Internal Revenue Bulletin 2009-5 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
9-5
February 2, 2009
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. 2009–3, page 382.
Insurance companies; interest rate tables.Prevailing
state assumed interest rates are provided for the determina-
tion of reserves under section 807 of the Code for contracts
issued in 2008 and 2009. Rev. Rul. 92–19 supplemented.
Rev. Rul. 2008–19 modified.
Rev. Rul. 2009–4, page 408.
Section 1256 contracts marked to market.This ruling
holds that Dubai Mercantile Exchange, which is a United Arab
Emirates Authorized Market Institution, is a qualified board or
exchange within the meaning of section 1256(g)(7)(C) of the
Code.
T.D. 9438, page 387.
REG–150066–08, page 423.
Final, temporary, and proposed regulations under section 954
of the Code relate to foreign base company sales income in
cases in which personal property sold by a controlled foreign
corporation is manufactured, produced, or constructed pur-
suant to a contract manufacturing arrangement or by one or
more branches of the controlled foreign corporation. A public
hearing on the proposed regulations is scheduled for April 20,
2009.
Notice 2009–10, page 419.
This notice serves to extend the application of the future regu-
lations described in Notice 2008–91, 2008–43 I.R.B. 1001, to
a third taxable year in certain cases and to extend Rev. Proc.
2008–26, 2008–21 I.R.B. 1014, to calendar year 2009.
EMPLOYEE PLANS
Notice 2009–9, page 419.
This notice provides guidance to financial institutions on the
reporting rules applicable to required minimum distributions
(RMDs) for 2009 in light of the enactment of the Worker, Re-
tiree, and Employer Recovery Act of 2008. Section 201 of
the Act waives any RMDs for 2009 from individual retirement
arrangements (IRAs) and retirement plans that hold participant
benefits in individual accounts. This notice modifies the report-
ingrequirementsapplicabletoRMDsfromIRAstoreflectthe
waiver of the RMD rules for 2009. Notice 2002–27 modified.
EMPLOYMENT TAX
T.D. 9440, page 409.
REG–148568–04, page 421.
Final, temporary, and proposed regulations under sections
6011 and 6302 of the Code relate to the annual filing of fed-
eral employment tax returns and requirements for employment
tax deposits. The regulations concern reporting and paying
income taxes withheld from wages and reporting and paying
taxes under the Federal Insurance Contributions Act (FICA)
(collectively, “employment taxes”). The regulations generally
allow certain employers to file a Form 944,Employer’sAN-
NUALFederalTaxReturn, rather than Form 941,Employer’s
QUARTERLYFederalTaxReturn.
(Continued on the next page)
Announcements of Disbarments and Suspensions begin on page 424.
Finding Lists begin on page ii.

ADMINISTRATIVE
T.D. 9439, page 416.
Final regulations under section 6103 of the Code relate to
disclosures of corporate tax return information to the Bureau
of Economic Analysis. The regulations authorize the IRS to
disclose certain items of corporate tax return information to
the Secretary of Commerce for purposes of structuring United
States national economic accounts and conducting related sta-
tistical activities authorized by law.
Notice 2009–11, page 420.
This notice provides that the February 17, 2009, due date for
brokers to furnish From 1099–B information to customers es-
tablished under section 403 of the Energy Improvement and
Extension Act of 2008 will apply to certain other tax informa-
tion reportable for tax year 2008 if furnished to customers with
Form 1099–B statements on an annual composite tax report-
ing statement.
February 2, 20092009–5 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2009–5 I.R.B.February 2, 2009

February 2, 20092009–5 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 446.—
General Rule
for Methods of
Accounting
26 CFR 1.446–1: General rule for methods of ac-
counting.
A revenue ruling holds that Dubai Mercantile Ex-
change, which is a United Arab Emirates Authorized
Market Institution, is a qualified board or exchange
within the meaning of section 1256(g)(7)(C) of the
Code. See Rev. Rul. 2009-4, page 408.
Section 481.—Adjustments
Required by Changes in
Method of Accounting
A revenue ruling holds that Dubai Mercantile Ex-
change, which is a United Arab Emirates Authorized
Market Institution, is a qualified board or exchange
within the meaning of section 1256(g)(7)(C) of the
Code. See Rev. Rul. 2009-4, page 408.
Section 807.—Rules for
Certain Reserves
Insuran
ce companies; interest rate
tables
.Prevailing state assumed interest
rates a
re provided for the determination of
reserv
es under section 807 of the Code for
contra
cts issued in 2008 and 2009. Rev.
Rul. 92
–19 supplemented. Rev. Rul.
2008–
19 modified.
Rev. Rul. 2009
–3
For purposes o
f § 807(d)(4) of the In-
ternal Revenu
e Code, for taxable years be-
ginning after
December 31, 2007, this rul-
ing suppleme
nts the schedules of prevail-
ing state ass
umed interest rates set forth
in Rev. Rul. 9
2–19, 1992–1 C.B. 227.
This informa
tionistobeusedbyinsurance
companies i
n computing their reserves for
(1) life ins
urance and supplementary total
and permane
nt disability benefits, (2) in-
dividual an
nuities and pure endowments,
and (3) gro
up annuities and pure endow-
ments. As §
807(d)(2)(B) requires that the
interest r
ate used to compute these reserves
be the grea
ter of (1) the applicable federal
interest r
ate, or (2) the prevailing state as-
sumed int
erest rate, the table of applicable
federal i
nterest rates in Rev. Rul. 92–19 is
also supp
lemented.
Followin
g are supplements to schedules
A, B, C, an
d D to Part III of Rev. Rul.
92–19, pr
oviding prevailing state assumed
interest
rates for insurance products with
differe
nt features issued in 2008 and 2009,
and a sup
plement to the table in Part IV of
Rev. Rul
. 92–19, providing the applica-
ble fede
ral interest rates under § 807(d) for
2008 and
2009. This ruling does not sup-
plemen
t Parts I and II of Rev. Rul. 92–19.
This is the sev
enteenth supplement to
the interest r
ates provided in Rev. Rul.
92–19. Earlie
r supplements were pub-
lished in Rev
. Rul. 93–58, 1993–2 C.B.
241 (interes
t rates for insurance prod-
ucts issued i
n 1992 and 1993); Rev. Rul.
94–11, 1994–
1 C.B. 196 (1993 and 1994);
Rev. Rul. 95
–4, 1995–1 C.B. 141 (1994
and 1995); R
ev. Rul. 96–2, 1996–1 C.B.
141 (1995 an
d 1996); Rev. Rul. 97–2,
1997–1 C.B.
134 (1996 and 1997); Rev.
Rul. 98–2, 1
998–1 C.B. 259 (1997 and
1998); Rev
. Rul. 99–10, 1999–1 C.B.
671 (1998 a
nd 1999); Rev. Rul. 2000–17,
2000–1 C.B
. 842 (1999 and 2000); Rev.
Rul. 2001–
11, 2001–1 C.B. 780 (2000
and 2001)
; Rev. Rul. 2002–12, 2002–1
C.B. 624 (
2001 and 2002); Rev. Rul.
2003–24,
2003–1 C.B. 557 (2002 and
2003); Re
v. Rul. 2004–14, 2004–1 C.B.
511 (2003
and 2004); Rev. Rul. 2005–29,
2005–1 C
.B. 1080 (2004 and 2005); Rev.
Rul. 200
6–25, 2006–1 C.B. 882 (May
15, 2006
) (2005 and 2006); Rev. Rul.
2007–10
, 2007–1 C.B. 660 (Mar. 5, 2007)
(2006 a
nd 2007); and Rev. Rul. 2008–19,
2008–1
3 I.R.B. 669 (Mar. 31, 2008) (2007
and 200
8).
2009–5 I.R.B.382February 2, 2009

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST RATES
BASED ON THE 1980 AMENDMENTS TO THE
N
AICSTANDARDVALUATIONLAW
A. Life insurance valuation:
G
uaranteeDuration(years)CalendarYearofIssue
20092008***
10 or fewer
4.50**4.50
More than 10
but not more than 20
4.25**4.25
More than 204.00**4.00
Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned Corporate
Bonds.
*The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard Valuation
Law; the terms are defined in Rev. Rul. 92–19.
**As these rates exceed the applicable federal interest rate for 2009of 4.06 percent, the valuation interest rate to be used for this
product under § 807 is the applicable rate specified in this table.
***The valuation interest rates for life insurance contracts issued in 2008 as set forth in Schedule A of Rev. Rul. 2008–19,
2008–13 I.R.B. 669 (Mar. 31, 2008) are corrected by the numbers set forth in this Schedule A.
February 2, 20093832009–5 I.R.B.

Part III, Schedule B
STATUTORY VALUATION INTEREST RATES
BASED ON THE 1980 AMENDMENTS TO THE
N
AICSTANDARDVALUATIONLAW
B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash
settlement options and from guaranteed interest contracts with cash settlement options:
C
alendarYearofIssueValuationInterestRate
2008
5.50*
Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned Corporate
Bonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates). The terms used in this
schedule are those used in the Standard Valuation Law as defined in Rev. Rul. 92–19.
*As this prevailing state assumed interest exceeds the applicable federal interest rate for 2008 of 4.06 percent, the valuation
interest rate of 5.50 percent is to be used for this product under § 807.
2009–5 I.R.B.384February 2, 2009

Part III, Schedule C24 — 2008
STATUTORY VALUATION INTEREST RATES
BASED ON NAIC STANDARD VALUATION LAW
FOR2008CALENDAR YEAR BUSINESS
G
OVERNEDBYTHE1980AMENDMENTS
C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:
Valuation Interest Rate (%)
For Plan Type
Cash
Settlement
O
ptions?
Future
Interest
G
uarantee?
Guarantee Duration
(
years)ABC
YesYes
5 or fewer5.50*5.00*4.50*
More than 5, but not
more than 10
5.50*5.00*4.50*
More than 10, but not
more than 20
5.00*4.50*4.25*
More than 20
4.25*
4.004.00
YesNo
5 or fewer5.75*5.00*4.75*
More than 5, but not
more than 10
5.50*5.00*4.75*
More than 10, but not
more than 20
5.00*4.75*4.50*
More than 20
4.50*4.25*4.25*
NoYes or No
5 or fewer5.50*
More than 5, but not
more than 10
5.50*
NOT
APPLICABLE
More than 10, but not
more than 20
5.00*
More than 20
4.50*
Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned Corporate
Bonds.
*As these rates exceed the applicable federal interest rate for 2008of 4.06 percent, the valuation interest rate to be used for this
product under § 807 is the applicable rate specified in the above table.
February 2, 20093852009–5 I.R.B.

Part III, Schedule D24 — 2008
STATUTORY VALUATION INTEREST RATES
BASED ON NAIC STANDARD VALUATION LAW
FOR2008CALENDAR YEAR BUSINESS
G
OVERNEDBYTHE1980AMENDMENTS
D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options
and that are valued on a change in fund basis:
Valuation Interest Rate
For Plan Type
Cash
Settlement
O
ptions?
Future
Interest
G
uarantee?
Guarantee Duration
(
years)ABC
YesYes
5 or fewer
6.00
5.754.75
More than 5, but not
more than 10
6.00
5.754.75
More than 10, but not
more than 20
5.505.504.50
More than 20
5.005.004.25*
YesNo
5 or fewer6.25
6.00
5.00
More than 5, but not
more than 10
6.006.00
5.00
More than 10, but not
more than 20
5.755.504.75
More than 20
5.005.004.50*
Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned Corporate
Bonds.
*As the applicable federal interest rate for 2008 of 4.06 percent is less than the prevailing state assumed interest rate, the valuation
interest rate to be used for this product under § 807 is the applicable rate specified in the above table.
2009–5 I.R.B.386February 2, 2009

Part IV. Applicable Federal Interest Rates.
TABLE OF
APPLICABLE FEDERAL INTEREST RATES
F
ORPURPOSESOF§807
YearInterestRate
20084.06
20094.06
Sources: Rev. Rul. 2004–106, 2004–2 C.B. 893, for the 2005 rate; Rev. Rul. 2005–77, 2005–2 C.B. 1071, for the 2006 rate; Rev.
Rul. 2006–61, 2006–2 C.B. 1028 (Dec. 11, 2006) for the 2007 rate; Rev. Rul. 2007–70, 2007–50 C.B. 1158 (Nov. 20, 2007) for
the 2008 rate; and Rev. Rul. 2008–53, 2008–49 I.R.B. 1231 (Nov. 19, 2008) for the 2009 rate.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 92–19 is supplemented by
the addition to Part III of that ruling of pre-
vailing state assumed interest rates under
§ 807 for certain insurance products issued
in 2008 and 2009 and is further supple-
mented by an addition to the table in Part
IV of Rev. Rul. 92–19 listing applicable
federal interest rates. Parts I and II of Rev.
Rul. 92–19 are not affected by this ruling.
Rev. Rul. 2008–19 is modified in that the
valuation interest rates set forth in Sched-
ule A of this ruling for contracts issued in
2008 correct and replace those set forth in
Schedule A of Rev. Rul. 2008–19.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Josephine H. Firehock of the Office
of Associate Chief Counsel (Financial In-
stitutions and Products). For further infor-
mation regarding this revenue ruling, con-
tact her at (202) 622–3970 (not a toll-free
call).
Section 954.—Foreign Base
Company Income
26 CFR 1.954–3: Foreign base company sales in-
come.
T.D. 9438
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Regarding Foreign
Base Company Sales Income
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal and temporary regulations that provide
guidance relating to foreign base company
sales income in cases in which personal
property sold by a controlled foreign cor-
poration is manufactured, produced, or
constructed pursuant to a contract manu-
facturing arrangement or by one or more
branches of the controlled foreign corpora-
tion. These regulations modify the foreign
base company sales income regulations
to address current business structures
and practices, particularly the growing
importance of contract manufacturing
and other manufacturing arrangements.
These regulations, in general, will af-
fect controlled foreign corporations and
their United States shareholders. The text
of the temporary regulations also serves
as the text of the proposed regulations
(REG–150066–08) set forth in the notice
of proposed rulemaking on this subject in
this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective July 1, 2009.
Applicability Date:For dates of
applicability, see§1.954–3(c) and
§1.954–3T(e). The final regulations shall
apply to taxable years of controlled for-
eign corporations beginning after June
30, 2009, and for taxable years of United
States shareholders in which or with which
such taxable years of the controlled for-
eign corporations end. The temporary
regulations shall apply to taxable years of
controlled foreign corporations beginning
after June 30, 2009, and for taxable years
of United States shareholders in which
or with which such taxable years of the
controlled foreign corporations end.
FOR FURTHER INFORMATION
CONTACT: Ethan Atticks, (202)
622–3840 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On February 28, 2008, the IRS and
the Treasury Department published in
theFederal Registerproposed regula-
tions (REG–124590–07, 2008–16 I.R.B.
801 [73 FR 10716], as corrected at
73 FR 20201), which provided proposed
amendments to §1.954–3, addressing
the treatment of contract manufacturing
arrangements under the foreign base
company sales income (FBCSI) rules.
February 2, 20093872009–5 I.R.B.

Written comments were received in
response to the notice of proposed
rulemaking, and a public hearing on the
proposed regulations was held on July 29,
2008.
Section 954(d)(1) definesFBCSIto
mean income derived by a controlled
foreign corporation (CFC) in connection
with: (1) the purchase of personal property
from a related person and its sale to any
person, (2) the sale of personal property to
any person on behalf of a related person,
(3) the purchase of personal property from
any person and its sale to a related person
or (4) the purchase of personal property
from any person on behalf of a related
person, provided (in all these cases) that
the property is manufactured, produced,
grown or extracted outside of the CFC’s
country of organization and is sold for
use, consumption or disposition outside of
such country.
The existing regulations further define
FBCSI and the applicable exceptions from
FBSCI, including the exceptions to the
FBCSI rules for personal property that is:
(1) manufactured, produced, constructed,
grown, or extracted within the CFC’s
country of organization (same country
manufacture exception); (2) sold for use,
consumption or disposition within the
CFC’s country of organization; and (3)
manufactured, produced, or constructed
by the CFC (the manufacturing excep-
tion). See §1.954–3(a)(2)–(4).
The existing regulations set forth
certain tests to determine whether a
CFC satisfies the manufacturing ex-
ception: the “substantial transforma-
tion test” of §1.954–3(a)(4)(ii) and
the “substantive test” and safe harbor
of §1.954–3(a)(4)(iii). For purposes
of this preamble, the requirements of
§1.954–3(a)(4)(ii) and 1.954–3(a)(4)(iii)
will be referred to collectively as the
“physical manufacturing test” and the sat-
isfaction of either test will be described as
“physical manufacturing.”
The proposed regulations provide a
third test for satisfying the manufacturing
exception, which may apply when a CFC
is involved in the manufacturing process
but does not satisfy the physical manu-
facturing test. In particular, the proposed
regulations provide that a CFC will satisfy
the manufacturing exception if the facts
and circumstances evince that the CFC
makes a substantial contribution through
the activities of its employees to the man-
ufacture, production, or construction of
personal property (substantial contribu-
tion test). The proposed regulations also
propose other modifications to the exist-
ing regulations to address the treatment
of contract manufacturing arrangements
under the FBCSI rules.
Written comments were received in
response to the notice of proposed rule-
making, and a public hearing was held on
July 29, 2008. After consideration of all
the comments, the proposed regulations,
as revised by this Treasury decision, are
adopted as final and temporary regula-
tions.
Summary of Comments and
Explanation of Provisions
This Treasury decision contains fi-
nal and temporary regulations relating to
FBCSI. The temporary regulations con-
tained in this Treasury decision also serve
as the text of proposed regulations set forth
inanoticeofproposedrulemakingonthis
subject in this issue of the Bulletin. The
preamble to this Treasury decision will
refer to the proposed regulations published
in theFederal Registeron February 28,
2008, as the proposed regulations. The
preamble will refer to the regulations that
are published simultaneously as temporary
regulations in this Treasury decision and
as proposed regulations in this issue of the
Bulletin as the temporary regulations.
A.Substantial Contribution Test
The proposed regulations provide that
a CFC will satisfy the substantial contri-
bution test with respect to personal prop-
erty only if all the facts and circumstances
evince that the CFC makes a substantial
contribution through the activities of its
employees to the manufacture of the prop-
erty. Prop. Reg. §1.954–3(a)(4)(iv)(b)
includes a non-exclusive list of activities
(collectively, “indiciaof manufacturing”)
to be considered in determining whether
the CFC satisfies the substantial contri-
bution test with respect to the manufac-
ture, production, or construction of the per-
sonal property (manufacture of the per-
sonal property) under all the facts and cir-
cumstances.
1.General operation of substantial
contribution test
In response to the proposed regula-
tions, commentators requested further
elaboration of the general operation of
the substantial contribution test. For ex-
ample, commentators requested guidance
on the amount of activity performed by
a CFC’s employees that would be neces-
sary to “satisfy” each individual activity
listed among theindiciaof manufacturing.
Several commentators requested clarifi-
cations that suggested they believed that
a certain threshold of employee activity
was required before the activity would be
considered in determining whether a CFC
satisfied the substantial contribution test.
Commentators requested, for example,
clarification as to whether the “vendor
selection” activity is satisfied if the CFC
provides a contract manufacturer with an
approved list of vendors but allows the
contract manufacturer to make the final
determination regarding the vendors to be
used.
Commentators also requested guid-
ance on how theindiciaof manufacturing
shouldbeweighedinrelationtoone
another and whether performing a cer-
tain minimum number of activities was
required in order for the substantial con-
tribution test to be satisfied. Others asked
that the regulations explain whether a CFC
must perform any particular activity in all
cases to satisfy the substantial contribution
test (for example, whether a CFC must
always perform oversight and direction of
the manufacturing process to satisfy the
substantial contribution test). Some com-
mentators requested that the regulations
emphasize that the importance of each
activity would vary by industry and by
taxpayer. Commentators also requested
that the regulations make clear that a CFC
need not perform all of theindiciaof
manufacturing to establish a substantial
contribution, and that the weight given to
activities performed by employees of the
CFC will depend on the economic signif-
icance of those activities to the business
of the taxpayer with respect to the product
being manufactured.
Although the proposed regulations pro-
vide guidance on many of these issues,
the IRS and the Treasury Department
believe that additional guidance with re-
spect to the application of the substantial
2009–5 I.R.B.388February 2, 2009

contribution test is warranted in light of
the comments received. Consequently,
§1.954–3(a)(4)(iv)(c) is added to the final
regulations to provide further clarification
on the application of the substantial con-
tribution test. First,§1.954–3(a)(4)(iv)(c)
clarifies that all CFC employee functions
contributing to the manufacture of the
personal property will be considered in
the aggregate when determining whether
a substantial contribution is made to the
manufacture of the personal property
through the activities of a CFC’s em-
ployees. Second, §1.954–3(a)(4)(iv)(c)
clarifies that there is no single activity
that will be accorded more weight than
any other activity in every case or that
will be required to be performed in all
cases. Third, it clarifies that there is no
minimum threshold with respect to func-
tions performed by employees of a CFC
before their functions with respect to a
given activity may be taken into account
as part of the substantial contribution
test. Therefore, all functions performed
by a CFC’s employees are considered
(and given appropriate weight) under the
substantial contribution test, even if the
CFC’s employees perform only some of
the functions in connection with any one
activity (for example, some, but not all,
of the vendor selection) considered under
that test. The weight given to any func-
tions performed by employees of the CFC
with respect to any activity will be based
on the economic significance of those
functions to the manufacture, production,
or construction of the relevant personal
property. Corresponding amendments and
additional examples have been added to
the final regulations to illustrate further the
application of the substantial contribution
test. See §1.954–3(a)(4)(iv)(d).
Other commentators sought clarifica-
tion as to the extent to which purely con-
tractual assumptions of risk are consid-
ered in a substantial contribution analy-
sis. The IRS and the Treasury Department
believe that no further clarification in the
final regulations is necessary to address
this point. Both the proposed and final
regulations provide that only activities of
the CFC’s employees are considered in the
substantial contribution analysis and, con-
sequently, purely contractual assumptions
of risk are not considered in the substantial
contribution analysis.
In addition, commentators requested
that the regulations clarify that more than
one person can provide a substantial con-
tribution to the manufacturing process
with respect to a given product. In re-
sponse to this comment, the IRS and the
Treasury Department amended the reg-
ulations to clarify that a CFC will not
be precluded from making a substantial
contribution to the manufacture of the
personal property by the fact that other
persons also make a substantial contri-
bution to the manufacture, production,
or construction of that property. Further,
§1.954–3(a)(4)(iv)(d)Example 9is added
to the final regulations to illustrate that
more than one person can provide a sub-
stantial contribution to the manufacture of
the same property.
2.Indicia of manufacturing
The IRS and the Treasury Department
received numerous comments with respect
to the specific activities listed in the pro-
posed regulation that are considered in de-
termining whether a CFC makes a substan-
tial contribution through its employees to
the manufacture, production, or construc-
tion of personal property.
a.Oversight and Direction of
Manufacturing
Commentators requested that the IRS
and the Treasury Department clarify cer-
tain issues related to the “oversight and
direction of the activities or process”
pursuant to which personal property is
manufactured, produced, or constructed.
Some commentators asked that the regula-
tions provide that oversight and direction
of the activities or process pursuant to
which personal property is manufactured,
produced, or constructed be a prerequisite
for satisfying the substantial contribution
test. Other commentators requested that
the IRS and the Treasury Department clar-
ify that in certain industries a substantial
contribution can be made by a CFC with-
out its employees engaging in significant
oversight and direction of the activities
or process pursuant to which personal
property is manufactured, produced, or
constructed. Some commentators focused
on the fact that in an example in the pro-
posed regulations the CFC was not treated
as making a substantial contribution to the
manufacture of personal property when
the CFC did not “regularly exercise” over-
sight and direction with respect to the
contract manufacturer. See Prop. Reg.
§1.954–3(a)(4)(iv)(c)Example 1.
The importance of oversight and direc-
tion of the activities or process pursuant to
which personal property is manufactured,
produced, or constructed will vary based
on the facts and circumstances associated
with the specific manufacture, production,
or construction at issue. The IRS and the
Treasury Department acknowledge that
oversight and direction of the activities
or process pursuant to which personal
property is manufactured, produced, or
constructedislikelytobeanimportant
element in many, but not all, substantial
contribution analyses. Thus, to address
taxpayer comments, the examples in the
final regulations are amended to make
clear that oversight and direction is not
a prerequisite for satisfying the substan-
tial contribution test and that in certain
industries a substantial contribution could
be made by a CFC without its employees
engaging in oversight and direction of the
activities or process pursuant to which per-
sonal property is manufactured, produced,
or constructed. Finally, the examples in
the final regulations do not use the poten-
tially confusing reference to “regularly”
exercising oversight.
b.Material Selection, Vendor Selection,
and Control of the Raw Materials,
Work-in-process, and Finished Goods
Some commentators asked if other ac-
tivities listed among theindiciaof manu-
facturing also represented means of exer-
cising control of the raw materials, work-
in-process and finished goods. The IRS
and the Treasury Department acknowledge
that some of the activities in theindiciaof
manufacturing may overlap with other ac-
tivities in that list. The final regulations re-
quire a substantial contribution to the man-
ufacture of the personal property through
the activities of the CFC’s employees and
not satisfaction of any specific activity in
theindiciaof manufacturing. Therefore,
the IRS and the Treasury Department de-
termined that it was not necessary to clar-
ify whether any particular function might
reasonably be included under more than
oneheadingintheindiciaof manufactur-
ing. However, to provide further clarity,
February 2, 20093892009–5 I.R.B.

the final regulations group material selec-
tion, vendor selection, and control of the
raw materials, work-in-process, and fin-
ished goods as a single activity in thein-
diciaof manufacturing.
Commentators asked whether the con-
trol of the raw materials, work-in-process,
and finished goods refers to the CFC hav-
ing the contractual right to take possession
of the personal property, to have title to the
property, or to have economic risk of loss
with respect to the property. These com-
mentators requested clarification regard-
ing whether tax ownership of raw materi-
als, work-in-process and finished goods is
required to have control of the raw mate-
rials, work-in-process, and finished goods.
In connection with this question, commen-
tators also asked whether a CFC can sat-
isfy the substantial contribution test when
the contract manufacturing arrangement is
buy-sell or “turnkey” (that is, when the
contract manufacturer purchases the raw
materials).
Both the proposed and final regula-
tions provide that only activities of the
CFC’s employees are considered in the
substantial contribution analysis. Thus,
mere contractual rights, legal title, tax
ownership, or assumption of economic
risk are not considered in the substantial
contribution analysis. To provide greater
clarity, the final regulations revise Prop.
Reg. §1.954–3(a)(4)(iv)(a), deleting the
phrase “purchased by a controlled foreign
corporation” in the first sentence of Prop.
Reg. §1.954–3(a)(4)(iv)(a) to eliminate
any inference that a CFC needs to own the
raw materials that are used in the manufac-
turing process. In addition, examples in
the final regulations clarify that buy-sell or
turnkey contract manufacturing arrange-
ments may satisfy the substantial con-
tribution test. See §1.954–3(a)(4)(iv)(d)
Examples 3and9.
c.Management of Manufacturing Profits
and Management of Risk of Loss
Commentators requested clarification
regarding which functions would qualify
as “management of the manufacturing
profits” or “management of the risk of
loss.” Some commentators expressed
concerns regarding the term “manage-
ment of the manufacturing profits.” Other
commentators suggested that it would
add clarity if “management of the risk
of loss” were deleted from Prop. Reg.
§1.954–3(a)(4)(iv)(b)(1) and included
with “management of manufacturing prof-
its” in a single item in theindiciaof manu-
facturing. Some commentators expressed
concern that the term “management of the
risk of loss” implicitly excluded all other
risk management functions. One commen-
tator expressed the view that theindicia
of manufacturing should include reference
to management of enterprise risk, other
than risks pertaining exclusively to sales
and marketing functions. Some com-
mentators suggested that management of
the manufacturing profits might refer to
such activities as the management of risks
related to the raw materials and the utiliza-
tion of plant capacity, but others thought it
might encompass the finance function of
a company.
The IRS and the Treasury Department
agree that further clarification is needed
as to the functions that are intended to be
included within what was labeled “man-
agement of the manufacturing profits” and
“management of the risk of loss” in the
proposed regulations. The IRS and the
Treasury Department intend that the sub-
stantial contribution test recognize contri-
butions made by a CFC’s employees to the
manufacturing process through functions
whichhelptoensurethataplantisrunin
an economically efficient manner, such as
optimization of plant capacity and reduc-
tion of waste (for example, waste of raw
materials). On the other hand, not all cor-
porate managerial decisions are intended
to be considered in the substantial contri-
bution test, because many such decisions
are not directly related to the manufacture
of the personal property with respect to
which the substantial contribution analy-
sis is being performed. For example, the
IRS and the Treasury Department do not
intend that corporate finance decisions be
considered in the substantial contribution
test. Similarly, the IRS and the Treasury
Department do not intend that the general
management of enterprise risk be consid-
ered in the substantial contribution test.
The IRS and the Treasury Department
concluded that the term “management of
the manufacturing costs or capacities”
more accurately reflects the type of func-
tions originally contemplated by “manage-
ment of the manufacturing profits” in the
proposed regulations and is also related
to the types of functions contemplated
by the “management of the risk of loss.”
Accordingly, the activity labeled “man-
agement of the manufacturing profits” in
the proposed regulations is replaced in the
final regulations with an activity entitled
“management of manufacturing costs or
capacities.” Further, the final regulations
include a parenthetical list of functions
(that is, managing the risk of loss, cost re-
duction or efficiency initiatives associated
with the manufacturing process, demand
planning, production scheduling, or hedg-
ing raw material costs) to elaborate on the
meaning of the activity.
d.Control of Logistics
Commentators asked for clarification
regarding the scope of logistical functions
that will contribute towards a substantial
contribution by a CFC. This activity is in-
tended to include, for example, arranging
for delivery of raw materials to a contract
manufacturer, but to exclude, for example,
delivery of finished goods to a customer.
The final regulations provide further clar-
ity on this issue by revising the activity to
read “control of manufacturing related lo-
gistics.”
e.Direction of the Development,
Protection, and Use of Trade Secrets,
Technology, Product Design, and Design
Specifications, and Other Intellectual
Property Used in Manufacturing the
Product
Commentators noted that the “and” in
the description of this activity in the pro-
posed regulations could be read to mean
that directing the “development, protec-
tion, and use” of intellectual property are
all required for this activity to be consid-
ered in the substantial contribution anal-
ysis. Commentators requested that these
activities be stated in the disjunctive. The
IRS and the Treasury Department adopted
this comment, replacing “and” with “or” in
the final regulations. This clarification is
consistent with providing that all functions
performed by a CFC’s employees are con-
sidered (and given appropriate weight) un-
der the substantial contribution test. Thus,
the CFC’s employees’ activities are con-
sidered regardless of whether the CFC’s
employees perform all or only some of the
functions listed in any enumerated item in
theindiciaof manufacturing.
2009–5 I.R.B.390February 2, 2009

