Internal Revenue Bulletin 2015-32 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
REG–115452–14, page 158.
These proposed regulations provide guidance to partnerships
and their partners regarding when an arrangement will be
treated as a disguised payment for services under section
707(a)(2)(A) of the Internal Revenue Code. This document also
proposes conforming modifications to the regulations govern-
ing guaranteed payments under section 707(c). Additionally,
this document provides notice of proposed modifications to
Rev. Procs. 93–27 and 2001–43 relating to the issuance of
interests in partnership profits to service providers.
T.D. 9727, page 154.
This document contains final regulations for filing a claim for
credit or refund.
EMPLOYEE PLANS
Announcement 2015–19, page 157.
This announcement describes future changes to the determi-
nation letter program for qualified individually designed plans
and sets forth an intended transition period for certain plans.
This announcement requests comments on specific issues
relating to the implementation of these changes. This an-
nouncement also provides that effective July 21, 2015, the IRS
will no longer accept determination letter applications that are
submitted off-cycle (except as otherwise described in the an-
nouncement).
EMPLOYMENT TAX
T.D. 9727, page 154.
This document contains final regulations for filing a claim for
credit or refund.
ADMINISTRATIVE
T.D. 9727, page 154.
This document contains final regulations for filing a claim for
credit or refund.
Finding Lists begin on page ii.
Bulletin No. 2015–32
August 10, 2015

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal 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, Legisla-
tion 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 Sec-
retary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and 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 contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
August 10, 2015Bulletin No. 2015–32

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
T.D. 9727
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Claims for Credit or Refund
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations for filing a claim for credit
or refund. The regulations provide guid-
ance to taxpayers generally as to the
proper place to file a claim for credit or
refund. The regulations are updated to re-
flect changes made by the Tax Reform
Act of 1976, section 1210, the Internal
Revenue Service Restructuring and Re-
form Act of 1998, and the Community
Renewal Tax Relief Act of 2000. The
regulations are further updated to reflect
that the IRS may prescribe additional
claim forms.
DATES:Effective Date: These regula-
tions are effective on July 24, 2015.
Applicability Dates: For dates of appli-
cability, see §§ 301.6402–2(g), 301.6402–
3(f) and 301.6402–4(b).
FOR FURTHER INFORMATION
CONTACT: Micah A. Levy, (202) 317-
6832 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations amend current
regulations under section 6402 of the In-
ternal Revenue Code (Code). Section
6402 of the Code authorizes the Secretary
to make credits or refunds of overpay-
ments. Section 6511 provides the limita-
tions period within which a taxpayer must
file a claim for credit or refund and re-
stricts the ability of the Secretary to issue
a credit or refund unless the claim is filed
by the taxpayer within that period. Section
7422 prohibits the maintenance of a suit
for refund until a claim has been duly
filed with the Secretary. Currently,
§ 301.6402–2(a)(2) provides generally
that a claim for credit or refund must be
filed with the service center serving the
internal revenue district in which the tax
was paid. These final regulations clarify
that, unless otherwise directed, the proper
place to file a claim for credit or refund is
with the service center at which the tax-
payer currently would be required to file a
tax return for the type of tax to which the
claim relates, irrespective of where the tax
was paid or was required to have been
paid.
These final regulations remove out-
dated portions of § 301.6402–2 that pro-
vided rules for claims filed prior to April
15, 1968 and § 301.6402–3 that provided
special rules for claims for credit or re-
fund of income taxes filed before July 1,
1976, and revises the reference in
§ 301.6402–4 to reflect the threshold for
referral to the Joint Committee on Taxa-
tion pursuant to section 6405. These final
regulations do not affect § 301.6402–3T
as promulgated in Treasury Decision 9658
(79 FR 12880) (March 6, 2014). Other
stylistic revisions were adopted solely to
conform the regulations to modern draft-
ing style and usage.
On June 10, 2011, the IRS published a
notice of proposed rulemaking (REG–
137128–08) in theFederal Register(76
FR 34017). No request for a public hear-
ing was received. The IRS received writ-
ten and electronic comments responding
to the notice of proposed rulemaking. Af-
ter consideration of the comments, the pro-
posed regulations are adopted as amended
by this Treasury decision. All comments are
available atwww.regulations.govor upon
request.
Explanation of Provisions and
Summary of Comments
I.Electronic Filing
Commentators suggested that the reg-
ulations should provide for electronic fil-
ing, when available. Although the final
regulations do not explicitly refer to elec-
tronic filing, the final regulations instruct
taxpayers to file a claim for credit or re-
fund in a manner consistent with forms,
form instructions, publications, and other
guidance on the IRS website. To the ex-
tent that electronic filing is or becomes
available for filing a claim for credit or
refund, it will be described elsewhere –
for example, in forms, form instructions,
publications, or the IRS website.
2.Claims Unrelated to a Tax for Which
a Return Is Required
Commentators noted that some penal-
ties are not related to any tax for which a
return is required. These commentators
observed that the instructions to Form
843, “Claim for Refund and Request for
Abatement,” that taxpayers use to file a
claim for credit or refund of penalties that
are unrelated to any tax for which a return
is required are unhelpful because they in-
struct taxpayers to file Form 843 with the
service center in which the taxpayer
would be required to file a current tax
return for “the tax to which your claim or
request relates.” For an assessable penalty
that is unrelated to a particular tax, the
notice containing or issued along with de-
mand for payment would provide the
proper address for filing a claim for credit
or refund and the taxpayer should file a
claim in accordance with any specific in-
structions contained therein.
The locations at which the IRS pro-
cesses the various forms for any given
subset of taxpayers may change and the
proper place to identify such locations is
in the various forms, instructions, publi-
cations, and the IRS.gov website. These
regulations appropriately cross-reference
such authorities.
3.Protective and Informal Claims
Commentators suggested that the reg-
ulations be amended to discuss protective
claims and informal claims. Although not
provided for in the Code, case law pro-
vides that protective claims may be filed
to preserve a taxpayer’s right to claim a
refund when the taxpayer’s right to the
refund is contingent on future events and
August 10, 2015Bulletin No. 2015–32
154

may not be determinable until after the
statute of limitations expires. Case law
also provides that a claim for refund that
is technically deficient with respect to
some formal claim requirement (that is,an
“informal” claim) might nonetheless be a
valid claim as long as it meets certain
basic requirements (for example, even an
informal claim must contain a written
component). While the IRS has recog-
nized both protective and informal claims
in some circumstances, neither is within
the scope of these regulations.
4.Authority to Make Refunds on
Equitable Grounds
Commentators suggested that Treas.
Reg. sec. 301.6402–2(b)(2), which ex-
plains that the IRS lacks the authority to
make a refund on equitable grounds,
should include exceptions for sections
6015(f) and 6343(d). Those and other
Code provisions allow the IRS to consider
equitable factors in making certain deter-
minations, such as whether a taxpayer is
eligible for innocent spouse relief or
whether a levy may be released. The eq-
uitable factors that the IRS may consider
in these statutorily prescribed situations
affect only whether the taxpayer has an
overpayment or otherwise may be entitled
to particular relief. Once an overpayment
is determined, whether by taking equitable
considerations into account or not, such
overpayment may be refunded only if the
taxpayer or IRS follows all of the statu-
tory and administrative prerequisites re-
quired to allow and make a refund.See
United States v. Clinton Elkhorn Mining
Co., 553 U.S. 1 (2008). None of those
equitable factors otherwise determine
whether or how the IRS is to issue a
refund. Section 6402, in turn, prescribes
the treatment of overpayments and pro-
vides the regime under which the IRS may
issue a refund. In other words, although
equitable considerations may be taken
into account under some Code sections in
determining either the existence or
amount of an overpayment, those sections
do not provide any authority (equitable or
statutory) to allow or make credits and
refunds under section 6402. The statutory
language of section 6402(a) provides that,
if there is an overpayment, then the IRS
shallrefund that overpayment (subject to
certain exceptions enumerated in the stat-
ute).
The IRS has discretion to grant equita-
ble relief from joint and several liability
under section 6015(f) to a requesting
spouse if, considering all of the facts and
circumstances, it would be inequitable to
hold the requesting spouse jointly and
severally liable. In those cases in which
the IRS does apply equitable factors to
determine whether a taxpayer is in an
overpayment situation, such as under sec-
tion 6015(f), the IRSconsiders things such
as (1) whether the taxpayer is divorced, (2)
whether the tax liability is due to income of
the non-requesting spouse, and (3) the
health of the requesting spouse.See, Rev.
Proc. 2013–34,2013–43 IRB 397 (Sept.
16, 2013). When a requesting spouse is
relieved of joint and several liability, re-
lief will rarely result in an overpayment
because equitable relief under section
6015(f) generally involves unpaid liabili-
ties. As a result, in many cases in which
the IRS determines that a requesting
spouse is entitled to equitable relief, the
IRS ceases collection activity against the
requesting spouse for any due, but unpaid,
tax liabilities. Nonetheless, when equita-
ble relief does result in an overpayment,
the requesting spouse may receive a re-
fund by filing a claim for refund using a
Form 8857, Request for Innocent Spouse
Relief, that complies with section 6402.
Thus, the equitable considerations in sec-
tion 6015(f) relate to whether the request-
ing spouse is entitled to relief, not whether
a resulting overpayment is refunded.
Section 6343(d) provides for the return
of levied property to a taxpayer in certain
circumstances, including when, “with the
consent of the taxpayer or the National
Taxpayer Advocate, the return of such
property would be in the best interests of
the taxpayer (as determined by the Na-
tional Taxpayer Advocate) and the United
States.” Although section 6343(d) may al-
low the IRS to consider equitable factors
in determining whether to return the prop-
erty, the return of levied property does not
affect the amount of a taxpayer’s tax lia-
bility and will not result in an overpay-
ment. Accordingly, if the IRS returns
property under section 6343(d) and the
taxpayer fails to pay the previously as-
sessed liability for which the levy was
made on the returned property, then the
IRS may collect the liability again, admin-
istratively or otherwise.
The refund provisions of section 6402
are only triggered once an overpayment ex-
ists and is established. Indeed, the section
begins “[i]n the case of any overpayment.
. . .” By presupposing the existence of an
overpayment, the equitable factors that the
IRS may have considered are not implicated
or relevant in the determination of whether
the overpayment is credited or refunded.
Moreover, once the equitable factors have
been used to establish the taxpayer’s ability
to claim a refund, the amount of any over-
payment is a purely mathematical calcula-
tion—no equitable factors exist at this stage.
The final regulations continue to make clear
that the IRS lacks the authority to refund on
equitable grounds penalties or other
amounts legally collected that comprise an
overpayment.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
the regulations and, therefore, a regulatory
flexibility analysis is not required. Pursu-
ant to section 7805(f) of the Internal Rev-
enue Code, the notice of proposed rule-
making preceding these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comments on its impact on small
business, and no comments were received.
Drafting Information
The principal author of the regulations
is Micah A. Levy, Office of the Associate
Chief Counsel (Procedure & Administra-
tion). Mr. Levy can be reached at (202)
317-6832 (not a toll-free number).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
Bulletin No. 2015–32August 10, 2015
155

PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 301.6402–2 is amended
by:
1. Revising paragraphs (a)(2), (b)(2),
(c), and (d).
2. Adding paragraph (g).
The revisions and addition read as fol-
lows:
§ 301.6402–2 Claims for credit or
refund.
(a)***
(2) Except as provided in paragraph (b)
of § 301.6091–1 (relating to hand-carried
documents), if a taxpayer is required to
file a claim for credit or refund using a
particular form, then the claim, together
with appropriate supporting evidence, shall
be filed in a manner consistent with such
form, form instructions, publications, or
other guidance found on the IRS.gov web-
site. If a taxpayer is filing a claim in re-
sponse to an IRS notice or correspondence,
then the claim must be filed in accordance
with the specific instructions contained in
the notice or correspondence regarding the
manner of filing. Any other claim not de-
scribed in the preceding sentences generally
must be filed with the service center at
which the taxpayer currently would be re-
quired to file a tax return for the type of tax
to which the claim relates or via the appro-
priate electronic portal. For rules relating to
interest in the case of credits or refunds, see
section 6611. For rules treating timely mail-
ing as timely filing, see section 7502. For
rules relating to the time for filing a claim
when the last day falls on Saturday, Sunday,
or a legal holiday, see section 7503.
(b)***
(2) The IRS does not have the authority
to refund on equitable grounds penalties
or other amounts legally collected.
(c)Form for filing claim. If a particular
form is prescribed on which the claim
must be made, then the claim must be
made on the form so prescribed. For spe-
cial rules applicable to refunds of income
taxes, see § 301.6402–3. For provisions
relating to credits and refunds of taxes
other than income tax, see the regulations
relating to the particular tax. All claims by
taxpayers for the refund of taxes, interest,
penalties, and additions to tax that are not
otherwise provided for must be made on
Form 843, “Claim for Refund and Request
for Abatement.”
(d)Separate claims for separate taxable
periods. In the case of income and gift taxes,
income tax withheld, taxes under the Fed-
eral Insurance Contributions Act, taxes un-
der the Railroad Retirement Tax Act, and
taxes under the Federal Unemployment Tax
Act, a separate claim must be made for each
return for each taxable period.
*****
(g)Effective/applicability date. Para-
graphs (a)(2), (b)(2), (c), and (d) of this
section apply to claims for credit or refund
filed on or after July 24, 2015. Paragraphs
(a)(1), (b)(1), (e), and (f) of this section
apply to claims for credit or refund filed
before, on or after July 24, 2015.
Par. 3. Section 301.6402–3 is amended
by:
1. Revising the introductory text of
paragraph (a).
2. Removing and reserving paragraph
(b).
3. Revising paragraphs (c) and (f).
The revisions read as follows:
§ 301.6402–3 Special rules applicable to
income tax.
(a) The following rules apply to a claim
for credit or refund of income tax:—
*****
(b) [Reserved]
(c) If the taxpayer is not required to
show the tax on the form (see section
6014 and the accompanying regulations),
the IRS will treat a properly filed income
tax return as a claim for refund and such
return will constitute a claim for refund
within the meaning of section 6402 and
section 6511 for the amount of the over-
payment shown by the computation of the
tax made by the IRS on the basis of the
return. For purposes of the limitations pe-
riod of section 6511, such claim will be
treated as filed on the date the return is
treated as filed.
*****
(f)Effective/applicability date. (1)
Paragraph (c) of this section, as revised,
applies to claims for credit or refund filed
on or after July 24, 2015. Paragraphs (a)
(d) and (e) of this section apply to claims
for credit or refund filed before, on or after
July 24, 2015, except references in para-
graph (e) to Form 8805 or other state-
ments required under § 1.1446–3(d)(2) of
this chapter apply to partnership taxable
years beginning after April 29, 2008.
(2) [Reserved]. For further guidance,
see § 301.6402–3T(f)(2).
Par. 4. Section 301.6402–4 is revised
to read as follows:
§ 301.6402– 4 Payments in excess of
amounts shown on return.
(a) If the IRS determines that the pay-
ments by the taxpayer that are made within
the period prescribed for payment and be-
fore the filing of the return exceed the
amount of tax shown on the return (for
example, excessive estimated income tax
payments or excessive withholding), the
IRS may credit or refund such overpayment
without awaiting examination of the com-
pleted return and without awaiting the filing
of a claim for refund. The provisions of
§§ 301.6402–2 and 301.6402–3 are applica-
ble to such overpayment, and taxpayers
should submit claims for refund (if the in-
come tax return is not itself a claim for
refund, as provided in § 301.6402–3) to
protect themselves in the event the IRS fails
to make such determination and credit or
refund. The provisions of section 6405 (re-
lating to reports of refunds in excess of the
statutorily prescribed threshold referral
amount to the Joint Committee on Taxation)
do not apply to the overpayments described
in this section.
(b)Effective/applicability date. The
rules of this section apply to payments
made on or after July 24, 2015.
John Dalrymple
Deputy Commissioner for
Services and Enforcement.
Approved: July 8, 2015
Mark J. Mazur
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on July 23, 2015,
8:45 a.m., and published in the issue of the Federal Register
for July 24, 2015, 80 F.R. 43949)
August 10, 2015Bulletin No. 2015–32
156

Part IV. Items of General Interest
Revisions to the Employee
Plans Determination Letter
Program
Announcement 2015–19
PURPOSE
This announcement describes impor-
tant changes to the Employee Plans deter-
mination letter program for qualified re-
tirement plans. Based on the need of the
Internal Revenue Service (IRS) to more
efficiently direct its limited resources, ef-
fective January 1, 2017, these changes
will eliminate the staggered 5-year deter-
mination letter remedial amendment cy-
cles for individually designed plans and
will limit the scope of the determination
letter program for individually designed
plans to initial plan qualification and qual-
ification upon plan termination. This an-
nouncement also provides a transition rule
with respect to the remedial amendment
period for certain plans currently on the
5-year cycle. The IRS isrequesting com-
ments on specific issues relating to the im-
plementation of these changes to the deter-
mination letter program. The changes to the
determination letter filing procedures de-
scribed in this announcement will be re-
flected in an update to Rev. Proc. 2007–44,
2007–2 C.B. 54, and in a successor to Rev.
Proc. 2015–6, 2015–1 I.R.B. 194.
In addition to announcing changes that
will be made to the determination letter
program, this announcement provides
that, effective July 21, 2015, the IRS will
no longer accept determination letter ap-
plications that are submitted off-cycle, ex-
cept as otherwise described below.
In connection with the modifications to
the determination letter program de-
scribed in this announcement, the Depart-
ment of the Treasury (Treasury) and the
IRS are considering ways to make it easier
for plan sponsors to comply with the qual-
ified plan document requirements. This
may include, in appropriate circum-
stances, providing model amendments,
not requiring certain plan provisions or
amendments to be adopted if and for so
long as they are not relevant to a particular
plan (for example, because of the type of
plan, employer, or benefits offered), or
expanding plan sponsors’ options to doc-
ument qualification requirements through
incorporation by reference.
BACKGROUND
Section 401(b) of the Internal Revenue
Code (Code) provides a remedial amend-
ment period during which a plan may be
amended retroactively to comply with the
Code’s qualification requirements. Sec-
tion 1.401(b)–1 describes the disqualify-
ing provisions that may be amended ret-
roactively and the remedial amendment
period during which retroactive amend-
ments may be adopted. Section 1.401(b)–
1(f) provides that the Commissioner may
extend the remedial amendment period at
the Commissioner’s discretion.
Revenue Procedure 2007–44 sets forth
procedures for issuing determination let-
ters and describes the 5-year remedial
amendment cycle for individually de-
signed plans. Under these procedures,
sponsors of individually designed plans
generally are permitted to apply for deter-
mination letters once every 5 years. Sec-
tion 5.03 of Rev. Proc. 2007–44 extends
the remedial amendment period for the
disqualifying provisions described in
5.03(1) and (2) to the end of a plan’s
applicable remedial amendment cycle.
Section 9 of Rev. Proc. 2007–44 provides
the rules and procedures for the 5-year
remedial amendment cycles. In general, a
plan’s 5-year remedial amendment cycle
is determined by reference to the last digit
of the employer identification number of
the employer that sponsors the plan.
Section 5.02 of Rev. Proc. 2007–44
provides that an interim amendment is a
plan amendment with respect to a disqual-
ifying provision described in section
5.01(1) or (2) of that revenue procedure.
Generally, pursuant to Section 5.05 of
Rev. Proc. 2007–44, interim amendments
must be adopted by the later of (1) the due
date (including extensions) for filing the
income tax return for the employer’s tax-
able year that includes the date on which
the remedial amendment period begins, or
(2) the last day of the plan year that in-
cludes the date the remedial amendment
period begins.
Under section 14.01 of Rev. Proc.
2007–44, a plan’s determination letter ap-
plication is filed off-cycle if it is submitted
anytime other than during the last 12-
month period of a plan’s remedial amend-
ment cycle (that is, the 12-month period
ending on January 31 of the last year of
the cycle).
CHANGES TO THE
DETERMINATION LETTER
PROGRAM
Elimination of 5-Year Remedial
Amendment Cycles
Effective January 1, 2017, the IRS will
eliminate the staggered 5-year remedial
amendment cycles for individually de-
signed plans. As of that date, the IRS will
no longer accept determination letter ap-
plications based on the 5-year remedial
amendment cycles. However, sponsors of
Cycle A plans, described in section 9.03
of Rev. Proc. 2007–44, will continue to
be permitted to submit determination let-
ter applications during the period begin-
ning February 1, 2016, and ending Janu-
ary 31, 2017.
Effective January 1, 2017, a sponsor of
an individually designed plan will be per-
mitted to submit a determination letter
application for a plan on initial plan qual-
ification (that is, a plan for which a Form
5300,Application for Determination for
Employee Benefit Plan, has not been filed
or for which a Form 5300 has been filed
but a determination letter was not issued
with respect to the plan, regardless of
when the plan was adopted) and for qual-
ification upon plan termination. In addi-
tion, a sponsor will be permitted to submit
a determination letter application in cer-
tain other limited circumstances that will
be determined by Treasury and the IRS.
Treasury and the IRS intend to request
comments periodically from the public re-
garding the other limited circumstances
under which a plan sponsor will be eligi-
ble to apply for a determination letter.
Treasury and the IRS will identify those
circumstances in published guidance on a
periodic basis.
Bulletin No. 2015–32August 10, 2015
157

