an
obligation on taxpayers, rather than on
tax return preparers, would be contrary to
the purpose of section 6695(g), which is
to discourage tax return preparers from
preparing EIC tax returns or claims for
refund without performing basic due dili-
gence. No modification is made in the
final regulations in response to this com-
ment.
4.Requirement to Verify Taxpayer
Information
Section 1.6695–2(b)(1)(i) of the
proposed regulations required submis-
sion of Form 8867 to the IRS, and
§1.6695–2(b)(4)(i)(C) of the proposed
regulations required retention of a copy of
any document that was provided by the
taxpayer and on which the tax return pre-
parer relied to complete Form 8867 or the
Earned Income Credit Worksheet. Two
commenters suggested that these addi-
tional requirements increased a tax return
preparer’s burden under the knowledge
requirement of existing §1.6695–2(b)(3)
because a tax return preparer would now
be obligated to verify taxpayers’ responses
to the eligibility questions and also to
verify nonsigning tax return preparers’ (if
any) completion of the Form 8867. The
proposed regulations, however, do not
expand tax return preparers’ obligation to
verify information provided by taxpayers
and other tax return preparers under exist-
ing §1.6695–2(b)(3).
Under §1.6695–2(b)(3) of the current
regulations, tax return preparers are al-
ready required to complete Form 8867,
prohibited from ignoring the implications
of information provided, obligated to make
reasonable inquiries if the information
provided appears incorrect, inconsistent,
or incomplete, and required to contem-
poraneously document their reasonable
inquiries and the taxpayer’s responses. For
purposes of §1.6695–2(b)(3), tax return
preparers would not be held to a higher
standard under the proposed regulations
than they are under the existing regula-
tions. A tax return preparer can generally
rely on the information furnished by a
taxpayer (or other tax return preparer who
determines eligibility for, or amount of,
theEIC)aslongasthetaxreturnpreparer
does not know, or have reason to know,
that the information is incorrect, inconsis-
tent, or incomplete. A signing tax return
preparer who satisfies the knowledge re-
quirement in §1.6695–2(b)(3), therefore,
will ordinarily be able to rely on the in-
formation furnished to the signing tax
return preparer by a taxpayer or nonsign-
ing tax return preparer regarding the EIC.
The additional requirements in proposed
§1.6695–2(b)(1)(i) and (b)(4)(i)(C) are
not unduly burdensome and will improve
the IRS’ ability to determine whether a tax
return preparer has complied with the EIC
due diligence requirements that already
exist. No modification is made in the final
regulations in response to these comments.
5.Nonsigning Tax Return Preparers
Two commenters expressed concern
that expanding the due diligence require-
ments and penalty to nonsigning tax return
preparers would subject individuals to the
section 6695(g) penalty who are beyond
the intended scope of these rules. The
commenters provided the example of indi-
viduals hired by tax preparation software
companies to answer discrete questions for
taxpayers who are using tax preparation
software to prepare their own tax return
or claim for refund. These individuals
provide general resource information for
the taxpayers who are preparing their own
tax return or claim for refund, and they do
not know all of the specific facts relating
to the taxpayer’s tax return or claim for re-
fund. The commenters reasoned that these
individuals might be nonsigning tax return
preparers and would arguably be subject
to these due diligencerequirements and
related penalty.
The term “nonsigning tax return
preparer” is specifically defined in
§301.7701–15(b)(2) and is limited to those
who prepare all or a substantial portion
of a tax return or claim for refund within
the meaning of §301.7701–15(b)(3). Un-
der §301.7701–15(b)(3), a person who
renders tax advice on a position that is di-
rectly relevant to the existence or amount
ofanentryonataxreturnorclaimfor
refund is regarded as having prepared that
entry. Section 301.7701–15(b)(3) further
provides that whether a schedule, entry, or
March 12, 20124782012–11 I.R.B.

other portion of a tax return or claim for re-
fund is a substantial portion is determined
based upon whether the person knows or
reasonably should know that the tax at-
tributable to the schedule, entry, or other
portion of a tax return or claim for refund
is a substantial portion of the tax required
to be shown on the tax return or claim
for refund. Also, §301.7701–15(f)(1)(viii)
provides an exception from the definition
of tax return preparer for any individual
providing only typing, reproduction, or
other mechanical assistance in the prepa-
ration of a tax return or claim for refund.
Treasury and the IRS have concluded
that, in the routine situation described by
these commenters, the individuals em-
ployed at the tax preparation software
companies as described in the comments
are not nonsigning tax return preparers
as long as they either (i) fall within the
mechanical exception because they are
not exercising independent judgment on
the taxpayer’s underlying tax positions, or
(ii) do not know (and reasonably should
not know) that any generic advice pro-
vided relating to the EIC is a substantial
portion of the tax required to be shown.
On the other hand, in rare instances when
anysuchindividualisbothexercising
independent judgment and knows or rea-
sonably should know that specific advice
provided to a taxpayer relating to EIC is
a substantial portion of the tax return or
claim for refund within the meaning of
§301.7701–15(b)(3), the individual is a
nonsigning tax return preparer subject to
the due diligence rules. No modification
is made to the final regulations in response
to this comment.
6.Penalizing Firms
By replacing “signing tax return
preparer” with “tax return preparer,”
§1.6695–2(a) of the proposed regulations
effectively provided that a firm that em-
ploys a person to prepare for compensation
a tax return or claim for refund may be
subject to the penalty for its employee’s
failure to comply with the due diligence
requirements. Two commenters ques-
tioned the proposed application of the
due diligence requirements and penalty to
firms. Section 6695(g) imposes a penalty
on “[a]ny person who is a tax return pre-
parer” that fails to comply with the due
diligence requirements “with respect to
determining eligibility for, or the amount
of, the credit allowable by section 32.”
Under section 7701(a)(36), a “tax return
preparer” is “any person who prepares
for compensation, or who employs one
or more persons to prepare for compen-
sation, any return of tax imposed by title
or any claim for refund of tax imposed
by this title.” After consideration of these
comments, Treasury and the IRS have
concluded that it is appropriate to apply
the due diligence requirements to firms as
provided in the proposed regulations. This
position is consistent with the long-stand-
ing application of the section 6694 tax
return preparer penalties to firms under the
rules provided in §§1.6694–2(a)(2) and
1.6694–3(a)(2). No modification is made
to the final regulations in response to these
comments.
7.Conditions Required for Imposing a
Penalty on a Firm
Proposed §1.6695–2(c) provided gen-
erally that a firm cannot be subject to
a penalty under section 6695(g) unless
one of the following three conditions
is satisfied: (1) a member of the prin-
cipal management of the firm knew of
the failure to comply with the due dili-
gence requirements; (2) the firm failed
to establish reasonable and appropriate
procedures to ensure compliance with the
due diligence requirements; or (3) the
firm failed to comply with its reasonable
and appropriate compliance procedures
through willfulness, recklessness, or gross
indifference. Two commenters expressed
concern with the conditions required for
applicationofthepenaltytoafirm,asset
forth in proposed §1.6695–2(c).
One of these commenters noted that,
if management became aware through the
firm’s reasonable and appropriate compli-
ance procedures that an employee failed
to comply with the due diligence require-
ments, then the firm would be subject to
a penalty under proposed §1.6695–2(c)(1)
because management knew of the failure.
The commenter suggested that the final
regulations provide that the penalty not
apply to the firm if management knew and
took reasonable action to resolve the prob-
lem before the penalty is assessed. After
consideration of this comment, Treasury
and the IRS have concluded that, if man-
agement knows of the failure to comply
prior to the date the tax return or claim
for refund is filed, the only acceptable re-
medial action would be to satisfy the due
diligence requirements prior to filing, in
which case there would be no penalty. If,
on the other hand, management does not
know of the failure to comply until after
the tax return or claim for refund is filed,
the appropriate analysis is whether the
firm had reasonable and appropriate com-
pliance procedures and disregarded those
procedures through willfulness, reckless-
ness, or gross indifference, as described
in §1.6695–2(c)(3), and management’s
knowledge is relevant only insofar as it is
a factor in that analysis. In response to this
comment, the final regulations provide
that a firm is only subject to a penalty un-
der §1.6695–2(c)(1) if the manager knew
of an employee’s failure to comply with
the due diligence requirements prior to the
date the tax return or claim for refund was
filed.
The other commenter suggested that
the IRS might determine under proposed
§1.6695–2(c)(3) that a single failure to
submit Form 8867 with a tax return by
an otherwise compliant firm qualifies as
disregard of reasonable and appropriate
compliance procedures through gross in-
difference. Section 1.6695–2(c)(3) of
the proposed regulations established a
heightened standard, in part, by imposing
liability for the penalty against a firm that
disregarded its reasonable and appropriate
compliance procedures through willful-
ness, recklessness, or gross indifference.
A single, accidental failure to submit Form
8867 with a tax return by an otherwise
compliant firm would not constitute dis-
regard of compliance procedures through
willfulness, recklessness, or gross indiffer-
ence, and the firm would not be subject to
the penalty in that situation. After consid-
eration of this comment, Treasury and the
IRS have concluded that the heightened
standards in proposed §1.6695–2(c)(3)
would adequately protect firms against
isolated and inadvertent instances of dis-
regard of their compliance procedures. No
modification is made to the final regula-
tions in response to this comment.
8.Retention of Records
Proposed §1.6695–2(b)(4)(ii) required
that a tax return preparer must retain the
records described in §1.6695–2(b)(4)(i)
2012–11 I.R.B.479March 12, 2012

for the period ending three years after the
later of the date the tax return or claim for
refund was due or the date it was filed.
One commenter stated that the record
retention date should not be tied to the
date the tax return or claim for refund was
filed because, if the tax return preparer
who prepares the tax return or claim for
refund is not the individual who files it,
that tax return preparer might not know
when it is filed and when the retention pe-
riod expires. In response to the comment,
the final regulations require a tax return
preparer to retain the records described in
§1.6695–2(b)(4)(i) for the period ending
three years after the later of the date the tax
return or claim for refund was due or the
date it was transferred in final form by the
tax return preparer to the next person in
the course of the filing process. In the case
of a signing tax return preparer who elec-
tronically files the tax return or claim for
refund, the next step in the filing process
will be to electronically file the tax return
or claim for refund, so the relevant date is
the date the tax return or claim for refund
is filed. In the case of a signing tax return
preparer who does not electronically file
the tax return or claim for refund, the next
person in the course of the filing process
will be the taxpayer, so the relevant date is
the date the tax return or claim for refund
is presented to the taxpayer for signature.
In the case of a nonsigning tax return pre-
parer, the next person in the course of the
filing process will be the signing tax return
preparer, so the relevant date is the date
the nonsigning tax return preparer sub-
mitted to the signing tax return preparer
that portion of the tax return or claim for
refund for which the nonsigning tax return
preparer was responsible.
The record retention date under the final
regulations will be the same for nonsigning
tax return preparers supervised by a sign-
ing tax return preparer in the same firm and
nonsigning tax return preparers who are
employed by a different firm than the sign-
ing tax return preparer. In both cases, the
records must be retained until three years
from the later of the due date of the tax
return or the date the tax return or claim
for refund is submitted in final form to the
signing tax return preparer. As a practi-
cal matter, however, a supervised nonsign-
ing tax return preparer and the supervising
signing tax return preparer can satisfy both
of their record retention obligations un-
der the final regulations by retaining a sin-
gle paper or electronic copy of the records
described in §1.6695–2(b)(4)(i). The su-
pervised nonsigning tax return preparer’s
record retention period may, nevertheless,
expire before the signing tax return pre-
parer’s record retention period. In such
cases, the supervising signing tax return
preparer is required to retain the records
until the expiration of his or her record re-
tention period under §1.6695–2(b)(4)(ii),
regardless of when the supervised non-
signing tax return preparer’s record reten-
tion period expires.
9.Comment Period and Effective Date
One commenter stated that the 30-day
comment period provided under the pro-
posed regulations was inadequate. Numer-
ous substantive comments were, in fact,
received addressing the proposed regula-
tions. Treasury and the IRS have con-
cluded that the duration of the comment
period provided in the proposed regula-
tions was in compliance with all of the ap-
plicable procedural rules and requirements
governing regulations.
Three commenters stated that the pro-
posed effective date of the regulations
would not provide tax return preparers and
computer software providers sufficient
time to adjust their procedures and prod-
ucts to reflect the proposed amendments.
The proposed regulations provided that
they will apply to tax returns and claims
for refund for tax years ending on or after
December 31, 2011. The IRS publicly
announced in Spring 2011 that the IRS
was exploring the implementation of a
new requirement for tax return preparers
to submit the Form 8867 with a taxpayer’s
tax return or claim for refund. Treasury
and the IRS have concluded that imple-
mentation of these rules for the upcoming
filing season is consistent with the best
interests of tax administration.
Special Analyses
It has been determined that this final
rule is not a significant regulatory action
as defined in Executive Order 12866, as
supplemented by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It also has been determined that
section553(b)oftheAdministrativePro-
cedure Act (5 U.S.C. chapter 5) does not
apply to the final regulations.
When an agency issues a rulemak-
ing, the Regulatory Flexibility Act (RFA)
(5 U.S.C. chapter 6), requires the agency
to “prepare and make available for public
comment an initial regulatory flexibility
analysis” that will “describe the impact
of the proposed rule on small entities.”
(5 U.S.C. 603(a)). Section 605 of the RFA
provides an exceptionto this requirement
if the agency certifies that the rulemaking
will not have a significant economic
impact on a substantial number of small
entities.
The final rules affect tax return prepar-
ers who determine the eligibility for, or the
amount of, EIC. The NAICS code that re-
lates to tax preparation services (NAICS
code 541213) is the appropriate code for
tax return preparers subject to the final reg-
ulations. Entities identified as tax prepa-
ration services are considered small un-
der the Small Business Administration size
standards (13 CFR 121.201) if their an-
nual revenue is less than $7 million. The
IRS estimates that approximately 75 to 85
percent of the 550,000 persons who work
at firms or are self-employed tax return
preparers are operating as or employed by
small entities. The IRS has determined
that the final rules will have an impact on
a substantial number of small entities.
The IRS has determined, however, that
the economic impact on entities affected
by the final rules will not be signifi-
cant. The prior regulations under section
6695(g) required tax return preparers to
complete the Form 8867 or otherwise
record in their files the information nec-
essary to complete the form. Tax return
preparers were also required to maintain
records of the checklists and EIC com-
putations, as well as a record of how and
when the information used to compute
the EIC was obtained by the tax return
preparer. The amount of time necessary to
submit, record, and retain the additional
information required in the final regula-
tions, therefore, should be minimal for
these tax return preparers.
Based on these facts, the IRS hereby
certifies that the collection of information
contained in the final regulations will not
have a significant economic impact on a
substantial number of small entities. Ac-
cordingly, a Regulatory Flexibility Analy-
sis is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
March 12, 20124802012–11 I.R.B.