The term “protection” is also deleted
from the final regulations. The IRS and
the Treasury Department were concerned
that absent this clarification the final regu-
lations could be read to provide that legal
work performed by a CFC’s in-house legal
staff was considered under the substantial
contribution test, including in cases where,
for example, litigation success could be
heavily correlated to profitability or busi-
ness failure with respect to a product. Fur-
ther, the IRS and the Treasury Department
modified the description of the activity in
the final regulations to clarify that devel-
oping, or directing the use or development
of, trade secrets, technology, or other in-
tellectual property, are considered under
the substantial contribution test, but only
when activities of this nature are under-
taken for the purpose of the manufacture
of the personal property.
Commentators asked whether the intel-
lectual property referred to in Prop. Reg.
§1.954–3(a)(4)(iv)(b)(9) included market-
ing intangibles. Theactivity as described
in both the proposed and final regulations
is with respect to intellectual property used
in the manufacture of the personal prop-
erty. Thus, developing, or directing the use
or development of, marketing intangibles
is not intended to be considered in the sub-
stantial contribution test.
3.Anti-abuse rule and safe harbor
The IRS and the Treasury Department
requested comments on whether the sub-
stantial contribution test should include
an anti-abuse rule and safe harbor. In
particular, comments were requested as to
whether it would be appropriate to add an
anti-abuse rule to prevent a CFC from sat-
isfying the substantial contribution test in
cases in which a significant portion of the
direct or indirect contributions to the man-
ufacture of personal property provided
collectively by the CFC and any related
U.S. persons are provided by one or more
related U.S. persons. Commentators rec-
ommended that in determining whether
a CFC makes a substantial contribution
it should not be relevant whether other
persons (whether U.S. or foreign, related
or unrelated) contribute to the manufac-
turing process. The IRS and the Treasury
Department agree with commentators that
the substantial contribution test should
focus on whether the activities of the CFC
itself are substantial without comparing
those activities to those of other persons.
Thus, the final regulations do not adopt
such a rule. Examples in the final regula-
tions also illustrate that the contributions
of other persons to the manufacture of a
product are not relevant to the analysis of
whether a CFC makes a substantial contri-
bution to the manufacturing process. See
§1.954–3(a)(4)(iv)(d)Examples 6,7,and
9.
The IRS and the Treasury Department
also requested comments as to whether
oneormoresafeharborsshouldbeadded
to the substantial contribution test of the
proposed regulations. Some commenta-
tors suggested that a CFC that contributes
at least twenty percent of the costs of man-
ufacturing personal property should be
deemed to have substantially contributed
to its manufacture. Other commentators
suggested that a safe harbor was only ap-
propriate if it were made clear that such
a safe harbor would not function as a
minimum standard and would be flex-
ible enough to accommodate multiple
industries. Many other commentators rec-
ommended that the IRS and the Treasury
Department not adopt a safe harbor. The
IRS and the Treasury Department con-
cluded that no safe harbor could fairly
apply across the range of industries poten-
tially subject to §1.954–3, and therefore
no safe harbor is provided in the final
regulations.
4.Definition of employee
The IRS and the Treasury Department
requested comments as to whether the re-
quirement in the proposed regulations that
the activities of the CFC be performed
by its employees should take into account
commercial arrangements where individu-
als performing services for the CFC while
not on its payroll are nevertheless con-
trolled by employees of the CFC. Com-
mentators requested that the regulations
expand the definition of the term “em-
ployee” to include various commercial or
economic arrangements where individu-
als who perform services for a CFC un-
der the CFC’s direction and control are
not necessarily the CFC’s employees un-
der local law. In particular, commentators
suggested that the term “employee” could
be defined for purposes of the substantial
contribution test using section 3121(d)(2).
Other commentators asked that the term
“employee” be defined more broadly to
include anyone in an agency relationship
with a CFC.
The IRS and the Treasury Depart-
ment agree that clarification of the term
“employee” will promote more effec-
tive application of these regulations. The
IRS and the Treasury Department also
agree that activities performed by certain
non-payroll workers should be considered
in determining whether the CFC provides
a substantial contribution through “its
employees.” However, the IRS and the
Treasury Department concluded that it
would be inappropriate to broaden the
definition of employee to include anyone
in an agency relationship with a CFC,
because it could create unintended branch
rule issues for taxpayers (for example, as
a result of employees of a contract man-
ufacturer being treated as employees of
the CFC under such a definition). Thus,
the final regulations provide that the term
employeemeans any individual who, un-
der §31.3121(d)–1(c), has the status of an
employee for U.S. Federal tax purposes.
This definition of the term “employee”
may encompass certain seconded work-
ers, part-time workers, workers on the
payroll of a related employment com-
pany whose activities are directed and
controlled by CFC employees, and con-
tractors, so long as those individuals are
deemed to be employees of the CFC under
§31.3121(d)–1(c). Consistent with com-
mentators’ request, this definition of the
term employee may result in an individual
being treated as an employee of two or
more entities simultaneously.
5.Product grouping
Commentators requested that the deter-
mination of whether a CFC provides a sub-
stantial contribution to the manufacture of
the personal property be made on the ba-
sis of a group or line of related products
rather than on a product-by-product basis.
The IRS and the Treasury Department be-
lieve that the substantial contribution test
must be met with respect to each prod-
uct. Whether manufactured goods are sep-
arate products or a single product for this
purpose is determined by reference to the
distinctions or lack thereof made by the
CFC in its business operations and in its
books and records, rather than by reference
February 2, 20093912009–5 I.R.B.

to a third party’s definition of a product
or an industry product classification sys-
tem, such as the Standard Industrial Clas-
sification Code. The IRS and the Trea-
sury Department recognize that some ac-
tivities taken into account under the sub-
stantial contribution test are not performed
with respect to each individual unit of a
particular product manufactured under a
contract manufacturing arrangement. Sec-
tion 1.954–3(a)(4)(iv)(d)Example 11has
been added to the final regulations to ad-
dress these comments.
6.Treatment of partnerships
Commentators requested that the regu-
lations adopt principles to determine when
the employees of a partnership should be
treated as employees of the CFC for pur-
poses of determining whether the CFC’s
relative economic interest in the partner-
ship should be relevant in determining
whether the CFC satisfies the substantial
contribution test. The IRS and the Trea-
sury Department concluded that this issue
was beyond the scope of this regulatory
project. However, the IRS and the Trea-
sury Department continue to study this
issue and welcome comments.
7.Rebuttable presumption
The proposed regulations provide a
rebuttable presumption that the CFC does
not satisfy the substantial contribution test
when the activities of a branch of the CFC
satisfy the physical manufacturing test.
The presumption can only be rebutted if
the taxpayer can prove to the satisfac-
tion of the Commissioner that the CFC
satisfied the substantial contribution test.
Commentators suggested that satisfaction
of the physical manufacturing test and
satisfaction of the substantial contribution
test should be treated equally under the
regulations. Commentators also expressed
the view that the standard required to rebut
the presumption was either too subjective,
imposedanimproperlyhighstandard,or
both. They recommended that if a re-
buttable presumption was retained, the
standard required to rebut the presumption
should be clear and convincing evidence.
In response to the comments received,
the IRS and the Treasury Department re-
considered the ability to examine a CFC’s
claim that it substantially contributes to
the manufacture of the personal property
when the activities of its branch satisfy the
physical manufacturing test. Upon further
study, the IRS and the Treasury Depart-
ment concluded that the substantial contri-
bution test can be administered without the
benefit of a rebuttable presumption that a
CFC does not satisfy the substantial contri-
bution test when the activities of a branch
of the CFC satisfy the physical manufac-
turing test. Thus, these final and temporary
regulations do not contain a rebuttable pre-
sumption. The IRS and the Treasury De-
partment took into account the request for
parity of treatment with respect to satisfac-
tion of the physical manufacturing test and
the substantial contribution test in reaching
this conclusion, as well as with respect to
other aspects of the temporary regulations,
as discussed further in Parts C and D of this
preamble.
8.Documentation
Some commentators requested guid-
ance on how taxpayers should document
their activities for application of the sub-
stantial contribution test. Because the
necessary documentation will vary by in-
dustry and by taxpayer, the IRS and the
Treasury Department believe that creat-
ing general rules of documentation would
prove impracticable and would not allow
for enough flexibility in application of the
substantial contribution test. Accordingly,
the final regulations do not include docu-
mentation rules.
9.Automated manufacturing
Several comments were received con-
cerning Prop. Reg. §1.954–3(a)(4)(iv)(c)
Example 4.InExample 4,aCFCowns
software and network systems that re-
motely and automatically (without human
involvement) order raw materials for use
by the contract manufacturer, take cus-
tomer orders and route them to the contract
manufacturer, and perform quality control.
Although the CFC has a small number of
computer technicians monitoring the soft-
ware and network systems, the software
and network systems were developed by
employees of DP, the CFC’s domestic
parent corporation. Those DP employees
supervise the CFC’s computer techni-
cians, evaluate the results of the automated
manufacturing business, make ongoing
operational decisions related to the per-
formance of the manufacturing process,
redesign and update the products and the
manufacturing process, and develop all of
the upgrades and patches for the software
and network systems owned by the CFC.
The example concludes that the CFC does
not provide a substantial contribution to
the manufacture of Product X.
Commentators expressed concern that
Prop. Reg. §1.954–3(a)(4)(iv)(c)Exam-
ple 4did not recognize the importance
of automated manufacturing in modern
business practices. These commentators
noted that manufacturing processes are
increasingly automated and explained that
in some high technology industries, au-
tomated manufacturing processes are the
only way to manufacture and test the qual-
ity of certain products. In such industries,
commentators noted that human involve-
ment in various parts of the manufacturing
process could be counterproductive. Some
commentators were concerned that Prop.
Reg. §1.954–3(a)(4)(iv)(c)Example 4
penalized such automated manufacturing
processes under the substantial contribu-
tion test.
The IRS and the Treasury Department
agree that a CFC may provide a substantial
contribution to a largely automated man-
ufacturing process through its employees.
Section 1.954–3(a)(4)(iv)(d)Example 5
contains the same facts as Prop. Reg.
§1.954–3(a)(4)(iv)(c)Example 4. Under
those particular facts, substantial opera-
tional responsibilities and decision making
by humans are required for the manufac-
turing process; however, they are not per-
formed by the CFC. To provide additional
guidance, the final regulations include an
additional example, §1.954–3(a)(4)(iv)(d)
Example 6, which illustrates that a CFC
whose employees perform most of the
functions that DP’s employees perform in
§1.954–3(a)(4)(iv)(d)Example 5makes a
substantial contribution to the manufac-
turing process. This result applies even
though DP’s employees also contribute
to the manufacturing process. Section
1.954–3(a)(4)(iv)(d)Example 7further
illustrates that the CFC can make a sub-
stantial contribution through the activities
of its employees regardless of whether
the software and network systems were
purchasedbytheCFC.Theseexamples
illustrate that the evaluation of whether
a CFC makes a substantial contribution
through its employees is determined based
on whether industry-sufficient substantial
2009–5 I.R.B.392February 2, 2009

contribution activities are conducted by
employees of the CFC.
B.The “Its” Argument
The proposed regulations clarify that
forpurposesofdeterminingFBCSIaCFC
qualifies for the manufacturing excep-
tion only if the CFC, acting through its
employees, manufactured, produced, or
constructed the relevant personal property
within the meaning of §1.954–3(a)(4)(i).
In response to the proposed regulations,
some commentators maintained that a
CFC need not satisfy the physical man-
ufacturing test or the substantial contri-
bution test to exclude a sale from FBCSI
as long as the personal property sold is
not the same as the property originally
purchasedbytheCFC.
The IRS and the Treasury Department
believe, as described in the preamble to
the proposed regulations, that this posi-
tion, commonly referred to as the “its” ar-
gument, is contrary to existing law, and
represents an incorrect reading of section
954(d)(1). The finalregulations accord-
ingly maintain the rules provided in the
proposed regulations regarding when per-
sonalpropertysoldbyaCFCwillbecon-
sidered to be other than the property pur-
chased by the CFC.
C.Same Country Manufacture Exception
Commentators requested that the reg-
ulations incorporate the substantial con-
tribution test in the same country man-
ufacture exception. The IRS and the
Treasury Department generally agree with
commentators that if the substantial con-
tribution test is sufficient to constitute
the manufacture of the personal property
where a CFC substantially contributes to
the manufacture, production, or construc-
tion of that property, then it should be
equally sufficient if those activities are
performedbyarelatedperson(asdefined
in section 954(d)(3)) in the CFC’s coun-
try of organization. However, the IRS
and the Treasury Department concluded
that the same country manufacture ex-
ception would be difficult to administer
and enforce in the case of a substantial
contribution performed by an unrelated
third party. Commentators suggested that
these concerns could be ameliorated if
taxpayers were required to maintain doc-
umentation with respect to a third party’s
substantial contribution. The IRS and
the Treasury Department do not believe
a documentation requirement adequately
addresses these concerns because the IRS
may be unable to audit the third party
to verify if those substantial contribution
activities in fact took place. Therefore,
the final regulations provide that the same
country manufacture exception is avail-
able to taxpayers in cases when a related
person provides a substantial contribution
to the manufacture of the personal prop-
erty in the CFC’s country of organization.
The final regulations also retain the rule
provided in the proposed regulations mod-
ifying the application of the principles of
§1.954–3(a)(4)(ii) and(a)(4)(iii) to reflect
that the personal property manufactured,
produced, or constructed in the country
of organization of theselling corporation
under the principles of §1.954–3(a)(4)(ii)
and (a)(4)(iii) will qualify for the same
country exception regardless of whose
employees engage in qualifying manufac-
turing activities in that country.
D.Branch Rule
In addition to the amendments to
§1.954–3(a), the proposed regulations
also proposed amendments to the rules of
§1.954–3(b) dealing with the application
of the FBCSI rules to CFCs with branches
or similar establishments (the branch rule),
particularly the rules dealing with man-
ufacturing branches. For the remainder
of this preamble, the word “branch” will
be used to refer to a “branch or similar
establishment.”
1.Branch definition
Some commentators requested that the
regulations define the term “branch” for
purposes of the branch rule. These com-
mentators suggested various definitions
for the IRS and the Treasury Department
to consider. Commentators suggested,
for instance, that a branch be defined as
a permanent establishment, as a business
activity in a jurisdiction outside a CFC’s
country of organization that has separate
books and records, or as a trade or business
outside a CFC’s country of organization.
Commentators pointed to precedents in the
section 367 and 987 regulations. Alterna-
tively, some commentators requested that
the regulations make clear that ade min-
imisamount of activity outside of a CFC’s
country of organization (for example,
traveling employees) does not constitute
a branch. Other commentators warned
that requiring too high a level of activity
outside of a CFC’s country of organiza-
tion before a CFC was treated as having a
“branch” would make it possible for a CFC
organized in a lower-tax jurisdiction to
contribute substantially to manufacturing
activities in a higher-tax jurisdiction with-
out causing the CFC to operate through
a branch. Still other commentators sug-
gested that courts have concluded that the
IRS and the Treasury Department lack
the regulatory authority to determine what
constitutes a branch, and they may only
address the consequences flowing from
the existence of a branch.
The IRS and the Treasury Depart-
ment determined that defining a branch
was beyond the scope of this regulatory
project. However, the temporary regula-
tions retain an example similar to Prop.
Reg. §1.954–3(b)(1)(ii)(c)(3)(f)Exam-
ple 3, which illustrates that employees
of a CFC that travel to a contract man-
ufacturer’s location outside the CFC’s
country of organization do not necessarily
give rise to a branch in that location. See
§1.954–3T(b)(1)(ii)(c)(3)(v)Example 6.
See also Part D.3.b of this preamble.
2.Determination of hypothetical effective
tax rate
Commentators requested that the reg-
ulations clarify that the tax rate dispar-
ity tests contained in §§1.954–3(b)(1)(i)(b)
and (b)(1)(ii)(b) take into account incen-
tive tax rates and other similar foreign tax
relief available to a CFC in calculating the
hypothetical effective tax rate of tax.
The IRS and the Treasury Department
recognize that the tax rate disparity tests
should take into account the actual tax rate
paid with respect to the sales income by
the selling branch or remainder and the hy-
pothetical effective tax rate that would be
paid by the manufacturing branch (or re-
mainder) on that sales income under the
laws of the country in which the manufac-
turing branch is located (or, in the case of
a remainder, the country of organization of
the CFC) if it were derived from sources
within that country. Thus, the IRS and
the Treasury Department agree that uni-
formly available tax incentives are to be
considered in determining the hypotheti-
February 2, 20093932009–5 I.R.B.

cal effective tax rate to be used in apply-
ing the tax rate disparity tests. In contrast,
if a sales affiliate in the country of manu-
facturing can theoretically receive certain
tax relief by taking certain actions, for ex-
ample, by applying for special treatment
pursuant to a ruling process, but the tax-
payer has not affirmatively obtained such
tax relief for the manufacturing branch (or
remainder), then the hypothetical effective
tax rate that would be paid by the manu-
facturing branch (or remainder) were it to
derive the sales income should be the ef-
fective tax rate that would be applicable
in that jurisdiction without such tax relief.
The IRS and the Treasury Department be-
lieve that no change to the text of the ex-
isting regulations is necessary to address
these points. However, §1.954–3T(b)(4)
Example (8)is included in the temporary
regulations to illustrate that uniformly ap-
plicable incentive tax rates are taken into
account in determining the hypothetical ef-
fective tax rate.
The IRS and the Treasury Depart-
ment concluded that other questions and
requests in this area,including further
clarification of the methodology for cal-
culation of hypothetical tax rates, and
for changes to the assumptions used in
applying the tax rate disparity tests and
determining the hypothetical effective tax
rate, are beyond the scope of this regula-
tory project. However, the IRS and the
Treasury Department continue to study
these questions and welcome comments.
3.Multiple manufacturing branch rules
a.Determination of the Location of
Manufacturing
Under Prop. Reg. §1.954–3(b)
(1)(ii)(c)(3), the relevant tax rate disparity
test is applied by giving satisfaction of the
physical manufacturing test precedence
over satisfaction of the substantial
contribution test when multiple branches,
or one or more branches and the remainder
of the CFC, perform manufacturing
activities with respect to the same item
of personal property. If more than one
branch (or one or more branches and the
remainder of the CFC) each independently
satisfies the physical manufacturing
test, then the branch or the remainder
of the CFC located or organized in the
jurisdiction that would impose the lowest
effective rate of tax is treated as the
location of manufacturing, producing, or
constructing of the personal property for
purposes of applying the tax rate disparity
test (lowest-of-all-rates rule). If only
one branch (or only the remainder of a
CFC) independently satisfies the physical
manufacturing test,then that branch (or
remainder) is treated as the location of
manufacturing, producing, or constructing
of the personal property (location of
manufacturing) for purposes of the tax rate
disparity test.
If none of the branches or the remain-
der of the CFC independently satisfies the
physical manufacturing test, but the CFC
as a whole satisfies the substantial contri-
bution test, then the location of manufac-
turing under the proposed regulations is
the location of the branch or the remain-
der of the CFC that provides the predomi-
nant amount of the CFC’s substantial con-
tribution to the manufacture of the per-
sonal property (predominant place rule). If
a predominant amount of the CFC’s con-
tribution to the manufacture of the per-
sonal property is not provided by any one
location, then the location of manufactur-
ing for purposes of applying the manufac-
turing branch tax rate disparity test under
the proposed regulations is that place (ei-
ther the remainder of the CFC or one of
its branches) where manufacturing activity
with respect to that property is performed
and which would impose the highest effec-
tive rate of tax (highest-of-all-rates rule)
when applying either §1.954–3(b)(1)(i)(b)
or (b)(1)(ii)(b).
The IRS and the Treasury Depart-
ment received multiple comments com-
paring and contrasting the highest- and
lowest-of-all-rates rules. For exam-
ple, commentators asked why the low-
est-of-all-rates rule should apply when
more than one branch (or one or more
branches and the remainder of the CFC) in-
dependently satisfy the physical manufac-
turing test, whereas the highest-of-all-rates
rule should apply when none of the
branches or the remainder of the CFC
independently satisfies the physical man-
ufacturing test but the CFC as a whole
satisfies the substantial contribution test.
Commentators suggested that satisfaction
of the physical manufacturing test and
the substantial contribution test should be
treated equally under the regulations, and
therefore suggested having the same rule
in both circumstances. These commenta-
tors proposed a lowest-of-all-rates rule or
the use of a weighted average of the tax
rate of each branch or remainder of the
CFC in both instances.
The IRS and the Treasury Department
generally agreed with these comments.
The IRS and the Treasury Department
adopted taxpayers’ comment that the
same rule should apply consistently when
a branch (or remainder) independently
satisfies §1.954–3(a)(4)(i), regardless of
whether it satisfies the physical manu-
facturing test or the substantial contri-
bution test. Therefore the rules set forth
in the proposed regulations are modified
in the temporary regulations to provide
that the lowest-of-all-rates rule will ap-
ply whenever a branch (or remainder)
independently satisfies §1.954–3(a)(4)(ii),
(iii), or (iv). However, providing parity
of treatment for satisfaction of the physi-
cal manufacturing test and the substantial
contribution test in respect of the low-
est-of-all-rates ruleis not sufficient to
determine the location of manufacturing
in cases where a CFC satisfies the sub-
stantial contribution test, yet no branch
(or remainder) independently satisfies
§1.954–3(a)(4)(iv).
Commentators questioned how to
treat branches making contributions to
the manufacture of the personal prop-
erty through the activities of employees
when no branch independently satisfies
§1.954–3(a)(4)(iv). Some commentators
expressed concern that it would be diffi-
cult to compare the relative contributions
of various locations to determine which
branch or remainder of the CFC made a
predominant contribution under the pre-
dominant place rule. Other commentators
requested greater guidance regarding the
meaning of predominant contribution.
Many commentators suggested that the
highest-of-all-rates rule in the proposed
regulations could leadto arbitrary results
when no predominant contributor could
be identified.
The IRS and the Treasury Department
generally agreed with these comments.
Consequently, the temporary regulations
revise the rules for determining the lo-
cation of manufacture of the personal
property when more than one branch (or
one or more branches and the remain-
der) contributes to the manufacture of
the personal property but no branch (or
2009–5 I.R.B.394February 2, 2009

remainder) independently satisfies the
physical manufacturing test or the sub-
stantial contributiontest. The revised rules
are based on the principle that the branch
rule should apply in situations where pur-
chase or sale activities with respect to
the personal property are separated from
manufacturing activities conducted by the
CFC such that a demonstrably greater
amount of manufacturing activity with
respect to that property occurs in jurisdic-
tions with tax rate disparity relative to the
sales or purchase branch (or, in the case
of a purchasing or selling remainder, the
demonstrably greater amount of manufac-
turing activity with respect to the personal
property occurs in jurisdictions with tax
rate disparity relative to the purchasing or
selling remainder).
Under the temporary regulations, if a
demonstrably greater amount of manufac-
turing activity with respect to the personal
property occurs in jurisdictions without tax
rate disparity relative to the sales or pur-
chase branch, the location of the sales or
purchase branch will be deemed to be the
location of manufacture of the personal
property. In that case, the purchase or sales
activities with respect to the property pur-
chased or sold by or through the sales or
purchase branch of the CFC will not, for
purposes of determining FBCSI in con-
nection with the sale of that property, be
deemed to have substantially the same tax
effect as if a branch were a wholly owned
subsidiary corporation of the CFC. Other-
wise, the location of manufacture of the
personal property will be deemed to be the
location of a manufacturing branch (or re-
mainder) that has tax rate disparity relative
to the sales or purchase branch. In that
case, the purchase or sales activities with
respect to the property purchased or sold
by or through the sales or purchase branch
of the CFC will be deemed to have sub-
stantially the same tax effect as if a branch
were a wholly owned subsidiary corpora-
tion of the CFC, and that branch will be
treated as a separate corporation for pur-
poses of applying the regulations.
The temporary regulations apply anal-
ogous rules in the case of purchase or
sales activity being conducted through the
jurisdiction under the laws of which the
CFC is organized. In such cases, how-
ever, the analysis focuses on whether the
demonstrably greater amount of manufac-
turing activity with respect to the personal
property occurs in jurisdictions that do or
do not have tax rate disparity relative to
the jurisdiction under the laws of which
the CFC is organized. The temporary
regulations incorporate examples under
§1.954–3T(b)(1)(ii)(c)(3)(v) to illustrate
the application of these rules.
b.Location of Activities
The proposed regulations provide that
for purposes of the multiple manufac-
turing branch rules the location of any
activity with respect to the manufacture of
the personal property is where the CFC’s
employees engage in such activity. Com-
mentators suggested that in some cases
the proposed regulations left it unclear,
for purposes of determining the location
of manufacturing, which jurisdiction was
accorded credit for activities performed by
an employee who is traveling temporarily
to a foreign jurisdiction. Some commenta-
tors suggested that the location of activity
rule should be removed or that the regula-
tions should clarify that, for instance, the
activities of employees of a CFC based in
the jurisdiction under the laws of which
the CFC is organized, even while traveling
outside the CFC’s country of organiza-
tion, would generally be credited toward
establishing that the jurisdiction under the
laws of which the CFC is organized pro-
vided a predominant amount of a CFC’s
substantial contribution. The IRS and the
Treasury Department believe the text of
§1.954–3T(b)(1)(ii)(c)(3)(iv) makes clear
that when an employee travels to perform
activities, those activities are credited to
the location in which the activities are
conducted if there is a branch or remainder
of the CFC in that jurisdiction. Section
1.954–3T(b)(1)(ii)(c)(3)(v) provides ex-
amples to further clarify this result.
Other commentators asked which loca-
tion was accorded credit, if any, for ac-
tivities performed by traveling employees
oftheCFCwhilelocatedinacountryin
which there is no branch or remainder of
the CFC. The temporary regulations pro-
vide that the location of any manufactur-
ing activity is where the employees of the
CFC perform that activity. Thus, the ac-
tivities of employees while traveling to a
country where the CFC does not maintain
a branch or remainder are not credited to
the branch or remainder where the trav-
eling employees are regularly employed
for purposes of determining the location
of manufacture of the personal property
under the branch rule. Such activities,
however, can be taken into account for
purposes of satisfying the manufacturing
exception and the substantial contribution
test. See §1.954–3T(b)(1)(ii)(c)(3)(v)Ex-
ample 6.
c.Clarifying Application of the Rule for
Determining the Remainder of the CFC
When Activities are Performed in Multiple
Locations
Prop Reg. §1.954–3(b)(2)(ii)(a)pro-
vides that when treating the location of
sales or purchase income as a separate
corporation for purposes of determining
whether FBCSI is realized, that separate
corporation will exclude any branch or the
remainder of the CFC that would be treated
as a separate corporation, if the hypothet-
ical tax rate imposed by the jurisdiction
of each such branch or the remainder of
the CFC were separately tested against
the effective rate of tax imposed on the
sales or purchase income under the rele-
vant tax rate disparity test. Commentators
suggested that the application of this rule
for determining the remainder of the CFC
when activities are preformed in multi-
ple locations is unclear. To clarify, the
language from the proposed regulations
isrevisedinthetemporaryregulationsto
describe what is included in the remain-
der, rather than what is excluded from the
remainder, for purposes of determining
whether there is FBCSI, after it is deter-
mined that a manufacturing branch should
receive treatment as a separate corporation
for purposes of applying the regulations.
See §1.954–3T(b)(2)(ii)(a).
As with the rule provided in the pro-
posed regulations, this rule is intended to
provide that the activities of all branch lo-
cations (or, in the case of a remainder,
the activities in the jurisdiction under the
laws of which the CFC is organized) that
do not have tax rate disparity relative to
the sales or purchase branch location (or,
in the case of a purchasing or selling re-
mainder, the jurisdiction under the laws
of which the CFC is organized) may be
taken into account together with the activ-
ities of the sales or purchase branch (or,
in the case of a purchasing or selling re-
mainder, activities of the remainder of the
CFC in the jurisdiction under the laws of
February 2, 20093952009–5 I.R.B.

