Internal Revenue Bulletin 2010-45 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 201
0-45
November 8, 2010
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
Announcement 2010–81, page 638.
This announcement delays, until further notice, the enrollment
renewal period under section 10.6(d) of the regulations gov-
erning practice before the IRS, which are reprinted as Treasury
Department Circular No. 230, 31 CFR part 10 (Circular 230),
for enrolled agents with social security numbers or tax identifi-
cation numbers ending in 4, 5, or 6.
INCOME TAX
T.D. 9498, page 605.
REG–144762–09, page 637.
Temporary and proposed regulations under section 108 of the
Code provide rules regarding partnerships and S corporations.
Section 108(i) allows a taxpayer to defer discharge of indebt-
edness income (and in certain cases, deductions for original is-
sue discount) arising from a reacquisition of an applicable debt
instrument that occurs in 2009 or 2010 for a four or five tax-
able-year period (unless an acceleration event occurs earlier).
Once the deferral period ends, taxpayers take into account the
deferred income and deductions ratably over a five taxable-year
period.
T.D. 9499, page 622.
Final regulations under section 6411 of the Code amend ex-
isting regulations relating to the computation and allowance of
the tentative carryback adjustments.
REG–119921–09, page 626.
Proposed regulations under section 7701 of the Code provide
whether or not a series of a domestic series LLC, a cell of a
domestic cell company, or a foreign series or cell that con-
ducts an insurance business is a juridical person for local law
purposes, for Federal tax purposes it is treated as an entity
formed under local law. Classification of a series or cell that is
treated as a separate entity for Federal tax purposes generally
is determined under the same rules that govern the classifica-
tion of other types of separate entities.
EMPLOYEE PLANS
Rev. Rul. 2010–27, page 620.
This ruling provides guidance, in the form of examples, on
what constitutes an unforeseeable emergency distribution
under section 457(b) of the Code and regulations section
1.457–6(c). The ruling also applies the same standards to
distributions from a nonqualified deferred compensation plan
subject to section 409A.
EXEMPT ORGANIZATIONS
Announcement 2010–80, page 638.
The IRS has revoked its determination that the Jeffrey Reiken
Johnson Clergy Public Ministry Association, Inc., a Church, of
San Francisco, CA; Life Time Transition, Inc., of Robbinsdale,
MN; Minnesota StandDown, Inc., of Minneapolis, MN; Ohio Nar-
cotic Officers Association of Warren, OH; Owls Nest 1424, Inc.,
of St. Mary’s, WV; and Task of Rome GA, Inc., of Rome, GA,
qualify as organizations described in sections 501(c)(3) and
170(c)(2) of the Code.
(Continued on the next page)
Finding Lists begin on page ii.

ADMINISTRATIVE
Announcement 2010–81, page 638.
This announcement delays, until further notice, the enrollment
renewal period under section 10.6(d) of the regulations gov-
erning practice before the IRS, which are reprinted as Treasury
Department Circular No. 230, 31 CFR part 10 (Circular 230),
for enrolled agents with social security numbers or tax identifi-
cation numbers ending in 4, 5, or 6.
November 8, 20102010–45 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2010–45 I.R.B.November 8, 2010

November 8, 20102010–45 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 108.—
Income From
Discharge of I
ndebtedness
26 CFR 1.108(i)–2T: Application of section 108(k) to
partnerships and S corporations (temporary).
T.D. 9498
DEPARTMENT O
FTHE
TREASURY
Internal Re
venue Service
26 CFR Parts
1and602
Application of Section
108(i) to Partnerships and
S Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: T
emporary regulations.
SUMMARY: This document contains
temporary regulationsrelatingtotheap-
plication of section 108(i) of the Internal
Revenue Code (Code) to partnerships
and S corporations and provides rules
regarding the deferral of discharge of
indebtedness income and original issue
discount deductions by a partnership or an
S corporation with respect to reacquisi-
tions of applicable debt instruments after
December 31, 2008, and before January 1,
2011. The regulations affect partnerships
and S corporations with respect to reacqui-
sitions of applicable debt instruments and
their partners and shareholders. The text
of these temporary regulations also serves
as the text of the proposed regulations
(REG–144762–09) set forth in this issue
of the Bulletin.
DATES:Effective Date:These regulations
are effective on August 13, 2010.
Applicability Date:For dates of appli-
cability, see §1.108(i)–0T(b).
FOR F
URTHER INFORMATION
CON
TACT: Megan A. Stoner or
Jos
eph R. Worst, Office of Associate
Chi
ef Counsel (Passthroughs and Special
Ind
ustries), (202) 622–3070 (not a toll-free
num
ber).
SUPPLEMENTAR
Y INFORMATION:
Paperwork Red
uction Act
The collectio
n of information con-
tained in thes
e temporary regulations
has been revie
wed and approved by the
Office of Man
agement and Budget in
accordance w
ith the Paperwork Reduc-
tion Act of 19
95 (44 U.S.C. 3507) under
control numb
er 1545–2147. The collec-
tion of infor
mation in these temporary
regulation
s is in §1.108(i)–2T(b)(3)(iv).
Under §1.10
8(i)–2T(b)(3)(iv), a partner
in a partner
ship that makes an election
under secti
on 108(i) is required to provide
certain in
formation to the partnership so
that the pa
rtnership can correctly deter-
mine the pa
rtner’s deferred section 752
amount wit
h respect to an applicable debt
instrume
nt.
An agency m
ay not conduct or sponsor,
and a pers
on is not required to respond
to, a coll
ection of information unless the
collecti
on of information displays a valid
control n
umber assigned by the Office of
Managem
ent and Budget.
Books or r
ecords relating to a collection
of infor
mation must be retained as long
as their
contents may become material in
the admi
nistration of any internal revenue
law. Gen
erally, tax returns and return in-
formati
on are confidential, as required by
26 U.S.
C. 6103.
Backgr
ound
Section
1231 of the American Recovery
and Rei
nvestment Tax Act of 2009, Pub.
L. 111–
5 (123 Stat. 338 (2009)), added
sectio
n 108(i) to the Code. Section 108(i)
genera
lly provides for an elective defer-
ral of d
ischarge of indebtedness income
(COD i
ncome) realized by a taxpayer from
a reac
quisition of an applicable debt in-
strum
ent that occurs after December 31,
2008,
and before January 1, 2011. COD
incom
e deferred under section 108(i) is in-
clud
ed in gross income ratably over a five
taxa
ble-year period (inclusion period) be-
ginn
ing with the taxpayer’s fourth or fifth
taxa
ble year following the taxable year of
the r
eacquisition. In circumstances where
ade
bt instrument is issued (or treated as
issued) as par
t of the reacquisition, some
or all of any or
iginal issue discount (OID)
expense accru
ing from the debt instrument
in a taxable y
ear prior to the first taxable
year of the in
clusion period may also be
requiredtob
e deferred (deferred OID de-
duction). Th
e aggregate amount of de-
ferred OID d
eductions is limited to the
amount of CO
D income deferred with re-
spect to the
applicable debt instrument for
which the se
ction 108(i) election is made
and the aggr
egate amount of deferred OID
deduction
s is taken into account ratably
over the in
clusion period. In general, COD
income def
erred under section 108(i) and
related de
ferred OID deductions with re-
spect to a
n applicable debt instrument that
have not b
een previously taken into ac-
count (de
ferred items) are accelerated and
taken int
o account in the taxable year in
whichana
cceleration event occurs. A sec-
tion 108
(i) election is irrevocable and, if
a sectio
n 108(i) election is made, sections
108(a)(
1)(A), (B), (C), and (D) do not ap-
plytoth
e COD income that is deferred un-
der sec
tion 108(i). Section 108(i)(7) au-
thoriz
es the Secretary to prescribe regula-
tions a
s may be necessary or appropriate
for pur
poses of applying section 108(i).
After s
ection 108(i) was enacted, the
IRS and
the Treasury Department re-
ceived
a number of comments regarding
the ap
plication of section 108(i) to part-
nersh
ips and S corporations. In August
2009,
the IRS and the Treasury Depart-
ment i
ssued Rev. Proc. 2009–37, 2009–36
I.R.B
. 309, which provides election pro-
cedu
res for taxpayers (including part-
ners
hips and S corporations) and other
guid
ance under section 108(i). With re-
spec
t to COD income realized by a part-
ners
hip or S corporation, the election is
made
at the entity level. Partnerships
and
S corporations that make an election
und
er section 108(i) (electing partnership
or e
lecting S corporation) must follow
the
election procedures and reporting
req
uirements of Rev. Proc. 2009–37.
The
se temporary regulations address is-
sue
s relating to partnerships and S corpo-
ra
tions with respect to section 108(i), in-
cl
uding issues raised by commenters.
2010–45 I.R.B.605November 8, 2010

Explanation of Provisions
A.Applicable Debt Instrument
Section 108(i)(3) defines an “applicable
debt instrument” as any debt instrument is-
sued by a C corporation or by any other
person in connection with the conduct of a
trade or business by that person. The de-
termination of whether a debt instrument
is an applicable debt instrument within the
meaning of section 108(i)(3) is based on all
the facts and circumstances.
Section 1.108(i)–2T(d)(1) provides five
safe harbors under which a debt instrument
issued by a partnership or an S corporation
is deemed to be issued in connection with
the partnership’s or S corporation’s trade
or business for purposes of section 108(i).
Thus, a debt instrument issued by a part-
nership or an S corporation qualifies as an
applicable debt instrument for purposes of
section 108(i) if the electing partnership or
electing S corporation can establish that it
meets the requirements of one of the safe
harbors.
Some commenters asked whether a debt
instrument issued by a non-C corporation
taxpayer to acquire an interest in a part-
nership or S corporation that is conduct-
ing a trade or business qualifies as an ap-
plicable debt instrument, where the issuing
taxpayer does not conduct a trade or busi-
ness. While a debt instrument generally
does not qualify as an applicable debt in-
strument unless the issuing taxpayer con-
ducts a trade or business, one of the safe
harbors under §1.108(i)–2T(d)(1) provides
that if an electing partnership or an electing
S corporation can establish that at least 95
percent of the interest paid or accrued on a
debt instrument issued by a partnership or
S corporation was allocated to a trade or
business expenditure under §1.163–8T for
the taxable year of issuance, then the debt
instrument qualifies as an applicable debt
instrument for purposes of section 108(i).
Commenters also asked how a debt
instrument issued by a disregarded entity
should be treated under section 108(i).
Generally, under §301.7701–2 of the Pro-
cedure and Administration Regulations,
if an entity is disregarded, its activities
are treated in the same manner as a sole
proprietorship, branch, or division of the
owner. Thus, for purposes of determin-
ing whether a debt instrument qualifies
as an applicable debt instrument under
section 108(i), a debt instrument issued
by a disregarded entity is treated as a debt
instrument issued by the person treated as
owning the assets of the disregarded entity
for federal income tax purposes.
B.Allocation of COD Income
Section 108(i)(6) requires that a part-
nership allocate the COD income that
is deferred under section 108(i) to the
partners that were partners immediately
prior to the transaction giving rise to the
COD income in the same manner the in-
come would be allocated without regard
to section 108(i). In addition, section
108(i)(5)(B)(iii) provides that the section
108(i) election is to be made by the part-
nership and not its partners separately.
The IRS and the Treasury Department
recognize that there are instances in which
the inclusion of COD income would be
beneficial to some partners, but not to
others. As a result, the temporary regula-
tions, while not changing the general rules
under section 704, permit a partnership
to determine the portion of each partner’s
allocable share of COD income resulting
from a reacquisition ofan applicable debt
instrument that is deferred under section
108(i) (deferred amount) and the portion
that is not deferred (included amount).
The temporary regulations therefore re-
quire that the electing partnership first
allocate all of the COD income with re-
spect to an applicable debt instrument to
its partners that are partners in the partner-
ship immediately before the reacquisition
in the manner in which the income would
be included in the distributive shares of
the partners under section 704 and the
regulations under section 704, including
§1.704–1(b)(2)(iii), without regard to sec-
tion 108(i). The partnership must then
determine the portion of each such part-
ner’s allocable share of the COD income
from the applicable debt instrument that
is the deferred amount, and the portion
that is the included amount and therefore
included in the partner’s distributive share
of partnership income for the taxable year
of the partnership in which the reacquisi-
tion occurs.
With respect to S corporations, section
108(i) requires that the election to defer
COD income be made at the corporate
level. Section 108(i) does not, however,
imposeaspecificallocationrulewithre-
spect to the COD income realized by an
electing S corporation from the reacquisi-
tion of an applicable debt instrument as it
does for electing partnerships. The IRS
and the Treasury Department believe that
a rule similar to the partnership alloca-
tion rule under section 108(i)(6) should
apply to electing S corporations. There-
fore, §1.108(i)–2T(c)(1) requires that the
deferred COD income of an electing S cor-
poration be sharedpro rata, on the basis of
stock ownership, among those sharehold-
ers that hold stock in the electing S corpo-
ration immediately prior to the transaction
giving rise to the COD income.
C.Basis Adjustments
Commenters asked whether a partner is
required to adjust the basis in its partner-
ship interest under section 705 in the year
of the reacquisition to account for the part-
ner’s share of deferred COD income, or
whether such adjustments occur when the
deferred items are recognized. In general,
a partner’s basis in its partnership inter-
est is increased under section 705(a) to ac-
count for the partner’s share of partnership
COD income in the taxable year that the
COD income is realized by the partnership.
If a partnership elects to defer its COD
income under section 108(i), however, a
partner’s basis in its partnership interest is
not increased under section 705(a) to ac-
count for the partner’s deferred amount in
the taxable year that the COD income is
realized, but rather isadjusted in the tax-
able year that the partner recognizes the
deferred amount. Because a partner does
not adjust its basis for deferred COD in-
come in the taxable year of a reacquisi-
tion, a partner could recognize gain under
section 731(a) in that taxable year if the
decrease in the partner’s share of partner-
ship liabilities exceeds the partner’s basis
in its partnership interest. Congress antic-
ipated this result and created a special de-
ferral rule in section 108(i)(6).
Section 108(i)(6) provides that any de-
crease in a partner’s share of partnership
liabilities as a result of the discharge shall
not be taken into account for purposes of
section 752 at the time of the discharge to
the extent it would cause the partner to rec-
ognize gain under section 731. If a partner
were to increase the basis in its partnership
interest to account for the deferred COD
income at the time of the reacquisition, the
November 8, 20106062010–45 I.R.B.

special deferral rule in section 108(i)(6)
would not be needed. Therefore, con-
sistent with the rule in section 108(i)(6),
§1.108(i)–2T(b)(2) provides that a part-
ner’s basis in its partnership interest is
not adjusted under section 705(a) to ac-
count for the partner’s share of the part-
nership’s deferred items at the time of the
reacquisition, but is adjusted when the de-
ferred items are recognized, either during
the recognition period or as a result of an
acceleration event. When the partner’s
share of the partnership’s deferred items
is recognized due to an acceleration event,
the partner must adjust the basis in its part-
nership interest under section 705 immedi-
ately prior to the acceleration event to ac-
count for the deferred items that are recog-
nized.
Like the basis adjustment rules for part-
ners, an S corporation shareholder’s stock
basis is not adjusted under section 1367 to
account for the shareholder’s share of the
S corporation’s deferred items at the time
of the reacquisition, but is adjusted when
the deferred items are recognized. More-
over, an S corporation’s accumulated ad-
justments account (AAA) is not adjusted to
account for the deferred items at the time
of the reacquisition, but is adjusted in the
taxable year in which the deferred items
are recognized.
D.Deferred Section 752 Amount Rules
Section 2.09 of Rev. Proc. 2009–37
provides general guidelines for a partner-
ship to use in determining a partner’s de-
ferred section 752 amount (that is, a de-
crease in a partner’s share of a partner-
ship liability under section 752(b) result-
ing from the reacquisition of an applica-
ble debt instrument that is not treated as a
current distribution of money to the part-
ner under section 752(b) by reason of sec-
tion 108(i)(6)). The temporary regulations
include the same general rules that are set
forth in Rev. Proc. 2009–37 and pro-
vide additional computational rules for de-
termining a partner’s deferred section 752
amount.
In computing a partner’s de-
ferred section 752 amount, under
§1.108(i)–2T(b)(3)(ii), the electing part-
nership must determine the amount of gain
the partner would recognize in a taxable
year of a reacquisition under section 731
as a result of the reacquisition absent the
deferral provided in the second sentence
of section 108(i)(6). In making this de-
termination, the basis ordering rules in
section 705(a) apply and the amount of
any deemed distribution of money under
section 752(b), resulting from the reac-
quisition of an applicable debt instrument,
that is treated as an advance or drawing
under §1.731–1(a)(1)(ii) is determined as
if no COD income resulting from the reac-
quisition is deferred under section 108(i).
See Rev. Rul. 94–4, 1994–1 C.B. 195,
and Rev. Rul. 92–97, 1992–2 C.B. 124,
for rules regarding when a deemed dis-
tribution of money under section 752(b)
resulting from a cancellation of debt is
treated as an advance or drawing under
§1.731–1(a)(1)(ii).
If the electing partnership determines
that a partner would recognize gain under
section 731 absent the deferral provided
in the second sentence of section 108(i)(6)
and the partnership makes a section 108(i)
election to defer COD income from only
one applicable debt instrument during the
taxable year, then any deferred section 752
amount of the partner relates to that appli-
cable debt instrument. If the partnership
makes a section 108(i) election to defer
COD income from more than one applica-
ble debt instrument during the taxable year,
§1.108(i)–2T(b)(3)(iii) provides a rule for
determining the portion of the partner’s de-
ferred section 752 amount that relates to
each such applicable debt instrument.
Section 4.12(4) of Rev. Proc. 2009–37
provides that the deferred section 752
amount for partners in a partnership mak-
ing a section 108(i) election is calculated
for the electing partnership’s direct part-
ners. In circumstances where a partnership
(upper-tier partnership) that is a direct or
indirect partner of an electing partnership
has a deferred section 752 amount with
respect to an applicable debt instrument
of the electing partnership, the upper-tier
partnership does not need to calculate
the deferred section 752 amount of its
direct partners in the same manner that
the electing partnership does. Instead,
the upper-tier partnership that has a de-
ferred section 752 amount shall allocate
such amount among its direct partners that
have a deferred amount with respect to the
applicable debt instrument in proportion
to the partners’ respective shares of the
upper-tier partnership’s deferred amount.
Section 1.108(i)–2T(b)(4)(ii) provides that
a partner’s share of an upper-tier partner-
ship’s deferred section 752 amount may
not exceed the partner’s deferred amount
with respect to the applicable debt instru-
ment to which the deferred section 752
amount relates.
The temporary regulations contain
examples to illustrate how a partner’s
deferred section 752 amount should be
computed. One example illustrates order-
ing rules in computing apartner’s deferred
section 752 amount if the partnership
has both gross income and separately
stated losses in the year of a reacquisition.
Section 1.704–1(d)(2) provides rules for
computing the adjusted basis of a partner’s
interest for purposes of determining the
extent to which a partner’s distributive
share of partnership loss is allowed as a
deduction. The example illustrates how
the deferred section752 computational
rule interacts with the rules under section
705(a) and §1.704–1(d)(2).
E.Capital Accounts
Commenters requested that guid-
ance address how a partnership’s cap-
ital account should be adjusted under
§1.704–1(b)(2)(iv) to account for a part-
ner’s share of the partnership’s deferred
items. The IRS and the Treasury De-
partment believe that, for capital account
maintenance purposes, a partnership
should treat deferred items as if no election
under section 108(i) has been made. Ac-
cordingly, §1.108(i)–2T(b)(2)(ii) provides
that a partner’s capital account is adjusted
under §1.704–1(b)(2)(iv) for the partner’s
share of the partnership’s deferred items
as if no election undersection 108(i) were
made.
F.Section 465(e) Recapture
Commenters requested that guidance be
provided under section 465 to prevent an
election under section 108(i) from trig-
gering recapture of losses under section
465(e). Under section 465(e)(1)(A), if at
the close of any taxable year a taxpayer’s
amount at risk in an activity is below zero,
the taxpayer generally is required to in-
clude the amount of the excess in gross
income. The amount required to be in-
cluded in gross income, however, is lim-
ited to losses allowed in previous years that
have not already been recaptured. Section
465(e)(1)(B) treats the recaptured amount
2010–45 I.R.B.607November 8, 2010

as a deduction attributable to the activity in
the following taxable year.
Although the second sentence of sec-
tion 108(i)(6) provides for deferral of a
deemed distribution under section 752 to
the extent that it triggers gain to a partner
under section 731, the statute does not pro-
vide a similar rule that defers any amount
at risk in an activity required to be recap-
tured under section 465(e). Thus, if the
discharged debt for which a section 108(i)
election is made has been included in a
partner’samountatriskinanactivityand
a portion of that debt is discharged, there
could be recapture under section 465(e) if
the amount discharged exceeds the part-
ner’s amount at risk in the activity. The
same issue may arise with respect to share-
holders of an S corporation.
The IRS and the Treasury Department
believe that the decrease in a partner’s or
shareholder’s amount at risk in an activ-
ity that results from the discharge of a
debt for which a section 108(i) election
is made by the partnership or S corpora-
tion, as the case may be, should also be
deferred to prevent the partner or share-
holder from recognizing more recapture
income under section 465(e) than the part-
ner or shareholder would recognize if the
section 108(i) election had not been made.
Accordingly, §1.108(i)–2T(d)(3) provides
that a decrease in a partner’s or share-
holder’s amount at risk in an activity that
results from a discharge of a debt for which
a section 108(i) election is made is not
taken into account in determining the part-
ner’s or shareholder’s amount at risk in that
activity under section 465 in the taxable
year of the reacquisition. The decrease is
taken into account at the same time and to
the extent remaining in the same amount as
the partner or shareholder recognizes the
deferred COD income.
G.Deferral of Original Issue Discount
Under section 108(i)(2), if a debt instru-
ment is issued (or treated as issued under
section 108(e)(4)) in a debt-for-debt ex-
change described in section 108(i)(2)(A)
or a deemed debt-for-debt exchange de-
scribed in §1.108(i)–3T(a) and there is any
OID on the debt instrument, the issuer of
the new debt instrument must defer some
or all of the deductions for such OID un-
der section 108(i). The temporary regula-
tions provide that the aggregate amount of
deferred OID is allowable as a deduction
to the issuer of the debt instrument ratably
over the inclusion period, or earlier upon
the occurrence of an acceleration event.
The OID deferral rule in section
108(i)(2) applies to an issuing entity. An
issuing entity includes an electing part-
nershiporanelectingScorporationthat
issues a debt instrument in a debt-for-debt
exchange or a deemed debt-for-debt ex-
change and a partnership or an S corpora-
tion that is related (within the meaning of
section 108(i)(5)(A))to an electing entity
(an entity that is a taxpayer that makes
an election under section 108(i)) and that
issues a debt instrument in a debt-for-debt
exchange or a deemed debt-for-debt ex-
change.
The issuing entity determines whether
any OID that accrues on a debt instrument
in a taxable year during the deferral period
is required to be deferred. For example, an
electing partnership that issues a debt in-
strument with OID in a debt-for-debt ex-
change described in section 108(i)(2)(A)
in which the partnership elects to defer
$100 of COD income must defer the first
$100 of OID that accrues on such debt in-
strument during the deferral period, even
if a partner’s share of the partnership’s de-
ferred OID exceeds the partner’s deferred
amount with respect to the applicable debt
instrument.
The temporary regulations provide
rules relating to basis adjustments and
adjustments to AAA for deferred OID
deductions that apply to the issuing entity.
H.Acceleration Events
Section 108(i)(5)(D)(i) provides that
deferred items must be taken into account
upon the occurrence of certain enumer-
ated events (acceleration events) with
respect to the electing partnership or elect-
ing S corporation. These events include
the liquidation or sale of substantially all
of the assets of the electing partnership
or electing S corporation (including in
a Title 11 or similar case), the cessation
of business, or similar circumstances.
If any of these events occurs, all of the
deferred items of the electing partnership
or electing S corporation are accelerated
and must be taken into account by the
partners and/or shareholders, as the case
may be, in the taxable year of the electing
partnership or electing S corporation in
which such event occurs.
Section 108(i)(5)(D)(ii) contains ad-
ditional acceleration events that apply
to the partners and/or shareholders of
an electing partnership or an electing
S corporation, as the case may be, and
includes the sale, exchange, or redemption
of an interest in the electing partnership
or electing S corporation by the holder
of such interest. If any of these events
occurs, the deferred items allocated to the
partner or S corporation shareholder that
sells, exchanges, or redeems its interest in
the electing partnership or S corporation,
as the case may be, are accelerated and
must be taken into account by such
partner or shareholder in the taxable year
in which the event occurs. When an
acceleration event occurs under section
108(i)(5)(D)(ii) with respect to a particular
partner or an S corporation shareholder,
it does not affect the continued deferral
of another partner’s or S corporation
shareholder’s share of the partnership’s or
S corporation’s deferred items.
Section 108(i)(7) authorizes the Secre-
tary to prescribe such regulations as may
be necessary or appropriate for purposes
of applying section 108(i), including rules
extending the acceleration provisions to
other circumstances where appropriate.
Therefore, the temporary regulations pro-
vide additional rules (and exceptions) that
apply to the acceleration of deferred items
under section 108(i)(5)(D).
The temporary regulations provide that
the deferred items allocated to the direct
and indirect partners of the electing part-
nership, which includes a shareholder of
an S corporation that is a direct/indirect
partner of an electing partnership (S cor-
poration partner), and to the shareholder of
an electing S corporation are accelerated
if the electing partnership or the electing
S corporation (i) liquidates, (ii) sells, ex-
changes, transfers (including contributions
and distributions), or gifts substantially all
of its assets, (iii) ceases doing business, or
(iv) files a petition in a Title 11 or simi-
lar case. In addition, the deferred items of
the shareholders of an electing S corpora-
tion or an S corporation partner are acceler-
ated in the taxable year in which the S cor-
poration’s or S corporation partner’s elec-
tion under section 1362(a) is terminated.
Moreover, the acceleration rules and ex-
ceptions that apply to an electing corpo-
November 8, 20106082010–45 I.R.B.