ing the final regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business and
no comments were received.
Drafting Information
The principal author of the final regula-
tions is Spence Hanemann, Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
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 * * *
Section 1.6695–2 also issued under
26 U.S.C. 6695(g). * * *
Par. 2. In §1.6695–2, paragraphs (a),
(b)(1), (b)(2), (b)(4), (c), and (d) are re-
vised and new paragraph (e) is added to
read as follows:
§1.6695–2 Tax return preparer due
diligence requirements for determining
earned income credit eligibility.
(a)Penalty for failure to meet due dili-
gence requirements. A person who is a tax
return preparer of a tax return or claim for
refund under the Internal Revenue Code
with respect to determining the eligibility
for, or the amount of, the earned income
credit (EIC) under section 32 and who fails
to satisfy the due diligence requirements of
paragraph (b) of this section will be subject
to a penalty of $500 for each such failure.
(b) * * *
(1)Completion and submission of Form
8867—(i) The tax return preparer must
complete Form 8867, “Paid Preparer’s
Earned Income Credit Checklist,” or such
other form and such other information as
may be prescribed by the Internal Revenue
Service (IRS), and—
(A) In the case of a signing tax return
preparer electronically filing the tax return
or claim for refund, must electronically file
the completed Form 8867 (or successor
form) with the tax return or claim for re-
fund;
(B) In the case of a signing tax return
preparer not electronically filing the tax
return or claim for refund, must provide the
taxpayer with the completed Form 8867
(orsuccessorform)forinclusionwiththe
filed tax return or claim for refund; or
(C) In the case of a nonsigning tax re-
turn preparer, must provide the signing tax
return preparer with the completed Form
8867 (or successor form), in either elec-
tronic or non-electronic format, for inclu-
sion with the filed tax return or claim for
refund.
(ii) The tax return preparer’s comple-
tion of Form 8867 (or successor form)
must be based on information provided by
the taxpayer to the tax return preparer or
otherwise reasonably obtained by the tax
return preparer.
(2)Computation of credit—(i) The tax
return preparer must either—
(A) Complete the Earned Income Credit
Worksheet in the Form 1040 instructions
or such other form and such other informa-
tion as may be prescribed by the IRS; or
(B) Otherwise record in one or more
documents in the tax return preparer’s
paper or electronic files the tax return
preparer’s EIC computation, including the
methodandinformationusedtomakethe
computation.
(ii) The tax return preparer’s comple-
tion of the Earned Income Credit Work-
sheet (or other record of the tax return pre-
parer’s EIC computation permitted under
paragraph (b)(2)(i)(B) of this section) must
be based on information provided by the
taxpayer to the tax return preparer or oth-
erwise reasonably obtained by the tax re-
turn preparer.
*****
(4)Retention of records—(i) The tax
return preparer must retain—
(A) A copy of the completed Form 8867
(or successor form);
(B) A copy of the completed Earned In-
come Credit Worksheet (or other record of
the tax return preparer’s EIC computation
permitted under paragraph (b)(2)(i)(B) of
this section); and
(C) A record of how and when the in-
formationusedtocompleteForm8867(or
successor form) and the Earned Income
Credit Worksheet (or other record of the
tax return preparer’s EIC computation per-
mitted under paragraph (b)(2)(i)(B) of this
section) was obtained by the tax return pre-
parer, including the identity of any per-
son furnishing the information, as well as
a copy of any document that was provided
by the taxpayer and on which the tax re-
turn preparer reliedto complete Form 8867
(or successor form) or the Earned Income
Credit Worksheet (or other record of the
tax return preparer’s EIC computation per-
mitted under paragraph (b)(2)(i)(B) of this
section).
(ii) The items in paragraph (b)(4)(i) of
this section must be retained for three years
from the latest of the following dates, as
applicable:
(A) The due date of the tax return (de-
termined without regard to any extension
of time for filing);
(B) In the case of a signing tax return
preparer electronicallyfiling the tax return
or claim for refund, the date the tax return
or claim for refund was filed;
(C) In the case of a signing tax return
preparer not electronically filing the tax
return or claim for refund, the date the tax
return or claim for refund was presented to
the taxpayer for signature; or
(D) In the case of a nonsigning tax re-
turn preparer, the date the nonsigning tax
return preparer submitted to the signing tax
return preparer that portion of the tax re-
turn or claim for refund for which the non-
signing tax return preparer was responsi-
ble.
(iii) The items in paragraph (b)(4)(i)
of this section may be retained on paper
or electronically in the manner prescribed
in applicable regulations, revenue rulings,
revenue procedures, or other appropriate
guidance (see §601.601(d)(2) of this chap-
ter).
(c)Special rule for firms. A firm that
employs a tax return preparer subject to a
penalty under section 6695(g) is also sub-
ject to penalty if, and only if—
(1) One or more members of the princi-
pal management (or principal officers) of
the firm or a branch office participated in
or, prior to the time the return was filed,
knew of the failure to comply with the due
diligence requirements of this section;
(2) The firm failed to establish reason-
able and appropriate procedures to ensure
compliance with the due diligence require-
ments of this section; or
(3) The firm disregarded its reasonable
and appropriate compliance procedures
through willfulness, recklessness, or gross
indifference (including ignoring facts that
2012–11 I.R.B.481March 12, 2012

would lead a person of reasonable pru-
dence and competence to investigate or
ascertain) in the preparation of the tax
return or claim for refund with respect to
which the penalty is imposed.
(d)Exception to penalty. The section
6695(g) penalty will not be applied with
respect to a particular tax return or claim
for refund if the tax return preparer can
demonstrate to the satisfaction of the IRS
that, considering all the facts and circum-
stances, the tax return preparer’s normal
office procedures are reasonably designed
and routinely followed to ensure compli-
ance with the due diligence requirements
of paragraph (b) of this section, and the
failure to meet the due diligence require-
mentsofparagraph(b)ofthissectionwith
respect to the particular tax return or claim
for refund was isolated and inadvertent.
The preceding sentence does not apply to
a firm that is subject to the penalty as a re-
sult of paragraph (c) of this section.
(e)Effective/applicability date.This
section applies to tax returns and claims for
refund for tax years ending on or after De-
cember 31, 2011.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 14, 2011.
Emily S. McMahon,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on December 19,
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 20,2011, 76 F.R. 78816)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2012. See Rev. Rul. 2012-9, page 475.
March 12, 20124822012–11 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Reimbursements Under
Section 1603 of ARRTA 2009
Notice 2012–23
PURPOSE
This notice provides guidance in a
question-and-answer format on tax-re-
lated issues involving cash payments for
specified energy property in lieu of tax
credits under Section 1603 of the Ameri-
can Recovery and Reinvestment Tax Act
of 2009 (ARRTA), Division B of Pub. L.
No. 111–5, 123 Stat. 115 (2009) (Sec-
tion 1603) as amended by Section 707 of
the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of
2010, Pub. L. No. 111–312. The Depart-
ment of the Treasury established an email
address (1603Questions@do.treas.gov)
for Section 1603 questions, to which tax-
payers and their representatives submitted
some of the questions contained in this
notice. The Internal Revenue Service re-
ceived additional questions by telephone
and facsimile. Any guidance, documents,
interpretations, or approvals issued by
Treasury relating to the Section 1603 pro-
gram are not precedent for the federal
income tax treatment of specified energy
property under sections 45 and 48 of the
Internal Revenue Code.
BACKGROUND
Section 1603 of ARRTA directs the
Secretary of the Treasury (Treasury) to
provide cash payments (Section 1603
payments) to eligible persons who place
in service specified energy property and
apply for such payments. The purpose of
Section 1603 is to reimburse eligible
applicants for a portion of the expense
of such property. Treasury issued a
Guidance Document(Program Guidance)
to establish procedures for applying
for payments under the Section 1603
program and to clarify the eligibility
requirements under the program.
Additionally, Treasury provides guidance
on the Section 1603 program website
in the form of two documents with
frequently asked questions and answers:
Frequently Asked Questions (FAQ1) and
Frequently Asked Questions Regarding
the Beginning of Construction. Each
of these documents is available at
http://www.treasury.gov/recovery/1603.shtml.
Treasury will make Section 1603 pay-
ments to qualified applicants in an amount
generally equal to 10 percent or 30 per-
cent of the basis of the specified energy
property, depending on the type of prop-
erty. Eligibility for a Section 1603 pay-
ment generally requires applicants to place
the property in service during 2009, 2010,
or 2011. Property placed in service after
2011 may qualify for a Section 1603 pay-
ment if construction began on the property
during 2009, 2010, or 2011 and the appli-
cant places the property in service by the
date on which the related tax credit expires
(the credit termination date). The Program
Guidance describes these dates and per-
centages more fully.
Treasury will review applications sub-
mitted through the Treasury website and
make payments within 60 days from the
later of the date of the filing of the com-
plete application or the date the applicant
places the property in service. Taxpayers
who receive payments for property under
Section 1603 of ARRTA may not claim the
renewable electricity production tax credit
undersection45oftheCode(PTC)orthe
energy investment tax credit under section
48 of the Code (ITC) with respect to the
same property for the taxable year of the
payment or subsequent years. In addition,
taxpayers must recapture any ITC previ-
ously allowed with respect to progress ex-
penditures for the property.
Eligible property under the program in-
cludesonlypropertyusedinatradeor
business or held for the production of in-
come. Nonbusiness energy property de-
scribedinsection25CoftheCodeand
residential energy efficient property de-
scribed in section 25D of the Code do not
qualify for payments under this program
but may qualify for tax credits under those
provisions.
QUESTIONS AND ANSWERS ON
TAX-RELATED ISSUES IN SECTION
1603
Q–1: What are the federal income tax
consequences to a taxpayer who receives
a Section 1603 payment? How does the
receipt of a Section 1603 payment affect
the basis of specified energy property?
A–1: A Section 1603 payment is not in-
cludible in a taxpayer’s gross income, and
the taxpayer’s basis in the specified energy
property is reduced by 50 percent of the
payment. Section 48(d)(3) of the Code.
All project costs that are properly capital-
ized for purposes of determining the depre-
ciation deduction are included in the cost
basis of specified energy property. See
Q&A #5, below, for tax consequences to
a lessee who receives a Section 1603 pay-
ment.
Q–2. What are the federal income tax
consequences to a taxpayer who receives
a Section 1603 payment and a Department
of Energy loan guarantee or an energy con-
servation subsidy from a public utility?
A–2: Receipt of an incentive in addi-
tion to a Section 1603 payment may re-
duce the eligible basis used in calculating
the Section 1603 payment. (See FAQ1, El-
igible Basis.) Receipt of a Department of
Energy loan guarantee does not reduce the
basis of specified energy property. Under
section 136 of the Code, an energy conser-
vation subsidy provided by a public utility
to a customer for the purchase or installa-
tion of any energy conservation measure
is excluded from income and reduces the
basis of specified energy property by the
amount of the exclusion.
Q–3: If a partnership that is eligible
to receive a Section 1603 payment has as
a partner a corporation that is a tax-ex-
empt controlled entity (within the mean-
ing of section 168(h)(6)(F)), does section
168(h)(6) apply for purposes of determin-
ing the partnership’s depreciation deduc-
tions?
A–3: Section 168(h)(6) applies to any
partnership that owns property and has a
tax-exempt entity or a tax-exempt con-
trolled entity as a partner even if the part-
nership is eligible for a Section 1603 pay-
ment. For purposes of section 168(h)(6),
if 50 percent or more of the value of a cor-
poration is owned by one or more tax-ex-
empt entities, the corporation is a tax-ex-
empt controlled entity and is treated as a
tax-exempt entity. Section 168(h)(6) pro-
vides that, subject to certain exceptions, if
a partnership has a tax-exempt entity part-
2012–11 I.R.B.483March 12, 2012