Transition Period for Individually
Designed Plans
Section 5.03 of Rev. Proc. 2007–44
extends the remedial amendment period
for disqualifying provisions described in
section 5.03(1) and (2) to the end of a
plan’s applicable remedial amendment
cycle. As a result of the elimination of
the 5-year remedial amendment cycles,
the extension of the remedial amend-
ment period provided in section 5.03
will not be available after December 31,
2016, and the remedial amendment pe-
riod definition in § 1.401(b)–1 will ap-
ply. However, the Commissioner in-
tends to extend the remedial amendment
period for individually designed plans to
a date that is expected to end no earlier
than December 31, 2017.
Immediate Elimination of Off-Cycle
Determination Letter Applications
Effective July 21, 2015, through De-
cember 31, 2016, the IRS will no longer
accept off-cycle determination letter ap-
plications, as defined in section 14 of
Rev. Proc. 2007–44, except for determi-
nation letter applications for new plans,
as defined in section 14.02(2) of Rev.
Proc. 2007–44, and for terminating
plans.
REQUEST FOR COMMENTS
The IRS requests comments on the fol-
lowing issues:
(1) What changes should be made to
the remedial amendment period that
would otherwise apply to individually de-
signed plans under § 401(b)?
(2) Treasury and the IRS have received
numerous comments concerning the rules
relating to interim amendments, as de-
scribed in section 5 of Rev. Proc. 2007–
44. In view of the changes being made to
the determination letter program, what ad-
ditional considerations should be taken
into account in connection with the cur-
rent interim amendment requirement?
(3) What guidance should be issued to
assist plan sponsors that wish to convert
an individually designed plan into a pre-
approved plan?
(4) What changes should be made to
other IRS programs to facilitate the
changes described in this announcement,
including revisions to the Employee Plans
Compliance Resolution System set forth
in Rev. Proc. 2013–12, 2013–4 I.R.B.
313, as modified by Rev. Proc. 2015–27,
2015–16 I.R.B. 914, and Rev. Proc. 2015–
28, 2015–16 I.R.B. 920?
Comments may be submitted in writing
on or before October 1, 2015. Comments
should be mailed to Internal Revenue Ser-
vice, CC:PA:LPD:PR (Announcement
2015–19), Room 5203, P.O. Box 7604, Ben
Franklin Station, Washington, D.C. 20044,
or sent electronically to notice.comments
@irscounsel.treas.gov. Please include “An-
nouncement 2015–19” in the subject line of
any electronic communications. Alterna-
tively, comments may be hand delivered
Monday through Friday between the hours
of 8:00 a.m. and 4:00 p.m. to CC:PA:LP-
D:PR (Announcement 2015–19), Courier’s
Desk, Internal Revenue Service, 1111 Con-
stitution Ave., NW, Washington, D.C. All
comments will be available for public in-
spection and copying.
The principal author of this announce-
ment is Angelique Carrington of the Of-
fice of Associate Chief Counsel (Tax Ex-
empt and Government Entities). For
further information regarding this an-
nouncement, contact Ms. Carrington at
(202) 317-4148 (not a toll-free number).
Disguised Payments for
Services
REG–115452–14
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION:Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to disguised
payments for services under section
707(a)(2)(A) of the Internal Revenue
Code. The proposed regulations provide
guidance to partnerships and their partners
regarding when an arrangement will be
treated as a disguised payment for ser-
vices. This document also proposes con-
forming modifications to the regulations
governing guaranteed payments under
section 707(c). Additionally, this docu-
ment provides notice of proposed modifi-
cations to Rev. Procs. 93–27 and 2001–43
relating to the issuance of interests in part-
nership profits to service providers.
DATES: Written and electronic com-
ments and requests for a public hearing
must be received by October 21, 2015.
ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG–115452–14), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR(REG–115452–14),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Wash-
ington, DC 20224, or sent electronically,
via the Federal eRulemaking Portal at
http://www.regulations.gov(indicate IRS
and REG–115452–14).
FOR FURTHER INFORMATION
CONTACT: Concerning submissions of
comments, Oluwafunmilayo (Funmi)
Taylor (202) 517-6901; concerning the
proposed regulations, Jaclyn M. Goldberg
(202) 317-6850 (not a toll-free number).
SUPPLEMENTARY
INFORMATION:
Background
Generally, under the statutory frame-
work of Subchapter K of the Code, an
allocation or distribution between a part-
nership and a partner for the provision of
services can be treated in one of three
ways: (1) a distributive share under sec-
tion 704(b); (2) a guaranteed payment un-
der section 707(c); or (3) as a transaction
in which a partner has rendered services to
the partnership in its capacity as other
than a partner under section 707(a).
Distributive Share Treatment
Partnership allocations that are deter-
mined with regard to partnership income
and that are made to a partner for services
rendered by the partner in its capacity as a
partner are generally treated as distribu-
tive shares of partnership income, taxable
under the general rules of sections 702,
703, and 704. In some cases, the right to
a distributive share may qualify as a prof-
its interest defined in Rev. Proc. 93–27,
1993–2 C.B. 343. Rev. Proc. 93–27,
August 10, 2015Bulletin No. 2015–32
158

clarified by Rev. Proc. 2001–43, 2001–2
C.B. 191, provides guidance on the treat-
ment of the receipt of a profits interest for
services provided to or for the benefit of
the partnership.
Arrangements subject to sections 707(c)
or 707(a)(1).
In 1954, Congress added section 707 to
the Code to clarify transactions between a
partner and a partnership. Section 707(a)
addresses arrangements in which a partner
engages with the partnership other than in
its capacity as a partner. The legislative
history to section 707(a) provides the gen-
eral rule that a partner who engages in a
transaction with the partnership, other
than in its capacity as a partner is treated
as though it were not a partner. The pro-
vision was intended to apply to the sale of
property by the partner to the partnership,
the purchase of property by the partner
from the partnership, and the rendering of
services by the partner to the partnership
or by the partnership to the partner. H.R.
Rep. No. 1337, 83d Cong., 2d Sess. 227
(1954) (House Report); S. Rep. No. 1622,
83d Cong., 2d Sess. 387 (1954) (Senate
Report).
Congress simultaneously added section
707(c) to address payments to partners of
the partnership acting in their partner ca-
pacity. Section 707(c) provides that to the
extent determined without regard to the
income of the partnership, payment to a
partner for services shall be considered as
made to a person who is not a partner, but
only for purposes of sections 61(a) and
162(a). The Senate Report and the House
Report provide that a fixed salary, payable
without regard to partnership income, to a
partner who renders services to the part-
nership is a guaranteed payment. The
amount of the payment shall be included
in the partner’s gross income, and shall
not be considered a distributive share of
income or gain. A partner who is guaran-
teed a minimum annual amount for its
services shall be treated as receiving a
fixed payment in that amount. House Re-
port at 227; Senate Report at 387.
In 1956, the Treasury Department and
the IRS issued additional guidance under
§ 1.707–1 relating to a partner not acting
in its capacity as a partner under section
707(a) and to guaranteed payments under
section 707(c). See TD 6175. However, it
remained unclear when a partner’s ser-
vices to the partnership were rendered in a
non-partner capacity under section 707(a)
rather than in a partner capacity under
section 707(c).
In 1975, the Tax Court distinguished
sections 707(a) and 707(c) payments in
Pratt v. Commissioner, 64 T.C. 204
(1975),aff’din part,rev’din part, 550
F.2d 1023 (5th Cir. 1977). InPratt, the
general partners in two limited partner-
ships formed to purchase, develop, and
operate two shopping centers received a
fixed percentage of gross rentals in ex-
change for the performance of managerial
services. The Tax Court held that these
payments were not guaranteed payments
under section 707(c) because they were
computed based on a percentage of gross
rental income and therefore were not paid
without regard to partnership income. The
Tax Court further held that section 707(a)
did not apply because the general partners
performed managerial duties in their part-
ner capacities in accordance with their
basic duties under the partnership agree-
ment. On appeal, the Fifth Circuit af-
firmed the Tax Court’s decision. The Fifth
Circuit reasoned that Congress enacted
section 707(a) to apply to partners who
perform services for the partnership that
are outside the scope of the partnership’s
activities. The Court indicated that if the
partner performs services that the part-
nership itself provides, then the com-
pensation to the service provider is
merely a rearrangement among the part-
ners of their distributive shares in the
partnership income.
In response to the decision inPratt, the
Treasury Department and the IRS issued
Rev. Rul. 81–300, 1981–2 C.B. 143 and
Rev. Rul. 81–301, 1981–2 C.B. 144 to
clarify the treatment of transactions under
sections 707(a) and 707(c). As in thePratt
case, Rev. Rul. 81–300 considers a part-
nership formed to purchase, develop, and
operate a shopping center. The partnership
agreement required the general partners to
contribute their time, managerial abilities,
and best efforts to the partnership. In re-
turn for these services, the general part-
ners received a fee equal to five percent of
the partnership’s gross rental income. The
ruling concluded that the taxpayers per-
formed managerial services in their capac-
ities as general partners, and characterized
the management fees as guaranteed pay-
ments under section 707(c). The ruling
provides that, although guaranteed pay-
ments under section 707(c) frequently in-
volve a fixed amount, they are not limited
to fixed amounts. Thus, the ruling con-
cluded that a payment for services deter-
mined by reference to an item of gross
income will be a guaranteed payment if,
on the basis of all facts and circumstances,
the payment is compensation rather than a
share of profits.
Rev. Rul. 81–301 describes a limited
partnership which has two classes of gen-
eral partners. The first class of general
partner (director general partners) had
complete control over the management,
conduct, and operation of partnership ac-
tivities. The second class of general part-
ner (adviser general partner) rendered to
the partnership services that were substan-
tially the same as those that the adviser
general partner rendered to other persons
as an independent contractor. The adviser
general partner received 10 percent of
daily gross income in exchange for the
management services it provided to the
partnership. Rev. Rul. 81–301 held that
the adviser general partner received its
gross income allocation in a non-partner
capacity under section 707(a) because the
adviser general partner provided similar
services to other parties, was subject to
removal by the director general partners,
was not personally liable to the other part-
ners for any losses, and its management
was supervised by the director general
partners.
Enactment of Section 707(a)(2)(A)
Congress revisited the scope of section
707(a) in 1984, in part to prevent partners
from circumventing the capitalization re-
quirements of sections 263 and 709 by
structuring payments for services as allo-
cations of partnership income under sec-
tion 704. H.R. Rep. No. 432 (Pt. 2), 98th
Cong., 2d Sess. 1216–21 (1984) (H.R.
Rep.); S. Prt. No. 169 (Vol. 1), 98th
Cong., 2d Sess. 223–32 (1984) (S. Prt.).
Congress specifically addressed the hold-
ings in Rev. Rul. 81–300 and Rev. Rul.
81–301, affirming Rev. Rul. 81–301 and
concluding that the payment in Rev. Rul.
81–300 should be recharacterized as a
Bulletin No. 2015–32August 10, 2015
159