ration under §1.108(i)–1T(b) also apply to
a C corporation partner in the same man-
ner as if the C corporation partner were an
electing corporation.
The temporary regulations specify
that substantially all of the partnership’s
or S corporation’s assets means assets
representing at least 90 percent of the
fair market value of the partnership’s or
S corporation’s net assets and at least
70 percent of the fair market value of
the partnership’s or S corporation’s gross
assets, as measured immediately prior
to the sale, exchange, transfer, or gift in
question. If an electing partnership holds
only an interest in another partnership
(lower-tier partnership) and the lower-tier
partnership sells its assets, the sale by
the lower-tier partnership would not
constitute a sale, exchange, transfer, or
gift of the electing partnership’s assets
for purposes of applying the acceleration
rules. However, the IRS and the Treasury
Department believe that if an electing
partnership, for example, transfers
property to a partnership (transferee
partnership) in a transaction governed
all or in part by section 721 and the
transferee partnership subsequently
sells substantially all of its assets, it is
appropriate to treat the electing partnership
as having sold, exchanged, transferred, or
gifted its entire interest in that transferee
partnership for purposes of applying the
acceleration rules. If, in that situation,
the electing partnership’s only asset is
its interest in the transferee partnership,
the electing partnership will be treated
as selling substantially all of its assets
and therefore, its deferred items would
be accelerated. The principles of the
substantially all rules apply to lower-tier
partnerships of the electing partnership
that receive assets of the electing
partnership from a transferee partnership
or another lower-tier partnership of the
electing partnership in a transaction
governed all or in part by section 721.
In addition to the electing partner-
ship-level or electing Scorporation-level
events that triggeracceleration under sec-
tion 108(i), certain events that occur at the
partner or shareholder level also trigger
acceleration of that partner’s or share-
holder’s share of the electing partnership’s
or electing S corporation’s deferred items.
For instance, the deferred items allocated
to a direct or indirect partner of an elect-
ing partnership are accelerated if: (1) the
partner dies or liquidates, (2) the partner
sells, exchanges (including redemptions
treated as exchanges under section 302),
transfers (including contributions and dis-
tributions), or gifts (including transfers
treated as gifts under section 1041) all or a
portion of a separate interest, (3) the part-
ner’s separate interest is redeemed, or (4)
the partner abandons its separate interest.
For this purpose, a distribution by a part-
nership to a partner of property other than a
separate interest, in a transaction that does
not constitute a complete redemption of
the partner’s interest, does not constitute
an acceleration event, even if, for example,
the distribution causes gain to be recog-
nized to the partner under section 731(a).
Moreover, a shareholder’s share of an
electing S corporation’s deferred items is
accelerated if the shareholder: (1) dies, (2)
sells, exchanges (including redemptions
treated as exchanges under section 302),
transfers (including contributions and dis-
tributions), or gifts (including transfers
treated as gifts under section 1041) all
or a portion of its interest in the electing
S corporation, or (3) abandons its interest
in the electing S corporation. For purposes
of the temporary regulations, a “separate
interest” is defined as any direct interest in
an electing partnership or in a partnership
or S corporation that is a direct or indirect
partner of an electing partnership.
If a partner or shareholder sells, ex-
changes, transfers, or gifts only a portion
of its interest in a partnership or an S cor-
poration, only a proportionate amount of
the partner’s or shareholder’s share of the
partnership’s or S corporation’s deferred
items is accelerated. For example, if a part-
ner of an electing partnership with a $100
deferred amount from the electing partner-
ship sells half of its interest in the elect-
ing partnership, $50 of the partner’s $100
share of the partnership’s deferred amount
is accelerated.
The temporary regulations address
when a partner’s separate interest is re-
deemed for purposes of section 108(i).
Commenters suggested that a non-liqui-
dating distribution of cash or other prop-
erty by a partnership to a partner should
not be treated as a redemption under sec-
tion 108(i). The IRS and the Treasury
Department agree with the commenters.
Difficulties in defining a redemption of a
partnership interest for purposes of section
108(i) arise if non-liquidating distributions
are treated as redemptions under section
108(i). The IRS and the Treasury Depart-
ment believe that, for purposes of section
108(i), redemptions should be limited to
cases where a partner’s interest in the part-
nership is completely liquidated. There-
fore, the temporary regulations provide
that a redemption of a partner’s separate
interest occurs when a partner receives
a distribution of cash and/or property in
complete liquidation of such partner’s
separate interest.
The IRS and the Treasury Department
believe that certain events should not cause
a partner’s or shareholder’s share of the
partnership’s or S corporation’s deferred
items to be accelerated. For instance, if an
electing partnershipcontributes its assets
to another partnership (transferee partner-
ship) in a transaction governed by section
721 (generally a non-recognition event to
the electing partnership and the transferee
partnership), the deferred items of an elect-
ing partnership can continue to be allo-
cated to its partners under principles simi-
lar to section 704(c). Therefore, transac-
tions wholly governed by section 721 in
which a partner’s or shareholder’s share
of the partnership’s or S corporation’s de-
ferred items can continue to be allocated
to that partner or shareholder are generally
not acceleration events for purposes of sec-
tion 108(i). These section 721 non-accel-
eration events include contributions by an
electing partnership or an electing S cor-
poration, contributions of an entire sep-
arate interest by direct or indirect part-
ners of an electing partnership, and sec-
tion 708(b)(2)(A) mergers or consolida-
tions of an electing partnership or a part-
nership that is a direct or indirect partner
of an electing partnership.
In any of the events listed above, the
general acceleration rules apply to any part
of the transaction to which section 721(a)
does not apply. For example, if an elect-
ing partnership merges with another part-
nership and one of the partners of the elect-
ing partnership elects to apply the partner
buy-out rule of §1.708–1(c)(4), such part-
ner’s share of the electing partnership’s de-
ferred items is accelerated because such
partner is treated as selling its interest in
the electing partnership immediately be-
fore the merger. The other partners’ shares
of deferred items of the electing partner-
2010–45 I.R.B.609November 8, 2010

ship are not accelerated as a result of the
merger.
In addition to the section 721 non-ac-
celeration events, like-kind exchanges of
property by an electing partnership or an
electing S corporation pursuant to sec-
tion 1031(a) are generally not acceleration
events. As in a transaction governed by
section 721, a transaction governed by sec-
tion 1031(a) is generally a non-recognition
event. The electing partnership or electing
S corporation that transfers property in the
like-kind exchange can continue to allo-
cate the partners’ or shareholders’ shares
of the partnership’s or S corporation’s
deferred items as if no exchange occurred.
To the extent money or property which
does not meet the requirements of
section 1031(a) (boot) is received in
the exchange, however, a portion of the
transferred property will be treated as
sold. Under §1.108(i)–2T(b)(6)(iii)(B)
and §1.108(i)–2T(c)(3)(iii)(B), the portion
of the transferred property that is treated
assoldisbasedontheratioofthe
boot to the total consideration received
in the exchange. For example, if an
electing partnershipexchanges property
with a value of $100 and a basis of $30
for $80 of like-kind property and $20
of non-like kind property, the electing
partnership is treated as if it sold 20
percent of the property transferred in
the exchange. In such a case, if the
portion sold constitutes substantially
all of the electing partnership’s assets,
the electing partnership’s deferred
items would be accelerated under
§1.108(i)–2T(b)(6)(i)(A)(2).
In addition to the section 721 and sec-
tion 1031 non-acceleration events, a tech-
nical termination of an electing partnership
or a partnership that is a direct or indirect
partnerofanelecting partnership under
section 708(b)(1)(B) is not an acceleration
event for purposes of section 108(i). Sec-
tion 708(b)(1)(B) provides that a partner-
ship is considered as terminated if within
a twelve-month period there is a sale or
exchange of 50 percent or more of the to-
tal interest in partnership capital and prof-
its. Under §1.708–1(b)(4), the terminated
partnership is deemed to contribute its as-
sets and liabilities to a new partnership in
exchange for an interest in the new part-
nership and, immediately thereafter, the
terminated partnership is deemed to dis-
tribute interests in the new partnership to
its partners in liquidation of their inter-
ests. As in a transaction governed by sec-
tion 721, the deferred items of the termi-
nated partnership’s partners can continue
to be allocated to those partners by the new
partnership. The terminated partnership’s
business continues in the new partnership
and the non-selling partners of the termi-
nated partnership remain partners in the
new partnership. The terminated partner-
ship’s section 108(i) election remains in ef-
fect for the new partnership. Therefore, a
technical termination of a partnership un-
der section 708(b)(1)(B) is not an acceler-
ation event for purposes of section 108(i).
The transfer that causes a technical termi-
nation, however, may be an acceleration
event for the transferring partner.
In addition to the section 721, section
1031, and section 708(b)(1)(B) non-ac-
celeration events, certain distributions of
separate interests by a partnership (up-
per-tier partnership) that is a direct or
indirect partner of an electing partnership
are not acceleration events for purposes
of section 108(i). If an upper-tier partner-
ship distributes its entire separate interest
(distributed separate interest) to one or
more of its partners (distributee partners)
that have a share of the electing part-
nership’s deferred items from upper-tier
partnership’s distributed separate interest,
the partnership, the interest in which was
distributed, can continue to allocate the
deferred items of any distributee partner
with respect to the distributed separate in-
terest. As a result, the distributee partner’s
share of the electing partnership’s deferred
items associated with the distributed sep-
arate interest are not accelerated, even if
such distribution is in complete liquidation
of that partner’s interest in the upper-tier
partnership. However, because the up-
per-tier partnership no longer holds the
separate interest, the upper-tier partner-
ship’s share of the electing partnership’s
deferred items associated with that sep-
arate interest will be accelerated for the
non-distributee partners. Further, if the
distributee’s partnership interest is re-
deemed by the upper-tier partnership, any
other share of an electing partnership’s de-
ferred items associated with the redeemed
separate interest in the upper-tier partner-
ship will be accelerated and must be taken
into account by the distributee partner.
Certain non-acceleration events that
applytoanelectingcorporationalsoapply
to C corporation partners. The exception
in §1.108(i)–1T(b)(2)(ii)(B) relating to
transactions governed by section 381 ap-
plies to C corporation partners. Section
1.108(i)–2T(b)(6)(iii)(G) contains special
rules for certain intercompany transfers
made by C corporation partners.
The above acceleration events only ap-
ply to deferred items allocated to direct
or indirect partners of an electing partner-
ship or to the shareholders of an electing
S corporation. A direct or indirect part-
ner’s share of a related partnership’s de-
ferred OID deduction or a shareholder’s
share of a related S corporation’s deferred
OID deduction is only accelerated to the
extent the deferred COD income attribut-
able to the related partnership’s or related
S corporation’s deferred OID deduction is
taken into account by the electing entity or
its owners.
I.Foreign Partners of Electing Partnership
Section 1446 and the regulations there-
under provide, in general, that if a domes-
tic or foreign partnership has effectively
connected taxable income allocable under
section 704 to a foreign partner, then the
partnership must withhold tax under sec-
tion 1446 (section 1446 tax) at the time and
in the manner prescribed in §§1.1446–1
through 1.1446–6. Section 1.1446–5 pro-
vides rules under section 1446 for tiered-
partnership structures. These regulations
provide a cross reference to the regulations
under section 1446 to signal to partner-
ships, including tiered partnerships, that
they may have an obligation to pay a sec-
tion 1446 tax when income deferred under
section 108(i) is recognized (either ratably
over the inclusion period or as a result of
an acceleration event).
J.Effective Date
These regulations apply to reacquisi-
tions of applicable debt instruments in
taxable years ending after December 31,
2008.
Availability of IRS documents
The IRS revenue procedure cited in
this preamble is published in the Inter-
nal Revenue Bulletin and is available at:
http://www.IRS.gov.
November 8, 20106102010–45 I.R.B.

Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. For applicability of the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6), refer to the Special Analyses section
of the preamble to the cross-reference no-
tice of proposed rulemaking published in
this issue of the Bulletin. Pursuant to sec-
tion 7805(f) of the Code, these regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Section 108(i) applies to the reacqui-
sition of an applicable debt instrument
during the brief election period, January 1,
2009 through December 31, 2010. These
temporary regulations provide necessary
guidance regarding the application of this
new section 108(i) in order for partner-
ships and S corporations to timely file
their tax returns. For this reason, it has
been determined pursuant to 5 U.S.C.
553(b)(3)(B), that prior notice and public
procedure are impracticable and contrary
to the public interest. For the same rea-
son, it has been determined pursuant to
5 U.S.C. 553(d)(3) that good cause exists
for not delaying the effective date of these
temporary regulations.
Drafting Information
The principal authors of these reg-
ulations are Megan A. Stoner and
Joseph R. Worst of the Office of the
Associate Chief Counsel (Passthroughs
and Special Industries).However,
other personnel from the IRS and the
Treasury Department participated in their
development.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108(i)–2T also issued under
26 U.S.C. 108(i)(7). * * *
Par. 2. Section 1.108(i)–2T is added to
read as follows:
§1.108(i)–2T Application of section
108(i) to partnerships and S corporations
(temporary).
(a)Overview. Under section 108(i), a
partnership or an S corporation may elect
to defer COD income arising in connec-
tion with a reacquisition of an applica-
ble debt instrument for the deferral pe-
riod. COD income deferred under sec-
tion 108(i) is included in gross income
ratably over the inclusion period, or ear-
lier upon the occurrence of any acceler-
ation event described in paragraph (b)(6)
or (c)(3) of this section. If a debt instru-
ment is issued (or treated as issued under
section 108(e)(4)) ina debt-for-debt ex-
change described in section 108(i)(2)(A)
or a deemed debt-for-debt exchange de-
scribed in §1.108(i)–3T(a), some or all of
the deductions for OID with respect to
such debt instrument must be deferred dur-
ing the deferral period. The aggregate
amount of OID deductions deferred during
the deferral period is generally allowed as
a deduction ratably over the inclusion pe-
riod, or earlier upon the occurrence of any
acceleration event described in paragraph
(b)(6) or (c)(3) of this section. Paragraph
(b) of this section provides rules that apply
to partnerships. Paragraph (c) of this sec-
tion provides rules that apply to S corpo-
rations. Paragraph (d) of this section pro-
vides general rules that apply to partner-
ships and S corporations. Paragraph (e) of
this section provides election procedures
and reporting requirements. Paragraph (f)
of this section contains the effective/appli-
cability date. See §1.108(i)–0T(a) for def-
initions that apply to this section.
(b)Specific rules applicable to partner-
ships—(1)Allocation of COD income and
partner’s deferred amounts. An electing
partnership that defers any portion of COD
income realized from a reacquisition of an
applicable debt instrument under section
108(i) must allocate all of the COD income
with respect to the applicable debt instru-
ment to its direct partners that are partners
in the electing partnership immediately
before the reacquisition in the manner in
which the income would be included in
the distributive shares of the partners un-
der section 704 and the regulations under
section 704, including §1.704–1(b)(2)(iii),
without regard to section 108(i). The
electing partnership may determine, in
any manner, the portion, if any, of a part-
ner’s COD income amount with respect to
an applicable debt instrument that is the
deferred amount, and the portion, if any,
that is the included amount. However, no
partner’s deferred amount with respect to
an applicable debt instrument may exceed
that partner’s COD income amount with
respect to such applicable debt instrument,
and the aggregate amount of the part-
ners’ COD income amounts and deferred
amounts with respect to each applicable
debt instrument must equal the electing
partnership’s COD income amount and de-
ferred amount, respectively, with respect
to each such applicable debt instrument.
(2)Basis adjustments and capital
account maintenance—(i)Basis adjust-
ments. The adjusted basis of a partner’s
interest in a partnership is not increased
under section 705(a)(1) by the partner’s
deferred amount in the taxable year of
the reacquisition. The adjusted basis of
a partner’s interest in a partnership is not
decreased under section 705(a)(2) by the
partner’s share of any deferred OID de-
duction in the taxable year in which the
deferred OID accrues. The adjusted basis
of a partner’s interest in a partnership is
adjusted under section 705(a) by the part-
ner’s share of the electing partnership’s
deferred items for the taxable year in
which the partner takes into account such
deferred items under this section.
(ii)Capital account maintenance.For
purposes of maintaining a partner’s capi-
tal account under §1.704–1(b)(2)(iv) and
notwithstanding §1.704–1(b)(2)(iv)(n),
the capital account of a partner of a partner-
ship is adjusted under §1.704–1(b)(2)(iv)
for a partner’s share of an electing part-
nership’s deferred items as if no election
under section 108(i) were made.
(3)Deferred section 752 amount—(i)
In general. An electing partnership shall
determine, for each of its direct partners
with a deferred amount, the partner’s de-
ferred section 752 amount, if any, with
respect to an applicable debt instrument. A
partner’s deferred section 752 amount with
respect to an applicable debt instrument
equals the decrease in the partner’s share
of a partnership liability under section
752(b) resulting from the reacquisition of
2010–45 I.R.B.611November 8, 2010

the applicable debt instrument that is not
treated as a current distribution of money
under section 752(b) by reason of section
108(i)(6) (deferred section 752 amount).
A partner’s deferred section 752 amount
is treated as a distribution of money by the
partnership to the partner under section
752(b), at the same time and to the extent
remaining in the same amount, as the part-
ner recognizes the deferred amount with
respect to the applicable debt instrument.
(ii)Electing partnership’s computa-
tion of a partner’s deferred section 752
amount. To compute a partner’s deferred
section 752 amount, the electing partner-
ship must first determine the amount of
gain that its direct partner would recognize
in the taxable year ofa reacquisition under
section 731 as a result of the reacquisition
of one or more applicable debt instruments
during the taxable year absent the deferral
provided in the second sentence of section
108(i)(6) (the section 108(i)(6) deferral).
If a direct partner of an electing partner-
ship would not recognize any gain under
section 731 as a result of the reacquisition
of one or more applicable debt instruments
during the taxable year absent the section
108(i)(6) deferral, the partner will not
have a deferred section 752 amount with
respect to any applicable debt instrument
that is reacquired during the taxable year.
If a direct partner of an electing partner-
ship would recognize gain under section
731 as a result of the reacquisition of one
or more applicable debt instruments dur-
ing the taxable year absent the section
108(i)(6) deferral, the partner’s deferred
section 752 amount for all applicable debt
instruments that are reacquired during the
taxable year is equal to the lesser of the
partner’s aggregate deferred amounts from
the electing partnership for all applicable
debt instruments reacquired during the
taxable year, or the gain that the partner
would recognize in the taxable year of
the reacquisitions under section 731 as
a result of the reacquisitions absent the
section 108(i)(6) deferral. In determining
the amount of gain that the direct partner
would recognize in the taxable year of a
reacquisition under section 731 as a result
of the reacquisition of one or more appli-
cable debt instruments during the taxable
year absent the section 108(i)(6) deferral,
the rule under §1.731–1(a)(1)(ii) applies to
any deemed distribution of money under
section 752(b) resulting from a decrease
in the partner’s share of a reacquired ap-
plicable debt instrument that is treated as
an advance or drawing of money. The
amount of any deemed distribution of
money under section 752(b) resulting from
a decrease in the partner’s share of a reac-
quired applicable debt instrument that is
treated as an advance or drawing of money
under §1.731–1(a)(1)(ii) is determined as
if no COD income resulting from the reac-
quisition of the applicable debt instrument
is deferred under section 108(i).
(iii)Multiple section 108(i) elections.
If a direct partner of an electing partner-
ship has a deferred section 752 amount
under paragraph (b)(3)(ii) of this section
for the taxable year of a reacquisition and
the partner has a deferred amount with re-
spect to more than one applicable debt in-
strument from the electing partnership for
which a section 108(i) election is made
in that taxable year, the partner’s deferred
section 752 amount with respect to each
such applicable debt instrument equals the
partner’s deferred section 752 amount as
determined under paragraph (b)(3)(ii) of
this section, multiplied by a ratio, the nu-
merator of which is the partner’s deferred
amount with respect to such applicable
debt instrument, and the denominator of
which is the partner’s aggregate deferred
amounts from the electing partnership for
all applicable debt instruments reacquired
during the taxable year.
(iv)Electing partnership’s request for
information. At the request of an elect-
ing partnership, each direct partner of the
electing partnership that has a deferred
amount with respect to such partnership
must provide to the electing partnership a
written statement containing information
requested by the partnership that is nec-
essary to determine the partner’s deferred
section 752 amount (such as the partner’s
adjusted basis in the partner’s interest
in the electing partnership). The written
statement must be signed under penalties
of perjury and provided to the requesting
partnership within 30 days of the date of
the request by the electing partnership.
(v)Examples. The following examples
illustrate the rules under paragraph (b)(3)
of this section:
Example 1. (i) A and B each hold a 50 percent in-
terest in Partnership, a calendar-year partnership. As
of January 1, 2009, A and B each have an adjusted
basis of $50 in their partnership interests. Partnership
has two applicable debt instruments outstanding, debt
one of $300 and debt two of $200. On March 1, 2009,
debt one is cancelled and Partnership realizes $300 of
COD income. On December 1, 2009, debt two is can-
celled and Partnership realizes $200 of COD income.
The Partnership has no other income or loss items for
2009. A and B are each allocated $150 of COD in-
come from debt one and$100 of COD income from
debt two. Partnership makes an election under sec-
tion 108(i) to defer $225 of the $300 of COD income
realized from the reacquisition of debt one, $150 of
which is A’s deferred amount, and $75 of which is
B’s deferred amount. Partnership also makes an elec-
tion under section 108(i) to defer $125 of the $200 of
COD income realized from the reacquisition of debt
two, $100 of which is A’s deferred amount, and $25
of which is B’s deferred amount. A has no included
amount for either debt. B has an included amount of
$75 with respect to debt one and an included amount
of $75 with respect to debt two for 2009.
(ii) Under paragraph (b)(3)(ii) of this section, the
amount of gain that A would recognize under section
731 as a result of the reacquisitions absent the section
108(i)(6) deferral is $200. Thus, A’s deferred sec-
tion 752 amount with respect to debt one and debt
two equals $200 (the lesser of A’s aggregate deferred
amounts with respect to debt one and debt two of
$250, or gain that A would recognize under section
731 in 2009, as a result of the reacquisitions absent
the section 108(i)(6) deferral, of $200). Under para-
graph (b)(3)(iii) of this section, $120 of A’s $200 de-
ferred section 752 amount relates to debt one ($200
x $150/$250) and $80 relates to debt two ($200 x
$100/$250).
(iii) Under paragraph (b)(3)(ii) of this section, the
amount of gain that B would recognize under section
731 as a result of the reacquisitions absent the sec-
tion 108(i)(6) deferral is $50. Thus, B’s deferred sec-
tion 752 amount with respect to debt one and debt
two equals $50 (the lesser of B’s aggregate deferred
amounts with respect to debt one and debt two of
$100, or gain that B would recognize under section
731 in 2009, as a result of the reacquisitions absent
the section 108(i)(6) deferral, of $50). Under para-
graph (b)(3)(iii) of this section, $37.50 of B’s $50 de-
ferred section 752 amount relates to debt one ($50
x $75/$100) and $12.50 relates to debt two ($50 x
$25/$100).
Example 2. (i) The facts are the same as inEx-
ample 1, except that Partnership has gross income for
the year (including the $500 of COD income) of $700
and other separately stated losses of $500. A’s and B’s
distributive share of each item is 50 percent.
(ii) In determining the amount of gain that A
would recognize under section 731 as a result of the
reacquisitions absent the section 108(i)(6) deferral,
Partnership first increases A’s $50 adjusted basis in
his interest in Partnership by A’s distributive share of
Partnership income (other than the deferred amounts
relating to debt one and debt two) of $100, and
then decreases A’s adjusted basis in Partnership by
deemed distributions under section 752(b) of $250
and, thereafter, by A’s distributive share of Partner-
ship losses of $250, but only to the extent that A’s
basis is not reduced below zero. Under paragraph
(b)(3)(ii) of this section, the amount of gain that A
would recognize under section 731 as a result of the
reacquisitions absent section 108(i)(6) deferral is
$100. Thus, A’s deferred section 752 amount with
respect to debt one and debt two equals $100 (the
lesser of A’s aggregate deferred amounts with respect
November 8, 20106122010–45 I.R.B.