which the CFC is organized) for purposes
of applying the separate corporation anal-
ysis required under the regulations and de-
termining whether the sales income of the
sales or purchase branch (or remainder) is
FBCSI. Such determination will depend on
whether the substantial contribution test is
satisfied by the combined activities of the
sales or purchase branch (or remainder)
and the other locations aggregated with the
sales or purchase branch (or remainder).
4.Coordination of sales and
manufacturing branch rules
Commentators requested guidance on
how the sales or purchase branch rules in-
teract with the manufacturing branch rules.
The current manufacturing branch rules
contemplate the existence of a sales or pur-
chase branch and a manufacturing branch.
The rules provide that in such an instance
the sales or purchase branch is treated as
the remainder of the CFC for purposes of
applying the tax rate disparity test. How-
ever, the sales or purchase branch rules
of §1.954–3(b)(1)(i) of the existing regu-
lations do not indicate that those rules do
not apply in cases where the manufactur-
ing branch rules are applied. Commenta-
tors were concerned that the manufactur-
ing branch rules would be applied in addi-
tion to, rather than in lieu of, the sales or
purchase branch rules.
The IRS and the Treasury Depart-
ment agree that if one or more sales
or purchase branches are used in ad-
dition to a manufacturing branch and
§1.954–3T(b)(1)(ii)(c)(1) (use of one
or more sales or purchases branches in
addition to a manufacturing branch) is
applied with respect to income from the
sale of an item of personal property, then
the sales or purchasing branch rules do
not also apply to determine whether that
income is FBCSI. Therefore, the tempo-
rary regulations clarify this point. See
§1.954–3(b)(1)(i)(c).
5.Unrelated to unrelated transactions
Commentators suggested that there was
uncertainty as to whether a substantial
contribution to the manufacture, produc-
tion, or construction of personal property
by a CFC could cause the CFC to earn
FBCSI in cases where, in the absence
of the substantial contribution test, some
taxpayers had taken the position that they
were outside the scope of the FBCSI rules.
Some commentators expressed concern
that transactions that are not currently
subject to the existing regulations may be-
come subject to the regulations as a result
of the interaction of the substantial contri-
bution test and the manufacturing branch
rule. Other commentators suggested more
generally that it was unclear if the sub-
stantial contribution test might create a
branch through which a CFC carries on
activities in a contract manufacturer’s ju-
risdiction. Commentators suggested that
taxpayers should be exempted from the
branch consequences of the regulations by
providing that the manufacturing branch
rule only apply if the CFC was relying on
the manufacturing exception for purposes
of section 954(d)(1), or alternatively that
the substantial contribution test should be
elective. In this context, commentators
noted that placing a CFC’s substantial
contribution activities, which are per-
formed outside the country where the sales
activities are performed, in a separately
incorporated entity could prevent the CFC
from having a branch that is subject to the
manufacturing branch rule as a result of
such activities.
The IRS and the Treasury Department
agree that taxpayers may be subject to the
FBCSI rules as a result of CFC employ-
ees performingindiciaof manufacturing
activities through a branch outside the
country of organization of a CFC. The IRS
and the Treasury Department believe this
result is clear in the proposed regulations,
and therefore no modifications are made
to the text of the temporary regulations
to clarify further this result. The IRS and
the Treasury Department note that many
commentators criticized the proposed reg-
ulations for drawing inappropriate distinc-
tions between satisfaction of the physical
manufacturing test and satisfaction of the
substantial contribution test, and argued
that updating the manufacturing excep-
tion in the context of modern business
enterprise models required treating with
equal importance and weight physical
manufacturing and activities satisfying
the substantial contribution test. The IRS
and the Treasury Department adopted this
comment in both the final regulations and
the temporary regulations and, accord-
ingly, did not incorporate in the temporary
regulations an exception regarding activ-
ities performed through a branch located
outside the country of organization of a
CFC for cases in which, in the absence
of the substantial contribution test, some
taxpayers had taken the position that they
were outside the scope of the FBCSI rules.
One commentator noted that while
there are strong policy reasons for the sub-
stantial contribution test and the branch
rules to apply in the case of “unrelated to
unrelated” transactions, the IRS and the
Treasury Department should consider a
special delayed effective date to allow tax-
payers in this position time to restructure
their operations in light of the regulations.
The commentator argued that such tax-
payers had been outside the scope of the
FBCSI rules prior to these regulations
and should be provided reasonable time
to restructure. For a discussion of the
effective date of the final and temporary
regulations, see Part F of this preamble.
6.Branch rule examples
Commentatorsexpressedcon-
cern that the facts of Prop. Reg.
§1.954–3(b)(1)(ii)(c)(3)(f)Example 4
ascribed most substantial contribution ac-
tivities to the remainder, but determined
that the remainder had not met the sub-
stantial contribution test. In the example,
the remainder performs seven activities
listed in theindiciaof manufacturing of
the proposed regulations, whereas Branch
A performs only one activity (design) and
Branch B performs only two activities.
The example was intended to show that in
a CFC’s particular industry, the weight ac-
corded to the activities performed by each
branch can be comparable, even though
a different number of activities occur in
different locations, because the economic
significance of the activities conducted in
each location is comparable. However,
the IRS and the Treasury Department rec-
ognize that the example may have caused
confusion for taxpayers. Therefore, the al-
location of activities inExample 4of Prop.
Reg. §1.954–3(b)(1)(ii)(c)(3)(f) has been
revised in §1.954–3T(b)(1)(ii)(c)(3)(v)
Example 3. Moreover,Examples 4,5,and
6of Prop. Reg. §1.954–3(b)(1)(ii)(c)(3)(f)
have been restructured in the temporary
regulations to be consistent with the revi-
sions to the branch rules.
Commentators also noted thatEx-
ample 4andExample 5of Prop. Reg.
§1.954–3(b)(1)(ii)(c)(3
)(f) suggest that
2009–5 I.R.B.396February 2, 2009

income other than sales or purchasing
income may be FBCSI. These examples
are amended in the temporary regulations
to be consistent with section 954(d)(2),
which provides that income attributable
to the carrying on of purchase or sales
activities by a branch may be FBCSI.
Commentators requested that the IRS
and the Treasury Department add an ex-
ample to the regulations to illustrate how
the substantial contribution test and the
branch rules operate in cases involving
multiple manufacturing branches and mul-
tiple sales branches. The temporary reg-
ulations include such an example. See
§1.954–3T(b)(1)(ii)(c)(3)(v)Example 5.
The temporary regulations also include
an example illustrating the operation of
the location of manufacture rules under
§1.954–3T(b)(1)(ii)(c)(3) and the appli-
cation of the substantial contribution test
when a tested manufacturing location
has been determined to have tax rate dis-
parity with a tested sales location. See
§1.954–3T(b)(4)Example (9).Example
(9)illustrates that a tested sales location
can satisfy the substantial contribution
test for purposes of determining FBCSI
once it has been determined that a tested
manufacturing location should be treated
as a separate corporation for purposes of
determining FBCSI. Although a branch
that has tax rate disparity with the tested
sales location is the tested manufactur-
ing location,Example (9)concludes that
the CFC does not have FBCSI from the
sale of the personal property because,
after applying the aggregation rules of
§1.954–3T(b)(2)(ii)(a), the tested sales
location satisfies §1.954–3(a)(4)(iv).
E.Conforming Amendments
Sections 1.954–3(a)(1)(i) and (c) of the
existing regulations contain cross-refer-
ences to foreign base company shipping
income under §1.954–6. Section 954
was amended by Public Law 108–357 in
2004, and foreign base company shipping
income was removed as a separate cat-
egory of foreign base company income.
The final regulations are amended by
deleting both references to foreign base
company shipping income to reflect the
2004 amendment to section 954.
Section 1.954–3(a)(1)(i) of the existing
regulations defines “related person” and
“unrelated person” by an obsolete cross
reference to §1.954–1(e). The final regu-
lations are amended to define “related per-
son” and “unrelated person” with refer-
ence to §1.954–1(f).
F.Effective Date
Several commentators requested that
the new regulations provide for a delayed
effective date to allow taxpayers to imple-
ment supply chain and structural changes
that may be required to satisfy the sub-
stantial contribution test and the branch
rules. The IRS and the Treasury Depart-
ment agree that a delayed effective date is
appropriate for taxpayers whose structures
require modification to accommodate the
new regulations. Accordingly, these fi-
nal and temporary regulations will apply
to taxable years of CFCs beginning after
June 30, 2009, and for taxable years of
United States shareholders in which or
with which such taxable years of the CFCs
end. Thus, the final and temporary reg-
ulations will become applicable January
1, 2010, for CFCs whose taxable year is
the calendar year. The temporary regula-
tions will expire on or before December
23, 2009. In addition, a taxpayer may
choose to apply these final and temporary
regulations retroactively with respect to
its open taxable years. The taxpayer may
so choose if and only if the taxpayer and
all members of the taxpayer’s affiliated
group apply both the final and temporary
regulations, in their entirety, to the earliest
taxable year of each controlled foreign
corporation that ends with or within an
open taxable year of the taxpayer and to
all subsequent taxable years. A taxpayer
that chose, prior to December 24, 2008, to
apply Prop. Reg. §1.954–3 (73 FR 10716
as corrected at 73 FR 20201) in its entirety
to all of the taxpayer’s open taxable years
in which or with which a taxable year of a
controlled foreign corporation of the tax-
payer ended, may continue to apply Prop.
Reg. §1.954–3 (73 FR 10716 as corrected
at 73 FR 20201) in its entirety with respect
to all of the taxpayer’s open taxable years
that begin prior to July 1, 2009.
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the notice of proposed rule-
making that preceded these final and tem-
porary regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regula-
tions is Ethan Atticks of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
26 CFR part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.954–3 is amended by:
1. Revising paragraphs (a)(1)(i),
(a)(1)(iii)Examples 1and2, (a)(2),
(a)(4)(i), (a)(4)(ii), (a)(4)(iii), (a)(6)(i),
and (c).
2. Adding paragraphs (a)(4)(iv) and
(d).
3. Removing and reserving paragraphs
(b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c),
(b)(2)(i)(b), (b)(2)(i)(d), (b)(2)(ii)(a),
(b)(2)(ii)(b), (b)(2)(ii)(e) and (b)(4)Exam-
ple (3).
The additions and revisions read as fol-
lows:
§1.954–3 Foreign base company sales
income.
(a) * * *
(1)In general—(i)General rules.For-
eign base company sales income of a con-
trolled foreign corporation shall, except
February 2, 20093972009–5 I.R.B.

as provided in paragraphs (a)(2), (a)(3)
and (a)(4) of this section, consist of gross
income (whether in the form of profits,
commissions, fees or otherwise) derived in
connection with the purchase of personal
property from a related person and its sale
to any person, the sale of personal property
to any person on behalf of a related person,
the purchase of personal property from any
person and its sale to a related person, or
the purchase of personal property from any
person on behalf of a related person. See
section 954(d)(1). For purposes of the
preceding sentence, except as provided in
paragraphs (a)(2) and (a)(4) of this section,
personal property sold by a controlled for-
eign corporation will be considered to be
the same property that was purchased by
the controlled foreign corporation regard-
less of whether the personal property is
sold in the same form in which it was pur-
chased, in a different form than the form
in which it was purchased, or as a compo-
nent part of a manufactured product. This
sectionshallapplytothepurchaseand/
or sale of personal property, whether or
not such property was purchased and / or
sold in the ordinary course of trade or busi-
ness, except that income derived in con-
nection with the sale of tangible personal
property will not be considered to be for-
eign base company sales income if such
property is sold to a person that is not a
related person, as defined in §1.954–1(f),
after substantial use has been made of the
property by the controlled foreign corpo-
ration in its trade or business. This sec-
tion shall not apply to the excess of gains
over losses from sales or exchanges of se-
curities or from futures transactions, to the
extent such excess gains are includible in
foreign personal holding company income
of the controlled foreign corporation under
§1.954–2; nor shall it apply to the sale of
the controlled foreign corporation’s prop-
erty (other than its stock in trade or other
property of a kind which would properly
be included in its inventory if on hand at
the close of the taxable year, or property
held primarily for sale to customers in the
ordinary course of its business) if substan-
tially all the propertyof such corporation is
sold pursuant to the discontinuation of the
trade or business previously carried on by
such corporation. The term “any person”
as used in this paragraph (a)(1)(i) includes
a related person as defined in §1.954–1(f).
*****
(iii) * * *
Example 1. Controlled foreign corporation A, in-
corporated under the laws of foreign country X, is
a wholly owned subsidiary of domestic corporation
M. Corporation A purchases from M Corporation, a
related person, articles manufactured in the United
States and sells the articles to P, an unrelated person,
fordeliveryanduseinforeign country Y. Gross in-
come of A Corporation derived from the purchase and
sale of the personal property is foreign base company
sales income.
Example 2. Corporation A inExample 1also pur-
chases from P, an unrelated person, articles manufac-
tured in country Y and sells the articles to foreign cor-
poration B, a related person, for use in foreign country
Z. Gross income of A Corporation derived from the
purchase and sale of the personal property is foreign
base company sales income.
*****
(2)Property manufactured, produced,
constructed, grown, or extracted within
the country in which the controlled foreign
corporation is created or organized.For-
eign base company sales income does not
include income derived in connection with
the purchase and sale of personal prop-
erty (or purchase or sale of personal prop-
erty on behalf of a related person) in a
transaction described in paragraph (a)(1)
of this section if the property is manufac-
tured, produced, constructed, grown, or
extracted in the country under the laws
of which the controlled foreign corpora-
tion which purchases and sells the prop-
erty (or acts on behalf of a related per-
son) is created or organized. See section
954(d)(1)(A). The principles set forth in
paragraphs (a)(4)(ii) and (a)(4)(iii) of this
section apply under this paragraph (a)(2)
in determining what constitutes the man-
ufacture, production, or construction of
personal property, excluding the require-
ment set forth in paragraph (a)(4)(i) of this
section that the provisions of paragraphs
(a)(4)(ii) and (a)(4)(iii) of this section may
only be satisfied through the activities of
employees of the corporation manufactur-
ing, producing, or constructing the per-
sonal property. The principles of para-
graph (a)(4)(iv) of this section apply under
this paragraph (a)(2) in determining what
constitutes the manufacture, production, or
construction of personal property but only
when the personal property is manufac-
tured, produced, or constructed by a per-
son related to the controlled foreign corpo-
ration within the meaning of §1.954–1(f).
The application of this paragraph (a)(2)
maybeillustratedbythefollowingexam-
ples:
*****
(4)Property manufactured, produced,
or constructed by the controlled foreign
corporation—(i)In general. Foreign base
company sales income does not include
income of a controlled foreign corporation
derived in connection with the sale of per-
sonal property manufactured, produced,
or constructed by such corporation. A
controlled foreign corporation will have
manufactured, produced, or constructed
personal property which the corporation
sells only if such corporation satisfies
the provisions of paragraph (a)(4)(ii),
(a)(4)(iii), or (a)(4)(iv) of this section
through the activities of its employees
(as defined in §31.3121(d)–1(c) of this
chapter) with respect to such property. A
controlled foreign corporation will not be
treated as having manufactured, produced,
or constructed personal property which
the corporation sells merely because the
property is sold in a different form than the
form in which it was purchased. For rules
of apportionment in determining foreign
base company sales income derived from
thesaleofpersonalproperty purchased
and used as a component part of property
which is not manufactured, produced, or
constructed, see paragraph (a)(5) of this
section.
(ii)Substantial transformation of prop-
erty. If personal property purchased by a
foreign corporation is substantially trans-
formed by such foreign corporation prior
to sale, the property sold by the selling
corporation is manufactured, produced, or
constructed by such selling corporation.
The application of this paragraph (a)(4)(ii)
maybeillustratedbythefollowingexam-
ples:
*****
(iii)Manufacture of a product when
purchased components constitute part of
thepropertysold. If purchased property
is used as a component part of personal
property which is sold, the sale of the
property will be treated as the sale of a
manufactured product, rather than the sale
of component parts, if the assembly or
conversion of the component parts into
the final product by the selling corporation
involves activities that are substantial in
nature and generally considered to con-
stitute the manufacture, production, or
2009–5 I.R.B.398February 2, 2009

construction of property. Without limiting
this substantive test, which is dependent
on the facts and circumstances of each
case, the operations of the selling corpo-
ration in connection with the use of the
purchased property as a component part of
the personal property which is sold will be
considered to constitute the manufacture
of a product if in connection with such
property conversioncosts (direct labor
and factory burden) of such corporation
account for 20 percent or more of the total
cost of goods sold. In no event, however,
will packaging, repackaging, labeling,
or minor assembly operations constitute
the manufacture, production, or construc-
tion of property for purposes of section
954(d)(1). The application of this para-
graph (a)(4)(iii) maybe illustrated by the
following examples:
*****
(iv)Substantial contribution to man-
ufacturing of personal property—(a)In
general.Ifanitemofpersonalproperty
would be considered manufactured, pro-
duced, or constructed (under the principles
of paragraph (a)(4)(ii) or (a)(4)(iii) of this
section) prior to sale by the controlled for-
eign corporation had all of the manufac-
turing, producing, and constructing activ-
ities undertaken with respect to that prop-
erty prior to sale been undertaken by the
controlled foreign corporation through the
activities of its employees, then this para-
graph (a)(4)(iv) applies. If this paragraph
(a)(4)(iv) applies and if the facts and cir-
cumstances evince thatthe controlled for-
eign corporation makes a substantial con-
tribution through the activities of its em-
ployees to the manufacture, production,
or construction of the personal property
sold, then the personal property sold by
the controlled foreign corporation is manu-
factured, produced, or constructed by such
controlled foreign corporation.
(b)Activities. The determination of
whether a controlled foreign corporation
makes a substantial contribution through
the activities of its employees to the manu-
facture, production, or construction of the
personal property sold involves, but will
not necessarily be limited to, consideration
of the following activities:
(1) Oversight and direction of the activ-
ities or process pursuant to which the prop-
erty is manufactured, produced, or con-
structed (under the principles of paragraph
(a)(4)(ii) or (a)(4)(iii) of this section).
(2) Activities that are considered in,
but that are insufficient to satisfy, the
tests provided in paragraphs (a)(4)(ii) and
(a)(4)(iii) of this section.
(3) Material selection,vendor selection,
or control of the raw materials, work-in-
process or finished goods.
(4) Management of manufacturing
costs or capacities (for example, man-
aging the risk of loss, cost reduction or
efficiency initiatives associated with the
manufacturing process, demand planning,
production scheduling, or hedging raw
material costs).
(5) Control of manufacturing related lo-
gistics.
(6) Quality control (for example, sam-
ple testing or establishment of quality con-
trol standards).
(7) Developing, or directing the use or
development of, product design and de-
sign specifications, as well as trade secrets,
technology, or other intellectual property
for the purpose of manufacturing, produc-
ing, or constructing the personal property.
(c)Application of substantial contribu-
tion test. When considering whether a con-
trolled foreign corporation makes a sub-
stantial contribution to the manufacture,
production, or construction of the personal
property, the performance of any activity
in paragraph (a)(4)(iv)(b)ofthissection
will be taken into account. The perfor-
mance or lack of performance of any par-
ticular activity in paragraph (a)(4)(iv)(b)
of this section, or of a particular number
of activities in (a)(4)(iv)(b) of this sec-
tion, is not determinative. The weight ac-
corded to the performance of any quantum
of any activity (whether or not specified
in paragraph (a)(4)(iv)(b)ofthissection)
will vary with the facts and circumstances
of the particular business. See paragraph
(a)(4)(iv)(d)Examples 8, 10and11of this
section. In determining whether the activ-
ities of the controlled foreign corporation
constitute a substantial contribution, there
is no minimum performance threshold be-
fore an activity can be considered. The
fact that other persons make a substantial
contribution to the manufacture, produc-
tion, or construction of the personal prop-
erty prior to sale does not preclude the
controlled foreign corporation from mak-
ing a substantial contribution to the manu-
facture, construction, or production of that
property through the activities of its em-
ployees. See paragraph (a)(4)(iv)(d)Ex-
ample 9
of this section.
(d)Examples. The rules of this para-
graph (a)(4)(iv) are illustrated by the fol-
lowing examples:
Example 1.No substantial contribution to manu-
facturing.(i)Facts. FS, a controlled foreign corpora-
tion, purchases raw materials from a related person.
The raw materials are manufactured (under the prin-
ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-
tion) into Product X by CM, an unrelated corporation,
pursuant to a contract manufacturing arrangement.
CM physically performs the substantial transforma-
tion, assembly, or conversion outside of FS’s country
of organization. Product X is sold by FS for use out-
side of FS’s country of organization. Under the terms
of the contract, FS retains the right to control the raw
materials, work-in-process, and finished goods, and
the right to oversee and direct the activities or process
pursuant to which Product X is manufactured by CM.
FS owns the intellectual property used in the manu-
facturing process. However, FS does not exercise,
through its employees, its powers to control the raw
materials, work-in-process, or finished goods, and FS
does not exercise its powers of oversight and direc-
tion. Likewise, FS does not, through its employees,
develop or direct the use or development of the in-
tellectual property for the purpose of manufacturing
Product X.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. FS does not satisfy
the test under this paragraph (a)(4)(iv) because it does
not make a substantial contribution through the activ-
ities of its employees to the manufacture of Product
X. Mere contractual rights to control materials, con-
tractual rights to oversee and direct the manufacturing
activities or process pursuant to which the property is
manufactured, and ownership of intellectual property
are not sufficient to satisfy this paragraph (a)(4)(iv).
Therefore, under the facts and circumstances of the
business, FS is not considered to have manufactured
Product X under paragraph (a)(4)(i) of this section.
Example 2.Substantial contribution to manufac-
turing.(i)Facts. Assume the same facts as inExam-
ple 1, except for the following. FS, through its em-
ployees, engages in product design and quality con-
trol and controls manufacturing related logistics. Em-
ployees of FS exercise the right to oversee and direct
the activities of CM in the manufacture of Product X.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS satisfies the test un-
der this paragraph (a)(4)(iv) because it makes a sub-
stantial contribution through the activities of its em-
ployees to the manufacture of Product X. Therefore,
FS is considered to have manufactured Product X un-
der paragraph (a)(4)(i) of this section. The analysis
February 2, 20093992009–5 I.R.B.

and conclusion would be the same if CM were related
to FS because the relationship between CM and FS is
irrelevant for purposes of applying paragraph (a)(4)
of this section.
Example 3.Raw materials procured by contract
manufacturer.(i)Facts. FS, a controlled foreign cor-
poration, enters into a contract with CM to manufac-
ture (under the principles of paragraph (a)(4)(ii) or
(a)(4)(iii) of this section) Product X. CM physically
performs the substantial transformation, assembly, or
conversion required to manufacture Product X out-
side of FS’s country of organization. Product X is
sold by FS for use outside of FS’s country of organi-
zation. Employees of FS select the materials that will
be used to manufacture Product X. FS does not own
the materials or work-in-process during the manufac-
turing process. FS, through its employees, exercises
oversight and direction of the manufacturing process
and provides quality control. FS manages the manu-
facturing costs and capacities with respect to Product
X by managing the risk of loss and engaging in de-
mand planning and production scheduling.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS satisfies the test un-
der this paragraph (a)(4)(iv) because it makes a sub-
stantial contribution through the activities of its em-
ployees to the manufacture of Product X. Therefore,
FS is considered to have manufactured Product X un-
der paragraph (a)(4)(i) of this section.
Example 4.Physical conversion by employees of
a person other than the contract manufacturer.(i)
Facts. FS, a controlled foreign corporation organized
in Country M, purchases raw materials from a related
person. The raw materials are manufactured (un-
der the principles of paragraph (a)(4)(ii) or (a)(4)(iii)
of this section) into Product X by CM, an unrelated
corporation, pursuant to a contract manufacturing ar-
rangement. CM physically performs the substantial
transformation, assembly, or conversion required to
manufacture Product X outside of FS’s country of or-
ganization. Product X is sold by FS for use outside
of FS’s country of organization. CM contracts with
another corporation for its employees in order to op-
erate CM’s manufacturing plant and transform, as-
semble, or convert the raw materials into Product X.
Apart from the physical performance of the substan-
tial transformation, assembly, or conversion of the
raw materials into Product X, employees of FS per-
form all of the other manufacturing activities required
in connection with the manufacture of Product X (for
example, oversight and direction of the manufactur-
ing process; vendor selection; control of raw materi-
als, work-in-process, and finished goods; control of
manufacturing related logistics; and quality control).
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS satisfies the test un-
der this paragraph (a)(4)(iv) because it makes a sub-
stantial contribution through the activities of its em-
ployees to the manufacture of Product X. Therefore,
FS is considered to have manufactured Product X un-
der paragraph (a)(4)(i) of this section.
Example 5.Automated manufacturing super-
vised by another person.(i)Facts. FS, a controlled
foreign corporation, purchases raw materials from
a related person. The raw materials are manufac-
tured (under the principles of paragraph (a)(4)(ii) or
(a)(4)(iii) of this section) into Product X by CM, an
unrelated corporation selected by FS, pursuant to a
contract manufacturing arrangement. CM physically
performs the substantial transformation, assembly, or
conversion outside of FS’s country of organization.
Product X is sold by FS to related and unrelated
persons for use outside of FS’s country of organiza-
tion. At all times, FS retains ownership of the raw
materials, work-in-process, and finished goods. FS
retains the right to oversee and direct the activities
or process pursuant to which Product X is manu-
factured by CM, but does not exercise, through its
employees, its powers of oversight and direction. FS
is the owner of sophisticated software and network
systems that remotely and automatically (without
human involvement) take orders, route them to CM,
order raw materials, and perform quality control. FS
has a small number of computer technicians who
monitor the software and network systems to ensure
that they are running smoothly and apply any nec-
essary patches or fixes. The software and network
systems were developed by employees of DP, the
U.S. corporate parent of FS. DP’s employees super-
vise the computer technicians, evaluate the results
of the automated manufacturing business, and make
ongoing operational decisions, including decisions
related to acceptable performance of the manufactur-
ing process, stoppages of that process, and decisions
related to product and manufacturing process design.
DP’s employees develop and provide to FS all of
the upgrades to the software and network systems.
DP also has employees who direct and control other
aspects of the manufacturing process such as vendor
and material selection, management of the manufac-
turing costs and capacities, and the selection of CM.
The need for DP’s employees to direct the activities
of the FS employees and otherwise contribute to
the manufacturing process evinces that substantial
operational responsibilities and decision making are
required to be exercised by parties other than CM in
order to manufacture Product X.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstance of the business, FS does not satisfy the
test under this paragraph (a)(4)(iv) because it does not
make a substantial contribution through the activities
of its employees to the manufacture of Product X.
Mere ownership of materials and intellectual property
along with contractual rights to exercise powers of
direction and control are not sufficient to satisfy this
paragraph (a)(4)(iv). The employees of FS do not per-
form the amount of activity necessary to constitute a
substantial contribution. FS is not considered to have
manufactured Product X under paragraph (a)(4)(i) of
this section.
Example 6.Automated manufacturing supervised
by FS.(i)Facts. Assume the same facts as inExam-
ple 5, except for the following. FS, through its em-
ployees, engages in the activities undertaken by DP’s
employees inExample 5. DP’s employees also con-
tribute to product and manufacturing process design,
and provide support and oversight to FS in connection
with functions performed by FS through its employ-
ees.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS satisfies the test un-
der this paragraph (a)(4)(iv) because it makes a sub-
stantial contribution through the activities of its em-
ployees to the manufacture of Product X. This deter-
mination does not require a comparison between the
activities of FS and the activities of DP. Selection of
the contract manufacturer, even though not specifi-
cally identified in paragraph (a)(4)(iv)(b)ofthissec-
tion, is considered under paragraph (a)(4)(iv)(c)of
this section in determining whether FS makes a sub-
stantial contribution to the manufacture of Product X
through its employees. FS is considered to have man-
ufactured Product X under paragraph (a)(4)(i) of this
section.
Example 7.Automated manufacturing supervised
by FS with purchased intellectual property.(i)Facts.
Assume the same facts as inExample 6, except for the
following. The software and network systems, and
the upgrades to those systems, were purchased by FS
rather than developed by employees of FS.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. The lack of per-
formance of software and network system develop-
ment activities is not determinative under the facts
and circumstances of the business. Therefore, FS sat-
isfies the test under this paragraph (a)(4)(iv) because
it makes a substantial contribution through the activ-
ities of its employees to the manufacture of Product
X. This determination does not require a comparison
between the activities of FS and the activities of DP.
FS is considered to have manufactured Product X un-
der paragraph (a)(4)(i) of this section.
Example 8.Manufacture without intellectual
property.(i)Facts. FS, a controlled foreign cor-
poration, purchases raw materials from a related
person. The raw materials are manufactured (under
the principles of paragraph (a)(4)(ii) or (a)(4)(iii)
of this section) into Product X by CM, an unrelated
corporation, pursuant to a contract manufacturing
arrangement. CM physically performs the substan-
tial transformation, assembly, or conversion outside
of FS’s country of organization. Product X is sold
by FS for use outside of FS’s country of organiza-
tion. At all times, FS controls the raw materials,
work-in-process, and finished goods. FS controls the
manufacturing related logistics, manages the manu-
facturing costs and capacities, and provides quality
control with respect to CM’s manufacturing process
2009–5 I.R.B.400February 2, 2009