section 707(a) payment. S. Prt. at 230.
Accordingly, the Treasury Department
and the IRS are obsoleting Rev. Rul. 81–
300 and request comments on whether it
should be reissued with modified facts.
Congress also added an anti-abuse rule to
section 707(a) relating to payments topart-
ner service providers. Section 707(a)(2)(A)
provides that if a partner performs ser-
vices for a partnership and receives a re-
lated direct or indirect allocation and dis-
tribution, and the performance of services
and allocation and distribution, when
viewed together, are properly character-
ized as a transaction occurring between
the partnership and a partner acting other
than in its capacity as a partner, the trans-
action will be treated as occurring be-
tween the partnership and one who is not
a partner under section 707(a)(1). See sec-
tion 73 of the Tax Reform Act of 1984
(the 1984 Act). The Treasury Department
and the IRS have concluded that section
707(a)(2) applies to arrangements in
which distributions to the service provider
depend on an allocation of an item of
income, and section 707(c) applies to
amounts whose payments are unrelated to
partnership income.
Section 707(a)(2) grants the Secretary
broad regulatory authority to identify
transactions involving disguised payments
for services under section 707(a)(2)(A).
This grant of regulatory authority stems
from Congress’s concern that partnerships
and service providers were inappropri-
ately treating payments as allocations and
distributions to a partner even when the
service provider acted in a capacity other
than as a partner. S. Prt. at 225. Congress
determined that allocations and distribu-
tions that were, in substance, direct pay-
ments for services should be treated as a
payment of fees rather than as an arrange-
ment for the allocation and distribution of
partnership income. H.R. Rep. at 1218; S.
Prt. at 225. Congress differentiated these
arrangements from situations in which a
partner receives an allocation (or in-
creased allocation) for an extended period
to reflect its contribution of property or
services to the partnership, such that the
partner receives the allocation in its ca-
pacity as a partner. In balancing these
potentially conflicting concerns, Congress
anticipated that the regulations would take
five factors into account in determining
whether a service provider would receive
its putative allocation and distribution in
its capacity as a partner. H.R. Rep. at
1219–20; S. Prt. at 227.
Congress identified as its first and most
important factor whether the payment is
subject to significant entrepreneurial risk
as to both the amount and fact of payment.
In explaining why entrepreneurial risk is
the most important factor, Congress pro-
vides that “[p]artners extract the profits of
the partnership with reference to the busi-
ness success of the venture, while third
parties generally receive payments which
are not subject to this risk.” S. Prt. at 227.
An arrangement for an allocation and dis-
tribution to a service provider which in-
volves limited risk as to amount and pay-
ment is treated as a fee under section
707(a)(2)(A). Congress specified exam-
ples of allocations that presumptively
limit a partner’s risk, including (i) capped
allocations of income, (ii) allocations for a
fixed number of years under which the
income that will go to the partner is rea-
sonably certain, (iii) continuing arrange-
ments in which purported allocations and
distributions are fixed in amount or rea-
sonably determinable under all facts and
circumstances, and (iv) allocations of
gross income items.
An arrangement in which an allocation
and distribution to a service provider are
subject to significant entrepreneurial risk
as to amount will generally be recognized
as a distributive share, although other fac-
tors are also relevant. The legislative his-
tory to section 707(a)(2)(A) includes the
following examples of factors that could
bear on this determination: (i) whether the
partner status of the recipient is transitory;
(ii) whether the allocation and distribution
that are made to the partner are close in
time to the partner’s performance of ser-
vices; (iii) whether the facts and circum-
stances indicate that the recipient became
a partner primarily to obtain tax benefits
for itself or the partnership that would not
otherwise have been available; and (iv)
whether the value of the recipient’s inter-
est in general and in continuing partner-
ship profits is small in relation to the al-
location in question.
Explanation of Provisions
Section 1.707–1 sets forth general rules
on the operation of section 707. Section
1.707–2 is titled “Disguised payments for
services” and is currently reserved. Sec-
tions 1.707–3 through 1.707–7 provide
guidance regarding transactions involving
disguised sales under section 707(a)(2)(B).
These proposed regulations are issued un-
der § 1.707–2 and provide guidance re-
garding transactions involving disguised
payments for services under section
707(a)(2)(A). The effective date of the
proposed regulations is provided under
§ 1.707–9.
I.General Rules Regarding Disguised
Payments for Services
A.Scope
Consistent with the language of section
707(a)(2)(A), § 1.707–2(b) of the pro-
posed regulations provides that an ar-
rangement will be treated as a disguised
payment for services if (i) a person (ser-
vice provider), either in a partner capacity
or in anticipation of being a partner, per-
forms services (directly or through its del-
egate) to or for the benefit of the partner-
ship; (ii) there is a related direct or
indirect allocation and distribution to the
service provider; and (iii) the performance
of the services and the allocation and dis-
tribution when viewed together, are prop-
erly characterized as a transaction occur-
ring between the partnership and a person
acting other than in that person’s capacity
as a partner.
The proposed regulations provide a
mechanism for determining whether or
not an arrangement is treated as a dis-
guised payment for services under section
707(a)(2)(A). An arrangement that is
treated as a disguised payment for ser-
vices under these proposed regulations
will be treated as a payment for services
for all purposes of the Code. Thus, the
partnership must treat the payments as
payments to a non-partner in determining
the remaining partners’ shares of taxable
income or loss. Where appropriate, the
partnership must capitalize the payments
or otherwise treat them in a manner con-
sistent with the recharacterization.
The consequence of characterizing an
arrangement as a payment for services is
otherwise beyond the scope of these reg-
ulations. For example, the proposed regu-
lations do not address the timing of inclu-
August 10, 2015Bulletin No. 2015–32
160

sion by the service provider or the timing
of a deduction by the partnership other
than to provide that each is taken into
account as provided for under applicable
law by applying all relevant sections of
the Code and all relevant judicial doc-
trines. Further, if an arrangement is sub-
ject to section 707(a), taxpayers should
look to relevant authorities to determine
the status of the service provider as an
independent contractor or employee.See
generallyRev. Rul. 69–184, 1969–1 C.B.
256. The Treasury Department and the
IRS believe that section 707(a)(2)(A) gen-
erally should not apply to arrangements
that the partnership has reasonably char-
acterized as a guaranteed payment under
section 707(c).
Allocations pursuant to an arrangement
between a partnership and a service pro-
vider to which sections 707(a) and 707(c)
do not apply will be treated as a distribu-
tive share under section 704(b). Rev. Proc.
93–27 and Rev. Proc. 2001–43 may apply
to such an arrangement if the specific re-
quirements of those Revenue Procedures
are also satisfied. The Treasury Depart-
ment and the IRS intend to modify the
exceptions set forth in those revenue pro-
cedures to include an additional exception
for profits interests issued in conjunction
with a partner forgoing payment of a sub-
stantially fixed amount. This exception is
discussed in part IV of the Explanation of
Provisions section of this preamble.
B.Application and Timing
These proposed regulations apply to a
service provider who purports to be a part-
ner even if applying the regulations causes
the service provider to be treated as a
person who is not a partner. S. Prt. at 227.
Further, the proposed regulations may ap-
ply even if their application results in a
determination that no partnership exists.
The regulations also apply to a special
allocation and distribution received in ex-
change for services by a service provider
who receives other allocations and distri-
butions in a partner capacity under section
704(b).
The proposed regulations character-
ize the nature of an arrangement at the
time at which the parties enter into or
modify the arrangement. Although sec-
tion 707(a)(2)(A)(ii)requires both an al-
location and a distribution to the service
provider, the Treasury Department and the
IRS believe that a premise of section
704(b) is that an income allocation corre-
lates with an increased distribution right,
justifying the assumption that an arrange-
ment that provides for an income alloca-
tion should be treated as also providing
for an associated distribution for purposes
of applying section 707(a)(2)(A). The
Treasury Department and the IRS consid-
ered that some arrangements provide for
distributions in a later year, and that those
later distributions may be subject to inde-
pendent risk. However, the Treasury De-
partment and the IRS believe that rechar-
acterizing an arrangement retroactively is
administratively difficult. Thus, the pro-
posed regulations characterize the nature
of an arrangement when the arrangement
is entered into (or modified) regardless of
when income is allocated and when
money or property is distributed. The pro-
posed regulations apply to both one-time
transactions and continuing arrangements.
S. Prt. at 226.
II.Factors Considered
Whether an arrangement constitutes a
payment for services (in whole or in part)
depends on all of the facts and circum-
stances. The proposed regulations include
six non-exclusive factors that may indi-
cate that an arrangement constitutes a dis-
guised payment for services. Of these fac-
tors, the first five factors generally track
the facts and circumstances identified as
relevant in the legislative history for pur-
poses of applying section 707(a)(2)(A).
The proposed regulations also add a sixth
factor not specifically identified by Con-
gress. The first of these six factors, the
existence of significant entrepreneurial
risk, is accorded more weight than the
other factors, and arrangements that lack
significant entrepreneurial risk are treated
as disguised payments for services. The
weight given to each of the other five
factors depends on the particular case, and
the absence of a particular factor (other
than significant entrepreneurial risk) is not
necessarily determinative of whether an
arrangement is treated as a payment for
services.
A.Significant Entrepreneurial Risk
As described in the Background sec-
tion of this preamble, Congress indicated
that the most important factor in determin-
ing whether or not an arrangement consti-
tutes a payment for services is that the
allocation and distribution is subject to
significant entrepreneurial risk. S. Prt. at
227. Congress noted that partners extract
the profits of the partnership based on the
business success of the venture, while
third parties generally receive payments
that are not subject to this risk.Id.
The proposed regulations reflect Con-
gress’s view that this factor is most im-
portant. Under the proposed regulations,
an arrangement that lacks significant en-
trepreneurial risk constitutes a disguised
payment for services. An arrangement in
which allocations and distributions to the
service provider are subject to significant
entrepreneurial risk will generally be rec-
ognized as a distributive share but the
ultimate determination depends on the to-
tality of the facts and circumstances. The
Treasury Department and the IRS request
comments on whether allocations to ser-
vice providers that lack significant entre-
preneurial risk could be characterized as
distributive shares under section 704(b) in
any circumstances.
Whether an arrangement lacks signifi-
cant entrepreneurial risk is based on the
service provider’s entrepreneurial risk rel-
ative to the overall entrepreneurial risk of
the partnership. For example, a service
provider who receives a percentage of net
profits in each of a partnership that invests
in high-quality debt instruments and a
partnership that invests in volatile or un-
proven businesses may have significant
entrepreneurial risk with respect to both
interests.
Section 1.707–2(c)(1)(i) through (v) of
the proposed regulations set forth arrange-
ments that presumptively lack significant
entrepreneurial risk. These arrangements
are presumed to result in an absence of
significant entrepreneurial risk (and there-
fore, a disguised payment for services)
unless other facts and circumstances can
establish the presence of significant entre-
preneurial risk by clear and convincing
evidence. These examples generally de-
scribe facts and circumstances in which
there is a high likelihood that the service
Bulletin No. 2015–32August 10, 2015
161