to debt one and debt two of $250, or gain that A
would recognize under section 731 as a result of the
reacquisitions absent the deferral section 108(i)(6)
deferral of $100). Under paragraph (b)(3)(iii) of this
section, A’s deferred section 752 amount with re-
spect to debt one is $60 ($100 x $150/$250), and A’s
deferred section 752 amount with respect to debt two
is $40 ($100 x $100/$250). A’s $250 of Partnership
losses are suspended under section 704(d).
(iii) In determining the amount of gain that B
would recognize under section 731 as a result of the
reacquisitions absent the section 108(i)(6) deferral,
Partnership first increases B’s $50 adjusted basis in
his interest in Partnership by B’s distributive share of
Partnership income (other than the deferred amounts
relating to debt one and debt two) of $250 ($100 other
income plus $150 included amount with respect to
debt one and debt two), and then decreases B’s ad-
justed basis in Partnership by deemed distributions
under section 752(b) of $250 and, thereafter, by B’s
distributive share of Partnership losses of $250, but
only to the extent that B’s basis is not reduced be-
low zero. Under paragraph (b)(3)(ii) of this section,
B would not recognize any gain under section 731
as a result of the reacquisitions absent the section
108(i)(6) deferral. Thus, B has no deferred section
752 amount with respect to either debt one or debt
two. B may deduct his distributive share of Partner-
ship losses to the extent of $50, with the remaining
$200 suspended under section 704(d).
(4)Tiered partnerships—(i)In general.
If a partnership (upper-tier partnership)
is a direct or indirect partner of an elect-
ing partnership and directly or indirectly
receives an allocation of a COD income
amount from the electing partnership, all
or a portion of which is deferred under
section 108(i), the upper-tier partnership
must allocate its COD income amount
to its partners that are partners in the
upper-tier partnership immediately be-
fore the reacquisition in the manner in
which the income would be included in
the distributive shares of the partners un-
der section 704 and the regulations under
section 704, including §1.704–1(b)(2)(iii),
without regard to section 108(i). The up-
per-tier partnership may determine, in any
manner, the portion, if any, of a partner’s
COD income amount with respect to an
applicable debt instrument that is the de-
ferred amount, and the portion, if any,
that is the included amount. However, no
partner’s deferred amount with respect to
an applicable debt instrument may exceed
that partner’s COD income amount with
respect to such applicable debt instrument,
and the aggregate amount of the part-
ners’ COD income amounts and deferred
amounts with respect to each applicable
debt instrument must equal the upper-tier
partnership’s COD income amount and de-
ferred amount, respectively, with respect
to each such applicable debt instrument.
(ii)Deferred section 752 amount.The
computation of a partner’s deferred sec-
tion 752 amount, as described in paragraph
(b)(3)(ii) of this section, is calculated only
for direct partners of the electing partner-
ship. An upper-tier partnership’s deferred
section 752 amount with respect to an ap-
plicable debt instrument of the electing
partnership is allocated only to those part-
ners of the upper-tier partnership that have
a deferred amount with respect to that ap-
plicable debt instrument, and in proportion
to such partners’ share of the upper-tier
partnership’s deferred amount with respect
to that applicable debt instrument. A part-
ner’s share of the upper-tier partnership’s
deferred section 752 amount with respect
to an applicable debt instrument must not
exceed that partner’s share of the upper-
tier partnership’s deferred amount with re-
spect to the applicable debt instrument to
which the deferred section 752 amount re-
lates. The deferred section 752 amount
of a partner of an upper-tier partnership is
treated as a distribution of money by the
upper-tier partnership to the partner under
section 752(b), at the same time and to the
extent remaining in the same amount, as
the partner recognizesthe deferred amount
with respect to the applicable debt instru-
ment.
(iii)Examples. The following examples
illustrate the rules under paragraph (b)(4)
of this section:
Example 1. (i) PRS, a calendar-year partnership,
has two equal partners, A, an individual, and XYZ,
a partnership. As of January 1, 2009, A and XYZ
each have an adjusted basis of $50 in their partnership
interests. PRS has a $500 applicable debt instrument
outstanding. On June 1, 2009, the creditor agrees to
cancel the $500 indebtedness. PRS realizes $500 of
COD income as a result of the reacquisition. PRS
has no other income or loss items for 2009. PRS
makes an election under section 108(i) to defer $200
of the $500 of COD income. PRS allocates the $500
of COD income equally between its partners ($250
each). PRS determines that, for each partner, $100 of
the COD income amount is the deferred amount, and
$150 is the included amount. For 2009, each of A’s
and XYZ’s share of the decrease in PRS’s reacquired
applicable debt instrument is $250.
(ii) XYZ has two equal partners, individuals X
and Y. X and Y share equally in XYZ’s liabilities.
XYZ allocates the $250 COD income amount from
PRS equally between X and Y ($125 each). XYZ
determines that X has a deferred amount of $100 and
an included amount of $25. All $125 of Y’s COD
income amount is Y’s included amount. For 2009,
each of X’s and Y’s share of XYZ’s $250 decrease in
liability with respect to the reacquired applicable debt
instrument of PRS is $125.
(iii) Under paragraph (b)(3)(ii) of this section,
PRS determines that XYZ has a deferred section 752
amount of $50. Therefore, for 2009, of XYZ’s $250
share of the decrease in PRS’s reacquired applicable
debt instrument, $200 is treated as a deemed distri-
bution under section 752(b) and $50 is the deferred
section 752 amount.
(iv) Under paragraph (b)(4)(ii) of this section,
none of XYZ’s $50 deferred section 752 amount is
allocated to Y because Y does not have a deferred
amount with respect to the reacquired applicable
debt interest. XYZ’s entire $50 of deferred section
752 amount is allocated to X. Therefore, of X’s $125
share of the XYZ’s decrease in liability with respect
to the reacquired applicable debt instrument of PRS,
$75 is treated as a deemed distribution under section
752(b) and $50 is X’s deferred section 752 amount.
Y’s $125 share of XYZ’s decrease in liability with
respect to the reacquired applicable debt instrument
of PRS is treated as a deemed distribution under
section 752(b) and none is a deferred section 752
amount.
Example 2. (i) The facts are the same as inEx-
ample 1, except for the following: XYZ has three
partners, X, Y, and Z. The profits and losses of XYZ
are shared 25 percent by X, 25 percent by Y, and 50
percent by Z. XYZ allocates its $250 COD income
amount from PRS $62.50 to each of X and Y, and
$125 to Z. XYZ determines that X has a deferred
amount of $50 and an included amount of $12.50, Y
has a deferred amount of $0 and an included amount
of $62.50, and Z has a deferred amount of $50 and an
included amount of $75 with respect to the applica-
ble debt instrument. X’s, Y’s, and Z’s share of XYZ’s
decrease in liability with respect to the reacquired ap-
plicable debt instrument of PRS is $62.50, $62.50 and
$125, respectively.
(ii) Under paragraph (b)(4)(ii) of this section,
none of XYZ’s $50 deferred section 752 amount is
allocated to Y because Y does not have a deferred
amount with respect to the reacquired applicable
debt instrument. XYZ’s $50 deferred section 752
amount is allocated to X and Z in proportion to X’s
and Z’s share of XYZ’s deferred amount, or $25
each ($50 x ($50/$100)). Therefore, of X’s $62.50
share of XYZ’s decrease in liability with respect to
the reacquired applicable debt instrument, $37.50 is
treated as a deemed distribution under section 752(b)
and $25 is X’s deferred section 752 amount. All of
Y’s $62.50 share of XYZ’s decrease in liability with
respect to the reacquired applicable debt instrument
is treated as a deemed distribution under section
752(b). Of Z’s $125 share of XYZ’s decrease in lia-
bility with respect to the reacquired applicable debt
instrument, $100 is treated as a deemed distribution
under section 752(b) and $25 is Z’s deferred section
752 amount.
(5)S corporation partner—(i)In gen-
eral. If an S corporation partner has a de-
ferred amount with respect to an applica-
ble debt instrument of an electing partner-
ship, such deferred amount is sharedpro
rataonly among those shareholders that
are shareholders of the S corporation part-
2010–45 I.R.B.613November 8, 2010

ner immediately before the reacquisition
of the applicable debt instrument.
(ii)Basis adjustments. The adjusted
basis of a shareholder’s stock in an S cor-
poration partner is not increased under sec-
tion 1367(a)(1) by the shareholder’s share
of the S corporation partner’s deferred
amount in the taxable year of the reacquisi-
tion. The adjusted basis of a shareholder’s
stockinanScorporationpartnerisnot
decreased under section 1367(a)(2) by the
shareholder’s share of the S corporation
partner’s deferred OID deduction in the
taxable year in which the deferred OID
accrues. The adjusted basis of a share-
holder’sstockinanScorporation partner
is adjusted under section 1367(a) by the
shareholder’s share of the S corporation
partner’s share of the electing partnership’s
deferred items for the taxable year in
which the shareholder takes into account
its share of such deferred items under this
section.
(iii)Accumulated adjustments account.
The accumulated adjustments account
(AAA), as defined in section 1368(e)(1),
of an S corporation partner that has a de-
ferred amount with respect to an applicable
debt instrument of an electing partnership
is not increased by its deferred amount in
the taxable year of the reacquisition. The
AAA of an S corporation partner is not
decreased by its share of any deferred OID
deduction in the taxable year in which the
deferred OID accrues. The AAA of an
S corporation partner is adjusted under
section 1368(e) by a shareholder’s share
of the S corporation partner’s share of
the electing partnership’s deferred items
for the S period (as defined in section
1368(e)(2)) in which the shareholder of
the S corporation partner takes into ac-
count its share of the deferred items under
this section.
(6)Acceleration of deferred items—(i)
Electing partnership-level events—(A)
General rules. Except as provided in para-
graph (b)(6)(iii) of this section, a direct
or indirect partner’s share of an electing
partnership’s deferred items is accelerated
and must be taken into account by such
partner—
(1) In the taxable year in which the
electing partnership liquidates;
(2) In the taxable year in which the
electing partnership sells, exchanges,
transfers (including contributions and dis-
tributions), or gifts substantially all of its
assets;
(3) In the taxable year in which the
electing partnershipceases doing business;
or
(4) In the taxable year that includes the
day before the day on which the electing
partnershipfilesapetitioninaTitle11or
similar case.
(B)Substantially all requirement.For
purposes of this paragraph (b)(6), substan-
tially all of a partnership’s assets means as-
sets representing at least 90 percent of the
fair market value of the net assets, and at
least 70 percent of the fair market value
of the gross assets, held by the partnership
immediately prior to the sale, exchange,
transfer, or gift. For purposes of applying
the rule in paragraph (b)(6)(i)(A)(2)ofthis
section, a sale, exchange, transfer, or gift
by any direct or indirect lower-tier partner-
ship of the electing partnership (lower-tier
partnership) of all or part of its assets is
not treated as a sale, exchange, transfer,
or gift of the assets of any partnership that
holds, directly or indirectly, an interest in
such lower-tier partnership. However, for
purposes of applying the rule in paragraph
(b)(6)(i)(A)(2) of this section, a sale, ex-
change, transfer, or gift of substantially all
of the assets of a transferee partnership (as
described in paragraph (b)(6)(iii)(A)(1)of
this section), or of a lower-tier partnership
that received assets of the electing partner-
ship from a transferee partnership or an-
other lower-tier partnership in a transac-
tion governed all or in part by section 721,
is treated as a sale, exchange, transfer, or
gift by the holder of an interest in such
transferee partnership or lower-tier part-
nership of its entire interest in that trans-
feree partnership or lower-tier partnership.
(ii)Direct or indirect partner-level
events—(A)General rules. Except as
provided in paragraph (b)(6)(iii) of this
section, a direct or indirect partner’s share
of an electing partnership’s deferred items
with respect to a separate interest is accel-
erated and must be taken into account by
such partner in the taxable year in which—
(1) The partner dies or liquidates;
(2) The partner sells, exchanges (in-
cluding redemptions treated as exchanges
under section 302), transfers (including
contributions and distributions), or gifts
(including transfers treated as gifts under
section 1041) all or a portion of its sepa-
rate interest;
(3) The partner’s separate interest is re-
deemed within the meaning of paragraph
(b)(6)(ii)(B)(2) of this section; or
(4) The partner abandons its separate
interest.
(B)Meaning of terms; special
rules—(1)Partial transfers.Forpur-
poses of paragraph (b)(6)(ii)(A)(2)ofthis
section, if a partner sells, exchanges (in-
cluding redemptionstreated as exchanges
under section 302), transfers (including
contributions and distributions), or gifts
(including transfers treated as gifts under
section 1041) a portion of its separate in-
terest, such partner’s share of the electing
partnership’s deferred items with respect
to the separate interest proportionate to the
separate interest sold, exchanged, trans-
ferred, or gifted is accelerated and must be
taken into account by such partner.
(2)Redemptions. For purposes of para-
graph (b)(6)(ii)(A)(3) of this section, a
partner’s separate interest is redeemed if
the partner receives adistribution of cash
and/or property in complete liquidation of
such separate interest.
(3)S corporation partners.Inaddi-
tion to the rules in paragraphs (b)(6)(i) and
(ii) of this section, an S corporation part-
ner’s share of the electing partnership’s de-
ferred items is accelerated and the share-
holders of the S corporation partner must
take into account their respective shares
of the S corporation partner’s share of the
electing partnership’s deferred items in the
taxable year in which the S corporation
partner’s election under section 1362(a)
terminates.
(4)C corporation partners. In addition
to the rules in paragraphs (b)(6)(i), (ii), and
(iii) of this section, the acceleration rules
in §1.108(i)–1T(b) and the earnings and
profits rules in §1.108(i)–1T(d) apply to
partners that are electing corporations.
(iii)Events not constituting accelera-
tion. Notwithstanding the rules in para-
graphs (b)(6)(i) and (ii) of this section, a di-
rect or indirect partner’s share of an elect-
ing partnership’s deferred items with re-
spect to a separate interest is not acceler-
ated by any of the events described in this
paragraph (b)(6)(iii).
(A)Section 721 contributions—(1)
Electing partnership contributions.A
direct or indirect partner’s share of an
electing partnership’s deferred items is
not accelerated if the electing partnership
contributes all or a portion of its assets
November 8, 20106142010–45 I.R.B.

in a transaction governed all or in part
by section 721(a) to another partnership
(transferee partnership) in exchange for an
interest in the transferee partnership pro-
vided that the electing partnership does not
terminate under section 708(b)(1)(A) or
transfer its assets and liabilities in a trans-
action described in section 708(b)(2)(A)
or section 708(b)(2)(B). See paragraph
(b)(6)(iii)(D) of this section for transac-
tions governed by section 708(b)(2)(A).
Notwithstanding the rules in this para-
graph (b)(6)(iii)(A)(1), the rules in para-
graphs (b)(6)(i)(A) and (b)(6)(ii)(A) of
this section apply to any part of the trans-
action to which section 721(a) does not
apply.
(2)Partner contributions. A direct
or indirect partner’s share of an electing
partnership’s deferred items with respect
to a separate interest is not accelerated
if the holder of such interest (contribut-
ing partner) contributes its entire separate
interest (contributed separate interest)
in a transaction governed all or in part
by section 721(a) to another partnership
(transferee partnership) in exchange for
an interest in the transferee partnership
provided that the partnership in which the
separate interest is held does not terminate
undersection708(b)(1)(A)ortransferits
assets and liabilities in a transaction de-
scribed in section 708(b)(2)(A) or section
708(b)(2)(B). See paragraph (b)(6)(iii)(D)
of this section for transactions governed
by section 708(b)(2)(A). The transferee
partnership becomes subject to section
108(i), including all reporting require-
ments under this section, with respect
to the contributing partner’s share of the
electing partnership’s deferred items as-
sociated with the contributed separate
interest. The transferee partnership must
allocate and report the share of the elect-
ing partnership’s deferred items that is
associated with the contributed separate
interest to the contributing partner to the
same extent that such share of the electing
partnership’s deferred items would have
been allocated and reported to the con-
tributing partner in the absence of such
contribution. Notwithstanding the rules in
this paragraph (b)(6)(iii)(A)(2), the rules
in paragraph (b)(6)(ii)(A) of this section
apply to any part of the transaction to
which section 721(a) does not apply.
(B)Section 1031 exchanges. A direct
or indirect partner’s share of the elect-
ing partnership’s deferred items is not
accelerated if the electing partnership
transfers property held for productive use
in a trade or business or for investment in
exchange for property of like kind which
is to be held either for productive use in
a trade or business or for investment in
a transaction to which section 1031(a)(1)
applies. Notwithstanding the rules in this
paragraph (b)(6)(iii)(B), to the extent the
electing partnership receives money or
other property which does not meet the
requirements of section 1031(a) (boot) in
the exchange, a proportionate amount of
the property transferred by the electing
partnership equal to the proportion of the
boot to the total consideration received in
the exchange shall be treated as sold for
purposes of paragraph (b)(6)(i)(A)(2)of
this section.
(C)Section 708(b)(1)(B) terminations.
A direct or indirect partner’s share of the
deferred items of an electing partnership
with respect to a separate interest is not
accelerated if the electing partnership
or a partnership that is a direct or indi-
rect partner of the electing partnership
terminates under section 708(b)(1)(B).
Notwithstanding the rules in this para-
graph (b)(6)(iii)(C), the rules in paragraph
(b)(6)(ii)(A) of this section apply to the
event that causes the termination un-
der section 708(b)(1)(B) to the extent
not otherwise excepted under paragraph
(b)(6)(iii) of this section.
(D)Section 708(b)(2)(A) mergers or
consolidations. A direct or indirect part-
ner’s share of the deferred items of an
electing partnership with respect to a
separate interest is not accelerated if the
partnership in which the separate interest
is held (the merger transaction partner-
ship) merges into or consolidates with
another partnership in a transaction to
which section 708(b)(2)(A) applies. The
resulting partnership or new partnership,
as determined under §1.708–1(c)(1), be-
comes subject to section 108(i), including
all reporting requirements under this sec-
tion, to the same extent that the merger
transaction partnership was so subject
prior to the transaction, and must allo-
cate and report any merger transaction
partnership’s deferred items to the same
extent and to the same partners that the
merger transaction partnership allocated
and reported such items prior to such trans-
action. Notwithstanding the rules in this
paragraph (b)(6)(iii)(D), the rules in para-
graphs (b)(6)(i)(A)(2) and (b)(6)(ii)(A)(2)
of this section apply to that portion of the
transaction that is treated as a sale, and the
rules of (b)(6)(ii)(A)(3) apply if, as part
of the transaction, the partner’s separate
interest is redeemed and the partner does
not receive an interest in the resulting
partnership with respect to such separate
interest.
(E)Certain distributions of separate in-
terests. If a partnership (upper-tier partner-
ship) that is a direct or indirect partner of
an electing partnership distributes its en-
tire separate interest (distributed separate
interest) to one or more of its partners (dis-
tributee partners) that have a share of the
electing partnership’s deferred items from
upper-tier partnership with respect to the
distributed separate interest, the distribu-
tee partners’ shares of the electing partner-
ship’s deferred items with respect to such
distributed separate interest are not accel-
erated. The partnership, the interest in
which was distributed, must allocate and
report the share of the electing partner-
ship’s deferred items associated with the
distributed separate interest only to such
distributee partners that had a share of the
electing partnership’s deferred items from
the upper-tier partnership with respect to
the distributed separate interest prior to the
distribution.
(F)Section 381 transactions.ACcor-
poration partner’s share of an electing part-
nership’s deferred items is not accelerated
if, as part of a transaction described in
paragraph (b)(6)(ii)(A) of this section, the
assets of the C corporation partner are ac-
quired by another C corporation (acquir-
ing C corporation) in a transaction that
is treated, under §1.108(i)–1T(b)(2)(ii)(B),
as a transaction to which section 381(a)
applies. An S corporation partner’s share
of an electing partnership’s deferred items
is not accelerated if, as part of a transac-
tion described in paragraph (b)(6)(ii)(A)
of this section, the assets of the S cor-
poration partner are acquired by another
S corporation (acquiring S corporation) in
a transaction to which section 381(a) ap-
plies. In such cases, the acquiring C cor-
poration or acquiring S corporation, as the
case may be, succeeds to the C corporation
partner’s or the S corporation partner’s re-
maining share of the electing partnership’s
deferred items and becomes subject to sec-
tion 108(i), including all reporting require-
2010–45 I.R.B.615November 8, 2010

ments under this section, as if the acquiring
C corporation or acquiring S corporation
were the C corporation partner or the S cor-
poration partner, respectively. The acquir-
ing S corporation must allocate and report
the S corporation partner’s deferred items
to the same extent and only to those share-
holders of the S corporation partner who
had a share of the S corporation partner’s
deferred items from the electing partner-
ship prior to the transaction.
(G)Intercompany transfers.AC
corporation partner’s share of an elect-
ing partnership’s deferred items is not
accelerated if, as part of a transaction
described in paragraph (b)(6)(ii)(A) of
this section, the C corporation partner
transfers its entire separate interest in an
intercompany transaction, as described in
§1.1502–13(b)(1)(i), and the electing part-
nership does not terminate under section
708(b)(1)(A) as a result of the intercom-
pany transaction.
(H)Retirement of a debt instrument.
See §1.108(i)–3T(c)(1) for rules regarding
the retirement of a debt instrument that is
subject to section 108(i).
(I)Other non-acceleration events.A
direct or indirect partner’s share of an
electing partnership’s deferred items is not
accelerated with respect to any transaction
if the Commissioner makes a determi-
nation by published guidance that such
transaction is not an acceleration event
under the rules of this paragraph (b)(6).
(iv)Related partnerships. A direct or
indirect partner’s share of a related partner-
ship’s deferred OID deduction (as deter-
mined in paragraph (d)(2) of this section)
that has not previously been taken into ac-
count is accelerated and taken into account
by the direct or indirect partner in the tax-
able year in which, and to the extent that,
deferred COD income attributable to the
related partnership’s deferred OID deduc-
tion is taken into account by the electing
entity or its owners.
(v)Examples. The following examples
illustrate the rules under this paragraph
(b)(6):
Example 1.Meaning of “separate interest.”(i)
Electing partnership (EP) has three partners, MT1,
MT2, and UT, each of which is a partnership. The
partners of MT1 are X and UT. The partners of MT2
are Y, UT, and B. The partners of UT are A, B, and C.
In addition to their interests in the partnerships noted,
MT1, MT2, and UT own other assets.
(ii) Within the meaning of paragraph (a)(29) of
§1.108(i)–0T, A and C each hold one separate interest
(their interests in UT), B holds two separate interests
(its interests in UT and MT2), UT holds three separate
interests (its interests in MT1, MT2, and EP), MT1
and MT2 each hold one separate interest (their inter-
ests in EP), and X and Y eachhold one separate in-
terest (their interests in MT1 and MT2, respectively)
with respect to EP.
Example 2.Distributions of separate interests in
an electing partnership. (i) The facts are the same
as inExample 1, except that A, as a direct partner of
UT, has a share of EP’s deferred items with respect to
UT’s interests in MT1 and EP. A does not have a share
of EP’s deferred items with respect to UT’s interest
in MT2. B, as a direct partner of UT, has a share of
EP’s deferred items with respect to UT’s interest in
MT1 and MT2, but not with respect to UT’s interest
in EP. B also has a share of EP’s deferred items with
respect to its separate interest in MT2. C does not
have any share of EP’s deferred items with respect to
UT’s interest in MT1, MT2, or EP.
(ii) UT distributes 40 percent of its separate
interest in MT1 to A in redemption of A’s inter-
est in UT. Under paragraphs (b)(6)(ii)(A)(2)and
(b)(6)(ii)(B)(1) of this section, a portion of UT’s
interest in MT1 has been transferred and a cor-
responding portion (40 percent) of UT’s share of
EP’s deferred items from MT1 is accelerated. Thus,
40 percent of A’s and B’s share of EP’s deferred
items from UT with respect to UT’s interest in
MT1 is accelerated. Further, because A’s interest in
UT is redeemed within the meaning of paragraph
(b)(6)(ii)(B)(2) of this section, all of A’s shares of
EP’s deferred items from UT are accelerated under
paragraph (b)(6)(ii)(A)(3) of this section. UT contin-
ues to allocate and report to B its remaining share of
EP’s deferred items from its separate interest in MT1
that was not distributed to A.
(iii) UT distributes its entire separate interest in
MT1 to B (other than in redemption of B’s interest in
UT). Under paragraph (b)(6)(ii)(A)(2) of this section,
UT’s share of EP’s deferred items from MT1 would
be accelerated. However, because UT distributes its
entire separate interest in MT1 to B, B’s share of EP’s
deferred items from UT with respect to UT’s separate
interest in MT1 is not accelerated under paragraph
(b)(6)(iii)(E) of this section. MT1 allocates and re-
ports to B B’s share of EP’s deferred items from UT’s
separate interest in MT1 that was distributed to B.
(iv) UT distributes its entire separate interest in
MT1 to A and B (other than in redemption of their
interests in UT). Under paragraph (b)(6)(iii)(E) of this
section, none of A’s or B’s shares of EP’s deferred
items from UT with respect to UT’s separate interest
in MT1 is accelerated, and MT1 allocates and reports
to A and B their respective share of EP’s deferred
items from UT’s separate interest in MT1 that was
distributed to A and B.
Example 3.Partial sale of interest by an indirect
partner. (i) Individual A holds a 50 percent partner-
ship interest in UTP, a partnership that holds a 50 per-
cent interest in EP, a partnership that makes an elec-
tion to defer COD income under section 108(i). A’s
share of UTP’s deferred amount with respect to EP’s
election under section 108(i) is $100. During a tax-
able year within the deferral period, A sells 25 percent
of his partnership interest in UTP to an unrelated third
party.
(ii) Under paragraphs (b)(6)(ii)(A)(2)and
(b)(6)(ii)(B)(1) of this section, 25 percent of A’s
$100 deferred amount is accelerated as a result of
A’s partial sale of his interest in UTP. Thus, A must
recognize $25 of his deferred amount in the taxable
year of the sale. A’s remaining deferred amount is
$75.
Example 4.Section 708(b)(1)(B) termination of
electing partnership. (i) A and B are equal partners in
partnership AB. On January 1, 2009, AB reacquires
an applicable debt instrument and makes an election
under section 108(i) to defer $400 of COD income.
A and B each have a deferred amount with respect to
the applicable debt instrument of $200. On January 1,
2010, A sells its entire 50 percent interest in AB to
C in a transfer that terminates the partnership under
section 708(b)(1)(B).
(ii) Under paragraph (b)(6)(iii)(C) of this sec-
tion, the technical termination of AB under section
708(b)(1)(B) does not cause A’s or B’s shares of
AB’s deferred items to be accelerated. However, A’s
$200 deferred amount is accelerated under paragraph
(b)(6)(ii)(A)(2) of this section as a result of the sale.
Example 5.Section 708(b)(2)(A) mergers.(i)A,
B, and C are equal partners in partnership X, which
has made an election under section 108(i) to defer
$150 of COD income. The fair market value of each
interest in partnership X is $100. A, B, and C each has
a deferred amount of $50 with respect to partnership
X’s election under section 108(i). E, F, and G are part-
ners in partnership Y. Partnership X and partnership
Y merge in a taxable year during the deferral period
of partnership X’s election under section 108(i). Un-
der section 708(b)(2)(A), the resulting partnership is
considered a continuation of partnership Y and part-
nership X is considered terminated. Under state law,
partnerships X and Y undertake the assets-over form
of §1.708–1(c)(3)(i) to accomplish the merger. C
does not want to become a partner in partnership Y,
and partnership X does nothave the resources to re-
deem C’s interest before the merger. C, partnership
X, and partnership Y enter into a merger agreement
that satisfies the requirements of §1.708–1(c)(4) and
specifies that partnership Y will purchase C’s interest
in partnership X for $100 before the merger, and as
part of the agreement, C consents to treat the trans-
action in a manner that is consistent with the agree-
ment. As part of the merger, partnership X receives
from partnership Y $100 (which will be distributed to
C immediately before the merger), $100 (which will
be distributed equally to A and B ($50 each)), and in-
terests in partnership Y with a value of $100 (which
will be distributed equally to A and B) in exchange
for partnership X’s assets and liabilities.
(ii) Under the general rule of paragraph
(b)(6)(iii)(D) of this section, and except as provided
below, the deferred items of partnership X are not
accelerated as a result of the merger with partnership
Y. Partnership Y, the resulting partnership that is con-
sidered the continuation of partnership X, becomes
subject to section 108(i), including all reporting
requirements under section 108(i), to the same extent
that partnership X was subject to such rules. Under
paragraph (b)(6)(iii)(D) of this section, partnership
Y must allocate and report partnership X’s deferred
items to A and B in the same manner as partnership
X had prior to the merger transaction.
(iii) Under §1.708–1(c)(4), C is treated as selling
its interest in partnership X immediately before the
merger. As a result, C’s $50 deferred amount is ac-
November 8, 20106162010–45 I.R.B.

