us-irs-revenue-rulings-irb-2007-5-pdf•Internal Revenue Bulletin 2007-5 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 2007-5 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-2007-5-pdfInternal Revenue Bulletin 2007-5 (PDF rendition): IRS Revenue RulingsGuidance
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.
Bulletin No. 200 7-5 January 29, 2007 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2007–5, page 378. Low-income housing credit; satisfactory bond; “bond factor” amounts for the period January through March 2007.This ruling provides the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through March 2007. Rev. Rul. 2007–6, page 393. LIFO; pric e indexes; department stores.The November 2006 Bure au of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last- in, first-out inventory methods for valuing inventories for tax ye ars ended on, or with reference to, November 30, 2006. T.D. 9303, page 379. REG–125632–06, page 415. Final, temporary, and proposed regulations under section 368 of the Code provide guidance regarding the qualification of certaintransactionsasreorganizationsdescribedinsection 368(a)(1)(D) where no stock and/or securities of the acquir- ing corporation is issued and distributed in the transaction. Notice 2007–9, page 401. This notice provides guidance under section 954(c)(6) of the Code on dividend, interest, rent and royalty payments that may be excluded from foreign personal holding company income. Notice 2007–13, page 410. This not ice announces that the Treasury Department and the Servic e will amend the regulations addressing substantial as- sistan ce rendered by a related person or persons to a con- trolled foreign corporation (CFC). These amended regulations will limit the types of activities that constitute substantial assis- tance to certain assistance rendered, directly or indirectly, by a United States person or persons to a related CFC. In addition, in light of the repeal of the foreign base company shipping in- come rules under subpart F, this notice confirms that income that previously was foreign base company shipping income will continue to be foreign base company income to the extent that it is within the definition of a remaining category of foreign base company income. EMPLOYEE PLANS T.D. 9302, page 382. Final regulations under section 409(p) of the Code provide guid- ance concerning requirements for employee stock ownership plans (ESOPs) holding stock of Subchapter S corporations. Notice 2007–7, page 395. Distribution issues; multiple issues; Pension Protection Act of 2006.This notice provides guidance in the form of questions and answers with respect to certain provisions con- tained in the Pension Protection Act of 2006, Pub. L. No. 109–280 (PPA ’06), that are effective in 2007 or earlier and are primarily related to distributions described in sections 303, 826, 828, 829, 845, 904, 1102, and 1201 of the statute. Notice 2007–12, page 409. Weighted average interest rate update; corporate bond indices; 30-year Treasury securities.The weighted aver- age interest rate for January 2007 and the resulting permissi- ble range of interest rates used to calculate current liability and to determine the required contribution are set forth. (Continued on the next page) Finding Lists begin on page ii. Index for January begins on page iv. EXCISE TAX Notice 2007–11, page 405. This notice answers questions raised by Notice 2006–50, 2006–25 I.R.B. 1141. It also provides guidance regarding the standard amounts for individuals and provides rules for the Business and Nonprofit Estimation Method (EM). Notice 2006–50 amplified, clarified, and modified. ADMINISTRATIVE Rev. Proc. 2007–18, page 413. Pursuant to section 1397E(e)(2) of the Code, this procedure sets forth the maximum face amount of Qualified Zone Acad- emy Bonds that may be issued for each state for each of the calendar years 2006 and 2007. For this purpose, “State” includes the District of Columbia and the possessions of the United States. Announcement 2007–8, page 416. This document contains corrections to temporary regulations (T.D. 9286, 2006–43 I.R.B. 750) providing rules for claiming the railroad track maintenance credit under section 45G of the Code for qualified railroad track maintenance expenditures paid or incurred by a Class II or Class III railroad and other eligible taxpayers during the taxable year. Announcem ent 2007–9, page 417. This docum ent contains corrections to final and temporary reg- ulations ( T.D. 9278, 2006–34 I.R.B. 256) regarding the treat- ment of con trolled services transactions under section 482 of theCodean d the allocation of income from intangibles, in par- ticular w ith respect to contributions by a controlled party to the value of a n intangible owned by another controlled party. January 29, 20072007–5 I.R.B. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, mod- ify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indi- cated. Procedures relating solely to matters of internal man- agement are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—19 86 Code. This part i ncludes rulings and decisions based on provisions of the Intern al Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Leg- islation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Sec- retary (Enforcement). Part IV .—Items of General Interest. This par t includes notices of proposed rulemakings, disbar- ment an d suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. The c ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402. 2007–5 I.R.B.January 29, 2007 Place missing child here. January 29, 20072007–5 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—Low-Income Housing Credit Low-income housing credit; satis- factory bond; “bond factor” amounts for the period January through March 2007.This ruling provides the monthly bond factor amounts to be used by taxpay- ers who dispose of qualified low-income buildings or interests therein during the period January through March 2007. Rev. Rul. 2007–5 In Rev. Rul. 90–60, 1990–2 C.B. 3, the Internal Revenue Service provided guidance to taxpayers concerning the gen- eral methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secre- tary under § 42(j)(6) of the Internal Rev- enue Code. It further announced that the Secretary would publishintheInternal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month. Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an al- ternative to providing a surety bond for taxpayers to avoid or defer recapture of the low-income housing tax credits under § 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security. This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low-in- come buildings or interests therein during the period January through March 2007. Table 1 Rev. Rul. 2007–5 Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year Month of Disposition 19931994199519961997199819992000200120022003 Jan ’0717.3932.4445.5256.9766.9569.2371.8674.7478.0981.8285.82 Feb ’0717.3932.4445.5256.9766.9569.0871.7074.5677.8981.6085.57 Mar ’0717.3932.4445.5256.9766.9568.9271.5374.3977.7181.4085.33 Table 1 (cont’d) Rev. Rul. 2007–5 Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year Month of Disposition 2004200520062007 Jan ’0789.7993.4196.7097.21 Feb ’0789.5093.0796.2797.21 Mar ’0789.2292.7595.8997.21 For a list of bond factor amounts ap- plicable to dispositions occurring during other calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B. 255; Rev. Rul. 2001–53, 2001–2 C.B. 488; Rev. Rul. 2002–72, 2002–2 C.B. 759; Rev. Rul. 2003–117, 2003–2 C.B. 1051; Rev. Rul. 2004–100, 2004–2 C.B. 718; Rev. Rul. 2005–67, 2005–2 C.B. 771; and Rev. Rul. 2006–51, 2006–41 I.R.B. 632. DRAFTING INFORMATION The principal author of this revenue ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further in- formation regarding this revenue ruling, 2007–5 I.R.B.378January 29, 2007 contact Mr. McDonnell at (202) 622–3040 (not a toll-free call). Section 368.—Definitions Relating to Corporate Reorganizations 26 CFR 1.368–2: Definition of terms. T.D. 9303 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Corporate Reorganizations; Distributions Under Sections 368(a)(1)(D) and 354(b)(1)(B) AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regula- tions. SUMMARY: This document contains temporary regulations under section 368 of the Internal Revenue Code of 1986 (Code). The temporary regulations pro- vide guidance regarding the qualification of certain transactions as reorganizations describedinsection368(a)(1)(D) where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction. These regulations affect corporations engaging in such transac- tions and their shareholders. The text of the temporary regulations also serves as the text of the proposed regulations (REG–125632–06) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin. DATES:Effective Date:These regulations are effective on December 19, 2006. Applicability Date:For dates of appli- cability, see §1.368–2T(l)(4)(i). FOR FURTHER INFORMATION CONTACT: Bruce A. Decker at (202) 622–7550 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background The IRS and Treasury Department have received requests for immediate guidance regarding whether certain acquisitive transactions can qualify as reorganizations described in section 368(a)(1)(D) where no stock of the transferee corporation is issued and distributed in the transac- tion. Currently, the IRS and Treasury Department are undertaking a broad study of issues related to acquisitive section 368(a)(1)(D) reorganizations. In the in- terest of efficient tax administration, the IRS and Treasury Department are issuing these temporary regulations to provide the requested certainty for taxpayers regard- ing these acquisitive transactions pending the broader study of issues. Although these rules also are being proposed in this issue of the Bulletin, the IRS and Treasury Department contemplate that the proposed rules may change upon completion of this broader study and the comments received. The Code provides general nonrecogni- tion treatment for reorganizations specif- ically described in section 368(a). Sec- tion 368(a)(1)(D) describes as a reorgani- zation a transfer by a corporation (trans- ferorcorporation)ofallorapartofitsas- sets to another corporation (transferee cor- poration) if, immediately after the transfer, the transferor corporation or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the transferee corporation; but only if stock or securities of the controlled corporation are distributed in pursuance of a plan of reorganization in a transaction that qualifies under section 354, 355, or 356. Section 354(a)(1) provides that no gain or loss shall be recognized if stock or se- curities in a corporation a party to a reor- ganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in an- other corporation a party to the reorgani- zation. Section 354(b)(1)(B) provides that section 354(a)(1) shall not apply to an ex- change in pursuance of a plan of reorga- nization described in section 368(a)(1)(D) unless the transferee corporation acquires substantially all of the assets of the trans- feror corporation, and the stock, securi- ties, and other properties received by such transferor corporation, as well as the other properties of such transferor corporation, are distributed in pursuance of the plan of reorganization. Further, section 356 provides that if sec- tion 354 or 355 would apply to an ex- change but for the fact that the property re- ceived in the exchange consists not only of property permitted by section 354 or 355 without the recognition of gain or loss but also of other property or money, then the gain, if any, to the recipient shall be recog- nized, but not in excess of the amount of money and fair market value of such other property. Accordingly, in the case of an acquisitive transaction, there can only be a distribution to which section 354 or 356 applies where the target shareholder(s) re- ceive at least some property permitted to be received by section 354. Notwithstanding the requirement in section 368(a)(1)(D) that “stock or securi- ties of the corporation to which the assets are transferred are distributed in a trans- action which qualifies under section 354, 355, or 356”, the IRS and the courts have not required the actual issuance and dis- tribution of stock and/or securities of the transferee corporation in circumstances where the same person or persons own all the stock of the transferor corporation and the transferee corporation. In such circumstances, the IRS and the courts have viewed an issuance of stock to be a “meaningless gesture” not mandated by sections 368(a)(1)(D) and 354(b). In Revenue Ruling 70–240, 1970–1 C.B. 81 (see §601.601(d)(2) of this chap- ter), B owned all of the stock of both corporation X and corporation Y. X sold its operating assets to Y for $34x dollars, which represented the fair market value of X’s assets. X had $33x of other assets, consisting generally of cash, accounts re- ceivables, and investments in stocks and bonds, so that the assets sold by X to Y constituted approximately 51% of X’s total assets. Following the sale to Y, X paid its debts, which amounted to $38x, and then liquidated, distributing $29x to B, while Y continued to conduct the busi- ness formerly operated by X. The IRS concluded that “although no actual shares of the stock of Y were distributed to B as a result of the transaction, B is treated as having received Y stock since he already owned all the stock of Y.” Accordingly, January 29, 20073792007–5 I.R.B. the IRS held that the sale of the oper- atingassetsbyXtoY,followedbythe liquidation and distribution of X’s assets to B, resulted in a reorganization under section 368(a)(1)(D) and a distribution under section 356(a), despite the absence of an actual issuance and distribution of Y stock. When considering a similar transaction between two corporations owned in identi- cal proportions by a husband and wife, the Tax Court concluded that there was in sub- stance an exchange of stock which meets the requirements of section 354 and 356, and stated, “[t]he issuance of further stock would have been a meaningless gesture, and we cannot conclude that the statute requires such a vain act.”James Armour, Inc. v. Commissioner, 43 T.C. 295, 307 (1964). See alsoWilson v. Commissioner, 46 T.C. 334 (1966). The IRS has also ap- plied this meaningless gesture doctrine to circumstances where the transferor corpo- ration and the transferee corporation are wholly owned by a single party directly or indirectly through subsidiaries, or as a re- sult of family attribution pursuant to sec- tion 318(a)(1). However, the application of this mean- ingless gesture doctrine has generally been limited to situations in which there is iden- tical shareholder identity and proportion- ality of interest in the transferor corpora- tion and the transferee corporation. For example, inWarsaw Photographic Asso- ciates, Inc. v. Commissioner,84T.C.21 (1985), there was no issuance of stock by the transferee corporation to the transferor corporation, and the stock ownership in the two corporations was not identical. On the basis of these facts, the Tax Court con- cluded that the distribution of stock would notbeamereformalityandrefusedtoap- ply the meaningless gesture doctrine. Ac- cordingly, the transaction failed to qual- ify as a section 368(a)(1)(D) reorganiza- tion because there was no distribution of stock of the transferee corporation under sections 368(a)(1)(D) and 354(b)(1)(B). Explanation of Provisions These temporary regulations provide guidance regarding the circumstances in which the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) is deemed satisfied despite the fact that no stock and/or securities are actually issued in a transaction otherwise described in sec- tion 368(a)(1)(D). In cases where the same person or persons own, directly or indi- rectly, all of the stock of the transferor and transferee corporations in identical propor- tions, these temporary regulations provide that the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) will be treated as satisfied even though no stock is actually issued in the transaction. For purposes of determining whether the same person or persons own all of the stock of the transferor and transferee cor- porations in identical proportions, these temporary regulations provide that an in- dividual and all members of his family that have a relationship described in section 318(a)(1) will be treated as one individual. The temporary regulations also provide that the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) will be treated as satisfied in the absence of any issuance of stock and/or securities where there is ade minimisvariation in shareholder identity or proportionality of ownership in the transferor and transferee corporations. Further, stock described in section 1504(a)(4) is disregarded for pur- poses of determining whether the same person or persons own all of the stock of the transferor and transferee corporations in identical proportions. Under these temporary regulations, in each case where it is determined that the same person or persons own all of the stock of the transferor and transferee corpora- tions in identical proportions, a nominal shareofstockofthetransfereecorpora- tion will be deemed issued in addition to the actual consideration exchanged in the transaction. The nominal share of stock in the transferee corporation will then be deemed distributed by the transferor cor- poration to its shareholders and, in appro- priate circumstances, further transferred to the extent necessary to reflect the actual ownership of the transferor and transferee corporations. These temporary regulations are being issued in response to requests for imme- diate guidance regarding whether trans- actions otherwise described in section 368(a)(1)(D) qualify as reorganizations where no stock and/or securities of the transferee corporation are actually issued in the transaction. The IRS and Treasury Department currently are undertaking a broad study of issues related to acquis- itive reorganizations, including issues addressed by these temporary regulations. The IRS and Treasury Department are is- suing these temporary regulations in order to provide certainty for taxpayers while these issues are under study. The IRS and Treasury Department believe that these temporary regulations are a reasonable interpretation of section 368(a)(1)(D) and section 354(b)(1)(B) given the history of those provisions and the manner in which they have previously been interpreted by the courts and the IRS. However, no inference should be drawn from these temporary regulations regarding the law prior to the effective date of these temporary regulations. In this issue of the Bulletin, the IRS and Treasury Department are requesting com- ments on several issues relating to acquis- itive reorganizations described in section 368(a)(1)(D). In addition, the IRS and Treasury Department note that these temporary regulations do not expressly implement Prop. Reg. §1.368–1(f)(4) (FR 70, 11903–11912), which provides that there must be an exchange of net value except in the case of a transaction that would otherwise qualify as a reorganization de- scribed in section 368(a)(1)(D), provided that the fair market value of the property transferred to the acquiring corporation by the target corporation exceeds the amount of liabilities of the target corporation im- mediately before theexchange (including any liabilities cancelled, extinguished, orassumedinconnectionwiththeex- change), and the fair market value of the assets of the acquiringcorporation equals or exceeds the amount of its liabilities immediately after the exchange. The sol- vency requirement remains the IRS’s and Treasury Department’s proposal but the IRS and Treasury Department continue to consider whether this solvency require- ment should be applied to the transactions described in these temporary regulations. Special Analyses It has been determined that this Trea- sury decision is not asignificant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been deter- mined that section 553(b) of the Admin- istrative Procedure Act (5 U.S.C. chapter 2007–5 I.R.B.380January 29, 2007 5) does not apply to these regulations. For the applicability of the Regulatory Flexi- bility Act, please refer to the cross-refer- ence notice of proposed rulemaking pub- lished elsewhere in this Bulletin. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for com- ment on their impact on small business. Drafting Information The principal author of these regula- tions is Bruce A. Decker of the Office of the Associate Chief Counsel (Corporate). ***** Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–2 is amended by revising paragraph (l) to read as follows: §1.368–2 Definition of terms. ***** (l) [Reserved]. For further guidance, see §1.368–2T(l). Par. 3. Section 1.368–2T is added to read as follows: §1.368–2T Definition of terms (temporary). (a)through(k)[Reserved].Forfurther guidance, see §1.368–2(a) through (k). (l)Certain transactions treated as reorganizations described in section 368(a)(1)(D)—(1)General rule.Inor- der to qualify as a reorganization under section 368(a)(1)(D), a corporation (trans- feror corporation) must transfer all or part of its assets to another corporation (transferee corporation) and immediately after the transfer the transferor corpora- tion, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, must be in control of the transferee corporation; but only if, in pursuance of the plan, stock or securities of the transferee are distributed in a trans- action which qualifies under section 354, 355, or 356. (2)Distribution requirement—(i)In general. For purposes of paragraph (l)(1) of this section, a transaction otherwise described in section 368(a)(1)(D) will be treated as satisfying the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) notwithstanding that there is no actual issuance of stock and/or securities of the transferee corporation if the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporations in identical proportions. In such cases, the transferee corporation will be deemed to issue a nominal share of stock to the transferor corporation in addition to the actual consideration ex- changed for the transferor corporation’s assets. The nominal share of stock in the transferee corporation will then be deemed distributed by the transferor corporation to its shareholders and, where appropriate, further transferred through chains of own- ership to the extent necessary to reflect the actual ownership of the transferor and transferee corporations. (ii)Attribution. For purposes of para- graph (l)(2)(i) of this section, ownership of stock will be determined by applying the principles of section 318(a)(2) with- out regard to the 50 percent limitation in section 318(a)(2)(C). In addition, an indi- vidual and all members of his family de- scribed in section 318(a)(1) shall be treated as one individual. (iii)De minimis variations in owner- ship and certain stock not taken into ac- count. For purposes of paragraph (l)(2)(i) of this section, the same person or persons will be treated as owning, directly or indi- rectly, all of the stock of the transferor and transferee corporations in identical propor- tions notwithstanding the fact that there is ade minimisvariation in shareholder iden- tity or proportionality of ownership. Addi- tionally, for purposes of paragraph (l)(2)(i) of this section, stock described in section 1504(a)(4) is not taken into account. (3)Examples.The following examples illustrate the principles of paragraph (l) of this section. For purposes of these exam- ples, each of A, B, C, and D is an indi- vidual, T is the acquired corporation, S is the acquiring corporation, P is the par- ent corporation, and each of S1, S2, S3, and S4 is a direct or indirect subsidiary of P. Further, all of the requirements of sec- tion 368(a)(1)(D) other than the require- ment that stock or securities be distributed in a transaction to which section 354 or 356 applies are satisfied. The examples are as follows: Example 1.A owns all the stock of T and S. The T stock has a fair market value of $100x. T sells all of its assets to S in exchange for $100x of cash and immediately liquidates. Because there is com- plete shareholder identity and proportionality of own- ership in T and S, under paragraph (l)(2)(i) of this sec- tion, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied notwithstanding the fact that no S stock is issued. Pursuant to para- graph (l)(2)(i) of this section, S will be deemed to is- sue a nominal share of S stock to T in addition to the $100x of cash actually exchanged for the T assets, and T will be deemed to distribute all