ner (including a tax-exempt controlled en-
tity) and any allocation to that tax-exempt
entity partner is not aqualified allocation,
then an amount equal to the tax-exempt en-
tity’s proportionate share of such property
(generally, the highest allocation of any
item of income or gain to the tax-exempt
entity) is treated as tax-exempt use prop-
erty. See sections 168(h)(6)(B) and (C) for
the rules concerning qualified allocations
and the proportionateshare to be treated as
tax-exempt use property. The percentage
of the property that is tax-exempt use prop-
erty is depreciated using the longer Al-
ternative Depreciation System (ADS) re-
covery periods, rather than the generally
shorter periods under the Modified Accel-
erated Cost Recovery System (MACRS).
Certain tax-exempt entities described in
Section 1603(g) of ARRTA may not re-
ceive a Section 1603 payment. Likewise,
a partnership that has such tax-exempt en-
tities as partners may not receive a Section
1603 payment unless these tax-exempt en-
tities own their interests indirectly through
taxable corporations. (See FAQ1, Appli-
cant Eligibility.) The tax-exempt entities
described in Section 1603(g) include, gen-
erally, the tax-exempt entities described in
section 168(h), but Section 1603 does not
require a tax-exempt controlled entity to
be treated as a tax-exempt entity for pur-
poses of determining eligibility for a Sec-
tion 1603 payment.
Q–4: Under the Section 1603 program,
the owner of multiple units of property that
are located at the same site and that will be
operated as a larger unit may elect to treat
the units (and any property, such as a com-
puter control system, that serves some or
all such units) as a single unit of property
for purposes of determining the beginning
of construction and the date the property is
placed in service. How will such a group-
ing election affect depreciation determina-
tions for federal income tax purposes?
A–4: A taxpayer’s grouping of the units
for purposes of Section 1603 of ARRTA
will not affect the determination of the unit
of property for depreciation or the date that
property is placed in service for purposes
of calculating the depreciation deduction.
Q–5: If a project is sold and leased
back more than three months after the
seller/lessee originally placed the project
in service, the seller/lessee is entitled
to the Section 1603 payment. Must the
seller/lessee report income equal to 50
percent of the amount of the Section 1603
payment ratably over the five-year recap-
ture period?
A–5: In some cases, a lessor and lessee
may elect to pass through the Section 1603
payment to the lessee. In such cases, the
lessor does not reduce basis by 50 percent
of the amount of the Section 1603 pay-
ment and the lessee must agree to include
in gross income ratably over the five-year
recapture period an amount equal to 50
percent of the amount of the Section 1603
payment. See Section VI of the Program
Guidance. In this case, however, the
sale-leaseback rules (also in Section VI
of the Program Guidance) apply. Under
those rules, the purchaser/lessor is not
eligible for the Section 1603 payment
and may not elect to pass through the
Section 1603 payment to the seller/lessee
because the project was sold and leased
back more than three months after the
project was placed in service. Instead,
the seller/lessee is the person placing the
property in service for purposes of Sec-
tion 1603 and receives the Section 1603
payment. The seller/lessee reduces the
basis of the project by 50 percent of the
amount of the Section 1603 payment be-
fore determining gain or loss on the sale
of the project to the purchaser/lessor. The
seller/lessee is not required to report in-
come equal to 50 percent of the amount of
the Section 1603 payment ratably over the
five-year recapture period.
DRAFTING INFORMATION
The principal author of this notice
is Brian J. Americus of the Office of
Associate Chief Counsel (Passthroughs
& Special Industries).For further
information regarding this notice, contact
Mr. Americus at (202) 622–3110 (not a
toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also: Part I, § 911, 1.911–1.)
Rev. Proc. 2012–21
SECTION 1. PURPOSE
.01 This revenue procedure provides in-
formation to any individual who failed to
meet the eligibility requirements of section
911(d)(1) of the Internal Revenue Code be-
cause adverse conditions in a foreign coun-
try precluded the individual from meeting
those requirements for taxable year 2011.
.02 This revenue procedure lists the
countries for which the eligibility require-
ments of section 911(d)(1) are waived for
taxable year 2011.
SECTION 2. BACKGROUND
.01 Section 911(a) of the Code al-
lows a “qualified individual,” as defined
in section 911(d)(1), to exclude foreign
earned income and housing cost amounts
from gross income. Section 911(c)(4) of
the Code allows a qualified individual to
deduct housing cost amounts from gross
income.
.02 Section 911(d)(1) of the Code de-
fines the term “qualified individual” as an
individual whose tax home is in a foreign
country and who is (A) a citizen of the
United States and establishes to the satis-
faction of the Secretary of the Treasury that
the individual has been abona fideresident
of a foreign country or countries for an un-
interrupted period that includes an entire
taxable year, or (B) a citizen or resident of
the United States who, during any period
of 12 consecutive months, is present in a
foreign country or countries during at least
330 full days.
.03 Section 911(d)(4) of the Code pro-
vides an exception to the eligibility re-
quirements of section 911(d)(1). An in-
dividual will be treated as a qualified in-
dividual with respect to a period in which
the individual was abona fideresident of,
or was present in, a foreign country, if the
individual left the country during a period
for which the Secretary of the Treasury, af-
ter consultation with the Secretary of State,
determines that individuals were required
to leave because of war, civil unrest, or
similar adverse conditions that precluded
the normal conduct of business. An in-
dividual must establish that but for those
conditions the individual could reasonably
have been expected to meet the eligibility
requirements.
.04 For 2011, the Secretary of the Trea-
sury, in consultation with the Secretary of
State, has determined that war, civil unrest,
or similar adverse conditions precluded the
normal conduct of business in the follow-
ing countries beginning on the specified
date:
March 12, 20124842012–11 I.R.B.

Date of Departure
CountryOn or after
EgyptFebruary 1, 2011
LibyaFebruary 21, 2011
Syria
April 25, 2011
Yemen
May 25, 2011
Accordingly,
for purposes of section
911 of the Code
, an individual who left one
of the foregoi
ng countries on or after the
specified dep
arture date during 2011 shall
be treated as
a qualified individual with re-
spect to the p
eriod during which that indi-
vidual was pr
esent in, or was abona fide
resident of,
such foreign country, if the in-
dividual es
tablishes a reasonable expecta-
tion of meet
ing the requirements of section
911(d) but f
or those conditions.
.06Toquali
fy for relief under section
911(d)(4) o
f the Code, an individual must
have establ
ished residency, or have been
physicall
y present, in the foreign country
on or prior
to the date that the Secretary
of the Trea
sury determines that individuals
were required
to leave the foreign coun-
try. Individu
als who establish residency,
or are first ph
ysically present, in the for-
eign country a
fter the date that the Secre-
tary prescri
bes shall not be treated as quali-
fied individ
uals under section 911(d)(4) of
the Code. For
example, individuals who
are first phy
sically present or establish res-
idency in Eg
ypt after February 1, 2011,
are not elig
ible to qualify for the exception
provided in
section 911(d)(4) of the Code
for taxable
year 2011.
SECTION 3. INQUIRIES
A taxpayer w
ho needs assistance on
how to clai
m this exclusion, or on how to
file an amende
d return, should contact a lo-
cal IRS Office
or, for a taxpayer residing
or traveling o
utside the United States, the
nearest overs
eas IRS office.
SECTION 4. DRA
FTING
INFORMATION
The principal author of this revenue
procedureisKateY.HwaoftheOfficeof
Associate Chief Counsel (International).
For further information regarding this rev-
enue procedure, contact Kate Y. Hwa at
(202) 622–3840 (not a toll-free call).
2012–11 I.R.B.485March 12, 2012

Part IV. Items o
fGeneralInterest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Public Hearing
Allocation and Apportionment
of Interest Expense
REG–113903–10
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
that provide guidance relating to the allo-
cation and apportionment of interest ex-
pense. The temporary regulations (T.D.
9571) provide guidance concerning the al-
location and apportionment of interest ex-
pense by corporations owning a 10 percent
or greater interest in a partnership, as well
as the allocation and apportionment of in-
terest expense using the fair market value
asset method. The temporary regulations
also update the interest allocation regula-
tions to conform to the changes made to
the applicable law by the legislation com-
monly referred to as the Education Jobs
and Medicaid Assistance Act (EJMAA),
enacted on August 10, 2010 (Public Law
111–226, 124 Stat. 2389 (2010)), which
affect corporations owning certain foreign
corporations engaged in the conduct of a
trade or business in the United States. The
text of those temporary regulations pub-
lished in this issue of the Bulletin also
serves as the text of these proposed reg-
ulations. This document also provides a
notice of public hearing on these proposed
regulations.
DATES: Written or electronic comments
must be received by March 13, 2012. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for April 3, 2012, at
10:00 a.m. must be received by March 13,
2012.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–113903–10), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–113903–10),
Courier’s desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20044, or sent elec-
tronically, via the Federal eRulemak-
ing Portal atwww.regulations.gov(IRS
REG–113903–10). The public hearing
will be held in the IRS Auditorium,
Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR F
URTHER INFORMATION
CONT
ACT: Concerning the regula-
tion
s, Jeffrey L. Parry, (202) 622–3850;
conc
erning submissions of comments,
the
hearing, and/or to be placed on the
bui
lding access list to attend the hearing
Olu
wfunmilayo Taylor (202) 622–7180
(no
t toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Tem
porary regulations in this issue of
the
Bulletin contain amendments to the In-
co
me Tax Regulations (26 CFR Part 1)
wh
ich provide rules under section 861 re-
la
ting to the affiliation of certain foreign
co
rporations for purposes of section 864,
th
e allocation and apportionment of inter-
es
t expense by corporations owning a 10
p
ercent or greater interest in a partnership,
a
nd the allocation and apportionment of in-
t
erest expense using the fair market value
m
ethod. The text of those regulations also
s
erves as the text of these proposed reg-
u
lations. The preamble to the temporary
regulations explains the temporary regula-
tions and these proposed regulations. The
regulations affect taxpayers that allocate
and apportion interest expense under sec-
tion 864.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these reg-
ulations, and because the regulations do
not impose a collection of information
on small entities, the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f), these
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment 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 electronic or writ-
ten comments (a signed original and eight
(8) copies) that are submitted timely to the
IRS. The IRS and the Treasury Department
request comments on all aspects of the pro-
posed rules. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for April 3, 2012, in the IRS auditorium,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. Due to
building security procedures, visitors must
enter at the Constitution Avenue entrance.
In addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance more than 30 minutes before
the hearing starts. For information about
having your name placed on the build-
ing access list to attend the hearing, see
theFOR FURTHER INFORMATION
CONTACTsection of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments by
March 13, 2012, and an outline of the top-
icstobediscussedandthetimetobede-
voted to each topic (signed original and
eight (8) copies) by March 13, 2012. A pe-
riod of 10 minutes will be allotted to each
person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receivingoutlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
March 12, 20124862012–11 I.R.B.