provider will receive an allocation regard-
less of the overall success of the business
operation, including (i) capped allocations
of partnership income if the cap would
reasonably be expected to apply in most
years, (ii) allocations for a fixed number
of years under which the service provid-
er’s distributive share of income is reason-
ably certain, (iii) allocations of gross in-
come items, (iv) an allocation (under a
formula or otherwise) that is predomi-
nantly fixed in amount, is reasonably de-
terminable under all the facts and circum-
stances, or is designed to assure that
sufficient net profits are highly likely to be
available to make the allocation to the
service provider (for example, if the part-
nership agreement provides for an alloca-
tion of net profits from specific transac-
tions or accounting periods and this
allocation does not depend on the overall
success of the enterprise), and (v) arrange-
ments in which a service provider either
waives its right to receive payment for the
future performance of services in a man-
ner that is non-binding or fails to timely
notify the partnership and its partners of
the waiver and its terms.
With respect to the fourth example, the
presence of certain facts, when coupled
with a priority allocation to the service
provider that is measured over any ac-
counting period of the partnership of 12
months or less, may create opportunities
that will lead to a higher likelihood that
sufficient net profits will be available to
make the allocation. One fact is that the
value of partnership assets is not easily
ascertainable and the partnership agree-
ment allows the service provider or a re-
lated party in connection with a revalua-
tion to control the determination of asset
values, including by controlling events
that may affect those values (such as tim-
ing of announcements that affect the value
of the assets). (See Example 3(iv).) An-
other fact is that the service provider or a
related party controls the entities in which
the partnership invests, including control-
ling the timing and amount of distribu-
tions by those controlled entities. (These
two facts by themselves do not, however,
necessarily establish the absence of signif-
icant entrepreneurial risk.) By contrast,
certain priority allocations that are in-
tended to equalize a service provider’s
return with priority allocations already al-
located to investing partners over the life
of the partnership (commonly known as
“catch-up allocations”) typically will not
fall within the types of allocations covered
by the fourth example and will not lack
significant entrepreneurial risk, although
all of the facts and circumstances are con-
sidered in making that determination.
With respect to the fifth example, the
Treasury Department and the IRS request
suggestions regarding fee waiver require-
ments that sufficiently bind the waiving
service provider and that are administra-
ble by the partnership and its partners.
Congress’s emphasis on entrepreneur-
ial risk requires changes to existing regu-
lations under section 707(c). Specifically,
Example 2 of § 1.707–1(c) provides that if
a partner is entitled to an allocation of the
greater of 30 percent of partnership in-
come or a minimum guaranteed amount,
and the income allocation exceeds the
minimum guaranteed amount, then the en-
tire income allocation is treated as a dis-
tributive share under section 704(b). Ex-
ample 2 also provides that if the income
allocation is less than the guaranteed
amount, then the partner is treated as re-
ceiving a distributive share to the extent of
the income allocation and a guaranteed
payment to the extent that the minimum
guaranteed payment exceeds the income
allocation. The treatment of the arrange-
ments in Example 2 is inconsistent with
the concept that an allocation must be
subject to significant entrepreneurial risk
to be treated as a distributive share under
section 704(b). Accordingly, the proposed
regulations modify Example 2 to provide
that the entire minimum amount is treated
as a guaranteed payment under section
707(c) regardless of the amount of the
income allocation. Rev. Rul. 66–95,
1966–1 C.B. 169, and Rev. Rul. 69–180,
1969–1 C.B. 183, are also inconsistent
with these proposed regulations. The
Treasury Department and the IRS intend
to obsolete Rev. Rul. 66–95 and Rev. Rul.
69–180, when these regulations are pub-
lished in final form.
B.Secondary factors
Section 1.707–2(c)(2) through (6) de-
scribes additional factors of secondary im-
portance in determining whether or not an
arrangement that gives the appearance of
significant entrepreneurial risk constitutes
a payment for services. The weight given
to each of the other factors depends on the
particular case, and the absence of a par-
ticular factor is not necessarily determina-
tive of whether an arrangement is treated
as a payment for services. Four of these
factors, described by Congress in the leg-
islative history to section 707(a)(2)(A),
are (i) that the service provider holds, or is
expected to hold, a transitory partnership
interest or a partnership interest for only a
short duration, (ii) that the service pro-
vider receives an allocation and distribu-
tion in a time frame comparable to the
time frame that a non-partner service pro-
vider would typically receive payment,
(iii) that the service provider became a
partner primarily to obtain tax benefits
which would not have been available if
the services were rendered to the partner-
ship in a third party capacity, and (iv) that
the value of the service provider’s interest
in general and continuing partnership
profits is small in relation to the allocation
and distribution.
To these four factors, the proposed reg-
ulations add a fifth factor. The fifth factor
is present if the arrangement provides for
different allocations or distributions with
respect to different services received,
where the services are provided either by
a single person or by persons that are
related under sections 707(b) or 267(b),
and the terms of the differing allocations
or distributions are subject to levels of
entrepreneurial risk that vary signifi-
cantly. For example, assume that a part-
nership receives services from both its
general partner and from a management
company that is related to the general
partner under section 707(b). Both the
general partner and the management com-
pany receive a share in future partnership
net profits in exchange for their services.
The general partner is entitled to an allo-
cation of 20 percent of net profits and
undertakes an enforceable obligation to
repay any amounts distributed pursuant to
its interest (reduced by reasonable allow-
ance for tax payments made on the gen-
eral partner’s allocable shares of partner-
ship income and gain) that exceed 20
percent of the overall net amount of part-
nership profits computed over the partner-
ship’s life and it is reasonable to anticipate
that the general partner can and will
August 10, 2015Bulletin No. 2015–32
162

comply fully with this obligation. The
proposed regulations refer to this type of
obligation and similar obligations, as a
“clawback obligation.” In contrast, the
management company is entitled to a pre-
ferred amount of net income that, once
paid, is not subject to a clawback obliga-
tion. Because the general partner and the
management company are service provid-
ers that are related parties under section
707(b), and because the terms of the allo-
cations and distributions to the manage-
ment company create a significantly lower
level of economic risk than the terms for
the general partner, the management com-
pany’s arrangement might properly be
treated as a disguised payment for ser-
vices (depending on all other facts and
circumstances, including amount of entre-
preneurial risk).
III.Examples
Section 1.707–2(d) of the proposed
regulations contains a number of exam-
ples illustrating the application of the fac-
tors described in § 1.707–2(c). The exam-
ples illustrate the application of these
regulations to arrangements that contain
certain facts and circumstances that the
Treasury Department and the IRS believe
demonstrate the existence or absence of
significant entrepreneurial risk.
Several of the examples consider ar-
rangements in which a partner agrees to
forgo fees for services and also receives a
share of future partnership income and
gains. The examples consider the applica-
tion of section 707(a)(2)(A) based on the
manner in which the service provider (i)
forgoes its right to receive fees, and (ii) is
entitled to share in future partnership in-
come and gains. In Examples 5 and 6, the
service provider forgoes the right to re-
ceive fees in a manner that supports the
existence of significant entrepreneurial
risk by forgoing its right to receive fees
before the period begins and by executing
a waiver that is binding, irrevocable, and
clearly communicated to the other part-
ners. Similarly, the service provider’s ar-
rangement in these examples include the
following facts and circumstances that
taken together support the existence of
significant entrepreneurial risk: the alloca-
tion to the service provider is determined
out of net profits and is neither highly
likely to be available nor reasonably de-
terminable based on all facts and circum-
stances available at the time of the ar-
rangement, and the service provider
undertakes a clawback obligation and is
reasonably expected to be able to comply
with that obligation. The presence of each
fact described in these examples is not
necessarily required to determine that sec-
tion 707(a)(2)(A) does not apply to an
arrangement. However, the absence of
certain facts, such as a failure to measure
future profits over at least a 12-month
period, may suggest that an arrangement
constitutes a fee for services.
The proposed regulations also contain
examples that consider arrangements to
which section 707(a)(2)(A) applies. Ex-
ample 1 concludes that an arrangement in
which a service provider receives a
capped amount of partnership allocations
and distributions and the cap is likely to
apply provides for a disguised payment
for services under section 707(a)(2)(A). In
Example 3(iii), a service provider is enti-
tled to a share of future partnership net
profits, the partnership can allocate net
profits from specific transactions or ac-
counting periods, those allocations do not
depend on the long-term future success of
the enterprise, and a party that is related to
the service provider controls the timing of
purchases, sales, and distributions. The
example concludes that under these facts,
the arrangement lacks significant entre-
preneurial risk and provides for a dis-
guised payment for services. Example 4
considers similar facts, but assumes that
the partnership’s assets are publicly traded
and are marked-to-market under section
475(f)(1). Under these facts, the example
concludes that the arrangement has signif-
icant entrepreneurial risk, and thus that
section 707(a)(2)(A) does not apply.
IV.Safe Harbor Revenue Procedures
Rev. Proc. 93–27 provides that in cer-
tain circumstances if a person receives a
profits interest for the provision of ser-
vices to or for the benefit of a partnership
in a partner capacity or in anticipation of
becoming a partner, the IRS will not treat
the receipt of such interest as a taxable
event for the partner or the partnership.
The revenue procedure does not apply if
(1) the profits interest relates to a substan-
tially certain and predictable stream of
income from partnership assets, such as
income from high-quality debt securities
or a high-quality net lease; (2) within two
years of receipt, the partner disposes of
the profits interest; or (3) the profits inter-
est is a limited partnership interest in a
“publicly traded partnership” within the
meaning of section 7704(b).
Rev. Proc. 2001–43 provides that, for
purposes of Rev. Proc. 93–27, if a part-
nership grants a substantially nonvested
profits interest in the partnership to a ser-
vice provider, the service provider will be
treated as receiving the interest on the date
of its grant, provided that: (i) the partner-
ship and the service provider treat the
service provider as the owner of the part-
nership interest from the date of its grant,
and the service provider takes into ac-
count the distributive share of partnership
income, gain, loss, deduction and credit
associated with that interest in computing
the service provider’s income tax liability
for the entire period during which the ser-
vice provider has the interest; (ii) upon the
grant of the interest or at the time that the
interest becomes substantially vested,nei-
ther the partnership nor any of the part-
ners deducts any amount (as wages,
compensation, or otherwise) for the fair
market value of the interest; and (iii) all
other conditions of Rev. Proc. 93–27 are
satisfied.
The Treasury Department and the IRS
are aware of transactions in which one
party provides services and another party
receives a seemingly associated allocation
and distribution of partnership income or
gain. For example, a management com-
pany that provides services to a fund in
exchange for a fee may waive that fee,
while a party related to the management
company receives an interest in future
partnership profits the value of which ap-
proximates the amount of the waived fee.
The Treasury Department and the IRS
have determined that Rev. Proc. 93–27
does not apply to such transactions be-
cause they would not satisfy the require-
ment that receipt of an interest in partner-
ship profits be for the provision of
services to or for the benefit of the part-
nership in a partner capacity or in antici-
pation of being a partner, and because the
service provider would effectively have
disposed of the partnership interest
Bulletin No. 2015–32August 10, 2015
163