such consideration to A. The transaction qualifies as a reorganization de- scribed in section 368(a)(1)(D). Example 2.The facts are the same as inExam- ple 1except that C, A’s son, owns all of the stock of S. Under paragraph (l)(2)(ii) of this section, A and C are treated as one individual. Accordingly, there is complete shareholder identity and proportionality of ownership in T and S. Therefore, under paragraph (l)(2)(i) of this section, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied notwithstanding the fact that no S stock is issued. Pur- suant to paragraph (l)(2)(i) of this section, S will be deemed to issue a nominal share of S stock to T in addition to the $100x of cash actually exchanged for the T assets, and T will be deemed to distribute all such consideration to A. Awill be deemed to trans- fer the nominal share of S stock to C. The transac- tion qualifies as a reorganization described in section 368(a)(1)(D). Example 3.P owns all of the stock of S1 and S2. S1 owns all of the stock of S3, which owns all of the stock of T. S2 owns all of the stock of S4, which owns all of the stock of S. The T stock has a fair market value of $70x. T sells all of its assets to S in exchange for $70x of cash and immediately liquidates. Under paragraph (l)(2)(ii) of this section, there is indirect, complete shareholder identity and proportionality of ownership in T and S. Accordingly, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B)are treated as satisfied notwithstanding the fact that no S stock is issued. Pursuant to paragraph (l)(2)(i) of this section, S will be deemed to issue a nominal share of S stock to T in addition to the $70x of cash actually exchanged for the T assets, and T will be deemed to distribute all such consideration to S3. S3 will be deemed to dis- tribute the nominal share of S stock to S1, which, in turn, will be deemed to distribute the nominal share of S stock to P. P will be deemed to transfer the nominal share of S stock to S2, which, in turn, will be deemed to transfer such share of S stock to S4. The transac- tion qualifies as a reorganization described in section 368(a)(1)(D). Example 4.A, B, and C own 34%, 33%, and 33%, respectively, of the stock of T. The T stock has a fair market value of $100x. A, B, and C each own 33% of the stock of S. D owns the remaining 1% of the stock of S. T sells all of its assets to S in exchange for $100x of cash and immediately liquidates. For purposes of January 29, 20073812007–5 I.R.B. determining whether the distribution requirement of sections 368(a)(1)(D) and 354(b)(1)(B) is met, under paragraph (l)(2)(iii) of this section, D’s ownership of ade minimisamount of stock of S is disregarded and the transaction is treated as if there is complete share- holder identity and proportionality of ownership in T and S. Because there is complete shareholder identity and proportionality of ownership in T and S, under paragraph (l)(2)(i) of this section, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied notwithstanding the fact that no S stock is issued. Pursuant to paragraph (l)(2)(i) of this sec- tion, S will be deemed to issue a nominal share of S stock to T in addition to the $100x of cash actually exchanged for the T assets, T will be deemed to dis- tribute all such consideration to A, B, and C, and the nominal S stock will be deemed transferred among the S shareholders to the extent necessary to reflect their actual ownership of S. The transaction qualifies as a reorganization described in section 368(a)(1)(D). Example 5.ThefactsarethesameasinEx- ample 4except that A, B, and C own 34%, 33%, and 33%, respectively, of the common stock of T and S. D owns preferred stock in S described in sec- tion 1504(a)(4). For purposes of determining whether the distribution requirement of sections 368(a)(1)(D) and 354(b)(1)(B) is met, under paragraph (l)(2)(iii) of this section, D’s ownership of S stock described in section 1504(a)(4) is ignored and the transaction is treated as if there is complete shareholder iden- tity and proportionality of ownership in T and S. Be- cause there is complete shareholder identity and pro- portionality of ownership in T and S, under paragraph (l)(2)(i) of this section, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satis- fied notwithstanding the fact that no S stock is issued. Pursuant to paragraph (l)(2)(i) of this section, S will be deemed to issue a nominal share of S stock to T in addition to the $100x of cash actually exchanged for the T assets, and T will be deemed to distribute all such consideration to A, B, and C. The transac- tion qualifies as a reorganization described in section 368(a)(1)(D). Example 6. AandBeachown50%ofthestock of T. The T stock has a fair market value of $100x. B and C own 90% and 10%, respectively, of the stock of S. T sells all of its assetsto S in exchange for $100x of cash and immediately liquidates. Because complete shareholder identity and proportionality of ownership in T and S does not exist, paragraph (l)(2)(i) of this section does not apply. The requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are not satisfied, and the transaction does not qualify as a reorganization described in section 368(a)(1)(D). (4)Effective date.(i)In general.This section applies to transactions occurring on or after March 19, 2007, except that they do not apply to any transaction occur- ring pursuant to a written agreement which is binding before December 19, 2006, and at all times thereafter. A taxpayer may apply the provisions of these temporary regulations to transactions occurring be- fore March 19, 2007. However, the trans- feror corporation, the transferee corpora- tion, any direct or indirect transferee of transferred basis property from either of the foregoing, and any shareholder of the transferor or transferee corporation may not apply the provisions of these tempo- rary regulations unless all such taxpayers apply the provisions of the temporary reg- ulations. (ii)Expiration.This section expires on or before December 18, 2009. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved December 6, 2006. Eric Solomon, Acting Deputy Assistant Secretary oftheTreasury(TaxPolicy). (Filed by the Office of the Federal Register on December 18, 2006, 8:45 a.m., and published in the issue of the Federa l Register for December 19, 2006, 71 F.R. 75879) Section 409.—Qualifi- cations for Tax Credit Employee Stock Own- ership Plans 26 CFR 1.409(p)–1: Prohibited allocation of securi- ties in an S corporation. T.D. 9302 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Prohibited Allocations of Securities in an S Corporation AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations that provide guidance concerning requirements under section 409(p) of the Internal Revenue Code for employee stock ownership plans (ESOPs) holding stock of Subchapter S corporations. These final regulations generally affect plan sponsors of, and participants in, ESOPs holding stock of Subchapter S corporations. DATES:Effective Date:These regulations are effective December 20, 2006. Applicability Dates:These regulations are generally applicable with respect to plan years beginning on or after January 1, 2006. See the Effective Date section of the preamble for specific information. FOR FURTHER INFORMATION CONTACT: John T. Ricotta or Veronica A. Rouse at (202) 622–6090 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains final regula- tions (26 CFR Part 1) under section 409(p) of the Internal Revenue Code (Code). Section 409(p)(1) requires an ESOP holding employer securities consisting of stockinanScorporationtoprovidethat, during an allocationyear,noportionof the assets of the plan attributable to, or allocable in lieu of, the employer securi- ties may accrue (or be allocated directly or indirectly under any plan of the em- ployer meeting the requirements of section 401(a)) for the benefitof any disqualified person. Section 409(p)(3)(A) provides that a nonallocation year includes any plan year during which the ownership of the S corporation is so concentrated among disqualified persons that they own or are deemed to own at least 50 percent of its shares. Section 409(p)(4) provides, in gen- eral, that a disqualified person is any per- son whose deemed-owned ESOP shares (allocated ESOP shares and proportion of suspense account shares) are at least 10 percent of the number of deemed-owned shares of S corporation stock held by an ESOP or for whom the aggregate num- ber of shares owned by such person and the members of such person’s family is at least 20 percent of deemed-owned ESOP shares. Under section 409(p)(5), the determination of whether a person is a disqualified person and whether a plan year is a nonallocation year is also made separately taking into account synthetic equity if such treatment results in treating the person as a disqualified person or the year as a nonallocation year. Temporary regulations (T.D. 9081, 2003–2 C.B. 420) under section 409(p) were issued on July 21, 2003, (68 FR 42970). The text of those temporary regu- lations also served as the text of a notice of proposed rulemaking (REG–129709–03, 2007–5 I.R.B.382January 29, 2007 2003–2 C.B. 506) published at 68 FR 43058. The 2003 regulations provided guidance on identifying disqualified per- sons, determining whether an ESOP has a nonallocation year, and defining syn- thetic equity under section 409(p)(5), and reserved some issues, including the def- inition of a prohibited allocation, the tax effect of a prohibited allocation, and cer- tain issues relating to the definition of synthetic equity. A public hearing on the 2003 regula- tions was held on November 17, 2003. New temporary regulations under section 409(p) (T.D. 9164, 2005–1 C.B. 320) were published in theFederal Registeron De- cember 17, 2004, (69 FR 75455). The new temporary regulations (2004 tempo- rary regulations) addressed certain issues raised in the comments, as well as address- ing the topics reserved in the 2003 tem- porary regulations. The text of the 2004 temporary regulations also served as the text for a notice of proposed rulemaking (REG–129709–03, 2005–1 C.B. 351) pub- lished at 69 FR 75492. A public hearing on the 2004 proposed regulations was held on April 20, 2005. After consideration of the comments re- ceived, these final regulations adopt the provisions of the proposed regulations with certain modifications discussed in this preamble. Explanation of Provisions Definition of Prohibited Allocation These regulations retain the rule of the 2004 temporary regulations concern- ing prohibited allocations under which there is an impermissible accrual to the extent employer securities consisting of stock in an S corporation are held under the ESOP for the benefit of a disquali- fied person during a nonallocation year. Thus, in the event of a nonallocation year, S corporation shares held in a disquali- fied person’s account and all other ESOP assets attributable to S corporation stock, including distributions, sales proceeds, and earnings, are treated as an imper- missible accrual whether attributable to contributions in the current year or a prior year. A commentatorquestioned whether the definition of prohibited allocation in the 2004 temporary regulations should include account balances of disqualified persons from prior years. The rule of the 2004 temporary regulations has been retained because it is consistent with the intent of the statute, and the IRS and Trea- sury Department believe it is necessary to prevent the concentration of ownership interests that section 409(p) was intended to prevent. A commentator also questioned the treatment of proceeds from the sale of stock previously allocated to a disqual- ified person’s account under the 2004 temporary regulations. The commenta- tor expressed concern that treating the sales proceeds as an impermissible accrual when the original allocation of stock is already a prohibitedallocation is a dou- ble penalty. The final regulations do not change this rule in the 2004 temporary regulations. An allocation of sales pro- ceeds from stock held for the benefit of a disqualified person back into the account of the disqualified person is as valuable an accrual for the disqualified person as an investment in employer stock. This treatment is also consistent with the pro- hibition in section 409(p)(1) with respect to amounts that are “allocable in lieu of” employer stock. Effect of a Prohibited Allocation These regulations retain the rule of the 2004 regulations that if there is a prohib- ited allocation during anonallocation year, the ESOP fails to satisfy the requirements of section 4975(e)(7) and ceases to be an ESOP. As a result, the exemption from the excise tax on prohibited transactions for loans to leveraged ESOPs contained in section 4975(d)(3) would cease to apply to any loan (with the result that the employer would owe an excise tax with respect to the previously exempt loan). These regula- tions clarify that an additional result would be the plan’s failure to satisfy the qualifica- tion requirements under section 401(a) for not operating the plan in accordance with its terms to reflect section 409(p). Other consequences include imposition of an ex- cise tax on the S corporation under sec- tion 4979A. An example has been added to these final regulations to illustrate the impact of these rules on an S corporation ESOP. These regulations include the rule from the 2004 regulations under which a pro- hibited allocation is a deemed distribution that is not an eligible rollover distribution. These regulations also add that same rule to the list of distributions that are not el- igible rollover distributions in the regula- tions under section 402(c) (at §1.402(c)–2 of the Treasury Regulations). As a result, under recently proposedregulations relat- ing to designated Roth contributions under section 402A, a deemed distribution as a result of a section 409(p) prohibited alloca- tion with respect to a designated Roth ac- count would not constitute a qualified dis- tribution for purposes of section 402A. See proposed §1.402A–1, A–11, at 71 FR 4320 (January 26, 2006). Prevention of Nonallocation Year The preamble to the 2004 regulations described methods that a plan might use to prevent the occurrence of a nonalloca- tion year, including (1) a reduction of syn- thetic equity (for example, through can- cellation or distribution), (2) a sale of the S corporation securities held in the partic- ipant’s ESOP account before a nonalloca- tion year occurs so that the account is not invested in S corporation stock, or (3) a transfer of the S corporation securities held for the participant under the ESOP into a separate portion of the plan that is not an ESOP or to another qualified plan of the employer that is not an ESOP. Any methods of preventing a nonallo- cation year must satisfy applicable legal and qualification requirements, including the nondiscrimination requirements of section 401(a)(4) (including the rules at §1.401(a)(4)–4 relating to benefits, rights and features), and implementation of these methods must be completed before a non- allocation year occurs. These regulations retain the special rule provided in the 2004 regulations for applying the nondis- crimination requirements under section 401(a)(4) for a plan that uses the transfer method. Thus, these regulations provide that, if a transfer is made from an ESOP to a separate portion of the plan (or to another qualified plan of the employer) that is not an ESOP in order to prevent a nonalloca- tion year, then both the ESOP and the plan that is not an ESOP will not fail to satisfy the requirements of §1.401(a)(4)–4 merely because of the transfer. Similarly, these regulations provide that, subsequent to the transfer, the plan will not fail to satisfy the requirements of §1.401(a)(4)–4 merely be- January 29, 20073832007–5 I.R.B. cause of the benefits, rights, and features with respect to the transferred benefits if those benefits, rights, and features would satisfy the requirements of §1.401(a)(4)–4 if the mandatory disaggregation rule for ESOPs at §1.410(b)–7(c)(2) did not ap- ply. These regulations clarify that any such transfers must be effectuated by an affirmative action taken no later than the date of the transfer, and all subsequent ac- tions (including benefit statements) must be consistent with the transfer having oc- curred on that date. Further, in order to use the transfer method to prevent a non- allocation year, the plan must provide for the transfer of the stock to the non-ESOP portion of the plan. A commentator described another method of preventing a nonallocation year under which stock of a participant is exchanged for cash or other assets, which are already in the accounts of other partici- pants in order to change the stock holdings among participants before a nonallocation year occurs, but which does not change the overall stock holding of the ESOP trust. This method has been referred to as reshuffling. The commentator requested that relief from the nondiscriminatory availability requirements be extended to this method. Absent a special rule for applying the nondiscrimination requirements of section 401(a)(4), it will be difficult for a plan to prevent a nonallocation year through reshuffling without violating section 401(a)(4). The right of each par- ticipant to have or not have a particular investment in his or her account (either as a participant-directed investment or as a trustee-directed investment) is a plan right or feature that is subject to the current and effective availability requirements of §1.401(a)(4)–4. Accordingly, if assets in the accounts of one or more non-highly compensated employees (NHCEs) are mandatorily exchanged, then, in the ab- sence of other relevant factors, the plan would generally be expected to fail to satisfy the nondiscriminatory availability requirements of §1.401(a)(4)–4. The IRS and Treasury Department do not believe that it would be appropriate to provide a special rule that would materi- ally weaken the standard for nondiscrim- inatory availability of participant rights to a particular investment under the plan. By contrast, the special nondiscrimina- tion rules for stock transferred out of the ESOP do not change the rights of NHCEs to any particular investment in the plan as a whole, but simply allow the transfer and allow the rights of participants whose stock is transferred out of the ESOP to be taken into account in determining whether the rights of participants whose stock remains in the ESOP satisfy the nondis- criminatory availability requirements of §1.401(a)(4)–4. An S corporation may be able to achieve the same result as reshuffling by reducing contributions for HCEs who are or may become disqualified persons, by providing additional benefits to NHCEs who are not disqualified persons, by ex- panding coverage to include all employ- ees, or by diversifying out of employer stock for HCEs who are or may become disqualified persons and who are qualified participants within the meaning of section 401(a)(28)(B)(iii) (that is, by mandating diversification using one of the diver- sification options that are offered to all qualified participants, for which there is an existing special nondiscrimination rule at §1.401(a)(4)–4(d)(6)). Thus, in addi- tion to plan transfers, any of these actions may help prevent the concentration of deemed-owned ESOP shares that section 409(p) prohibits, without the nondiscrimi- nation problems otherwise associated with reshuffling. Of course, any transfer or other method used to ensure compliance with section 409(p) must also satisfy any other legal requirements that may apply, including section 407(b)(2) of the Em- ployee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93–406 (which, in relevant part, generally prohibits a plan from investing more than 10 percent of elective deferral accounts in employer stock, unless the plan is an ESOP, the investment is at the direction of the participant, or another exception applies). Treatment of Family Members as Disqualified Persons The 2004 regulations included a num- ber of attribution rules, which these regu- lations retain, including the application of the section 318 attribution rules to own- ership of synthetic equity in determining who is a disqualified person. Section 409(p) contains references to the sec- tion 318 rules in certain cases, such as in determining a nonallocation year, but commentators pointed out that the section 318 rules did not apply for purposes of the disqualified person definition, which was not reflected in an example. Another commentator pointed out that the rules for determining whether family members are disqualified persons varies accord- ing to the individual being tested. For example, the technical language of sec- tion 409(p)(4)(D) treats parents-in-law as members of a married child’s family when testing whether a child is a disqualified person, but not as members of the same family as the child’s parents when testing whether the child’s parents are disquali- fied persons. In response to comments, the regulations have been modified to clarify these rules, including revisions in the ex- amples to illustrate the application of the rules to specific factual patterns. Determination of Number of Shares of Non-Stock-Based Synthetic Equity These regulations retain the rules from both the 2003 and the 2004 regulations regarding calculation of the number of shares of synthetic equity that are not de- termined by reference to shares of stock of the S corporation. These regulations provide that the person who is entitled to the synthetic equity is treated as own- ing a number of shares of stock in the S corporation equal to the present value of the synthetic equity (with such value determined without regard to any lapse restriction as defined under the section 83 regulations) divided by the fair market value of a share of the S corporation’s stock as of the same date. These regula- tions also retain the special rule under the 2004 regulations that permits the ESOP to provide, on a reasonable and consistent basis for all persons, for the number of synthetic equity shares treated as owned on a determination date to remain constant for up to a 3-year period from that date (triennial method). This rule addresses concerns raised in comments to the 2003 regulations regarding the volatility of the number of shares of synthetic equity where that calculation is based on the value of an S corporation share. A commentator questioned whether the triennial method of the 2004 regulations should be expanded to permit a more flex- 2007–5 I.R.B.384January 29, 2007 ible triennial period that allows for the ac- celeration or delay of the triennial determi- nation date. The commentator argued that, since the triennial method’s purpose is to eliminate the risk attributable to volatility of the present value of the nonqualified de- ferred compensation stock and the risk at- tributable to the fair market value of com- pany stock, the inability to delay or ac- celerate the date, automatically and daily if necessary, weakens the purpose of the method. These regulations include changes in the triennial methodology to permit the ability, during the 3-year period, to accel- erate a determination date prospectively in the event of a change in the plan year or any merger, consolidation, or trans- fer of ESOP assets under section 414(l). However, a determination date may not be changed retroactively and the change must be effectuated by a plan amendment adopted before the new determination date. 1 A commentator also requested clar- ification regarding how shares of syn- thetic equity are calculated with respect to nonqualified deferred compensation. Specifically, the commentator wanted to know what discount rate should be used to calculate the present value of nonqual- ified deferred compensation, and how to determine the number of equivalent shares for a split-dollar life insurance arrange- ment. These regulations do not mandate a specific discount rate for calculating the present value of nonqualified deferred compensation or a specific method for de- termining the equivalent number of shares for a split dollar arrangement. However, any assumptions used for such purposes must be reasonable. Finally, a commentator asked whether an individual S corporation share- holder’s right of first refusal to acquire S corporation stock from an ESOP for its fair market value is considered syn- thetic equity. The regulations have been revised to clarify that the right of first re- fusal to acquire stock held by an ESOP is not treated as a right to acquire stock of an S corporation under these regulations if the right to acquire stock would not be taken into account under §1.1361–1(l)(2)(iii)(A) in determining whether an S corporation has a second class of stock and the price at which the stock is acquired under the right of first refusal is not less than the price determined for purposes of the put right required by section 409(h). See §54.4975–11(d)(5) of the Excise Tax Reg- ulations. Of course, any right of first refusal must comply with the require- ments of §54.4975–7(b)(9) of the Excise Tax Regulations. In addition, these regula- tions give the Commissioner the authority to treat a right of first refusal as synthetic equity if the Commissioner determines, based on the facts and circumstances, that the right to acquire stock held by the ESOP constitutes an avoidance or evasion of section 409(p). Effective Dates These regulations generally are appli- cable for plan years beginning on or after January 1, 2006. However, these regula- tions retain, by cross reference, the 2004 regulations for plan years beginning before January 1, 2006. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Or- der 12866. Therefore, a regulatory assess- ment is not required. It also has been de- termined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations, and because the regulation does not im- pose a collection of information require- ment upon small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the tem- porary and proposed regulations preced- ing these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for com- ment on its impact on small business. Drafting Information The principal authors of these regulations are John T. Ricotta and Veronica A. Rouse of the Office of the Di- vision Counsel/Associate Chief Counsel (Tax Exempt and Government Entities); however, other personnel from the IRS and Treasury participated in their devel- opment. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry to read, in part, as follows: Authority: 26 U.S.C. 7805 * * * Section 1.409(p)–1 is also issued under 26 U.S.C. 409(p)(7). * * * Par. 2. Section 1.402(c)–2, A–4, is revised by redesignating paragraph (g) as (h) and adding a new paragraph (g) to read as follows: §1.402(c)–2 Eligible rollover distributions; questions and answers. ***** A–4. *** (g) Prohibited allocations that are treated as deemed distributions pursuant to section 409(p). * * * Par. 3. Section1.409(p)–1isaddedto read as follows: §1.409(p)–1 Prohibited allocation of securities in an S corporation. (a)Organization of this section and def- inition—(1)Organization of this section. Section 409(p) applies if a nonallocation year occurs in an ESOP that holds shares of stock of an S corporation that are em- ployer securities. Paragraph (b) of this sec- tion sets forth the general rule under sec- tion 409(p)(1) and (2) prohibiting any ac- crual or allocation to a disqualified per- son in a nonallocation year. Paragraph (c) of this section sets forth rules under sec- tion 409(p)(3), (5), and (7) for determining whether a year is a nonallocation year, gen- erally based on whether disqualified per- sons own at least 50 percent of the shares of the S corporation,either taking into ac- count only the outstanding shares of the S corporation (including shares held by the 1 As indicated in Notice 2005–95,2005–2 C.B. 1172, dated December 19, 2005, the general deadline for discretionary amendments in Rev. Proc. 2005–66, 2005–2 C.B. 509, does not apply if a statute or regulation specifically provides an earlier deadline. These regulations provide such an earlier deadline. January 29, 20073852007–5 I.R.B. ESOP) or taking into account both the out- standing shares and synthetic equity of the S corporation. Paragraphs (d), (e), and (f) of this section contain definitions of dis- qualified person under section 409(p)(4) and (5), deemed-owned ESOP shares un- der section 409(p)(4)(C), and synthetic eq- uity under section 409(p)(6)(C). Paragraph (g) of this section contains a standard for determining when the principal purpose of the ownership structure of an S corporation constitutes an avoidance or evasion of sec- tion 409(p). (2)Definitions. The following defini- tions apply for purposes of section 409(p) and this section, as well as for purposes of section 4979A, which imposes an excise tax on certain events. (i)Deemed-owned ESOP shareshas the meaning set forth in paragraph (e) of this section. (ii)Disqualified personhas the mean- ing set forth in paragraph (d) of this sec- tion. (iii)Employerhas the meaning set forth in §1.410(b)–9. (iv)Employer securitiesmeans em- ployer securities within the meaning of section 409(l). (v)ESOPmeans an employee stock ownership plan within the meaning of section 4975(e)(7). (vi)Prohibited allocationhas the mean- ing set forth in paragraph (b)(2) of this sec- tion. (vii)S corporationmeans S corporation within the meaning of section 1361. (viii)Synthetic equityhas the meaning set forth in paragraph (f) of this section. (b)Prohibited allocation in a nonallo- cation year—(1)General rule. Section 409(p)(1) provides that an ESOP holding employer securities consisting of stock in an S corporation must provide that no por- tion of the assets of the plan attributable to (or allocable in lieu of) such employer se- curities may, during a nonallocation year, accrue under the ESOP, or be allocated di- rectly or indirectly under any plan of the employer (including the ESOP) meeting the requirements of section 401(a), for the benefit of any disqualified person. (2)Additional rules—(i)Prohibited allocation definition. For purposes of section 409(p) and this section, aprohib- ited allocationmeans an impermissible accrual or an impermissible allocation. Whether there is impermissible accrual is determined under paragraph (b)(2)(ii) of this section and whether there is an impermissible allocation is determined under paragraph (b)(2)(iii) of this section. The amount of the prohibited allocation is equal to the sum of the amount of the impermissible accrual plus the amount of the impermissible allocation. (ii)Impermissible accrual.Thereisan impermissible accrual to the extent that employer securities consisting of stock in an S corporation owned by the ESOP and any assets attributable thereto are held under the ESOP for the benefit of a dis- qualified person during a nonallocation year. For this purpose,assets attributable to stock in an S corporation owned by an ESOP include any distributions, within the meaning of section 1368, made on S corporation stock held in a disqualified person’s account in the ESOP (including earnings thereon), plus any proceeds from the sale of S corporation securities held for a disqualified person’s account in the ESOP (including any earnings thereon). Thus, in the event of a nonallocation year, all S corporation shares and all other ESOP assets attributable toS corporation stock, including distributions, sales proceeds, and earnings on either distributions or proceeds, held for the account of such dis- qualifiedpersonintheESOPduringthat year are an impermissible accrual for the benefit of that person, whether attributable to contributions in the current year or in prior years. (iii)Impermissible allocation.Anim- permissible allocation occurs during a nonallocation year to the extent that a con- tribution or other annual addition (within the meaning of section 415(c)(2)) is made with respect to the account of a disqual- ified person, or the disqualified person otherwise accrues additional benefits, di- rectly or indirectly under the ESOP or any other plan of the employer qualified under section 401(a) (including a release and al- location of assets from a suspense account, as described at §54.4975–11(c) and (d) of this chapter) that, for the nonallocation year, would have been added to the ac- count of the disqualified person under the ESOP and invested in employer securities consisting of stock in an S corporation owned by the ESOP but for a provision in the ESOP that precludes such addition to the account of the disqualified person, and investment in employer securities during a nonallocation year. (iv)Effects of prohibited alloca- tion—(A)Deemed distribution.Ifaplan year is a nonallocation year, the amount of any prohibited allocation in the account of a disqualified person as of the first day of the plan year, as determined under this paragraph (b)(2), istreated as distributed from the ESOP (or other plan of the em- ployer) to the disqualified person on the first day of the plan year. In the case of an impermissible accrual or impermissible allocation that is not in the account of the disqualified person as of the first day of the plan year, the amount of the prohibited allocation, as determined under this para- graph (b)(2), is treated as distributed on the date of the prohibited allocation. Thus, the fair market value of assets in the dis- qualified person’s account that constitutes an impermissible accrual or allocation is included in gross income (to the extent in excess of any investment in the contract allocable to such amount) and is subject to any additional income tax that applies under section 72(t). Adeemed distribution under this paragraph (b)(2)(iv)(A) is not an actual distribution from the ESOP. Thus, the amount of the prohibited allocation is not an eligible rollover distribution under section 402(c). However, for purposes of applying sections 72 and 402 with respect to any subsequent distribution from the ESOP, the amount that the disqualified person previously took into account as in- come as a result of the deemed distribution is treated as investment in the contract. (B)Other effects. If there is a prohib- ited allocation, then the plan fails to satisfy the requirements of section 4975(e)(7) and ceases to be an ESOP. In such a case, the exemption from the excise tax on prohib- ited transactions for loans to leveraged ESOPs contained in section 4975(d)(3) would cease to apply to any loan (with the result that the employer would owe an excise tax with respect to the previously exempt loan). As a result of these failures, the plan would lose the prohibited trans- actionexemptionforloanstoanESOP under section 4975(d)(3) of the Code and section 408(b)(3) of Title I of the Em- ployee Retirement Income Security Act of 1974, as amended (ERISA). Finally, a plan that does not operate in accordance with its terms to reflectsection 409(p) fails to satisfy the qualification requirements 2007–5 I.R.B.386January 29, 2007 of section 401(a), which would cause the corporation’s S election to terminate under section 1362. See also section 4979A(a) which imposes an excise tax in certain events, including a prohibited allocation under section 409(p). (C)Example. Therulesofthispara- graph (b)(2)(iv) are illustrated by the fol- lowing example: Example.(i)Facts. CorporationM,an S corporation under section 1361, establishes Plan P as an ESOP in 2006, with a calendar plan year. Plan P is a qualified plan that includes terms providing that a prohibited allocation will not occur during a nonallocation year in accordance with section 409(p). On December 31, 2006, all of the 1,000 outstanding shares of stock of Corporation M, with a fair market value of $30 per share, are contributed to Plan P and allocated among accounts established within Plan P for the benefit of Corporation M’s three employees, individuals A, B, and C, based on their compensa- tion for 2006. As a result, on December 31, 2006, participant A’s account includes 800 of the shares ($24,000); participant B’s account includes 140 of the shares ($4,200); and participant C’s account includes the remaining 60 shares ($1,800). The plan year 2006 is a nonallocation year, participants A and B are disqualified persons on December 31, 2006, and a prohibited allocation occurs for A and B on December 31, 2006. (ii)Conclusion. On December 31, 2006, par- ticipants A and B each have a deemed distribution as a result of the prohibited allocation, resulting in income of $24,000 for participant A and $4,200 for participant B. Corporation M owes an excise tax under section 4979A, based on an amount involved of $28,200. Plan P ceases to be an ESOP on the date of the prohibited allocation (December 31, 2006) and also fails to satisfy the qualification requirements of section 401(a) on that date due to the failure to com- ply with the provisions requiring compliance with section 409(p). As a result of having an ineligible shareholder under section 1361(b)(1)(B), Corpora- tion M ceases to be an S corporation under section 1361 on December 31, 2006. (v)Prevention of prohibited allo- cation—(A)Transfer of account to non-ESOP. An ESOP may prevent a non- allocation year or a prohibited allocation during a nonallocation year by providing for assets (including S corporation secu- rities) allocated to the account of a dis- qualified person (ora person reasonably expected to become a disqualified person absent a transfer described in this para- graph (b)(2)(v)(A)) to be transferred into a separate portion of the plan that is not an ESOP, as described in §54.4975–11(a)(5) of this chapter, or to another plan of the employer that satisfies the requirements of section 401(a) and that is not an ESOP. Any such transfer must be effectuated by an affirmative action taken no later than the date of the transfer, and all subsequent actions (including benefit statements) gen- erally must be consistent with the transfer having occurred on that date. In the event of such a transfer involving S corporation securities, the recipient plan is subject to tax on unrelated business taxable income under section 512. (B)Relief from nondiscrimination re- quirement. Pursuant to this paragraph (b)(2)(v)(B), if a transfer described in paragraph (b)(2)(v)(A) of this section is made from an ESOP to a separate portion of the plan or to another qualified plan of the employer that is not an ESOP, then both the ESOP and the plan or portion of a plan that is not an ESOP do not fail to satisfy the requirements of §1.401(a)(4)–4 merely because of the transfer. Further, subsequent to the transfer, that plan will not fail to satisfy the requirements of §1.401(a)(4)–4 merely because of the benefits, rights, and features with respect to the transferred benefits if those ben- efits, rights, and features would satisfy the requirements of §1.401(a)(4)–4 if the mandatory disaggregation rule for ESOPs at §1.410(b)–7(c)(2) did not apply. (c)Nonallocation year. A year is a non- allocation year if it is described in the gen- eral definition in paragraph (c)(1) of this section or if the special rule of paragraph (c)(3) of this section applies. (1)General definition. For purposes of section 409(p) and this section, anonallo- cation yearmeans a plan year of an ESOP during which, at any time, the ESOP holds any employer securities that are shares of an S corporation and either— (i) Disqualified persons own at least 50 percent of the number of outstanding shares of stock in the S corporation (in- cluding deemed-owned ESOP shares); or (ii) Disqualified persons own at least 50 percent of the sum of: (A) The outstanding shares of stock in the S corporation (including deemed-owned ESOP shares); and (B) The shares of synthetic equity in the S corporation owned by disqualified persons. (2)Attribution rules. For purposes of this paragraph (c), the rules of section 318(a) apply to determine ownership of shares in the S corporation (including deemed-owned ESOP shares) and syn- thetic equity. However, for this purpose, section 318(a)(4) (relating to options to acquire stock) is disregarded and, in ap- plying section 318(a)(1), the members of an individual’s family include members of the individual’s family under paragraph (d)(2) of this section. In addition, an indi- vidual is treated as owning deemed-owned ESOP shares of that individual notwith- standing the employee trust exception in section 318(a)(2)(B)(i). If the attribution rules in paragraph (f)(1) of this section apply, then the rules of paragraph (f)(1) of this section are applied before (and in addition to) the rules of this paragraph (c)(2). (3)Special rule for avoidance or eva- sion. (i) Any ownership structure de- scribed in paragraph (g)(3) of this section results in a nonallocation year. In addition, each individual referred to in paragraph (g)(3) of this section is treated as a disqual- ified person and the individual’s interest in the separate entity described in paragraph (g)(3) of this section is treated as synthetic equity. (ii) Pursuant to section 409(p)(7)(B), the Commissioner, in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), may provide that a nonallocation year occurs in any case in which the principal pur- pose of the ownership structure of an S corporation constitutes an avoidance or evasion of section 409(p). For any year that is a nonallocation year under this para- graph (c)(3), the Commissioner may treat any person as a disqualified person. See paragraph (g) of this section for guidance regarding when the principal purpose of an ownership structure of an S corporation involving synthetic equity constitutes an avoidance or evasion of section 409(p). (4)Special rule for certain stock rights. (i) For purposes of paragraph (c)(1) of this section, a person is treated as own- ing stock if the person has an exercisable right to acquire the stock, the stock is both issued and outstanding, and the stock is held by persons other than the ESOP, the S corporation, or a related entity (as de- fined in paragraph (f)(3) of this section). (ii) This paragraph (c)(4) applies only if treating persons as owning the shares described in paragraph (c)(4)(i) of this section results in a nonalloca- tion year. This paragraph (c)(4) does not applytoarighttoacquirestockofan S corporation held by a shareholder that is subject to Federal income tax that, under January 29, 20073872007–5 I.R.B. §1.1361–1(l)(2)(iii)(A) or (l)(4)(iii)(C), would not be taken into account in deter- mining if an S corporation has a second class of stock, provided that a principal purpose of the right is not the avoidance or evasion of section 409(p). Under the last sentence of paragraph (f)(2)(i) of this section, this paragraph (c)(4)(ii) does not apply for purposes of determining own- ership of deemed-owned ESOP shares or whether an interest constitutes synthetic equity. (5)Application with respect to shares treated as owned by more than one person. For purposes of applying paragraph (c)(1) of this section, if, by application of the rules of paragraph (c)(2), (c)(4), or (f)(1) of this section, any share is treated as owned by more than one person, then that share is counted as a single share and that share is treated as owned by disqualified persons if any of the owners is a disqualified person. (6)Effect of nonallocation year.See paragraph (b) of this section for a pro- hibition applicable during a nonallocation year. See also section 4979A for an ex- cise tax applicable in certain cases, includ- ing section 4979A(a)(3) and (4) which ap- plies during a nonallocation year (whether or not there is a prohibited allocation dur- ing the year). (d)Disqualified persons. A person is a disqualified person if the person is described in paragraph (d)(1), (d)(2), or (d)(3) of this section. (1)General definition. For purposes of section 409(p) and this section, adisquali- fied personmeans any person for whom— (i) The number of such person’s deemed-owned ESOP shares of the S corporation is at least 10 percent of the number of the deemed-owned ESOP shares of the S corporation; (ii) The aggregate number of such person’s deemed-owned ESOP shares and synthetic equity shares of the S corporation is at least 10 percent of the sum of— (A) The total number of deemed-owned ESOP shares of the S corporation; and (B) The person’s synthetic equity shares of the S corporation; (iii) The aggregate number of the S corporation’s deemed-owned ESOP shares of such person and of the mem- bers of such person’s family is at least 20 percent of the number of deemed-owned ESOP shares of the S corporation; or (iv) The aggregate number of the S corporation’s deemed-owned ESOP shares and synthetic equity shares of such person and of the members of such per- son’s family is at least 20 percent of the sum of— (A) The total number of deemed-owned ESOP shares of the S corporation; and (B) The synthetic equity shares of the S corporation owned by such person and the members of such person’s family. (2)Treatment of family members; defi- nition—(i)Rule. Each member of the fam- ily of any person who is a disqualified per- son under paragraph (d)(1)(iii) or (iv) of this section and who owns any deemed- owned ESOP shares or synthetic equity shares is a disqualified person. (ii)General definition. For purposes of section 409(p) and this section,member of the familymeans, with respect to an individual— (A) The spouse of the individual; (B) An ancestor or lineal descendant of the individual or the individual’s spouse; (C) A brother or sister of the individual or of the individual’s spouse and any lineal descendant of the brother or sister; and (D) The spouse of any individual de- scribed in paragraph (d)(2)(ii)(B) or (C) of this section. (iii)Spouse. A spouse of an individual who is legally separated from such individ- ual under a decree of divorce or separate maintenance is not treated as such individ- ual’s spouse under paragraph (d)(2)(ii) of this section. (3)Special rule for certain nonalloca- tion years. See paragraph (c)(3) of this section (relating to avoidance or evasion of section 409(p)) for special rules under which certain persons are treated as dis- qualified persons. (4)Example. The rules of this para- graph (d) are illustrated by the following examples: Example 1.(i)Facts. AnScorporationhas800 outstanding shares, of which 100 are owned by in- dividual O and 700 are held in an employee stock ownership plan (ESOP) during 2006, including 200 shares held in the ESOP account of O, 65 shares held in the ESOP account of participant P, 65 shares held in the ESOP account of participant Q who is P’s spouse, and14sharesheldintheESOPaccountofR,whois the daughter of P and Q. There are no unallocated sus- pense account shares in the ESOP. The S corporation has no synthetic equity. (ii)Conclusion. Under paragraph (d)(1)(i) of this section, O is a disqualified person during 2006 be- cause O’s account in the ESOP holds at least 10% of the shares owned by the ESOP (200 is 28.6% of 700). During 2006, neither P, Q, nor R is a disquali- fied person under paragraph (d)(1)(i) of this section, because each of their accounts holds less than 10% of the shares owned by the ESOP. However, each of P, Q, and R is a disqualified person under paragraph (d)(1)(iii) of this section because P and members of P’s family own at least 20% of the deemed-owned ESOP shares (144 (the sum of 65, 65 and 14) is 20.6% of 700). As a result, disqualified persons own at least 50% of the outstanding shares of the S corporation during 2006 (O’s 100 directly owned shares, O’s 200 deemed-owned shares, P’s65 deemed-owned shares, Q’s 65 deemed-owned shares, and R’s 14 deemed- owned shares are 55.5% of 800). Example 2.