and product. No intellectual property of significant
value is required to manufacture Product X. FS does
not own any intellectual property underlying Product
X, or hold an exclusive or non-exclusive right to
manufacture Product X.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Because use of in-
tellectual property plays little or no role in the man-
ufacture of Product X, it is irrelevant to the substan-
tial contribution analysis under paragraph (a)(4)(iv)
of this section. Under the facts and circumstances
of the business, FS satisfies the test under this para-
graph (a)(4)(iv) because it makes a substantial con-
tribution through the activities of its employees to
the manufacture of Product X. Therefore, FS is con-
sidered to have manufactured Product X under para-
graph (a)(4)(i) of this section.
Example 9.Substantial contribution by more than
one CFC.(i)Facts. FS1 and FS2, unrelated con-
trolled foreign corporations, contract with CM, an un-
related corporation, to manufacture (under the prin-
ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-
tion) Product X. CM physically performs the substan-
tial transformation, assembly, or conversion required
to manufacture Product X outside of FS1’s and FS2’s
respective countries of organization. Neither FS1 nor
FS2 owns the materials or work-in-process during the
manufacturing process. Product X is sold by FS1
and FS2 to persons related to FS1 and FS2, respec-
tively, for disposition outside of FS1’s and FS2’s re-
spective countries of organization. FS1, through its
employees, designs Product X. FS1 directs the use
of the product design and design specifications, and
other intellectual property, for the purpose of man-
ufacturing Product X. Employees of FS1 also select
the materials that will be used to manufacture Prod-
uct X, and the vendors that provide those materials.
FS2, through its employees, designs the process for
manufacturing Product X. FS2, through its employ-
ees, manages the manufacturing costs and capacities
withrespecttoProductX.FS1andFS2eachprovide
quality control and oversight and direction of CM’s
manufacturing activities with respect to different as-
pects of the manufacture of Product X.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS1 or FS2 through the activities of their
employees, FS1 or FS2 would have satisfied the man-
ufacturing exception contained in paragraph (a)(4)(ii)
or (a)(4)(iii) of this section with respect to Product X.
Therefore, this paragraph (a)(4)(iv) applies. The fact
that other persons make a substantial contribution to
the manufacture of personal property does not pre-
clude a controlled foreigncorporation from making
a substantial contribution to the manufacture of per-
sonal property through the activities of its employ-
ees. In the analysis of whether FS1 or FS2 make a
substantial contribution to the manufacture of Prod-
uct X, each company takes into account its individual
activities, including those of providing quality con-
trol and oversight and direction of the manufacture
of Product X. In addition, no threshold level of ac-
tivity is required, including with respect to provid-
ing quality control or oversight and direction of the
activities or process pursuant to which Product X is
manufactured, before FS1and FS2 can take into ac-
count their respective activities. Under the facts and
circumstances of the business, both FS1 and FS2 sat-
isfy the test under this paragraph (a)(4)(iv) because
each independently makes a substantial contribution
through the activities of its employees to the man-
ufacture of Product X. Therefore, FS1 and FS2 are
each considered to have manufactured Product X un-
der paragraph (a)(4)(i) of this section.
Example 10.Manufacture of products designed
by CFC.(i)Facts. FS, a controlled foreign corpora-
tion, purchases raw materials from a related person.
The raw materials are manufactured (under the prin-
ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-
tion) into Product X by CM, an unrelated corpora-
tion, pursuant to a contract manufacturing arrange-
ment. CM physically performs the substantial trans-
formation, assembly, or conversion outside of FS’s
country of organization. Product X is sold by FS for
use outside of FS’s country of organization. Products
in the X industry are distinguished (and vary widely
in value) based on the raw materials used to make
the product and the product design. FS designs the
product and selects the materials that CM will use to
manufacture Product X. FS also manages the manu-
facturing costs and capacities. Product X can be man-
ufactured from the raw materials to FS’s design spec-
ifications without significant oversight and direction,
quality control, or control of manufacturing related
logistics. The activities most relevant to the substan-
tial contribution analysis under these facts are mate-
rial selection, product design and management of the
manufacturing costs and capacities.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS makes a substan-
tial contribution through the activities of its employ-
ees to the manufacture of Product X. FS satisfies the
test under this paragraph (a)(4)(iv) because it makes
a substantial contribution through the activities of its
employees to the manufacture of Product X. There-
fore, FS is considered to have manufactured Product
X under paragraph (a)(4)(i) of this section.
Example 11.Direction and oversight of manu-
facturing and quality control through periodic visits.
(i)Facts. FS, a controlled foreign corporation, pur-
chases raw materials from a related person. The raw
materials are manufactured (under the principles of
paragraph (a)(4)(ii) or (a)(4)(iii) of this section) into
Product X by CM, an unrelated corporation, pursuant
to a contract manufacturing arrangement. CM physi-
cally performs the substantial transformation, assem-
bly, or conversion outside of FS’s country of organ-
ization. Product X is sold by FS for use outside of
FS’s country of organization. FS controls the raw ma-
terial, work-in-process, and finished goods, manages
the manufacturing costs and capacities, and provides
oversight and direction of the manufacture of Prod-
uct X. Employees of FS visit CM’s manufacturing fa-
cility for one week each quarter and perform quality
control tests on a random sample of the units of Prod-
uct X produced during the week. In the X industry,
quarterly visits to a manufacturing facility by qual-
ified persons are sufficient to control the quality of
manufacturing.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to Product X. Therefore,
this paragraph (a)(4)(iv) applies. Under the facts and
circumstances of the business, FS satisfies the test un-
der this paragraph (a)(4)(iv) with respect to Product
X because it makes a substantial contribution through
the activities of its employees to the manufacture of
ProductX.Therefore,FSisconsideredtohaveman-
ufactured Product X under paragraph (a)(4)(i) of this
section.
*****
(6)Special rule applicable to distribu-
tive share of partnership income—(i)In
general. To determine the extent to which
a controlled foreign corporation’s distribu-
tive share of any item of gross income
of a partnership would have been foreign
base company sales income if received by
it directly, under §1.952–1(g), the prop-
erty sold will be considered to be manu-
factured, produced, or constructed by the
controlled foreign corporation, within the
meaning of paragraph (a)(4)(i) of this sec-
tion, only if the manufacturing exception
of paragraph (a)(4)(i) of this section would
have applied to exclude the income from
foreign base company sales income if the
controlled foreign corporation had earned
the income directly, determined by taking
into account only the activities of the em-
ployees of, and property owned by, the
partnership.
*****
(b) * * *
(1) * * *
(i) * * *
(c) [Reserved]. For further guidance,
see §1.954–3T(b)(1)(i)(c).
(ii) * * *
(a) [Reserved]. For further guidance,
see §1.954–3T(b)(1)(ii)(a).
*****
(c) [Reserved]. For further guidance,
see §1.954–3T(b)(1)(ii)(c).
(2) * * *
(i) * * *
(b) [Reserved]. For further guidance,
see §1.954–3T(b)(2)(i)(b).
*****
(d) [Reserved]. For further guidance,
see §1.954–3T(b)(2)(i)(d).
*****
February 2, 20094012009–5 I.R.B.

(ii) * * *
(a) [Reserved]. For further guidance,
see §1.954–3T(b)(2)(ii)(a).
(b) [Reserved]. For further guidance,
see §1.954–3T(b)(2)(ii)(b).
*****
(e) [Reserved]. For further guidance,
see §1.954–3T(b)(2)(ii)(e).
*****
(4) * * *
Example (3). [Reserved]. For further
guidance, see §1.954–3T(b)(4)Example
(3).
*****
(c)Effective/applicability date. Para-
graphs (a)(1)(i), (a)(1)(iii)Example 1,
(a)(1)(iii)Example 2, (a)(2), (a)(4)(i),
(a)(4)(ii), (a)(4)(iii), (a)(4)(iv) and (a)(6)(i)
shall apply to taxable years of controlled
foreign corporations beginning after June
30, 2009, and for taxable years of United
States shareholders in which or with which
such taxable years of the controlled for-
eign corporations end.
(d)Application of regulations to earlier
taxable years. A taxpayer may choose
to apply these regulations and the reg-
ulations under §1.954–3T retroactively
with respect to its open taxable years. The
taxpayer may so choose if and only if the
taxpayer and all members of the taxpayer’s
affiliated group (within the meaning of
§1504(a)) apply both these regulations and
the regulations under §1.954–3T, in their
entirety, to the earliest taxable year of each
controlled foreign corporation that ends
with or within an open taxable year of
the taxpayer and to all subsequent taxable
years of the taxpayer.
Par. 3. Section 1.954–3T is added to
read as follows:
§1.954–3T Foreign base company sales
income (temporary).
(a) through (b)(1)(i)(b) [Reserved]. For
further guidance, see §1.954–3(a) through
(b)(1)(i)(b).
(c)Use of more than one branch.If
a controlled foreign corporation carries
on purchasing or selling activities by or
through more than one branch or sim-
ilar establishment located outside the
country under the laws of which such
corporation is created or organized, then
§1.954–3(b)(1)(i)(b) shall be applied sep-
arately to the income derived by each
such branch or similar establishment (by
treating such purchasing or selling branch
or similar establishment as if it were the
only branch or similar establishment of
the controlled foreign corporation and as
if any such other branches or similar es-
tablishments were separate corporations)
in determining whether the use of such
branch or similar establishment has sub-
stantially the same tax effect as if such
branch or similar establishment were a
wholly owned subsidiary corporation of
the controlled foreign corporation. See
paragraph (b)(1)(ii)(c)(1)ofthissection
for rules applicable to a controlled for-
eign corporation that carries on purchase
or sales activities by or through one or
more branches or similar establishments
in addition to carrying on manufactur-
ing activities by or through one or more
branches or similar establishments.
(ii)Manufacturing branch—(a)In gen-
eral. If a controlled foreign corporation
carries on manufacturing, producing, con-
structing, growing, or extracting activities
by or through a branch or similar estab-
lishment located outside the country un-
der the laws of which such corporation is
created or organized and the use of the
branch or similar establishment for such
activities with respectto personal property
purchasedorsoldbyorthroughthere-
mainder of the controlled foreign corpo-
ration has substantially the same tax ef-
fect as if the branch or similar establish-
ment were a wholly owned subsidiary cor-
poration of such controlled foreign corpo-
ration, the branch or similar establishment
and the remainder of the controlled for-
eign corporation will be treated as sepa-
rate corporations for purposes of determin-
ing foreign base company sales income of
such corporation. See section 954(d)(2).
The provisions of this paragraph (b)(1)(ii)
and §1.954–3(b)(1)(ii)(b) will apply only
if the controlled foreign corporation (in-
cluding any branches or similar establish-
ments of such controlled foreign corpo-
ration) manufactures, produces, or con-
structs such personal property within the
meaning of §1.954–3(a)(4)(i), or carries on
growing or extracting activities with re-
spect to such personal property.
(b) [Reserved]. For further guidance,
see §1.954–3(b)(1)(ii)(b).
(c
)Use of more than one branch—(1)
Use of one or more sales or purchase
branches in addition to a manufacturing
branch. If, with respect to personal prop-
erty manufactured, produced, constructed,
grown, or extracted by or through a branch
or similar establishment located outside
the country under the laws of which the
controlled foreign corporation is created
or organized, purchasing or selling activ-
ities are carried on by or through more
than one branch or similar establishment,
or by or through one or more branches
or similar establishments located outside
such country, of such corporation, then
§1.954–3(b)(1)(ii)(b) shall be applied sep-
arately to the income derived by each such
purchasing or selling branch or similar es-
tablishment (by treating such purchasing
or selling branch or similar establishment
as though it alone were the remainder of
the controlled foreign corporation) for
purposes of determining whether the use
of such manufacturing, producing, con-
structing, growing, or extracting branch or
similar establishment has substantially the
same tax effect as if such branch or similar
establishment were a wholly owned sub-
sidiary corporation of the controlled for-
eign corporation. If this rule applies, the
sales or purchase branch rules contained in
paragraph (b)(1)(i)(c)ofthissectionand
§1.954–3(b)(1)(i) do not apply. The appli-
cation of this paragraph (b)(1)(ii)(c)(1)is
illustrated by the following example:
Example.All activities of controlled foreign cor-
poration conducted through sales branches and man-
ufacturing branch.(i)Facts. FS, a controlled foreign
corporation organized under the laws of country M,
operates three branches. Branch A, located in coun-
try A, manufactures Product X under the principles
of §1.954–3(a)(4)(i). Branch B, located in Country
B, sells Product X manufactured by Branch A to cus-
tomers for use outside of Country B. Branch C, lo-
cated in Country C sells Product X manufactured by
Branch A to customers for use outside of Country C.
FS does not conduct any manufacturing or selling ac-
tivities apart from the activities of Branches A, B and
C. Country M imposes an effective rate of tax on sales
income of 0%. Country A imposes an effective rate
of tax on sales income of 20%. Country B imposes an
effective rate of tax on sales income of 20%. Country
C imposes an effective rate of tax on sales income of
18%.
(ii)Result.Pursuant to this paragraph
(b)(1)(ii)(c)(1), §1.954–3(b)(1)(ii)(b) is applied to
the sales income derived by Branch B by treating
Branch B as though it alone were the remainder of the
controlled foreign corporation. The use of Branch
B does not have the same tax effect as if Branch B
were a wholly owned subsidiary of FS because the
tax rate applicable to the income allocated to Branch
B under §1.954–3(b)(1)(ii)(b) (20%) is not less than
90 percent of, and at least 5 percentage points less
than, the effective rate of tax which would apply to
such income under the laws of Country A (20%),
2009–5 I.R.B.402February 2, 2009

the country in which Branch A is located. Section
1.954–3(b)(1)(ii)(b) is applied separately to the sales
income derived by Branch C by treating Branch C as
though it alone were the remainder of the controlled
foreign corporation. The use of Branch C does
not have the same tax effect as if Branch C were
a wholly owned subsidiary of FS because the tax
rate applicable to the income allocated to Branch C
under §1.954–3(b)(1)(ii)(b) (18%) is not less than 90
percent of, and at least 5 percentage points less than,
the effective rate of tax which would apply to such
income under the laws of Country A (20%), the coun-
try in which Branch A is located. Pursuant to this
paragraph (b)(1)(ii)(c)(1), the rules under paragraph
(b)(1)(i)(c) of this section and §1.954–3(b)(1)(i) for
determining whether a sales or purchase branch is
treated as a separate corporation from the remainder
of the controlled foreign corporation do not apply.
(2)Use of more than one branch to
manufacture, produce, construct, grow, or
extract separate items of personal prop-
erty. If a controlled foreign corporation
carries on manufacturing, producing, con-
structing, growing, or extracting activities
with respect to separate items of personal
property by or through more than one
branch or similar establishment located
outside the country under the laws of
which such corporation is created or or-
ganized, then paragraph (b)(1)(ii)(c)of
this section and §1.954–3(b)(1)(ii)(b)will
be applied separately to each such branch
or similar establishment (by treating such
manufacturing branch or similar establish-
ment as if it were the only such branch
or similar establishment of the controlled
foreign corporation and as if any other
such branches or similar establishments
were separate corporations) for purposes
of determining whether the use of such
branch or similar establishment has sub-
stantially the same tax effect as if such
branch or similar establishment were a
wholly owned subsidiary corporation of
the controlled foreign corporation. The ap-
plication of this paragraph (b)(1)(ii)(c)(2)
is illustrated by the following example:
Example.Multiple branches that satisfy
§1.954–3(a)(4)(i).(i)Facts. FS is a controlled
foreign corporation organized in Country M. FS op-
erates two branches, Branch A and Branch B located
in Country A and Country B, respectively. Branch
A and Branch B each manufacture separate items of
personal property (Product X and Product Y, respec-
tively) within the meaning of §1.954–3(a)(4)(ii) or
(iii). Raw materials used in the manufacture of Prod-
uct X and Product Y are purchased by FS from an
unrelated person. FS engages in activities in Coun-
try M to sell Product X and Product Y to a related
person for use, disposition or consumption outside
of Country M. Employees of FS located in Country
M perform only sales functions. The effective rate
imposed in Country M on the income from the sales
of Product X and Product Y is 10%. Country A
imposes an effective rate of tax on sales income of
20%. Country B imposes an effective rate of tax on
sales income of 12%.
(ii)Result.Pursuant to this paragraph
(b)(1)(ii)(c)(2), §1.954–3(b)(1)(ii)(b) is applied sep-
aratelytoBranchAandBranchBwithrespectto
the sales income of FS attributable to Product X
(manufactured by Branch A) and Product Y (manu-
factured by Branch B). Because the effective rate of
tax on FS’s sales income from the sale of Product X
in Country M (10%) is less than 90% of, and at least
5 percentage points less than, the effective rate of tax
that would apply to such income in the country in
which Branch A is located (20%), the use of Branch
A to manufacture Product X has substantially the
same tax effect as if Branch A were a wholly owned
subsidiary corporation of FS. Because the effective
rate of tax on FS’s sales income from the sale of
Product Y in Country M (10%) is not less than 90%
of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income
in the country in which Branch B is located (12%),
the use of Branch B to manufacture Product Y does
not have substantially the same tax effect as if Branch
B were a wholly owned subsidiary corporation of
FS. Consequently, only Branch A is treated as a
separate corporation apart from the remainder of FS
for purposes of determining foreign base company
sales income from the sales of Product X.
(3)Use of more than one manufac-
turing branch, or one or more manu-
facturing branches and the remainder
of the controlled foreign corporation, to
manufacture, produce, or construct the
same item of personal property—(i)In
general. This paragraph (b)(1)(ii)(c)(3)
applies to determine the location of man-
ufacture, production, or construction of
personal property for purposes of apply-
ing §1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)
where more than one branch (or simi-
lar establishment) of a controlled foreign
corporation, or one or more branches (or
similar establishments) of a controlled
foreign corporation and the remainder of
the controlled foreign corporation, each
engage in manufacturing, producing, or
constructing activities with respect to the
same item of personal property which is
then sold by the controlled foreign cor-
poration. The location of manufacture,
production, or construction is determined
under paragraph (b)(1)(ii)(c)(3)(ii)ofthis
section if one or more branches (or sim-
ilar establishments), or the remainder of
the controlled foreign corporation, inde-
pendently satisfies §1.954–3(a)(4)(i) with
respect to an item of personal property.
The location of manufacture, production,
or construction is determined under para-
graph (b)(1)(ii)(c)(3)(iii)ofthissectionif
none of the branches (or similar establish-
ments), or the remainder of the controlled
foreign corporation,independently satis-
fies §1.954–3(a)(4)(i) with respect to an
item of personal property, but the con-
trolled foreign corporation as a whole
makes a substantial contribution to the
manufacture, production or construction
of that property within the meaning of
§1.954–3(a)(4)(iv). For purposes of this
paragraph (b)(1)(ii)(c)(3), the location of
any activity with respect to the manufac-
ture, production, or construction of an
item of personal property is determined
under paragraph (b)(1)(ii)(c)(3)(iv)ofthis
section. For purposes of this paragraph
(b)(1)(ii)(c)(3), if multiple branches (or
similar establishments) are located in a
single jurisdiction, then the activities of
those branches will be aggregated for pur-
poses of determining whether a branch or
remainder of the controlled foreign corpo-
ration satisfies §1.954–3(a)(4)(i).
(ii)Manufacture, production, or con-
struction in one or more locations. If only
one branch (or similar establishment),
or only the remainder of a controlled
foreign corporation, independently sat-
isfies §1.954–3(a)(4)(i) with respect to
an item of personal property, then that
branch(orsimilarestablishment)orthe
remainder of the controlled foreign cor-
poration will be the location of manu-
facture, production, or construction of
that property for purposes of applying
§1.954–3(b)(1)(i)(b)or(b)(1)(ii)(b)to
the income from the sale of that prop-
erty. See paragraph (b)(1)(ii)(c)(3)(v)
Example 1of this section. If more than
one branch (or similar establishment),
or one or more branches (or similar es-
tablishments) and the remainder of the
controlled foreign corporation, each inde-
pendently satisfy §1.954–3(a)(4)(i) with
respect to an item of personal property,
then the location of manufacture, produc-
tion, or construction of that property for
purposes of applying §1.954–3(b)(1)(i)(b)
or (b)(1)(ii)(b) will be the location of
that branch (or similar establishment)
or the jurisdiction under the laws of
which the remainder of the controlled
foreign corporation is organized that sat-
isfies §1.954–3(a)(4)(i) and that would,
after applying §1.954–3(b)(1)(ii)(b)to
such branch (or similar establishment) or
§1.954–3(b)(1)(i)(b) to the remainder of
the controlled foreign corporation, im-
February 2, 20094032009–5 I.R.B.

pose the lowest effective rate of tax on
the income allocated to such branch or the
remainder of the controlled foreign corpo-
ration under such section (that is, either
§1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)). See
paragraph (b)(1)(ii)(c)(3)(v)Example 2of
this section.
(iii)No location independently sat-
isfies manufacturing test. If none of
the branches (or similar establishments)
or the remainder of the controlled for-
eign corporation independently satis-
fies §1.954–3(a)(4)(i) with respect to an
item of personal property but the con-
trolled foreign corporation as a whole
makes a substantial contribution to the
manufacture, production, or construc-
tion of that property within the mean-
ing of §1.954–3(a)(4)(iv), then for pur-
poses of applying §1.954–3(b)(1)(i)(b)or
(b)(1)(ii)(b), the location of manufacture,
production, or construction with respect
to that property will be the “tested man-
ufacturing location” unless the “tested
sales location” provides a demonstra-
bly greater contribution to the manu-
facture, production, or construction of
the property. The tested manufacturing
location is the location of any branch
(or similar establishment) or remain-
der of the controlled foreign corpora-
tion that contributes to the manufacture,
production, or construction of the per-
sonal property, if any, and that would,
after applying §1.954–3(b)(1)(ii)(b)to
such branch (or similar establishment)
or §1.954–3(b)(1)(i)(b)totheremain-
der of the controlled foreign corporation,
be treated as a separate corporation and
would impose the lowest effective rate
of tax on the income allocated to such
branch (or similar establishment) or to
the remainder of the controlled foreign
corporation under such section (that is, ei-
ther §1.954–3(b)(1)(ii)(b)or(b)(1)(i)(b)).
The tested sales location is the location
where the branch (or similar establish-
ment)ortheremainderofthecontrolled
foreign corporation purchases or sells the
personal property. For purposes of this
paragraph (b)(1)(ii)(c)(3)(iii), the contri-
bution to the manufacture, production, or
construction of the personal property by
the tested sales location will be deemed
to include the activities of any branch (or
similar establishment) or remainder of the
controlled foreign corporation that would
not be treated as a corporation separate
from the tested sales location after the
application of §1.954–3(b)(1)(ii)(b)or
(b)(1)(i)(b). For purposes of this para-
graph (b)(1)(ii)(c)(3)(iii), the contribution
of the tested manufacturing location to the
manufacture, production, or construction
of the personal property will be deemed
to include any activities of any branch
(or similar establishment) or remainder
of the controlled foreign corporation that
would be treated as a corporation sepa-
rate from the tested sales location after
the application of §1.954–3(b)(1)(ii)(b)
or (b)(1)(i)(b). Whether the tested sales
location provides a demonstrably greater
contribution to the manufacture, pro-
duction, or construction of the personal
property is determined by weighing the
relative contributions to the manufac-
ture, production, or construction of that
property by the tested sales location and
the tested manufacturing location under
the facts and circumstances test provided
in §1.954–3(a)(4)(iv). See paragraph
(b)(1)(ii)(c)(3)(v)Examples 4,5,and6of
this section. If the tested sales location
provides a demonstrably greater contri-
bution to the manufacture, production,
or construction of the personal property
than the tested manufacturing location
or if there is no tested manufacturing lo-
cation, then the tested sales location is
the location of manufacture, production,
or construction of that property and the
rules of paragraph (b)(1)(ii)(a)ofthis
section and §1.954–3(b)(1)(i)(a) will not
apply with respect to the sales income
related to that property and the use of the
purchasing or selling branch (or similar
establishment) or the purchasing or sell-
ing remainder will not result in a branch
being treated as a separate corporation for
purposes of paragraph (b)(2)(ii) of this
section or §1.954–3(b)(2)(ii).
(iv)Location of activity. For purposes
of paragraph (b)(1)(ii)(c)(3)ofthissection,
the location of any activity with respect to
the manufacture, production, or construc-
tion of an item of personal property is the
location where the employees of the con-
trolled foreign corporation perform such
activity. For example, the location of any
activity concerning intellectual property is
determined based on where employees of
the controlled foreign corporation develop,
or direct the use or development of, the in-
tellectual property, not on the formal as-
signment of that intellectual property.
(v)
Examples. The following examples
illustrate the application of this paragraph
(b)(1)(ii)(c)(3):
Example 1.Multiple branches contribute to the
manufacture of a single product, only one branch
satisfies §1.954–3(a)(4)(i).(i)Facts. FS is a con-
trolled foreign corporation organized in Country M.
FS operates three branches, Branch A, Branch B,
and Branch C, located respectively in Country A,
Country B, and Country C. Branch A, Branch B,
and Branch C each performs different manufacturing
activities with respect to the manufacture of Product
X. Branch A, through the activities of employees
of FS located in Country A, designs Product X.
Branch B, through the activities of employees of
FS located in Country B, provides quality control
and oversight and direction. Branch C, through the
activities of employees of FS located in Country
C, manufactures Product X (within the meaning of
§1.954–3(a)(4)(ii) or (a)(4)(iii)) using the designs
developed by Branch A and under the oversight of
the quality control personnel of Branch B. The activ-
ities of Branch A and Branch B do not independently
satisfy §1.954–3(a)(4)(i). Employees of FS located
in Country M purchase the raw materials used in
the manufacture of Product X from a related person
and control the work-in-process and finished goods
throughout the manufacturing process. Employees
of FS located in Country M also manage the man-
ufacturing costs and capacities related to Product
X. Further, employees of FS located in Country
M oversee the coordination between the branches.
Employees of FS located in Country M sell Product
X to unrelated persons for use outside of Country
M. The sales income from the sale of Product X is
taxed in Country M at an effective rate of tax of 10%.
Country C imposes an effective rate of tax of 20%
on sales income.
(ii)Result. Country C is the location of manufac-
ture for purposes of applying §1.954–3(b)(1)(ii)(b)
because only the activities of Branch C independently
satisfy §1.954–3(a)(4)(i). The use of Branch C has
substantially the same tax effect as if Branch C were
a wholly owned subsidiary corporation of FS because
the effective rate of tax on the sales income (10%)
is less than 90% of, and at least 5 percentage points
less than, the effective rate of tax that would apply
to such income in the country in which Branch C
is located (20%). Therefore, sales of Product X by
the remainder of FS are treated as sales on behalf of
Branch C. In determining whether the remainder of
FS will qualify for the manufacturing exception under
§1.954–3(a)(4)(iv), the activities of FS will include
the activities of Branch A or Branch B, respectively,
if each of those branches would not be treated as a
separate corporation under §1.954–3(b)(1)(ii)(b), if
that paragraph were applied independently to each of
Branch A and Branch B. See paragraph (b)(2)(ii)(a)
of this section.
Example 2.Multiple branches satisfy
§1.954–3(a)(4)(i) with respect to the same product
sold by the controlled foreign corporation.(i)Facts.
Assume the same facts as inExample 1,exceptfor
the following. In addition to the design of Product
X, Branch A also performs in Country A other
manufacturing activities, including those ascribed
to FS inExample 1, that are sufficient to qualify as
manufacturing under §1.954–3(a)(4)(iv) with respect
2009–5 I.R.B.404February 2, 2009