(through a constructive transfer to the re-
lated party) within two years of receipt.
Further, the Treasury Department and
the IRS plan to issue a revenue procedure
providing an additional exception to the
safe harbor in Rev. Proc. 93–27 in con-
junction with the publication of these reg-
ulations in final form. The additional ex-
ception will apply to a profits interest
issued in conjunction with a partner for-
going payment of an amount that is sub-
stantially fixed (including a substantially
fixed amount determined by formula, such
as a fee based on a percentage of partner
capital commitments) for the performance
of services, including a guaranteed pay-
ment under section 707(c) or a payment in
a non-partner capacity under section
707(a).
In conjunction with the issuance of
proposed regulations (REG–105346–03;
70 FR 29675–01; 2005–1 C.B. 1244) re-
lating to the tax treatment of certain trans-
fers of partnership equity in connection
with the performance of services, the
Treasury Department and the IRS issued
Notice 2005–43, 2005–24 I.R.B. 1221.
Notice 2005–43 includes a proposed rev-
enue procedure regarding partnership in-
terests transferred in connection with the
performance of services. In the event that
the proposed revenue procedure provided
for in Notice 2005–43 is finalized, it will
include the additional exception refer-
enced.
Effective Dates
The proposed regulations would be ef-
fective on the date the final regulations are
published in theFederal Registerand
would apply to any arrangement entered
into or modified on or after the date of
publication of the final regulations. In the
case of any arrangement entered into or
modified before the final regulations are
published in theFederal Register, the
determination of whether an arrangement
is a disguised payment for services under
section 707(a)(2)(A) is made on the basis
of the statute and the guidance provided
regarding that provision in the legislative
history of section 707(a)(2)(A). Pending
the publication of final regulations, the
position of the Treasury Department and
the IRS is that the proposed regulations
generally reflect Congressional intent as
to which arrangements are appropriately
treated as disguised payments for services.
Effect on Other Documents
The following publication is obsolete
as of July 23, 2015:
Rev. Rul. 81–300 (1981–2 C.B. 143).
The following publications will be ob-
solete as of the date of a Treasury Deci-
sion adopting these rules as final regula-
tions in theFederal Register:
Rev. Rul. 66–95 (1966–1 C.B. 169);
and
Rev. Rul. 69–180 (1969–1 C.B. 183).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulation
does not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing will be submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Comments and Requests for Public
Hearing
The Treasury Department and the IRS
invite public comment on these proposed
regulations. The legislative history sup-
porting section 707(a)(2)(A) indicates that
an arrangement that lacks significant en-
trepreneurial risk is generally treated as a
disguised payment for services. The Trea-
sury Department and the IRS have con-
cluded that the presence of significant en-
trepreneurial risk in an arrangement is
necessary for the arrangement to be
treated as occurring between a partnership
and a partner acting in a partner capacity.
Nonetheless, the Treasury Department
and the IRS request comments on, and
examples of, whether arrangements could
exist that should be treated as a distribu-
tive share under section 704(b) despite the
absence of significant entrepreneurial risk.
In addition, the Treasury Department and
the IRS request comments on sufficient
notification requirements to effectively
render a fee waiver binding upon the ser-
vice provider and the partnership.
The Treasury Department and the IRS
have become aware that some partner-
ships that assert reliance on § 1.704–
1(b)(2)(ii)(i) (the economic effect equiva-
lence rule) have expressed uncertainty on
the proper treatment of partners who re-
ceive an increased right to share in part-
nership property upon a partnership liqui-
dation without respect to the partnership’s
net income. These partnerships typically
set forth each partner’s distribution rights
upon a liquidation of the partnership and
require the partnership to allocate net in-
come annually in a manner that causes
partners’ capital accounts to match part-
nership distribution rights to the extent
possible. Such agreements are commonly
referred to as “targeted capital account
agreements.” Some taxpayers have ex-
pressed uncertainty whether a partnership
with a targeted capital account agreement
must allocate income or a guaranteed pay-
ment to a partner who has an increased
right to partnership assets determined as if
the partnership liquidated at the end of the
year even in the event that the partnership
recognizes no, or insufficient, net income.
The Treasury Department and the IRS
generally believe that existing rules under
§§ 1.704–1(b)(2)(ii) and 1.707–1(c) ad-
dress this circumstance by requiring part-
ner capital accounts to reflect the partner’s
distribution rights as if the partnership liq-
uidated at the end of the taxable year, but
request comments on specific issues and
examples with respect to which further
guidance would be helpful. No inference
is intended as to whether and when tar-
geted capital account agreements could
satisfy the economic effect equivalence
rule.
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS request comments on all aspects of
the proposed regulations. All comments
will be available for public inspection and
copying upon request. A public hearing
August 10, 2015Bulletin No. 2015–32
164

will be scheduled if requested in writing
by any person that timely submits written
or electronic comments. If a public hear-
ing is scheduled, notice of the date, time,
and place for the public hearing will be
published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is Jaclyn M. Goldberg of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). How-
ever, other personnel from the Internal
Revenue Service and the Treasury Depart-
ment participated in their development.
*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1— INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.707–0 also issued under 26
U.S.C. 707(a).
Section 1.707–2 also issued under 26
U.S.C. 707(a).
Section 1.707–9 also issued under 26
U.S.C. 707(a).***
Section 1.736–1 also issued under 26
U.S.C. 736(a).***
Par. 2. Section 1.707–0 is amended by
revising § 1.707–2 to read as follows:
§ 1.707– 0. Table of contents.
*****
§ 1.707–2. Disguised payments for
services.
(a) In general.
(b) Elements necessary to characterize
arrangements as disguised payments for
services.
(1) In general.
(2) Application and timing.
(i) Timing and effect of the determina-
tion.
(ii) Timing of inclusion.
(3) Application of disguised payment
rules.
(c) Factors considered.
(d) Examples.
*****
Par. 3. Section 1.707–1 is amended by
adding a sentence at the end of paragraph
(a) and revising paragraph (c) Example 2
to read as follows:
§ 1.707–1. Transactions between partner
and partnership.
(a)***Forarrangements pursuant to
which a purported partner performs ser-
vices for a partnership and the partner
receives a related direct or indirect alloca-
tion and distribution from the partnership,
see § 1.707–2 to determine whether the
arrangement should be treated as a dis-
guised payment for services.
(c)***
Example 2.Partner C in the CD partnership is to
receive 30 percent of partnership income, but not
less than $10,000. The income of the partnership is
$60,000, and C is entitled to $18,000 (30 percent of
$60,000). Of this amount, $10,000 is a guaranteed
payment to C. The $10,000 guaranteed payment
reduces the partnership’s net income to $50,000 of
which C receives $8,000 as C’s distributive share.
*****
Par. 4. Section 1.707–2 is added to read
as follows:
§ 1.707–2. Disguised payments for
services.
(a)In general. This section prescribes
rules for characterizing arrangements as
disguised payments for services. Para-
graph (b) of this section outlines the ele-
ments necessary to characterize an ar-
rangement as a payment for services, and
it provides operational rules regarding ap-
plication and timing of this section. Para-
graph (c) of this section identifies the fac-
tors that weigh in the determination of
whether an arrangement includes the ele-
ments described in paragraph (b) of this
section that make it appropriate to charac-
terize the arrangement as a payment for
services. Paragraph (d) of this section pro-
vides examples applying these rules to
determine whether an arrangement is a
payment for services.
(b)Elements necessary to characterize
arrangements as disguised payments for
services—(1)In general. An arrangement
will be treated as a disguised payment for
services if—
(i) A person (service provider), either
in a partner capacity or in anticipation of
becoming a partner, performs services (di-
rectly or through its delegate) to or for the
benefit of a partnership;
(ii) There is a related direct or indirect
allocation and distribution to such service
provider; and
(iii) The performance of such services
and the allocation and distribution, when
viewed together, are properly character-
ized as a transaction occurring between
the partnership and a person acting other
than in that person’s capacity as a partner.
(2)Application and timing.—(i)Tim-
ing and effect of the determination.
Whether an arrangement is properly char-
acterized as a payment for services is de-
termined at the time the arrangement is
entered into or modified and without re-
gard to whether the terms of the arrange-
ment require the allocation and distribu-
tion to occur in the same taxable year. An
arrangement that is treated as a payment
for services under this paragraph (b) is
treated as a payment for services for all
purposes of the Internal Revenue Code,
including for example, sections 61, 409A,
and 457A (as applicable). The amount
paid to a person in consideration for ser-
vices under this section is treated as a
payment for services provided to the part-
nership, and, when appropriate, the part-
nership must capitalize these amounts (or
otherwise treat such amounts in a manner
consistent with their recharacterization).
The partnership must also treat the ar-
rangement as a payment to a non-partner
in determining the remaining partners’
shares of taxable income or loss.
(ii)Timing of inclusion. The inclusion
of income by the service provider and
deduction (if applicable) by the partner-
ship of amounts paid pursuant to an ar-
rangement that is characterized as a pay-
ment for services under paragraph (b)(1)
of this section is taken into account in the
taxable year as required under applicable
law by applying all relevant sections of
the Internal Revenue Code, including for
example, sections 409A and 457A (as ap-
plicable), to the allocation and distribution
when they occur (or are deemed to occur
under all other provisions of the Internal
Revenue Code).
(3)Application of disguised payment
rules. If a person purports to provide ser-
Bulletin No. 2015–32August 10, 2015
165