(i)Facts. An S corporation has shares that are owned by an ESOP and various individuals. Individuals S and T are married and have a son, U. In- dividuals V and W are married and have a daughter, X. Individuals U and X are married. Individual V has a brother Y. Their percentages of the deemed-owned ESOP shares of the S corporation are as follows: T has 6%; U has 7%; and V has 8%. Neither S, W, X, nor Y has any deemed-owned ESOP shares and the S corporation has no synthetic equity. However, individual S and individual Y each own directly a number of shares of the outstanding shares of the S corporation. (ii)Conclusion. In this example, individual U is a disqualified person under paragraph (d)(1) of this sec- tion (because U’s family consists of S, T, U, V, W, and X, and, in the aggregate, those persons own more than 20% of the deemed-owned ESOP shares) and individ- ual X is also a disqualified person under paragraph (d)(1) of this section (because X’s family consists of S, T, U, V, W, and X, and, in the aggregate, those persons own more than 20% of the deemed-owned ESOP shares). Further, individuals T and V are each a disqualified person under paragraph (d)(2) of this section because each is a member of a family that in- cludes one or more disqualified persons and each has deemed-owned ESOP shares. However, individuals S, W, and Y are not disqualified persons under this paragraph (d). For example, S does not own more than 10% of the deemed-owned ESOP shares, and S’s family, which consists of S, T, U, and X, owns, in the aggregate, only 13% of the deemed-owned ESOP shares (X’s parents are not members of S’s family be- cause the family members of a person do not include the parents-in-law of the person’s descendants). Fur- ther, note that, for purposes of determining whether the ESOP has a nonallocation year under paragraph (c) of this section, the shares directly owned by S and Y would be taken intoaccount as shares owned by disqualified persons under the attribution rules in paragraph (c)(2) of this section. (e)Deemed-owned ESOP shares.For purposes of section 409(p) and this section, a person is treated as owning his or her deemed-owned ESOP shares. Deemed- owned ESOP shares owned by a person mean, with respect to any person— (1) Any shares of stock in the S corporation constituting employer secu- rities that are allocated to such person’s account under the ESOP; and 2007–5 I.R.B.388January 29, 2007 (2) Such person’s share of the stock in the S corporation that is held by the ESOP but is not allocated to the account of any participant or beneficiary (with such per- son’s share to be determined in the same proportion as the shares released and al- located from a suspense account, as de- scribed at §54.4975–11(c) and (d) of the Excise Tax Regulations, under the ESOP for the most recently ended plan year for which there were shares released and allo- cated from a suspense account, or if there has been no such prior release and alloca- tion from a suspense account, then deter- mined in proportion to a reasonable esti- mate of the shares that would be released and allocated in the first year of a loan re- payment). (f)Synthetic equity and rights to ac- quire stock of the S corporation—(1)Own- ership of synthetic equity. For purposes of section 409(p) and this section, synthetic equity means the rights described in para- graph (f)(2) of this section. Synthetic eq- uity is treated as owned by the person that has any of the rights specified in paragraph (f)(2) of the section. In addition, the attri- bution rules as set forth in paragraph (c)(2) of this section apply for purposes of at- tributing ownershipof synthetic equity. (2)Synthetic equity—(i)Rights to ac- quire stock of the S corporation—(A)Gen- eral rule. Synthetic equity includes any stock option, warrant, restricted stock, de- ferred issuance stock right, stock appre- ciation right payable in stock, or similar interest or right that gives the holder the right to acquire or receive stock of the S corporation in the future. Rights to ac- quire stock in an S corporation with respect to stock that is, at all times during the pe- riod when such rights are effective, both issued and outstanding, and held by a per- son other than the ESOP, the S corporation, or a related entity are not synthetic equity but only if that person is subject to federal income taxes. (See also paragraph (c)(4) of this section.) (B)Exception for certain rights of first refusal. A right of first refusal to acquire stock held by an ESOP is not treated as a right to acquire stock of an S corporation under this paragraph if the right to acquire stock would not be taken into account un- der §1.1361–1(l)(2)(iii)(A) in determining if an S corporation has a second class of stockandthepriceatwhichthestockis acquired under the right of first refusal is not less than the price determined un- der section 409(h). See §54.4975–11(d)(5) of the Excise Tax Regulations. The right of first refusal must also comply with the requirements of §54.4975–7(b)(9) of the Excise Tax Regulations. This paragraph (f)(2)(i)(B) does not apply if, based on the facts and circumstances, the Commis- sioner finds that the right to acquire stock held by the ESOP constitutes an avoidance or an evasion of section 409(p). See also section 408(d) of ERISA, under which the exemption provided by section 408(e) of ERISA (and the related exemption at sec- tion 4975(d)(13) of the Code) does not ap- ply to an owner-employee, including an employee or officer of an S corporation who is a 5 percent owner. (ii)Special rule for certain stock rights. Synthetic equity also includes a right to a future payment (payable in cash or any other form other than stock of the S corporation) from an S corporation that is based on the value of the stock of the S corporation, such as appreciation in such value. Thus, for example, synthetic equity includes a stock appreciation right with respect to stock of an S corporation that is payable in cash or a phantom stock unit with respect to stock of an S corporation that is payable in cash. (iii)Rights to acquire interests in or as- sets of an S corporation or a related entity. Synthetic equity includes a right to acquire stock or other similar interests in a related entity to the extent of the S corporation’s ownership. Synthetic equity also includes a right to acquire assets of an S corporation or a related entity other than either rights to acquire goods, services, or property at fair market value in the ordinary course of business or fringe benefits excluded from gross income under section 132. (iv)Special rule for nonqualified de- ferred compensation. (A) Synthetic equity also includes any of the following with re- spect to an S corporation or a related en- tity: any remuneration to which section 404(a)(5) applies; remuneration for which a deduction would be permitted under sec- tion 404(a)(5) if separate accounts were maintained; any right to receive property, as defined in §1.83–3(e) of the Income Tax Regulations (including a payment to a trust described in section 402(b) or to an annuity described in section 403(c)) in a future year for the performance of services; any transfer of property in con- nection with the performance of services to which section 83 applies to the extent that the property is not substantially vested within the meaning of §1.83–3(i) by the end of the plan year in which transferred; and a split-dollar life insurance arrange- ment under §1.61–22(b) entered into in connection with the performance of ser- vices (other than one under which, at all times, the only economic benefit that will be provided under the arrangement is cur- rent life insurance protection as described in §1.61–22(d)(3)). Synthetic equity also includes any other remuneration for ser- vices under a plan, method, or arrangement deferring the receipt of compensation to a date that is after the 15th day of the 3 rd cal- endar month after the end of the entity’s taxable year in which the related services are rendered. However, synthetic equity does not include benefits under a plan that is an eligible retirement plan within the meaning of section 402(c)(8)(B). (B) For purposes of applying paragraph (f)(2)(iv)(A) of this section with respect to an ESOP, synthetic equity does not include any interest described in such paragraph (f)(2)(iv)(A) of this section to the extent that— (1) The interest is nonqualified deferred compensation (within the meaning of sec- tion 3121(v)(2)) that was outstanding on December 17, 2004; (2) The interest is an amount that was taken into account (within the meaning of §31.3121(v)(2)–1(d) of this chapter) prior to January 1, 2005, for purposes of taxation under chapter 21 of the Internal Revenue Code (or income attributable thereto); and (3) The interest was held before the first date on which the ESOP acquires any em- ployer securities. (v)No overlap among shares of deemed-owned ESOP shares or synthetic equity. Synthetic equity under this para- graph (f)(2) does not include shares that are deemed-owned ESOP shares (or any rights with respect to deemed-owned ESOP shares to the extent such rights are specifically provided under section 409(h)). In addition, synthetic equity under a specific subparagraph of this para- graph (f)(2) does not include anything that is synthetic equity under a preceding pro- vision of paragraph (f)(2)(i), (ii), (iii), or (iv) of this section. (3)Related entity. For purposes of this paragraph (f),related entitymeans any en- January 29, 20073892007–5 I.R.B. tity in which the S corporation holds an in- terest and which is a partnership, a trust, an eligible entity that is disregarded as an entity that is separate from its owner un- der §301.7701–3 of this chapter, or a qual- ified subchapter S subsidiary under section 1361(b)(3). (4)Number of synthetic shares—(i) Synthetic equity determined by reference to S corporation shares. In the case of synthetic equity that is determined by reference to shares of stock of the S corporation, the person who is entitled to the synthetic equity is treated as owning the number of shares of stock deliverable pursuant to such synthetic equity. In the case of synthetic equity that is determined by reference to shares of stock of the S corporation, but for which payment is made in cash or other property (besides stock of the S corporation), the number of shares of synthetic equity treated as owned is equal to the number of shares of stock having a fair market value equal to the cash or other property (disregarding lapse restrictions as described in §1.83–3(i)). Where such synthetic equity is a right to purchase or receive S corporation shares, the corresponding number of shares of synthetic equity is determined without regard to lapse restrictions as described in §1.83–3(i) or to any amount required to be paid in exchange for the shares. Thus, for example, if a corporation grants an employee of an S corporation an option to purchase 100 shares of the corpora- tion’s stock, exercisable in the future only after the satisfaction of certain per- formance conditions, the employee is the deemed owner of 100 synthetic eq- uity shares of the corporation as of the date the option is granted. If the same employee were granted 100 shares of re- stricted S corporation stock (or restricted stock units), subject to forfeiture until the satisfaction of performance or service con- ditions, the employee would likewise be the deemed owner of 100 synthetic equity shares from the grant date. However, if the same employee were granted a stock ap- preciation right with regard to 100 shares of S corporation stock (whether payable in stock or in cash), the number of synthetic equity shares the employee is deemed to own equals the number of shares having a value equal to the appreciation at the time of measurement (determined without regard to lapse restrictions). (ii)Synthetic equity determined by ref- erence to shares in a related entity.Inthe case of synthetic equity that is determined by reference to shares of stock (or simi- lar interests) in a related entity, the per- son who is entitled to the synthetic eq- uity is treated as owning shares of stock of the S corporation with the same aggre- gate value as the number of shares of stock (or similar interests) of the related entity (with such value determined without re- gard to any lapse restriction as defined at §1.83–3(i)). (iii)Other synthetic equity—(A)Gen- eral rule. In the case of any synthetic eq- uity to which neither paragraph (f)(4)(i) of this section nor paragraph (f)(4)(ii) of this section apply, the person who is entitled to the synthetic equity is treated as owning on any date a number of shares of stock in the S corporation equal to the present value (on that date) of the synthetic eq- uity (with such value determined without regard to any lapse restriction as defined at §1.83–3(i)) divided by the fair market value of a share of the S corporation’s stock as of that date. (B)Use of annual or more frequent determination dates. A year is a non- allocation year if the thresholds in para- graph (c) of this section are met at any time during that year. However, for pur- poses of this paragraph (f)(4)(iii), an ESOP may provide that the number of shares of S corporation stock treated as owned by a person who is entitledto synthetic equity to which this paragraph (f)(4)(iii) applies is determined annually (or more frequently), as of the first day of the ESOP’s plan year or as of any other reasonable determina- tion date or dates during a plan year. If the ESOP so provides, the number of shares of synthetic equity to which this paragraph (f)(4)(iii) applies that are treated as owned by that person for any period from a given determination date through the date imme- diately preceding the next following de- termination date is the number of shares treated as owned on the given determina- tion date. (C)Use of triennial recalculations.(1) Although an ESOP must have a determina- tion date that is no less frequent than annu- ally, if the terms of the ESOP so provide, thenthenumberofsharesofsyntheticeq- uity with respect to grants of synthetic eq- uity to which this paragraph (f)(4)(iii) ap- plies may be fixed for a specified period from a determination date identified un- der the ESOP through the day before a de- termination date that is not later than the third anniversary of the identified determi- nation date. Thus, the ESOP must pro- vide for the number of shares of synthetic equity to which this paragraph (f)(4)(iii) applies to be re-determined not less fre- quently than every three years, based on the S corporation share value on a deter- mination date that is not later than the third anniversary of the identified deter- mination date and the aggregate present value of the synthetic equity to which this paragraph (f)(4)(iii) applies (including all grants made during the three-year period) on that determination date. (2) However, additional accruals, al- locations, or grants (to which this para- graph (f)(4)(iii) applies) that are made dur- ing such three-year period are taken into account on each determination date during that period, based on the number of syn- thetic equity shares resulting from the ad- ditional accrual, allocation, or grant (deter- mined as of the determination date on or next following the date of the accrual, al- location, or grant). SeeExample 3of para- graph (h) of this section for an example il- lustrating this paragraph (f)(4)(iii)(C). (3) If, as permitted under this paragraph (f)(4)(iii)(C), an ESOP provides for the number of shares of synthetic equity to be fixed for a specified period from a deter- mination date to a subsequent determina- tion date, then that subsequent determina- tion date can be changed to a new determi- nation date, subject to the following con- ditions: (i) The change in the subsequent deter- mination date must be effectuated through a plan amendment adopted before the new determination date; (ii) The new determination date must be earlier than the prior determination date (that is, the new determination date must be earlier than the determination date ap- plicable in the absence of the plan amend- ment); (iii) The conditions in paragraph (f)(4)(iii)(C)(2)ofthissectionmustbe satisfied measured from the new determi- nation date; and (iv) Except to the extent permitted by the Commissioner in revenue rul- ings, notices, or other guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), the 2007–5 I.R.B.390January 29, 2007 change must be adopted in connection with either a change in the plan year of the ESOP or a merger, consolidation, or transfer of plan assets of the ESOP under section 414(l) (and the new determination date must be consistent with that plan year change or section 414(l) event). (4)Conditions for application of rules. This paragraph (f)(4)(iii)(C) only applies with respect to grants of synthetic equity to which this paragraph (f)(4)(iii) applies. In addition, paragraph (f)(4)(iii)(C) of this section applies only if the fair mar- ket value of a share of the S corporation securities on any determination date is not unrepresentative of the value of the S corporation securities throughout the rest of the plan year and only if the terms of the ESOP include provisions conform- ing to paragraph (f)(4)(iii)(C)(1)ofthis section which are consistently used by the ESOP for all persons. In addition, paragraph (f)(4)(iii)(C)(1) of this section applies only if the terms of the ESOP in- clude provisions conforming to paragraphs (f)(4)(iii)(C)(1) of this section which are consistently used by the ESOP for all per- sons. (iv)Adjustment of number of synthetic equity shares where ESOP owns less than 100 Percent of S corporation.Thenum- ber of synthetic shares otherwise deter- mined under this paragraph (f)(4) is de- creased ratably to the extent that shares of the S corporation are owned by a person who is not an ESOP and who is subject to Federal income taxes. For example, if an S corporation has 200 outstanding shares, of which individual A owns 50 shares and the ESOP owns the other 150 shares, and individual B would be treated under this paragraph (f)(4) as owning 100 synthetic equity shares of the S corporation but for this paragraph (f)(4)(iv), then, under the rule of this paragraph (f)(4)(iv), the num- ber of synthetic shares treated as owned by B under this paragraph (f)(4) is decreased from 100 to 75 (because the ESOP only owns 75 percent of the outstanding stock of the S corporation, rather than 100 per- cent). (v)Special rule for shares with greater voting power than ESOP shares. Notwith- standing any other provision of this para- graph (f)(4), if a synthetic equity right includes (directly or indirectly) a right to purchase or receive shares of S corporation stock that have per-share voting rights greater than the per-share voting rights of one or more shares of S corporation stock held by the ESOP, then the number of shares of deemed owned synthetic equity attributable to such right is not less than the number of shares that would have the same voting rights if the shares had the same per-share voting rights as shares held by the ESOP with the least voting rights. For example, if shares of S corporation stock held by the ESOP have one voting right per share, thenan individual who holds an option to purchase one share with 100 voting rights is treated as owning 100 shares of synthetic equity. (g)Avoidance or evasion of section 409(p) involving synthetic equity—(1) General rule. Paragraph (g)(2) of this section sets forth a standard for determin- ing whether the principal purpose of the ownership structure of an S corporation involving synthetic equity constitutes an avoidance or evasion of section 409(p). Paragraph (g)(3) of this section identi- fies certain specific ownership structures that constitute an avoidance or evasion of section 409(p). See also paragraph (c)(3) of this section for a rule under which the ownership structures in paragraph (g)(3) of this section result in a nonallocation year for purposes of section 409(p). (2)Standard for determining when there is an avoidance or evasion of sec- tion 409(p) involving synthetic equity.For purposes of section 409(p) and this sec- tion, whether the principal purpose of the ownership structure of an S corporation involving synthetic equity constitutes an avoidance or evasion of section 409(p) is determined by taking into account all the surrounding facts and circumstances, including all features of the ownership of the S corporation’s outstanding stock and related obligations (including synthetic equity), any shareholders who are taxable entities, and the cash distributions made to shareholders, to determine whether, to the extent of the ESOP’s stock own- ership, the ESOP receives the economic benefits of ownership in the S corporation that occur during the period that stock of the S corporation is owned by the ESOP. Among the factors indicating that the ESOP receives those economic ben- efits include shareholder voting rights, the right to receive distributions made to shareholders, and the right to benefit from the profits earned by the S corporation, including the extent to which actual dis- tributions of profits are made from the S corporation to the ESOP and the extent to which the ESOP’s ownership interest in undistributed profits and future profits is subject to dilution as a result of synthetic equity. For example, the ESOP’s owner- ship interest is not subject to dilution if the total amount of synthetic equity is a rel- atively small portion of the total number of shares and deemed-owned shares of the S corporation. (3)Specific transactions that constitute an avoidance or evasion of section 409(p) involving segregated profits.Takinginto account the standard in paragraph (g)(2) of this section, the principal purpose of the ownership structure of an S corporation constitutes an avoidance or evasion of sec- tion 409(p) in any case in which— (i) The profits of the S corporation gen- erated by the business activities of a spe- cific individual or individuals are not pro- vided to the ESOP, but are instead substan- tially accumulated and held for the ben- efit of the individual or individuals on a tax-deferred basis within an entity related to the S corporation, such as a partner- ship, trust, or corporation (such as in a sub- sidiary that is a disregarded entity), or any other method that has the same effect of segregating profits for the benefit of such individual or individuals (such as nonqual- ified deferred compensation described in paragraph (f)(2)(iv) of this section); (ii) The individual or individuals for whom profits are segregated have rights to acquire 50 percent or more of those profits directly or indirectly (for example, by pur- chase of the subsidiary); and (iii) A nonallocation year would oc- cur if this section were separately applied with respect to either the separate entity or whatever method has the effect of seg- regating profits of the individual or indi- viduals, treating such entity as a separate S corporation owned by an ESOP (or in the case of any other method of segregation of profits by treating those profits as the only assets of a separate Scorporation owned by an ESOP). (h)Examples. The rules of this section are illustrated by the following examples: Example 1.Relating to determination of disquali- fied persons and nonallocation year if there is no syn- thetic equity.(i)Facts. Corporation X is a calendar year S corporation that maintains an ESOP. X has a single class of common stock, of which there are a total of 1,200 shares outstanding. X has no synthetic January 29, 20073912007–5 I.R.B. equity. In 2006, individual A, who is not an employee of X (and is not related to any employee of X), owns 100 shares directly, B, who is an employee ofX,owns 100 shares directly, and the remaining 1,000 shares are owned by an ESOP maintained by X for its em- ployees. The ESOP’s 1,000 shares are allocated to the accounts of individuals who are employees of X (none of whom are related), as set forth in columns 1 and 2 in the following table: 1 Shareholders 2 Deemed-Owned ESOP Shares (total of 1,000) 3 Percentage Deemed-Owned ESOP Shares 4 Disqualified Person B33033%Yes C 14514.5% Yes D 757.5% No E303%No F202%No Other participants400 (none exceed 10 shares)1% or lessNo (ii)Conclusion with respect to disqualified per- sons. As shown in column 4 in the table contained in paragraph (i) ofExample 1, individuals B and C are disqualified persons for 2006 under paragraph (d)(1) of this section because each owns at least 10% of X’s deemed-owned ESOP shares. However, the syn- thetic equity shares owned by any person do not af- fect the calculation for any other person’s ownership of shares. (iii)Conclusion with respect to nonallocation year. 2006 is not a nonallocation year under section 409(p) because disqualified persons do not own at least 50% of X’s outstanding shares (the 100 shares owned directly by B, B’s 330 deemed-owned ESOP shares, plus C’s 145 deemed-owned ESOP shares equal only 47.9% of the 1,200 outstanding shares of X). Example 2.Relating to determination of disqual- ified persons and nonallocation year if there is syn- thetic equity.