to Product X. Country A imposes an effective rate of
tax of 12% on sales income.
(ii)Result. Branch A and Branch C through
their activities each independently satisfy the
requirements of §1.954–3(a)(4)(i).Therefore,
§1.954–3(b)(1)(ii)(b) is applied by comparing the
effective rate of tax imposed on the income from the
sales of Product X against the lowest effective rate
of tax that would apply to the sales income in either
Country A or Country C if §1.954–3(b)(1)(ii)(b)
wereappliedseparatelytoBranchAandBranch
C. Country A imposes the lower effective rate of
tax, and therefore, Branch A is treated as the lo-
cation of manufacture for purposes of applying
§1.954–3(b)(1)(ii)(b). The effective rate of tax in
Country B is not considered because Branch B does
not satisfy §1.954–3(a)(4)(i). Neither Branch A nor
Branch C is treated as a separate corporation because
the effective rate of tax on the sales income of FS
from the sale of Product X (10%) is not less than
90% of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income
in the country in which Branch A is located (12%).
Sales of Product X by the remainder of the controlled
foreign corporation are not treated as made on behalf
of any branch.
Example 3.Determining the location of man-
ufacture when manufacturing activities performed
by multiple branches and no branch independently
satisfies §1.954–3(a)(4)(i).(i)Facts. FS, a con-
trolled foreign corporation organized in Country M,
purchases raw materials from a related person. The
raw materials are manufactured (under the princi-
ples of §1.954–3(a)(4)(ii) or (a)(4)(iii)) into Product
X by CM, an unrelated corporation, pursuant to a
contract manufacturing arrangement. CM physically
performs the substantial transformation, assembly,
or conversion of the raw materials in Country C. FS
has two branches, Branch A and Branch B, located
in Country A and Country B respectively. Branch
A, through the activities of employees of FS lo-
cated in Country A, designs Product X. Branch B,
through the activities of employees of FS located in
Country B, controls manufacturing related logistics,
provides oversight and direction during the manu-
facturing process, and controls the raw materials and
work-in-process. FS manages the manufacturing
costs and capacities related to the manufacture of
Product X through employees located in Country
M. Further, employees of FS located in Country M
oversee the coordination between the branches. Em-
ployees of FS located in Country M also sell Product
X to unrelated persons for use outside of Country M.
Country M imposes an effective rate of tax on sales
income of 10%. Country A imposes an effective rate
of tax on sales income of 20%, and Country B im-
poses an effective rate of tax on sales income of 24%.
Neither the remainder of FS, nor any branch of FS
independently satisfies §1.954–3(a)(4)(i). However,
under the facts and circumstances of the business,
FS as a whole provides a substantial contribution to
the manufacture of Product X within the meaning of
§1.954–3(a)(4)(iv).
(ii)Result. Based on the facts, neither the remain-
der of FS (through the activities of its employees
in Country M) nor any branch of FS independently
satisfies §1.954–3(a)(4)(i) with respect to Product
X, but FS, as a whole, provides a substantial con-
tribution through the activities of its employees
to the manufacture of Product X. The remainder
of FS, Branch A, and Branch B each provides a
contribution through the activities of employees to
the manufacture of Product X. Therefore, FS must
determine the location of manufacture under para-
graph (b)(1)(ii)(c)(3)(iii) of this section The tested
sales location is Country M because the remainder
of FS performs the selling activities with respect to
Product X. The location of Branch A is the tested
manufacturing location because the effective rate
of tax imposed on FS’s sales income by Country M
(10%) is less than 90% of, and at least 5 percent-
age points less than, the effective rate of tax that
would apply to such income in Country A (20%),
and Country A has the lowest effective rate of tax
among the manufacturing branches that would, after
applying §1.954–3(b)(1)(ii)(b), be treated as a sep-
arate corporation. The activities of Branch B will
be included in the contribution of Branch A for pur-
poses of determining the location of manufacture of
Product X because the effective rate of tax imposed
on the sales income by Country M (10%) is less than
90% of, and at least 5 percentage points less than,
the effective rate of tax that would apply to such
income in Country B (24%). Under the facts and
circumstances of the business, the activities of the
remainder of FS would not provide a demonstrably
greater contribution to the manufacture of Product X
than the activities of Branch A and Branch B, consid-
ered together. Therefore, the location of manufacture
is Country A, the location of Branch A.
Example 4.Manufacturing activities performed
by multiple branches, no branch independently sat-
isfies §1.954–3(a)(4)(i), selling activities performed
by remainder of the controlled foreign corporation,
remainder contribution includes branch manufactur-
ing activities.(i)Facts. The facts are the same asEx-
ample 3, except that the effective rate of tax on sales
income in Country B is 12%. In addition, under the
facts of the particular business, the activities of em-
ployees of FS located in Country B and Country M,
if considered together, would provide a demonstra-
bly greater contribution to the manufacture of Prod-
uct X than the activities of employees of FS located
in Country A.
(ii)Result. Based on the facts, neither the re-
mainder of FS (through activities of its employees in
Country M) nor any branch of FS independently sat-
isfies §1.954–3(a)(4)(i) with respect to Product X, but
FS, as a whole, provides a substantial contribution
through the activities of its employees to the manu-
facture of Product X. The remainder of FS, Branch
A, and Branch B each provide a contribution through
the activities of their employees to the manufacture of
Product X. Therefore, FS must determine the location
of manufacture under paragraph (b)(1)(ii)(c)(3)(iii)
of this section. The tested sales location is Coun-
try M because the remainder of FS performs the sell-
ing activities with respect to Product X. The location
of Branch A is the tested manufacturing location be-
cause the effective rate of tax imposed on FS’s sales
income by Country M (10%) is less than 90% of, and
at least 5 percentage points less than, the effective rate
of tax that would apply to such income in Country A
(20%), and Branch A is the only branch that would,
after applying §1.954–3(b)(1)(ii)(b), be treated as a
separate corporation. The activities of Branch B will
be included in the contribution of the remainder of FS
for purposes of determining the location of manufac-
ture of Product X because the effective rate of tax im-
posed on the sales income by Country M (10%) is not
less than 90% of, and at least 5 percentage points less
than, the effective rate of tax that would apply to such
income in Country B (12%). Under a facts and cir-
cumstances analysis, considered together, the activi-
ties of Branch B and the remainder of FS would pro-
vide a demonstrably greater contribution to the man-
ufacture of Product X than the activities of Branch
A. Therefore, the rules of paragraph (b)(1)(ii)(a) of
this section will not apply and neither Branch A nor
Branch B will be treated as a separate corporation for
purposes of paragraph (b)(2)(ii) of this section and
§1.954–3(b)(2)(ii).
Example 5.Manufacturing activities performed
by multiple branches, no branch independently satis-
fies §1.954–3(a)(4)(i), selling activities performed by
remainder of the controlled foreign corporation and
a sales branch.(i)Facts. The facts are the same as
Example 3, except that selling activities are also per-
formed by Branch D in Country D, and Country D
imposes a 16% effective rate of tax on sales income.
In addition, under the facts and circumstances of the
business, the activities of employees of FS located
in Country A and Country M,considered together,
would provide a demonstrably greater contribution to
the manufacture of Product X than the activities of
employees of FS located in Country B.
(ii)Result. Based on the facts, neither the re-
mainder of FS nor any branch of FS independently
satisfies §1.954–3(a)(4)(i) with respect to Product
X, but FS, as a whole, provides a substantial con-
tribution through the activities of its employees to
the manufacture of ProductX. The remainder of FS,
Branch A, and Branch B each provide a contribu-
tion through the activities of their employees to the
manufacture of Product X.Therefore, FS must de-
termine the location of manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. Further, pursuant
to paragraph (b)(1)(ii)(c)(1) of this section, paragraph
(b)(1)(ii)(c)(3)(
iii) of this section must be applied
separately to the sales income derived by the remain-
der of FS and Branch D respectively. The results
with respect to the remainder of FS in thisExample
6are the same as inExample 3. However, paragraph
(b)(1)(ii)(c)(3)(iii) of this section must also be ap-
plied with respect to Branch D because Branch D
performs selling activities with respect to Product X.
Thus, for purposes of that sales income, the location
of Branch D is the tested sales location. The location
of Branch B is the tested manufacturing location be-
cause the effective rate of tax imposed on the Branch
D’s sales income by Country D (16%) is less than
90% of, and at least 5 percentage points less than, the
effective rate of tax thatwould apply to such income
in Country B (24%), and Branch B is the only branch
that would, after applying §1.954–3(b)(1)(ii)(b), be
treated as a separate corporation. The manufacturing
activities performed in Country M by the remainder
of FS and the manufacturing activities performed in
Country A by Branch A will be included in Branch
D’s contribution to the manufacture of Product X for
purposes of determining the location of manufacture
of Product X with respect to Branch D’s sales income
because the effective rate of tax imposed on the sales
income by Country D (16%) is not less than 90% of,
and at least 5 percentage points less than, the effec-
tive rate of tax that would apply to such income in
Country M (10%) and Country A (20%). Under the
February 2, 20094052009–5 I.R.B.

facts and circumstances of the business, the activities
of Branch D, Branch A, and the remainder of FS,
considered together, would provide a demonstrably
greater contribution to the manufacture of Product
X than the activities of Branch B. Therefore, the
rules of paragraph (b)(1)(ii)(a) of this section will
not apply to Branch D and neither Branch A nor
Branch D will be treated as a separate corporation
for purposes of paragraph (b)(2)(ii) of this section
and §1.954–3(b)(2)(ii).
Example 6.Determining the location of manufac-
ture when employees of remainder of controlled for-
eign corporation travel to location of unrelated con-
tract manufacturer to perform manufacturing activ-
ities.(i)Facts. FS, a controlled foreign corpora-
tion organized in Country M, purchases raw materials
from a related person. The raw materials are manu-
factured (under the principles of §1.954–3(a)(4)(ii) or
(a)(4)(iii)) into Product X by CM, an unrelated corpo-
ration, pursuant to a contract manufacturing arrange-
ment. CM physically performs the substantial trans-
formation, assembly, or conversion of the raw materi-
als in Country C. Employees of FS located in Country
M sell Product X to unrelated persons for use outside
of Country M. Employees of FS located in Country M
engage in product design, manage the manufacturing
costs and capacities with respect to Product X, and di-
rect the use of intellectual property for the purpose of
manufacturing Product X. Quality control and over-
sight and direction of the manufacturing process are
conducted in Country C by employees of FS who are
employed in Country M but who regularly travel to
CountryC.BranchA,locatedinCountryA,isthe
onlybranchofFS.Productdesignwithrespectto
Product X conducted by employees of FS located in
Country A is supplemental to the bulk of the design
work, which is done by employees of FS located in
Country M. At all times, employees of Branch A con-
trol the raw materials, work-in-process and finished
goods. Employees of FS located in Country A also
control manufacturing related logistics with respect
to Product X. Country M imposes an effective rate of
tax on sales income of 10%. Country A imposes an
effective rate of tax on sales income of 20%. Nei-
ther the remainder of FS nor Branch A independently
satisfies §1.954–3(a)(4)(i). However, under the facts
and circumstance of the business, FS as a whole (in-
cluding Branch A) provides a substantial contribution
to the manufacture of Product X within the meaning
of §1.954–3(a)(4)(iv).
(ii)Result. Based on the facts, neither the re-
mainder of FS nor Branch A independently satisfies
§1.954–3(a)(4)(i) with respect to Product X, but
FS, as a whole, provides a substantial contribution
through the activities of its employees to the man-
ufacture of Product X. The remainder of FS and
Branch A each provide a contribution through the
activities of employees to the manufacture of Product
X. Therefore, FS must determine the location of
manufacture under paragraph (b)(1)(ii)(c)(3)(iii)of
this section. The tested sales location is Country M
because the remainder of FS performs the selling
activities with respect to Product X. The tested manu-
facturing location is the location of Branch A because
the effective rate of tax imposed on the remainder of
FS’s sales income by Country M (10%) is less than
90% of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income
in Country A (20%), and Branch A is the only branch
that would, after applying §1.954–3(b)(1)(ii)(b),
be treated as a separate corporation. Although the
activities of traveling employees are considered in
determining whether FS, as a whole, makes a sub-
stantial contribution to the manufacture of Product
X under §1.954–3(a)(4)(iv), the activities of the
employees of FS that are performed in Country C are
not taken into consideration in determining whether
Country M, the jurisdiction under the laws of which
FS is organized, is the location of manufacture under
paragraph (b)(1)(ii)(c)(3)(iii) of this section. Activi-
ties of employees performed outside the jurisdiction
in which the controlled foreign corporation is orga-
nized and outside a location in which the controlled
foreign corporation maintains a branch or similar
establishment, are not considered in determining the
location of manufacture. Under the facts and circum-
stances of the business, the activities of employees
of FS performed in Country M do not provide a
demonstrably greater contribution to the manufacture
of Product X than the activities of employees of FS
performed in Country A. Therefore, the location of
manufacture is Country A, the location of Branch A.
(4)Use of more than one branch to
manufacture, produce, construct, grow,
or extract separate items of personal
property. For purposes of paragraphs
(b)(1)(ii)(c)(2) and (b)(1)(ii)(c)(3)ofthis
section, anitemof personal property refers
to an individual unit of personal property
rather than a type or class of personal
property.
(2) [Reserved]. For further guidance,
see §1.954–3(b)(2).
(i) [Reserved]. For further guidance,
see §1.954–3(b)(2)(i).
(a) Treatment as separate corporations.
[Reserved]. For further guidance, see
§1.954–3(b)(2)(i)(a).
(b)Activities treated as performed on
behalf of the remainder of corporation.
With respect to purchasing or selling activ-
ities performed by or through the branch or
similar establishment, such purchasing or
selling activities will—
(1) With respect to personal property
manufactured, produced, or constructed by
the remainder of the controlled foreign cor-
poration (or any branch treated as the re-
mainder of the controlled foreign corpora-
tion); or
(2) With respect to personal prop-
erty (other than property described in
paragraph (b)(2)(i)(b)(1)ofthissection)
purchased or sold, or purchased and sold,
by the remainder of the controlled for-
eign corporation (or any branch treated
as the remainder of the controlled foreign
corporation), be treated on behalf of the
remainder of the controlled foreign corpo-
ration.
(c) [Reserved]. For further guidance,
see §1.954–3(b)(2)(i)(c).
(d)Determination of hypothetical tax.
To the extent applicable, the principles
of §1.954–1(d)(2) shall be used in deter-
mining, under paragraph (b)(1)(i) of this
section and §1.954–3(b)(1)(i), the effec-
tive rate of tax which would apply to the
income of the branch or similar estab-
lishment under the laws of the country in
which the controlled foreign corporation
is created or organized, or in determining,
under paragraph (b)(1)(ii) of this section
and §1.954–3(b)(1)(ii), the effective rate
of tax which would apply to the income
of the branch or similar establishment un-
der the laws of the country in which the
manufacturing, producing, constructing,
growing, or extracting branch or similar
establishment is located.
(e) [Reserved]. For further guidance,
see §1.954–3(b)(2)(i)(e).
(ii) [Reserved]. For further guidance,
see §1.954–3(b)(2)(ii).
(a)Treatment as separate corpora-
tions. The branch or similar establish-
ment will be treated as a wholly owned
subsidiary corporation of the controlled
foreign corporation, and such branch or
similar establishment will be deemed to
be incorporated in the country in which
it is located. For purposes of applying
the rules of this paragraph (b)(2)(ii) and
§1.954–3(b)(2)(ii), a branch or similar
establishment of a controlled foreign cor-
poration treated as a separate corporation
purchasing or selling on behalf of the
remainder of the controlled foreign cor-
poration under paragraph (b)(2)(ii)(b)
of this section, or the remainder of the
controlled foreign corporation treated
as a separate corporation purchasing or
selling on behalf of a branch or similar
establishment of the controlled foreign
corporation under §1.954–3(b)(2)(ii)(c),
will include any other branch or similar
establishment or remainder of the con-
trolled foreign corporation that would not
be treated as a separate corporation (apart
from the branch or similar establishment
of a controlled foreign corporation that is
treated as performing purchasing or sell-
ing activities on behalf of the remainder of
the controlled foreign corporation under
paragraph (b)(2)(ii)(b) of this section or
the remainder of the controlled foreign
corporation that is treated as performing
purchasing or selling activities on behalf
2009–5 I.R.B.406February 2, 2009

of the branch or similar establishment un-
der §1.954–3(b)(2)(ii)(c)) if the effective
rate of tax imposed on the income of the
purchasing or selling branch or similar
establishment, or purchasing or selling
remainder of the controlled foreign cor-
poration, were tested under the principles
of §1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)
against the effective rate of tax that would
apply to such income if it were considered
derived by such other branch or similar
establishment or the remainder of the con-
trolled foreign corporation.
(b)Activities treated as performed on
behalf of the remainder of corporation.
With respect to purchasing or selling activ-
ities performed by or through the branch or
similar establishment, such purchasing or
selling activities will—
(1) With respect to personal property
manufactured, produced, or constructed by
the remainder of the controlled foreign cor-
poration (or any branch treated as the re-
mainder of the controlled foreign corpora-
tion); or
(2) With respect to personal prop-
erty (other than property described in
paragraph (b)(2)(ii)(b)(1)ofthissection)
purchased or sold, or purchased and sold,
by the remainder of the controlled foreign
corporation (or any branch treated as the
remainder of the controlled foreign corpo-
ration), be treated as performed on behalf
of the remainder of the controlled foreign
corporation.
(c)and(d) [Reserved]. For further
guidance, see §1.954–3(b)(2)(ii)(c)and
(d).
(e)Comparison with ordinary treat-
ment. Income derived by a branch or
similar establishment, or by the remain-
der of the controlled foreign corporation,
shall not be determined to be foreign base
company sales income under paragraph
(b) of this section or §1.954–3(b) if the in-
come would not be so considered if it were
derived by a separate controlled foreign
corporation under like circumstances.
(f) [Reserved]. For further guidance,
see §1.954–3(b)(2)(ii)(f).
(3) [Reserved]. For further guidance,
see §1.954–3(b)(3).
(4)Illustrations. The application of this
paragraph (b)(4) may be illustrated by the
following examples:
Examples (1)and(2). [Reserved]. For
further guidance, see §1.954–3(b)(4)Ex-
amples (1)and(2).
Example (3).(i)Facts. Corporation E, a con-
trolled foreign corporation incorporated under the
laws of foreign Country X, is a wholly owned sub-
sidiary of Corporation D, also a controlled foreign
corporation incorporated under the laws of Country
X. Corporation E maintains Branch B in foreign
Country Y. Both corporations use the calendar year
as the taxable year. In 1964, Corporation E’s sole
activity, carried on through Branch B, consists of the
purchase of articles manufactured in Country X by
Corporation D, a related person, and the sale of the
articles through Branch B to unrelated persons. One
hundred percent of the articles sold through Branch B
are sold for use outside Country X and 90 percent are
also sold for use outside of Country Y. The income of
Corporation E derived by Branch B from such trans-
actions is taxed to Corporation E by Country X only
at the time Corporation E distributes such income to
Corporation D and is taxedon the basis of what the
tax (a 40 percent effective rate) would have been if
the income had been derived in 1964 by Corpora-
tion E from sources within Country X from doing
business through a permanent establishment therein.
Country Y levies an income tax at an effective rate
of 50 percent on income derived from sources within
such country, but the income of Branch B for 1964
is effectively taxed by Country Y at a 5 percent rate
since under the laws of such country, only 10 percent
of Branch B’s income is derived from sources within
such country. Corporation E makes no distributions
to Corporation D in 1964.
(ii)Result. In determining foreign base company
sales income of Corporation E for 1964, Branch B is
treated as a separate wholly owned subsidiary corpo-
ration of Corporation E, the 5 percent rate of tax be-
ing less than 90 percent of,and at least 5 percentage
points less than the 40 percent rate. Income derived
by Branch B, treated as a separate corporation, from
the purchase from a related person (Corporation D),
of personal property manufactured outside of Coun-
try Y and sold for use, disposition, or consumption
outside of Country Y constitutes foreign base com-
pany sales income. If, instead, Corporation D were
unrelated to Corporation E, none of the income would
be foreign base company sales income because Cor-
poration E would be purchasing from and selling to
unrelated persons and if Branch B were treated as a
separate corporation it would likewise be purchasing
from and selling to unrelated persons. Alternatively,
if Corporation D were related to Corporation E, but
Branch B manufactured the articles prior to sale un-
der the principles of §1.954–3(a)(4)(iv), the income
would not be foreign base company sales income be-
cause Branch B, treated as a separate corporation,
would qualify for the manufacturing exception under
§1.954–3(a)(4).
Examples (4)through(7)[Reserved]. For further
guidance, see §1.954–3(b)(4)Examples (4)through
(7).
Example (8).Uniformly applicable incentive tax
rate in one country.(i)Facts. FS is a controlled
foreign corporation organized in Country M. FS op-
erates one branch, Branch A, located in Country A.
Branch A manufactures Product X within the mean-
ing of §1.954–3(a)(4)(ii) or (a)(4)(iii). Raw materials
used in the manufacture of Product X are purchased
by FS from an unrelated person. FS engages in activ-
ities in Country M to sell Product X to a related per-
son for use outside of Country M. Employees of FS
located in Country M perform only sales functions.
The effective rate imposed in Country M on the in-
come from the sale of Product X is 10%. Country A
generally imposes an effective rate of tax on income
of 20%, but imposes a uniformly applicable incentive
rate of tax of 10% on manufacturing income and re-
lated sales income.
(ii)Result. The use of Branch A to manufacture
Product X does not have substantially the same tax ef-
fect as if Branch A were a wholly owned subsidiary
corporation of FS because the effective rate of tax on
FS’s sales income from the sale of Product X in Coun-
try M (10%) is not less than 90% of, and at least 5 per-
centage points less than, the effective rate of tax that
would apply to such income in the country in which
Branch A is located (10%). Consequently, pursuant
to §1.954–3(b)(1)(ii)(b), Branch A is not treated as
a separate corporation apart from the remainder of
FS for purposes of determining foreign base company
sales income.
Example (9).Manufacturing activities performed
by multiple branches, no branch independently sat-
isfies §1.954–3(a)(4)(i), selling activities performed
by remainder of the controlled foreign corpora-
tion, branch manufacturing activities included in
remainder contribution.(i)Facts. FS, a controlled
foreign corporation organized in Country M, has
two branches, Branch A and Branch B, located in
Country A and Country B respectively. FS pur-
chases raw materials from a related person. The raw
materials are manufactured (under the principles of
§1.954–3(a)(4)(ii) or (a)(4)(iii)) into Product X by
CM, an unrelated corporation, pursuant to a con-
tract manufacturing arrangement. CM physically
performs the substantial transformation, assembly,
or conversion required to manufacture Product X
outside of FS’s country of organization. FS manages
the manufacturing costs and capacities with respect
to the manufacture of Product X through employees
located in Country M. Further, employees of FS lo-
cated in Country M oversee the coordination between
the branches. Branch A, through the activities of em-
ployees of FS located in Country A, designs Product
X, controls manufacturing related logistics, and con-
trols the raw materials and work-in-process during
the manufacturing process. Branch B, through the
activities of employees of FS located in Country B,
provides quality control and oversight and direction
during the manufacturing process. Employees of FS
located in Country M sell Product X to unrelated
persons for use outside of Country M. Country M
imposes an effective rate of tax on sales income of
10%. Country A imposes an effective rate of tax
on sales income of 12%, and Country B imposes
an effective rate of tax on sales income of 24%.
None of the remainder of FS, Branch A, or Branch B
independently satisfies §1.954–3(a)(4)(i). However,
under the facts and circumstances of the business,
FS, as a whole, provides a substantial contribution
to the manufacture of Product X within the meaning
of §1.954–3(a)(4)(iv). Under the facts and circum-
stances of the business, the activities of the remainder
of FS and Branch A, if considered together, would
not provide a demonstrably greater contribution to
the manufacture of Product X than the activities of
Branch B. Under the facts and circumstances of the
business, however, the activities of the employees
of the remainder of FS and Branch A, if considered
February 2, 20094072009–5 I.R.B.

together, would constitute a substantial contribution
to the manufacture of Product X.
(ii)Result. Based on the facts, neither the re-
mainder of FS (through activities of its employees
in Country M) nor any branch of FS independently
satisfies §1.954–3(a)(4)(i) with respect to Product
X, but FS, as a whole, provides a substantial con-
tribution through the activities of its employees to
the manufacture of Product X. The remainder of
FS, Branch A, and Branch B each provide a con-
tribution through the activities of employees to the
manufacture of Product X. Therefore, FS must de-
termine the location of manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. The tested sales
location is Country M because the remainder of FS
performs the selling activities with respect to Product
X. The location of Branch B is the tested manu-
facturing location becausetheeffectiverateoftax
imposed on FS’s sales income by Country M (10%)
is less than 90% of, and at least 5 percentage points
less than, the effective rate of tax that would apply to
such income in Country B (24%); and Branch B is
the only manufacturing branch that would, after ap-
plying §1.954–3(b)(1)(ii)(b), be treated as a separate
corporation. The manufacturing activities performed
in Country A will be included in the contribution
of the remainder of FS for purposes of determining
the location of manufacture of Product X because
the effective rate of tax imposed on the sales income
by Country M (10%) is not less than 90% of, and at
least 5 percentage points less than, the effective rate
of tax that would apply to such income in Country
A (12%). Under the facts and circumstances of the
business, the manufacturing activities of the remain-
der of FS and Branch A, considered together, would
not provide a demonstrably greater contribution to
the manufacture of Product X than the activities of
Branch B. Therefore, the location of manufacture is
Country B, the location of Branch B. In determining
that Country B is the location of manufacture, it was
determined that after applying §1.954–3(b)(1)(ii)(b)
Branch B would be treated as a separate corpora-
tion under paragraph (b)(1)(ii)(a)ofthissectionfor
purposes of determining foreign base company sales
income. To determine whether income from the sale
of Product X is foreign base company sales income,
the remainder of FS takes into account the activities
of Branch A because, under paragraph (b)(2)(ii)(a)
of this section, Branch A would not be treated as a
separate corporation apart from FS. The remainder
of FS is considered to have manufactured Product X
under §1.954–3(a)(4)(i) because the manufacturing
activities of the remainder of FS and Branch A,
considered together, would make a substantial con-
tribution to the manufacture of Product X within the
meaning of §1.954–3(a)(4)(iv). Therefore, income
derived from the sale of Product X by the remainder
of FS does not constitute foreign base company sales
income.
(c) [Reserved]. For further guidance,
see §1.954–3(c).
(d) [Reserved]. For further guidance,
see §1.954–3(d).
(e)Effective/applicability date of
temporary regulations.Paragraphs
(b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c),
(b)(2)(i)(b), (b)(2)(ii)(a), (b)(2)(ii)(b),
(b)(2)(ii)(e), and (b)(4)Example (3),Ex-
ample (8),andExample (9)of this section
shall apply to taxable years of controlled
foreign corporations beginning after June
30, 2009, and for taxable years of United
States shareholders in which or with which
such taxable years of the controlled for-
eign corporations end.
(f)Application of temporary regula-
tions to earlier taxable years.Forthe
application of these temporary regula-
tions retroactively with respect to taxable
years of controlled foreign corporations
and to open taxable years of United States
shareholders in which or with which such
taxable years of the controlled foreign
corporations end, see §1.954–3(d).
(g)Expiration date. The applicability
of this section expires on or before Decem-
ber 23, 2011.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 18, 2008.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 24,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2008, 73 F.R. 79334)
Section 1256.—Section
1256 Contracts Marked
to Market
(Also §§ 446, 481, 7805; 1.446–1, 301.7805–1.)
Section 1256 contracts marked to
market.This ruling holds that Dubai Mer-
cantile Exchange, which is a United Arab
Emirates Authorized Market Institution, is
a qualified board or exchange within the
meaning of section 1256(g)(7)(C) of the
Code.
Rev. Rul. 2009–4
ISSUE
Is Dubai Mercantile Exchange, which
is a United Arab Emirates Authorized
Market Institution, a qualified board or
exchange within the meaning of section
1256(g)(7)(C) of the Internal Revenue
Code?
LAW
Section 1256(g)(7) of the Code pro-
vides that the term “qualified board or ex-
change” means:
(A) a national securities exchange
which is registered with the Securities and
Exchange Commission,
(B) a domestic board of trade desig-
nated as a contract market by the Com-
modity Futures Trading Commission, or
(C) any other exchange, board of trade,
or other market which the Secretary deter-
mines has rules adequate to carry out the
purposes of section 1256.
HOLDING
The Internal Revenue Service deter-
mines that Dubai Mercantile Exchange,
whichisaUnitedArabEmiratesAutho-
rized Market Institution, is a qualified
board or exchange within the meaning of
section 1256(g)(7)(C) of the Code.
EFFECTIVE DATE
Under the authority of section
7805(b)(8) of the Code, this revenue
ruling is effective for Dubai Mercantile
Exchange Contracts (commodity futures
contracts and futures contract options)
entered into on or after February 1, 2009.
CHANGE IN METHOD OF
ACCOUNTING
A change in the treatment of Dubai
Mercantile Exchange Contracts to comply
with this revenue ruling is a change in
method of accounting within the mean-
ing of sections 446 and 481 of the Code
and the regulations thereunder. The Com-
missioner grants consent to taxpayers to
change to the section 1256 mark to market
method for the first taxable year during
which the taxpayer holds a Dubai Mercan-
tile Exchange Contract that was entered
into on or after February 1, 2009. Such a
taxpayer need not file a Form 3115,Appli-
cation for Change in Accounting Method.
Dubai Mercantile Exchange Contracts that
were entered into before February 1, 2009,
are not covered by the change in method
for which consent is granted. Because
the change is being made on a “cut-off”
basis, there is no potential omission or
duplication of income or deductions, and
2009–5 I.R.B.408February 2, 2009