Drafting Information
The principal author of these regula-
tions is Jeffrey L. Parry of the Office of
Chief Counsel (International). However,
other personnel from the IRS and the
Treasury Department participated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.861–9, paragraphs (e)(2),
(e)(3), (h)(4), and (k) are revised to read as
follows:
§1.861–9 Allocation and apportionment
of interest expense
*****
(e) * * *
(2)and(3)[Thetextofthepro-
posed amendments to §1.861–9(e)(2) and
§1.861–9(e)(3) is the same as the text
of §1.861–9T(e)(2) and §1.861–9T(e)(3)
published elsewhere in this issue of the
Bulletin.]
*****
(h) * * *
(4) [The text of the proposed amend-
ment to §1.861–9(h)(4) is the same as the
text of §1.861–9T(h)(4) published else-
where in this issue of the Bulletin.]
*****
(k) [The text of the proposed amend-
ment to §1.861–9(k) is the same as the
text of §1.861–9T(k) published elsewhere
in this issue of the Bulletin.]
Par. 3. In §1.861–11, paragraphs
(d)(6)(ii) and (h) are revised to read as
follows:
§1.861–11 Special rules for allocating
and apportioning interest expense of an
affiliated group of corporations.
*****
(d) * * *
(6)(ii) [The text of proposed
§1.861–11(d)(6)(ii) is the same as the text
of §1.861–11T(d)(6)(ii) published else-
where in this issue of the Bulletin.]
*****
(h) [The text of the proposed amend-
ment to §1.861–11(h) is the same as the
text of §1.861–11T(h) published else-
where in this issue of the Bulletin.]
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Reg
ister on January 13,
2012, 8:45 a.m., and published in the issue of the Federal
Register for January 17, 2012, 77 F.R. 2240)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Public Hearing
Dividend Equivalents From
Sources Within the United
States
REG–120282–10
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9572) that provide guidance on the
definition of the term “specified notional
principal contract” for purposes of sec-
tion 871(m) of the Internal Revenue Code
(Code) beginning after March 18, 2012
through December 31, 2012. The text of
those regulations also serves as the text
of the proposed regulations. The pream-
ble to the temporary regulations explains
the amendments added by the temporary
regulations. The preamble to this notice
of proposed rulemaking explains the pro-
posed regulations, which provide guidance
to nonresident aliens and foreign corpora-
tions that hold certain financial products
providing for payments that are contingent
upon or determined by reference to pay-
ments of dividends from sources within the
United States. This document also pro-
vides a notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
must be received by April 6, 2012. Out-
lines of topics to be discussed at the pub-
lic hearing scheduledfor April 27, 2012,
at 10:00 a.m., must be received by April 6,
2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–120282–10), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–120282–10),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal
athttp://www.regulations.gov(IRS
REG–120282–10). The public hearing
will be held in the auditorium, Internal
Revenue Service Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the pro-
posed regulations, Mark E. Erwin or
D. Peter Merkel at (202) 622–3870;
concerning submission of comments,
the hearing, and/or to be placed on
the building access list to attend the
hearing, Oluwafunmilayo (Funmi) Taylor,
Publications and Regulations Branch
Specialist, at (202) 622–7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in this issue of
the Bulletin amend the Income Tax Regu-
lations (26 CFR part 1) relating to section
871. The temporary regulations extend
the section 871(m)(3)(A) statutory defini-
tion of the term specified notional princi-
pal contract (specified NPC) through De-
cember 31, 2012. This document contains
proposed regulations under section 871(m)
of the Code that will be applicable as of
January 1, 2013. The preamble to the tem-
porary regulations provides a discussion
of the background of section 871(m) and
2012–11 I.R.B.487March 12, 2012

explains the provisions contained in the
temporary regulations and §1.871–16(b)
of these proposed regulations.
1.In General
Section 1.871–15(a) of these proposed
regulations treats a dividend equivalent as
a dividend from sources within the United
States for purposes of sections 871(a), 881,
and 4948(a), and chapters 3 and 4 of subti-
tle A of the Code. As prescribed by section
871(m)(2), §1.871–15(b)(1) defines a div-
idend equivalent as (1) any substitute divi-
dend made pursuant to a securities lending
or a sale-repurchase transaction that is con-
tingent upon or determined by reference
to the payment of a dividend from sources
within the United States, (2) any payment
made pursuant to a specified NPC that is
contingent upon or determined by refer-
ence to the payment of a dividend from
sources within the United States, or (3) any
other payment substantially similar to such
payments. The proposed regulations spec-
ify that a payment is not a dividend equiv-
alent if it is determined by reference to an
estimate of an expected (but not yet an-
nounced) dividend without reference to or
adjustment for the amount of any actual
dividend.
For purposes of determining a dividend
equivalent, the termpaymentincludes any
gross amount used in computing any net
amount transferred to or from the taxpayer.
For example, the terms of a notional prin-
cipal contract (NPC) may provide for pe-
riodic payments by each of the counter-
parties that occur at quarterly intervals.
Because these payments may offset each
other, in whole or in part, the terms of
such contracts generally provide for pay-
ment of only the net amount owed between
the counterparties (that is, the difference
between the amounts owed between the
counterparties). A dividend equivalent is
equal to the gross amount that is contingent
upon or determined by reference to a divi-
dend used to determine a net amount, even
if no net payment is made or the party en-
titled to a gross amount determined by ref-
erence to a dividend is required to make a
net payment to the other contracting party.
Section 1.871–15(d) describes pay-
ments that are considered substantially
similar to substitute dividends made pur-
suant to securities lending and sale-repur-
chase transactions and to payments made
pursuant to specifiedNPCs. Substantially
similar payments are (1) gross-up amounts
paid by a short party in satisfaction of the
long party’s tax liability with respect to
a dividend equivalent, and (2) payments
calculated by reference to a dividend from
sources within the United States that are
made pursuant to an equity-linked instru-
ment other than an NPC. The Treasury
Department and the IRS will continue to
monitor equity-linked transactions, and
may identify in separate guidance other
payments that are substantially similar to a
substitute dividend payment or a payment
made pursuant to a specified NPC.
2.Definition of Specified Notional
Principal Contract
Section 1.871–16 defines the term
specified NPC for payments made after
March 18, 2012. Comments requested that
rules promulgated under section 871(m)
rely on objective factors for determining
whether an NPC is a specified NPC. The
Treasury Department and the IRS believe
that the proposed regulations address these
requests by providing objective rules that
will be administrable and that identify
NPCs entered into with the potential for
tax avoidance.
A.Transition Period
To provide taxpayers with the time
needed to implement withholding on
specified NPCs, temporary regulations
issued together with these proposed reg-
ulations provide that the term specified
NPC will have the same meaning as pro-
vided in section 871(m)(3)(A) for pay-
ments made prior to January 1, 2013.
Section 1.871–16(b) is the same as the
temporary regulations accompanying this
notice of proposed rulemaking. Thus,
§1.871–16T(b) applies to payments made
on or after March 18, 2012 and before
January 1, 2013.
B.Definition Applicable to Payments
Made on or after January 1, 2013
Beginning on January 1, 2013, an NPC
generally will be a specified NPC for pur-
posesofsection871(m)if: (1)thelong
party is “in the market” on the same day
that the parties price the NPC or when the
NPC terminates; (2) the underlying secu-
rity is not regularlytraded on a qualified
exchange; (3) the short party posts the un-
derlying security as collateral and the un-
derlying security represents more than ten
percent of the collateral posted by the short
party; (4) the term of the NPC has fewer
than 90 days; (5) the long party controls the
short party’s hedge; (6) the notional prin-
cipal amount is greater than five percent
of the total public float of the underlying
security or greater than 20 percent of the
30-day daily average trading volume, as
determined at the close of business on the
day immediately preceding the first day of
the term of the NPC; or (7) the NPC is en-
tered into on or after the announcement of
a special dividend and prior to the ex-div-
idend date.
A long party is considered to be “in the
market” if the long party sells the underly-
ing security on the same day that the par-
ties price an NPC or purchases the under-
lying security on the day that the parties
terminate an NPC. An NPC is sometimes
entered into in tranches that spread the exe-
cution over more than one day; in that case,
the proposed regulations consider each day
that a tranche is executed or settled as a
testing date. Similarly, if the long party
to an NPC sells or purchases an underly-
ing security on a day other than the pricing
date or the settlement date of an NPC, but
sets the price to align with the price of the
NPC (such as with a forward contract), the
long party will be treated as in the market
on that day.
The Code and regulations define “read-
ily tradable on an established securities
market” (and similar phrases) differently
depending on the context. The Treasury
Department and the IRS believe that “read-
ily tradable on an established securities
market,” as used in section 871(m), is in-
tended to ensure that the underlying secu-
rities trade in sufficient volume to provide
ample liquidity in the position. The pro-
posed regulations provide that if the un-
derlying security is not regularly traded on
a qualified exchange, an NPC referencing
that security is a specified NPC. An under-
lying security is “regularly traded” for this
purpose if it is traded on a qualified ex-
change and it was traded on at least 15 out
of the 30 trading days prior to the date that
the parties entered into an NPC.
Section 871(m)(3)(A)(iv) provides that
prior to March 18, 2012, an NPC will be a
specified NPC if the short party to the con-
tract posts the underlying security as col-
March 12, 20124882012–11 I.R.B.

lateral with any long party to the contract.
The Treasury Department and the IRS be-
lieve that when a short party posts the un-
derlying security as collateral with the long
party the related NPC should be a specified
NPC. In the event of default by the short
party, the fact that the underlying secu-
rity is posted as collateral guarantees that
the value of the collateral moves in tan-
dem with the contract. This concern is less
applicable when the value of the underly-
ing securities posted as collateral is a small
portion of the total amount of cash or other
property posted as collateral for the NPC.
The proposed regulations treat an NPC as a
specified NPC only if the underlying secu-
rity is posted as collateral and the underly-
ing security represents more than ten per-
cent of the total fair market value posted
as collateral on any day that the NPC is in
effect.
The proposed regulations treat an NPC
as a specified NPC if the term of the
contract has fewer than 90 days. As the
market for equity-linked NPCs grew and
evolved, taxpayers began to purchase and
sell NPCs in lieu of trading the underlying
equities. Many transactions entered into
to avoid U.S. withholding tax on divi-
dends involved short-term equity swaps
around an ex-dividend date. In many
cases, the taxpayer entered into an NPC
with a financial institution that acquired
the underlying security as a hedge of a
contract; the parties then settled or termi-
nated that contract within days or weeks
of the date it was entered into. When an
NPC has a short duration and is in effect
over an ex-dividend date, the source rule
of section 871(m) should take precedence
over the general source rule for NPC in-
come in §1.863–7.
In some situations, the long party con-
trols the acquisition of stock that the short
party uses to hedge its position under the
contract or has directed the short party to
sell the short party’s hedge to a particular
purchaser at a specific price and date. The
long party in these situations may exercise
such control over the short party’s hedge
pursuant to terms of a written agreement or
through course of conduct. The Treasury
Department and the IRS believe that the
source rule of section 871(m) should ap-
ply to an NPC when a long party exercises
control over the short party’s hedge. Ac-
cordingly, the proposed regulations treat
an NPC as a specified NPC when a foreign
investor controls the short party’s hedge or
participates in an underlying equity con-
trol program. An underlying equity con-
trol program is any system, whether car-
ried out electronically or otherwise, that
allows a long party to direct its counter-
party’s hedge of an NPC or that allows a
long party to acquire economic exposure
to an underlying security and to determine
the form of the transaction later. An un-
derlying equity control program, however,
does not include an electronic trading plat-
form that allows a customer to place an or-
der to enter into an NPC with a dealer, pro-
vided that the dealer independently deter-
mines whether and how to hedge its posi-
tion without customer direction.
The proposed regulations treat an eq-
uity swap as a specified NPC when the no-
tional principal amount of an NPC is a sig-
nificant percentage of the trading volume.
Specifically, when the notional principal
amount of the NPC is greater than five per-
cent of the total public float or 20 percent
of the 30-day average daily trading volume
such contract is treated as a specified NPC.
If a long party has multiple NPCs that ref-
erence the same underlying security, the
notional principal amounts of those con-
tracts must be aggregated when determin-
ing whether the notional principal amount
represents a significant percentage of the
trading volume.
A special dividend is a nonrecurring
payment to shareholders that is in addi-
tion to any recurring dividend payment.
The proposed regulations provide that any
NPC is a specified NPC when the parties
enter into the NPC after the announcement
of a special dividend on the underlying
stock. The Treasury Department and the
IRS believe that an NPC entered into af-
ter the announcement of a special dividend
and before the ex-dividend date is more
likely to be entered into for the purpose of
avoiding U.S. tax than an NPC referencing
a stock that pays only a recurring dividend.
To prevent taxpayers from avoiding
these rules through related parties, the
proposed regulations provide that each
related person (within the meaning of sec-
tion 267(b) or 707(b)(1)) is treated as a
party to the contract. The proposed regu-
lations also provide that an NPC entered
into between two related dealers is not
a specified NPC if the NPC hedges risk
associated with another NPC entered into
with a third party. This rule is intended to
avoid excessive withholding tax on trans-
actions commonly employed by dealers
to transfer risk from one entity to another
within their affiliated group.
Notwithstanding these rules defining
the term specified NPC, the Commissioner
may challenge transactions that are de-
signed to avoid the application of these
rules under applicable judicial doctrines.
Nothing in these rules precludes the Com-
missioner from asserting that a contract
labeled as an NPC or other equity deriva-
tive is in fact an ownership interest in the
equity referencedin the contract.
3.Underlying Security
The termunderlying securitymeans
any security that pays a U.S. source divi-
dend. If an NPC references more than one
security, each reference security is treated
as an underlying security of a separate
NPC. If an NPC references a customized
index, each component security of that in-
dex is treated as an underlying security in a
separate NPC for purposes of this section.
An index is treated as a customized index
if it is (1) a narrow-based index or (2) any
other index unless futures contracts or op-
tions contracts referencing the index trade
on a qualified board or exchange. The
definition of the “narrow-based index” is
generally based on the definition of that
term in the Securities Exchange Act of
1934, Section 3(a)(55)(B).
4.Specified NPC Status Arising
During Term of Contract; Liability
of Withholding Agent; and Other
Conforming Amendments
These proposed regulations amend sev-
eral regulations under section 1441 to re-
quire a withholding agent to withhold tax
owed with respect to a dividend equiva-
lent. If an NPC that is not a specified NPC
on the date it is entered into becomes a
specified NPC during the term of the con-
tract, it will be treated as though it had
been a specified NPC during the entire
term of the contract. Payments made un-
der the NPC by reference to the payment of
a dividend from sources within the United
States will be re-characterized as dividend
equivalents and all tax owed with respect
to such dividend equivalents will be due at
the time of the next payment made under
the NPC, including a termination payment.
In cases where the tax owed is greater than
2012–11 I.R.B.489March 12, 2012