(i)Facts. The facts are the same as in Example 1, except that, as shown in column 4 of the table in thisExample 2, individuals E and F have op- tions to acquire 110 and 130 shares, respectively, of the common stock of X from X: 1 Shareholder 2 Deemed-Owned ESOP Shares (total of 1,000) 3 Percentage Deemed- Owned ESOP Shares 4 Options (240) 5 Shareholder Percentage of Deemed-Owned ESOP plus Synthetic Equity Shares 6 Disqualified Person B33033%Yes (col. 3) C 14514.5% Yes (col. 3) D 757.5% No E303%11011.1% ([30+ 91.7] divided by 1,091.7) Yes (col. 5) F202%13011.6% ([20 +108.3] divided by 1,108.3) Yes (col. 5) Other participants400 (none exceeds 10 shares) 1% or lessNo (ii)Conclusion with respect to disqualified per- s ons. Individual E’s synthetic equity shares are counted in determining whether E is a disqualified person for 2006, and individual F’s synthetic equity s hares are counted in determining whether F is a disqualified person for 2006. Applying the rule of paragraph (f)(4)(iv) of this section, E’s option to acquire 110 shares of the S corporation converts under paragraph (f)(4)(iv) of this section, into 91.7 shares of synthetic equity (110 times the ratio of the 1,000 deemed-owned ESOP shares to the sum of the 1,000 deemed-owned ESOP shares plus the 200 shares held outside the ESOP by A and B). Similarly, F’s option to acquire 130 shares of the S corporation converts into 108.3 shares of synthetic equity (130 times the ratio of the 1,000 deemed-owned ESOP shares to the sum of the 1,000 deemed-owned ESOP shares plus the 200 shares held outside the ESOP by A and B). However, the synthetic equity shares owned by any person do not affect the calculation for any other person’s ownership of shares. Accord- ingly, as shown in column 6 in the table contained in p aragraph (i) ofExample 2, individuals B, C, E, and F are disqualified persons for 2006. (iii)Conclusion with respect to nonalloca- t ion year. The 100 shares owned directly by B, B’s 330 deemed-owned ESOP shares, C’s 145 deemed-owned ESOP shares, E’s 30 deemed-owned E SOP shares, E’s 91.7 synthetic equity shares, F’s 20 deemed-owned ESOP shares, plus F’s 108.3 syn- thetic equity shares total 825, which equals 58.9% of 1,400, which is the sum of the 1,200 outstanding shares of X and the 200 shares of synthetic equity shares of X held by disqualified persons. Thus, 2006 is a nonallocation year for X’s ESOP under section 409(p) because disqualified persons own at least 50% of the total shares of outstanding stock of X and the total synthetic equity shares of X held by disqualified persons. In addition, independent of the preceding conclusion, 2006 would be a nonal- location year because disqualified persons own at least 50% of X’s outstanding shares because the 100 shares owned directly byB, B’s 330 deemed-owned E SOP shares, C’s 145 deemed-owned ESOP shares, E’s 30 deemed-owned ESOP shares, plus F’s 20 deemed-owned ESOP shares equal 52.1% of the 1 ,200 outstanding shares of X. Example 3.Relating to determination of number of shares of synthetic equity.(i)Facts. Corporation Y is a calendar year S corporation that maintains an ESOP. Y has a single class of common stock, of which there are a total of 1,000 shares outstanding, all of which are owned by the ESOP. Y has no synthetic equity, except for four grants of nonqualified deferred compensation that are made to an individual during the period from 2005 through 2011, as set forth in column 2 in the following table. The ESOP provides for the rules in paragraph (f)(4)(iii) of this section to determine the number of shares of synthetic equity owned by that individual with a determination date of January 1 and the triennial rule redetermining value, as shown in columns 4 and 5: 2007–5 I.R.B.392January 29, 2007 1 Determination Date 2 Present Value of Nonqualified Deferred Compensation on Determination Date 3 Share Value on Determination Date 4 New Shares of Synthetic Equity on Determination Date 5 Aggregate Number of Synthetic Equity Shares on Determination Date January 1, 2005 A grant is made on January 1, 2005, with a present value of $1,000. An additional grant of nonqualified deferred compensation with a present value of $775 is made on March 1, 2005. $10 per share 100100 January 1, 2006An additional grant is made on December 31, 2005, which has a present value of $800 on January 1, 2006. The March 1, 2005, grant has a present value on January 1, 2006, of $800. $8 per share 200300 January 1, 2007No new grants made. $12 per share 300 January 1, 2008An additional grant is made on December 31, 2007, which has a present value of $3,000 on January 1, 2008. The grants made during 2005 through 2007 have an aggregate present value on January 1, 2008, of $3,750. $15 per share 200 450 January 1, 2009No new grants are made. $11 per share 450 January 1, 2010No new grants are made. $22 per share 450 January 1, 2011No new grants are made. The grants made during 2005 through 2008 have an aggregate present value on January 1, 2011, of $7,600. $20 per share 380 (ii )Conclusion. The grant made on January 1, 2005, is treated as 100 shares until the determination date in 2008. The grant made on March 1, 2005, is no t taken into account until the 2006 determination date and its present value on that date, along with the then present value of the grant made on December 31 , 2005, is treated as a number of shares that are based on the $8 per share value on the 2006 determi- nation date, with the resulting number of shares con- t inuing to apply until the determination date in 2008. On the January 1, 2008, determination date, the grant made on the preceding day is taken into account at i ts present value of $3,000 on January 1, 2008 and the $15 per share value on that date with the resulting number of shares (200) continuing to apply until the n ext determination date. In addition, on the January 1, 2008, determination date, the number of shares de- termined under other grants made between January 1, 2005 and December 31, 2007, must be revalued. Accordingly, the aggregate value of all nonqualified deferred compensation granted during that period is determined to be $3750 on January 1, 2008, and the corresponding number of shares of synthetic equity based on the $15 per share value is determined to be 250 shares on the 2008 determination date, with the resulting aggregate number of shares (450) continu- ing to apply until the determination date in 2011. On the January 1, 2011, determination date, the aggregate value of all nonqualified deferred compensation is de- ter mined to be $7,600 and the corresponding num- ber of shares of synthetic equity based on the $20 per share value on the 2011 determination date is deter- mi ned to be 380 shares (with the resulting number of shares continuing to apply until the day before the de- termination date in 2014, assuming no further grants ar e made). (i )Effective dates—(1)Statutory effec- ti ve date. (i) Except as otherwise provided in paragraph (i)(1)(ii) of this section, sec- ti on 409(p) applies for plan years ending a fter March 14, 2001. (i i) If an ESOP holding stock in an S corporation was established on or be- f ore March 14, 2001, and the election un- d er section 1362(a) with respect to that S corporation was in effect on March 14, 2 001, section 409(p) applies for plan years b eginning on or after January 1, 2005. ( 2)Regulatory effective date.This s ection applies for plan years beginning on or after January 1, 2006. For plan years beginning before January 1, 2006, §1.409(p)–1T (as it appeared in the April 1, 2005, edition of 26 CFR part 1) applies. Mar k E. Matthews, Dep uty Commissioner for Se rvices and Enforcement. Approved November 30, 2006. Eric Solomon, Acting Deputy Assistant Secretary oftheTreasury(TaxPolicy). (Filed by the Office of the Federal Register on December 19, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 20, 2006, 71 F.R. 76134) Section 472.—Last-in, First-out Inventories 26 CFR 1.472–1: Last-in, first-out inventories. LIFO; price indexes; department stores.The November 2006 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories January 29, 20073932007–5 I.R.B. for tax years ended on, or with reference to, November 30, 2006. Rev. Rul. 2007–6 The following Department Store In- ventory Price Indexes for November 2006 were issued by the Bureau of Labor Sta- tistics (BLS). The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regula- tions and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inven- tories of department stores employing the retail inventory and last-in, first-out in- ventory methods for tax years ended on, or with reference to, November 30, 2006. The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of depart- ments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, ex- cept for the following: candy, food, liquor, tobacco, and contract departments. BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (January 1941 = 100, unless otherwise noted) GroupsNov. 2005Nov. 2006 Percent Change from Nov. 2005 to Nov. 2006 1 1. PieceGoods .............................................480.6471.2-2.0 2. DomesticsandDraperies..................................508.2478.1-5.9 3. Women’sandChildren’sShoes ............................684.7678.1-1.0 4. Men’sShoes.............................................868.9894.22.9 5. Infants’Wear ............................................564.1573.31.6 6. Women’sUnderwear......................................548.8560.22.1 7. Women’sHosiery ........................................339.8346.52.0 8. Women’sandGirls’Accessories ...........................582.1542.0-6.9 9. Women’sOuterwearandGirls’Wear .......................368.3373.51.4 10. Men’sClothing ..........................................542.1529.6-2.3 11. Men’sFurnishings........................................574.9574.90.0 12. Boys’ClothingandFurnishings............................403.5411.31.9 13. Jewelry..................................................861.4893.33.7 14. Notions .................................................803.1817.91.8 15. ToiletArticlesandDrugs..................................1001.01005.10.4 16. FurnitureandBedding ....................................596.7596.90.0 17. FloorCoverings..........................................612.3623.21.8 18. Housewares..............................................701.9689.7-1.7 19. MajorAppliances.........................................204.3208.92.3 20. RadioandTelevision......................................38.134.4-9.7 21. Recreation and Education 2 .................................77.676.7-1.2 22. Home Improvements 2 .....................................137.2141.33.0 23. Automotive Accessories 2 ..................................116.5122.24.9 Groups1–15:SoftGoods .......................................561.0561.90.2 Groups16–20:DurableGoods...................................376.2371.2-1.3 Gro ups 21–23: Misc. Goods 2 .................................... 93.194.21.2 Store Total 3 ..............................................495.4495.30.0 1 Absence of a minus sign before the percentage change in this column signifies a price increase. 2 I ndexes on a January 1986 = 100 base. 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments. DRAFTING INFORMATION The principal author of this revenue rul- ingisJohnRomanFaronoftheOffice of Associate Chief Counsel (Income Tax and Accounting). For further informa- tion regarding this revenue ruling, con- tact Mr. Faron at (202) 622–8142 (not a toll-free call). 2007–5 I.R.B.394January 29, 2007 Part III. Administrative, Procedural, and Miscellaneous Miscellaneous Pension Protection Act Changes Notice 2007–7 I. PURPOSE This notice provides guidance in the form of questions and answers with re- spect to certain provisions of the Pension Protection Act of 2006, P.L. 109–280 (“PPA ’06”), that are effective in 2007 or earlier. The sections of PPA ’06 ad- dressed in this notice, which are primarily related to distributions, are § 303 (relating to interest rate assumptions for lump sum distributions), § 826 (relating to hardship distributions), § 828 (relating to early distributions to public safety employees), § 829 (relating to rollovers for nonspouse beneficiaries), § 845 (relating to dis- tributions to pay for accident or health insurance for public safety officers), § 904 (relating to vesting of nonelective con- tributions), § 1102 (relating to the notice and consent period for distributions), and § 1201 (relating to distributions from IRAs to charitable organizations). II. SECTION 303 OF PPA ’06 Section 415(b) of the Code provides limitations on annual benefits under a de- fined benefit plan. Under § 415(b)(2)(B), if a benefit is payable in a form other than a straight life annuity, the benefit is adjusted to an actuarially equivalent straight life an- nuity for purposes of determining whether the limitations of § 415(b) have been sat- isfied. Section 415(b)(2)(E) provides lim- itations on the actuarial assumptions that can be used in making the adjustment un- der § 415(b)(2)(B). Prior to the enactment of PPA ’06, for purposes of adjusting a benefit payable in a form that is subject to the minimum present value requirements of § 417(e)(3), § 415(b)(2)(E)(ii) provided that the interest rate assumption must not be less than the greater of the applicable interest rate as defined in § 417(e)(3) or the rate specified in the plan. However, § 101(b)(4) of the Pension Funding Eq- uity Act of 2004, P.L. 108–218, amended § 415(b)(2)(E)(ii) to provide that, for plan years beginning in 2004 and 2005, 5.5% must be used in lieu of the applicable in- terest rate (as defined in § 417(e)(3)) for purposes of adjusting the benefit. Section 303(a) of PPA ’06 amended § 415(b)(2)(E)(ii) to provide that the in- terest rate assumption for purposes of ad- justing a benefit payable in a form that is subject to the minimum present value re- quirements of § 417(e)(3) must not be less than the greatest of (i) 5.5%, (ii) the rate that provides a benefit of not more than 105% of the benefit that would be provided if the applicable interest rate (as defined in § 417(e)(3)) were the interest rate as- sumption, or (iii) the rate specified under the plan. Q–1. What is the effective date of the changes made to § 415 of the Code by § 303(a) of PPA ’06? A–1. The changes to § 415 of the Code made by § 303(a) of PPA ’06 ap- ply to distributions made in plan years be- ginning after December 31, 2005. How- ever, the changes do not apply to a plan with a termination date that is on or before August 17, 2006, the date of enactment of PPA ’06. Q–2. May a plan be amended retroac- tively to comply with the requirements of § 303(a) of PPA ’06 without violating the anti-cutback rules provided in § 411(d)(6) of the Code? A–2. Yes. Under § 1107 of PPA ’06, a plan does not violate the anti-cutback rules of § 411(d)(6) of the Code if it is amended retroactively to comply with § 303(a) of PPA ’06, provided the amend- ment is adopted on or before the last day of the first plan year beginning on or after January 1, 2009 (2011 in the case of a gov- ernmental plan), and the plan is operated as if such amendment were in effect as of the first date the amendment is effective. Q–3. If a plan made a distribution in a plan year beginning in 2006 that satisfied the limitations of § 415(b) prior to the en- actment of PPA ’06 but which is in excess of the limitations of § 415(b) taking into account the amendments to § 415 made by § 303(a) of PPA ’06 (a “§ 303 excess distri- bution”), does the distribution violate the requirements of § 415(b)? A–3. Yes. However, three methods are available for correcting a § 303 excess distribution. First, Q&A–4 of this notice sets forth a special correction method that is available for a § 303 excess distribution made prior to September 1, 2006, pro- vided that the correction is completed by March 15, 2007. Second, if correction is completed by December 31, 2007 (even if the § 303 excess distribution occurs after September 1, 2006), a plan may correct a § 303 excess distribution by using the correction method for a § 415(b) excess distribution described in the Employee Plans Compliance Resolution System (“EPCRS”) (see section 2.04(1) in Appen- dix B in Rev. Proc. 2006–27, 2006–22 I.R.B. 945) even if the plan does not meet the requirements specified in Rev. Proc. 2006–27, including the special require- ments for self correction under Part IV of Rev. Proc. 2006–27. Finally, a plan that meets the requirements of Rev. Proc. 2006–27 may correct § 303 excess dis- tributions by using the correction method for § 415(b) excess distributions under EPCRS even after December 31, 2007. A plan that is amended retroactively to com- ply with § 303(a) of PPA ’06 will not fail to satisfy the requirement in § 1107(b)(2)(A) of PPA ’06 (that the plan be operated in accordance with the terms of the amend- ment) merely because it made a § 303 excess distribution, provided the § 303 excess distribution is corrected using one of these three correction methods. Q–4. What special correction method is available to correct a § 303 excess distribu- tion made prior to September 1, 2006? A–4. A special correction method is available for a § 303 excess distribution made prior to September 1, 2006, provided the correction is completed by March 15, 2007. Under the special correction method, a plan may use the EPCRS cor- rection method for a § 415(b) excess dis- tribution(asdescribedinsection2.04(1) in Appendix B in Rev. Proc. 2006–27, even if the plan does not otherwise meet the requirements of Rev. Proc. 2006–27, including the special requirements for self correction) with the following mod- ifications. The excess amount (i.e.,the amount by which the distribution actually made exceeds the distribution permitted using the interest assumption specified in § 415(b) as amended by PPA ’06) is not required to be returned to the plan January 29, 20073952007–5 I.R.B. (as otherwise required under the EPCRS correction method). Instead, a plan must issue two Forms 1099–R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) to a participant who has received a § 303 excess distribution. The first Form 1099–R should include only the amount that would have been distributed had the benefit payable been adjusted us- ing the interest assumptions specified in § 415(b) as amended by PPA ’06. The second Form 1099–R should include only the excess amount that was distributed, and should include code “E” in box 7 to identify the amount as an excess dis- tribution. As provided in the EPCRS correction, this excess amount is not an eligible rollover distribution, and therefore must be included in gross income in the year distributed from the plan. III. SECTION 826 OF PPA ’06 An employee’s elective contributions under a cash or deferred arrangement can only be distributed upon the occurrence of certain events, one of which is the em- ployee’s hardship. A distribution is made on account of hardship only if the distri- bution both is made on account of an im- mediate and heavy financial need of the employee and is necessary to satisfy the financial need. A distribution made for any of the expenses listed in Regulation § 1.401(k)–1(d)(3)(iii)(B) is deemed to be on account of an immediate and heavy fi- nancial need of the employee. Several of these listed expenses can be expenses of the employee’s spouse or dependents. Section 826 of PPA ’06 directs the Sec- retary of the Treasury to modify the rules relating to distributions from § 401(k), § 403(b), § 409A, and § 457(b) plans on account of a participant’s hardship or unforeseeable financial emergency to permit such plans to treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred a hardship or unforeseeable fi- nancial emergency. Q–5. What changes are being made pursuant to § 826 of PPA ’06 in the rules relating to hardship distributions from § 401(k) plans and § 403(b) plans and relating to distributions on account of an unforeseeable financial emergency from a plan described in § 457(b) or § 409A? A–5. (a)Hardship distributions from § 401(k) plans and § 403(b) plans.A § 401(k) plan that permits hardship dis- tributions of elective contributions to a participant only for expenses described in § 1.401(k)–1(d)(3)(iii)(B) may, be- ginning August 17, 2006, permit dis- tributions for expenses described in § 1.401(k)–1(d)(3)(iii)(B)(1), (3), or (5) (relating to medical, tuition, and funeral expenses, respectively) for a primary ben- eficiary under the plan. For this purpose, a “primary beneficiary under the plan” is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant’s account balance under the plan upon the death of the participant. A plan that adopts these expanded hardship provisions must still satisfy all the other requirements ap- plicable to hardship distributions, such as the requirement that the distribution be necessary to satisfy the financial need. These rules also apply to § 403(b) plans. (b)Distributions on account of an unforeseeable financial emer- gency from a plan described in § 457(b) or § 409A. In applying § 457(d)(1)(A)(iii), § 1.457–6(c)(2)(i), § 409A(a)(2)(A)(vi), and Proposed Reg- ulation § 1.409A–3(g)(3)(i), a plan de- scribed in § 457(b) or § 409A may treat a participant’s beneficiary under the plan thesameastheparticipant’sspouseor dependent in determining whether the participant has incurred an unforeseeable financial emergency. This will be reflected in the upcoming final regulations under § 409A. IV. SECTION 828 OF PPA ’06 Section 72(t)(1) of the Code provides for a 10% additional tax on an early dis- tribution from a qualified retirement plan (as defined in § 4974(c)), unless the early distribution qualifies for one of the ex- ceptions listed in § 72(t)(2). For exam- ple, § 72(t)(2)(A)(v) provides an exception to the 10% additional tax for distributions made to an employee who separates from service after attainment of age 55. Under § 72(t)(3)(A), § 72(t)(2)(A)(v) does not ap- ply to individual retirement plans. Section 828 of PPA ’06 amended § 72 of the Code by adding § 72(t)(10), which provides that in the case of a distribu- tion to a qualified public safety employee from a governmental defined benefit plan, § 72(t)(2)(A)(v) is applied by substituting age 50 for age 55. Thus, the 10% ad- ditional tax on early distributions under § 72(t)(1) does not apply to a distribution from a governmental defined benefit plan made to a qualified public safety employee who separates from service after attain- ment of age 50. This exception to the 10% additional tax applies to distributions made after August 17, 2006 (the date of enact- ment of PPA ’06). Q–6. Who is a qualified public safety employee? A–6. For purposes of § 72(t)(10), the term “qualified public safety employee” means an employee of a State or of a politi- cal subdivision of a State (such as a county or city) whose principal duties include ser- vices requiring specialized training in the area of police protection, firefighting ser- vices, or emergency medical services for any area within the jurisdiction of the State or the political subdivision of the State. Q–7. How does a qualified public safety employee qualify for the excep- tion to the 10% additional tax under § 72(t)(10)? A–7. In order to qualify for the ex- ception to the 10% additional tax under § 72(t)(10), a qualified public safety em- ployee (i) must have received the distri- bution from a governmental defined ben- efit plan after separating from service with the employer maintaining the plan and (ii) the separation from service must have oc- curred during or after the calendar year in which the qualified public safety em- ployee attained age 50. For example, a qualified public safety employee who sep- arated from service on June 30, 2006, and attained age 50 on December 12, 2006, is eligible for the exception under § 72(t)(10) with respect to distributions made after August 17, 2006. Q–8. What are the consequences if, be- fore August 18, 2006, a qualified public safety employee began receiving substan- tially equal periodic payments that qual- ify for the exception to the 10% additional tax described in § 72(t)(2)(A)(iv) and then modified the periodic payments after Au- gust 17, 2006? A–8. If the payments satisfy the re- quirements in Q&A–7 of this notice, payments received by the qualified public 2007–5 I.R.B.396January 29, 2007 safety employee after August 17, 2006, would qualify for the exception to the 10% additional tax under § 72(t)(10). However, if the modification would result in the im- position of the recapture tax under the rules of § 72(t)(4), then the recapture tax applies to the payments made before Au- gust 18, 2006. Q–9. Does the exception to the 10% ad- ditional tax under § 72(t)(10) apply if the qualified public safety employee rolls over distributions from agovernmental defined benefitplanintoanIRAoradefinedcon- tribution plan and subsequently takes an early distribution from the IRA or defined contribution plan? A–9. No. The exception to the 10% ad- ditional tax under § 72(t)(10) applies only to amounts distributed from a governmen- tal defined benefit plan and does not apply to distributions from a defined contribu- tion plan or an individual retirement plan. Q–10. How does a payer report distri- butions that qualify for the exception to the 10% additional tax under § 72(t)(10) on Form 1099–R? A–10. A payer is permitted to use distribution code 2 (early distribution, ex- ception applies) in box 7 of Form 1099–R. However, a payer is also permitted to use distribution code 1 (early distribu- tion, no known exception) in box 7 of Form 1099–R, if the payer does not know whether the exception under § 72(t)(10) applies. For further information on report- ing, see Instructions for Forms 1099–R and 5498. V. SECTION 829 OF PPA ’06 Under § 402(c)(11) of the Code, which was added by § 829 of PPA ’06, if a di- rect trustee-to-trustee transfer of any por- tion of a distribution from an eligible re- tirement plan is made to an individual re- tirement plan described in § 408(a) or (b) (an “IRA”) that is established for the pur- pose of receiving the distribution on be- half of a designated beneficiary who is a nonspouse