celerated under paragraph (b)(6)(ii)(A)(2) of this sec-
tion.
(iv) Under section 707(a)(2)(B), partnership
X is deemed to have sold a portion of its assets
to partnership Y. Because partnership X is not
treated as selling substantially all of its assets under
paragraph (b)(6)(i)(B) of this section, A’s and B’s de-
ferred amounts are not accelerated under paragraph
(b)(6)(i)(A)(2)ofthissection.
(v) Because A’s and B’s interests in partnership
X are redeemed within the meaning of paragraph
(b)(6)(ii)(B)(2) of this section, all of their shares
of partnership X’s deferred items would be accel-
erated under paragraph (b)(6)(ii)(A)(3). However,
because they receive an interest in partnership Y in
the merger, none of A’s and B’s share of partnership
X’s deferred items is accelerated.
(7)Withholding under section 1446.
See section 1446 regarding withholding by
a partnership on a foreign partner’s share
of income effectively connected with a
U.S. trade or business.
(c)Specific rules applicable to S corpo-
rations—(1)Deferred COD income.An
electing S corporation’s COD income de-
ferred under section 108(i) (an S corpo-
ration’s deferred COD income) is shared
pro rataamong those shareholders that
are shareholders of the electing S corpora-
tion immediately before the reacquisition
of the applicable debt instrument. Any
COD income deferred under section 108(i)
is taken into account under section 1366(a)
by those shareholders in the inclusion pe-
riod, or earlier upon the occurrence of an
acceleration event described in paragraph
(c)(3) of this section.
(2)Basis adjustments and accumulated
adjustments account—(i)Basis adjust-
ments. The adjusted basis of a share-
holder’s stock in an electing S corporation
is not increased under section 1367(a)(1)
by the shareholder’s share of the S cor-
poration’s deferred COD income in the
taxable year of the reacquisition. The
adjusted basis of a shareholder’s stock
in an electing S corporation or a related
S corporation is not decreased under
section 1367(a)(2) by the shareholder’s
share of the S corporation’s deferred OID
deduction in the taxable year in which the
deferred OID accrues. The adjusted basis
of a shareholder’s stock in an electing
S corporation or a related S corporation
is adjusted under section 1367(a) by the
shareholder’s share of the S corporation’s
deferred items for the taxable year in
which the shareholder takes into account
its share of the deferred items under this
section.
(ii)Accumulated adjustments account.
The AAA of an electing S corporation is
not increased by the S corporation’s de-
ferred COD income in the taxable year of
a reacquisition. The AAA of an electing
S corporation or a related S corporation is
not decreased by the S corporation’s de-
ferred OID deduction in the taxable year
in which the deferred OID accrues. The
AAA of an electing S corporation or a re-
lated S corporation is adjusted under sec-
tion 1368(e) by a shareholder’s share of the
S corporation’s deferred items for the S pe-
riod (as defined in section 1368(e)(2)) in
which a shareholder of the S corporation
takes into account its share of the deferred
items under this section.
(3)Acceleration of deferred items—(i)
Electing S corporation-level events—(A)
General rules. Except as provided in para-
graph (c)(3)(iii) of this section, a share-
holder’s share of an electing S corpora-
tion’s deferred items is accelerated and
must be taken into account by such share-
holder—
(1) In the taxable year in which the
electing S corporation liquidates;
(2) In the taxable year in which the
electing S corporation sells, exchanges,
transfers (including contributions and dis-
tributions), or gifts substantially all of its
assets;
(3) In the taxable year in which the
electing S corporation ceases doing busi-
ness;
(4) In the taxable year in which the
electing S corporation’s election under
section 1362(a) terminates; or
(5) In the taxable year that includes the
day before the day on which the electing
S corporation files a petition in a Title 11
or similar case.
(B)Substantially all requirement.For
purposes of this paragraph (c)(3), substan-
tially all of an electing S corporation’s
or partnership’s assets means assets rep-
resenting at least 90 percent of the fair
market value of the net assets, and at least
70 percent of the fair market value of the
gross assets, held by the S corporation
or partnership immediately prior to the
sale, exchange, transfer, or gift. For pur-
poses of applying the rule in paragraph
(c)(3)(i)(A)(2) of this section, a sale, ex-
change, transfer, or gift by any direct or
indirect lower-tier partnership of the elect-
ing S corporation (lower-tier partnership)
of all or part of its assets is not treated as
a sale, exchange, transfer, or gift of the
assets of any person that holds, directly
or indirectly, an interest in such lower-tier
partnership. However, for purposes of ap-
plying the rule in paragraph (c)(3)(i)(A)(2)
of this section, a sale, exchange, transfer,
or gift of substantially all of the assets of
a transferee partnership (as described in
paragraph (c)(3)(iii)(A) of this section),
or of a lower-tier partnership that re-
ceived assets of the electing S corporation
from a transferee partnership of the elect-
ing S corporation or another lower-tier
partnershipinatransactiongovernedallor
in part by section 721, is treated as a sale,
exchange, transfer, or gift by the holder of
an interest in such transferee partnership or
lower-tier partnership of its entire interest
in that transferee partnership or lower-tier
partnership.
(ii)Shareholder events—(A)General
rules. Except as provided in paragraph
(c)(3)(iii) of this section, a shareholder’s
share of an electing S corporation’s de-
ferred items is accelerated and must be
taken into account by such shareholder in
the taxable year in which—
(1) The shareholder dies;
(2) The shareholder sells, exchanges
(including redemptions treated as ex-
changes under section 302), transfers (in-
cluding contributions and distributions),
or gifts (including transfers treated as gifts
under section 1041) all or a portion of its
interest in the electing S corporation; or
(3) The shareholder abandons its inter-
est in the electing S corporation.
(B)Partial transfers. For purposes of
paragraph (c)(3)(ii)(A)(2) of this section,
if a shareholder of an electing S corpora-
tion sells, exchanges (including redemp-
tions treated as exchanges under section
302), transfers, or gifts (including transfers
treated as gifts under section 1041) a por-
tion of its interest in the electing S corpora-
tion, such shareholder’s share of the elect-
ing S corporation’s deferred items propor-
tionate to the interest that was sold, ex-
changed, transferred, or gifted is acceler-
ated and must be taken into account by
such shareholder.
(iii)
Events not constituting accelera-
tion. Notwithstanding the rules in para-
graphs (c)(3)(i) and (ii) of this section, a
shareholder’s share of an electing S cor-
poration’s deferred items is not accelerated
by any of the events described in this para-
graph (c)(3)(iii).
2010–45 I.R.B.617November 8, 2010

(A)Electing S corporation’s contri-
butions. A shareholder’s share of an
electing S corporation’s deferred items is
not accelerated if the electing S corpo-
ration contributes all or a portion of its
assets in a transaction governed all or in
part by section 721(a) to a partnership
(transferee partnership) in exchange for
an interest in the transferee partnership.
Notwithstanding the rules in this para-
graph (c)(3)(iii)(A), the rules in paragraph
(c)(3)(i)(A) of this section apply to any
part of the transaction to which section
721(a) does not apply.
(B)Section 1031 exchanges. A share-
holder’s share of an electing S corpora-
tion’s deferred items is not accelerated
if the electing S corporation transfers
property held for productive use in a
trade or business or for investment in ex-
change for property of like kind which is
to be held either for productive use in a
trade or business or for investment in a
transaction to whichsection 1031(a)(1)
applies. Notwithstanding the rules in this
paragraph (c)(3)(iii)(B), to the extent the
electing S corporation receives money or
other property which does not meet the
requirements of section 1031(a) (boot) in
the exchange, a proportionate amount of
the property transferred by the electing
S corporation equal to the proportion of
the boot to the total consideration received
in the exchange shall be treated as sold for
purposes of paragraph (c)(3)(i)(A)(2)of
this section.
(C)Section 381 transactions. A share-
holder’s share of an electing S corpora-
tion’s deferred items is not accelerated if,
as part of a transaction described in para-
graph (c)(3)(i)(A) of this section, the elect-
ing S corporation’s assets are acquired by
another S corporation (acquiring S corpo-
ration) in a transaction to which section
381(a) applies. In such a case, the acquir-
ing S corporation succeeds to the electing
S corporation’s remaining deferred items
and becomes subject to section 108(i), in-
cluding all reporting requirements under
this section, as if the acquiring S corpora-
tion were the electing S corporation. The
acquiring S corporation must allocate and
report the electing S corporation’s deferred
itemstothesameextentandonlytothose
shareholders who had a share of the elect-
ing S corporation’s deferred items prior to
the transaction.
(D)Retirement of a debt instrument.
See §1.108(i)–3T(c)(1) for rules regarding
the retirement of a debt instrument that is
subject to section 108(i).
(E)Other non-acceleration events.A
shareholder’s share of an electing S cor-
poration’s deferred items is not accelerated
with respect to any transaction if the Com-
missioner makes a determination by pub-
lished guidance that such transaction is not
an acceleration event under the rules of this
paragraph (c)(3).
(iv)Related S corporations. A share-
holder’s share of a related S corporation’s
deferred OID deduction (as determined in
paragraph (d)(2) of this section) that has
not previously been taken into account is
accelerated and taken into account by the
shareholder in the taxable year in which,
and to the extent that, deferred COD in-
come attributable to the related S corpora-
tion’s deferred OID deduction is taken into
account by the electing entity or its owners.
(d)General rules applicable to partner-
ships and S corporations—(1)Applicable
debt instrument (trade or business require-
ment). The determination of whether a
debt instrument issued by a partnership or
an S corporation is treated as a debt instru-
ment issued in connection with the conduct
of a trade or business by the partnership
or S corporation for purposes of this sec-
tion is based on all the facts and circum-
stances. However, a debt instrument is-
sued by a partnership or an S corporation
shall be treated as an applicable debt in-
strument for purposes of this section if the
electing partnership or electing S corpora-
tion can establish that—
(i) The gross fair market value of the
trade or business assets of the partnership
or S corporation that issued the debt in-
strument represented at least 80 percent of
the gross fair market value of that partner-
ship’s or S corporation’s total assets on the
date of issuance;
(ii) The trade or business expenditures
of the partnership or S corporation that
issued the debt instrument represented at
least 80 percent of the partnership’s or
S corporation’s total expenditures for the
taxable year of issuance;
(iii) At least 95 percent of interest paid
or accrued on the debt instrument issued
by the partnership or S corporation was al-
located to one or more trade or business
expenditures under §1.163–8T for the tax-
able year of issuance;
(iv) At least 95 percent of the proceeds
from the debt instrument issued by the
partnership or S corporation were used by
the partnership or S corporation to acquire
one or more trades or businesses within six
months from the date of issuance; or
(v) The partnership or S corporation is-
sued the debt instrument to a seller of a
trade or business to acquire the trade or
business.
(2)Deferral of OID at entity level—(i)
In general. For each taxable year during
the deferral period, anissuingentitydeter-
mines the amount of its deferred OID de-
duction with respect toa debt instrument, if
any. An issuing entity’s deferred OID de-
duction for a taxable year is the lesser of:
(A) The OID that accrues in a current
taxable year during the deferral period
with respect to the debt instrument (less
any of such OID that is allowed as a de-
duction in the current taxable year as a
result of an acceleration event), or
(B) The excess, if any, of the electing
entity’s deferred COD income (less the ag-
gregate amount of such deferred COD in-
come that has been included in income
in the current taxable year and any pre-
vious taxable year during the deferral pe-
riod) over the aggregate amount of OID
that accrued in previous taxable years dur-
ing the deferral period with respect to the
debt instrument (less the aggregate amount
of such OID that has been allowed as a de-
duction in the current taxable year and any
previous taxable year during the deferral
period).
(ii)Excess deferred OID deduction.If,
as a result of an acceleration event during
a taxable year in the deferral period, an is-
suing entity’s aggregate deferred OID de-
duction for previous taxable years with re-
spect to a debt instrument (less the aggre-
gate amount of such deferred OID deduc-
tion that has been allowed as a deduction
in a previous taxable year during the defer-
ral period) exceeds theamount of the elect-
ing entity’s deferred COD income (less the
aggregate amount of such deferred COD
income that has been included in income
in the current taxable year and any pre-
vious taxable year during the deferral pe-
riod), the excess deferred OID deduction
shall be allowed as a deduction in the tax-
able year in which the acceleration event
occurs.
November 8, 20106182010–45 I.R.B.

(iii)Examples. The following examples
illustrate the rules under paragraph (d)(2)
of this section:
Example 1.Partner joins partnership during de-
ferral period. (i) A and B each hold a 50 percent in-
terest in AB partnership, a calendar-year partnership.
On January 1, 2009, AB partnership issues a new debt
instrument with OID and uses all of the proceeds to
reacquire an outstanding applicable debt instrument
of AB partnership, realizing $100 of COD income,
and makes an election undersection 108(i) to defer
$50 of the COD income. During the deferral period,
a total of $150 of OID accrues on the new debt in-
strument issued as part of the reacquisition. A and
B each have a deferred amount of $25 with respect to
the applicable debt instrument reacquired by AB part-
nership. For 2009, $28 of OID accrues on the new
debt instrument and A and B are each allocated $14
of accrued OID with respect to the new debt instru-
ment. On January 1, 2010, C contributes cash to AB
partnership in exchange for a 1/3 partnership inter-
est. For 2010, $29 of OID accrues on the new debt
instrument, and A, B, and C are each allocated $9.67
of accrued OID.
(ii) Under paragraph (d)(2) of this section, AB
partnership’s deferred OID deduction for 2009 is the
lesser of: $28 of OID that accrues on the new debt
instrument in 2009, or the excess of AB partnership’s
deferred COD income of $50 over the aggregate
amount of OID that accrued on the debt instrument in
previous taxable years during the deferral period of
$0, or $50. Thus, all $28 of the OID that accrues on
the debt instrument in 2009 is deferred under section
108(i).
(iii) Under paragraph (d)(2) of this section, AB
partnership’s deferred OID deduction for 2010 is the
lesser of: $29 of OID that accrues on the new debt
instrument in 2010, or the excess of AB partnership’s
deferred COD income of $50 over the aggregate
amount of OID that accrued on the debt instrument in
previous taxable years during the deferral period of
$28, or $22. Thus, $22 of the $29 of OID that accrues
in 2010 is deferred under section 108(i). A, B, and
C will each defer $7.33 of the $9.67 of accrued OID
that was allocated to each of them.
Example 2.Acceleration of deferred items during
deferral period. (i) On January 1, 2009, ABC part-
nership, a calendar-year partnership with three part-
ners, issues a new debt instrument with OID and uses
all of the proceeds to reacquire an outstanding ap-
plicable debt instrument of ABC partnership. ABC
partnership realizes $150 of COD income and makes
an election under section 108(i) to defer the $150 of
COD income. A’s deferred amount with respect to
the applicable debt instrument is $75, while B and C
each have a deferred amount of $37.50. In 2009, $28
of OID accrues on the new debt instrument and is al-
located $7.00 to A and $10.50 to each of B and C. In
2010, $29 of OID accrues on the new debt instrument
and is allocated $7.25 to A and $10.87 to each of B
and C. In 2011, $30 of OID accrues on the new debt
instrument and is allocated $7.50 to A and $11.25 to
each of B and C. In 2012, $31 of OID accrues on the
new debt instrument and is allocated $7.75 to A and
$11.62 to each of B and C. On December 31, 2012,
A’s entire share of ABC partnership’s deferred items
is accelerated under paragraph (b)(6) of this section.
For 2012, A includes $75 of COD income in income
and is allowed a deduction of $21.75 for A’s share of
ABC partnership’s deferred OID deduction for tax-
able years 2009 through 2011, and a deduction of
$7.75 for A’s share of ABC partnership’s OID that
accrues on the debt instrument in 2012.
(ii) Under paragraph (d)(2) of this section, ABC
partnership’s deferred OID deduction for 2012 is the
lesser of: $23.35 ($31 of OID that accrues on the new
debt instrument in 2012 less $7.75 of this OID that is
allowed as a deduction to A in 2012) or $9.75 (the
excess of $75 (ABC partnership’s deferred COD in-
come of $150 less A’s share of ABC partnership’s de-
ferred COD income that is included in A’s income for
2012 of $75) over $65.25 (the aggregate amount of
OID that accrued in previous taxable years of $87 less
the aggregate amount of such OID that has been al-
lowed as a deduction by A in 2012 of $21.75)). Thus,
of the $31 of OID that accrues in 2012, $9.75 is de-
ferred under section 108(i).
(3)Effect of an election under section
108(i) on recapture amounts under sec-
tion 465(e)—(i)In general.Totheex-
tent that a decrease in a partner’s or share-
holder’s amount at risk (as defined in sec-
tion 465) in an activity as a result of a
reacquisition of an applicable debt instru-
ment would cause a partner with a deferred
amount or a shareholder with a share of
the S corporation’s deferred COD income
to have income under section 465(e) in
the taxable year of the reacquisition, such
decrease (not to exceed the partner’s de-
ferred amount or the shareholder’s share of
the S corporation’s deferred COD income
with respect to that applicable debt instru-
ment) (deferred section 465 amount) shall
not be taken into account for purposes of
determining the partner’s or shareholder’s
amount at risk in an activity under section
465 as of the close of the taxable year of the
reacquisition. A partner’s or shareholder’s
deferred section 465 amount is treated as
a decrease in the partner’s or shareholder’s
amount at risk in an activity at the same
time, and to the extent remaining in same
amount, as the partner recognizes its de-
ferred amount or the S corporation share-
holder recognizes its share of the S corpo-
ration’s deferred COD income.
(ii)Example. The following example
illustrates the rules in paragraph (d)(3) of
this section:
Example. (i) PRS is a calendar-year partnership
with two equal partners, individuals A and B. PRS
is engaged in an activity described in section 465(c)
(Activity). PRS has a $500 recourse applicable debt
instrument outstanding. Each partner’s amount at risk
on January 1, 2009 is $50. On June 1, 2009, the cred-
itor agrees to cancel the $500 indebtedness. PRS re-
alizes $500 of COD income as a result of the reacqui-
sition. The partners’ share of the liabilities of PRS
decreases by $500 under section 752(b), and each
partner’s amount at risk is decreased by $250. Other
than the $500 of COD income, PRS’s income and ex-
penses for 2009 are equal. PRS makes an election
under section 108(i) to defer $200 of the $500 COD
income realized in connection with the reacquisition.
PRS allocates the $500 of COD income equally be-
tween its partners, A and B. A and B each have a COD
income amount of $250 with respect to the applica-
ble debt instrument. PRS determines that, for both
partners A and B, $100 of the $250 COD income
amount is the deferred amount, and $150 is the in-
cluded amount. Beginning in each taxable year 2014
through 2018, A and B each include $20 of the de-
ferred amount in gross income.
(ii) Under paragraph (d)(3)(i) of this section, $50
of the $250 decrease in A’s and B’s amount at risk in
Activity is the deferred section 465 amount for each
of A and B and is not taken into account for purposes
of determining A’s and B’s amount at risk in Activ-
ity at the close of 2009. In taxable year 2014, A’s
and B’s amount at risk in Activity is decreased by
$20 (deferred section 465 amount that equals the de-
ferred amount included in A’s and B’s gross income
in 2014). In taxable year 2015, A’s and B’s amount at
risk in Activity is decreased by $20 for the deferred
section 465 amount that equals the deferred amount
included in A’s and B’s gross income in 2015. In tax-
able year 2016, A’s and B’s amount at risk in Activity
is decreased by $10 (the remaining amount of the de-
ferred section 465 amount).
(e)Election procedures and reporting
requirements—(1)Partnerships—(i)In
general. A partnership makes an election
under section 108(i) by following proce-
dures outlined in guidance and applicable
forms and instructions issued by the Com-
missioner. An electing partnership (or its
successor) must provide to its partners
certain information as required by guid-
ance and applicable forms and instructions
issued by the Commissioner.
(ii)Tiered pass-through entities.A
partnership that is a direct or indirect
partner of an electing partnership (or its
successor) or a related partnership or an
S corporation partner must provide to
its partners or shareholders, as the case
may be, certain information as required
by guidance and applicable forms and in-
structions issued bythe Commissioner.
(iii)Related partnerships.Arelated
partnership must provide to its partners
certain information as required by guid-
ance and applicable forms and instructions
issued by the Commissioner.
(2)S corporations—(i)In general.An
S corporation makes an election under sec-
tion 108(i) by following procedures out-
lined in guidance and applicable forms and
instructions issued by the Commissioner.
An electing S corporation (or its successor)
must provide to its shareholders certain in-
formation as required by guidance and ap-
2010–45 I.R.B.619November 8, 2010

plicable forms and instructions issued by
the Commissioner.
(ii)Related S corporations.Arelated
S corporation must provide to its share-
holders certain information as required by
guidance and applicable forms and instruc-
tionsissuedbytheCommissioner.
(f)Effective/applicability date.For
the applicability dates of this section, see
§1.108(i)–0T(b).
(g)Expiration date. This section ex-
pires on August 9, 2013.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b) is
amended by adding the following entry in
numerical order to the table to read as fol-
lows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.108(i)–2T...........................................................
1545–2147
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved August 6, 2010.
Michael F. Mundaca,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on August 11,
2010, 11:15
a.m., and published in the issue of the Federal
Register for August 13, 2010, 75 F.R. 49380)
Section 409
A.—Inclusion in
Gross Incom
e of Deferred
Compensati
on Under
Nonqualified Deferred
Compensation Plans
26 CFR 1.409A–3: Permissible payments.
The revenue ruling provides guidance, in the form
of examples, on what constitutes an unforeseeable
emergency distribution under section 457(b) of the
Code and section 1.457–6(c) of the regulations. The
revenue ruling also applies the same standards to dis-
tributions from a nonqualified deferred compensation
plan subject to section 409A. See Rev. Rul. 2010-27,
page 620.
Section 457.—Deferred
Compensation Plans
of State and Local
Governments and Tax-
Exempt Organizations (Also
Section 409A—Inclusion in
Gross Income of Deferred
Compensation Under
Nonqualified Deferred
Compensation Plans)
26 CFR 1.457–6(c): Timing of distributions under
eligible plans.
(Also 26 CFR 1.409A–3: Permissible payments).
This ruling provides guidance, in the
form of examples, on what constitutes an
unforeseeable emergency distribution un-
der section 457(b) of the Code and regula-
tions section 1.457–6(c). The ruling also
applies the same standards to distributions
from a nonqualified deferred compensa-
tion plan subject to section 409A.
Rev. Rul. 2010–27
ISSUE
Whether a plan is permitted to make an
unforeseeable emergency distribution to a
participant under § 457(d)(1)(A)(iii) of the
Internal Revenue Code in the following
factual situations?
FACTS
State X maintains Plan Y, an eligible de-
ferred compensation plan under § 457(b)
and § 1.457–2(f) of the Income Tax Regu-
lations. Under the terms of Plan Y, a partic-
ipant who has an unforeseeable emergency
before retirement or other severance from
employment may request an unforeseeable
emergency distribution.
The provisions of Plan Y governing
unforeseeable emergency distributions are
substantiallysimilartoSection5.10of
the Model Amendment contained in the
Appendix to Rev. Proc. 2004–56, 2004–2
C.B. 376. Specifically, an unforeseeable
emergency is defined in Plan Y as a se-
vere financial hardship of the participant
resulting from any of the following: an
illness or accident of the participant, the
participant’s spouse, or the participant’s
dependent (as defined in § 152(a)); loss
of the participant’s property due to ca-
sualty (including the need to rebuild a
home following damage to a home not
otherwise covered by homeowner’s insur-
ance,e.g., as a result of a natural disaster);
the need to pay for the funeral expenses
of the participant’s spouse or dependent
(as defined in § 152(a)); or other similar
extraordinary and unforeseeable circum-
stances arising as a result of events beyond
the control of the participant. The plan
document provides various examples of
an unforeseeable emergency, including
the imminent foreclosure of, or eviction
from, the participant’s primary residence.
The plan document states that, except as
otherwise specifically provided, neither
the purchase of a home nor the payment of
college tuition is an unforeseeable emer-
gency.
The plan document limits the amount
of a distribution on account of an unfore-
seeable emergency to the extent that such
emergency is or may be relieved either:
November 8, 20106202010–45 I.R.B.