therefore no adjustment under section 481
is required.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is K. Scott Brown of the Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Brown at (202) 622–7454 (not a
toll-free call).
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 31.6011(a)–1: Returns under Federal Insur-
ance Contributions Act.
T.D. 9440
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 31
Employer’s Annual Federal
Tax Return and Modifications
to the Deposit Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
temporary regulationsrelatingtothean-
nual filing of Federal employment tax
returns and requirements for employment
tax deposits. These temporary regulations
relate to sections 6011 and 6302 of the
Internal Revenue Code (Code) concern-
ing reporting and paying income taxes
withheld from wages and reporting and
paying taxes under the Federal Insurance
Contributions Act (FICA) (collectively,
“employment taxes”). These temporary
regulations generally allow certain em-
ployers to file a Form 944,“Employer’s
ANNUAL Federal Tax Return,”rather than
Form 941,“Employer’s QUARTERLY
Federal Tax Return.”In addition to rules
related to Form 944, the temporary regu-
lations provide an additional method for
employers who file Form 941 to determine
whether the amount of accumulated em-
ployment taxes is consideredde minimis.
The portions of this document that are final
regulations provide necessary cross-refer-
ences to the temporary regulations. The
text of these temporary regulations also
serves as the text of the proposed regula-
tions (REG–148568–04) set forth in this
issue of the Bulletin.
DATES:Effective Date:These regulations
are effective on December 29, 2008.
Applicability Date:For dates of
applicability, see §§31.6011(a)–1T(g),
31.6011(a)–4T(d), and 31.6302–1T(n).
FOR FURTHER INFORMATION
CONTACT: Audra Dineen, (202)
622–4910 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These temporary regulations amend
the Regulations on Employment Taxes
and Collection of Income Tax at Source
(26 CFR part 31) under section 6011
relating to the Federal employment tax
return filing requirements and section
6302 relating to the employment tax
deposit requirements. These temporary
regulations are part of the IRS’s effort
to reduce taxpayer burden by permitting
certain employers to file one return
annually to report their employment tax
liabilities instead of four quarterly returns.
These temporary regulations affect
taxpayers that file Form 941,“Employer’s
QUARTERLY Federal Tax Return,”Form
944,“Employer’s ANNUAL Federal Tax
Return,”and any related Spanish-language
returns or returns for U.S. possessions.
On January 3, 2006, a temporary reg-
ulation (T.D. 9239, 2006–1 C.B. 401)
relating to Form 944 (the 2006 temporary
regulation) was published in theFederal
Register(71 FR 11). A notice of proposed
rulemaking (REG–148568–04, 2006–1
C.B. 417) cross-referencing the temporary
regulations was published in theFederal
Registerfor the same day (71 FR 46) (the
2006 proposed regulation). A correction
to the 2006 temporary regulation was pub-
lished in the Federal Register on March
17, 2006 (71 FR 13766). No requests for
a public hearing were received; therefore,
no public hearing was held. Comments
responding to the notice of proposed rule-
making were received.
Those comments requested that use of
Form 944 be changed from mandatory
to voluntary and that the amount of the
employment tax liability used to deter-
mine whether employers are eligible to
file Form 944 (the “eligibility threshold”)
be increased. The Treasury Department
and the IRS agree with the suggestion to
make Form 944 voluntary. The Treasury
Department and the IRS will continue to
consider whether to increase the eligibil-
ity threshold. The final regulations allow
the eligibility threshold to be increased
through future guidance.
These temporary regulations continue
to permit most employers who file Form
944 to pay accumulated employment taxes
annually when they file their returns and
modify the lookback period andde min-
imisdeposit rule for these employers. In
addition to the rules related to Form 944,
these temporary regulations provide an ad-
ditional method for employers who file
Forms 941 quarterly to determine whether
the amount of accumulated employment
taxesisconsideredde minimis.Thissafe
harbor was originally proposed in the 2006
proposed regulation.
Explanation of Provisions
Form 944 — Regulations Concerning
Filing Requirements Under Section 6011
These temporary regulations allow
certain employers to file an annual em-
ployment tax return, Form 944, to report
their social security, Medicare, and with-
held Federal income taxes rather than the
quarterly Form 941. For these employers,
Form 944 will replace Form 941 and re-
duce their burden by reducing the number
of returns they arerequired to file each
year. Form 944 will not replace Form 943,
“Employer’s Annual Federal Tax Return
for Agricultural Employees,”or Schedule
H (Form 1040),“Household Employment
Taxes.”However, if an employer files
Form 944, the employer may choose to
report wages with respect to household
employees on Form 944, instead of re-
porting such wages on Schedule H (Form
1040). Form 944 is generally due January
31 of the year following the tax year for
which the return is filed. If the employer
February 2, 20094092009–5 I.R.B.

timely deposits all accumulated employ-
ment taxes on or before January 31 of
the year following the tax year for which
the return is filed, the employer will have
10 extra calendar days to file Form 944
pursuant to §31.6071(a)–1(a).
Under the 2006 proposed and tempo-
rary regulations, the IRS sent a notification
letter to qualified employers with an esti-
mated employment tax liability of $1,000
or less requiring them to participate in the
Employers’ Annual Federal Tax Program
(Form 944) (hereinafter referred to as the
Form 944 Program). Employers were eli-
gible to opt out only if they estimated that
their employment tax liability would ex-
ceed the $1,000 threshold or if they wanted
to e-file Forms 941 quarterly instead. New
employers who estimated that their em-
ployment tax liability would be $1,000 or
less also were eligible to file Form 944.
These employers were identified by their
responses on Form SS–4,Application for
Employer Identification Number,andno-
tified that they were required to file Form
944 in the letter advising them of their em-
ployer identification number. Employers
that were not identified by the IRS in ei-
ther manner were able to contact the IRS
if they thought they were qualified. If
the IRS determined they were qualified, it
wouldsendconfirmationtotheseemploy-
ers. Once employers received this letter,
they were required to file Form 944 instead
of Forms 941.
Commentators suggested that Form
944 should be voluntary instead of manda-
tory. This benefits taxpayers because it
allows them to choose the filing require-
ment they prefer and to change from year
to year more easily. In addition, commen-
tators suggested that the threshold should
be increased in order to allow more em-
ployers to take advantage of Form 944 and
to bring the threshold in line with thede
minimisdeposit rule amount, which is less
than $2,500 as discussed more fully in this
preamble. Sections 31.6011(a)–1T(a)(5)
and 31.6011(a)–4T(a)(4) have been re-
vised to incorporate the suggestion to
make the program voluntary. Although
these temporary regulations do not adopt
the suggestion to increase the eligibility
threshold, the Treasury Department and
the IRS will continue to consider this sug-
gestion and may increase the threshold in
the future. To accommodate any potential
increase to the threshold amount before fi-
nal regulations are issued, these temporary
regulations contain a provision that allows
the IRS to increase the eligibility threshold
by guidance published in the Internal Rev-
enue Bulletin. See §601.601(d)(2)(ii)(b).
Under §§31.6011(a)–1T(a)(5) and
31.6011(a)–4T(a)(4) in effect for taxable
years beginning on or after January 1,
2009, employers who estimate that their
annual employment tax liability will be
$1,000 or less can contact the IRS to ex-
press their desire to file Form 944 instead
of Forms 941 for a taxable year. Only
upon such a request will the IRS send a
notification letter to qualified employers
confirming that they may file Form 944
for that taxable year. Once employers re-
ceive this notice they must file Form 944
and cannot file Forms 941 instead for a
taxable year until they contact the IRS to
change their filing requirement to Form
941 for that taxable year and receive con-
firmation that their filing requirement has
been changed.
The IRS will issue guidance published
in the Internal Revenue Bulletin inform-
ing employers how they can contact the
IRStoparticipateintheForm944Program
and how they can elect out if they later de-
cide that they want to file Forms 941 in-
stead of Form 944. Under the 2006 reg-
ulations, employers were only eligible to
opt out if they estimated that their employ-
ment tax liability would exceed the $1,000
thresholdoriftheywantedtoe-fileForms
941 quarterly instead. Because the pro-
gram is being made voluntary, beginning
in tax year 2010, employers will be able to
opt out for any reason if they follow pro-
cedures to be provided in future guidance.
Employers that have received notification
of their qualification to file Form 944, even
if the notification was received prior to the
publication of these regulations, must con-
tinue to file Form 944 unless they properly
opt out of the Form 944 program.
In addition, a few clarifying revisions
were made to the regulations under section
6011. First, §§31.6011(a)–1T(a) and
31.6011(a)–4T(a) wereclarified by adding
references to §§31.6011(a)–1T(a)(5)
and 31.6011(a)–4T(a)(4) to account for
Form 944 in §§31.6011(a)–1T(a)(1)
and 31.6011(a)–4T(a)(1).Sec-
ond,§§31.6011(a)–1(a)(5)and
31.6011(a)–4(a)(4) were revised to re-
move the details regarding the procedures
to use for opting out of the Form 944
program and provide that the IRS will
issue guidance published in the Internal
Revenue Bulletin containing these proce-
dures. The IRS will issue procedures in
other forms of guidance published in the
IRB regarding how to opt out of Form 944
for taxable year 2009 and how to elect
to file Form 944 for taxable year 2010
and beyond. This will allow the IRS to
administer the program more effectively,
by having the flexibility to adjust the
procedures as necessary due to changes in
the program and taxpayer response.
Form 944 — Regulations Concerning
Deposit Requirements Under Section
6302
These temporary regulations revise the
2006 temporary regulation concerning
requirements for employers to make de-
posits of employment taxes under section
6302 and §31.6302–1 to make a few clar-
ifying changes to §31.6302–1 related to
Form 944. These temporary regulations
continue to permit employers who file
Form 944 to deposit or pay their accumu-
lated employment taxes annually when
they file their Form 944 if they satisfy the
provisions of thede minimisdeposit rule,
as modified in §31.6302–1T(f)(4)(iii),
rather than make monthly or semi-weekly
deposits. These temporary regulations
continue to contain the exception in
§31.6302–1T(c)(6) for employers who
filed Form 944 in the preceding year but
who no longer qualify because their an-
nual employment taxliability exceeds the
eligibility threshold.
Also, these temporary regulations con-
tinue to provide a different lookback
period for Form 944 filers to use to deter-
mine an employer’s status as a monthly
or semi-weekly depositor. The lookback
period was changed in the 2006 temporary
and proposed regulations because once an
employer begins to file annual Form 944
returns, it may not be possible for the IRS
to determine the employer’s aggregate
amount of employment tax liability during
the lookback period set forth in the existing
regulations (12-month period ending the
preceding June 30) because the employer
may not have filed any quarterly returns
during that period. Under the 2006 tem-
porary regulation, §31.6302–1T(b)(4)(i)
provided that the lookback period for em-
ployers who filed Form 944 during the
2009–5 I.R.B.410February 2, 2009

current, or preceding, calendar year is the
second calendar year preceding the current
calendar year. For example, the lookback
period for calendar year 2009 is calendar
year 2007.
In these temporary regulations,
§31.6302–1T(b)(4)(i) is clarified to reflect
that the lookback period is the second
preceding calendar year for employers
who filed Form 944 for either of the two
previous calendar years, not just the one
previous calendar year. This clarification
was needed because an employer would
not have filed the requisite quarterly re-
turns to use the other lookback period
(12-monthperiodendingJune30)ifthey
filed Form 944 in either of the prior years.
For example, if an employer filed Form
944 in 2006 but not in 2007, the lookback
period for 2008 would be 2006, because
they would not have filed quarterly returns
for July through December 2006 and, thus,
it would be impossible to use July 2006 —
June 2007 as the lookback period.
Section 31.6302–1T(b)(4)(i) also is re-
vised to clarify that the amount of tax re-
ported during the lookback period is de-
termined without regard to the employer’s
filing requirement. In other words, in the
preceding example, if an employer is re-
quired to file Forms 941 for 2008 but filed
Form 944 for the lookback period (2006),
the amount of employment tax liability re-
ported for the lookback period would be
the amount of employment tax the em-
ployer reported on its Form 944 for 2006
even though the employer will file Forms
941 to report its 2008 liability. The reverse
also is true. The employment tax liability
reported for the lookback period (2006) of
an employer required to file Form 944 for
2008 would be the sum of the liabilities it
reported on its four Forms 941 for 2006.
In addition, §31.6302–1T(b)(4)(ii) is
revised by changing the term “supple-
mental” to “adjusted” and deleting the
reference to Form 941c,“Supporting
Statement To Correct Information,”due to
the revisions to the process of adjusting
employment tax liability. Final regula-
tions (T.D. 9405, 2008–32 I.R.B. 293)
relating to employment tax adjustments
were published in theFederal Register
(73 FR 37371) on July 1, 2008. For pe-
riods ending on or before December 31,
2008, the employment tax liability re-
ported on the original return includes any
prior period adjustments reported on that
return (for example, prior period adjust-
ments supported by a Form 941c attached
to the return for a subsequent period). For
periods beginning on or after January 1,
2009, employers can no longer make prior
period adjustments on a return. Instead,
employers will use an adjusted return or
claim for refund to make corrections to the
amounts reported on their original returns.
Lastly, §31.6302–1T is revised by adding
references to Form 944 in paragraphs
(e)(2) and (g)(1).
Form 941 — New Deposit Rule Safe
Harbor Under Section 6302
In addition to revising the 2006 tempo-
rary regulation regarding Form 944, these
temporary regulations incorporate the safe
harbor for employers who file Forms 941
that was included in the 2006 proposed
regulation. The safe harbor helps small
employers who file Form 941 and have an
unexpected increase in their deposit liabil-
ity for a quarterly return period. These
temporary regulations provide an alternate
method for determining whether the em-
ployer’s employment tax obligations are
de minimis, which is based on the employ-
ment taxes due for the prior return period.
This special rule applies only to employers
filing quarterly tax returns and, therefore,
does not apply to employers who file Form
944.
Generally, deposits of taxes reported
on Form 941,“Employer’s QUARTERLY
Federal Tax Return,”are due monthly
or semi-weekly. If an employer failed
to make timely deposits of employment
taxes, the employer, absent reasonable
cause, is subject to the penalty for failure to
deposit under section 6656. Prior to these
temporary regulations, §31.6302–1(f)(4)
(thede minimisdeposit rule) provided that,
for quarterly and annual return periods, if
the aggregate amount of employment taxes
for the return period is less than $2,500
and that amount was deposited or paid
with a timely filed return for that return
period, the amount was deemed to have
been timely deposited and the employer
was not subject to the penalty for failure to
deposit. Accordingly, employers who paid
their employment taxes when they timely
filed their quarterly returns were deemed
to have timely deposited their taxes if the
amount of taxes due was less than $2,500
for that quarter. Similarly, employers
who paid their employment taxes when
they timely filed their annual returns were
deemed to have timely deposited if the
amount of taxes due was less than $2,500
for the entire year.
Under these temporary regulations,
pursuant to §31.6302–1T(f)(4)(i) and (ii),
employers may pay their employment
taxeswhentheytimelyfiletheirquarterly
returns and be deemed to have timely de-
posited if the amount of the taxes due for
the current quarter or for the prior quarter
is less than $2,500.
This special rule can be illustrated by
the following example: an employer has
less than $50,000 in employment taxes
reported during the lookback period and
is therefore a monthly depositor under
§31.6302–1(b)(2). The employer’s em-
ployment tax liabilities for the first and
second quarters of 2010 are $2,450 and
$2,400, respectively. In the third quarter
of 2010, however, the employer’s employ-
ment tax liability is $2,550. Under thede
minimisdeposit rule in effect prior to these
temporary regulations, if the employer
pays the $2,550 with its return for the third
quarter of 2010, the amount would not be
considered timely deposited for that quar-
ter and, therefore, the employer would
be assessed the section 6656 penalty for
failure to deposit.
Modifying thede minimisdeposit rule
to allow employers to base the determina-
tion on the employment taxes due for the
immediately preceding quarter provides a
safe harbor for employers regarding their
deposit obligations. Thus, in this exam-
ple, when the employer had an increase in
its employment tax liability for the third
quarter of 2010, its remittance still would
be deemed to have been timely deposited
because the taxes for the immediately
preceding return period werede minimis.
These regulations have no application to
the One-Day rule in §31.6302–1(c)(2),
which requires employers to make a de-
posit on the next banking day if they
accumulate $100,000 or more of employ-
ment taxes on any day during a deposit
period. Therefore, if an employer accu-
mulates $100,000 or more of employment
taxes during a deposit period, the em-
ployer must make a deposit on the next
banking day even if the employer’s em-
ployment tax liability for the prior quarter
wasde minimis. Due to the programming
changes necessary to implement this safe
February 2, 20094112009–5 I.R.B.

harbor, the safe harbor will be available
for deposit periods beginning on or after
January 1, 2010.
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. For appli-
cability of the Regulatory Flexibility Act,
please refer to the Special Analyses section
of the preamble to the cross-referenced no-
tice of proposed rulemaking published in
this issue of the Bulletin. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
these regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these final
regulations are Raymond Bailey and
Audra M. Dineen of the Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Amendments to the Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph. 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.6011(a)–1 is
amended by revising paragraph (a)(1) and
adding paragraph (g) to read as follows:
§31.6011(a)–1 Returns under Federal
Insurance Contributions Act.
(a) * * * (1) [Reserved]. For further
guidance, see §31.6011(a)–1T(a)(1).
*****
(g) [Reserved]. For further guidance,
see §31.6011(a)–1T(g).
Par. 3. Section 31.6011(a)–1T is re-
vised to read as follows:
§31.6011(a)–1T Returns under Federal
Insurance Contributions Act (temporary).
(a)Requirement—(1)In general.
Except as otherwise provided in
§31.6011(a)–5, every employer required
to make a return under the Federal In-
surance Contributions Act, as in effect
prior to 1955, for the calendar quarter
ended December 31, 1954, in respect of
wages other than wages for agricultural
labor, shall make a return for each sub-
sequent calendar quarter (whether or not
wages are paid in such quarter) until he
has filed a final return in accordance with
§31.6011(a)–6. Except as otherwise pro-
vided in §31.6011(a)–5, every employer
not required to make a return for the cal-
endar quarter ended December 31, 1954,
shall make a return for the first calen-
dar quarter thereafter in which he pays
wages, other than wages for agricultural
labor, subject to the tax imposed by the
Federal Insurance Contributions Act as
in effect after 1954, and shall make a re-
turn for each subsequent calendar quarter
(whether or not wages are paid therein)
until he has filed a final return in ac-
cordance with §31.6011(a)–6. Except
as otherwise provided in §31.6011(a)–8
and in §31.6011(a)–1(a)(3), (a)(4), and
(a)(5), Form 941,“Employer’s QUAR-
TERLY Federal Tax Return,”is the form
prescribed for making the return required
by this subparagraph. Such return shall
not include wages for agricultural labor
requiredtobereportedonanyreturn
prescribed by §31.6011(a)–1(a)(2). The
return shall include wages received by an
employee in the form of tips only to the
extent of the tips reported by the employee
to the employer in a written statement fur-
nished to the employer pursuant to section
6053(a).
(a)(2) through (a)(4) [Reserved]. For
further guidance, see §31.6011(a)–1(a)(2)
through (a)(4).
(5)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. Employers notified of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944) are re-
quired to file Form 944,“Employer’s
ANNUAL Federal Tax Return,”instead of
Form 941 to make a return as required
by paragraph (a)(1) of this section. Upon
proper request by the employer, the In-
ternal Revenue Service (IRS) will notify
employers in writing of their qualification
for the Employers’ Annual Federal Tax
Program (Form 944). Qualified employ-
ers are those with an estimated annual
employment tax liability (that is, social
security, Medicare, and withheld Federal
income taxes) of $1,000 or less for the
entire calendar year, except employers
required under §31.6011(a)–1(a)(2) to
makeareturnonForm943,“Employer’s
Annual Federal Tax Return for Agricul-
tural Employees,”or §31.6011(a)–1(a)(3)
to make a return on Schedule H (Form
1040),“Household Employment Taxes.”
The IRS may increase the amount of the
estimated annual employment tax liability
that qualifies employers to file Form 944
through a revenue procedure, notice, or
other IRS guidance published in the Inter-
nal Revenue Bulletin. The IRS will notify
employers when they no longer qualify
for the Employers’ Annual Federal Tax
Program (Form 944) and must file Forms
941 instead.
(ii)Requests to participate and eligi-
bility to opt out of the Employers’ Annual
Federal Tax Program (Form 944).TheIRS
will establish procedures in a revenue pro-
cedure, notice, or other guidance published
in the Internal Revenue Bulletin for em-
ployers to follow to request to receive no-
tification to participate in the Employers’
Annual Federal Tax Program (Form 944)
and to be removed from the Employers’
Annual Federal Tax Program (Form 944)
after becoming a participant in order to file
Forms 941 instead.
(b) through (f) [Reserved]. For further
guidance, see §31.6011(a)–1(b) through
(f).
(g)Effective/applicability dates—(1)In
general. Paragraphs (a)(1) and (a)(5) of
this section apply to taxable years begin-
ning on or after December 30, 2008. The
rules of paragraph (a)(1) of this section
that apply to taxable years beginning be-
fore December 30, 2008, are contained in
§31.6011(a)–1. The rules of paragraph
(a)(5) of this section that apply to tax-
able years beginning before December 30,
2008, are contained in §31.6011(a)–1T in
effect prior to December 30, 2008.
(2)Expiration date. The applicability
of this section will expire on or before De-
cember 23, 2011.
2009–5 I.R.B.412February 2, 2009

Par. 4. Section 31.6011(a)–4 is
amended by revising paragraph (a)(1) and
adding paragraph (d) to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
(a) * * * (1) [Reserved]. For further
guidance, see §31.6011(a)–4T(a)(1).
*****
(d) [Reserved]. For further guidance,
see §31.6011(a)–4T(d).
Par. 5. Section 31.6011(a)–4T is re-
vised to read as follows:
§31.6011(a)–4T Returns of income tax
withheld (temporary).
(a)Withheld from wages—(1)In gen-
eral. Except as otherwise provided in
§31.6011(a)–4(a)(2), (a)(3), (a)(4), and
(b), and in §31.6011(a)–5, every person
required to make a return of income tax
withheld from wages pursuant to section
3402 shall make a returnfor the first calen-
dar quarter in which the person is required
to deduct and withhold such tax and for
each subsequent calendar quarter, whether
or not wages are paid therein, until the per-
son has filed a final return in accordance
with §31.6011(a)–6. Except as otherwise
provided in §31.6011(a)–4(a)(2), (a)(3),
(a)(4) and (b), and in §31.6011(a)–8, Form
941,“Employer’s QUARTERLY Federal
Tax Return,”is the form prescribed for
making the return required under this para-
graph (a)(1).
(a)(2) through (a)(3) [Reserved]. For
further guidance, see §31.6011(a)–4(a)(2)
through (a)(3).
(4)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. Employers notified of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944) are re-
quired to file Form 944,“Employer’s
ANNUAL Federal Tax Return,”instead of
Form 941 to make a return of income tax
withheld from wages pursuant to section
3402. Upon proper request by the em-
ployer, the Internal Revenue Service (IRS)
will notify employers in writing of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944). Quali-
fied employers are those with an estimated
annual employment tax liability (that is,
social security, Medicare, and withheld
federal income taxes) of $1,000 or less for
the entire calendar year, except employ-
ers required under §31.6011(a)–4(a)(2)
to make a return on Schedule H (Form
1040),“Household Employment Taxes,”
or §31.6011(a)–4(a)(3) to make a return on
Form 943,“Employer’s Annual Federal
Tax Return for Agricultural Employees.”
The IRS may increase the amount of the
estimated annual employment tax liability
that qualifies employers to file Form 944
through a revenue procedure, notice or
other IRS guidance published in the Inter-
nal Revenue Bulletin. The IRS will notify
employers when they no longer qualify
for the Employers’ Annual Federal Tax
Program (Form 944) and must file Forms
941 instead.
(ii)Request to participate and eligibil-
ity to opt out of the Employers’ Annual
Federal Tax Program (Form 944).TheIRS
will establish procedures in a revenue pro-
cedure, notice, or other IRS guidance pub-
lished in the Internal Revenue Bulletin for
employers to follow to request to receive
notification to participate in the Employ-
ers’ Annual Federal Tax Program (Form
944) and to be removed from the Employ-
ers’ Annual Federal Tax Program (Form
944) after becoming a participant in order
to file Forms 941 instead.
(b) through (c) [Reserved]. For further
guidance, see §31.6011(a)–4(b) through
(c).
(d)Effective/applicability dates—(1)In
general. Paragraphs (a)(1) and (a)(4) of
this section apply to taxable years begin-
ning on or after December 30, 2008. The
rules of paragraph (a)(1) of this section
that apply to taxable years beginning be-
fore December 30, 2008, are contained in
§31.6011(a)–4. The rules of paragraph
(a)(4) of this section that apply to tax-
able years beginning before December 30,
2008, are contained in §31.6011(a)–4T in
effect prior to December 30, 2008.
(2)Expiration date. The applicability
of this section will expire on or before De-
cember 23, 2011.
Par. 6. Section 31.6302–0 is
amended by revising the entries for
§31.6302–1(f)(4)(i), (g)(1) and (n) to read
as follows:
§31.6302–0 Table of contents.
*****
§31.6302–1 Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(f) * * *
(4) * * *
(i) [Reserved]. For further guid-
ance, see §31.6302–0T, the entry for
§31.6302–1T(f)(4)(i).
*****
(g) * * *
(1) [Reserved]. For further guid-
ance, see §31.6302–0T, the entry for
§31.6302–1T(g)(1).
*****
(n) [Reserved]. For further guid-
ance, see §31.6302–0T, the entry for
§31.6302–1T(n).
Par. 7. Section 31.6302–0T is added to
read as follows:
§31.6302–0T Table of contents
(temporary).
This section lists the captions that ap-
pear in §31.6302–1T.
Section 31.6302–1T Federal tax deposit
rules for withheld income taxes and
taxes under the Federal Insurance
Contributions Act (FICA) attributable to
payments made after December 31, 1992
(temporary).
(a) through (b)(3) [Reserved]. For fur-
ther guidance, see §31.6302–0, the entries
for §31.6302–1(a) through (b)(3).
(4) Lookback period.
(i) In general.
(ii) Adjustments and claims for refund.
(c)(1) through (c)(4) [Reserved]. For
further guidance, see §31.6302–0, the en-
tries for §31.6302–1(c)(1) through (c)(4).
(c)(5) Exception to the monthly and
semi-weekly deposit rules for employers
in the Employers’ Annual Federal Tax
Program (Form 944).
(c)(6) Extension of time to deposit for
employers in the Employers’ Annual Fed-
eral Tax Program (Form 944) during the
preceding year.
(d)Examples 1through5[Reserved].
For further guidance, see §31.6302–0,
February 2, 20094132009–5 I.R.B.