beneficiary, the transfer is treated as a direct rollover of an eligi- ble rollover distribution for purposes of § 402(c). The IRA of the nonspouse bene- ficiary is treated as an inherited IRA within the meaning of § 408(d)(3)(C). Section 402(c)(11) applies to distributions made after December 31, 2006. Q–11. Can a qualified plan described in § 401(a) offer a direct rollover of a distri- bution to a nonspouse beneficiary? A–11.Yes.Under§402(c)(11),a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary who is a des- ignated beneficiary within the meaning of § 401(a)(9)(E), provided that the dis- tributed amount satisfies all the require- ments to be an eligible rollover distribution other than the requirement that the distri- bution be made to the participant or the participant’s spouse. (See § 1.401(a)(9)–4 for rules regarding designated beneficia- ries.) The direct rollover must be made to an IRA established on behalf of the desig- nated beneficiary that will be treated as an inherited IRA pursuant to the provisions of § 402(c)(11). If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross in- come in the year of the distribution. See § 1.401(a)(31)–1, Q&A–3 and–4, for pro- cedures for making a direct rollover. Q–12. Can other types of plans offer a direct rollover of a distribution to a non- spouse beneficiary? A–12. Yes. Section 402(c)(11) also ap- plies to annuity plans described in § 403(a) or (b) and to eligible governmental plans under § 457(b). Q–13. How must the IRA be estab- lished and titled? A–13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceasedindividual and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.” Q–14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402(c)(11)? A–14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary. If a plan does offer direct rollovers to nonspouse bene- ficiaries of some, but not all, participants, such rollovers must be offered on a nondis- criminatory basis because the opportunity to make a direct rollover is a benefit, right, or feature that is subject to § 401(a)(4). In the case of distributions from a termi- nated defined contribution plan pursuant to 29 C.F.R. § 2550.404a–3(d)(1)(ii), the plan will be considered to offer direct rollovers pursuant to § 402(c)(11) with respect to such distributions without regard to plan terms. Q–15. For what purposes is the direct rollover of a distribution by a nonspouse beneficiary treated as a rollover of an eli- gible rollover distribution? A–15. Section 402(c)(11) provides that a direct rollover of a distribution by a non- spouse beneficiary is a rollover of an eligi- ble rollover distribution only for purposes of § 402(c). Accordingly, the distribution is not subject to the direct rollover require- ments of § 401(a)(31), the notice require- ments of § 402(f), or the mandatory with- holding requirements of § 3405(c). If an amount distributed from a plan is received by a nonspouse beneficiary, the distribu- tion is not eligible for rollover. Q–16. If the named beneficiary of a decedent is a trust, is a plan permitted to make a direct rollover to an IRA estab- lished with the trust as beneficiary? A–16. Yes. A plan may make a di- rect rollover to an IRA on behalf of a trust where the trust is the named beneficiary of a decedent, provided the beneficiaries of thetrustmeettherequirementstobedes- ignated beneficiaries within the meaning of § 401(a)(9)(E). The IRA must be es- tablished in accordance with the rules in Q&A–13 of this notice, with the trust iden- tified as the beneficiary. In such a case, the beneficiaries of the trust are treated as having been designated as beneficiaries of the decedent for purposes of determining the distribution period under § 401(a)(9), if the trust meets the requirements set forth in § 1.401(a)(9)–4, Q&A–5, with respect to the IRA. Q–17. How is the required minimum distribution (an amount not eligible for rollover) determined with respect to a non- spouse beneficiary if the employee dies before his or her required beginning date within the meaning of § 401(a)(9)(C)? A–17. (a)General rule.Iftheem- ployee dies before his or her required be- ginning date, the required minimum dis- tributions for purposes of determining the amount eligible for rollover with respect to a nonspouse beneficiary are determined under either the 5-year rule described in § 401(a)(9)(B)(ii) or the life expectancy rule described in § 401(a)(9)(B)(iii). See Q&A–4 of § 1.401(a)(9)–3 to determine which rule applies to a particular desig- nated beneficiary. Under either rule, no amount is a required minimum distribution January 29, 20073972007–5 I.R.B. for the year in which the employee dies. The rule in Q&A–7(b) of § 1.402(c)–2 (re- lating to distributions before an employee has attained age 70½) does not apply to nonspouse beneficiaries. (b)Five-year rule. Under the 5-year rule described in § 401(a)(9)(B)(ii), no amount is required to be distributed until the fifth calendar year following the year of the employee’s death. In that year, the entire amount to which the beneficiary is entitled under the plan must be distributed. Thus, if the 5-year rule applies with re- spect to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), for the first 4 years after the year the employee dies, no amount payable to the beneficiary is ineligible for direct rollover as a required minimum distribution. Accordingly, the beneficiary is permitted to directly roll over the bene- ficiary’s entire benefit until the end of the fourth year (but, as described in Q&A–19 of this notice, the 5-year rule must also apply to the IRA to which the rollover contribution is made). On or after Jan- uary1ofthefifthyearfollowingtheyear in which the employee died, no amount payable to the beneficiary is eligible for rollover. (c)Life expectancy rule.(1)General rule. If the life expectancy rule described in § 401(a)(9)(B)(iii) applies, in the year following the year of death and each subsequent year, there is a required min- imum distribution. See Q&A–5(c)(1) of § 1.401(a)(9)–5 to determine the applica- ble distribution period for the nonspouse beneficiary. The amount not eligible for rollover includes all undistributed re- quired minimum distributions for the year in which the direct rollover occurs and any prior year (even if the excise tax under § 4974 has been paid with respect to the failure in the prior years). See the last sentence of § 1.402(c)–2, Q&A–7(a). (2)Special rule. If, under paragraph (b) or (c) of Q&A–4 of § 1.401(a)(9)–3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary. Q–18. How is the required minimum distribution with respect to a nonspouse beneficiary determined if the employee dies on or after his or her required begin- ning date? A–18. If an employee dies on or after his or her required beginning date, within the meaning of § 401(a)(9)(C), for the year of the employee’s death, the required min- imum distribution not eligible for rollover is the same as the amount that would have applied if the employee were still alive and elected the direct rollover. For the year after the year of the employee’s death and subsequent years, see Q&A–5 of § 1.401(a)(9)–5 to determine the applica- ble distribution period to use in calculating the required minimum distribution. As in the case of death before the employee’s required beginning date, the amount not eligible for rollover includes all undis- tributed required minimum distributions for the year in which the direct rollover occurs and any prior year, including years before the employee’s death. Q–19. After a direct rollover by a nonspouse designated beneficiary, how is the required minimum distribution deter- mined with respect to the IRA to which the rollover contribution is made? A–19. Under § 402(c)(11), an IRA established to receive a direct rollover on behalf of a nonspouse designated ben- eficiary is treated as an inherited IRA within the meaning of § 408(d)(3)(C). The required minimum distribution re- quirements set forth in § 401(a)(9)(B) and the regulations thereunder apply to the inherited IRA. The rules for determin- ing the required minimum distributions under the plan with respect to the non- spouse beneficiary also apply under the IRA. Thus, if the employee dies before his or her required beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan making the direct rollover, the 5-year rule applies for purposes of determining required minimum distribu- tionsundertheIRA.If the life expectancy rule applied to the nonspouse designated beneficiary under the plan, the required minimum distribution under the IRA must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred. Similarly, if the em- ployee dies on or after his or her required beginning date, the required minimum dis- tribution under the IRA for any year after the year of death must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred. VI. SECTION 845 OF PPA ’06 Code § 402(l), which was added by § 845(a) of PPA ’06, provides for an exclusion from gross income for dis- tributions from certain retirement plans (referred to in this notice as “Eligible Government Plans”) used to pay qualified health insurance premiums of an eligible retired public safety officer. The exclu- sion applies with respect to an eligible retired public safety officer who elects to have qualified health insurance premiums deducted from amounts distributed from an Eligible Government Plan and paid directly to the insurer. Qualified health insurance premiums include premiums for accident and health insurance or qualified long-term care insurance contracts for the eligible retired public safety officer and his or her spouse and dependents. The dis- tribution is excluded from gross income to the extent that the aggregate amount of the distributions does not exceed the amount used to pay the qualified health insurance premiums of the eligible retired public safety officer and his or her spouse and dependents. An “Eligible Government Plan” is a governmental plan described in § 414(d) that is either: a § 401(a), § 403(a), or § 403(b) plan; or an eligible govern- mental plan under § 457(b). Section 402(l) applies to distributions in taxable years be- ginning after December 31, 2006. Q–20. Who is an eligible retired public safety officer for purposes of the exclusion under § 402(l)? A–20. An employee is an eligible re- tired public safety officer for purposes of the exclusion under § 402(l) only if the employee is an individual who separated from service, either by reason of disabil- ity or after attainment of normal retirement age, as a public safety officer with the em- ployer who maintains the Eligible Gov- ernment Plan from which the distributions to pay qualified health insurance premi- ums are made. Thus, a public safety of- ficer who retires before attainment of nor- 2007–5 I.R.B.398January 29, 2007 mal retirement age is not an eligible re- tired public safety officer unless the pub- lic safety officer retires by reason of dis- ability. The terms of the Eligible Govern- ment Plan from which the participant will be receiving the distributions apply in de- termining whether a public safety officer has separated from service by reason of disability or after attainment of normal re- tirement age. Q–21. Who is a public safety officer? A–21. For purposes of § 402(l), the term “public safety officer” means an in- dividual serving a public agency in an official capacity, with or without com- pensation, as a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew. See § 1204(9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(9)(A)). Q–22. Under what circumstances are the provisions of § 402(l) available for el- igible retired public safety officers? A–22. The favorable tax treatment un- der § 402(l) is available only when an el- igible retired public safety officer elects to have an amount subtracted from his or her distributions from an Eligible Govern- mentPlanandsuchamountisusedtopay qualified health insurance premiums. The employer sponsoring the Eligible Govern- ment Plan is not required to offer such an election. Q–23. Can the accident or health plan receiving the payments of qualified health insurancepremiumsbeaself-insured plan? A–23. No. The accident or health plan must be an accident or health insurance plan. Thus, the plan must be providing insurance issued by an insurance company regulated by a State (including a managed care organization that is treated as issuing insurance). Q–24. Will an eligible retired public safety officer be entitled to favorable tax treatment under § 402(l) with respect to benefits attributable to service other than as a public safety officer? A–24. Yes. Benefits attributable to ser- vice other than as a public safety officer are eligible for favorable tax treatment under § 402(l), as long as the individual separates from service as a public safety officer, by reason of disability or after attainment of normal retirement age, with the employer maintaining the Eligible Government Plan. Q–25. If an eligible retired public safety officer dies, are amounts subtracted from distributions made to the decedent’s surviving spouse or dependents eligible for favorable tax treatment under § 402(l)? A–25. No. Section 402(l) provides that the distribution is not includible in the gross income of an employee who is an el- igible retired public safety officer. Thus, the exclusion would not extend to amounts subtracted from distributions to other dis- tributees. Q–26. Is an eligible retired public safety officer limited in the amount that the officer can exclude from gross income for distributions from an Eligible Gov- ernment Plan used to pay qualified health insurance premiums? A–26. Yes. The aggregate amount that is permitted to be excluded, with respect to any taxable year, from an eligible re- tired public safety officer’s gross income by reason of § 402(l) is limited to $3,000. For purposes of applying this $3,000 limi- tation, distributions with respect to the el- igible retired public safety officer that are used to pay for qualified health insurance premiums from all Eligible Government Plans are aggregated. Q–27. Are amounts used to pay quali- fied health insurance premiums that are ex- cluded from gross income under § 402(l) taken into account for purposes of deter- mining the itemized deduction for medical care expenses under § 213? A–27. No. Amounts used to pay quali- fied health insurance premiums that are ex- cluded from gross income under § 402(l) are not taken into account in determining the itemized deduction for medical care expenses under § 213. VII. SECTION 904 OF PPA ’06 Prior to the effective date of PPA ’06 § 904, a defined contribution plan satis- fied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year vesting schedule. Section 904 of PPA ’06 amended the minimum vesting require- ments to require faster vesting of employer nonelective contributions to a defined con- tribution plan. Under Code § 411(a)(2)(B) as amended by § 904 of PPA ’06, a defined contribution plan satisfies the minimum vesting requirements with respect to em- ployer nonelective contributions if it has a 3-year vesting schedule or a 2 to 6 year vesting schedule. Code § 411(a)(2)(B) as amended by § 904 of PPA ’06 generally applies to contributions for plan years be- ginning after December 31, 2006. Q–28. If a plan amendment changes the plan’s vesting schedule to satisfy Code § 411(a)(2)(B) as amended by § 904 of PPA ’06, is the plan amendment required to satisfy § 411(a)(10)? A–28. Yes. A plan amendment that changes the vesting schedule must satisfy Code § 411(a)(10). Although § 411(a)(10)(B) would require a partic- ipant with at least 3 years of service to elect to have the nonforfeitable percentage of his accrued benefit determined without regard to the amendment, the plan must ensure that any such election satisfies the vesting requirements of § 411(a)(2)(B), as amended by § 904 of PPA ’06. Thus, such a participant must be provided, at all times, a vesting percentage that is no less than the minimum under a vesting schedule that satisfies § 904 and the vest- ing percentage determined under the plan without regard to the amendment. Under Temporary Regulation § 1.411(a)–8T, no election need be provided for any par- ticipant whose nonforfeitable percentage under the plan, as amended, at any time cannot be less than such percentage deter- mined without regard to such amendment. Q–29. Can a plan have separate vesting schedules for employer nonelective contri- butions that are and are not subject to Code § 411(a)(2)(B), as amended by § 904 of PPA ’06? A–29. Yes. A plan can have a vesting schedule for employer nonelective con- tributions for plan years beginning after December 31, 2006, and another vesting schedule for other employer nonelective contributions under the plan, provided that the plan separately accounts for the contri- butions made under the vesting schedule in effect prior to the first day of the first plan year beginning after December 31, 2006, and the vesting schedule for em- ployer nonelective contributions for plan years beginning after December 31, 2006, satisfies Code § 411(a)(2)(B), as amended by § 904 of PPA ’06. Q–30. If a plan maintains a bifurcated vesting schedule, how is it determined whether a contribution is for a plan year beginning before January 1, 2007? January 29, 20073992007–5 I.R.B. A–30. A contribution is for a plan year that begins before January 1, 2007, if it is allocated under the terms of the plan as of a date in that plan year and is not subject to any conditions that have not been satis- fied by the end of that plan year. This ap- plies even if the contribution is not made until the next plan year. Thus, for exam- ple, if a plan with a calendar-year plan year makes a contribution as of December 31, 2006, based on compensation and service in 2006, and the contribution is not con- tingent on the occurrence of an event af- ter 2006, then the contribution is treated as made for the 2006 plan year and is not sub- ject to Code § 411(a)(2)(B), as amended by § 904 of PPA ’06, even if it is not con- tributed until 2007. Forfeitures and ESOP allocations from a suspense account are treated in the same manner for this pur- pose. VIII. SECTION 1102 OF PPA ’06 Section 1102 of PPA ’06 makes certain changes to the notice requirements related to distributions. Section 1102(a) provides that a notice required to be provided un- der § 402(f), § 411(a)(11), or § 417 may be provided to a participant as much as 180 days before the annuitystarting date. Sec- tion 1102(b) directs the Secretary to mod- ify the regulations under § 411(a)(11) of the Code and § 205 of ERISA to provide that the description ofa participant’s right to defer a distribution must also include a description of the consequences of fail- ing to defer receipt of a distribution. The modifications made by § 1102 apply to years beginning after December 31, 2006. However, § 1102(b)(2)(B) provides that a plan will not be treated as failing to meet the new requirements under § 1102(b) if the plan administrator makes a reasonable attempt to comply with the new require- ments under that section during the period that is within 90 days of the issuance of regulations required by § 1102(b). Q–31. How does the effective date of §1102operate? A–31. The provisions of § 1102 ap- ply to plan years that begin after Decem- ber 31, 2006. This means that the new rules relating to the content of the notices apply only to notices issued in those plan years, without regard to the annuity start- ing date for the distributions. Similarly, the 180-day period for distributing notices ap- plies to notices distributed in a plan year that begins after December 31, 2006. This change to the 180-day period also modi- fies the definition of the maximum QJSA explanation period under § 1.411(d)–3(g), whichisusedinapplyingthetimingrules for the effective date of a plan amendment under the rules of § 1.411(d)–3(c) and (f) in the case of an amendment that is adopted in a plan year that begins after Decem- ber 31, 2006. Q–32. Is a plan required to revise the notice under § 411 pursuant to the modifi- cations made by § 1102(b) before the regu- lations are amended to reflect the require- ment? A–32. Yes. A plan administrator is required to revise the notice under § 411 to reflect the modifications to the require- ments made by § 1102(b) for notices pro- vided in plan years beginning after De- cember 31, 2006. However, pursuant to § 1102(b)(2)(B) of PPA ’06, a plan will not be treated as failing to meet the new requirements under § 1102(b) if the plan administrator makesa reasonable attempt to comply with the new requirements un- der that section in the case of a notice that is provided prior to the 90th day after the issuance of regulations reflecting the mod- ifications required by § 1102(b). Q–33. Is there a safe harbor available to a plan administrator that would be consid- ered a reasonable attempt to comply with the requirement in § 1102(b)(1) that a de- scription of a participant’s right to defer re- ceipt of a distribution include a description of the consequences of failing to defer? A–33. Yes. A description that is writ- ten in a manner reasonably calculated to be understood by the average participant and that includes the following informa- tion is a reasonable attempt to comply with the requirements of § 1102(b)(2)(B): (a) in the case of a defined benefit plan, a description of how much larger benefits will be if the commencement of distribu- tions is deferred; (b) in the case of a de- fined contribution plan, a description in- dicating the investment options available under the plan (including fees) that will be available if distributions are deferred; and (c) the portion of the summary plan description that contains any special rules that might materially affect a participant’s decision to defer. For purposes of clause (a), a plan administrator can use a de- scription that includes the financial effect of deferring distributions, as described in § 1.417(a)(3)–1(d)(2)(i), based solely on the normal form of benefit. IX. SECTION 1201 OF PPA ’06 Section 1201(a) of PPA ’06 adds § 408(d)(8) to the Code, which is ap- plicable to distributions made in taxable years 2006 and 2007. Under § 408(d)(8), generally, if a distribution from an IRA owned by an individual after the individ- ual has attained age 70½ is made directly by the trustee to certain organizations described in § 170(b)(1)(A), the distri- bution is excluded from gross income. The exclusion is only available to the ex- tent that the distribution would otherwise have been includible in gross income, and § 408(d)(8)(D) provides a special rule for determining the amount that would oth- erwise be includible in gross income. In addition, the exclusion applies only if the contribution would otherwise qualify for a charitable contribution deduction under § 170 (without regard to the percentage limitations of § 170(b)). A distribution that is eligible for this exclusion is called a qualified charitable distribution. Q–34. Is there an overall limit on the amount that may be excluded from gross income for qualified charitable distribu- tions that are made in a year? A–34. Yes. The income exclusion for qualified charitable distributions only applies to the extent that the aggregate amount of qualified charitable distribu- tions made during any taxable year with respect to an IRA owner does not exceed $100,000. Thus, if an IRA owner main- tains multiple IRAs in a taxable year, and qualified charitable distributions are made from more than one of these IRAs, the maximum total amount that may be ex- cluded for that year by the IRA owner is $100,000. For married individuals filing a joint return, the limit is $100,000 per individual IRA owner. Q–35. Is the exclusion for qualified charitable distributions available for a dis- tribution made to any organization eligible to receive charitable contributions that are deductible by the donor for income tax pur- poses? A–35. No. Qualified charitable distri- butionsmaybemadetoanorganization described in § 170(b)(1)(A), other than supporting organizations described in 2007–5 I.R.B.400January 29, 2007 § 509(a)(3) or donor advised funds that are described in § 4966(d)(2). Q–36. Is the exclusion for qualified charitable distributionsavailable for distri- butions from any type of IRA? A–36. Generally, the exclusion for qualified charitable distributions is avail- able for distributions from any type of IRA (including a Roth IRA described in § 408A and a deemed IRA described in § 408(q)) that is neither an ongoing SEP IRA described in § 408(k) nor an ongoing SIMPLE IRA described in § 408(p). For this purpose, a SEP IRA or a SIMPLE IRA is treated as ongoing if it is maintained un- der an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charita- ble