the next payment made under the speci-
fied NPC, the withholding agent is respon-
sible for reporting and depositing the total
amount due with the IRS. The mechanism
by which a withholding agent collects the
amount due from the taxpayer is left to the
discretion of the withholding agent and the
taxpayer, and is not specified in these pro-
posed regulations. The withholding agent
must deposit the total amount due even if
it cannot collect the amount from the coun-
terparty.
The proposed regulations provide that
dividend equivalents are treated as income
from investments in stock for purposes
of section 892; taxpayers may rely on
§1.892–3(a)(6) until final regulations are
issued. Finally, the proposed regulations
provide that a reduced rate of withholding
tax provided by an income tax convention
for dividends paid or derived by a foreign
person applies to a dividend equivalent.
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.
Because the regulation does not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. 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.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and the Trea-
sury Department request comments on the
clarity of the proposed rules and how they
can be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing has been sched-
uled for April 27, 2012, beginning at
10:00 a.m. in the auditorium of the
Internal Revenue Service Building, 1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the Constitution
Avenue entrance. All visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immediate
entrance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply
to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments
and an outline of the topics to be discussed
and the time to be devoted to each topic
by April 6, 2012. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be prepared
after the deadline for receiving outlines
has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is D. Peter Merkel, the Office of
Associate Chief Counsel (International).
Other personnel from the Treasury
Department and the IRS participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1— INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 871(m) and 7805
***
Par. 2. In §1.863–7, paragraph (a) is
revised to read as follows:
§1.863–7 Allocation of income
attributable to certain notional principal
contracts under section 863(a).
(a)Scope—(1)Introduction.[The
text of the proposed amendments to
§1.863–7(a)(1) is the same as the text for
§1.863–7T(a)(1) published elsewhere in
this issue of the Bulletin].
*****
Par. 3. Section 1.871–15 is added to
read as follows:
§1.871–15 Treatment of dividend
equivalents.
(a)In general. A dividend equivalent
as defined in paragraph (b) of this sec-
tion shall be treated as a dividend from
sources within the United States for pur-
poses of sections 871(a), 881, and 4948(a),
and chapters 3 and 4 of subtitle A of the
Code and the regulations thereunder.
(b)Dividend equivalent—(1)Defi-
nition.Thetermdividend equivalent
means—
(i) Any substitute dividend made pur-
suant to a securities lending transaction,
a sale-repurchase transaction, or a sub-
stantially similar transaction that (directly
or indirectly) is contingent upon or deter-
mined by reference to the payment of a
dividend (including payments pursuant to
a redemption of stock that gives rise to a
dividend under section 301) from sources
within the United States;
(ii) Any payment made pursuant to a
specified notional principal contract (spec-
ified NPC) described in section 871(m)
or §1.871–16 that (directly or indirectly)
is contingent upon or determined by ref-
erence to the payment of a dividend (in-
cluding payments pursuant to a redemp-
tion of stock that gives rise to a dividend
under section 301) from sources within the
United States; and
(iii) Any substantially similar payment
as defined in paragraph (d) of this section.
(2)Exception—(i)In general.The
term dividend equivalent does not include
any payment made pursuant to a specified
NPC, or any substantially similar payment
as defined in §1.871–15(d), if such pay-
ment is contingent upon or determined
by reference to an estimate of expected
dividends and the estimate of an expected
dividend is not adjusted in any way for the
amount of an actual dividend.
(ii)Expected dividends. For purposes
of this section, an expected dividend is not
considered an estimate of expected divi-
dends on or after the date that the corpo-
rate issuer announces a dividend. A divi-
dend announcement occurs on the earliest
March 12, 20124902012–11 I.R.B.

date on which the corporation declares, an-
nounces, or agrees to the amount or pay-
ment of such dividend.
(c)Payments determined on gross ba-
sis. A payment includes any gross amount
that is used in computing any net amount
that is transferred to or from the taxpayer
under the terms of the contract. For exam-
ple, a dividend equivalent includes a gross
amount determined by reference to a divi-
dend that is used in computing a net pay-
ment even if the taxpayer makes a net pay-
ment or no payment is made because the
net amount is zero.
(d)Substantially similar payments—(1)
In general. For purposes of section
871(m), the following payments are con-
sidered payments substantially similar to
payments described in paragraph (b)(1)(i)
or (b)(1)(ii) of this section and are there-
fore dividend equivalents:
(i) Any payment of a beneficial owner’s
tax liability with respect to a dividend
equivalent made by a withholding agent
is a dividend equivalent received by the
beneficial owner in an amount determined
under the gross-up formula provided in
§1.1441–3(f)(1).
(ii) Any payment, including the pay-
ment of the purchase price or an adjust-
ment to the purchase price, is a dividend
equivalent if made pursuant to an equity-
linked instrument that is contingent upon
or determined by reference to a dividend
(including payments pursuant to a redemp-
tion of stock that gives rise to a dividend
under section 301) from sources within the
United States.
(2)Rules regarding equity-linked
instruments—(i)In general.Aneq-
uity-linked instrumentis a financial in-
strument or combination of financial
instruments that references one or more
underlying securities to determine its
value, including a futures contract, for-
ward contract, option, or other contractual
arrangement.
(ii)Equity-linked instruments treated
as a notional principal contract.Aneq-
uity-linked instrument that provides for
a payment that is a substantially similar
payment within the meaning of paragraph
(d) of this section is treated as a notional
principal contract for purposes of section
871(m)(3), this section, and §1.871–16.
(e)Anti-abuse rule. If a taxpayer en-
ters into a transaction or transactions with a
principal purpose of avoiding the applica-
tion of this section or §1.871–16, payments
made with respect to such transaction or
transactions may be treated as a dividend
equivalent to the extent necessary to pre-
vent the avoidance of these rules.
(f)Effective/applicability date.The
rules of this section apply to payments
made on or after the date of publication
of the Treasury decision adopting these
rules as final regulations in theFederal
Register.
Par. 4. Section 1.871–16 is added to
read as follows:
§1.871–16 Specified notional principal
contracts.
(a)Purpose and scope. This section
provides guidance with respect to the def-
inition of a “specified notional principal
contract” (specifiedNPC). Paragraph (b)
of this section provides the definition of
a specified NPC for payments made af-
ter March 18, 2012, through December 31,
2012. Paragraph (c) of this section pro-
vides the definition of a specified NPC for
payments made after December 31, 2012.
Paragraph (d) of this section provides rules
with respect to a notional principal con-
tract that becomes a specified NPC during
the term of the contract. Paragraph (e) of
this section provides rules with respect to
the treatment of a specified NPC entered
into by related parties. For purposes of
section 871(m) and this section, the term
notional principal contract(NPC) means
an NPC as defined in §1.446–3(c)(1) and
an equity-linked instrument as provided in
§1.871–15(d).
(b) [The text of the proposed amend-
ment to §1.871–16(b) is the same as the
text for §1.871–16T(b) found elsewhere in
this issue of the Bulletin].
(c)Specified NPCs after December 31,
2012. With respect to payments made af-
ter December 31, 2012, the termspecified
NPCmeans any NPC described in any of
the paragraphs (c)(1) through (7) of this
section.
(1)Contemporaneous transfers of the
underlying securities.AnNPCisde-
scribed in this paragraph (c)(1) if the long
party to the NPC is “in the market” with
respect to the underlying security on the
same day or days that the parties price the
NPCoronthesamedayordaysthatthe
NPC terminates.
(i)Determining when a long party is in
the market. The long party is “in the mar-
ket” with respect to the underlying security
if the long party—
(A) Sells or otherwise disposes of the
underlying security on the same day or
days that the parties price the NPC;
(B) Purchases or otherwise acquires the
underlying security on the same day or
days that the NPC terminates; or
(C) Either purchases or disposes of the
underlying security at a price that is set or
calculated in such a way as to be substan-
tially identical to or determined by refer-
ence to an amount used to price or termi-
nate the NPC.
(ii)De minimis exception. The long
party will not be deemed to be in the mar-
ket with respect to the underlying security
if the amount of the underlying securities
disposed of on a pricing date or acquired
on a termination date is less than ten per-
cent of the notional principal amount of the
NPC.
(2)Underlying security is not regularly
traded.AnNPCisdescribedinthispara-
graph (c)(2) if the underlying security in
the NPC is not regularly traded.
(i)Definition of regularly traded
—(A)
In general. For purposes of this paragraph
(c)(2), an underlying security is regularly
traded if such security is listed on one or
more qualified exchanges at the time the
NPC is priced and the underlying security
wastradedonatleast15tradingdaysdur-
ing the 30 trading days prior to the date the
parties price the NPC.
(B)Special rule for first 30 days fol-
lowing a public offering. When a corpora-
tion initiates a public offering of a security,
such security is regularly traded if such se-
curity is traded during at least 15 trading
days on one or more qualified exchanges
during the 30 trading days subsequent to
the initial offering.
(C)Days on which a security is consid-
ered traded. The underlying securities will
be considered traded only on those days in
which the underlying securities are traded
in quantities that exceed ten percent of the
30-day average daily trading volume.
(ii)Qualified exchange. For purposes
of paragraph (c)(2)(i) of this section, the
termqualified exchangemeans a national
securities exchange that is registered with
the Securities and Exchange Commission
or the national market system established
2012–11 I.R.B.491March 12, 2012