vices to a partnership in a capacity as a
partner or in anticipation of becoming a
partner, the rules of this section apply for
purposes of determining whether the ser-
vices were provided in exchange for a
disguised payment, even if it is deter-
mined after applying the rules of this sec-
tion that the service provider is not a part-
ner. If after applying the rules of this
section, no partnership exists as a result of
the service provider failing to become a
partner under the arrangement, then the
service provider is treated as having pro-
vided services directly to the other pur-
ported partner.
(c)Factors considered. Whether an ar-
rangement constitutes a payment for ser-
vices (in whole or in part) depends on all
of the facts and circumstances. Paragraphs
(c)(1) through (6) of this section provide a
non-exclusive list of factors that may in-
dicate that an arrangement constitutes (in
whole or in part) a payment for services.
The presence or absence of a factor is
based on all of the facts and circumstances
at the time the parties enter into the ar-
rangement (or if the parties modify the
arrangement, at the time of the modifica-
tion). The most important factor is signif-
icant entrepreneurial risk as set forth in
paragraph (c)(1) of this section. An ar-
rangement that lacks significant entrepre-
neurial risk constitutes a payment for ser-
vices. An arrangement that has significant
entrepreneurial risk will generally not
constitute a payment for services unless
other factors establish otherwise. For pur-
poses of making determinations under this
paragraph (c), the weight to be given to
any particular factor, other than entre-
preneurial risk, depends on the particu-
lar case and the absence of a factor is
not necessarily indicative of whether or
not an arrangement is treated as a pay-
ment for services.
(1) The arrangement lacks significant
entrepreneurial risk. Whether an arrange-
ment lacks significant entrepreneurial risk
is based on the service provider’s entre-
preneurial risk relative to the overall en-
trepreneurial risk of the partnership. Para-
graphs (c)(1)(i) through (v) of this section
provide facts and circumstances that cre-
ate a presumption that an arrangement
lacks significant entrepreneurial risk and
will be treated as a disguised payment for
services unless other facts and circum-
stances establish the presence of signifi-
cant entrepreneurial risk by clear and con-
vincing evidence:
(i) Capped allocations of partnership
income if the cap is reasonably expected
to apply in most years;
(ii) An allocation for one or more years
under which the service provider’s share
of income is reasonably certain;
(iii) An allocation of gross income;
(iv) An allocation (under a formula or
otherwise) that is predominantly fixed in
amount, is reasonably determinable under
all the facts and circumstances, or is de-
signed to assure that sufficient net profits
are highly likely to be available to make
the allocation to the service provider (e.g.
if the partnership agreement provides for
an allocation of net profits from specific
transactions or accounting periods and
this allocation does not depend on the
long-term future success of the enter-
prise); or
(v) An arrangement in which a service
provider waives its right to receive pay-
ment for the future performance of ser-
vices in a manner that is non-binding or
fails to timely notify the partnership and
its partners of the waiver and its terms.
(2) The service provider holds, or is
expected to hold, a transitory partnership
interest or a partnership interest for only a
short duration.
(3) The service provider receives an
allocation and distribution in a time frame
comparable to the time frame that a non-
partner service provider would typically
receive payment.
(4) The service provider became a part-
ner primarily to obtain tax benefits that
would not have been available if the ser-
vices were rendered to the partnership in a
third party capacity.
(5) The value of the service provider’s
interest in general and continuing partner-
ship profits is small in relation to the al-
location and distribution.
(6) The arrangement provides for dif-
ferent allocations or distributions with re-
spect to different services received, the
services are provided either by one person
or by persons that are related under sec-
tions 707(b) or 267(b), and the terms of
the differing allocations or distributions
are subject to levels of entrepreneurial risk
that vary significantly.
(d)Examples. The following examples
illustrate the application of this section:
Example 1. Partnership ABC constructed a build-
ing that is projected to generate $100,000 of gross
income annually. A, an architect, performs services
for partnership ABC for which A’s normal fee would
be $40,000 and contributes cash in an amount equal
to the value of a 25 percent interest in the partner-
ship. In exchange, A will receive a 25 percent dis-
tributive share for the life of the partnership and a
special allocation of $20,000 of partnership gross
income for the first two years of the partnership’s
operations. The ABC partnership agreement satisfies
the requirements for economic effect contained in
§ 1.704–1(b)(2)(ii), including requiring that liquidat-
ing distributions are made in accordance with the
partners’ positive capital account balances. Under
paragraph (c) of this section, whether the arrange-
ment is treated as a payment for services depends on
the facts and circumstances. The special allocation to
A is a capped amount and the cap is reasonably
expected to apply. The special allocation is also
made out of gross income. Under paragraphs
(c)(1)(i) and (iii) of this section, the capped alloca-
tions of income and gross income allocations de-
scribed are presumed to lack significant entrepre-
neurial risk. No additional facts and circumstances
establish otherwise by clear and convincing evi-
dence. Thus, the allocation lacks significant entre-
preneurial risk. Accordingly, the arrangement pro-
vides for a disguised payment for services as of the
date that A and ABC enter into the arrangement and,
pursuant to paragraph (b)(2)(ii) of this section,
should be included in income by A in the time and
manner required under applicable law as determined
by applying all relevant sections of the Internal Rev-
enue Code to the arrangement.
Example 2. A, a stock broker, agrees to effect
trades for Partnership ABC without the normal bro-
kerage commission. A contributes 51 percent of part-
nership capital and in exchange, receives a 51 per-
cent interest in residual partnership profits and
losses. In addition, A receives a special allocation of
gross income that is computed in a manner which
approximates its foregone commissions. The special
allocation to A is computed by means of a formula
similar to a normal brokerage fee and varies with the
value and amount of services rendered rather than
with the income of the partnership. It is reasonably
expected that Partnership ABC will have sufficient
gross income to make this allocation. The ABC
partnership agreement satisfies the requirements for
economic effect contained in § 1.704–1(b)(2)(ii),
including requiring that liquidating distributions are
made in accordance with the partners’ positive cap-
ital account balances. Under paragraph (c) of this
section, whether the arrangement is treated as a
payment for services depends on the facts and cir-
cumstances. Under paragraphs (c)(1)(iii) and (iv) of
this section, because the allocation is an allocation of
gross income and is reasonably determinable under
the facts and circumstances, it is presumed to lack
significant entrepreneurial risk. No additional facts
and circumstances establish otherwise by clear and
convincing evidence. Thus, the allocation lacks sig-
nificant entrepreneurial risk. Accordingly, the ar-
rangement provides for a disguised payment for ser-
vices as of the date that A and ABC enter into the
August 10, 2015Bulletin No. 2015–32
166

arrangement and, pursuant to paragraph (b)(2)(ii) of
this section, should be included in income by A in
the time and manner required under applicable law
as determined by applying all relevant sections of the
Internal Revenue Code to the arrangement.
Example 3. (i) M performs services for which a
fee would normally be charged to new partnership
ABC, an investment partnership that will acquire a
portfolio of investment assets that are not readily
tradable on an established securities market. M will
also contribute $500,000 in exchange for a one per-
cent interest in ABC’s capital and profits. In addition
to M’s one percent interest, M is entitled to receive
a priority allocation and distribution of net gain from
the sale of any one or more assets during any 12-
month accounting period in which the partnership
has overall net gain in an amount intended to ap-
proximate the fee that would normally be charged
for the services M performs. A, a company that
controls M, is the general partner of ABC and directs
all operations of the partnership consistent with the
partnership agreement, including causing ABC to
purchase or sell an asset during any accounting pe-
riod. A also controls the timing of distributions to M
including distributions arising from M’s priority al-
location. Given the nature of the assets in which
ABC will invest and A’s ability to control the timing
of asset dispositions, the amount of partnership net
income or gains that will be allocable to M under the
ABC partnership agreement is highly likely to be
available and reasonably determinable based on all
facts and circumstances available upon formation of
the partnership. A will be allocated 10 percent of any
net profits or net losses of ABC earned over the life
of the partnership. A undertakes an enforceable ob-
ligation to repay any amounts allocated and distrib-
uted pursuant to this interest (reduced by reasonable
allowances for tax payments made on A’s allocable
shares of partnership income and gain) that exceed
10 percent of the overall net amount of partnership
profits computed over the life of the partnership (a
“clawback obligation”). It is reasonable to anticipate
that A could and would comply fully with any re-
payment responsibilities that arise pursuant to this
obligation. The ABC partnership agreement satisfies
the requirements for economic effect contained in
§ 1.704–1(b)(2)(ii), including requiring that liquidat-
ing distributions are made in accordance with the
partners’ positive capital account balances.
(ii) Under paragraph (c) of this section, whether
A’s arrangement is treated as a payment for services
in directing ABC’s operations depends on the facts
and circumstances. The most important factor in this
facts and circumstances determination is the pres-
ence or absence of significant entrepreneurial risk.
The arrangement with respect to A creates signifi-
cant entrepreneurial risk under paragraph (c)(1) of
this section because the allocation to A is of net
profits earned over the life of the partnership, the
allocation is subject to a clawback obligation and it
is reasonable to anticipate that A could and would
comply with this obligation, and the allocation is
neither reasonably determinable nor highly likely to
be available. Additionally, other relevant factors do
not establish that the arrangement should be treated
as a payment for services. Thus, the arrangement
with respect to A does not constitute a payment for
services for purposes of paragraph (b)(1) of this
section.
(iii) Under paragraph (c) of this section, whether
M’s arrangement is treated as a payment for services
depends on the facts and circumstances. The most
important factor in this facts and circumstances de-
termination is the presence or absence of entrepre-
neurial risk. The priority allocation to M is an allo-
cation of net profit from any 12-month accounting
period in which the partnership has net gain, and thus
it does not depend on the overall success of the
enterprise. Moreover, the sale of the assets by ABC,
and hence the timing of recognition of gains and
losses, is controlled by A, a company related to M.
Taken in combination, the facts indicate that the
allocation is reasonably determinable under all the
facts and circumstances and that sufficient net profits
are highly likely to be available to make the priority
allocation to the service provider. As a result, the
allocation presumptively lacks significant entrepre-
neurial risk. No additional facts and circumstances
establish otherwise by clear and convincing evi-
dence. Accordingly, the arrangement provides for a
disguised payment for services as of the date M and
ABC enter into the arrangement and, pursuant to
paragraph (b)(2)(ii) of this section, should be in-
cluded in income by M in the time and manner
required under applicable law as determined by ap-
plying all relevant sections of the Internal Revenue
Code to the arrangement.
(iv) Assume the facts are the same as paragraph
(i) of this example, except that the partnership can
also fund M’s priority allocation and distribution of
net gain from the revaluation of any partnership
assets pursuant to § 1.704–1(b)(2)(iv)(f). As the
general partner of ABC, A controls the timing of
events that permit revaluation of partnership assets
and assigns values to those assets for purposes of the
revaluation. Under paragraph (c) of this section,
whether M’s arrangement is treated as a payment for
services depends on the facts and circumstances. The
most important factor in this facts and circumstances
determination is the presence or absence of signifi-
cant entrepreneurial risk. Under this arrangement,
the valuation of the assets is controlled by A, a
company related to M, and the assets of the company
are difficult to value. This fact, taken in combination
with the partnership’s determination of M’s profits
by reference to a specified accounting period, causes
the allocation to be reasonably determinable under
all the facts and circumstances or to ensure that net
profits are highly likely to be available to make the
priority allocation to the service provider. No addi-
tional facts and circumstances establish otherwise by
clear and convincing evidence. Accordingly, the ar-
rangement provides for a disguised payment for ser-
vices as of the date M and ABC enter into the
arrangement and, pursuant to paragraph (b)(2)(ii) of
this section, should be included in income by M in
time and manner required under applicable law as
determined by applying all relevant sections of the
Internal Revenue Code to the arrangement.
Example 4. (i) The facts are the same as in
Example 3, except that ABC’s investment assets are
securities that are readily tradable on an established
securities market, and ABC is in the trade or busi-
ness of trading in securities and has validly elected to
mark-to-market under section 475(f)(1). In addition,
M is entitled to receive a special allocation and
distribution of partnership net gain attributable to a
specified future 12-month taxable year. Although it
is expected that one or more of the partnership’s
assets will be sold for a gain, it cannot reasonably be
predicted whether the partnership will have net prof-
its with respect to its entire portfolio in that 12-
month taxable year.
(ii) Under paragraph (c) of this section, whether
the arrangement is treated as a payment for services
depends on the facts and circumstances. The most
important factor in this facts and circumstances de-
termination is the presence or absence of significant
entrepreneurial risk. The special allocation to M is
allocable out of net profits, the partnership assets
have a readily ascertainable market value that is
determined at the close of each taxable year, and it
cannot reasonably be predicted whether the partner-
ship will have net profits with respect to its entire
portfolio for the year to which the special allocation
would relate. Accordingly, the special allocation is
neither reasonably determinable nor highly likely to
be available because the partnership assets have a
readily ascertainable fair market value that is deter-
mined at the beginning of the year and at the end of
the year. Thus, the arrangement does not lack sig-
nificant entrepreneurial risk under paragraph (c)(1)
of this section. Additionally, the facts and circum-
stances do not establish the presence of other factors
that would suggest that the arrangement is properly
characterized as a payment for services. Accord-
ingly, the arrangement does not constitute a payment
for services under paragraph (b)(1) of this section.
Example 5. (i) A is a general partner in newly-
formed partnership ABC, an investment fund. A is
responsible for providing management services to
ABC, but has delegated that management function to
M, a company controlled by A. Funds that are com-
parable to ABC commonly require the general part-
ner to contribute capital in an amount equal to one
percent of the capital contributed by the limited
partners, provide the general partner with an interest
in 20 percent of future partnership net income and
gains as measured over the life of the fund, and pay
the fund manager annually an amount equal to two
percent of capital committed by the partners.
(ii) Upon formation of ABC, the partners of ABC
execute a partnership agreement with terms that dif-
fer from those commonly agreed upon by other com-
parable funds. The ABC partnership agreement pro-
vides that A will contribute nominal capital to ABC,
that ABC will annually pay M an amount equal to
one percent of capital committed by the partners, and
that A will receive an interest in 20 percent of future
partnership net income and gains as measured over
the life of the fund. A will also receive an additional
interest in future partnership net income and gains
determined by a formula (the “Additional Interest”).
The parties intend that the estimated present value of
the Additional Interest approximately equals the
present value of one percent of capital committed by
the partners determined annually over the life of the
fund. However, the amount of net profits that will be
allocable to A under the Additional Interest is neither
highly likely to be available nor reasonably deter-
minable based on all facts and circumstances avail-
able upon formation of the partnership. A undertakes
a clawback obligation, and it is reasonable to antic-
Bulletin No. 2015–32August 10, 2015
167