through reimbursement or compensation
from insurance or otherwise; by liquida-
tion of the participant’s assets, to the ex-
tent the liquidation of such assets would
not itself cause severe financial hardship;
or by cessation of deferrals under Plan
Y. While distributions because of an un-
foreseeable emergency may not exceed the
amount reasonably necessary to satisfy the
emergency need, Plan Y allows any dis-
tribution to include the amount necessary
to pay any federal, state, or local income
taxes or penalties reasonably anticipated to
result from the distribution.
In each of the situations below, the plan
participant requests a distribution to pay
certain expenses, as well as an additional
amount to pay federal, state, or local in-
come taxes that will result from the dis-
tribution, and the participant provides ad-
equate documentation under the facts and
circumstances regarding the claimed ex-
pense, including the amount (if any) of in-
surance that will cover the expense and
that the participant has no other source of
funds to pay the expense.
Situation 1. Participant A requests
an unforeseeable emergency distribution
from Plan Y to pay for the cost of hav-
ing A’s principal residence repaired after
significant water damage from a water
leak, that was discovered in the basement.
Participant A provides written estimates
of the repair cost.
Situation 2. Participant B requests
an unforeseeable emergency distribution
from Plan Y to pay for funeral expenses
for B’s adult son, who is not a dependent
(as defined in § 152(a)) of B. B provides
a bill from the funeral home that itemizes
the cost of the funeral expenses.
Situation 3. Participant C requests
an unforeseeable emergency distribution
from Plan Y to pay accumulated credit
card debt, which is not due to any events
that are extraordinary and unforeseeable
circumstances arising as a result of events
beyond the control of C.
LAW AND ANALYSIS
In order to be an eligible deferred com-
pensation plan under § 457(b), a plan must
satisfy the distribution requirements of
§ 457(d). Section 457(d)(1)(A) allows
distributions to be made available only in
certain events, which include when the
participant is faced with an unforeseeable
emergency.
An unforeseeable emergency is defined
in § 1.457–6(c)(2)(i)as a severe financial
hardship of the participant or beneficiary
resulting from: an illness or accident of
the participant or beneficiary, the par-
ticipant’s or beneficiary’s spouse, or the
participant’s or beneficiary’s dependent
(as defined in § 152(a)); loss of the par-
ticipant’s or beneficiary’s property due to
casualty (including the need to rebuild a
home following damage to a home not
otherwise covered by homeowner’s insur-
ance,e.g., as a result of a natural disaster);
or other similar extraordinary and unfore-
seeable circumstances arising as a result
of events beyond the control of the partic-
ipant or the beneficiary. For example, the
imminent foreclosure of or eviction from
the participant’s or beneficiary’s primary
residence may constitute an unforeseeable
emergency. In addition, the need to pay
for medical expenses, including non-re-
fundable deductibles, as well as for the
cost of prescription drug medication, may
constitute an unforeseeable emergency.
Finally, the need to pay for the funeral
expenses of a spouse or a dependent (as
definedin§152(a))mayalsoconstitutean
unforeseeable emergency. However, the
purchase of a home and the payment of
college tuition are not considered unfore-
seeable emergencies.
Under § 1.457–6(c)(2)(ii), whether a
participant or beneficiary is faced with an
unforeseeable emergency permitting a dis-
tribution under § 457(d)(1)(A) is deter-
mined based on the relevant facts and cir-
cumstances of each case. In any case, how-
ever, a distribution on account of an un-
foreseeable emergency may not be made
to the extent that such emergency is or
may be relieved through reimbursement
or compensation from insurance or other-
wise, by liquidation of the participant’s as-
sets, to the extent the liquidation of such
assets would not itself cause severe finan-
cial hardship, or by cessation of deferrals
under the plan.
Under § 1.457–6(c)(2)(iii), a distribu-
tion due to an unforeseeable emergency
must be limited to the amount reasonably
necessary to satisfy the emergency need.
However, the distribution may include any
amount necessary to pay any federal, state,
or local income taxes or penalties reason-
ably anticipated to result from the distribu-
tion.
A plan is not required to provide for dis-
tributions in all of the events permitted un-
der § 457(d)(1)(A) in order to constitute
an eligible deferred compensation plan un-
der § 457(b). Further, if a plan provides
for distributions due to an unforeseeable
emergency under § 457(d)(1)(A)(iii), it is
not required to include all of the events
for which distributions are permitted under
§ 457(d)(1)(A)(iii) and § 1.457–6(c)(2)(i).
Section 5.10 of the Model Amendment
published in the Appendix to Rev. Proc.
2004–56 provides for distributions under
all of the conditions for which unforesee-
able emergency distributions are permitted
under the regulations, including not only a
number of specific examples but also any
other similar extraordinary and unforesee-
able circumstances arising as a result of
events beyond the control of the partici-
pant or the beneficiary. The terms of Plan
Y are substantially the same as those in
Section 5.10 of the Model Amendment.
The facts inSituation 1do not fit within
any of the specific examples that are listed
in § 1.457–6(c)(2)(i) or Plan Y as consti-
tuting an unforeseeable emergency. Nev-
ertheless, § 1.457–6(c)(2)(i) and Plan Y
also authorize distribution in other similar
extraordinary and unforeseeable circum-
stances arising as a result of events beyond
the control of the participant. The need to
repair the principal residence because of
significant water damage, that is not cov-
ered by insurance is an extraordinary and
unforeseeable circumstance that arises as
a result of events beyond the control of the
participant and is substantially similar to
the need to pay for damage to a home as
a result of a natural disaster.
The facts inSituation 2also do not fit
within any of the specific examples that are
listed in § 1.457–6(c)(2)(i) or Plan Y as
constituting an unforeseeable emergency.
The need to pay for funeral expenses of
a spouse or dependent is one of the ex-
amples that is listed in the regulation and
the plan document as constituting an un-
foreseeable emergency, but the facts in
Situation 2involve the death of an adult
son who is not a dependent (as defined
in § 152(a)) of the participant. Neverthe-
less, § 1.457–6(c)(2)(i) and Plan Y also
authorize payment in other similar extra-
ordinary and unforeseeable circumstances
arising as a result of events beyond the
2010–45 I.R.B.621November 8, 2010

control of the participant. The need to pay
for the funeral expenses of a non-depen-
dent adult son is an extraordinary and un-
foreseeable circumstance that arises as a
result of events beyond the control of the
participant and that is substantially similar
to the need to pay for the funeral expenses
of a dependent.
The facts inSituation 3do not fit within
any of the specific examples set forth in
§ 1.457–6(c)(2)(i) or Plan Y as constituting
an unforeseeable emergency, nor do they
present facts indicating that an unforesee-
able emergency circumstance has arisen as
a result of events beyond the control of the
participant.
HOLDINGS
InSituation 1andSituation 2,PlanYis
permitted to provide unforeseeable emer-
gency distributions to Participant A and
Participant B under § 457(d)(1)(A)(iii).
InSituation 3, Plan Y is not permit-
ted to provide an unforeseeable emer-
gency distribution to Participant C under
§ 457(d)(1)(A)(iii).
APPLICATION OF ANALYSIS TO
PLANS SUBJECT TO § 409A
Section 409A(a) applies to amounts
deferred under a nonqualified deferred
compensation plan. If such a plan fails
to meet the requirements of § 409A(a),
all amounts deferred under the plan for
that taxable year and all previous tax-
able years are includible in income and
subject to additional taxes. As provided
in § 409A(a)(2)(A), one of the require-
ments of § 409A(a) is that the nonquali-
fied deferred compensation plan provide
that amounts deferred under the plan are
payable only upon one or more of the
specified events listed in the statute, which
include the occurrence of an unforeseeable
emergency. Although a plan described
in § 457(b) is not subject to § 409A, the
definition of “unforeseeable emergency”
under § 1.409A–3(i)(3) is substantially
similar to the definition of “unforesee-
able emergency” under § 1.457–6(c)(2)(i).
Accordingly, the principles and rulings
set forth in this revenue ruling apply to
an amount deferred under a nonquali-
fied deferred compensation plan subject
to § 409A(a) that may be paid under the
terms of the plan upon the occurrence of
an event constituting an unforeseeable
emergency that complies with § 409A(a)
and § 1.409A–3(i)(3).
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Vernon S. Carter of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt & Government Entities).
For further information regarding this rev-
enue ruling, contactVernon S. Carter at
(202) 622–6060 (not a toll-free call).
Section 6411.—Tentative
Carryback and Refund
Adjustments
26 CFR 1.6411–2: Computation of tentative carry-
back adjustments.
T.D. 9499
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Clarification to Section 6411
Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations amending existing regulations
under section 6411 of the Internal Rev-
enue Code (Code) relating to the computa-
tion and allowance ofthe tentative carry-
back adjustment. These regulations adopt
without change the rules of the temporary
regulations, which clarify that, for pur-
poses of allowing a tentative adjustment,
the IRS may credit or reduce the tentative
adjustment by both assessed and certain
unassessed tax liabilities. These final reg-
ulations affect taxpayers that file an appli-
cation for a tentative carryback allowance.
DATES:Effective Date:These regulations
are effective on August 24, 2010.
Applicability Date:These regulations
apply with respect to applications for ten-
tative refund filed on or after August 24,
2010.
FOR FURTHER INFORMATION
CONTACT: Contact
ElizabethMezheritsky
at (202) 622–3600 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Revisions
This document contains final regula-
tions amending the Income Tax Regula-
tions (26 CFR part 1) under section 6411
relating to the computation and allowance
of the tentative carryback adjustment.
On August 24, 2007, temporary regula-
tions (T.D. 9355, 2007–2 C.B. 577 [72 FR
48933]) and a notice of proposed rulemak-
ing by cross-reference to temporary reg-
ulations (REG–118886–06, 2007–2 C.B.
591 [72 FR 48952]) were published in the
Federal Register. On October 4, 2007,
corrections to the temporary regulations
were published in theFederal Register
(72 FR 56619). Only one set of writ-
ten comments responding to the notice of
proposed rulemaking was received, and
the same commenter was the sole speaker
at a public hearing on the notice of pro-
posed rulemaking, which was held on Feb-
ruary 5, 2008. After consideration of the
comments, the temporary regulations are
adopted without change by this Treasury
decision. The comments are discussed in
the preamble.
Explanation of Provisions and
Summary of Comments
In general, section 6411(a) provides
that, in the case of certain loss or credit
carrybacks, a taxpayer may file an appli-
cation for a tentative carryback adjustment
of the tax for a prior taxable year. Under
section 6411(b), any resulting decrease
in tax attributable to the carryback must
be credited against any tax or installment
“then due” from the taxpayer, or refunded
to the taxpayer. Existing regulations at
section 1.6411–3(d)(1)(iii) further provide
that the decrease in tax is first applied
against any unpaid amount of tax that is
“due and payable” on the date the decrease
is allowed.
These regulations amend existing reg-
ulations under section 6411 to clarify
the computation and allowance of the
tentative carryback adjustment. The ten-
tative allowance is computed pursuant
to §1.6411–2 but applied pursuant to
November 8, 20106222010–45 I.R.B.

§1.6411–3. The regulations provide that,
for purposes of computing the tentative
allowance under section 6411, the Com-
missioner will not consider amounts to
which the taxpayer and the Commissioner
are in disagreement. For purposes of ap-
plying the tentative allowance, however,
the regulations provide that the Commis-
sioner may credit or reduce the tentative
adjustment by any assessed tax liabili-
ties, unassessed liabilities determined in a
statutory notice of deficiency, unassessed
liabilities identified in a proof of claim
filed in a bankruptcy proceeding, and other
unassessed liabilities in rare and unusual
circumstances. Regarding unassessed li-
abilities determined in a statutory notice
of deficiency, see Rev. Rul. 2007–51.
Regarding unassessed liabilities identified
in a proof of claim filed in a bankruptcy
proceeding, see Rev. Rul. 2007–52. See
also §601.601(d)(2).
The sole commenter asserted that the
IRS lacks the authority to credit a tax de-
crease due to a tentative carryback adjust-
ment against a tax liability unless the li-
ability has been assessed against the tax-
payer. According to the commenter, an
assessed liability is the only proper inter-
pretation of the terms “due and payable”
and “then due” for purposes of section
6411(b). The Treasury Department and the
IRS disagree with this position. The gen-
eral authority to apply credits is provided
by section 6402, which permits the IRS
to credit the amount of any overpayment,
including interest, against any tax liabil-
ity of the person who made the overpay-
ment. Nothing in section 6402 or the ap-
plicable regulations specifies when a lia-
bility arises for purposes of crediting over-
payments. The Treasury Department and
IRS have determined that both assessed
and certain unassessed liabilities are ap-
propriately considered “then due” for pur-
poses of section 6411. Accordingly, the
temporary regulations are adopted as final
regulations without change.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b)
of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply
to these final regulations and because
these final regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding these
final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
the impact on small businesses and no
comments were received.
Drafting Information
The principal author of these final regu-
lations is Elizabeth K. Mezheritsky, Office
of the Associate ChiefCounsel (Procedure
and Administration).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6411–2 is amended
by:
1. Revising paragraph (a).
2. Revising paragraph (b).
The revisions read as follows:
§1.6411–2 Computation of tentative
carryback adjustment.
(a)Tax previously determined.Thetax-
payer is to determine the amount of de-
crease, attributable to the carryback, in
tax previously determined for each tax-
able year before the taxable year of the
net operating loss, net capital loss, or un-
used investment credit. The tax previously
determined is to be ascertained in accor-
dance with the method prescribed in sec-
tion 1314(a). Thus, the tax previously de-
termined will be the tax shown on the re-
turn as filed, increased by any amounts as-
sessed (or collected without assessment) as
deficiencies before the date of the filing
of the application for a tentative carryback
adjustment, and decreased by any amounts
abated, credited, refunded, or otherwise re-
paid prior to that date. Any items as to
which the Commissioner and the taxpayer
are in disagreement at the time of the fil-
ing of the application shall, for purposes
of §1.6411–2, be taken into account in as-
certaining the tax previously determined
only if, and to the extent that, they were
reported on the return, or were reflected in
any amounts assessed (or collected with-
out assessment) as deficiencies, or in any
amounts abated, credited, refunded, or oth-
erwise repaid, before the date of filing
the application. The tax previously deter-
mined, therefore, will reflect the foreign
tax credit and the credit for tax withheld
at source provided in section 33.
(b)Decrease attributable to carryback.
After ascertaining the tax previously de-
termined in the manner described in para-
graph (a) of this section, the taxpayer shall
determine the decrease in tax previously
determined attributable to the carryback
and any related adjustments on the basis
of the items of tax taken into account in
computing the tax previously determined.
In determining any decrease attributable to
the carryback or any related adjustment,
items shall be taken into account under
this subsection only to the extent that they
were reported on the return, or were re-
flected in amounts assessed (or collected
without assessment) as deficiencies, or in
amounts abated, credited, refunded, or oth-
erwise repaid, before the date of filing the
application for a tentative carryback ad-
justment. If the Commissioner and the tax-
payer are in disagreement as to the proper
treatment of any item, it shall be assumed,
for purposes of determining the decrease
in the tax previously determined, that the
item was reported correctly by the tax-
payer unless, and to the extent that, the dis-
agreement has resulted in the assessment
of a deficiency (or the collection of an
amount without an assessment), or the al-
lowing or making of an abatement, credit,
refund, or other repayment, before the date
of filing the application. Thus, if the tax-
payer claimed a deduction on its return of
$50,000 for salaries paid its officers but the
Commissioner proposes that the deduction
should not exceed $20,000, and the Com-
missioner and the taxpayer have not agreed
on the amount properly deductible before
the date the application for a tentative car-
ryback adjustment is filed, $50,000 shall
be considered as the amount properly de-
ductible for purposes of determining the
2010–45 I.R.B.623November 8, 2010

decrease in tax previously determined in
respect of the application for a tentative
carryback adjustment. In determining the
decrease in tax previously determined, any
items that are affected by the carryback
must be adjusted to reflect the carryback.
Thus, unless otherwise provided, any de-
duction limited, for example, by adjusted
gross income, such as the deduction for
medical, dental, etc., expenses, is to be re-
computed on the basis of the adjusted gross
income as affected by the carryback. See
§1.6411–3(d) for rules on the application
of the decrease in tax to any tax liability.
*****
§1.6411–2T [Removed].
Par. 3. Section 1.6411–2T is removed.
Par. 4. Section 1.6411–3 is amended
by:
1. Revising paragraph (b).
2. Revising paragraph (c).
3. Revising paragraph (d)(1) introduc-
tory text.
4. Revising paragraph (d)(1)(ii).
5. Revising paragraph (d)(1)(iii).
6. Revising paragraph (d)(2).
7. Revising paragraph (d)(3).
The revisions read as follows:
§1.6411–3 Allowance of adjustments.
*****
(b)Examination. Within the 90-day pe-
riod described in paragraph (a) of this sec-
tion, the Commissioner shall make, to the
extent deemed practicable within this pe-
riod, an examination of the application to
discover omissions and errors of compu-
tation. The Commissioner shall determine
within this period the decrease in tax pre-
viously determined, affected by the car-
ryback or any related adjustments, upon
the basis of the application and examina-
tion. The decrease shall be determined in
the same manner as that provided in sec-
tion 1314(a) for the determination by the
taxpayer of the decrease in taxes previ-
ously determined, which must be set forth
in the application for a tentative carryback
adjustment. The Commissioner may cor-
rect any errors of computation or omis-
sions discovered upon examination of the
application. In determining the decrease
in tax previously determined which is af-
fected by the carryback or any related ad-
justment, the Commissioner may correct
any mathematical error appearing on the
application and may correct any modifi-
cation required by the law and incorrectly
made by the taxpayer in computing the
net operating loss, net capital loss, or un-
used investment credit, the resulting car-
rybacks, or the net operating loss deduc-
tion, capital loss deduction, or investment
credit allowable. If the required modifica-
tion has not been made by the taxpayer and
the Commissioner has the necessary infor-
mation to make the modification within the
90-day period, the Commissioner may, in
the Commissioner’s discretion, make the
modification. In determining the decrease,
the Commissioner will not, for example,
change the amount claimed on the return
as a deduction for depreciation because the
Commissioner believes that the taxpayer
has claimed an excessive amount; and the
Commissioner will not include in gross in-
come any amount not so included by the
taxpayer, even though the Commissioner
believes that the amount is subject to tax
andproperlyshouldbeincludedingross
income.
(c)Disallowance in whole or in part.If
the Commissioner finds that an application
for a tentative carryback adjustment con-
tains material omissions or errors of com-
putation, the Commissioner may disallow
the application in whole or in part with-
out further action. If the Commissioner
deems that any error of computation can
be corrected within the 90-day period, the
Commissioner may do so and allow the ap-
plication in whole or in part. The Com-
missioner’s determination as to whether
the Commissioner can correct any error of
computation within the 90-day period shall
be conclusive. The Commissioner’s action
in disallowing, in whole or in part, any ap-
plication for a tentative carryback adjust-
ment shall be final and may not be chal-
lenged in any proceeding. The taxpayer
may, however, file a claim for credit or re-
fund under section 6402, and may maintain
a suit based on the claim if the claim is dis-
allowed or if the Commissioner does not
act upon the claim within 6 months from
thedateitisfiled.
(d)Application of decrease. (1) Each
decrease determined by the Commissioner
in any previously determined tax that is
affected by the carryback or any related
adjustments shall first be applied against
any unpaid amount of the tax with respect
to which such decrease was determined.
The unpaid amount of tax may include one
or more of the following:
*****
(ii) An amount the time for payment
of which has been extended under section
6164 and which is due and payable on or
after the date of the allowance of the de-
crease.
(iii) An amount (not including an
amount the time for payment of which has
been extended under section 6164) which
is due and payable on or after the date of
the allowance of the decrease, including
any assessed liabilities, unassessed liabil-
ities determined in a statutory notice of
deficiency, unassessed liabilities identified
in a proof of claim filed in a bankruptcy
proceeding, and other unassessed liabili-
ties in rare and unusual circumstances.
(2) If the unpaid amount of tax includes
more than one unpaid amount, the Com-
missioner may determine against which
amount or amounts, and in what propor-
tion, the decrease is to be applied. In gen-
eral, however, the decrease will be applied
against any amounts described in para-
graphs (d)(1)(i) through (iii) of this section
in the order named. If there are several
amounts of the type described in paragraph
(d)(1)(iii) of this section, any amount of the
decrease that is to be applied against the
amount will be applied by assuming that
the tax previously determined minus the
amount of the decrease to be so applied is
“the tax” and that the taxpayer had elected
to pay the tax in installments. The unpaid
amount of tax against which a decrease
may be applied under paragraph (d)(1) of
this section may not include any amount
of tax for any taxable year other than the
year of the decrease. After making the
application, the Commissioner will credit
any remainder of the decrease against any
unsatisfied amount of any tax for the tax-
able year immediately preceding the tax-
able year of the net operating loss, capital
loss, or unused investment credit, the time
for payment of which has been extended
under section 6164.
(3) Any remainder of the decrease after
the application and credits may, within
the 90-day period, in the discretion of the
Commissioner, be credited against any
tax liability or installment thereof then
due from the taxpayer (including assessed
liabilities, unassessed liabilities deter-
mined in a statutory notice of deficiency,
November 8, 20106242010–45 I.R.B.

unassessed liabilities identified in a proof
of claim filed in a bankruptcy proceeding,
and other unassessed liabilities in rare
and unusual circumstances), and, if not so
credited, shall be refunded to the taxpayer
within the 90-day period.
*****
§1.6411–3T [Removed].
Par. 5. Section 1.6411–3T is removed.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved August 11, 2010.
Michael Mundaca,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on August 23,
2010, 8:45 a.m., and published in the issue of the Federal
Register for August 24, 2010, 75 F.R. 51934)
2010–45 I.R.B.625November 8, 2010