pursuant to section 11A of the Securities
Exchange Act of 1934 (15 U.S.C. 78f).
(3)Underlying security posted as col-
lateral.AnNPCisdescribedinthispara-
graph (c)(3) if the short party to the NPC
posts the underlying security with the long
party as collateral and the underlying se-
curity posted as collateral represents more
than ten percent of the total fair market
value of all the collateral posted by the
short party on any date that the NPC is out-
standing.
(4)The NPC has a term of fewer than 90
days—(i)In general. An NPC is described
in this paragraph (c)(4) if the NPC has a
term of fewer than 90 days.
(ii)Term of an NPC. For purposes of
this section, the term of any NPC is the
number of days that the contract is actually
outstanding, including the date on which
the NPC is terminated, but not the date
that the NPC was entered into. For pur-
poses of determining whether a contract is
a specified NPC, an NPC is treated as ter-
minated, in whole or in part, on the date
that a long party enters into any position
within the meaning of §1.246–5(b)(3) to
the extent that the position offsets a portion
of the long party’s position with respect to
an underlying security in the NPC.
(5)Long party controls short party’s
hedge. An NPC is described in this para-
graph (c)(5) if—
(i) The long party controls contractually
or by conduct the short party’s hedge of the
short position; or
(ii) The long party enters into an NPC
using an underlying equity control pro-
gram (as defined in paragraph (f)(2) of this
section).
(6)Notional principal amount repre-
sents a significant percentage of trading
volume—(i)In general.AnNPCisde-
scribed in this paragraph (c)(6) if the no-
tional principal amount of the underlying
security in the NPC is greater than—
(A) Five percent of the total public float
of that class of security; or
(B) Twenty percent of the 30-day aver-
age daily trading volume determined as of
the close of the business day immediately
preceding the first day in the term of an
NPC.
(ii)Aggregating certain NPCs.When
determining whether the notional principal
amount of an NPC represents a significant
percentage of the trading volume, a tax-
payer must aggregate the notional princi-
pal amounts of all NPCs for which the tax-
payer is the long party that reference the
same underlying security.
(7)NPC provides for the payment of a
special dividend. An NPC is described in
this paragraph (c)(7) if the NPC is entered
into on or after the announcement of a spe-
cial dividend and prior to the ex-dividend
date. An announcement of a special divi-
dend occurs on the earliest date on which
the corporation declares, announces, or
agrees to the amount or payment of such
special dividend.
(d)Specified NPC status arising dur-
ing the term of the contract—(1)In gen-
eral. This section provides rules for de-
termining the timing and amount of a div-
idend equivalent when an NPC is not a
specified NPC on the date the parties enter
into the NPC and subsequently becomes
a specified NPC during the term of the
transaction. If an NPC that is not a speci-
fied NPC on the date the parties enter into
the contract subsequently becomes a spec-
ified NPC, any payment made during the
term of the contract (including any pay-
ment during the period between the date
the contract is entered into and the date
the contract becomes a specified NPC) that
is contingent upon or determined by ref-
erence to the payment of a dividend from
sources within the United States is a divi-
dend equivalent.
(2)Determination of dividend equiva-
lent—(i)In general. For purposes of sec-
tions 871(a), 881, 4948(a), and chapters 3
and 4 of subtitle A of the Code, when an
NPC becomes a specified NPC during the
term of the contract, any tax owed with re-
spect to a dividend equivalent made prior
to the NPC becoming a specified NPC
is payable when the next payment as de-
scribed in §1.871–15(c), including a ter-
mination payment, is made pursuant to the
contract.
(ii)Payment to include amount equal
to dividend equivalent with respect to cur-
rent and prior payments. In computing
theamountoftaxowedwithrespectto
the termination of the specified NPC or
the first payment that occurs after the NPC
becomes a specifiedNPC, the dividend
equivalent equals the sum of all the divi-
dend equivalents with respect to the NPC
arising before thedate the NPC became a
specified NPC and the amount of any div-
idend equivalent arising upon the termina-
tion or payment.
(3)Example.The rules of this para-
graph (d) are illustrated by the following
example:
Example.(i)Facts.Party A is a foreign corpora-
tion organized in a jurisdiction that does not have an
income tax treaty with the United States. Party B is
a domestic corporation and a dealer in NPCs. Party
AandPartyBenterintoanNPConDay1whereby
Party A will pay Party B an amount equal to LIBOR
multiplied by the notional value of a specified num-
ber of shares of Corporation X, a domestic corpora-
tion, plus any depreciation on the same number of
shares of Corporation X upon settlement of the con-
tract. Inreturn,PartyBwillpayPartyAanamount
equal to any dividends paid on the same specified
number of shares of Corporation X, plus any appreci-
ation on those shares upon settlement of the contract.
On Day 1, the NPC is not a specified NPC. On Day
30, Party B determines that it owes Party A $25 based
on a dividend paid on the underlying security and that
Party A owes Party B $125 on the LIBOR leg of the
contract. Party A therefore makes a net payment of
$100 to Party B. On Day 120, the NPC becomes a
specified NPC within the meaning of section 871(m),
§§1.871–15, and 1.871–16. On Day 120, Party A ter-
minates the contract and makes a net termination pay-
ment to Party B. In calculating the net payment, Party
B determined that it owes Party A $25 based on a div-
idend paid with respect to the shares of Corporation X
and that Party A owes it $125 attributable to interest
and the decrease in the value of the shares of Corpo-
ration X.
(ii)Analysis. On Day 120, Party A is treated as
having received a dividend equivalent of $50. This
dividend equivalent consists of the $25 payment
made on Day 120 that is based on a dividend pay-
ment made with respect to the shares of Corporation
X and the $25 dividend equivalent made prior to the
contract being considered a specified NPC.
(e)Related persons and parties to an
NPC—(1)In general. For purposes of this
section, a related person is considered a
partytoanNPC.Arelatedpersonisaper-
son that is related within the meaning of
section 267(b) or 707(b)(1) to one of the
parties to the NPC.
(2)NPC entered into between related
dealers. An NPC entered into between re-
lated persons is not a specified NPC when
the NPC hedges another NPC (whether or
not a specified NPC) entered into with an
unrelatedpartyandbothNPCswereen-
tered into by the related persons in the or-
dinary course of their business as a dealer
in securities or commodities derivatives.
(f)Definitions—(1)Underlying secu-
rity. For purposes of this section, the term
underlying securitymeans, for any NPC,
the security with respect to which the div-
idend referred to in §1.871–15(b)(1)(ii) is
paid. If an NPC references more than one
security or a customized index, each se-
curity or component of such customized
index is treated as an underlying security
March 12, 20124922012–11 I.R.B.

in a separate NPC for purposes of section
871(m), §1.871–15, and this section.
(2)Underlying equity control pro-
gram—(i)In general.Thetermunderlying
equity control programmeans any system
or procedure that permits—
(A)AlongpartytoanNPCtodirect
how a short party hedges its risk under
such NPC; or
(B) A long party to acquire, or cause
the short party to acquire, an underlying
security in a transaction with a short party
and to instruct the short party to execute
such acquisition in the form of an NPC
after acquiring such underlying security.
(ii)Electronic trading—(A)In general.
The termunderlying equity control pro-
gramdoes not include an electronic trading
platform that allows customers electroni-
cally to place an order to enter into an NPC
with a dealer and through which the dealer
determines whether and how to hedge its
position.
(B)Example. Customer, a foreign corporation,
and Dealer have entered into a master agreement that
governs NPCs entered into between Customer and
Dealer. Customer places an order with Dealer via
Dealer’s electronic trading platform to enter into an
NPC with a long position in 100 shares of Corpo-
ration ABC, a domestic corporation. Dealer’s elec-
tronic trading platform allows Customer to place an
order using Dealer’s computer program. Dealer’s
computer system confirms that Corporation ABC is
not on its restricted list upon receipt of the order.
Dealer’s computer system automatically determines
whether it has an internal hedge available to offset
the risk of a short position in 100 shares of Corpora-
tion ABC. To the extent that an internal hedge is un-
available, Dealer’s computer program automatically
seeks to acquire the stock as a hedge in a market
transaction. After obtaining its hedge, Dealer sends
a confirmation that memorializes the NPC. The no-
tional amount on the confirmation reflects the price of
Dealer’s hedge plus a market standard spread. Cus-
tomer did not enter into the NPC using an underly-
ing equity control program solely by placing the order
through Dealer’s electronic trading platform because
Customer did not direct how Dealer hedged its posi-
tion under the NPC.
(3)Customized index—(i)In general.
For purposes of this section, the termcus-
tomized indexmeans any index, as deter-
mined on the date that the long party and
short party enter into an NPC, that is—
(A) A narrow-based index; or
(B) Any other index unless futures con-
tracts or option contracts on such index
trade on a qualified board or exchange, as
definedinsection1256(g)(7).
(ii)Narrow-based index.Thetermnar-
row-based indexmeans an index—
(A) That has nine or fewer component
securities;
(B) In which a component security
comprises more than 30 percent of the
index’s weighting;
(C) In which the five highest weighted
component securities in the aggregate
comprise more than 60percent of the in-
dex’s weighting; or
(D) In which the lowest weighted com-
ponent securities comprising, in the aggre-
gate, 25 percent of the index’s weighting
have an aggregate dollar value of av-
erage daily trading volume of less than
$50,000,000 (or in the case of an index
with 15 or more component securities,
$30,000,000), except that if there are two
or more securities with equal weighting
that could be included in the calculation of
the lowest weighted component securities
comprising, in the aggregate, 25 percent of
the index’s weighting, such securities shall
be ranked from lowest to highest dollar
value of average daily trading volume and
shall be included in the calculation based
on their ranking starting with the lowest
ranked security.
(iii)Aggregate dollar value of aver-
age daily trading volume. For purposes
of determining whether an index is a
narrow-based index, the method for de-
termining the aggregate dollar value of
average daily trading volume is the method
described in Rule 3a55–1(b)(1), 17 CFR
240.3a55–1(b)(1), under the Securities
Exchange Act of 1934, as in effect on
January 23, 2012.
(4)Long party.Thelong partyis the
party with respect to an NPC entitled to re-
ceive any payment pursuant to such con-
tract that is contingent upon or determined
by reference to the payment of a dividend
from sources within the United States on
an underlying security.
(5)Short party.Theshort partyis any
partytoanNPCwhoisnotalongparty.
(6)Special dividend. For purposes
of this section, the termspecial divi-
dendmeans a nonrecurring payment to
shareholders of corporate assets that is in
addition to a recurring dividend payment,
if any (even if paid in conjunction with a
recurring dividend).
(g)Effective/applicability date.The
rules of this section apply to payments
made on or after the date of publication
of the Treasury decision adopting these
rules as final regulations in theFederal
Register.
Par. 5. In §1.881–2, paragraph (b)(3) is
added and paragraph (e) is revised to read
as follows:
§1.881–2 Taxation of foreign corporations
not engaged in U.S. business.
*****
(b) * * *
(3) [The text of the proposed amend-
ments to §1.881–2(b)(3) is the same as the
text for §1.881–2T(b)(3) published else-
where in this issue of the Bulletin].
*****
(e)Effective/applicability date. Except
as otherwise provided in this paragraph (e),
this section applies for taxable years be-
ginning after December 31, 1966. Para-
graph (b)(2) of this section is applicable to
payments made after November 13, 1997.
Paragraph (b)(3) of this section applies to
payments made on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulation in theFed-
eral Register. For corresponding rules ap-
plicable to taxable years beginning before
January 1, 1967, see 26 CFR 1.881–2 (Re-
vised as of January 1, 1971).
Par. 6. Section 1.892–3 is added to read
as follows:
§1.892–3 Income of foreign governments.
(a)(1) through (a)(5) [Reserved]. For
further information, see §1.892–3T(a)(1)
through (a)(5).
(6)Dividend Equivalents. Income from
investments in stocks includes the pay-
ment of a dividend equivalent described in
section 871(m) and §1.871–15.
(b) [Reserved]. For further informa-
tion, see §1.892–3T(b).
(c)Effective/applicability date. Para-
graph (a)(6) of this section applies to pay-
ments made on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulation in theFed-
eral Register. See §1.892–3T(a) for the
rules that apply before the date the regula-
tions are published as final regulations in
theFederal Register.
Par. 7. Section 1.894–1 is amended
by redesignating paragraph (c) as (c)(1),
adding paragraph (c)(2), and revising para-
graph (e) to read as follows:
2012–11 I.R.B.493March 12, 2012