the entries for §31.6302–1(d)Examples 1
through5.
Example 6. Extension of time to deposit
for employers who filed Form 944 for the
preceding year satisfied.
(e) through (f)(3) [Reserved]. For fur-
ther guidance, see §31.6302–0, the entries
for §31.6302–1(e) through (f)(3).
(4)De minimisrule.
(i)De minimisdeposit rules for quar-
terly and annual return periods beginning
on or after January 1, 2001.
(ii)De minimisdeposit rule for quar-
terlyreturnperiodsbeginningonorafter
January 1, 2010
(iii)De minimisdeposit rule for em-
ployers who file Form 944.
(f)(5)Examples 1and2[Reserved]. For
further guidance, see §31.6302–0, the en-
tries for §31.6302–1(f)(5)Examples 1and
2.
Example 3.De minimisdeposit rule for
employers who file Form 944 satisfied.
(g) [Reserved]. For further guid-
ance, see §31.6302–0, the entry for
§31.6302–1(g).
(1) In general.
(g)(2) through (m) [Reserved]. For fur-
ther guidance, see §31.6302–0, the entries
for §31.6302–1(g)(2) through (m).
(n) Effective/applicability dates.
Par. 8. Section 31.6302–1 is amended
by revising paragraphs (e)(2), (f)(4)(i),
(g)(1) and (n) and adding paragraph
(f)(4)(ii) to read as follows:
*****
(e) * * *
(2) [Reserved]. For further guidance,
see §31.6302–1T(e)(2).
(f) * * *
(4) * * * (i) and (ii) [Reserved]. For
further guidance, see §31.6302–1T(f)(4)(i)
and (ii).
*****
(g)***(1)[Reserved]. Forfurther
guidance, see §31.6302–1T(g)(1).
*****
(n) [Reserved]. For further guidance,
see §31.6302–1T(n).
Par. 9. Section 31.6302–1T is revised
to read as follows:
§31.6302–1T Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992 (temporary).
(a) through (b)(3) [Reserved]. For fur-
ther guidance, see §31.6302–1(a) through
(b)(3).
(4)Lookback period—(i)In general.
For employers who file Form 941,“Em-
ployer’s QUARTERLY Federal Tax Re-
turn,”the lookback period for each calen-
dar year is the twelve month period ended
the preceding June 30. For example, the
lookback period for calendar year 2006 is
the period July 1, 2004, to June 30, 2005.
The lookback period for employers who
file Form 944,“Employer’s ANNUAL
Federal Tax Return,”or filed Form 944
either of the two previous calendar years,
is the second calendar year preceding the
current calendar year. For example, the
lookback period for calendar year 2006
is calendar year 2004. In determining
status as either a monthly or semi-weekly
depositor, an employer should determine
the aggregate amount of employment tax
liabilities reported on its return(s) (Form
941 or Form 944) for the lookback pe-
riod. The amount of employment tax
liabilities reported for the lookback period
is the amount the employer reported on
either Forms 941 or Form 944 even if
the employer is required to file the other
form(s) for the current calendar year. New
employers shall be treated as having em-
ployment tax liabilities of zero for any part
of the lookback period before the date the
employer started or acquired its business.
(ii)Adjustments and claims for refund.
The employment tax liability reported on
the original return for the return period is
the amount taken into account in determin-
ing whether the aggregate amount of em-
ployment taxes reported for the lookback
period exceeds $50,000. Any amounts re-
ported on adjusted returns or claims for re-
fund pursuant to sections 6205, 6402, 6413
and 6414 filed after the due date of the
original return are not taken into account
when determining the aggregate amount of
employment taxes reported for the look-
back period. However, prior period adjust-
ments reported on Forms 941 or 944 for
2008 and earlier years are taken into ac-
count in determining the employment tax
liability for the return period in which the
adjustments are reported.
(c)(1) through (c)(4) [Reserved]. For
further guidance, see §31.6302–1(c)(1)
through (c)(4).
(5)Exception to the monthly and semi-
weekly deposit rules for employers in the
Employers’ Annual Federal Tax Program
(Form 944). Generally, an employer who
files Form 944 for a taxable year may remit
its accumulated employment taxes with its
timely filed return for that taxable year
and is not required to deposit under ei-
ther the monthly or semi-weekly rules set
forth in §31.6302–1(c)(1) and (2) during
that taxable year. An employer who files
Form 944 whose actual employment tax
liability exceeds the eligibility threshold,
as set forth in §§31.6011(a)–1T(a)(5) and
31.6011(a)–4T(a)(4), will not qualify for
this exception and should follow the de-
posit rules set forth in this section.
(6)Extension of time to deposit for em-
ployers in the Employers’ Annual Federal
Tax Program (Form 944) during the pre-
ceding year. An employer who filed Form
944 for the preceding year but will file
Forms 941 instead for the current year will
be deemed to have timely deposited its cur-
rent year’s January deposit obligation(s)
under §31.6302–1(c)(1) through (4) if the
employer deposits the amount of such de-
posit obligation(s) by March 15 of that
year.
(d)Examples 1through5[Reserved].
For further guidance, see §31.6302–1(d)
Examples 1through5.
Example 6.Extension of time to deposit for
employers who filed Form 944 for the preceding year
satisfied. F (a monthly depositor) was notified to
file Form 944 to report its employment tax liabilities
for the 2006 calendar year. F filed Form 944 on
January 31, 2007, reporting a total employment tax
liability for 2006 of $3,000. Because F’s annual
employment tax liability for the 2006 taxable year
exceeded $1,000 (the applicable eligibility threshold
for that taxable year), the Internal Revenue Service
(IRS) notified F to file Forms 941 for calendar year
2007 and thereafter. Based on F’s liability during
the lookback period (calendar year 2005, pursuant
to paragraph (b)(4)(i) of this section), F is a monthly
depositor for 2007. F accumulates $1,000 in em-
ployment taxes during January 2007. Because F is a
monthly depositor, F’s January deposit obligation is
due February 15, 2007. F does not deposit these ac-
cumulated employment taxes on February 15, 2007.
F accumulates $1,500 in employment taxes during
February 2007. F’s February deposit is due March
15, 2007. F deposits the $2,500 of employment taxes
accumulated during January and February on March
15, 2007. Pursuant to §31.6302–1T(c)(6), F will be
deemed to have timely deposited the employment
taxes due for January 2007, and, thus, the IRS will
2009–5 I.R.B.414February 2, 2009

not impose a failure-to-deposit penalty under section
6656 for that month.
(e)(1) [Reserved]. For further guid-
ance, see §31.6302–1(e)(1).
(2) The termemployment taxesdoes not
include taxes with respect to wages for do-
mestic service in a private home of the em-
ployer, unless the employer is otherwise
required to file a Form 941 or Form 944
under §31.6011(a)–4, §31.6011(a)–4T, or
§31.6011(a)–5. In the case of employ-
ers paying advance earned income credit
amounts, the amount of taxes required to
be deposited shall be reduced by advance
amounts paid to employees. Also, see
§31.6302–3 concerning a taxpayer’s op-
tion with respect to payments made before
January 1, 1994, to treat backup withhold-
ing amounts under section 3406 separately.
(f)(1) through (f)(3) [Reserved]. For
further guidance, see §31.6302–1(f)(1)
through (f)(3).
(4)De minimis rule—(i)De minimis de-
posit rules for quarterly and annual re-
turn periods beginning on or after January
1, 2001. If the total amount of accumu-
lated employment taxes for the return pe-
riod isde minimisand the amount is fully
deposited or remitted with a timely filed
return for the return period, the amount de-
posited or remitted will be deemed to have
been timely deposited. The total amount of
accumulated employment taxes isde min-
imisif it is less than $2,500 for the return
period or if it isde minimispursuant to
paragraph (f)(4)(ii) of this section.
(ii)De minimis deposit rule for quar-
terly return periods beginning on or after
January 1, 2010. For purposes of para-
graph (f)(4)(i) of this section, if the total
amount of accumulated employment taxes
for the immediately preceding quarter was
less than $2,500, unless §31.6302–1(c)(3)
applies to require a deposit at the close of
the next banking day, then the employer
will be deemed to have timely deposited
the employer’s employment taxes for the
current quarter if the employer complies
with the time and method payment require-
ments contained in paragraph (f)(4)(i) of
this section.
(iii)De minimis deposit rule for em-
ployers who file Form 944.Anemployer
who files Form 944 whose employment
tax liability for the year equals or exceeds
$2,500 but whose employment tax liability
for a quarter of the year isde minimispur-
suant to paragraph (f)(4)(i) of this section
will be deemed to have timely deposited
the employment taxes due for that quarter
if the employer fully deposits the employ-
ment taxes accumulated during the quarter
by the last day of the month following the
close of that quarter. Employment taxes
accumulated during the fourth quarter can
be either deposited by January 31 or remit-
ted with a timely filed return for the return
period.
(5)Examples 1and2[Reserved]. For
further guidance, see §31.6302–1(f)(5)Ex-
amples 1and2.
Example 3.De minimis deposit rule for employ-
ers who file Form 944 satisfied. K (a monthly de-
positor) was notified to file Form 944 to report its
employment tax liabilities for the 2006 calendar year.
In the first quarter of 2006, K accumulates employ-
ment taxes in the amount of $1,000. On April 28,
2006, K deposits the $1,000 of employment taxes ac-
cumulated in the 1
st
quarter. K accumulates another
$1,000 of employment taxes during the second quar-
ter of 2006. On July 31, 2006, K deposits the $1,000
of employment taxes accumulated in the 2nd quar-
ter. K’s business grows and accumulates $1,500 in
employment taxes during the third quarter of 2006.
On October 31, 2006, K deposits the $1,500 of em-
ployment taxes accumulated in the 3rd quarter. K ac-
cumulates another $2,000 in employment taxes dur-
ing the fourth quarter. K files Form 944 on January
31, 2007, reporting a total employment tax liability
for 2006 of $5,500 and submits a check for the re-
maining $2,000 of employment taxes with the return.
K will be deemed to have timely deposited the em-
ployment taxes due for all of 2006, because K com-
plied with thede minimisdeposit rule provided in
paragraph (f)(4)(iii) of this section. Therefore, the
IRS will not impose a failure-to-deposit penalty under
section 6656 for any month of the year. Under thisde
minimisdeposit rule, as K was required to file Form
944 for calendar year 2006, if K’s employment tax li-
ability for a quarter isde minimis,thenKmaydeposit
that quarter’s liability by the last day of the month
following the close of the quarter. Thisde minimis
rule allows K to have the benefit of the same quar-
terlyde minimisamount K would have received if K
filed Form 941 each quarter instead of Form 944 an-
nually. Thus, as K’s employment tax liability for each
quarter wasde minimis, K could deposit quarterly.
(g)Agricultural employers—special
rules—(1)In general. An agricultural em-
ployer reports wages paid to farm workers
annually on Form 943(Employer’s Annual
Tax Return for Agricultural Employees)
and reports wages paid to nonfarm work-
ers quarterly on Form 941 or annually on
Form 944. Accordingly, an agricultural
employer must treat employment taxes re-
portable on Form 943 (“Form 943 taxes”)
separately from employment taxes re-
portable on Form 941 or Form 944 (“Form
941 or Form 944 taxes”). Form 943 taxes
and Form 941 or Form 944 taxes are not
combined for purposes of determining
whether a deposit of either is due, whether
the One-Day rule of §31.6302–1(c)(3)
applies, or whether any safe harbor is ap-
plicable. In addition, separate Federal tax
deposit coupons must be used to deposit
Form 943 taxes and Form 941 or Form
944 taxes. (See §31.6302–1(b) for rules
for determining an agricultural employer’s
deposit status for Form 941 taxes.) The
determination of whether an agricultural
employer is a monthly or semi-weekly
depositor of Form 943 taxes is made ac-
cording to the rules of this paragraph (g).
(g)(2) through (m) [Reserved]. For
further guidance, see §31.6302–1(g)(2)
through (m).
(n)Effective/applicability dates—(1)
In general. Sections 31.6302–1 through
31.6302–3 apply with respect to the
deposit of employment taxes attribut-
able to payments made after December
31, 1992. To the extent that the provi-
sions of §§31.6302–1 through 31.6302–3
are inconsistent with the provisions of
§§31.6302(c)–1 and 31.6302(c)–2, a
taxpayer will be considered to be in
compliance with §§31.6301–1 through
31.6302–3 if the taxpayer makes timely
deposits during 1993 in accordance with
§§31.6302(c)–1 and 31.6302(c)–2. Para-
graphs (b)(4), (c)(5), (c)(6), (d)Example
6, (e)(2), (f)(4)(i), (f)(4)(iii), (f)(5)Exam-
ple 3, and (g)(1) of this section apply to
taxable years beginning on or after De-
cember 30, 2008. Paragraph (f)(4)(ii) of
this section applies to taxable years be-
ginning on or after January 1, 2010. The
rules of paragraphs (e)(2) and (g)(1) of
this section that apply to taxable years
beginning before December 30, 2008, are
contained in §31.6302–1 in effect prior to
December 30, 2008. The rules of para-
graphs (b)(4), (c)(5), (c)(6), (d)Example
6, (f)(4)(i), (f)(4)(iii), and (f)(5)Example
3of this section that apply to taxable years
beginning on or after January 1, 2006 and
before December 30, 2008, are contained
in §31.6302–1T in effect prior to Decem-
ber 30, 2008. The rules of paragraphs
(b)(4) and (f)(4) of this section that apply
to taxable years beginning before January
1, 2006, are contained in §31.6302–1 in
effect prior to January 1, 2006.
(2)Expiration date. The applicability
of this section will expire on or before De-
cember 23, 2011.
February 2, 20094152009–5 I.R.B.

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 18, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 24,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2008, 73 F.R. 79354)
Section 6103.—Confi-
dentiality and Disclosure
of Returns and Return
Information
26 CFR 301.6103(j)(1)–1: Disclosures of return in-
formation to officers and employees of the Depart-
ment of Commerce for certain statistical purposes
and related activities.
T.D. 9439
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return
Information to the Bureau
of Economic Analysis
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation and removal of
temporary regulations.
SUMMARY: This document contains final
regulations relating to disclosures of cor-
porate tax return information to the Bureau
of Economic Analysis (Bureau). The final
regulations authorize the IRS to disclose
certain items of corporate tax return infor-
mation to the Secretary of Commerce for
purposes of structuring United States na-
tional economic accounts and conducting
related statistical activities authorized by
law. The final regulations facilitate the as-
sistance of the IRS to the Bureau in its sta-
tistics programs, require no action by tax-
payers, and have no effect on their tax lia-
bilities.
DATES:Effective Date:These regulations
are effective on December 29, 2008.
Applicability Date:These regulations
apply to disclosures made to the Bureau of
Economic Analysis on or after December
29, 2008.
FOR FURTHER INFORMATION
CONTACT: Charles B. Christopher, (202)
622–4570 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions amending the Procedure and Admin-
istration Regulations (26 CFR Part 301)
under section 6103(j)(1)(B) of the Inter-
nal Revenue Code (Code). The final reg-
ulations contain rules relating to the dis-
closure of corporate tax return information
to the Bureau of Economic Analysis (Bu-
reau) of the Department of Commerce for
the purpose of, but only to the extent nec-
essary in, structuring national economic
accounts and conductingrelated statistical
activities authorized by law.
Section 6103(j)(1)(B) provides that,
upon written request from the Secre-
tary of Commerce, the Secretary of the
Treasury shall furnish to BEA return in-
formation that is prescribed by Treasury
regulations for the purpose of, but only
to the extent necessary in, structuring of
national economic accounts and conduct-
ing related statistical activities authorized
by law. Prior regulations under section
6103(j)(1)(B) permitted the disclosure to
BEA of return information from corporate
returns processed by the IRS’s Statistics of
Income Division for its corporate sample
file.
By letter dated December 18, 2003,
the Department of Commerce requested
disclosure of certain items of return
information obtained from all corpo-
rate returns, not just those processed by
the IRS’s Statistics of Income Division
for its corporate sample file. Proposed
regulations (REG–148864–03, 2006–2
C.B. 320 [71 FR 38323]) and tempo-
rary regulations (T.D. 9267, 2006–2 C.B.
313 [71 FR 38262]) were published
in theFederal Registeron July 6,
2006. The Department of Commerce
thereafter submitted comments requesting
certain technical corrections to the
items of corporate return information
authorized to be disclosed. No other
comments were received, and no public
hearing was requested or held. After
consideration of the comments received
from the Department of Commerce, the
proposed regulations, as amended by
this Treasury decision, are adopted as
final regulations, and the corresponding
temporary regulations are removed.
See §601.601(d)(2)(ii)(b). These final
regulations generally retain the provisions
of the proposed regulations with the
inclusion of the additional requested
items as explained in more detail in this
preamble.
Explanation and Summary of
Comments
Proposed §301.6103(j)(1)–1(c)(3) pro-
vided an itemized description of the cor-
porate tax return information authorized
to be disclosed to the Bureau for the pur-
pose of structuring national economic ac-
counts and conducting related statistical
activities required by law. In its comments,
the Department of Commerce requested
that certain additional items of corporate
tax return information that are essential to
the Bureau’s ability to measure accurately
U.S. economic activity be included in the
itemized list in the final regulations. Most
of the additional items of corporate tax re-
turn information to which the Department
of Commerce requests access are slightly
different variants of the same items autho-
rized in the proposed regulations. The in-
clusion of these items will enable the Bu-
reau to measure accurately corporate prof-
its, gross domestic product, and other mea-
sures of activity in the economy. After
consideration of these comments, the Trea-
sury Department and IRS have included
the additional requested items in the final
regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. Because the
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
2009–5 I.R.B.416February 2, 2009

does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small businesses.
Drafting Information
The principal author of these regula-
tions is Robin M. Tuczak, Office of the As-
sociate Chief Counsel (Procedure & Ad-
ministration).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6103(j)(1)–1 is
amended by revising paragraphs (c) intro-
ductory text, (c)(1) and (e) and removing
and reserving paragraph (c)(2), and adding
paragraph (c)(3) to read as follows:
§301.6103(j)(1)–1 Disclosures of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities.
*****
(c) Disclosure of return information re-
flected on returns of corporations to offi-
cers and employees of the Bureau of Eco-
nomic Analysis.
(1) As authorized by law for purposes
of, but only to the extent necessary in,
conducting and preparing statistical analy-
ses, the Internal Revenue Service will dis-
close to officers and employees of the Bu-
reau of Economic Analysis all return in-
formation, regardless of format or medium
and including edited information from the
Statistics of Income sample, of designated
classes or categories of corporations with
respect to the tax imposed by chapter 1 of
the Internal Revenue Code.
(2) [Reserved].
(3) The Internal Revenue Service will
disclose the following return information
reflected on returns filed by corporations
to officers and employees of the Bureau of
Economic Analysis:
(i) From the business master files of the
Internal Revenue Service—
(A) Taxpayer identity information (as
definedinsection6103(b)(6))withrespect
to corporate taxpayers;
(B) Business or industry activity codes;
(C) Filing requirement code; and
(D) Physical location.
(ii) From Form SS–4,“Application for
Employer Identification Number,”filed by
an entity identifying itself on the form as a
corporation or a private services corpora-
tion—
(A) Taxpayer identity information (as
defined in section 6103(b)(6), including le-
gal, trade, and business name);
(B) Physical location;
(C) State or country of incorporation;
(D) Entity type (corporate only);
(E) Estimated highest number of em-
ployees expected in the next 12 months;
(F) Principal activity of the business;
(G) Principal line of merchandise;
(H) Posting cycle date relative to filing;
and
(I) Document code.
(iii) From an employment tax return
filed by a corporation—
(A) Taxpayer identity information (as
defined in section 6103(b)(6));
(B) Total compensation reported;
(C) Taxable wages paid for purposes of
Chapter 21 to each employee;
(D) Master file tax account code
(MFT);
(E) Total number of individuals em-
ployed in the taxable period covered by the
return;
(F) Posting cycle date relative to filing;
(G) Accounting period covered; and
(H) Document code.
(iv) From returns of corporate taxpay-
ers, including Form 1120, “U.S. Corpora-
tion Income Tax Return,” Form 851,“Af-
filiations Schedule,”and other business re-
turns, schedules and forms that the Internal
Revenue Service may issue—
(A) Taxpayer identity information (as
defined in section 6103(b)(6)), including
that of a parent corporation, affiliate, or
subsidiary; a shareholder; a foreign corpo-
rationofwhichoneormoreU.S.share-
holders (as defined in section 951(b)) own
at least 10% of the voting stock; a foreign
trust; and a U.S. agent of a foreign trust;
(B) Gross sales and receipts;
(C) Gross income, including life insur-
ance company gross income;
(D) Gross income from sources outside
the U.S.;
(E) Gross rents from real property;
(F) Other Gross Rents;
(G) Total Gross Rents;
(H) Returns and allowances;
(I) Percentage of foreign ownership of
corporations and trusts;
(J) Fact of ownership of foreign partner-
ships;
(K) Fact of ownership of foreign entity
disregarded as a foreign entity;
(L) Country of the foreign owner;
(M) Gross value of the portion of the
foreign trust owned by filer;
(N) Country of incorporation;
(O) Cost of labor, salaries, and wages;
(P) Total assets;
(Q) The quantity of certain forms at-
tached that are returns of U.S. persons
with respect to foreign disregarded enti-
ties, partnerships, and corporations.
(R) Posting cycle date relative to filing;
(S) Accounting period covered;
(T) Master file tax account code (MFT);
(U) Document code; and
(V) Principal industrial activity code.
*****
(e)Effective/applicability date.This
section applies to disclosures to the Bureau
of Economic Analysis on or after Decem-
ber 29, 2008.
§301.6103(j)(1)–1T [Removed]
Par. 3. Section 301.6103(j)(1)–1T is
removed.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 17, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 24,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 25, 2008, 73 F.R. 79361)
February 2, 20094172009–5 I.R.B.

Section 6302.—Mode or
Time of Collection
26 CFR 31.6302–1: Federal tax deposit rules for
withheld income taxes and taxes under the Federal
Insurance Contributions Act (FICA) attributable to
payments made after December 31, 1992.
Temporary regulations relate to the annual filing
of Federal employment tax returns and requirements
for employment tax deposits. These temporary regu-
lations relate to sections 6011 and 6302 of the Inter-
nal Revenue Code (Code) concerning reporting and
paying income taxes withheld from wages and re-
porting and paying taxes under the Federal Insur-
ance Contributions Act (FICA) (collectively, “em-
ployment taxes”). See T.D. 9440, page 409.
Section 7805.—Rules
and Regulations
26 CFR 301.7805–1: Rules and regulations.
A revenue ruling holds that Dubai Merchantile Ex-
change, which is a United Arab Emirates Authorized
Market Institution, is a qualified board or exchange
within the meaning of section 1256(g)(7)(C) of the
Code. See Rev. Rul. 2009-4, page 408.
2009–5 I.R.B.418February 2, 2009

Part III. Administrative, Procedural, and Miscellaneous
Required Minimum
Distributions for 2009
Notice 2009–9
PURPOSE
This notice provides guidance to finan-
cial institutions on reporting required min-
imum distributions for 2009 after enact-
ment of the Worker, Retiree, and Employer
Recovery Act of 2008, P. L. 110–458.
BACKGROUND
On December 23, 2008, the President
signed the Worker, Retiree, and Employer
Recovery Act of 2008 (the Act) into law.
Section 201 of the Act waives any required
minimum distributions (RMDs) for 2009
from retirement plans that hold each par-
ticipant’s benefit in an individual account,
such as § 401(k) plans and § 403(b) plans,
and certain § 457(b) plans. The Act also
waives any RMD for 2009 from an In-
dividual Retirement Arrangement (IRA).
This means that most participants and
beneficiaries otherwise required to take
minimum distributions from these types
of accounts are not required to withdraw
any amount in 2009. If they do make a
withdrawal in 2009 (that is not an RMD
for 2008), they might be able to roll over
the withdrawn amount into other eligible
retirement plans. Of course, they must still
include any previously untaxed portion of
the withdrawal that they do not roll over in
their gross income. SeeIndividual Retire-
ment Arrangements (IRAs), Publication
590, andPension and Annuity Income,
Publication 575, foradditional informa-
tion on rollovers and on calculating the
taxable portion of a distribution.
The Act does not waive any 2008
RMDs, even for individuals who were eli-
gible and chose to delay taking their 2008
RMD until April 1, 2009 (e.g., retired em-
ployees and IRA owners who turned 70
1
/2
in 2008). These individuals must still take
their full 2008 RMD by April 1, 2009.
The 2009 RMD waiver under the Act does
apply to individuals who may be eligible
to postpone taking their 2009 RMD until
April 1, 2010 (generally, retired employ-
ees and IRA owners who attain age 70
1
/2
in 2009). However, the Act does not waive
any RMDs for 2010.
If a beneficiary is receiving distribu-
tions over a 5-year period, he or she can
now waive the distribution for 2009, ef-
fectively taking distributions over a 6-year
rather than a 5-year period.
IRA REPORTING
Issuers of the 2008 Form 5498,IRA
Contribution Information, shouldnotput a
check in Box 11. However, in recognition
of the short amount of time to make pro-
gramming changes, if a financial institu-
tion issues a 2008 Form 5498 with a check
in Box 11, the IRS will not consider such
form issued incorrectly solely because of
the check in Box 11, provided the IRA
owner is notified by the financial institu-
tion no later than March 31, 2009, that no
RMD is required for 2009.
In addition, the RMD information re-
quired under Notice 2002–27, 2002–1
C.B. 814, need not be sent to IRA own-
ers for 2009. If a financial institution
sends a separate RMD statement to an
IRA owner, either initially or in response
to the owner’s request for the financial
institution to calculate the RMD for 2009,
the financial institution must show the
RMD for 2009 as zero (0). Alternatively,
the financial institution may send the IRA
owner a statement showing the RMD
that would have been required but for the
waiver of RMDs for 2009, along with an
explanation of thewaiver for 2009.
The IRS encourages all financial insti-
tutions to inform IRA owners who delayed
taking their 2008 RMD until April 1, 2009,
that they are still required to take that dis-
tribution.
EFFECT ON OTHER DOCUMENTS
Notice 2002–27 is modified.
DRAFTING INFORMATION
The principal author of this no-
tice is Anita Bower of the Employee
Plans, Tax Exempt and Government
Entities Division. Questions regarding
this notice may be sent via e-mail to
RetirementPlanQuestions@irs.gov.
Treatment of Certain
Obligations Under Section
956(c)
Notice 2009–10
1. On October 27, 2008, the Treasury
Department and the Internal Revenue Ser-
vice (Service) published Notice 2008–91.
SeeNotice 2008–91, 2008–43 I.R.B. 1001.
This notice provides that the regulations
described in Notice 2008–91 will apply (in
addition to the period described in Notice
2008–91) to the third consecutive taxable
year of a foreign corporation, if any, (in-
cluding any short taxable year) that ends
after October 3, 2008, and that ends on or
before December 31, 2009.
2. On May 27, 2008, the Treasury De-
partment and the Service published Rev.
Proc. 2008–26, 2008–21 I.R.B. 1014,
which applies to determine whether securi-
ties are “readily marketable” for purposes
of section 956(c)(2)(J) for any day during
calendar years 2007 or 2008, for which it
is relevant whether securities are readily
marketable for purposes of that section.
This notice extends the application of Rev.
Proc. 2008–26 to any day during calendar
year 2009, for which it is relevant whether
securities are readily marketable for pur-
poses of section 956(c)(2)(J) (in addition
to any day during calendar years 2007 or
2008).
DRAFTING INFORMATION
The principal author of this notice is
Ethan A. Atticks of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Atticks at (202) 622–3840 (not a toll-
free call).
February 2, 20094192009–5 I.R.B.