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Series LLCs an
dCell
Companies
REG–119921–09
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Noti
ce of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations regarding the classifica-
tion for Federal tax purposes of a series
of a domestic series limited liability com-
pany (LLC), a cell of a domestic cell com-
pany, or a foreign series or cell that con-
ducts an insurance business. The proposed
regulations provide that, whether or not a
series of a domestic series LLC, a cell of
a domestic cell company, or a foreign se-
ries or cell that conducts an insurance busi-
ness is a juridical person for local law pur-
poses, for Federal tax purposes it is treated
as an entity formed under local law. Clas-
sification of a series or cell that is treated
as a separate entity for Federal tax pur-
poses generally is determined under the
same rules that govern the classification of
other types of separate entities. The pro-
posed regulations provide examples illus-
trating the application of the rule. The pro-
posed regulations willaffect domestic se-
ries LLCs; domestic cell companies; for-
eign series, or cells that conduct insurance
businesses; and their owners.
DATES: Written or electronic comments
and requests for a public hearing must be
received by December 13, 2010.
ADDRE
SSES: Send submissions to:
CC:P
A:LPD:PR(REG–119921–09),
Room
5203, Internal Revenue Service,
PO Bo
x 7604, Ben Franklin Station,
Wash
ington, DC 20044. Submissions may
be ha
nd-delivered Monday through Friday
betw
een the hours of 8 a.m. and 4 p.m.
to C
C:PA:LPD:PR (REG–119921–09),
Cou
rier’s Desk, Internal Revenue
Ser
vice, 1111 Constitution Avenue, NW,
Was
hington, DC, or sent electronically,
via
theFederaleRulemaking
portal atwww.
regulations.gov(IRS
REG–119921–0
9)
FOR FURTHER IN
FORMATION
CONTACT: Conc
erning the proposed
regulations,
Joy Spies, (202) 622–3050;
concerning su
bmissions of comments,
Oluwafunmil
ayo (Funmi) Taylor, (202)
622–7180 (no
t toll-free numbers).
SUPPLEMENTA
RY INFORMATION:
Background
1.Introduc
tion
A number of s
tates have enacted
statutes pr
oviding for the creation of en-
tities that
may establish series, including
limited lia
bility companies (series LLCs).
In general
, series LLC statutes provide
that a limi
ted liability company may es-
tablish se
parate series. Although series
of a series
LLC generally are not treated
as separat
e entities for state law purposes
and, thus,
cannot have members, each
series ha
s “associated” with it specified
members,
assets, rights, obligations, and
investme
nt objectives or business pur-
poses. Me
mbers’ association with one
or more p
articular series is comparable
to direc
t ownership by the members in
such ser
ies, in that their rights, duties,
and powe
rs with respect to the series are
direct a
nd specifically identified. If the
condit
ions enumeratedin the relevant
statut
e are satisfied, the debts, liabilities,
and obl
igations of one series generally are
enforc
eable only against the assets of that
series
and not against assets of other series
or of t
he series LLC.
Certai
n jurisdictions have enacted
statu
tes providing for entities similar to the
serie
s LLC. For example, certain statutes
provi
de for the chartering of a legal en-
tity (
or the establishment of cells) under
astru
cture commonly known as a pro-
tect
ed cell company, segregated account
comp
any or segregated portfolio company
(cel
l company). A cell company may es-
tabl
ish multiple accounts, or cells, each of
whic
h has its own name and is identified
with
a specific participant, but generally is
not
treated under local law as a legal entity
dis
tinct from the cell company. The assets
of e
ach cell are statutorily protected from
the creditors
of any other cell and from the
creditors of t
he cell company.
Under current
law, there is little spe-
cific guidanc
e regarding whether for Fed-
eral tax purpo
ses a series (or cell) is treated
as an entity se
parate from other series or
the series LLC
(or other cells or the cell
company, as t
he case may be), or whether
the company a
nd all of its series (or cells)
should be tre
ated as a single entity.
Notice 2008–
19, 2008–1 C.B. 366 re-
quested comm
ents on proposed guidance
concerning i
ssues that arise if arrange-
ments enter
ed into by a cell constitute
insurance f
or Federal income tax purposes.
The notice a
lso requested comments on
the need for
guidance concerning simi-
lar segreg
ated arrangements that do not
involve in
surance. The IRS received a
number of c
omments requesting guidance
for simila
r arrangements not involving
insuranc
e, including series LLCs and cell
companie
s. These comments generally
recommen
ded that series and cells should
be treate
d as separate entities for Federal
tax purpo
ses if they are established under a
statute
with provisions similar to the series
LLC stat
utes currently in effect in several
states.
The IRS and Treasury Department
general
ly agree with these comments. See
§601.60
1(d)(2)(ii)(b
).
2.Entit
y Classification for Federal Tax
Purpos
es
A.Regu
latory framework
Sectio
ns301.7701–1through
301.77
01–4 of the Procedure and Admin-
istrat
ion Regulations provide the frame-
work fo
r determining an organization’s en-
tity cl
assification for Federal tax purposes.
Class
ification of an organization depends
on whe
ther the organization is treated as:
(i) a s
eparate entity under §301.7701–1,
(ii) a
“business entity” within the mean-
ing of
§301.7701–2(a) or a trust under
§301
.7701–4, and (iii) an “eligible entity”
unde
r §301.7701–3.
Sect
ion 301.7701–1(a)(1) provides that
the d
etermination of whether an entity is
sepa
rate from its owners for Federal tax
purp
oses is a matter of Federal tax law
and d
oes not depend on whether the or-
gani
zation is recognized as an entity un-
der
local law. Section 301.7701–1(a)(2)
November 8, 20106262010–45 I.R.B.

provides that a joint venture or other con-
tractual arrangement may create a separate
entity for Federal tax purposes if the par-
ticipants carry on a trade, business, finan-
cial operation, or venture and divide the
profits therefrom. However, a joint un-
dertaking merely to share expenses does
not create a separate entity for Federal
tax purposes, nor does mere co-owner-
ship of property where activities are lim-
ited to keeping property maintained, in re-
pair, and rented or leased.Id.
Section 301.7701–1(b) provides that
the tax classification of an organiza-
tion recognized as a separate entity for
tax purposes generally is determined
under §§301.7701–2, 301.7701–3, and
301.7701–4. Thus, for example, an organ-
ization recognized as an entity that does
not have associates or an objective to carry
on a business may be classified as a trust
under §301.7701–4.
Section 301.7701–2(a) provides that a
business entity is any entity recognized for
Federal tax purposes (including an entity
with a single owner that may be disre-
garded as an entity separate from its owner
under §301.7701–3) that is not properly
classified as a trustor otherwise subject
to special treatment under the Internal
Revenue Code (Code). A business entity
with two or more members is classified
for Federal tax purposes as a corporation
or a partnership. See §301.7701–2(a). A
business entity with one owner is clas-
sified as a corporation or is disregarded.
See §301.7701–2(a). If the entity is dis-
regarded, its activities are treated in the
same manner as a sole proprietorship,
branch, or division of the owner. However,
§301.7701–2(c)(2)(iv) and (v) provides
foranotherwisedisregardedentitytobe
treated as a corporation for certain Federal
employment tax and excise tax purposes.
Section 301.7701–3(a) generally pro-
vides that an eligible entity, which is a
business entity that is not a corporation un-
der §301.7701–2(b), may elect its classifi-
cation for Federal tax purposes.
B.Separate entity classification
The threshold question for determining
the tax classification of a series of a se-
ries LLC or a cell of a cell company is
whether an individual series or cell should
be considered an entity for Federal tax pur-
poses. The determination of whether an
organization is an entity separate from its
owners for Federal tax purposes is a mat-
ter of Federal tax law and does not de-
pend on whether the organization is rec-
ognized as an entity under local law. Sec-
tion 301.7701–1(a)(1). InMoline Proper-
ties, Inc. v. Commissioner,319U.S.436
(1943), the Supreme Court noted that, so
long as a corporation was formed for a pur-
pose that is the equivalent of business ac-
tivity or the corporation actually carries on
a business, the corporation remains a tax-
able entity separate from its shareholders.
Although entities that are recognized un-
der local law generally are also recognized
for Federal tax purposes, a state law entity
may be disregarded if it lacks business pur-
pose or any business activity other than tax
avoidance. SeeBertoli v. Commissioner,
103 T.C. 501 (1994);Aldon Homes, Inc. v.
Commissioner, 33 T.C. 582 (1959).
The Supreme Court inCommissioner
v. Culbertson, 337 U.S. 733 (1949), and
Commissioner v. Tower, 327 U.S. 280
(1946), set forth the basic standard for de-
termining whether a partnership will be
respected for Federal tax purposes. In
general, a partnership will be respected
if, considering all the facts, the parties in
good faith and acting with a business pur-
pose intended to join together to conduct
an enterprise and share in its profits and
losses. This determination is made consid-
ering not only the stated intent of the par-
ties, but also the terms of their agreement
and their conduct.Madison Gas & Elec.
Co.v.Commissioner, 633 F.2d 512, 514
(7
th
Cir. 1980);Luna v. Commissioner,42
T.C. 1067, 1077–78 (1964).
Conversely, under certain circum-
stances, arrangements that are not recog-
nized as entities under state law may be
treated as separate entities for Federal tax
purposes. Section 301.7701–1(a)(2). For
example, courts have found entities for
tax purposes in some co-ownership situa-
tions where the co-owners agree to restrict
their ability to sell, lease or encumber
their interests, waive their rights to par-
tition property, or allow certain manage-
ment decisions to be made other than by
unanimous agreement among co-owners.
Bergford v. Commissioner,12F.3d166
(9
th
Cir. 1993);Bussing v. Commissioner,
89 T.C. 1050 (1987);Alhouse v. Commis-
sioner, T.C. Memo. 1991–652. However,
the Internal Revenue Service (IRS) has
ruled that a co-ownership does not rise to
the level of an entity for Federal tax pur-
poses if the owner employs an agent whose
activities are limited to collecting rents,
paying property taxes, insurance premi-
ums, repair and maintenance expenses,
and providing tenants with customary ser-
vices. Rev. Rul. 75–374, 1975–2 C.B.
261. See also Rev. Rul. 79–77, 1979–1
C.B. 448, (see §601.601(d)(2)(ii)(b).
Rev. Proc. 2002–22, 2002–1 C.B.
733, (see §601.601(d)(2)(ii)(b)), specifies
the conditions under which the IRS will
consider a request for a private letter rul-
ing that an undivided fractional interest in
rental real property is not an interest in a
business entity under §301.7701–2(a). A
number of factors must be present to ob-
tain a ruling under the revenue procedure,
including a limit on the number of co-own-
ers, a requirement that the co-owners not
treat the co-ownership as an entity (that
is, that the co-ownership may not file a
partnership or corporate tax return, con-
duct business under a common name, exe-
cute an agreement identifying any or all of
the co-owners as partners, shareholders, or
members of a business entity, or otherwise
hold itself out as a partnership or other
form of business entity), and a requirement
that certain rights with respect to the prop-
erty (including the power to make certain
management decisions) must be retained
by co-owners. The revenue procedure pro-
vides that an organization that is an entity
for state law purposes may not be charac-
terized as a co-ownership under the guid-
ance in the revenue procedure.
The courts and the IRS have addressed
the Federal tax classification of investment
trusts with assets divided among a number
of series. InNational Securities Series-In-
dustrial Stocks Series v. Commissioner,13
T.C. 884 (1949),acq., 1950–1 C.B. 4, sev-
eral series that differed only in the nature
of their assets were created within a statu-
tory open-end investment trust. Each se-
ries regularly issued certificates represent-
ingsharesinthepropertyheldintrustand
regularly redeemed the certificates solely
from the assets and earnings of the individ-
ual series. The Tax Court stated that each
series of the trust was taxable as a sepa-
rate regulated investment company. See
also Rev. Rul. 55–416, 1955–1 C.B. 416,
(see §601.601(d)(2)(ii)(b)). But seeUnion
Trusteed Funds v. Commissioner,8T.C.
1133 (1947), (series funds organized by a
state law corporation could not be treated
2010–45 I.R.B.627November 8, 2010

as if each fund were a separate corpora-
tion).
In 1986, Congress added section 851(g)
to the Code. Section 851(g) contains a
special rule for series funds and provides
that, in the case of a regulated investment
company (within the meaning of section
851(a)) with more than one fund, each fund
generally is treated as a separate corpora-
tion. For these purposes, a fund is a segre-
gated portfolio of assets the beneficial in-
terests in which are owned by holders of
interests in the regulated investment com-
pany that are preferred over other classes
or series with respect to these assets.
C.Insurance company classification
Section7701(a)(3)and
§301.7701–2(b)(4) provide that an ar-
rangement that qualifies as an insurance
company is a corporation for Federal
income tax purposes. Sections 816(a) and
831(c) define an insurance company as
any company more than half the business
of which during the taxable year is the
issuing of insurance or annuity contracts
or the reinsuring of risks underwrit-
ten by insurance companies. See also
§1.801–3(a)(1), (“[T]hough its name,
charter powers, and subjection to State
insurance laws are significant in deter-
mining the business which a company
is authorized and intends to carry on, it
is the character of the business actually
done in the taxable year which determines
whether a company is taxable as an
insurance company under the Internal
Revenue Code.”). Thus, an insurance
company includes an arrangement that
conducts insurance business, whether or
not the arrangement is a state law entity.
3.Overview of Series LLC Statutes and
Cell Company Statutes
A.Domestic statutes
Although §301.7701–1(a)(1) provides
that state classification of an entity is
not controlling for Federal tax purposes,
the characteristics of series LLCs and
cell companies under their governing
statutes are an important factor in ana-
lyzing whether series and cells generally
should be treated as separate entities for
Federal tax purposes.
Series LLC statutes have been enacted
in Delaware, Illinois, Iowa, Nevada, Okla-
homa, Tennessee, Texas, Utah and Puerto
Rico. Delaware enacted the first series
LLC statute in 1996. Del. Code Ann. Tit.
6, section 18–215 (the Delaware statute).
Statutes enacted subsequently by other
states are similar, butnot identical, to the
Delaware statute. All of the statutes pro-
vide a significant degree of separateness
for individual series within a series LLC,
but none provides series with all of the
attributes of a typical state law entity, such
as an ordinary limited liability company.
Individual series generally are not treated
as separate entities for state law purposes.
However, in certain states (currently Illi-
nois and Iowa), a series is treated as a
separate entity to the extent provided in
the series LLC’s articles of organization.
The Delaware statute provides that a
limited liability company may establish, or
provide for the establishment of, one or
more designated series of members, man-
agers, LLC interests or assets. Under the
Delaware statute, any such series may have
separate rights, powers, or duties with re-
spect to specified property or obligations
of the LLC or profits and losses associated
with specified property or obligations, and
any such series may have a separate busi-
ness purpose or investment objective. Ad-
ditionally, the Delaware statute provides
that the debts, liabilities, obligations, and
expenses of a particular series are enforce-
able against the assets of that series only,
and not against the assets of the series
LLC generally or any other series of the
LLC, and, unless the LLC agreement pro-
vides otherwise, none of the debts, liabil-
ities, obligations, and expenses of the se-
ries LLC generally or of any other series of
the series LLC are enforceable against the
assets of the series, provided that the fol-
lowing requirements are met: (1) the LLC
agreement establishes or provides for the
establishment of one or more series; (2)
records maintained for any such series ac-
count for the assets of the series separately
from the other assets of the series LLC, or
of any other series of the series LLC; (3)
the LLC agreement so provides; and (4)
notice of the limitation on liabilities of a
series is set forth in the series LLC’s cer-
tificate of formation.
Unless otherwise provided in the LLC
agreement, a series established under
Delaware law has the power and capacity
to, in its own name, contract, hold title to
assets, grant liens and security interests,
and sue and be sued. A series may be
managed by the members of the series or
by a manager. Any event that causes a
manager to cease to be a manager with
respect to a series will not, in itself, cause
the manager to cease to be a manager of
the LLC or of any other series of the LLC.
Under the Delaware statute, unless the
LLC agreement provides otherwise, any
event that causes a member to cease to be
associated with a series will not, in itself,
cause the member to cease to be associ-
ated with any other series or with the LLC,
or cause termination of the series, even if
there are no remaining members of the se-
ries. Additionally, the Delaware statute al-
lows a series to be terminated and its affairs
wound up without causing the dissolution
of the LLC. However, all series of the LLC
terminate when the LLC dissolves. Fi-
nally, under the Delaware statute, a series
generally may not make a distribution to
the extent that the distribution will cause
the liabilities of the series to exceed the fair
market value of the series’ assets.
The series LLC statutes of Illinois, 805
ILCS 180/37–40 (the Illinois statute), and
Iowa, I.C.A. §489.1201 (the Iowa statute)
provide that a series with limited liability
will be treated as a separate entity to the ex-
tent set forth in the articles of organization.
The Illinois statute provides that the LLC
and any of its series may elect to consoli-
date their operations as a single taxpayer to
the extent permitted under applicable law,
elect to work cooperatively, elect to con-
tract jointly, or elect to be treated as a sin-
gle business for purposes of qualification
to do business in Illinois or any other state.
In addition, under the Illinois statute, a
series’ existence begins upon filing of a
certificate of designation with the Illinois
secretary of state. A certificate of designa-
tion must be filed for each series that is to
have limited liability. The name of a se-
ries with limited liability must contain the
entire name of the LLC and be distinguish-
able from the names of the other series of
the LLC. If different from the LLC, the cer-
tificate of designation for each series must
list the names of the members if the se-
ries is member-managed or the names of
the managers if the series is manager-man-
aged. The Iowa and Illinois statutes both
provide that, unless modified by the se-
ries LLC provisions, the provisions gen-
erally applicable to LLCs and their man-
November 8, 20106282010–45 I.R.B.

agers, members, and transferees are appli-
cable to each series.
Some states have enacted series pro-
visions outside of LLC statutes. For
example, Delaware has enacted series
limited partnership provisions (6 Del. C.
§17–218). In addition, Delaware’s statu-
tory trust statute permits a statutory trust to
establish series (12 Del. C. §3804). Both
of these statutes contain provisions that
are nearly identical to the corresponding
provisions of the Delaware series LLC
statute with respect to the ability of the
limited partnership or trust to create or
establish separate series with the same
liability protection enjoyed by series of a
Delaware series LLC.
All of the series LLC statutes con-
tain provisions that grant series certain
attributes of separate entities. For exam-
ple, individual series may have separate
business purposes, investment objectives,
members, and managers. Assets of a par-
ticular series are not subject to the claims
of creditors of other series of the series
LLC or of the series LLC itself, provided
that certain record-keeping and notice re-
quirements are observed. Finally, most
series LLC statutes provide that an event
that causes a member to cease to be as-
sociated with a series does not cause the
member to cease to be associated with the
series LLC or any other series of the series
LLC.
However, all of the state statutes limit
the powers of series of series LLCs. For
example, a series of a series LLC may not
convert into another type of entity, merge
with another entity, or domesticate in an-
other state independent from the series
LLC. Several of the series LLC statutes
do not expressly address a series’ ability
to sue or be sued, hold title to property,
or contract in its own name. Ordinary
LLCs and series LLCs generally may ex-
ercise these rights. Additionally, most of
the series LLC statutes provide that the
dissolution of a series LLC will cause the
termination of each of its series.
B.Statutes with respect to insurance
The insurance codes of a number of
states include statutes that provide for
the chartering of a legal entity commonly
known as a protected cell company, seg-
regated account company, or segregated
portfolio company. See, for example, Vt.
Stat. Ann. tit. 8, chap.141, §§6031–6038
(sponsored captive insurance companies
and protected cells ofsuch companies);
S.C. Code Ann. tit. 38, chap. 10,
§§38–10–10 through 39–10–80 (protected
cell insurance companies). Under those
statutes, as under the series LLC statutes
described above, the assets of each cell
are segregated from the assets of any other
cell. The cell may issue insurance or an-
nuity contracts, reinsure such contracts,
or facilitate the securitization of obliga-
tions of a sponsoring insurance company.
Rev. Rul. 2008–8, 2008–1 C.B. 340, (see
§601.601(d)(2)(ii)(b)), analyzes whether
an arrangement entered into between a
protected cell and its owner possesses the
requisite risk shifting and risk distribution
to qualify as insurance for Federal income
tax purposes. Under certain domestic
insurance codes, the sponsor may be orga-
nized under a corporate or unincorporated
entity statute.
Series or cell company statutes in a
number of foreign jurisdictions allow
series or cells to engage in insurance
businesses. See, for example, The Com-
panies (Guernsey) Law, 2008 Part XXVII
(Protected Cell Companies), Part XXVIII
(Incorporated Cell Companies); The Com-
panies (Jersey) law, 1991, Part 18D;
Companies Law, Part XIV (2009 Revi-
sion) (Cayman Isl.) (Segregated Portfolio
Companies); and Segregated Accounts
Companies Act (2000) (Bermuda).
Explanation of Provisions
1.In General
The proposed regulations provide that,
for Federal tax purposes, a domestic series,
whether or not a juridical person for local
law purposes, is treated as an entity formed
under local law.
With one exception, the proposed regu-
lations do not apply to series or cells or-
ganized or established under the laws of
a foreign jurisdiction. The one exception
is that the proposed regulations apply to a
foreign series that engages in an insurance
business.
Whether a series that is treated as a
local law entity under the proposed reg-
ulations is recognized as a separate en-
tity for Federal tax purposes is determined
under §301.7701–1 and general tax prin-
ciples. The proposed regulations further
provide that the classification of a series
that is recognized as a separate entity for
Federal tax purposes is determined under
§301.7701–1(b), which provides the rules
for classifying organizations that are rec-
ognized as entities for Federal tax pur-
poses.
The proposed regulations define ase-
ries organizationas a juridical entity that
establishes and maintains, or under which
is established and maintained, a series. A
series organization includes a series lim-
ited liability company, series partnership,
series trust, protected cell company, seg-
regated cell company, segregated portfolio
company, or segregated account company.
The proposed regulations define ase-
ries statuteas a statute of a State or foreign
jurisdiction that explicitly provides for the
organization or establishment of a series
of a juridical person and explicitly permits
(1) members or participants of a series or-
ganization to have rights, powers, or du-
ties with respect to the series; (2) a se-
ries to have separate rights, powers, or du-
ties with respect to specified property or
obligations; and (3) the segregation of as-
sets and liabilities such that none of the
debts and liabilities of the series organiza-
tion (other than liabilities to the State or
foreign jurisdiction related to the organ-
ization or operation of the series organi-
zation, such as franchise fees or adminis-
trativecosts)orofanyotherseriesofthe
series organization are enforceable against
the assets of a particular series of the series
organization. For purposes of this defini-
tion, a “participant” of a series organiza-
tion includes an officer or director of the
series organization who has no ownership
interest in the series or series organization,
but has rights, powers, or duties with re-
spect to the series.
The proposed regulations define a se-
ries as a segregated group of assets and
liabilities that is established pursuant to a
series statute by agreement of a series or-
ganization. A series includes a cell, seg-
regated account, or segregated portfolio,
including a cell, segregated account, or
segregated portfolio that is formed under
the insurance code of a jurisdiction or is
engaged in an insurance business. How-
ever, the term “series” does not include
a segregated asset account of a life insur-
ance company, which consists of all assets
the investment return and market value of
which must be allocated in an identical
2010–45 I.R.B.629November 8, 2010

manner to any variable life insurance or
annuity contract invested in any of the as-
sets. See §1.817–5(e). Such an account is
accorded special treatment under subchap-
ter L. See generally section 817(a) through
(c).
Certain series statutes provide that the
series liability limitation provisions do
not apply if the series organization or se-
ries does not maintain records adequately
accounting for the assets associated with
each series separately from the assets of
the series organization or any other series
of the series organization. The IRS and the
Treasury Department considered whether
a failure to elect or qualify for the liability
limitations under the series statute should
affect whether a series is a separate entity
for Federal tax purposes. However, limita-
tions on liability of owners of an entity for
debts and obligations of the entity and the
rights of creditors to hold owners liable
for debts and obligations of the entity gen-
erally do not alter the characterization of
the entity for Federal tax purposes. There-
fore, the proposed regulations provide that
an election, agreement, or other arrange-
ment that permits debts and liabilities of
other series or the series organization to
be enforceable against the assets of a par-
ticular series, or a failure to comply with
the record keeping requirements for the
limitation on liability available under the
relevant series statute, will not prevent
a series from meeting the definition of
“series” in the proposed regulations. For
example, a series generally will not cease
to be an entity under the proposed regu-
lations simply because it guarantees the
debt of another series within the series
organization.
The proposed regulations treat a series
as created or organized under the laws of
the same jurisdiction in which the series
is established. Because a series may not
be a separate juridical entity for local law
purposes, this rule provides the means for
establishing the jurisdiction of the series
for Federal tax purposes.
Under§301.7701–1(b),
§301.7701–2(b) applies to a series that is
recognized as a separate entity for Federal
tax purposes. Therefore, a series that
is itself described in §301.7701–2(b)(1)
through (8) would be classified as a
corporation regardless of the classification
of the series organization.
The proposed regulations also provide
that, for Federal tax purposes, ownership
of interests in a series and of the assets
associated with a series is determined un-
der general tax principles. A series or-
ganization is not treated as the owner of
a series or of the assets associated with a
series merely because the series organiza-
tion holds legal title to the assets associated
with the series. For example, if a series or-
ganization holds legal title to assets asso-
ciated with a series because the statute un-
der which the series organization was or-
ganized does not expressly permit a series
to hold assets in its own name, the series
will be treated as the owner of the assets
for Federal tax purposes if it bears the eco-
nomic benefits and burdens of the assets
under general Federal tax principles. Sim-
ilarly, for Federal tax purposes, the obligor
for the liability of a series is determined
under general tax principles.
In general, the same legal principles
that apply to determine who owns inter-
ests in other types of entities apply to de-
termine the ownership of interests in series
and series organizations. These principles
generally look to who bears the economic
benefits and burdens of ownership. See,
for example, Rev. Rul. 55–39, 1955–1
C.B. 403, (see §601.601(d)(2)(ii)(b)). Fur-
thermore, common law principles apply to
the determination of whether a person is
a partner in a series that is classified as
a partnership for Federal tax purposes un-
der §301.7701–3. See, for example,Com-
missioner v. Culbertson, 337 U.S. 733
(1949);Commissioner v. Tower, 327 U.S.
280 (1946).
The IRS and the Treasury Department
considered other approaches to the classi-
fication of series for Federal tax purposes.
In particular, the IRS and the Treasury De-
partment considered whether series should
be disregarded as entities separate from
the series organization for Federal tax pur-
poses. This approach would be supported
by the fact that series are not generally
considered entitiesfor local law purposes
(except, for example, potentially under the
statutes of Illinois and Iowa, where a series
may be treated as a separate entity to the
extent set forth in the articles of organiza-
tion). Additionally, while the statutes en-
abling series organizations grant series sig-
nificant autonomy, under no current statute
do series possess all of the attributes of
independence that entities recognized un-
der local law generally possess. For ex-
ample, series generally cannot convert into
another type of entity, merge with another
entity, or domesticate in another jurisdic-
tion independent of the series organization.
In addition, the dissolution of a series or-
ganization generally will terminate all of
its series.
The IRS and the Treasury Department
believe that, notwithstanding that series
differ in some respects from more tradi-
tional local law entities, domestic series
generally should be treated for Federal tax
purposes as entities formed under local
law. Because Federal tax law, and not lo-
cal law, governs the question of whether
an organization is an entity for Federal tax
purposes, it is not dispositive that domes-
tic series generally are not considered en-
tities for local law purposes. Additionally,
the IRS and the Treasury Department be-
lieve that, overall, the factors supporting
separate entity status for series outweigh
the factors in favor ofdisregarding series
as entities separate from the series organ-
ization and other series of the series or-
ganization. Specifically, managers and eq-
uity holders are “associated with” a se-
ries, and their rights, duties, and powers
with respect to the series are direct and
specifically identified. Also, individual se-
ries may (but generally are not required
to) have separate business purposes and
investment objectives. The IRS and the
Treasury Department believe these factors
are sufficient to treat domestic series as en-
tities formed under local law.
Although some statutes creating series
organizations permit an individual series to
enter into contracts, sue, be sued, and/or
hold property in its own name, the IRS and
the Treasury Department do not believe
that the failure of a statute to explicitly pro-
vide these rights should alter the treatment
of a domestic series as an entity formed un-
der local law. These attributes primarily
involve procedural formalities and do not
appear to affect the substantive economic
rights of series or their creditors with re-
spect to their property and liabilities. Even
in jurisdictions where series may not pos-
sess these attributes, the statutory liability
shields would still apply to the assets of a
particular series, provided the statutory re-
quirements are satisfied.
Furthermore, the rule provided in
the proposed regulations would provide
greater certainty to both taxpayers and the
November 8, 20106302010–45 I.R.B.