§1.894–1 Income affected by treaty.
*****
(c) * * *
(2)Dividend equivalents. The provi-
sions of an income tax convention relating
to dividends paid to or derived by a foreign
person apply to a dividend equivalent un-
der section 871(m) and §1.871–15.
*****
(e)Effective/applicability date. Para-
graphs (a) and (b) of this section apply
for taxable years beginning after Decem-
ber 31, 1966. For corresponding rules ap-
plicable to taxable years beginning before
January 1, 1967, (see 26 CFR part 1 re-
vised April 1, 1971). Except as otherwise
provided in this paragraph, paragraph (c)
of this section is applicable to payments
made after November 1, 1997. Paragraph
(c)(2) of this section applies to payments
made on or after the date of publication of
the Treasury decision adopting these rules
as final regulation in theFederal Register.
See paragraph (d)(6) of this section for ap-
plicability dates for paragraph (d) of this
section.
Par. 8. Section 1.1441–2 is amended
by adding paragraphs (b)(6) and (e)(7), and
revising paragraph (f) to read as follows:
§1.1441–2 Amounts subject to
withholding.
*****
(b) * * *
(6) [The text of the proposed amend-
ments to §1.1441–2(b)(6) is the same as
the text for §1.1441–2T(b)(6)) published
elsewhere in this issue of the Bulletin].
*****
(e) * * *
(7) [The text of the proposed amend-
ments to §1.1441–2(e)(7) is the same as the
text for §1.1441–2T(e)(7)) published else-
where in this issue of the Bulletin].
(f)Effective/applicability date. Except
as otherwise provided in this paragraph (f),
this section applies to payments made after
December 31, 2000. Paragraphs (b)(5) and
(d)(4) of this section apply to payments
made after August 1, 2006. Paragraphs
(b)(6) and (e)(7) of this section apply to
payments made on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulation in theFed-
eral Register.
Par. 9. Section 1.1441–3 is amended
by:
1. Redesignating paragraph (h) as para-
graph (j), and revising newly designated
paragraph (j).
2. Adding new paragraphs (h) and (i).
The revision and addition read as fol-
lows:
§1.1441–3 Determination of amounts to
be withheld.
*****
(h)Dividend equivalents—(1)In gen-
eral. [The text of the proposed amend-
ments to §1.1441–3(h)(1) is the same as
the text for §1.1441–3T(h)(1) published
elsewhere in this issue of the Bulletin].
(2)Procedures for withholding with re-
spect to a dividend equivalent paid prior
to a notional principal contract (NPC) be-
coming a specified NPC. In the event that
an NPC becomes a specified NPC (as de-
fined in §1.871–16) after the date that the
parties enter into the NPC, the term divi-
dend equivalent includes any payment that
is made prior to the date the NPC becomes
a specified NPC and that was (directly or
indirectly) contingent upon or determined
by reference to the payment of a dividend
(including payments pursuant to a redemp-
tion of stock that gives rise to a dividend
under section 301) from sources within the
United States. The withholding agent is re-
quired to withhold with respect to a div-
idend equivalent made prior to the NPC
becoming a specified NPC when the next
payment as described in §1.871–15(c), in-
cluding a termination payment, is made
pursuant to the contract. For purposes
of section 6601 and the regulations there-
under, the last date prescribed for pay-
ment of tax imposed with respect to a div-
idend equivalent made prior to an NPC
becoming a specified NPC is determined
based on the date of the next payment
as described in §1.871–15(c), including
a termination payment, made pursuant to
the contract. For further guidance regard-
ing liability for penalties and interest, see
§§1.1441–1(b)(7)(iii) and 1.1461–1(a)(2).
(3)Effective/applicability date.The
rules of this paragraph (h)(2) apply to
payments made on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulation in theFed-
eral Register.
(i) [The text of the proposed amend-
ments to §1.1441–3(i)(1) is the same as the
text for §1.1441–3T(i)(1) published else-
whereinthisissueoftheBulletin].
(j)Effective/applicability date. Except
as otherwise provided in paragraphs (g),
(h), and (i) of this section, this section ap-
plies to payments made after December 31,
2000.
Par. 10. Section 1.1441–4 is amended
by:
1. Revising paragraph (a)(3)(i).
2. Adding paragraph (a)(3)(iii).
3. Revising paragraph (g)(1).
The revisions and addition read as fol-
lows:
§1.1441–4 Exemptions from withholding
for certain effectively connected income
and other amounts.
(a)***
(3)(i) [The text of the proposed amend-
ments to §1.1441–4(a)(3)(i) is the same as
the text for §1.1441–4T(a)(3)(i) published
elsewhere in this issue of the Bulletin].
(ii) * * *
(iii) [The text of the proposed amend-
ments to §1.1441–4(a)(3)(iii) is the same
as the text for §1.1441–4T(a)(3)(iii) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(g)Effective/applicability date—(1)
General rule. Except as otherwise
provided in this paragraph (g)(1), this
section applies to payments made af-
ter December 31, 2000. The rules of
paragraph (a)(3)(iii) of this section apply
to payments made on or after the date
of publication of the Treasury decision
adopting these rules as final regulation in
theFederal Register.
*****
Par. 11. Section 1.1441–6 is amended
by:
1. Revising paragraph (c)(2).
2. Redesignating paragraph (h) as para-
graph (i) and revising newly designated
paragraph (i).
3. Adding a new paragraph (h).
The revision and addition read as fol-
lows:
§1.1441–6 Claim of reduced withholding
under an income tax treaty.
*****
March 12, 20124942012–11 I.R.B.

(c) * * *
(2)Income to which special rules ap-
ply. The income to which paragraph (c)(1)
of this section applies is dividends and in-
terest from stocks and debt obligations that
are actively traded, dividends from any re-
deemable security issued by an investment
company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a–1),
dividends, interest, or royalties from units
of beneficial interest in a unit investment
trust that are (or were upon issuance) pub-
licly offered and are registered with the
Securities and Exchange Commission un-
der the Securities Act of 1933 (15 U.S.C.
77a), and amounts paid with respect to
loans of securities described in this para-
graph (c)(2). With respect to a dividend
equivalent as defined in section 871(m)
and §1.871–15, this paragraph (c)(2) ap-
plies to the extent that the underlying secu-
rity as defined in §1.871–16(f)(1) satisfies
the requirements of this paragraph (c)(2).
For purposes of this paragraph (c)(2), a
stock or debt obligation is actively traded
if it is actively traded within the meaning
of section 1092(d) and §1.1092(d)–1 when
documentation is provided.
*****
(h)Dividend equivalents.Therateof
withholding on a dividend equivalent may
be reduced to the extent provided under
an income tax treaty in effect between
the United States and a foreign country.
For this purpose, a dividend equivalent is
treated as a dividend from sources within
the United States. To receive a reduced
rate of withholding with respect to a div-
idend equivalent, a foreign person must
satisfy the other requirements described in
this section.
(i)Effective/applicability dates—(1)
General rule. This section applies to pay-
ments made after December 31, 2000,
except for paragraph (g) of this section
which applies to payments made after De-
cember 31, 2001, and paragraph (h) of this
section which applies to payments made
on or after the date of publication of the
Treasury decision adopting these rules as
final regulation in theFederal Register.
(2) [Reserved]
Par. 12. Section 1.1441–7 is amended
by:
1. Redesignating paragraph (a)(2) as
paragraph (a)(3) and revising newly des-
ignated paragraph (a)(3).
2. Adding a new paragraph (a)(2).
3. Adding an entry forExample 6in
paragraph (a)(3).
4. Revising paragraph (g).
The revision and addition read as fol-
lows:
§1.1441–7 General provisions relating to
withholding agents.
(a) * * *
(2) [The text of the proposed amend-
ments to §1.1441–7(a)(2) is the same as the
text for §1.1441–7T(a)(2) published else-
where in this issue of the Bulletin].
(3) [The text of the proposed amend-
ments to §1.1441–7(a)(3) is the same as the
text for §1.1441–7T(a)(3) published else-
where in this issue of the Bulletin].
*****
Example 6. [The text of the proposed amend-
ments to §1.1441–7(a)(3),Example 6is the same as
the text for §1.1441–7T(a)(3),Example 6published
elsewhere in this issue of the Bulletin].
*****
(g)Effective/applicability date. Except
as otherwise provided in paragraph (f)(3)
of this section and as otherwise provided
in this paragraph (g), this section applies to
payments made after December 31, 2000.
Paragraph (a)(2) applies to payments made
on or after the date of publication of the
Treasury decision adopting these rules as
final regulation in theFederal Register.
Par. 13. Section 1.1461–1 is amended
by:
1. Redesignating paragraph (c)(2)(i)(L)
and (M) as paragraphs(c)(2)(i)(M) and (N)
respectively.
2. Adding a new paragraph (c)(2)(i)(L).
3. Revising paragraph (i).
The addition reads as follows:
§1.1461–1 Payment and returns of tax
withheld.
*****
(c) * * *
(2) * * *
(i) * * *
(L) [The text of the proposed amend-
ments to §1.1461–1(c)(2)(i)(L) is the same
as the text for §1.1461–1T(c)(2)(i)(L) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(i)Effective/applicability date.Unless
otherwise provided in this section and as
otherwise provided in this paragraph (i),
this section shall apply to returns required
for payments made after December 31,
2000. The rules of paragraph (c)(2)(i)(L)
of this section apply to returns for pay-
ments made on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulation in theFed-
eral Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on January 19,
2012, 11:15 a.m., and published in the issue of the Federal
Register for January 23, 2012, 77 F.R. 3202)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Proposed
Rulemaking
Use of Differential Income
Stream as an Application of
the Income Method and as a
Consideration in Assessing
the Best Method
REG–145474–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and Notice of proposed rulemaking.
SUMMARY: In this issue of the Bulletin,
temporary regulations (T.D. 9569) provide
guidance on how an analysis of the differ-
ential income stream may provide a best
method consideration for evaluating an ap-
plication of the income method to deter-
mine taxable income in connection with
a cost sharing arrangement. The text of
those regulations also serves as the text of
regulations that are proposed by cross-ref-
erence to the temporary regulations. This
document also contains proposed regula-
tions providing guidance on the use of the
differential income stream as a specified
application of the income method to deter-
mine taxable income in connection with a
cost sharing arrangement.
2012–11 I.R.B.495March 12, 2012

DATE: Written or electronic comments
and requests for a public hearing must be
received by March 22, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–145474–11),
room 5205, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–145474–11),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, N.W.,
Washington, DC, or sent electronically,
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–145474–11).
FOR FURTHER INFORMATION
CONTACT: Concerning the pro-
posed regulations, Joseph L. Tobin
or Mumal R. Hemrajani, (202)
435–5265 (not a toll-free number);
concerning submission of comments
and/or requests for a hearing,
Richard.A.Hurst@irscounsel.treas.gov.
SUPPLEMENTARY INFORMATION:
Background
A notice of proposed rulemaking and
notice of public hearing regarding ad-
ditional guidance to improve compli-
ance with, and administration of, the
rules in connection with a cost sharing
arrangement (CSA) were published in
theFederal Register(70 FR 51116)
(REG–144615–02, 2005–2 C.B. 625) on
August 29, 2005 (2005 proposed regu-
lations). A correction to the notice of
proposed rulemaking and notice of pub-
lichearingwaspublishedintheFederal
Register(70FR56611)onSeptember28,
2005. A public hearing was held on
December 16, 2005.
The Treasury Department and the IRS
received numerous comments on a wide
range of issues addressed in the 2005 pro-
posed regulations. In response to these
comments, temporary and proposed regu-
lations were published in theFederal Reg-
ister(74 FR 340–01 and 74 FR 236–01)
(REG–144615–02) on January 5, 2009
(2008 temporary regulations). Corrections
to the 2008 temporary regulations were
published in theFederal Registeron Feb-
ruary 27, 2009 (74 FR 8863–01), March 5,
2009 (74 FR 9570–01, 74 FR 9570–02,
and 74 FR 9577–01), and March 19, 2009
(74 FR 11644–01). A public hearing was
held on April 21, 2009.
The Treasury Department and the IRS
received comments on a range of issues ad-
dressed in the 2008 temporary regulations.
Final regulations were issued in a previous
issue of the Bulletin (REG–144615–02)
(T.D. 9568) in December 2011 (final reg-
ulations). Certain guidance regarding dis-
count rates was reserved in the final reg-
ulations because the Treasury Department
and the IRS believe it is appropriate to so-
licit public comments on that subject mat-
ter.
Temporary regulations in this issue
of the Bulletin contain amendments to
the final regulations and implement the
use of the differential income stream
as a consideration in assessing the best
method in connection with a CSA. The
text of those regulations also serves as
the text of the regulations contained
in this document that are proposed by
cross-reference to the temporary regu-
lations (§1.482–7T(g)(2)(v)(B)(2)and
(4)(vi)(F)(2)). This document also con-
tains a proposed amendment to the reg-
ulations under section 482 that describes
the specific application of the income
method using the differential income
stream (§1.482–7(g)(4)(v)).
Explanation of Provisions
See the Explanation of Provisions
for the temporary cost sharing regu-
lations published in this issue of the
Bulletin for an explanation of how
proposed §1.482–7(g)(2)(v)(B)(2)and
(4)(vi)(F)(2) build upon and augment
§1.482–7(g)(4)(vi)(F)(1) (Reflection of
similar risk profiles in cost sharing alter-
native and licensing alternative) of the
final regulations.
Theseproposedregulations
also build upon and augment
§1.482–7(g)(4)(vi)(F)(1)ofthefinal
regulations by providing a new specified
application of the income method. Section
1.482–7(g)(4)(v) of the proposed regu-
lations provides that the determination
of the arm’s length charge for the PCT
Payment can be derived by discounting
the differential income stream at an appro-
priate rate. The differential income stream
approach to determining PCT Payments
depends on reliably determining the dis-
count rate associated with the differential
income stream. This, in turn, requires an
understanding of the economic meaning
of the differential income stream. For
example, assume a CSA in which the PCT
Payor does not contribute any platform or
operating contributions, and undertakes
only routine exploitation activities for
which it anticipates a routine return. In
such case, the total undiscounted antic-
ipated profits (before PCT Payments)
to the CSA in the PCT Payor’s territory
can be thought of as comprising the
anticipated routine exploitation profits
plus the anticipated development value
of the cost shared intangibles in the PCT
Payor’s territory. Under the licensing
alternative, on the other hand, the PCT
Payor’s total undiscounted anticipated
profits consist solely of the anticipated
routine exploitation profits. Thus, the
differential income stream conceptually
corresponds to the development value
of the cost shared intangibles. For these
reasons, an appropriate discount rate for
the differential income stream might be
determined based, for example, on the
weighted average cost of capital of uncon-
trolled companies whose activities consist
primarily of developing intangibles sim-
ilar to the cost shared intangibles, and
whose resources, capabilities, or rights
are similar to the platform contributions
and cost shared intangibles under the
CSA. These proposed regulations also
add §1.482–7(g)(4)(viii)Example 9to
illustrate this newly specified application
of the income method.
Proposed Effective Dates
Prop.Treas.Reg.
§1.482–7(g)(2)(v)(B)(2), (4)(vi)(F)(2)
and (viii),Example 8areproposedtobe
applied to taxable years beginning on or
after December 19, 2011.
Prop. Treas. Reg. §1.482–7(g)(4)(v)
and (viii),Example 9are proposed to apply
to taxable years beginning on or after the
date of publication of a Treasury decision
adopting such rules as final regulations in
theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a sig-
nificant regulatoryaction as defined in
March 12, 20124962012–11 I.R.B.