ipate that A could and would comply fully with any
repayment responsibilities that arise pursuant to this
obligation. The ABC partnership agreement satisfies
the requirements for economic effect contained in
§ 1.704–1(b)(2)(ii), including requiring that liquidat-
ing distributions are made in accordance with the
partners’ positive capital account balances.
(iii) Under paragraph (c) of this section, whether
the arrangement relating to the Additional Interest is
treated as a payment for services depends on the
facts and circumstances. The most important factor
in this facts and circumstances determination is the
presence or absence of significant entrepreneurial
risk. The arrangement with respect to A creates
significant entrepreneurial risk under paragraph
(c)(1) of this section because the allocation to A is of
net profits, the allocation is subject to a clawback
obligation over the life of the fund and it is reason-
able to anticipate that A could and would comply
with this obligation, and the allocation is neither
reasonably determinable nor highly likely to be
available. Additionally, the facts and circumstances
do not establish the presence of other factors that
would suggest that the arrangement is properly char-
acterized as a payment for services. Accordingly, the
arrangement does not constitute a payment for ser-
vices under paragraph (b)(1) of this section.
Example 6. (i) A is a general partner in limited
partnership ABC, an investment fund. A is respon-
sible for providing management services to ABC,
but has delegated that management function to M, a
company controlled by A. The ABC partnership
agreement provides that A must contribute capital in
an amount equal to one percent of the capital con-
tributed by the limited partners, that A is entitled to
an interest in 20 percent of future partnership net
income and gains as measured over the life of the
fund, and that M is entitled to receive an annual fee
in an amount equal to two percent of capital com-
mitted by the partners. The amount of partnership net
income or gains that will be allocable to A under the
ABC partnership agreement is neither highly likely
to be available nor reasonably determinable based on
all facts and circumstances available upon formation
of the partnership. A also undertakes a clawback
obligation, and it is reasonable to anticipate that A
could and would comply fully with any repayment
responsibilities that arise pursuant to this obligation.
(ii) ABC’s partnership agreement also permits M
(as A’s appointed delegate) to waive all or a portion
of its fee for any year if it provides written notice to
the limited partners of ABC at least 60 days prior to
the commencement of the partnership taxable year
for which the fee is payable. If M elects to waive
irrevocably its fee pursuant to this provision, the
partnership will, immediately following the com-
mencement of the partnership taxable year for which
the fee would have been payable, issue to M an
interest determined by a formula in subsequent part-
nership net income and gains (the “Additional Inter-
est”). The parties intend that the estimated present
value of the Additional Interest approximately
equals the estimated present value of the fee that was
waived. However, the amount of net income or gains
that will be allocable to M is neither highly likely to
be available nor reasonably determinable based on
all facts and circumstances available at the time of
the waiver of the fee. The ABC partnership agree-
ment satisfies the requirements for economic effect
contained in § 1.704–1(b)(2)(ii), including requiring
that liquidating distributions are made in accordance
with the partners’ positive capital account balances.
The partnership agreement also requires ABC to
maintain capital accounts pursuant to § 1.704–
1(b)(2)(iv) and to revalue partner capital accounts
under § 1.704–1(b)(2)(iv)(f) immediately prior to
the issuance of the partnership interest to M. M
undertakes a clawback obligation, and it is reason-
able to anticipate that M could and would comply
fully with any repayment responsibilities that arise
pursuant to this obligation.
(iii) Under paragraph (c) of this section, whether
the arrangements relating to A’s 20 percent interest
in future partnership net income and gains and M’s
Additional Interest are treated as payment for ser-
vices depends on the facts and circumstances. The
most important factor in this facts and circumstances
determination is the presence or absence of signifi-
cant entrepreneurial risk. The allocations to A and M
do not presumptively lack significant entrepreneurial
risk under paragraph (c)(1) of this section because
the allocations are based on net profits, the alloca-
tions are subject to a clawback obligation over the
life of the fund and it is reasonable to anticipate that
A and M could and would comply with this obliga-
tion, and the allocations are neither reasonably de-
terminable nor highly likely to be available. Addi-
tionally, the facts and circumstances do not establish
the presence of other factors that would suggest that
the arrangement is properly characterized as a pay-
ment for services. Accordingly, the arrangements do
not constitute payment for services under paragraph
(b)(1) of this section.
Par. 5. Section 1.707–9 is amended by:
a. Redesignating paragraph (b) as para-
graph (c);
b. Redesignating paragraph (a) as para-
graph (b); and
c. Adding new paragraph (a).
The addition reads as follows:
§ 1.707–9. Effective dates and
transitional rules.
(a)Section 1.707–2—(1)In general.
Section 1.707–2 applies to all arrange-
ments entered into or modified after the
date of publication of the Treasury Deci-
sion adopting that section as final regula-
tions in theFederal Register. To the ex-
tent that an arrangement permits a service
provider to waive all or a portion of its fee
for any period subsequent to the date the
arrangement is created, then the arrange-
ment is modified for purposes of this para-
graph on the date or dates that the fee is
waived.
(2)Arrangements entered into or mod-
ified before final regulations are pub-
lishedin theFederal Register. In the case
of any arrangement entered into or modi-
fied that occurs on or before final regula-
tions are published in theFederal Regis-
ter, the determination of whether the
arrangement is a disguised fee for services
under section 707(a)(2)(A) is to be made
on the basis of the statute and the guid-
ance provided regarding that provision in
the legislative history of section 73 of the
Tax Reform Act of 1984 (Pub. L. 98–369,
98 Stat. 494). See H.R. Rep. No. 861, 98th
Cong., 2d Sess. 859–2 (1984); S. Prt. No.
169 (Vol. I), 98th Cong., 2d Sess. 223–32
(1984); H.R. Rep. No. 432 (Pt. 2), 98th
Cong., 2d Sess. 1216–21 (1984).
*****
Par. 6. Section 1.736–1 is amended by
adding a sentence at the end of paragraph
(a)(1)(i) to read as follows:
§ 1.736 –1. Payments to a retiring part-
ner or a deceased partner’s successor in
interest.
(a)***
(1)(i)***Section 736 does not apply
to arrangements treated as disguised pay-
ments for services under § 1.707–2.
*****
John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 22, 2015,
8:45 a.m., and published in the issue of the Federal Register
for July 23, 2015, 80 F.R. 43652)
August 10, 2015Bulletin No. 2015–32
168

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
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the 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 with
modified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. 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
with amplified andclarified, 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
being stated in a new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
supersededdescribes 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
published 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
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings 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 following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
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—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE
—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2015–32August 10, 2015
i

Numerical Finding List
1
Bulletins 2015–27 through 2015–32
Announcements:
2015-17, 2015-28 I.R.B.67
2015-19, 2015-32 I.R.B.157
Notices:
2015-43, 2015-29 I.R.B.73
2015-46, 2015-28 I.R.B.64
2015-47, 2015-30 I.R.B.76
2015-48, 2015-30 I.R.B.77
2015-49, 2015-30 I.R.B.79
2015-50, 2015-30 I.R.B.81
2015-51, 2015-31 I.R.B.133
Proposed Regulations:
REG-115452-14, 2015-32 I.R.B.158
REG-138526-14, 2015-28 I.R.B.67
REG-102648-15, 2015-31 I.R.B.134
REG-102837-15, 2015-27 I.R.B.43
Revenue Procedures:
2015-34, 2015-27 I.R.B.4
2015-36, 2015-27 I.R.B.20
Revenue Rulings:
2015-15, 2015-27 I.R.B.1
2015-16, 2015-31 I.R.B.130
Treasury Decisions:
9723, 2015-31 I.R.B.84
9726, 2015-31 I.R.B.98
9727, 2015-32 I.R.B.154
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015–01 through 2015–26 is in Internal Revenue Bulletin
2015–26, dated June 29, 2015.
August 10, 2015Bulletin No. 2015–32
ii

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2015–27 through 2015–32
Notices:
2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B.133
Revenue Procedures:
2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B.20
2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B.20
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015–01 through 2015–26 is in Internal Revenue Bulletin
2015–26, dated June 29, 2015.
Bulletin No. 2015–32August 10, 2015
iii

INTERNAL REVENUE BULLETIN
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