IRS regarding the tax status of domestic
series and foreign series that conduct in-
surance businesses. In effect, taxpayers
that establish domestic series are placed
in the same position as persons that file
a certificate of organization for a state
law entity. The IRS and the Treasury De-
partment believe that the approach of the
proposed regulations is straightforward
and administrable, and is preferable to
engaging in a case by case determination
of the status of each series that would re-
quire a detailed examination of the terms
of the relevant statute. Finally, the IRS
and the Treasury Department believe that
a rule generally treating domestic series as
local law entities would be consistent with
taxpayers’ current ability to create similar
structures using multiple local law entities
that can elect their Federal tax classifica-
tion pursuant to §301.7701–3.
The IRS and the Treasury Department
believe that domestic series should be
classified as separate local law entities
based on the characteristics granted to
them under the various series statutes.
However, except as specifically stated
in the proposed regulations, a particular
series need not actually possess all of the
attributes that its enabling statute permits
it to possess. The IRS and the Treasury
Department believe that a domestic series
should be treated as a separate local law
entity even if its business purpose, in-
vestment objective, or ownership overlaps
with that of other series or the series organ-
ization itself. Separate state law entities
may have common or overlapping busi-
ness purposes, investment objectives and
ownership, but generally are still treated
as separate local law entities for Federal
tax purposes.
The proposed regulations do not ad-
dress the entity status for Federal tax pur-
poses of a series organization. Specifi-
cally, the proposed regulations do not ad-
dress whether a series organization is rec-
ognized as a separate entity for Federal tax
purposes if it has no assets and engages in
no activities independent of its series.
Until further guidance is issued, the en-
tity status of a foreign series that does not
conduct an insurancebusiness will be de-
termined under applicable law. Foreign
series raise novel Federal income tax is-
sues that continue tobe considered and ad-
dressed by the IRS and the Treasury De-
partment.
2.Classification of a Series that is Treated
as a Separate Entity for Federal Tax
Purposes
If a domestic series or a foreign se-
ries engaged in an insurance business is
treated as a separate entity for Federal tax
purposes, then §301.7701–1(b) applies to
determine the proper tax classification of
the series. However, the proposed regula-
tions do not provide how a series should
be treated for Federal employment tax pur-
poses. If a domestic series is treated as
a separate entity for Federal tax purposes,
then the series generally is subject to the
same treatment as any other entity for Fed-
eral tax purposes. For example, a se-
ries that is treated as a separate entity for
Federal tax purposes may make any Fed-
eral tax elections it is otherwise eligible to
make independently of other series or the
series organization itself, and regardless of
whether other series (or the series organ-
ization) do not make certain elections or
make different elections.
3.Entity Status of Series Organizations
The proposed regulations do not ad-
dress the entity status or filing require-
ments of series organizations for Federal
tax purposes. A series organization gen-
erally is an entity for local law purposes.
An organization that is an entity for lo-
cal law purposes generally is treated as
an entity for Federal tax purposes. How-
ever, an organization characterized as an
entity for Federal income tax purposes
may not have an income or informa-
tion tax filing obligation. For example,
§301.6031(a)-(1)(a)(3)(i) provides that a
partnership with no income, deductions,
or credits for Federal income tax purposes
for a taxable year is not required to file a
partnership return for that year. Generally,
filing fees of a series organization paid
by series of the series organization would
be treated as expenses of the series and
not as expenses of the series organization.
Thus, a series organization characterized
as a partnership for Federal tax purposes
that does not have income, deductions, or
credits for a taxableyear need not file a
partnership return for the year.
4.Continuing Applicability of Tax Law
Authority to Series
Notwithstanding that a domestic series
or a foreign series engaged in an insurance
business is treated as an entity formed un-
der local law under the proposed regula-
tions, the Commissioner may under appli-
cable law, including common law tax prin-
ciples, characterize aseries or a portion of
a series other than as a separate entity for
Federal tax purposes. Series covered by
the proposed regulations are subject to ap-
plicable law to the same extent as other en-
tities. Thus, a series may be disregarded
under applicable law even if it satisfies
the requirements of the proposed regula-
tions to be treated as an entity formed un-
der local law. For example, if a series has
no business purpose or business activity
other than tax avoidance, it may be dis-
regarded under appropriate circumstances.
SeeBertoli v. Commissioner, 103 T.C. 501
(1994);Aldon Homes, Inc. v. Commis-
sioner, 33 T.C. 582 (1959). Furthermore,
the anti-abuse rule of §1.701–2 is applica-
ble to a series or series organization that is
classified as a partnership for Federal tax
purposes.
5.Applicability to Organizations that
Qualify as Insurance Companies
Notice 2008–19 requested comments
on proposed guidance setting forth con-
ditions under which a cell of a protected
cell company would be treated as an in-
surance company separate from any other
entity for Federal income tax purposes.
Those who commented on the notice gen-
erally supported the proposed guidance,
and further commented that it should ex-
tend to non-insurance arrangements as
well, including series LLCs. Rather than
provide independent guidance for insur-
ance company status setting forth what
is essentially the same standard, the pro-
posed regulations define the termseries
to include a cell, segregated account, or
segregated portfolio that is formed under
the insurance code of a jurisdiction or is
engaged in an insurance business (other
than a segregated asset account of a life
insurance company).
Although the proposed regulations
do not apply to a series organized or
established under the laws of a foreign
jurisdiction, an exception is provided for
2010–45 I.R.B.631November 8, 2010

certain series conducting an insurance
business. Under thisexception, a series
that is organized or established under the
laws of a foreign jurisdiction is treated
as an entity if the arrangements and other
activities of the series, if conducted by
a domestic company,would result in its
being classified as an insurance company.
Thus, a foreign series would be treated as
an entity if more than half of the series’
business is the issuing or reinsuring of
insurance or annuity contracts. The IRS
and the Treasury Department believe it
is appropriate to provide this rule even
though the proposed regulations otherwise
do not apply to a foreign series because an
insurance company is classified as a per
se corporation under section 7701(a)(3)
regardless of how it otherwise would be
treated under §§301.7701–1, 301.7701–2,
or 301.7701–3.
The IRS and the Treasury Department
are aware that insurance-specific guidance
may still be needed to address the issues
identified in §3.02 of Notice 2008–19
and insurance-specific transition issues
that may arise for protected cell compa-
nies that previously reported in a manner
inconsistent with the regulations. See
§601.601(d)(2)(ii)(b).
6.Effect of Local Law Classification on
Tax Collection
The IRS and Treasury Department un-
derstand that there are differences in local
law governing series (for example, rights
to hold title to property and to sue and
be sued are expressly addressed in some
statutes but not in others) that may affect
how creditors of series, including state tax-
ing authorities, may enforce obligations of
a series. Thus, the proposed regulations
provide that, to the extent Federal or lo-
cal law permits a creditor to collect a li-
ability attributable to a series from the se-
ries organization or other series of the se-
ries organization, the series organization
and other series of the series organization
may also be considered the taxpayer from
whom the tax assessed against the series
may be collected pursuant to administra-
tive or judicial means. Further, when a
creditor is permitted to collect a liability at-
tributable to a series organization from any
series of the series organization, a tax lia-
bility assessed against the series organiza-
tion may be collected directly from a series
of the series organization by administrative
or judicial means.
7.Employment Tax and Employee
Benefits Issues
A.In general
The domestic statutes authorizing the
creation of series contemplate that a series
may operate a business. If the operating
business has workers, it will be necessary
to determine how the business satisfies
any employment tax obligations, whether
it has the ability to maintain any employee
benefit plans and, if so, whether it com-
plies with the rules applicable to those
plans. Application of the employment tax
requirements will depend principally on
whether the workers are employees, and,
if so, who is considered the employer for
Federal income and employment tax pur-
poses. In general, an employment relation-
ship exists when the person for whom ser-
vices are performed has the right to control
and direct the individual who performs the
services, not only as to the result to be ac-
complished by the work but also as to the
details and means by which that result is
accomplished. See §§31.3121(d)–1(c)(2),
31.3306(i)–1(b), and 31.3401(c)–1(b).
B.Employment tax
An entity must be a person in order
to be an employer for Federal employ-
ment tax purposes. See sections 3121(b),
3306(a)(1), 3306(c), and 3401(d) and
§31.3121(d)–2(a). However, status as a
person, by itself, is not enough to make
an entity an employer for Federal employ-
ment tax purposes. The entity must also
satisfy the criteria to be an employer un-
der Federal employment tax statutes and
regulations for purposes of the determina-
tion of the proper amount of employment
taxes and the party liable for reporting and
paying the taxes. Treatment of a series as
a separate person for Federal employment
tax purposes would create the possibility
that the series could be an “employer” for
Federal employment tax purposes, which
would raise both substantive and adminis-
trative issues.
The series structure would make it diffi-
cult to determine whether the series or the
series organization is the employer under
the relevant criteria with respect to the ser-
vices provided. For example, if workers
perform all of their services under the di-
rection and control of individuals who own
the interests in a series, but the series has
no legal authority to enter into contracts or
to sue or be sued, could the series nonethe-
less be the employer of the workers? If
workers perform services under the direc-
tion and control of the series, but they are
paid by the series organization, would the
series organization, as the nominal owner
of all the series assets, have control over
the payment of wages such that it would
be liable as the employer under section
3401(d)?
The structure of a series organization
could also affect the type of employment
tax liability. For example, if a series were
recognized as a distinct person for Federal
employment tax purposes, a worker pro-
viding services as an employee of one se-
ries and as a member of another series or
the series organization would be subject to
FICA tax on the wages paid for services as
an employee and self-employment tax on
the member income. Note further that, if
a domestic series were classified as a sep-
arate entity that is a business entity, then,
under §301.7701–3, the series would be
classified as either a partnership or a cor-
poration. While a business entity with one
owner is generally classified as a corpora-
tion or is disregarded for Federal tax pur-
poses, such an entity cannot be disregarded
for Federal employment tax purposes. See
§301.7701–2(c)(2)(iv).
Once the employer is identified, addi-
tional issues arise, including but not lim-
ited to the following: How would the wage
base be determined for employees, partic-
ularly if they work for more than one se-
ries in a common line of business? How
would the common paymaster rules apply?
Who would be authorized to designate an
agent under section 3504 for reporting and
payment of employment taxes, and how
would the authorization be accomplished?
How would the statutory exceptions from
the definitions of employment and wages
apply given that they may be based on the
identity of the employer? Which entity
would be eligible for tax credits that go to
the employer such as the Work Opportu-
nity Tax Credit under section 51 or the tip
credit under section 45B? If a series organ-
ization handles payroll for a series and is
also the nominal owner of the series assets,
would the owners or the managers of the
series organization be responsible persons
November 8, 20106322010–45 I.R.B.

for the Trust Fund Recovery Penalty under
section 6672?
Special administrative issues might
arise if the series were to be treated as the
employer for Federal employment tax pur-
poses but not for state law purposes. For
example, if the series were the employer
for Federal employment tax purposes and
filed a Form W–2, “Wage and Tax State-
ment,” reporting wages and employment
taxes withheld, but the series were not
recognized as a juridical person for state
law purposes, then administrative prob-
lems might ensue unless separate Forms
W–2 were prepared for state and local tax
purposes. Similarly, the IRS and the states
might encounter challenges in awarding
the FUTA credit under section 3302 to
the appropriate entity and certifying the
amount of state unemployment tax paid.
In light of these issues, the proposed
regulations do not currently provide how
a series should be treated for Federal em-
ployment tax purposes.
C.Employee benefits
Various issues arise with respect to the
ability of a series to maintain an employee
benefit plan, including issues related to
those described above with respect to
whether a series may be an employer.
The proposed regulations do not address
these issues. However, to the extent that
a series can maintain an employee benefit
plan, the aggregation rules under section
414(b),(c),(m),(o)and(t),aswellas
the leased employee rules under section
414(n), would apply. In this connection,
the IRS and Treasury Department ex-
pect to issue regulations under section
414(o) that would prevent the avoidance
of any employee benefit plan requirement
through the use of the separate entity sta-
tus of a series.
8.Statement Containing Identifying
Information about Series
As the series organization or a series of
the series organization may be treated as
a separate entity for Federal tax and re-
lated reporting purposes but may not be
a separate entity under local law, the IRS
and Treasury Department believe that a
new statement may need to be created and
required to be filed annually by the se-
ries organization and each series of the se-
ries organization to provide the IRS with
certain identifying information to ensure
the proper assessment and collection of
tax. Accordingly, these regulations pro-
pose to amend the Procedure and Admin-
istration Regulations under section 6011 to
include this requirement and a cross-refer-
ence to those regulations is included under
§301.7701–1. The IRS and Treasury De-
partment are considering what information
should be required by these statements. In-
formation tentatively being considered in-
cludes (1) the name, address, and taxpayer
identification number of the series organ-
ization and each of its series and status
of each as a series of a series organiza-
tion or as the series organization; (2) the
jurisdiction in which the series organiza-
tion was formed; and (3) an indication of
whether the series holds title to its assets
or whether title is held by another series
or the series organization and, if held by
another series or the series organization,
the name, address, and taxpayer identifica-
tion number of the series organization and
each series holding title to any of its as-
sets. The IRS and Treasury Department
are also considering the best time to re-
quire taxpayers to file the statement. For
example, the IRS and Treasury Depart-
ment are considering whether the state-
ment should be filed when returns, such as
income tax returns and excise tax returns,
are required to be filed or whether it should
be a stand-alone statement filed separately
by a set date each year, as with information
returns such as Forms 1099. A cross-refer-
ence to these regulations was added to the
Procedure and Administration regulations
under section 6071 for the time to file re-
turns and statements. The proposed reg-
ulations under section 6071 provide that
the statement will be a stand-alone state-
ment due March 15
th
of each year. In ad-
dition, the IRS and Treasury Department
are considering revising Form SS–4, “Ap-
plication for Employer Identification Num-
ber,” to include questions regarding series
organizations.
Proposed Effective Date
These regulations generally apply on
the date final regulations are published in
theFederal Register. Generally, when fi-
nal regulations become effective, taxpay-
ers that are treating series differently for
Federal tax purposes than series are treated
under the final regulations will be required
to change their treatment of series. In this
situation, a series organization that previ-
ously was treated as one entity with all of
its series may be required to begin treating
each series as a separate entity for Federal
tax purposes. General tax principles will
apply to determine the consequences of the
conversion from one entity to multiple en-
tities for Federal tax purposes. See, for
example, section 708 for rules relating to
partnership divisions in the case of a series
organization previously treated as a part-
nership for Federal tax purposes convert-
ing into multiple partnerships upon recog-
nition of the series organization’s series
as separate entities. While a division of
a partnership may be tax-free, gain may
be recognized in certain situations under
section 704(c)(1)(B) or section 737. Sec-
tions 355 and 368(a)(1)(D) provide rules
that govern certain divisions of a corpora-
tion. The division of a series organization
into multiple corporations may be tax-free
to the corporation and to its shareholders;
however, if the corporate division does not
satisfy one or more of the requirements in
section 355, the division may result in tax-
able events to the corporation, its share-
holders, or both.
The regulations include an exception
for series established prior to publication
of the proposed regulations that treat all
series and the series organization as one
entity. If the requirements for this excep-
tion are satisfied, after issuance of the fi-
nal regulations the series may continue to
be treated together with the series organ-
ization as one entity for Federal tax pur-
poses. Specifically, these requirements are
satisfied if (1) The series was established
prior to September 14, 2010; (2) The series
(independent of the series organization or
other series of the series organization) con-
ducted business or investment activity or,
in the case of a foreign series, more than
half the business of the series was the issu-
ing of insurance or annuity contracts or the
reinsuring of risks underwritten by insur-
ance companies, on and prior to Septem-
ber 14, 2010; (3) If the series was estab-
lished pursuant to a foreign statute, the
series’ classification was relevant (as de-
fined in §301.7701–3(d)), and more than
half the business of the series was the is-
suing of insurance or annuity contracts or
the reinsuring of risks underwritten by in-
surance companies for all taxable years be-
ginning with the taxable year that includes
2010–45 I.R.B.633November 8, 2010

September 14, 2010; (4) No owner of the
series treats the series as an entity sepa-
rate from any other series of the series or-
ganization or from the series organization
for purposes of filing any Federal income
tax returns, information returns, or with-
holding documents for any taxable year;
(5) The series and series organization had
a reasonable basis (within the meaning of
section 6662) for their claimed classifica-
tion; and (6) Neither the series nor any
owner of the series nor the series organi-
zation was notified in writing on or before
the date final regulations are published in
theFederal Registerthat classification of
the series was under examination (in which
case the series’ classification will be deter-
mined in the examination).
This exception will cease to apply on
the date any person or persons who were
not owners of the series organization (or
series) prior to September 14, 2010, own,
in the aggregate, a 50 percent or greater in-
terest in the series organization (or series).
For this purpose, the terminterestmeans
(i) in the case of a partnership, a capital or
profits interest and (ii) in the case of a cor-
poration, an equity interest measured by
vote or value. This transition rule does not
apply to any determination other than the
entity status of a series, for example, tax
ownership of a series or series organization
or qualification of a series or series organi-
zation conducting an insurance business as
a controlled foreign corporation.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
Pursuant to the Regulatory Flexibility
Act (5.U.S.C. chapter 6), it is hereby cer-
tified that the regulations will not have a
significant economic impact on a substan-
tial number of small entities. The regula-
tions require that series and series organi-
zations file a statement to provide the IRS
with certain identifying information to en-
sure the proper assessment and collection
of tax. The regulations affect domestic se-
ries LLCs, domestic cell companies, and
foreign series and cells that conduct insur-
ance businesses, and their owners. Based
on information available at this time, the
IRS and the Treasury Department believe
that many series and series organizations
are large insurance companies or invest-
ment firms and, thus, are not small entities.
Although a number of small entities may
be subject to the information reporting re-
quirement of the new statement, any eco-
nomic impact will be minimal. The infor-
mation that the IRS and the Treasury De-
partment are considering requiring on the
proposed statement should be known by
or readily available to the series or the se-
ries organization. Therefore, it should take
minimal time and expense to collect and
report this information. For example, the
IRS and the Treasury Department are con-
sidering requiring the following informa-
tion: (1) The name, address, and taxpayer
identification number of the series organ-
ization and each of its series and status of
each as a series of a series organization or
as the series organization; (2) The jurisdic-
tion in which the series organization was
formed; and (3) An indication of whether
the series holds title to its assets or whether
title is held by another series or the series
organization and, if held by another series
or the series organization, the name, ad-
dress, and taxpayer identification number
of the series organization and each series
holding title to any of its assets. The IRS
and the Treasury Department request com-
ments on the accuracy of the statement that
the regulations in this document will not
have a significant economic impact on a
substantial number of small entities. Pur-
suant to section 7805(f) of the Code, this
notice of proposed rulemaking has been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
nesses.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, con-
sideration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. Alternatively, taxpayers may
submit comments electronically directly
to the Federal eRulemaking portal at
www.regulations.gov.
The IRS and the Treasury Department
request comments on the proposed regula-
tions. In addition, the IRS and the Treasury
Department request comments on the fol-
lowing issues:
(1) Whether a series organization
should be recognized asa separate entity
for Federal tax purposes if it has no assets
and engages in no activities independent
of its series;
(2) The appropriate treatment of a se-
ries that does not terminate for local law
purposes when it has no members associ-
ated with it;
(3) The entity status for Federal tax pur-
poses of foreign cells that do not conduct
insurance businesses and other tax conse-
quences of establishing, operating, and ter-
minating all foreign cells;
(4) How the Federal employment tax is-
sues discussed and similar technical issues
should be resolved;
(5) How series and series organizations
will be treated for state employment tax
purposes and other state employment-re-
lated purposes and how that treatment
should affect the Federal employment tax
treatment of series and series organiza-
tions (comments from the states would be
particularly helpful);
(6) What issues could arise with respect
to the provision of employee benefits by a
series organization or series; and
(7) The requirement for the series or-
ganization and each series of the series or-
ganization to file a statement and what in-
formation should be included on the state-
ment.
All comments will be available for pub-
lic inspection and copying. A public hear-
ing may be scheduled if requested in writ-
ingbyapersonwhotimelysubmitscom-
ments. If a public hearing is scheduled, no-
tice of the date, time and place for the hear-
ing will be published in theFederal Reg-
ister.
Drafting Information
The principal author of these proposed
regulations is Joy Spies, IRS Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
November 8, 20106342010–45 I.R.B.

Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posedtobeamendedasfollows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6011–6 also issued under
26 U.S.C. 6011(a). * * *
Section 301.6071–2 also issued under
26 U.S.C. 6071(a). * * *
Par. 2. Section 301.6011–6 is added to
read as follows:
§301.6011–6 Statements of series and
series organizations.
(a)Statement required. Each series
and series organization (as defined in
paragraph (b) of this section) shall file a
statement for each taxable year containing
the identifying information with respect
to the series or series organization as pre-
scribed by the Internal Revenue Service
for this purpose and shall include the in-
formation required by the statement and
its instructions.
(b)Definitions—(1)Series.The
termserieshas the same meaning as in
§301.7701–1(a)(5)(viii)(C).
(2)Series organization.Thetermseries
organizationhas the same meaning as in
§301.7701–1(a)(5)(viii)(A).
(c)Effective/applicability date.This
section applies to taxable years beginning
after the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
Par. 3. Section 301.6071–2 is added to
read as follows:
§301.6071–2 Time for filing statements of
series and series organizations.
(a)In general. Statements required by
§301.6011–6 must be filed on or before
March 15 of the year following the period
for which the return is made.
(b)Effective/applicability date.This
section applies to taxable years beginning
after the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
Par. 4. Section 301.7701–1 is amended
by:
1. Adding paragraph (a)(5).
2. Revising paragraphs (e) and (f).
The additions and revisions read as fol-
lows:
§301.7701–1 Classification of
organizations for Federal tax purposes.
(a) * * *
(5)Series and series organizations—(i)
Entity status of a domestic series.ForFed-
eral tax purposes, except as provided in
paragraph (a)(5)(ix) of this section, a series
(as defined in paragraph (a)(5)(viii)(C) of
this section) organized or established un-
der the laws of the United States or of any
State, whether or not a juridical person for
local law purposes, is treated as an entity
formed under local law.
(ii)Certain foreign series conducting
an insurance business. For Federal tax
purposes, except as provided in paragraph
(a)(5)(ix) of this section, a series orga-
nized or established under the laws of a
foreign jurisdiction is treated as an entity
formed under local law if the arrangements
and other activities of the series, if con-
ducted by a domestic company, would re-
sult in classification as an insurance com-
pany within the meaning of section 816(a)
or section 831(c).
(iii)Recognition of entity status.
Whether a series that is treated as a local
law entity under paragraph (a)(5)(i) or (ii)
of this section is recognized as a separate
entity for Federal tax purposes is deter-
mined under this section and general tax
principles.
(iv)Classification of series. The clas-
sification of a series that is recognized as
a separate entity for Federal tax purposes
is determined under paragraph (b) of this
section.
(v)Jurisdiction in which series is orga-
nized or established. A series is treated as
created or organized under the laws of a
State or foreign jurisdiction if the series is
established under the laws of such jurisdic-
tion. See §301.7701–5 for rules that deter-
mine whether a business entity is domestic
or foreign.
(vi)Ownership of series and the assets
of series. For Federal tax purposes, the
ownership of interests in a series and of
the assets associated with a series is deter-
mined under general tax principles. A se-
ries organization is not treated as the owner
for Federal tax purposes of a series or of
the assets associated with a series merely
because the series organization holds legal
title to the assets associated with the series.
(vii)Effect of Federal and local law
treatment. To the extent that, pursuant
to the provisions of this paragraph (a)(5),
a series is a taxpayer against whom tax
may be assessed under Chapter 63 of Title
26, then any tax assessed against the se-
ries may be collected by the Internal Rev-
enue Service from the series in the same
manner the assessment could be collected
by the Internal Revenue Service from any
other taxpayer. In addition, to the ex-
tent Federal or local law permits a debt
attributable to the series to be collected
from the series organization or other series
of the series organization, then, notwith-
standing any other provision of this para-
graph (a)(5), and consistent with the provi-
sions of Federal or local law, the series or-
ganization and other series of the series or-
ganization may also be considered the tax-
payer from whom the tax assessed against
the series may be administratively or judi-
cially collected. Further, when a creditor is
permitted to collect a liability attributable
to a series organization from any series of
the series organization, a tax liability as-
sessed against the series organization may
be collected directly from a series of the
series organization by administrative or ju-
dicial means.
(viii)Definitions—(A)Series organiza-
tion.Aseries organizationis a juridi-
cal entity that establishes and maintains,
or under which is established and main-
tained, a series (as defined in paragraph
(a)(5)(viii)(C) of this section). A series
organization includes a series limited lia-
bility company, series partnership, series
trust, protected cell company, segregated
cell company, segregated portfolio com-
pany, or segregated account company.
(B)Series statute.Aseries statuteis a
statute of a State or foreign jurisdiction that
explicitly provides for the organization or
establishment of a series of a juridical per-
son and explicitly permits—
(1) Members or participants of a series
organization to have rights, powers, or du-
ties with respect to the series;
(2) A series to have separate rights,
powers, or duties with respect to specified
property or obligations; and
2010–45 I.R.B.635November 8, 2010

(3) The segregation of assets and lia-
bilities such that none of the debts and li-
abilities of the series organization (other
than liabilities to the State or foreign juris-
diction related to the organization or op-
eration of the series organization, such as
franchise fees or administrative costs) or of
any other series of the series organization
are enforceable against the assets of a par-
ticular series of the series organization.
(C)Series.Aseriesis a segregated
group of assets and liabilities that is es-
tablished pursuant to a series statute (as
defined in paragraph (a)(5)(viii)(B) of
this section) by agreement of a series
organization (as defined in paragraph
(a)(5)(viii)(A) of this section). A series
includes a series, cell, segregated account,
or segregated portfolio, including a cell,
segregated account, or segregated port-
folio that is formed under the insurance
code of a jurisdiction or is engaged in an
insurance business. However, the term
seriesdoes not include a segregated asset
account of a life insurance company. See
section 817(d)(1); §1.817–5(e). An elec-
tion, agreement, or other arrangement that
permits debts and liabilities of other series
or the series organization to be enforceable
against the assets of a particular series, or a
failure to comply with the record keeping
requirements for the limitation on liability
available under the relevant series statute,
will be disregarded for purposes of this
paragraph (a)(5)(viii)(C).
(ix)Treatment of series and series orga-
nizations under Subtitle C — Employment
Taxes and Collection of Income Tax (Chap-
ters 21, 22, 23, 23A, 24 and 25 of the In-
ternal Revenue Code). [Reserved.]
(x)Examples. The following examples
illustrate the principles of this paragraph
(a)(5):
Example 1. Domestic Series LLC.(i)Facts.Se-
ries LLC is a series organization (within the mean-
ing of paragraph (a)(5)(viii)(A) of this section). Se-
ries LLC has three members (1, 2, and 3). Series
LLC establishes two series (A and B) pursuant to
the LLC statute of state Y, a series statute within
the meaning of paragraph (a)(5)(viii)(B) of this sec-
tion. Under general tax principles, Members 1 and
2 are the owners of Series A, and Member 3 is the
owner of Series B. Series A and B are not described
in §301.7701–2(b) or paragraph (a)(3) of this section
and are not trusts within the meaning of §301.7701–4.
(ii)Analysis. Under paragraph (a)(5)(i) of this
section, Series A and Series B are each treated as an
entity formed under local law. The classification of
Series A and Series B is determined under paragraph
(b) of this section. The default classification under
§301.7701–3 of Series A is a partnership and of Series
B is a disregarded entity.
Example 2. Foreign Insurance Cell.(i)Facts.
Insurance CellCo is a series organization (within the
meaning of paragraph (a)(5)(viii)(A) of this section)
organized under the laws of foreign Country X. In-
surance CellCo has established one cell, Cell A, pur-
suant to a Country X law that is a series statute (within
the meaning of paragraph (a)(5)(viii)(B) of this sec-
tion). More than half the business of Cell A during
the taxable year is the issuing of insurance or annu-
ity contracts or the reinsuring of risks underwritten
by insurance companies. If the activities of Cell A
were conducted by a domestic company, that com-
pany would qualify as an insurance company within
the meaning of sections 816(a) and 831(c).
(ii)Analysis. Under paragraph (a)(5)(ii) of this
section, Cell A is treated as an entity formed under lo-
cal law. Because Cell A is an insurance company, it is
classified as a corporation under §301.7701–2(b)(4).
*****
(e)State. For purposes of this section
and §§301.7701–2 and 301.7701–4, the
termStateincludes the District of Colum-
bia.
(f)Effective/applicability dates—(1)In
general. Except as provided in paragraphs
(f)(2) and (f)(3) of this section, the rules of
this section are applicable as of January 1,
1997.
(2)Cost sharing arrangements.The
rules of paragraph (c) of this section are
applicable on January 5, 2009.
(3)Series and series organizations—(i)
In general. Except as otherwise provided
in this paragraph (f)(3), paragraph (a)(5) of
this section applies on and after the date
final regulations are published in theFed-
eral Register.
(ii)Transition rule—(A)In gen-
eral. Except as provided in paragraph
(f)(3)(ii)(B) of this section, a taxpayer’s
treatment of a series in a manner incon-
sistent with the final regulations will be
respected on and after the date final reg-
ulations are published in theFederal
Register, provided that—
(1) The series was established prior to
September 14, 2010;
(2) The series (independent of the series
organization or other series of the series or-
ganization) conducted business or invest-
ment activity, or, in the case of a series
established pursuant to a foreign statute,
more than half the business of the series
was the issuing of insurance or annuity
contracts or the reinsuring of risks under-
written by insurance companies, on and
prior to September 14, 2010;
(3) If the series was established pur-
suant to a foreign statute, the series’
classification was relevant (as defined in
§301.7701–3(d)), and more than half the
business of the series was the issuing of
insurance or annuity contracts or the rein-
suring of risks underwritten by insurance
companies for all taxable years begin-
ning with the taxable year that includes
September 14, 2010;
(4) No owner of the series treats the se-
ries as an entity separate from any other se-
ries of the series organization or from the
series organization for purposes of filing
any Federal income tax returns, informa-
tion returns, or withholding documents in
any taxable year;
(5) The series and series organization
had a reasonable basis (within the meaning
of section 6662) for their claimed classifi-
cation; and
(6) Neither the series nor any owner
of the series nor the series organization
was notified in writing on or before the
date final regulations are published in the
Federal Registerthat classification of the
series was under examination (in which
case the series’ classification will be deter-
mined in the examination).
(B)Exception to transition rule. Para-
graph (f)(3)(ii)(A) of this section will
not apply on and after the date any per-
son or persons who were not owners of
the series organization (or series) prior
to September 14, 2010, own, in the
aggregate, a fifty percent or greater interest
in the series organization (or series). For
purposes of the preceding sentence, the
terminterestmeans—
(1) In the case of a partnership, a capital
or profits interest; and
(2) In the case of a corporation, an eq-
uity interest measured by vote or value.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September 13,
2010, 8:45 a.m., and published in the issue of the Federal
Register for September 14, 2010, 75 F.R. 55699)
November 8, 20106362010–45 I.R.B.

Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Application of Section
108(i) to Partnerships and
S Corporations
REG–144762–09
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9498) relating to the application of
section 108(i) of the Internal Revenue
Code (Code) to partnerships and S cor-
porations. The temporary regulations
provide rules regarding the deferral of
discharge of indebtedness income and
original issue discount deductions by a
partnership or an S corporation with re-
spect to reacquisitions of applicable debt
instruments after December 31, 2008, and
before January 1, 2011. The regulations
affect partnerships and S corporations
with respect to reacquisitions of applicable
debt instruments and their partners and
shareholders. The text of the temporary
regulations published in this issue of the
Bulletin also serves as the text of these
proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received November 12, 2010.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–144762–09),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–144762–09),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC, or sent electroni-
cally, via the Federal eRulemaking Por-
talathttp://www.regulations.gov(IRS
REG–144762–09).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Megan A. Stoner and
Joseph R. Worst, Office of Associate
Chief Counsel (Passthroughs and
Special Industries) (202) 622–3070;
concerning submissions of comments
or a request for a public hearing,
Richard Hurst, (202) 622–7180 (not
toll-free numbers) and his e-mail address
isRichard.A.Hurst@irscounsel.treas.gov.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these proposed regulations has
been reviewed and approved by the Of-
fice of Management and Budget in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507) under
control number 1545–2147. The col-
lection of information in these regula-
tions are in §1.108(i)–2(b)(3)(iv). Under
§1.108(i)–2(b)(3)(iv), a partner in a part-
nership that makes an election under
section 108(i) is required to provide cer-
tain information to the partnership so that
the partnership can correctly determine
the partner’s deferred section 752 amount
with respect to an applicable debt instru-
ment.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Income Tax Reg-
ulations (26 CFR part 1) relating to sec-
tion 108(i). The temporary regulations set
forth rules for applying section 108(i) to
partnerships and S corporations. The text
of the temporary regulations also serves as
the text of these proposed regulations. The
preamble to the temporary regulations ex-
plains the temporary regulations and these
proposed regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that the collection of in-
formation contained in these regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties. This certification is based on the fact
that the collection of information imposed
on partners of partnerships is minimal in
that it requires partners to share informa-
tion with partnerships that partners already
maintain. Moreover, it should take a part-
ner no more than one hour to satisfy the
information-sharing requirement in these
regulations. Therefore, a regulatory flex-
ibility analysis under the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) is not re-
quired. Pursuant to section 7805(f) of the
Code, this regulation has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written or electronic com-
ments. If a public hearing is scheduled, no-
tice of the date, time,and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal authors of these reg-
ulations are Megan A. Stoner and
Joseph R. Worst, Office of the Associate
Chief Counsel (Passthroughs and Special
2010–45 I.R.B.637November 8, 2010

Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR Part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108(i)–2 also issued under
26 U.S.C. 108(i)(7). * * *
Par. 2. Section 1.108(i)–2 is added to
read as follows:
§1.108(i)–2 Application of section 108(i)
to partnerships and S corporations.
[The text of proposed §1.108(i)–2 is
the same as the text of §1.108(i)–2T(a)
through (f) published elsewhere in this is-
sue of the Bulletin].
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 11,
2010, 11:15 a.m., and published in the issue of the Federal
Register for August 13, 2010, 75 F.R. 49427)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2010–80
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on October 18, 2010,
andwouldendonthedatethecourtfirst
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
The Jeffrey Reiken Johnson Clergy Public
Ministry Association, Inc. A Church,
San Francisco, CA
Life Time Transition, Inc.,
Robbinsdale, MI
Minnesota StandDown, Inc.
Minneapolis, MN
Ohio Narcotic Officers Association,
Warren, OH
Owls Nest 1424, Inc.
St. Mary’s, WV
Task of Rome GA, Inc.
Rome, GA
Delay of Renewal Period for
Enrolled Agents Whose Tax
Identification Numbers End in
4, 5, OR 6
Announcement 2010–81
This announcement delays until further
notice the renewal period under section
10.6(d) of the regulations governing prac-
tice before the IRS, Treasury Department
Circular No. 230, 31 CFR part 10 (Circular
230), for enrolled agents with social secu-
rity numbers or tax identification numbers
ending in 4, 5, or 6.
Circular 230 requires that, to maintain
active enrollment to practice before the
IRS, enrolled agentsmust renew enroll-
ment every third yearafter initial enroll-
ment is granted. An enrolled agent’s re-
newal schedule is determined by the last
digit of the individual’s social security or
tax identification number as provided in
section 10.6(d) of Circular 230. The re-
newal schedules are staggered with ap-
proximately one third of enrolled agents
renewing every year. To apply for renewal,
individuals file a Form 8554,“Applica-
tion for Renewal of Enrollment to Practice
Before the Internal Revenue Service.”The
Form must be filed between November 1
and January 31 of the appropriate year, and
renewal is effective on April 1. The re-
newal period for enrolled agents whose so-
cial security numbers or tax identification
numbers end in 4, 5, or 6 is scheduled to
begin on November 1, 2010, and end on
January 31, 2011.
The IRS is currently implementing the
recommendations inPublication 4832,
“Return Preparer Review,”which was
published on January 4, 2010. As part
of the implementation, the IRS published
regulations that require all individuals who
apply for or renew a PTIN to pay a $50
user fee, plus a separate fee of $14.25 to
the vendor (T.D. 9503). A portion of the
costs to the government to process a PTIN
application or renewal, which are recov-
ered by the $50 user fee, overlaps with
the costs to the government to process an
initial enrollment or renewal of enrollment
application. The Treasury Department
and the IRS anticipate that the enrolled
agent initial enrollment and renewal of
enrollment user fees may be substantially
reduced in the future.
November 8, 20106382010–45 I.R.B.

To ensure that the revised user fee to
renew enrollment as an enrolled agent is
effective before the start of the next
renewal period, the IRS is delaying the
upcoming renewal period for enrolled
agents whose social security numbers or
tax identification numbers end in 4, 5, or
6 until further notice. When a date for the
renewal period is determined, the IRS
will publish a schedule for affected
enrolledagentstorenew their enrollment
in the Internal Revenue Bulletin and
on the IRS Office of Professional
Responsibility (OPR) webpage at
http://www.irs.gov/taxpros/agents/index.html.
This schedule will be published at least
30 days prior to the beginning of the
revised period for enrollment. Affected
enrolled agents will have at least 60
calendar days but no more than 120
calendar days under the revised renewal
of enrollment schedule to submit the
required applications for renewal.
OPR will not accept or process appli-
cations for renewal of enrollment until the
period for renewal of enrollment is an-
nounced in the Internal Revenue Bulletin
and on the OPR webpage. This delay will
not impact an affected enrolled agent’s cur-
rent status as an enrolled agent in good
standing. Also, this delay will not affect
the number of hours of continuing profes-
sional education required for renewal or
the time period within which these hours
must be completed.
The principal author of this announce-
ment is Emily M. Lesniak of the Office
of Associate Chief Counsel (Procedure
& Administration). For further infor-
mation regarding this notice, contact
Emily M. Lesniak at (202) 622–4570 (not
a toll-free call).
2010–45 I.R.B.639November 8, 2010

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
November 8, 2010i2010–45 I.R.B.

Numerical Finding List
1
Bulletins 2010–27 through 2010–45
Announcements:
2010-43, 2010-27 I.R.B.42
2010-44, 2010-28 I.R.B.54
2010-45, 2010-29 I.R.B.87
2010-46, 2010-29 I.R.B.87
2010-47, 2010-30 I.R.B.173
2010-48, 2010-32 I.R.B.234
2010-49, 2010-34 I.R.B.272
2010-50, 2010-33 I.R.B.260
2010-51, 2010-33 I.R.B.261
2010-52, 2010-36 I.R.B.315
2010-53, 2010-36 I.R.B.323
2010-54, 2010-38 I.R.B.386
2010-55, 2010-37 I.R.B.346
2010-56, 2010-39 I.R.B.398
2010-57, 2010-38 I.R.B.386
2010-58, 2010-38 I.R.B.387
2010-59, 2010-39 I.R.B.399
2010-60, 2010-40 I.R.B.417
2010-61, 2010-40 I.R.B.417
2010-62, 2010-40 I.R.B.417
2010-63, 2010-40 I.R.B.417
2010-64, 2010-40 I.R.B.418
2010-65, 2010-40 I.R.B.418
2010-66, 2010-40 I.R.B.418
2010-67, 2010-40 I.R.B.418
2010-68, 2010-40 I.R.B.418
2010-69, 2010-40 I.R.B.418
2010-70, 2010-40 I.R.B.418
2010-71, 2010-40 I.R.B.418
2010-72, 2010-40 I.R.B.419
2010-73, 2010-40 I.R.B.419
2010-74, 2010-40 I.R.B.419
2010-75, 2010-41 I.R.B.428
2010-76, 2010-41 I.R.B.432
2010-77, 2010-41 I.R.B.433
2010-78, 2010-41 I.R.B.433
2010-79, 2010-42 I.R.B.475
2010-80, 2010-45 I.R.B.638
2010-81, 2010-45 I.R.B.638
2010-82, 2010-42 I.R.B.476
2010-84, 2010-44 I.R.B.603
2010-85, 2010-44 I.R.B.604
2010-86, 2010-44 I.R.B.604
2010-87, 2010-43 I.R.B.557
Notices:
2010-48, 2010-27 I.R.B.9
2010-49, 2010-27 I.R.B.10
2010-50, 2010-27 I.R.B.12
2010-51, 2010-29 I.R.B.83
2010-52, 2010-30 I.R.B.88
Notices— Continued:
2010-53, 2010-31 I.R.B.182
2010-54, 2010-40 I.R.B.403
2010-55, 2010-33 I.R.B.253
2010-56, 2010-33 I.R.B.254
2010-57, 2010-34 I.R.B.267
2010-58, 2010-37 I.R.B.326
2010-59, 2010-39 I.R.B.396
2010-60, 2010-37 I.R.B.329
2010-61, 2010-40 I.R.B.408
2010-62, 2010-40 I.R.B.411
2010-63, 2010-41 I.R.B.420
2010-64, 2010-41 I.R.B.421
2010-65, 2010-41 I.R.B.424
2010-66, 2010-42 I.R.B.437
2010-67, 2010-43 I.R.B.529
2010-68, 2010-44 I.R.B.576
2010-69, 2010-44 I.R.B.576
2010-70, 2010-44 I.R.B.576
Proposed Regulations:
REG-138637-07, 2010-44 I.R.B.581
REG-139343-08, 2010-33 I.R.B.256
REG-119921-09, 2010-45 I.R.B.626
REG-142800-09, 2010-44 I.R.B.580
REG-144762-09, 2010-45 I.R.B.637
REG-151605-09, 2010-31 I.R.B.184
REG-153340-09, 2010-42 I.R.B.469
REG-112841-10, 2010-27 I.R.B.41
REG-118412-10, 2010-29 I.R.B.85
REG-119046-10, 2010-40 I.R.B.415
REG-120391-10, 2010-35 I.R.B.310
REG-120399-10, 2010-32 I.R.B.239
REG-125592-10, 2010-43 I.R.B.556
Revenue Procedures:
2010-25, 2010-27 I.R.B.16
2010-26, 2010-30 I.R.B.91
2010-27, 2010-31 I.R.B.183
2010-28, 2010-34 I.R.B.270
2010-29, 2010-35 I.R.B.309
2010-30, 2010-36 I.R.B.316
2010-31, 2010-40 I.R.B.413
2010-32, 2010-36 I.R.B.320
2010-33, 2010-38 I.R.B.347
2010-34, 2010-41 I.R.B.426
2010-35, 2010-42 I.R.B.438
2010-36, 2010-42 I.R.B.439
2010-37, 2010-42 I.R.B.440
2010-38, 2010-43 I.R.B.530
2010-39, 2010-42 I.R.B.459
Revenue Rulings:
2010-18, 2010-27 I.R.B.1
2010-19, 2010-31 I.R.B.174
2010-20, 2010-36 I.R.B.312
Revenue Rulings— Continued:
2010-21, 2010-39 I.R.B.388
2010-22, 2010-39 I.R.B.388
2010-23, 2010-39 I.R.B.388
2010-24, 2010-40 I.R.B.400
2010-25, 2010-44 I.R.B.571
2010-26, 2010-44 I.R.B.573
2010-27, 2010-45 I.R.B.620
Tax Conventions:
2010-48, 2010-32 I.R.B.234
2010-52, 2010-36 I.R.B.315
Treasury Decisions:
9486, 2010-27 I.R.B.3
9487, 2010-28 I.R.B.48
9488, 2010-28 I.R.B.51
9489, 2010-29 I.R.B.55
9490, 2010-31 I.R.B.176
9491, 2010-32 I.R.B.186
9492, 2010-33 I.R.B.242
9493, 2010-35 I.R.B.273
9494, 2010-43 I.R.B.500
9495, 2010-43 I.R.B.477
9496, 2010-43 I.R.B.484
9497, 2010-44 I.R.B.558
9498, 2010-45 I.R.B.605
9499, 2010-45 I.R.B.622
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin
2010–26, dated June 28, 2010.
2010–45 I.R.B.iiNovember 8, 2010

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2010–27 through 2010–45
Notices:
96-53
Modified by
Notice 2010-59, 2010-39 I.R.B.396
2003-19
Revoked by
Notice 2010-53, 2010-31 I.R.B.182
2004-2
Modified by
Notice 2010-59, 2010-39 I.R.B.396
2004-50
Modified by
Notice 2010-59, 2010-39 I.R.B.396
2005-90
Supplemented by
Notice 2010-65, 2010-41 I.R.B.424
2006-69
Amplified by
Notice 2010-59, 2010-39 I.R.B.396
2008-51
Modified by
Notice 2010-59, 2010-39 I.R.B.396
2008-52
Modified by
Notice 2010-59, 2010-39 I.R.B.396
2009-47
Obsoleted by
Rev. Proc. 2010-28, 2010-34 I.R.B.270
2009-80
Corrected by
Ann. 2010-59, 2010-39 I.R.B.399
2009-90
Superseded by
Notice 2010-54, 2010-40 I.R.B.403
Proposed Regulations:
REG-115037-00
Withdrawn by
Ann. 2010-60, 2010-40 I.R.B.417
REG-146893-02
Withdrawn by
Ann. 2010-60, 2010-40 I.R.B.417
Revenue Procedures:
81-18
Obsoleted by
Rev. Proc. 2010-27, 2010-31 I.R.B.183
Revenue Procedures— Continued:
2007-44
Modified by
Notice 2010-48, 2010-27 I.R.B.9
2008-49
Superseded by
Rev. Proc. 2010-38, 2010-43 I.R.B.530
2009-18
Obsoleted in part by
Rev. Proc. 2010-25, 2010-27 I.R.B.16
2009-30
Superseded by
Rev. Proc. 2010-26, 2010-30 I.R.B.91
2009-35
Superseded by
Rev. Proc. 2010-33, 2010-38 I.R.B.347
2009-46
Superseded by
Rev. Proc. 2010-37, 2010-42 I.R.B.440
2009-47
Superseded by
Rev. Proc. 2010-39, 2010-42 I.R.B.459
2009-50
Modified by
Rev. Proc. 2010-35, 2010-42 I.R.B.438
2010-3
Modified by
Notice 2010-62, 2010-40 I.R.B.411
Revenue Rulings:
2003-102
Obsoleted by
Rev. Rul. 2010-23, 2010-39 I.R.B.388
Treasury Decisions:
9487
Corrected by
Ann. 2010-50, 2010-33 I.R.B.260
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin 2010–26, dated June 28, 2010.
November 8, 2010iii2010–45 I.R.B.

INTERNAL REVENUE BULLETIN
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