Executive Order 12866. Therefore, a reg-
ulatory 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 this
regulation, and because the regulation does
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 Internal
Revenue Code, these regulations have
been submitted to the Chief Counsel
for Advocacy of the Small Business
Administration (CCASBA) for comment
on their impact on small businesses.
CCASBAhadnocomments.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
Treasury and the IRS request comments on
all aspects of the proposed rules. All com-
ments will be available for public inspec-
tion and copying. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled, no-
tice of the date, time, and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal authors of these pro-
posed regulations are Joseph L. Tobin
and Mumal R. Hemrajani, Office of the
Associate Chief Counsel (International).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Authority: 26 U.S.C. 7805 * * *
Section 1.482–7 is also issued under
26 U.S.C. 482. * * *
Par. 2. Section 1.482–7 is amended
by adding paragraphs (g)(2)(v)(B)(2),
(g)(4)(v), and (g)(4)(vi)(F)(2), andExam-
ples 8and9to paragraph (g)(4)(viii).
The additions read as follows:
§1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
*****
(g)* * *
(2)* * *
(v)* * *
(B)***
(2) [The text of the proposed
amendment to §1.482–7(g)(2)(v)(B)(2)
is the same as the text of
§1.482–7T(g)(2)(v)(B)(2)published
elsewhere in this issue of the Bulletin].
*****
(4)* * *
(v)Application of income method using
differential income stream. In some cases,
the present value of an arm’s length PCT
Payment may be determined as the present
value, discounted at the appropriate rate,
of the PCT Payor’s reasonably anticipated
stream of additional positive or negative
income over the duration of the CSA Ac-
tivity that would result (before PCT Pay-
ments) from undertaking the cost sharing
alternative rather than the licensing alter-
native (differential income stream). See
Example 9of paragraph (g)(4)(viii) of this
section.
*****
(vi)* * *
(F)* * *
(2) [The text of the proposed
amendment to §1.482–7(g)(4)(vi)(F)(2)
is the same as the text of
§1.482–7T(g)(4)(vi)(F)(2)published
elsewhere in this issue of the Bulletin.]
*****
(viii) * * *
Example 8[The text of the proposed amendment
to §1.482–7(g)(4)(viii) (Example 8) is the same as the
text of §1.482–7T(g)(4)(viii) (Example 8) published
elsewhere in this issue of the Bulletin.]
Example 9. ThefactsarethesameasinExam-
ple 1, except that additional data on discount rates are
available that were not available inExample 1.The
Commissioner determines the arm’s length charge for
the PCT Payment by discounting at an appropriate
rate the differential income stream associated with
the rights contributed by USP in the PCT (that is,
the stream of income in column (11) ofExample 1).
Based on an analysis of a set of public companies
whose resources, capabilities, and rights consist pri-
marily of resources, capabilities, and rights similar to
those contributed by USP in the PCT, the Commis-
sioner determines that 15% to 17% is an appropriate
range of discount rates to use to assess the value of the
differential income stream associated with the rights
contributed by USP in the PCT. The Commissioner
determines that applying a discount rate of 17% to the
differential income stream associated with the rights
contributed by USP in the PCT yields a present value
of $446 million, while applying a discount rate of
15% to the differential income stream associated with
the rights contributed by USP in the PCT yields a
present value of $510 million. Because the taxpayer’s
result, $464 million, is within the interquartile range
determined by the Commissioner, no adjustments are
warranted. See paragraphs (g)(2)(v)(B)(2), (g)(4)(v),
and (g)(4)(vi)(F)(1)ofthissection.
*****
(l)Effective/Applicability Dates.
Treas. Reg. §1.482–7(g)(2)(v)(B)(2),
(g)(4)(vi)(F)(2) and (g)(4)(viii),Example
8apply to taxable years beginning on or
after December 19, 2011. Treas. Reg.
§1.482–7(g)(4)(v) and (viii),Example 9
apply to taxable years beginning on or
after the date of publication of a Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 19,
2011, 11:15 a.m., and published in the issue of the Federal
Register for December 23,2011, 76 F.R. 80249)
2012–11 I.R.B.497March 12, 2012

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.
March 12, 2012i2012–11 I.R.B.

Numerical Finding List
1
Bulletins 2012–1 through 2012–11
Announcements:
2012-1, 2012-1 I.R.B.249
2012-2, 2012-2 I.R.B.285
2012-3, 2012-4 I.R.B.335
2012-4, 2012-4 I.R.B.335
2012-5, 2012-5 I.R.B.348
2012-6, 2012-6 I.R.B.366
2012-7, 2012-6 I.R.B.367
2012-8, 2012-7 I.R.B.373
2012-9, 2012-7 I.R.B.377
Notices:
2012-1, 2012-2 I.R.B.260
2012-3, 2012-3 I.R.B.289
2012-4, 2012-3 I.R.B.290
2012-5, 2012-3 I.R.B.291
2012-6, 2012-3 I.R.B.293
2012-7, 2012-4 I.R.B.308
2012-8, 2012-4 I.R.B.309
2012-9, 2012-4 I.R.B.315
2012-10, 2012-5 I.R.B.343
2012-11, 2012-5 I.R.B.346
2012-12, 2012-6 I.R.B.365
2012-13, 2012-9 I.R.B.421
2012-14, 2012-8 I.R.B.411
2012-15, 2012-9 I.R.B.424
2012-16, 2012-9 I.R.B.427
2012-17, 2012-9 I.R.B.430
2012-18, 2012-10 I.R.B.438
2012-19, 2012-10 I.R.B.440
2012-21, 2012-10 I.R.B.450
2012-23, 2012-11 I.R.B.483
Proposed Regulations:
REG-109369-10, 2012-9 I.R.B.434
REG-113903-10, 2012-11 I.R.B.486
REG-120282-10, 2012-11 I.R.B.487
REG-130302-10, 2012-8 I.R.B.412
REG-149625-10, 2012-2 I.R.B.279
REG-102988-11, 2012-4 I.R.B.326
REG-124627-11, 2012-8 I.R.B.417
REG-130777-11, 2012-5 I.R.B.347
REG-145474-11, 2012-11 I.R.B.495
Revenue Procedures:
2012-1, 2012-1 I.R.B.1
2012-2, 2012-1 I.R.B.92
2012-3, 2012-1 I.R.B.113
2012-4, 2012-1 I.R.B.125
2012-5, 2012-1 I.R.B.169
2012-6, 2012-1 I.R.B.197
2012-7, 2012-1 I.R.B.232
Revenue Procedures— Continued:
2012-8, 2012-1 I.R.B.235
2012-9, 2012-2 I.R.B.261
2012-10, 2012-2 I.R.B.273
2012-11, 2012-7 I.R.B.368
2012-12, 2012-2 I.R.B.275
2012-13, 2012-3 I.R.B.295
2012-14, 2012-3 I.R.B.296
2012-15, 2012-7 I.R.B.369
2012-16, 2012-10 I.R.B.452
2012-17, 2012-10 I.R.B.453
2012-18, 2012-10 I.R.B.455
2012-21, 2012-11 I.R.B.484
Revenue Rulings:
2012-1, 2012-2 I.R.B.255
2012-2, 2012-3 I.R.B.286
2012-3, 2012-8 I.R.B.383
2012-4, 2012-8 I.R.B.386
2012-5, 2012-5 I.R.B.337
2012-6, 2012-6 I.R.B.349
2012-7, 2012-6 I.R.B.362
2012-9, 2012-11 I.R.B.475
Treasury Decisions:
9559, 2012-2 I.R.B.252
9560, 2012-4 I.R.B.299
9561, 2012-5 I.R.B.341
9562, 2012-5 I.R.B.339
9563, 2012-6 I.R.B.354
9565, 2012-8 I.R.B.378
9566, 2012-8 I.R.B.389
9567, 2012-8 I.R.B.395
9569, 2012-11 I.R.B.465
9570, 2012-11 I.R.B.477
9571, 2012-11 I.R.B.468
9572, 2012-11 I.R.B.471
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin
2011–52, dated December 27, 2011.
2012–11 I.R.B.iiMarch 12, 2012

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2012–1 through 2012–11
Announcements:
2002-44
Supplemented by
Notice 2012-13, 2012-9 I.R.B.421
2011-63
Corrected by
Ann. 2012-9, 2012-7 I.R.B.377
Notices:
2006-87
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2007-25
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2007-77
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2008-107
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2010-27
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2010-88
As modified by Ann. 2011-40, is superseded by
Notice 2012-1, 2012-2 I.R.B.260
2011-8
Superseded by
Notice 2012-19, 2012-10 I.R.B.440
2011-28
Superseded by
Notice 2012-9, 2012-4 I.R.B.315
Revenue Procedures:
2000-43
Amplified, modified and superseded by
Rev. Proc. 2012-18, 2012-10 I.R.B.455
2003-61
Superseded by
Notice 2012-8, 2012-4 I.R.B.309
2007-44
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
2011-1
Superseded by
Rev. Proc. 2012-1, 2012-1 I.R.B.1
Revenue Procedures— Continued:
2011-2
Superseded by
Rev. Proc. 2012-2, 2012-1 I.R.B.92
2011-3
Superseded by
Rev. Proc. 2012-3, 2012-1 I.R.B.113
2011-4
Superseded by
Rev. Proc. 2012-4, 2012-1 I.R.B.125
2011-5
Superseded by
Rev. Proc. 2012-5, 2012-1 I.R.B.169
2011-6
Superseded by
Rev. Proc. 2012-6, 2012-1 I.R.B.197
2011-7
Superseded by
Rev. Proc. 2012-7, 2012-1 I.R.B.232
2011-8
Superseded by
Rev. Proc. 2012-8, 2012-1 I.R.B.235
2011-9
Superseded by
Rev. Proc. 2012-9, 2012-2 I.R.B.261
2011-10
Superseded by
Rev. Proc. 2012-10, 2012-2 I.R.B.273
2011-37
Obsoleted in part by
Rev. Proc. 2012-16, 2012-10 I.R.B.452
2011-40
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2011-49
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
2011-50
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2011-51
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2012-8
Corrected by
Ann. 2012-7, 2012-6 I.R.B.367
Revenue Rulings:
92-19
Supplemented in part by
Rev. Rul. 2012-6, 2012-6 I.R.B.349
Revenue Rulings— Continued:
2008-40
Modified by
Notice 2012-6, 2012-3 I.R.B.293
2011-1
Modified by
Notice 2012-6, 2012-3 I.R.B.293
Treasury Decision:
9517
Corrected by
Ann. 2012-4, 2012-4 I.R.B.335
Ann. 2012-5, 2012-5 I.R.B.348
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27,
2011.
March 12, 2012iii2012–11 I.R.B.

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