Brokers May Furnish Certain
Composite Annual Tax
Reporting Statements by
February 17, 2009, Without
Penalty
Notice 2009–11
PURPOSE
This notice provides additional time for
furnishing certain composite annual tax re-
porting statements.
BACKGROUND
Section 403 of the Energy Improve-
ment and Extension Act of 2008, Div.
B of Pub. L. No. 110–343, 122 Stat.
3765 (the Act), enacted on October 3,
2008, amended section 6045(b) of the
Internal Revenue Code to change from
January 31 to February 15 the deadline
for furnishing to customers the informa-
tion statements required by section 6045,
including Form 1099–B(Proceeds From
Broker and Barter Exchange Transac-
tions),effective for statements required
to be furnished after December 31, 2008.
Because February 15, 2009, is a Sunday,
and because February 16, 2009, is a le-
gal holiday, the deadline under section
6045(b) with respect to reportable items
from calendar year 2008 is February 17,
2009, pursuant to section 7503. The Act
also added language to section 6045(b) to
permit reporting entities to furnish other
items that they must report to customers
in January by the extended deadline when
these other items are furnished with a
“consolidated reporting statement (as de-
fined in regulations).” There is not yet a
regulatory definition of the term “consol-
idated reporting statement.” Section 6722
imposes a penalty on any reporting entity
that fails to furnish any required payee
statement by its deadline.
DEADLINE FOR REPORTING ITEMS
FROM 2008
This notice applies to reporting enti-
ties that furnish Form 1099–B and that
customarily report the items furnished on
Form 1099–B to customers on an annual
composite form recipient statement (as
describedinSection4.2ofRev. Proc.
2008–36, 2008–33 I.R.B. 340). This no-
tice provides that such reporting entities
have until February 17, 2009, to report all
items that they customarily report on these
annual composite form recipient state-
ments to all customers whether or not each
customer’s transactional history for 2008
triggeredanobligationtofurnishForm
1099–B to that particular customer. This
notice modifies the 2008 General Instruc-
tions for Forms 1099, 1098, 5498, and
W–2G and applies only to the reporting of
items from calendar year 2008.
EXAMPLE
This notice is illustrated by the follow-
ing example:
Broker, a brokerage firm, customarily issues an
annual composite form recipient statement to each
of its customers that reports dividends as required
by section 6042(c), interest as required by section
6049(c), and the gross proceeds of the sale of secu-
rities and other items as required by section 6045(b).
Broker issued correct annual composite form recipi-
ent statements to all of its customers on February 12,
2009. Because only 80 percent of Broker’s customers
sold securities or other items in 2008, only 80 percent
of the annual composite form recipient statements
contained information required to be reported under
section 6045(b) on Form 1099–B. Because the com-
posite form recipient statements customarily included
dividends and interest with items reportable on Form
1099–B, and because Broker provided correct state-
ments to each of its customers by February 17, 2009,
the IRS will treat Broker as having met its report-
ing deadline requirements under sections 6042(c) and
6049(c) for items from calendar year 2008 reported
on the annual composite form recipient statements
and will not assess any penalties under section 6722
for these items.
DRAFTING INFORMATION
The principal author of this notice
is Stephen Schaeffer of the Office of
Associate Chief Counsel (Procedure &
Administration). For further informa-
tion regarding this notice, please contact
Stephen Schaeffer at (202) 622–4910 (not
a toll-free call).
2009–5 I.R.B.420February 2, 2009

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations
Employer’s A
nnual Federal
Tax Return an
d Modifications
to the Depos
it Rules
REG–148568
–04
AGENCY: Int
ernal Revenue Service
(IRS), Tre
asury.
ACTION: No
tice of proposed rulemaking
by cross-r
eference to temporary regula-
tions.
SUMMARY: T
his document revises the
notice of p
roposed rulemaking published
in theFed
eral Registeron January 3,
2006. In t
his issue of the Bulletin, the
IRS is iss
uing temporary regulations (T.D.
9440) rel
ating to the annual filing of Fed-
eral empl
oyment tax returns and require-
ments fo
r employment tax deposits under
section
s 6011 and 6302 of the Internal
Revenue
Code (Code). Those temporary
regulat
ions generally allow certain em-
ployers
tofileaForm944,“Employer’s
ANNUAL
Federal Tax Return,” rather than
Form 94
1, “Employer’s QUARTERLY
Federa
lTaxReturn.” In addition to rules
relate
d to Form 944, those temporary reg-
ulatio
ns provide an additional method for
emplo
yers who file Form 941 to determine
wheth
er the amount of accumulated em-
ploym
ent taxes is consideredde minimis.
The te
mporary and proposed regulations
affec
t taxpayers that file Form 941, “Em-
ploy
er’s QUARTERLY Federal Tax Re-
turn
,” Form 944, “Employer’s ANNUAL
Fede
ral Tax Return,” and any related
Span
ish-language returns or returns for
U.S.
possessions. The text of those reg-
ula
tions also serves as the text of these
pro
posed regulations.
DAT
ES: Written or electronic comments
and
requests for a public hearing must be
rec
eived by March 30, 2009.
ADD
RESSES: Send submissions to:
CC:
PA:LPD:PR (REG–148568–04), room
5203, Interna
l Revenue Service, POB
7604, Ben Fran
klin Station, Washing-
ton, DC 20044.
Submissions may be
hand-deliver
ed Monday through Friday
between the ho
urs of 8 a.m. and 4 p.m.
to: CC:PA:LP
D:PR (REG–148568–04),
Courier’s De
sk, Internal Revenue
Service, 111
1 Constitution Avenue, NW,
Washington,
DC, or sent electronically
via the Fede
ral eRulemaking Portal
athttp://w
ww.regulations.gov(IRS
REG–148568
–04).
FOR FURTHER
INFORMATION
CONTACT: Co
ncerning the proposed
regulatio
ns, Audra M. Dineen at (202)
622–4910;
concerning submissions of
comments a
nd requests for a public hear-
ing, Oluwa
funmilayo Taylor of the Publi-
cations an
d Regulations Branch at (202)
622–7180
(not toll-free numbers).
SUPPLEME
NTARY INFORMATION:
Backgrou
nd
Temporar
y regulations in this issue of
the Bulle
tin amend the Regulations on Em-
ployment
Taxes and Collection of Income
Tax at Sou
rce (26 CFR part 31) under sec-
tion 601
1relatingtothefederalemploy-
ment tax
return filing requirements and
section
6302 relating to the employment
tax depo
sit requirements. The regulations
concern
the reporting and paying of in-
come ta
xes withheld from wages and taxes
under t
he Federal Insurance Contributions
Act (FI
CA). The text of those temporary
regula
tions also serves as the text of these
propos
ed regulations. The preamble to the
tempo
rary regulations explains the tempo-
rary r
egulations and these proposed regu-
latio
ns. The temporary and proposed regu-
latio
ns are part of the IRS’s effort to reduce
taxpa
yer burden by permitting certain em-
ploy
ers to file one return annually to report
thei
r employment tax liabilities instead of
four
quarterly returns.
Prop
osed Effective/Applicability Date
The r
egulations, as proposed, will ap-
ply t
o taxable years ending on or after the
date
of publication of the Treasury deci-
sion
adopting these rules as final regula-
tio
ns in theFederal Register.
Special Analy
ses
It has been det
ermined that this notice
of proposed ru
lemaking is not a significant
regulatory ac
tion as defined in Executive
Order 12866. T
herefore, a regulatory as-
sessment is no
t required. It also has been
determined t
hatsection553(b)oftheAd-
ministrativ
e Procedure Act (5 U.S.C. chap-
ter5)doesno
t apply to these regulations.
It is hereby c
ertified that these regula-
tions will no
t have a significant economic
impact on a su
bstantial number of small
entities pu
rsuant to the Regulatory Flexi-
bility Act (
5 U.S.C. Chapter 6). The regu-
lations und
er sections 6011 and 6302 affect
only a small
number of taxpayers that file
employmen
t tax returns. Therefore, the
Treasury D
epartment and the IRS have de-
termined t
hat these regulations will not af-
fect a subs
tantial number of small entities.
In additi
on, the Treasury Department and
the IRS ha
ve determined that any impact
on entiti
es affected by the regulations will
not be sig
nificant. The regulations merely
allow cer
tain employers to file their em-
ploymen
t tax return annually rather than
quarter
ly. Therefore, these regulations will
reduce t
he burden on these employers, by
reducin
g the number of returns they must
file eac
h year. Based on these facts, the
IRS has
determined that these regulations
will no
t have a significant economic im-
pact on
a substantial number of small en-
tities
. Pursuant to section 7805(f) of the
Intern
al Revenue Code, this regulation has
been s
ubmitted to the Chief Counsel for
Advoc
acy of the Small Business Admin-
istra
tion for comment on their impact on
small
business.
Comme
nts and Requests for a Public
Heari
ng
Befor
e these proposed regulations are
adopt
ed as final regulations, consideration
will
be given to any written (a signed origi-
nal a
nd eight (8) copies) or electronic com-
ment
s that are submitted timely to the IRS.
The I
RS and Treasury Department request
comm
ents on the substance of the pro-
pos
ed regulations, as well as on the clarity
of t
he proposed rules and how they can be
mad
e easier to understand. All comments
wil
l be available for public inspection and
cop
ying. A public hearing will be sched-
February 2, 20094212009–5 I.R.B.

uled if requested in writing by any person
that timely submits written comments. If
a public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal authors of these final
regulations are Raymond Bailey and
Audra M. Dineen of the Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posedtobeamendedasfollows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph. 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.6011(a)–1, which
wasproposedtobeamendedat71FR46
on January 3, 2006, is further amended
by revising paragraph (a)(1) and paragraph
(a)(5) and adding paragraph (g) to read as
follows:
§31.6011(a)–1 Returns under Federal
Insurance Contributions Act.
(a)***(1)[Thetextofproposed
§31.6011(a)–1(a)(1) is the same as the
text of §31.6011(a)–1T(a)(1) published
elsewhere in this issue of the Bulletin].
*****
(5) [The text of proposed
§31.6011(a)–1(a)(5) is the same as the
text of §31.6011(a)–1T(a)(5) published
elsewhere in this issue of the Bulletin].
*****
(g) [The text of proposed
§31.6011(a)–1(g) is the same as the text of
§31.6011(a)–1T(g) published elsewhere
in this issue of the Bulletin].
Par. 3. Section 31.6011(a)–4, which
wasproposedtobeamendedat71FR46
(January 3, 2006), is further amended by
revising paragraphs (a)(1) and (a)(4) and
adding paragraph (d) to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
(a)* * *(1) [The text of proposed
§31.6011(a)–4(a)(1) is the same as the
text of §31.6011(a)–4T(a)(1) published
elsewhere in this issue of the Bulletin].
*****
(4) [The text of proposed
§31.6011(a)–4(a)(4) is the same as the
text of §31.6011(a)–4T(a)(4) published
elsewhere in this issue of the Bulletin].
*****
(d) [The text of proposed
§31.6011(a)–4(d) is the same as the text of
§31.6011(a)–4T(d) published elsewhere
in this issue of the Bulletin].
Par. 4. Section 31.6302–0 is
amended by revising the entries for
§31.6302–1(f)(4)(i), (g)(1) and (n) to read
as follows:
§31.6302–0 Table of contents.
*****
§31.6302–1 Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(f) * * *
(4) * * *
(i) [The text of the proposed entry for
§31.6302–1(f)(4)(i) is the same as the text
of the entry for §31.6302–1T(f)(4)(i) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(g) * * *
(1) [The text of the proposed entry for
§31.6302–1(g)(1) is the same as the text of
the entry for §31.6302–1T(g)(1) published
elsewhere in this issue of the Bulletin].
*****
(n) [The text of the proposed entry for
§31.6302–1(n) is the same as the text of the
entry for §31.6302–1T(n) published else-
where in this issue of the Bulletin].
Par. 5. Section 31.6302–1, which was
proposed to be amended at 71 FR 46 on
January 3, 2006, is further amended by re-
vising paragraphs (b)(4), (c)(5), (c)(6), (d)
Example 6, (e)(2), (f)(4), (f)(5)Example 3,
(g)(1) and (n) to read as follows:
§31.6302–1 Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(b)***
*****
(4) [The text of proposed
§31.6302–1(b)(4) is the same as the text of
§31.6302–1T(b)(4) published elsewhere
in this issue of the Bulletin].
(c) * * *
(5) [The text of proposed
§31.6302–1(c)(5) is the same as the text of
§31.6302–1T(c)(5) published elsewhere
in this issue of the Bulletin].
(6) [The text of proposed
§31.6302–1(c)(6) is the same as the text of
§31.6302–1T(c)(6) published elsewhere
in this issue of the Bulletin].
(d)***
Example 6. [The text of proposed
§31.6302–1(d)Example 6is the same as
the text of §31.6302–1T(d)Example 6
published elsewhere in this issue of the
Bulletin].
(e) * * *
(2) [The text of proposed
§31.6302–1(e)(2) is the same as the text of
§31.6302–1T(e)(2) published elsewhere
in this issue of the Bulletin].
(f) * * *
(4) [The text of proposed
§31.6302–1(f)(4) is the same as the text of
§31.6302–1T(f)(4) published elsewhere
in this issue of the Bulletin].
(5) * * *
Example 3. [The text of proposed
§31.6302–1(f)(5)Example 3is the same
as the text of §31.6302–1T(f)(5)Example
3published elsewhere in this issue of the
Bulletin].
(g)***(1)[Thetextofproposed
§31.6302–1(g)(1) is the same as the text of
§31.6302–1T(g)(1) published elsewhere in
this issue of the Bulletin].
*****
(n) [The text of proposed
§31.6302–1(n) is the same as the text of
§31.6302–1T(n)(1) published elsewhere
in this issue of the Bulletin].
2009–5 I.R.B.422February 2, 2009

*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 24,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2008, 73 F.R. 79423)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
and Notice of Public Hearing
Guidance Regarding Foreign
Base Company Sales Income
REG–150066–08
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 and Treasury Department are is-
suing temporary regulations (T.D. 9438)
relating to foreign base company sales in-
come, in cases in which personal property
sold by a controlled foreign corporation
(CFC) is manufactured, produced, or
constructed pursuant to a contract manu-
facturing arrangement or by one or more
branches of the CFC. The temporary reg-
ulations modify the foreign base company
sales income regulations to adequately
address current business structures and
practices, particularly the growing impor-
tance of contract manufacturing and other
manufacturing arrangements. The tem-
porary regulations, in general, will affect
CFCs and their United States sharehold-
ers. The text of the temporary regulations
also serves as the text of the proposed
regulations. This document also provides
notice of a public hearing.
DATES: Written or electronic comments
must be received by March 30, 2009.
Outlines of the topics to be discussed at
the public hearing scheduled for April 20,
2009, at 10 a.m. must be received by April
2, 2009.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–150066–08),
room 5203 Internal Revenue Service, PO
Box 7604 Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–150066–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC 20224. Alternatively,
taxpayers may submit electronic
comments via the Federal eRulemaking
Portalatwww.regulations.gov
(IRS-REG–150066–08).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Ethan Atticks, (202)
622–3840; concerning submissions
of comments, hearing, and/or to be
placed on the building access list to at-
tend the hearing, Richard A. Hurst at
Richard.A.Hurst@irscounsel.treas.govor
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provision
The temporary regulations in this issue
of the Bulletin amend the Income Tax Reg-
ulations (26 CFR part 1) relating to for-
eign base company sales income, in cases
inwhichpersonalpropertysoldbyacon-
trolled foreign corporation (CFC) is man-
ufactured, produced, or constructed pur-
suant to a contract manufacturing arrange-
ment or by one or more branches of the
CFC. These regulations, in general, will
affect CFCs and their United States share-
holders. The text of those temporary regu-
lations also serves as the text of these pro-
posed regulations. The preamble to the
temporary regulations explains these pro-
posed regulations.
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, these regulations have been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
ness.
Comments and Public Hearing
Before the proposed regulations are
adopted as final regulations, considera-
tion will be give to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submit-
tedtimelytotheIRS.TheIRSandthe
Treasury Department specifically request
comments on the clarity of the proposed
rules and how they may be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled for
April 20, 2009, beginning at 10 a.m. in the
IRS Auditorium, Internal Revenue Build-
ing, 1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the Consti-
tution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the Constitution Avenue entrance
area more than 30 minutes before the hear-
ing starts. For information about having
your name placed on the building access
list to attend the hearing, see the “FOR
FURTHER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written comments or elec-
tronic comments by March 30, 2009, and
an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
April 2, 2009. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receivingoutlines 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 Ethan Atticks of the Office of
February 2, 20094232009–5 I.R.B.

Associate Chief Counsel (International).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Proposed Amend
ments 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
26 CFR part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.954–3 is amended
by revising paragraphs (b)(1)(i)(c),
(b)(1)(ii)(a), (b)(1)(ii)(c), (b)(2)(i)(b),
(b)(2)(i)(d), (b)(2)(ii)(a), (b)(2)(ii)(b),
(b)(2)(ii)(e), (b)(4)Example 3, (c) and (d),
and addingExamples 8and9to paragraph
(b)(4), and adding paragraphs (e), (f) and
(g) to read as follows:
§1.954–3 Fo
reign base company sales
income.
*****
(b)***(1)***(i)***
(c) [The text of the proposed amend-
ments to §1.954–3(b)(1)(i)(c)isthesame
as the text of §1.954–3T(b)(1)(i)(c) pub-
lished elsewhere in this issue of the Bul-
letin].
(ii)***(a) [The text of the proposed
amendments to §1.954–3(b)(1)(ii)(a)isthe
same as the text of §1.954–3T(b)(1)(ii)(a)
published elsewhere in this issue of the
Bulletin].
*****
(c) [The text of the proposed amend-
ments to §1.954–3(b)(1)(ii)(c)isthesame
as the text of §1.954–3T(b)(1)(ii)(c) pub-
lished elsewhere in this issue of the Bul-
letin].
(2)***(i)***
(b) [The text of the proposed amend-
ments to §1.954–3(b)(2)(i)(b)isthesame
as the text of §1.954–3T(b)(2)(i)(b) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(d) [The text of the proposed amend-
ments to §1.954–3(b)(2)(i)(d)isthesame
as the text of §1.954–3T(b)(2)(i)(d) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(ii) * * *
(a) [The text of the proposed amend-
ments to §1.954–3(b)(2)(ii)(a)isthesame
as the text of §1.954–3T(b)(2)(ii)(a) pub-
lished elsewhere in this issue of the Bul-
letin].
(b) [The text of the proposed amend-
ments to §1.954–3(b)(2)(ii)(b)isthesame
as the text of §1.954–3T(b)(2)(ii)(b) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(e) [The text of the proposed amend-
ments to §1.954–3(b)(2)(ii)(e)isthesame
as the text of §1.954–3T(b)(2)(ii)(e) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(4) * * *
Example 3. [The text of the proposed
amendments to §1.954–3(b)(4)Example 3
is the same as the text of §1.954–3T(b)(4)
Example 3published elsewhere in this is-
sue of the Bulletin].
*****
Example 8. [The text of the proposed
amendments to §1.954–3(b)(4)Example 8
is the same as the text of §1.954–3TEx-
ample 8published elsewhere in this issue
of the Bulletin].
Example 9. [The text of the proposed
amendments to §1.954–3(b)(4)Example 9
is the same as the text of §1.954–3TEx-
ample 9published elsewhere in this issue
of the Bulletin].
(e) [The text of the proposed amend-
ments to §1.954–3(e) is the same as the
text of §1.954–3T(e) published elsewhere
in this issue of the Bulletin].
(f) [The text of the proposed amend-
ments to §1.954–3(f) is the same as the
text of §1.954–3T(f) published elsewhere
in this issue of the Bulletin].
(g) [The text of the proposed amend-
ments to §1.954–3(g) is the same as the
text of §1.954–3T(g) published elsewhere
in this issue of the Bulletin].
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 24,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2008, 73 F.R. 79421)
Announcement of Disciplinary Sanctions From the Office
of Professional Responsibility
Announcement 2009-2
TheOfficeofProfessionalResponsi-
bility (OPR) announcesrecent disciplinary
sanctions involving attorneys, certified
public accountants, enrolled agents, en-
rolled actuaries, enrolled retirement plan
agents, and appraisers. These individuals
are subject to the regulations governing
practice before the Internal Revenue Ser-
vice (IRS), which are set out in Title 31,
Code of Federal Regulations, Part 10, and
which are published in pamphlet form as
Treasury Department Circular No. 230.
The regulations prescribe the duties and
restrictions relating to such practice and
prescribe the disciplinary sanctions for
violating the regulations.
The disciplinary sanctions to be im-
posed for violation of the regulations are:
Disbarred from practice before the
IRS—An individual who is disbarred is
not eligible to represent taxpayers before
the IRS.
Suspended from practice before the
IRS—An individual who is suspended is
not eligible to represent taxpayers before
the IRS during the term of the suspension.
Censured in practice before the
IRS—Censure is a public reprimand. Un-
like disbarment or suspension, censure
does not affect an individual’s eligibility
to represent taxpayers before the IRS, but
OPR may subject the individual’s future
2009–5 I.R.B.424February 2, 2009

representations to conditions designed to
promote high standards of conduct.
Monetary penalty—A monetary
penalty may be imposed on an individual
who engages in conduct subject to sanc-
tion or on an employer, firm, or entity
if the individual was acting on its behalf
and if it knew, or reasonably should have
known, of the individual’s conduct.
Disqualification of appraiser—An
appraiser who is disqualified is barred
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or the IRS.
Under the regulations, attorneys, cer-
tified public accountants, enrolled agents,
enrolled actuaries, and enrolled retirement
plan agents may not assist, or accept assis-
tance from, individuals who are suspended
or disbarred with respect to matters consti-
tuting practice (i.e., representation) before
the IRS, and they may not aid or abet sus-
pended or disbarred individuals to practice
before the IRS.
Disciplinary sanctions are described in
these terms:
Disbarred by decision after hearing,
Suspended by decision after hearing,
Censured by decision after hearing,
Monetary penalty imposed after hear-
ing, and Disqualified after hearing—An
administrative law judge (ALJ) conducted
an evidentiary hearing upon OPR’s com-
plaint alleging violation of the regulations
and issued a decision imposing one of
these sanctions. After 30 days from the
issuance of the decision, in the absence of
an appeal, the ALJ’s decision became the
final agency decision.
Disbarred by default decision, Sus-
pended by default decision, Censured by
default decision, Monetary penalty im-
posed by default decision, and Disqual-
ified by default decision—An ALJ, after
findingthatnoanswertoOPR’scomplaint
had been filed, granted OPR’s motion for a
default judgment and issued a decision im-
posing one of these sanctions.
Disbarment by decision on appeal,
Suspended by decision on appeal, Cen-
sured by decision on appeal, Monetary
penalty imposed by decision on ap-
peal, and Disqualified by decision on
appeal—The decision of the ALJ was
appealed to the agency appeal authority,
acting as the delegate of the Secretary
of the Treasury, and the appeal authority
issued a decision imposing one of these
sanctions.
Disbarred by consent, Suspended by
consent, Censured by consent, Mone-
tary penalty imposed by consent, and
Disqualified by consent—In lieu of a
disciplinary proceeding being instituted
or continued, an individual offered a con-
sent to one of these sanctions and OPR
accepted the offer. Typically, an offer
of consent will provide for: suspension
for an indefinite term; conditions that the
individual must observe during the sus-
pension; and the individual’s opportunity,
after a stated number of months, to file
with OPR a petition for reinstatement af-
firming compliance with the terms of the
consent and affirming current eligibility
to practice (i.e., an active professional
license or active enrollment status). An
enrolled agent or an enrolled retirement
plan agent may also offer to resign in order
to avoid a disciplinary proceeding.
Suspended by decision in expedited
proceeding, Suspended by default de-
cision in expedited proceeding, Sus-
pended by consent in expedited pro-
ceeding—OPR instituted an expedited
proceeding for suspension (based on cer-
tain limited grounds, including loss of a
professional license and criminal convic-
tions).
OPR has authority to disclose the
grounds for disciplinary sanctions in these
situations: (1) an ALJ or the Secretary’s
delegate on appeal has issued a decision
on or after September 26, 2007, which was
theeffectivedateofamendmentstothe
regulations that permit making such deci-
sions publicly available; (2) the individual
has settled a disciplinary case by signing
OPR’s “consent to sanction” form, which
requires consenting individuals to admit to
one or more violations of the regulations
and to consent to the disclosure of the in-
dividual’s own return information related
to the admitted violations (for example,
failure to file Federal income tax returns);
or (3) OPR has issued a decision in an
expedited proceeding for suspension.
Announcements of disciplinary sanc-
tions appear in the Internal Revenue Bul-
letin at the earliest practicable date. The
sanctions announced below are alphabet-
ized first by the names of states and sec-
ond by the last names of individuals. Un-
less otherwise indicated, section numbers
(e.g., § 10.51) refer to the regulations.
City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Alabama
FlorenceBowlin, Donald W.CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
December 1, 2008
February 2, 20094252009–5 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Arizona
ScottsdaleCifelli, Thomas A.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
December 3, 2008
PhoenixGroh, Gregory G.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
December 1, 2008
ChandlerHuynh, Hoang V.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
November 5, 2008
PaysonJohnson, Richard B.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
December 5, 2008
MesaMatheny, Ronald S.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
December 1, 2008
PhoenixOlson, Carl R.CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license in Kansas)
Indefinite from
December 15,
2008
DeweyWirth, Andrew T.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 3, 2008
California
VenturaHartnett, John G.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license in
Massachusetts)
Indefinite from
December 11,
2008
Colorado
EnglewoodSimon, Harry L.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
November 5, 2008
2009–5 I.R.B.426February 2, 2009

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Illinois
NorthbrookKipnis, Mark S.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(conviction under
18 U.S.C. §§ 1341 and 1346,
frauds and swindles)
Indefinite from
December 4, 2008
WaukeganMeuth, Patterson C.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 4, 2008
Kansas
EmporiaMarkowitz, Daniel J.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment in
Missouri)
Indefinite from
December 17,
2008
Olson, Carl R.,
See Arizona
Overland ParkStewart, KimberlyCPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
December 15,
2008
Kentucky
LouisvilleBrooks, Troy L.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment in
Tennessee)
Indefinite from
December 9, 2008
Louisiana
LafayettePeddy, Jr., Millard C.CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
December 17,
2008
Massachusetts
East WalpoleBrauer, David P.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
December 11,
2008
Hartnett, John G.,
See California
February 2, 20094272009–5 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Minnesota
Varriano, Richard D.,
See North Dakota
Mississippi
JacksonMcIntyre, James G.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 17,
2008
OxfordScruggs, Richard F.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 17,
2008
Missouri
KirkwoodBelz, MarkAttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
December 12,
2008
Markowitz, Daniel J.,
See Kansas
New York
New YorkLefrak, Joseph S.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (attorney
disbarment)
Indefinite from
November 12,
2008
Dix HillsNapolitano, James P.CPASuspended by ALJ default
decision for violation
of § 10.51 (failure to
exercise due diligence in
representations to client)
Indefinite from
September 23,
2008
North Carolina
RaleighMcLamb, Jr., James O. CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
December 17,
2008
North Dakota
FargoVarriano, Richard D.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney suspension in
Minnesota)
Indefinite from
December 9, 2008
2009–5 I.R.B.428February 2, 2009

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Oklahoma
BethanyFarrow, Katherine L.CPASuspended by consent
for violation of § 10.51
(failure to timely file
Federal income tax
returns)
Indefinite from
November 1, 2008
Oregon
SandyRyan, Jane D.CPASuspended by default
decision in expedited
proceeding under § 10.82
(conviction under State of
Oregon law 164.055, theft
in the first degree)
Indefinite from
December 9, 2008
Tennessee
Brooks, Troy L.,
See Kentucky
MartinSpeight, Harry M.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 15,
2008
GreenvilleWelch, Lawrence A.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
December 9, 2008
Virginia
AshburnAskintowicz, John W.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney license annulled
in West Virginia)
Indefinite from
December 15,
2008
West Virginia
Askintowicz, John W.,
See Virginia
February 2, 20094292009–5 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Wisconsin
RiponGoluba, David A.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
December 9, 2008
RacineShumate, Thomas M.AttorneySuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction
under 26 U.S.C. § 7212,
corruptly impeding the
administration of the IRS
laws)
Indefinite from
December 1, 2008
2009–5 I.R.B.430February 2, 2009

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.
February 2, 2009i2009–5 I.R.B.

Numerical Finding List
1
Bulletins 2009–1 through 2009–5
Announcements:
2009-1, 2009-1 I.R.B.242
2009-2, 2009-5 I.R.B.424
Notices:
2009-1, 2009-2 I.R.B.250
2009-2, 2009-4 I.R.B.344
2009-3, 2009-2 I.R.B.250
2009-4, 2009-2 I.R.B.251
2009-5, 2009-3 I.R.B.309
2009-6, 2009-3 I.R.B.311
2009-7, 2009-3 I.R.B.312
2009-8, 2009-4 I.R.B.347
2009-9, 2009-5 I.R.B.419
2009-10, 2009-5 I.R.B.419
2009-11, 2009-5 I.R.B.420
Proposed Regulations:
REG-148568-04, 2009-5 I.R.B.421
REG-160872-04, 2009-4 I.R.B.358
REG-158747-06, 2009-4 I.R.B.362
REG-150670-07, 2009-4 I.R.B.378
REG-113462-08, 2009-4 I.R.B.379
REG-150066-08, 2009-5 I.R.B.423
Revenue Procedures:
2009-1, 2009-1 I.R.B.1
2009-2, 2009-1 I.R.B.87
2009-3, 2009-1 I.R.B.107
2009-4, 2009-1 I.R.B.118
2009-5, 2009-1 I.R.B.161
2009-6, 2009-1 I.R.B.189
2009-7, 2009-1 I.R.B.226
2009-8, 2009-1 I.R.B.229
2009-9, 2009-2 I.R.B.256
2009-10, 2009-2 I.R.B.267
2009-11, 2009-3 I.R.B.313
2009-12, 2009-3 I.R.B.321
2009-13, 2009-3 I.R.B.323
2009-14, 2009-3 I.R.B.324
2009-15, 2009-4 I.R.B.356
Revenue Rulings:
2009-1, 2009-2 I.R.B.248
2009-2, 2009-2 I.R.B.245
2009-3, 2009-5 I.R.B.382
2009-4, 2009-5 I.R.B.408
Treasury Decisions:
9434, 2009-4 I.R.B.339
9435, 2009-4 I.R.B.333
9436, 2009-3 I.R.B.268
Treasury Decisions— Continued:
9437, 2009-4 I.R.B.341
9438, 2009-5 I.R.B.387
9439, 2009-5 I.R.B.416
9440, 2009-5 I.R.B.409
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin
2008–52, dated December 29, 2008.
2009–5 I.R.B.iiFebruary 2, 2009

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2009–1 through 2009–5
Notices:
2001-55
Modified by
Notice 2009-1, 2009-2 I.R.B.250
2002-27
Modified by
Notice 2009-9, 2009-5 I.R.B.419
2007-54
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-11
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-12
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
2008-13
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
List of forms modified and superseded by
Rev. Proc. 2009-11, 2009-3 I.R.B.313
Modified and clarified by
Notice 2009-5, 2009-3 I.R.B.309
2008-46
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
Revenue Procedures:
2007-17
Superseded by
Rev. Proc. 2009-14, 2009-3 I.R.B.324
2007-71
Modified by
Notice 2009-3, 2009-2 I.R.B.250
2008-1
Superseded by
Rev. Proc. 2009-1, 2009-1 I.R.B.1
2008-2
Superseded by
Rev. Proc. 2009-2, 2009-1 I.R.B.87
2008-3
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-4
Superseded by
Rev. Proc. 2009-4, 2009-1 I.R.B.118
Revenue Procedures— Continued:
2008-5
Superseded by
Rev. Proc. 2009-5, 2009-1 I.R.B.161
2008-6
Superseded by
Rev. Proc. 2009-6, 2009-1 I.R.B.189
2008-7
Superseded by
Rev. Proc. 2009-7, 2009-1 I.R.B.226
2008-8
Superseded by
Rev. Proc. 2009-8, 2009-1 I.R.B.229
2008-9
Superseded by
Rev. Proc. 2009-9, 2009-2 I.R.B.256
2008-61
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-68
Amplified and superseded by
Rev. Proc. 2009-15, 2009-4 I.R.B.356
Revenue Rulings:
65-286
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
76-54
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
92-19
Supplemented by
Rev. Rul. 2009-3, 2009-5 I.R.B.382
2008-19
Modified by
Rev. Rul. 2009-3, 2009-5 I.R.B.382
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin 2008–52, dated December 29,
2008.
February 2, 2009iii2009–5 I.R.B.

2009–5 I.R.B.February 2, 2009

February 2, 20092009–5 I.R.B.

INTERNAL REVENUE BULLETIN
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