contributions would be made. Q–37. Is the exclusion for qualified charitable distributionsavailable for distri- butions from an IRA maintained for a ben- eficiary if the beneficiary has attained age 70½ before the distribution is made? A–37. Yes. The exclusion from gross income for qualified charitable distribu- tions is available for distributions from an IRA maintained for the benefit of a bene- ficiary after the death of the IRA owner if the beneficiary has attained age 70½ be- fore the distribution is made. Q–38. If a 2006 distribution satisfies all the requirements under § 408(d)(8), but it was made before August 17, 2006 (the date PPA ’06 was enacted), is the amount dis- tributed excludable as a qualified charita- ble distribution? A–38. Yes. Section 408(d)(8) is ap- plicable to distributions made at any time in 2006. Thus, a distribution made in 2006 that satisfies the requirements under § 408(d)(8) is a qualified charitable distri- bution even if it was made before August 17, 2006. Q–39. Is the amount of a qualified char- itable distribution deductible as a charita- ble contribution under § 170? A–39. No. For purposes of determin- ing the amount of charitable contributions that may be deducted under § 170, quali- fied charitable distributions which are ex- cluded from income under § 408(d)(8) are not taken into account. However, qualified charitable distributions must still satisfy the requirements to be deductible charita- ble contributions under § 170 (other than the percentage limits of § 170(b)), includ- ing the substantiation requirements under § 170(f)(8). Q–40. Is a qualified charitable distribu- tion subject to withholding under § 3405? A–40. No. A qualified charitable dis- tribution is not subject to withholding under § 3405 because an IRA owner that requests such a distribution is deemed to have elected out of withholding under § 3405(a)(2). For purposes of determin- ing whether a distribution requested by an IRA satisfies the requirements under § 408(d)(8), the IRA trustee, custodian, or issuer may rely upon reasonable represen- tations made by the IRA owner. Q–41. Is a check from an IRA made payable to a charitable organization de- scribed in § 408(d)(8) and delivered by the IRA owner to the charitable organization a direct payment to such organization? A–41. Yes. If a check from an IRA is made payable to a charitable organization described in § 408(d)(8) and delivered by the IRA owner to the charitable organiza- tion, the payment to the charitable organi- zation will be considered a direct payment by the IRA trustee to the charitable organ- ization for purposes of § 408(d)(8)(B)(i). Q–42. Will a qualified charitable dis- tribution be taken into account in deter- mining whether the required minimum distribution requirements of §§ 408(a)(6), 408(b)(3), and 408A(c)(5) have been sat- isfied? A–42. Yes. The amount distributed in a qualified charitable distribution is an amount distributed from the IRA for purposes of §§ 408(a)(6), 408(b)(3), and 408A(c)(5). Q–43. What are the tax consequences of a direct payment of an amount from an IRA to a charity where the transaction is intended to satisfy the requirements of § 408(d)(8) but fails to do so? A–43. If an amount intended to be a qualified charitable distribution is paid to a charitable organization but fails to sat- isfy the requirements of § 408(d)(8), the amount paid is treated as (1) a distribution from the IRA to the IRA owner that is in- cludible in gross income under the rules of § 408 or § 408A, as applicable; and (2) a contribution from the IRA owner to the charitable organization that is subject to the rules under § 170 (including the per- centage limits of § 170(b)). Q–44. Will a distribution made directly by the trustee to a § 170(b)(1)(A) organi- zation (as permitted by § 408(d)(8)(B)(i)) be treated as a receipt by the IRA owner under § 4975(d)(9)? A–44. Yes. The Department of La- bor, which has interpretive jurisdiction with respect to § 4975(d), has advised Treasury and the IRS that a distribution made by an IRA trustee directly to a § 170(b)(1)(A) organization (as permit- ted by § 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under § 4975(d)(9), and thus would not consti- tute a prohibited transaction. This would be true even if the individual for whose benefit the IRA is maintained had an out- standing pledge to the receiving charitable organization. DRAFTING INFORMATION The principal author of this notice is Angelique V. Carrington of the Employee Plans, Tax Exempt and Government Enti- ties Division. For further information re- garding this notice, please contact the Em- ployee Plans taxpayer assistance telephone service at (877) 829–5500 (a toll-free num- ber) between the hours of 8:30 am and 4:30 pm Eastern Time, Monday through Friday. Ms. Carrington may be reached at (202) 283–9888 (not a toll-free number). Look-thru Rule for Related Controlled Foreign Corporations Notice 2007–9 SECTION 1. OVERVIEW This notice provides guidance under section 954(c)(6) of the Internal Revenue Code (Code) enacted by the Tax Increase Prevention and Reconciliation Act of 2005 and amended by the Tax Relief and Health Care Act of 2006. In general, and subject to certain limitations, section 954(c)(6) provides that dividends, interest, rents, and royalties received or accrued by one controlled foreign corporation (CFC) from another CFC which is a related per- son shall not be treated as foreign personal holding company income to the extent at- tributable or properly allocable to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of January 29, 20074012007–5 I.R.B. a trade or business in the United States (ECI). The provisions of section 954(c)(6) apply to taxable years of foreign corpora- tions beginning after December 31, 2005, and before January 1, 2009, and to taxable years of United States shareholders with or within which such taxable years of the foreign corporations end. The Internal Revenue Service (IRS) and the Treasury Department intend to issue additional guidance concerning sec- tion 954(c)(6). The IRS and the Treasury Department expect to issue regulations that incorporate the guidance provided in this notice and in any subsequent guid- ance. SECTION 2. BACKGROUND Section 951(a)(1) provides that if a for- eign corporation is a CFC for an uninter- rupted period of 30 days or more during any taxable year, every person who is a United States shareholder of such corpora- tion and who owns stock in such corpora- tion on the last day, in such year, on which such corporation is a CFC shall include in its gross income, for its taxable year in which or with which such taxable year of the corporation ends, itspro ratashare of the corporation’s subpart F income for such year. Section 957(a) defines a CFC as any foreign corporation if more than 50 per- cent of the total combined voting power of all classes of stock of such corporation entitled to vote, or more than 50 percent of the total value of the stock of such cor- poration, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of sec- tion 958(b), by United States sharehold- ers on any day during the taxable year of such corporation. Section 951(b) defines a United States shareholder as a United States person who owns (within the mean- ing of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes ofstockentitledtovoteofsuchforeign corporation. Section 952(a)(2) provides that subpart F income includes foreign base company income (FBCI). Subject to certain ex- ceptions, section 954(a)(1) provides that FBCI includes foreign personal holding company income (FPHCI) for the taxable year. Section 954(c)(1)(A) provides that FPHCI includes dividends, interest, royal- ties, rents, and annuities. Section 954(c) also provides special rules and exceptions to the definition of FPHCI (e.g., sections 954(c)(2) and (3)). Section 103(b) of the Tax Increase Pre- vention and Reconciliation Act of 2005 (TIPRA) (P.L. 109–222), enacted on May 17, 2006, added section 954(c)(6) to the Code. Section 426(a) of Division A of the Tax Relief and Health Care Act of 2006 (P.L. 109–432), enacted on December 20, 2006, made technicalcorrections to sec- tion 954(c)(6). Section 954(c)(6)(A) provides that for purposes of section 954(c), dividends, in- terest, rents, and royalties received or ac- crued from a CFC which is a related per- son shall not be treated as FPHCI to the ex- tent attributable or properly allocable (de- termined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor ECI (section 954(c)(6) exception). For this pur- pose, interest includes factoring income which is treated as income equivalent to in- terest for purposes of section 954(c)(1)(E). Section 954(c)(6)(A) also provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provision, including regulations to prevent the abuse of the purposes of the provision. Section 954(c)(6)(B) provides that sub- paragraph (A) applies to taxable years of foreign corporations beginning after De- cember 31, 2005, and before January 1, 2009, and to taxable years of United States shareholders with or within which such taxable years of the foreign corporations end. For purposes of section 954(c)(6), a related person has the meaning provided in section 954(d)(3) and Treas. Reg. § 1.954–1(f). The CFCs must be related persons only at the time the particular dividend, interest, rent, or royalty in ques- tion is received or accrued. The section 954(c)(6) exceptionis not elective, and so applies to all covered transactions. SECTION 3. DIVIDENDS For purposes of section 954(c)(6), the term “dividend” has the meaning provided in section 316(a), including any amount treated as a section 301(c)(1) distribution as a result of a redemption described in ei- ther section 302 or section 304. That term also includes gains treated as dividends pursuant to sections 964(e) and 356(a)(2). If a CFC is an exchanging share- holder and includes in income as a deemed dividend the all earnings and profits amount pursuant to Treas. Reg. § 1.367(b)–3(b)(3)(i), such inclusion is not eligible for the section 954(c)(6) ex- ception. With respect to the types of dividends above that are eligible for the section 954(c)(6) exception, the earnings and profits of the distributing CFC need not be accumulated during a period when it was a CFC, or during a period when the CFC receiving the dividend was a related per- son. The key requirement in this regard is that the relevant CFCs are related persons at the time the dividend is received. Dividends are not eligible for the sec- tion 954(c)(6) exception to the extent they are distributed out of earnings and profits that are attributable to subpart F income or income that is (or is treated as) ECI. Because of the way the subpart F rules operate, distributions of earnings from a CFC to a related CFC typically will not be attributable to subpart F income for pur- poses of the section 954(c)(6) exception. Such a distribution will be attributable ei- ther to earnings and profits which are, or have been, included in a United States shareholder’s gross income under section 951(a) (i.e., previously taxed income) or, to the extent the distributions are attrib- utable to earnings and profits that are not PTI, to income that is not subpart F in- come. Dividends that are attributable to income that is (or is treated as) ECI are not eligible for the section 954(c)(6) ex- ception. SECTION 4. PARTNERSHIPS If interest is received or accrued from a partnership with one or more partners that are CFCs, such interest will be treated as received or accrued from a CFC for pur- poses of section 954(c)(6) to the extent that such CFC partner would be treated as the payor of the interest under Treas. Reg. § 1.954–2(b)(4)(i)(B). Similarly, if rents or royalties are received or accrued from a partnership with one or more partners that are CFCs, such rents or royalties will 2007–5 I.R.B.402January 29, 2007 be treated as received or accrued from a CFC for purposes of section 954(c)(6) to the extent that such CFC partner would be treated as the payor of the rents or royalties under Treas. Reg. § 1.954–2(b)(5)(i)(B). If dividends, interest, rents, or royalties are received by a partnership with one or more partners that are CFCs, such amounts will be treated as received or accrued by a CFC for purposes of section 954(c)(6) to the extent provided under Treas. Reg. §§ 1.702–1(a)(8)(ii), 1.952–1(g), and 1.954–1(g), as applicable. SECTION 5. ALLOCATION AND ATTRIBUTION RULES FOR INTEREST This section applies for purposes of de- termining the extent to which interest is at- tributable or properly allocable to income of the related person which is neither sub- part F income nor ECI. (a)Interest properly allocable or apportionable to non-subpart F income Interest is not eligible for the sec- tion 954(c)(6) exception to the extent the deduction for the interest payment is al- located and apportioned under section 954(b)(5) and Treas. Reg. § 1.954–1(a)(4) and (c) to reduce the related CFC payor’s adjusted gross FBCI (as defined in Treas. Reg. § 1.954–1(a)(3)), adjusted gross in- surance income (as defined in Treas. Reg. § 1.954–1(a)(6)), or any other category of income included in subpart F income under section 952(a). In general, interest that is allocated and apportioned to income that is not sub- part F income is eligible for the section 954(c)(6) exception (subject to the rules below for ECI), even if interest deductions exceed the gross income of the related CFC payor in the year paid or accrued. However, interest is not eligible for the section 954(c)(6) exception to the extent interest deductions create (or increase) a deficit which under section 952(c) may reduce the subpart F income of the related CFC payor or another CFC. (b)Interest properly allocable or apportionable to non-ECI Interest is not eligible for the sec- tion 954(c)(6) exception to the extent the deduction for the interest payment is allocated and apportioned under section 882(c) and Treas. Reg. § 1.882–5, to gross income of the related CFC payor that is (or is treated as) ECI, or as expressly pro- vided by or pursuant to a U.S. income tax treaty or accompanying documents (such as an exchange of notes), is allocated and apportioned to gross income of the related CFC payor that is attributable to a U.S. permanent establishment. This paragraph applies if, in a single taxable year, the related CFC payor incurs both interest expense that, but for the ap- plication of section 5(b) of this notice, is eligible for the section 954(c)(6) exception (section 954(c)(6) interest expense), and other interest expense. In such a case, the amount of interest expense that is treated as allocated and apportioned to gross in- come of the related CFC payor that is (or is treated as) ECI, or under an applicable treaty, that is allocated and apportioned to gross income of the related CFC payor that is attributable to a U.S. permanent estab- lishment, is the related CFC payor’s in- terest expense for the taxable year multi- plied by a fraction equal to the amount of section 954(c)(6) interest expense over the related CFC payor’s total interest expense incurred during the taxable year. Interest is not eligible for the section 954(c)(6) exception to the extent interest deductions create (or increase) a net oper- ating loss carryover that is effectively con- nected with the conduct of a trade or busi- ness within the United States (or that is at- tributable to a permanent establishment, in the context of an applicable U.S. income tax treaty). SECTION 6. ALLOCATION AND ATTRIBUTION RULES FOR RENTS AND ROYALTIES This section applies for purposes of de- termining the extent to which rents and royalties are attributable or properly al- locable to income of the related person which is neither subpart F income nor ECI. (a)Rents and royalties properly allocable or apportionable to non-subpart F income Rents and royalties are not eligible for the section 954(c)(6) exception to the ex- tent the deductions for the rent or royalty payments are allocated and apportioned under section 954(b)(5) and Treas. Reg. § 1.954–1(a)(4) and (c) to reduce the re- lated CFC payor’s adjusted gross FBCI (as defined in Treas. Reg. § 1.954–1(a)(3)), adjusted gross insurance income (as de- fined in Treas. Reg. § 1.954–1(a)(6)), or any other category of income included in subpart F income under section 952(a). In general, rents and royalties that are allocated and apportioned to income that is not subpart F income are eligible for the section 954(c)(6) exception (subject to the rules below for ECI), even if deduc- tions for such amounts exceed the gross income of the related CFC payor in the year paid or accrued. However, rents and royalties are not eligible for the section 954(c)(6) exception to the extent deduc- tions for such amounts create (or increase) a deficit which under section 952(c) may reduce the subpart F income of the related CFC payor or another CFC. (b)Rents and royalties properly allocable or apportionable to non-ECI Rents and royalties are not eligible for the section 954(c)(6) exception to the ex- tent the deductions for the rent or royalty payments are allocated and apportioned under section 882(c) and Treas. Reg. § 1.861–8, to gross income of the related CFC payor that is (or is treated as) ECI. Rents and royalties are not eligible for the section 954(c)(6) exception to the ex- tent deductions for such amounts create (or increase) a net operating loss carry- over that is effectively connected with the conduct of a trade or business within the United States. SECTION 7. ANTI-ABUSE RULES (a)Overview In addition to the general grant of reg- ulatory authority, section 954(c)(6)(A) specifically grants the Secretary the au- thority to prescribe regulations to pre- vent the abuse of the purposes of section 954(c)(6). The transactions described be- low are abusive of the purposes of section 954(c)(6). However, the IRS and the Trea- sury Department do not intend this to be an exclusive list of abusive transactions and expect to provide further anti-abuse rules in subsequent guidance. For exam- ple, the IRS and the Treasury Department January 29, 20074032007–5 I.R.B. are considering a rule similar to the one described in section 7(d) of this notice for principal purpose domestic partnerships. (b)Amounts that reduce the U.S. income tax base, including factoring income Transactions abuse the purposes of sec- tion 954(c)(6) if they reduce income from the U.S. income tax base by having the net effect of creating a deduction of a payment, accrual, or loss of a person subject to U.S. tax without a corresponding inclusion in the subpart F income of the CFC recipient, where such inclusion would have resulted in the absence of section 954(c)(6). For purposes of section 954(c)(6), in- terest includes factoring income which is treated as income equivalent to interest for purposes of section 954(c)(1)(E) and in- terest described in section 864(d) (collec- tively, factoring income). However, cer- tain factoring income is not eligible for the section 954(c)(6) exception. Any fac- toring income derived from a transaction which has the net effect of creating a de- duction of a payment, accrual, or loss of a person subject to U.S. tax without a cor- responding inclusion in the subpart F in- come of the CFC recipient, where such in- clusion would have resulted in the absence of section 954(c)(6), is not eligible for the section 954(c)(6) exception. The follow- ing example illustrates the application of this paragraph: Example.(i)Facts. USP, a domestic corporation, owns 100% of the stock of CFC1 and CFC2. USP sells inventory to CFC1 in exchange for receivables. USP sells the CFC1 receivables to CFC2 at a dis- count, and CFC2 generates income on the collection of the CFC1 receivables. (ii)Analysis. The income earned by CFC2 on the collection of receivables is related person factoring income as defined in section 864(d) and, therefore, is treated as interest income received on a loan from CFC2 to CFC1. However, because CFC2 acquired the CFC1 receivables from USP at a discount, result- ing in a current loss for USP, such interest income is not eligible for the section 954(c)(6) exception. (c)Avoidance of section 956 If a dividend reduces or eliminates the applicable earnings of a CFC, within the meaning of section 956(b)(1), such that it reduces a U.S. shareholder’s in- clusion pursuant to section 951(a)(1)(B), the dividend is not eligible for the sec- tion 954(c)(6) exception. See also Treas. Reg. § 1.956–1T(b)(4). The following example illustrates theapplication of this paragraph: Example.(i)Facts. USP, a domestic corporation, owns 100% of the stock of CFC1 which, in turn, owns 100% of the stock of CFC2. At the beginning of Year 1, at a time when the stock of CFC2 has a value of $300 and CFC2 has zero applicable earnings (within the meaning of section 956(b)(1)), CFC2 loans $100 to USP in exchange for a note. During Year 1, CFC2 generates $100 of non-subpart F earnings and profits. Shortly before the end of Year 1, CFC2 distributes $100 to CFC1 that results in a $100 dividend to CFC1 and, as a result, CFC2 takes the position that it’s ap- plicable earnings under section 956(b)(1) are reduced from $100 to $0. (ii)Analysis. TheUSPnoteheldbyCFC2is United States property (within the meaning of section 956(c)(1)(C)), and CFC2 generated $100 of earnings and profits during Year 1. As a result, USP would have an income inclusion of $100 pursuant to section 951(a)(1)(B), but for the applicable earnings limita- tion under section 956(b)(1). However, as a result oftheYear1dividendCFC2paidtoCFC1,CFC2 does not have any applicable earnings and USP, there- fore, would not have a section 951(a)(1)(B) inclusion. Thus, the dividend income of CFC1 is not eligible for the section 954(c)(6) exception. (d)Use of options or similar interests When the use of options or similar in- terests causes a foreign corporation to be- come a CFC payor, and a principal pur- pose for the use of the options or similar interests is to qualify dividends, interest, rents, or royalties paid by the foreign cor- poration for the section 954(c)(6) excep- tion, the dividends, interest, rents, or royal- ties received or accrued from such foreign corporation will not be treated as being re- ceived or accrued from a CFC payor and, therefore, will not be eligible for the sec- tion 954(c)(6) exception. For purposes of this paragraph, an interest that is similar to an option includes, but is not limited to, a warrant, a convertible debt instrument, an instrument other than debt that is convert- ible into stock, a put, a stock interest sub- ject to risk of forfeiture, and a contract to acquire or sell stock. (e)Change of character of income through the use of a conduit entity When a transaction changes the charac- ter of the underlying income, is effected through the use of a conduit entity, and a principal purpose for the use of the con- duit entity is to qualify the underlying in- come for the section 954(c)(6) exception, the dividends, interest, rents, or royalties received or accrued will not be treated as being received or accrued from a related CFC and, therefore, will not be eligible for the section 954(c)(6) exception. The fol- lowing example illustrates the application of this paragraph: Example.(i)Facts. USP, a domestic corporation, owns 100% of the stock of CFC1, a country Y cor- poration, and CFC2, a country Z corporation. FC, a country Z corporation, is not a CFC, but is a re- lated person under section 954(d)(3). In year 1, FC leases property from CFC1 for $100. USP causes the rental payment to be made through CFC2. Thus, CFC2 receives a payment from FC that is excluded from FPHCI under section 954(c)(3)(A)(i). CFC2 then makes a payment to CFC1, in satisfaction of the rent owed by FC, which is intended to qualify for the section 954(c)(6) exception. A principal purpose for the involvement of CFC2 in the transaction is to qual- ify the rental payment from FC to CFC1 as eligible for the section 954(c)(6) exception. (ii)Analysis. If the rental payment had been made directly from FC to CFC1, it would have been included as FPHCI under section 954(c)(1)(A). By causing the payment to be made through CFC2, USP sought to convert the character of the income from FPHCI to income excluded from FPHCI. However, because a principal purpose of including CFC2 in the transaction as a conduit entity was to avoid in- clusion of the rental payment from FC to CFC1 as FPHCI,thepaymentfromCFC2toCFC1willbe treated as being made from FC to CFC1. Therefore, the payment is not eligible for the section 954(c)(6) exception. SECTION 8. EFFECTIVE DATE Sections 3, 4, 5, 6, 7(b) and 7(c) of this notice are effective for taxable years of for- eign corporations beginning after Decem- ber 31, 2005. Sections 7(d) and 7(e) of this notice are effective for taxable years of for- eign corporations beginning after Decem- ber 31, 2006. SECTION 9. DRAFTING INFORMATION The principal author of this notice is Paul J. Carlino of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Carlino at (202) 622–3840 (not a toll- free call). Request for Comments Comments may be submitted to CC:PA:LPD:PR (Notice 2007–9), Room 5203, Internal Revenue Service, PO Box 7604, Washington, DC 20044. Submis- sions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and4p.m. totheCourier’sDeskat1111 2007–5 I.R.B.404January 29, 2007 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR (No- tice 2007–9) Room 5203. Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2007–9) in the subject line. Communications Excise Tax; Toll Telephone Service Notice 2007–11 SECTION 1. PURPOSE This notice amplifies, clarifies, and modifies Notice 2006–50, 2006–25 I.R.B. 1141. That notice provides that the tax imposedby§4251oftheInternalRev- enue Code (relating to communications excise tax) does not apply to amounts paid for long distance service and bundled ser- vice (collectively, nontaxable service) and also provides that taxpayers may request a credit or refund of tax on nontaxable ser- vice that was billed to the taxpayer after February 28, 2003, and before August 1, 2006, only on their 2006 federal income tax returns. This notice— (a) Provides the conditions under which individual taxpayers may use the standard amounts announced in IR–2006–137 (Au- gust 31, 2006) on their 2006 federal in- come tax returns to request a credit or re- fund of the excise tax paid on nontaxable service; (b) Provides guidance regarding the Business and Nonprofit Estimation Method, announced in IR–2006–179 (November 16, 2006); (c) Answers questions that have been raised since the issuance of No- tice 2006–50; and (d) Modifies the requirement for claims filed on or before May 25, 2006. SECTION 2. BACKGROUND For the statutory background of the tax imposedby§4251,seesection2ofNo- tice 2006–50. When used in this notice, local-only service,long distance service, andnontaxable servicehave the meaning giventothetermsinsection3ofNotice 2006–50.Bundled servicehas the mean- ing given to the term by section 5 of this notice. SECTION 3. STANDARD AMOUNT (a)Conditions to allowance of standard amount. A request for credit or refund of the standard amount, instead of the actual amount of federal communications excise tax paid for nontaxable service, may be made on a 2006 Form 1040 Series,U.S. In- dividual Income Tax Return, if any person filing the return, or any dependent listed on the return— (1) Paid for any nontaxable service (other than for a prepaid telephone card or prepaid cellular telephone) that was billed to the taxpayer after February 28, 2003, and before August 1, 2006; (2) Paid all federal communications ex- cise taxes billed by their telecommunica- tions provider after February 28, 2003, and before August 1, 2006; (3) Has not received a credit or refund of these taxes from the telecommunica- tions provider; (4) Has not requested a credit or refund from the telecommunications provider or, if so requested, has withdrawn any such request; and (5) Did not file any other claim or re- quest for credit or refund with the IRS for the federal communications excise tax for a period after February 28, 2003. (b)Calculating standard amounts—(1) In general—(i)2006 Form 1040 Series (other than EZ). To determine the standard amount, taxpayers must first determine the number of exemptions for which they are entitled on their 2006 Form 1040 Se- ries federal income tax return (other than the 2006 Form 1040 EZ). The Instruc- tions to the 2006 Form 1040 Series federal income tax return and Publication 501, Exemptions, Standard Deduction, and Filing Information, provide guidance on determining the correct number of exemp- tions. Once the individual determines the number of exemptions, the individual can select the appropriate standard amount based upon the number of those exemp- tions. Individuals should refer to the 2006 federal income tax return instructions to ensure that the standard amount is entered on the appropriate part of the return. (ii)2006 Form 1040 EZ.Online5,a taxpayer that checks the box for “you” is treated as having one exemption. A tax- payer that checks the boxes for “you” and “spouse” is treated as having two exemp- tions. (2)Amounts—(i) For each 2006 Form 1040 Series federal income tax return filed showing one exemption for purposes of determining the standard amount, the stan- dard amount allowed on that return is $30. (ii) For each 2006 Form 1040 Series federal income tax return filed showing two exemptions for purposes of deter- mining the standard amount, the standard amount allowed on that return is $40. (iii) For each 2006 Form 1040 Series federal income tax return filed showing three exemptions for purposes of deter- mining the standard amount, the standard amount allowed on that return is $50. (iv) For each 2006 Form 1040 Series federal income tax return filed showing four or more exemptions for purposes of determining the standard amount, the stan- dard amount allowed on that return is $60. (c)Interest. The standard amount rep- resents both the overpayment of the fed- eral communications excise tax paid on nontaxable service and the interest on that overpayment. (d)Actual Amounts. To request a credit or refund for the actual amount of federal communications excise tax paid, taxpayers must complete Form 8913,Credit for Fed- eral Telephone Excise Tax Paid, and attach that form to their 2006 Form 1040 Series federal income tax return. (e)Examples. The following examples illustrate the application of this section. Example 1. A, an individual, files a joint return with Z, A’s spouse. A meets the conditions to al- lowance described in paragraph (a) of this section. A used the 2006 federal income tax return instructions to determine that their correct number of exemptions is two. A may request the credit or refund of the fed- eral communications excise tax under § 4251 for $40. Example 2. B, an individual, used the 2006 fed- eral income tax return instructions to determine that she had one exemption. B further used her telephone bills for the period March 1, 2003, through July 31, 2006, to determine that the total amount paid for fed- eral communications excise tax under § 4251 for non- taxable service to all telecommunications providers was $45. Completing Form 8913 and attaching it to her 2006 Form 1040 Series federal income tax return, B may request a credit or refund of $45, the actual amount she paid in federal communications excise tax on nontaxable service under § 4251. As an alter- native, B may request a credit or refund of the stan- dard amount of $30 without having to complete Form 8913. January 29, 20074052007–5 I.R.B. SECTION 4. DISTINCTION BETWEEN LOCAL-ONLY SERVICE AND BUNDLED SERVICE (a)Technology for transmitting tele- phone call. The method for sending or receiving a call, such as on a landline telephone, wireless (cellular) telephone or some other method, does not affect whether a service is local-only or bundled. (b)Combined local exchanges.Iftwo or more telecommunications providers combine their resources to expand the ge- ographic area that each treats as “local” service and each bills its customers for that service as local-only service, then that service is local-only service. (c)Billing method.Section3(a)ofNo- tice 2006–50 and section 5 of this no- tice provide that bundled service is lo- cal and long distance service provided un- der a plan that does not separately state the charge for the local telephone service. Thus, if local and long distance service is billed to a customer on a single bill but the telecommunications company sep- arately states the amount paid for local- only service and the amount paid for long distance service, the amount paid for lo- cal-only service is subject to federal com- munications excise tax. (d)Examples. The following examples illustrate the application of this section. Example 1. Customer A purchases telecom- munications service from B, a telecommunications provider. Such service includes both local-only ser- vice and long distance service. B’s bill to A states $X for telecommunications service. The bill does not separately state a charge for either local-only service or long distance service. Since the bill does not separately state the charge for local-only service, the service is a bundled service. Thus, the entire amount of A’s telecommunications service is bundled service and thus nontaxable service. Example 2. Customer C purchases telecom- munications service from D, a telecommunications provider. Such service includes both local-only ser- vice and long distance service. D’s bill to C states $X amount for telecommunications service. The bill further states $Y amount for local-only service and $Z amount for long distance service. Since the charges for local-only service and long distance ser- vice are separately stated,the service is not bundled service. Accordingly, only the amounts charged for long distance service are for nontaxable service; tax is imposed on the amounts paid for the local-only service. SECTION 5. CLARIFICATION OF DEFINITION OF BUNDLED SERVICE (a)Present definition. Section 3(a) of Notice 2006–50 defines bundled ser- vice as local and long distance service provided under a planthat does not sep- arately state the charge for the local telephone service. Bundled service in- cludes, for example, Voice over Inter- net Protocol service, prepaid telephone cards, and plans that provide both lo- cal and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. Telecommu- nications companies provide bundled service for both landline and wireless (cellular) service. (b)Reason for clarification.Theex- ample in the second sentence of the def- inition of bundled service incorrectly as- sumes that all Voice over Internet Proto- col (VoIP) service would provide both lo- cal and long distance service and that the charges for the two services would not be separately stated. As noted in section 4(a) of this notice, the method of transmitting a call is not a factor in determining whether a service is local-only or bundled. Ac- cordingly, a VoIP service that provides lo- cal-only service is treated as local-only ser- vice. (c)Revised definition. Accordingly, the definition of bundled service is clarified to read as follows: Bundled service is local and long dis- tance service provided under a plan that does not separately state the charge for the local telephone service. Bun- dled service includes plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmis- sion time for which the service is used. Telecommunications companies pro- vide bundled service for both landline and wireless (cellular) service. If Voice over Internet Protocol service provides both local and long distance service and the charges are not separately stated, such service is bundled service. SECTION 6. PREPAID TELEPHONE CARDS (PTC) (a)In general—(1)Prepaid telephone cards. Section 4251(d) and § 49.4251–4 of the Facilities and Services Excise Taxes Regulations provide rules for prepaid tele- phone cards (PTC). Section 49.4251–4(b) defines PTC as a card or similar arrange- ment that permits its holder to obtain a fixed amount of communications services by means of a code (such as a personal identification number (PIN)) or other ac- cess device provided by the carrier and to pay for those services in advance. The amount paid for PTCs is determined un- der the rules of §§ 4251(d)(1) and (2) and § 49.4251–4(c). Under this notice, the PTC will be treated as nontaxable service unless a PTC expressly states it is for lo- cal-only service. (2)Other cards. This section does not address cards that permit the holder to purchase various services in addition to telecommunications services. Such services include, but are not limited to, ring tone downloads, music downloads, text messaging, picture messaging, web browsing, game downloads, or screen saver downloads. (b)Application of the tax—(1)Defi- nitions. Section 49.4251–4(b) provides that— (i)Carriermeans a telecommunica- tions carrier as defined in 47 U.S.C. 153. (ii)Holdermeans a person that pur- chases other than for resale. (iii)Transfereemeans the first person that is not a carrier to whom a PTC is trans- ferred by a carrier. (2)Imposition, liability, and collection. Section 4251(d) provides that the § 4251 tax is imposed on the transfer of a PTC to a transferee; § 49.4251–4(d)(1) provides that the person liable for the tax is the transferee and that the person responsi- ble for collecting the tax generally is the carrier transferring the PTC to the trans- feree. Section 49.4251–4(d)(1) further provides that if a holder purchases a PTC from a transferee reseller, the amount the holder pays for the PTC is not treated as an amount paid for communications ser- vices and thus tax is not imposed on that payment. (c)Person eligible to request credit or refund. The transferee is the person liable for the tax paid on a PTC and thus gener- ally is the person eligible to request a credit or refund of the tax it paid. The carrier is eligible to request a credit or refund only if it meets the conditions of section 5(d)(4) of Notice 2006–50. The holder is not li- 2007–5 I.R.B.406January 29, 2007 able for the tax and thus cannot request a credit or refund. SECTION 7. PREPAID CELLULAR TELEPHONES (a)In general—(1)Prepaid cellular telephones. Certain telecommunications providers offer wireless (cellular) telecom- munications service on a prepaid service basis (prepaid telephones) whereby a cus- tomer purchases the cellular telephone with a set number of minutes available for telecommunications. When the cus- tomer exhausts the number of minutes on the prepaid telephone, the customer may purchase additional minutes. The cus- tomer does not enter into a contract with the telecommunications provider; there are no service charges after the additional purchase and no monthly bills. Under this notice, the prepaid telephone will be treated as nontaxable service unless the terms of the prepaid telephone service expressly state it is for local-only service. (2)Other prepaid cellular telephones. This section does not address arrange- ments that permit the holder to purchase various services in addition to telecommu- nications services. Such services include, but are not limited to, ring tone down- loads, music downloads, text messaging, picture messaging, web browsing, game downloads, or screen saver downloads. (b)Application of the tax.Rulessim- ilar to the rules for PTCs, as described in section 6 of this notice, apply to prepaid telephones. Thus, the person liable for tax is the person (transferee) that buys the prepaid telephone from the telecommuni- cations provider (carrier) and the carrier is responsible for collecting the tax. Any holder of a prepaid telephone (that is, a per- son that buys the prepaid telephone other than for resale) is not liable for tax. (c)Person eligible to request credit or refund. The transferee is the person liable for the tax paid on a prepaid telephone and thus generally is the person eligible to re- quest a credit or refund of the tax it paid. The carrier is eligible to request a credit or refund only if it meets the conditions of section 5(d)(4) of Notice 2006–50. The holder is not liable for the tax and thus can- not request a credit or refund. SECTION 8. CHARGES IN CONNECTION WITH LOCAL-ONLY SERVICE (a)Background. Section3(b)ofNo- tice 2006–50 defines local-only service as including certain services and facilities provided in connection with local tele- phone service, even though these services mayalsobeusedinconnectionwithlong distance service. As examples, the no- tice cites to Rev. Rul. 72–537, 1972–2 C.B. 574 (telephone amplifier), Rev. Rul. 73–171, 1973–1 C.B. 445 (automatic call distributing equipment), and Rev. Rul. 73–269, 1973–1 C.B. 444 (special tele- phone). (b)Subscriber line charges. In addi- tion to the examples in paragraph (a) of this section, amounts paid for subscriber line charges, which are described in Rev. Rul. 87–108, 1987–2 C.B. 260, are also amounts paid for local telephone service. This charge may appear on a bill as “Fed- eral Access Charge,” “Customer or Sub- scriber Line Charge,” or “Interstate Access Charge.” (c)Universal service fees—(1)Back- ground. All telecommunications compa- nies that provide interstate and interna- tional telecommunications service con- tribute to the federal Universal Service Fund (USF). Their contributions support four Universal Service programs estab- lished and overseen by the Federal Com- munications Commission (FCC). Some telecommunications companies recover their contribution to the USF directly from their customers by billing them for this charge. The FCC does not require companies to pass on these costs to their customers. Each company makes a busi- ness decision about whether and how to recover USF costs. A company that sepa- rately states this charge on a bill may call it a “Federal Universal Service Fee” or “Universal Connectivity Fee.” (2)Application. Because telecommu- nications providers charge the USF to their customers in connection with their customers’ long distance service, amounts paid for separately stated USF amounts are not amounts paid forlocal-only service. SECTION 9. PERSON TO MAKE REQUEST IF TAXPAYER IS NO LONGER IN BUSINESS OR DECEASED Neither Notice 2006–50 nor this notice create any special rules regarding the per- son to request a credit or refund of tax for a taxpayer that no longer exists or is de- ceased. The same rules that apply to re- quests for credits or refunds of other fed- eral taxes also apply to similar requests of the tax imposed under § 4251. These rules depend upon the facts and circumstances relating to the reasons that the taxpayer no longer exists. The Form 8913 Instructions and Publication 559,Survivors, Executors, and Administrators, provide general guid- ance for taxpayers regarding deceased tax- payers. SECTION 10. EFFECT OF NOTICE 2006–50 ON STATE AND LOCAL TELECOMMUNICATIONS TAXES Neither Notice 2006–50 nor this notice affect the ability of state or local govern- ments to impose or collect telecommuni- cation taxes under the respective statutes of those governments. SECTION 11. NO OBLIGATION OF TELECOMMUNICATIONS PROVIDERS TO SUPPLY RECORDS TO CUSTOMERS The IRS has been asked to require telecommunications providers to supply their customers with those customers’ telecommunications bills for periods after February 28, 2003, and before August 1, 2006. Neither Notice 2006–50 nor this notice requires telecommunications providers to supply billing records to their customers. SECTION 12. BUSINESS AND NONPROFIT ESTIMATION METHOD (a)In general. This section provides rules for the Business and Nonprofit Esti- mation Method (EM) that eligible entities may use to determine the amount of their credit or refund for nontaxable service. El- igible entities may, but are not required to, use the EM instead of the actual amount of federal communications excise tax they paid on nontaxable service to calculate the amount of their credit or refund. January 29, 20074072007–5 I.R.B. (b)Definitions. The following defini- tions apply to this section. (1)Eligible entitymeans— (i) Any— (A) Business entity (including a corpo- ration or partnership); (B) Trust or estate; (C) Tax-exempt organization; and (D) Individual owner of rental property and any self-employed individual (includ- ing an independent contractor, sole propri- etor, or farmer) but only if the individual (including a married couple filing a joint return) reports gross rental and business in- come totaling more than $25,000 on his or her 2006 federal income tax return; (ii) That was in operation during any time from March 1, 2003 through July 31, 2006; and (iii) That received and paid for telecom- munications service that was reflected on bills dated in April 2006 and September 2006. (2)Total telephone expensesmeans all amounts paid to every telecommunications provider used by the eligible entity for tele- phone service that werebilled after Febru- ary 28, 2003, and before August 1, 2006. These amounts include, but are not lim- ited to, amounts paid for long distance ser- vice, local-only service, bundled service, 900 number service, universal service fees, federal, state, and local taxes. If an eligible entity is billed for telephone and non-tele- phone services on one bill each month and does not separately track non-telephone services in its books and records, the en- tire amount of that bill is included in to- tal telephone expenses. An eligible en- tity may determine the amount of its to- tal telephone expenses by examining its books and records, including, for example, its general ledger, check register, and can- celed checks. (3)Employeemeans any person work- ing for the taxpayer full or part time as re- ported on the eligible entity’s Form 941, Employer’s Quarterly Federal Tax Return, for the 2 nd quarter of 2006, other than any person employed as a household em- ployee, in a non-pay status, on a pension, or an active member of the Armed Forces. (c)Using the EM to determine the amount of the credit or refund—(1)De- termining the federal excise tax as a percentage of the telephone bill—(i) First, determine the amount of federal commu- nications excise tax on all telephone bills dated in April 2006 and all telephone bills dated in September 2006. The amount is generally separately stated on the bill as “FET” or “federal tax”. (ii) Next, for all the April telephone bills and all the September telephone bills, divide the amount of federal communica- tions excise tax included on the bills by the total telephone expenses on the bills. The resulting amounts are the April and September percentages, respectively. (iii) Next, subtractthe September per- centage from the April percentage. For purposes of this notice, this amount is the federal excise tax percentage (FETP). (2)Capping the FETP—(i) Determine the number of employees. (ii) For taxpayers with 250 or fewer em- ployees, the FETP is capped at 2 percent. (iii) For taxpayers with more than 250 employees, the FETP is capped at 1 per- cent. (d)Calculating the amount of the credit or refund—(1)Records kept on a monthly basis. If the entity has maintained its tele- phone expense records on a monthly ba- sis, multiply the FETP amount by the tax- payer’s monthly total telephone expenses for each month of the 41 month period from March 2003 through July 2006. The product of this calculation is the taxpayer’s credit or refund amount. (2)Records kept on an annual basis. If the entity has maintained its telephone expense records on an annual basis rather than a monthly basis, prorate its annual amount equally to each month of that year. Thus, for example, a taxpayer maintaining annual telephone expense records for 2003 would divide its total telephone expenses by 12. Next, the taxpayer would use that monthly amount to complete the calcula- tions for the credit or refund amount for 2003. (e)Actual Amounts.UseoftheEMis optional. Taxpayers may use the actual amounts paid for federal communications excise tax for nontaxable service to deter- mine the amount of their credit or refund. (f)Examples. The following examples illustrate the application of this section. Example 1—(i)Facts. Business A has 250 em- ployees. A’s April 2006 telephone bill is $1,700, in- cluding federal communications excise tax of $47.60. A’s September 2006 telephone bill is $1,600, includ- ing federal communications excise tax of $24.00. A’s total telephone expenses, for which it does not have monthly records, are as follows: 2003 — $10,800.00 2004 — $16,000.00 2005 — $20,000.00 2006 — $20,571.37. (ii)Determining the April and September percent- ages. A’s April percentage is 2.8 percent (47.60 ÷ 1,700). A’s September percentage is 1.5 percent (24 ÷ 1,600). (iii)Determining the FETP. The difference be- tween A’s April percentage and September percent- age is 1.3 percent (2.8 - 1.5). Thus, the FETP is 1.3 percent. (iv)Capping the FETP. Because A’s number of employees does not exceed 250, A’s FETP is not capped at 1 percent. (v)Prorating. Because A did not maintain its total telephone expense records by month, it prorates those amounts equally to each month within the March 2003 — July 2006 period for each particular year. For 2003, A divides its total telephone expense of $10,800 by 12 and multiplies that result by 10 (the number of months between March and December). ([10,800 ÷ 12] x 10 = 9,000.) For 2006, A divides its total telephone expense of $20,571.37 by 12 and multiplies that result by 7 (the number of months between January and July). ([20,571.37 ÷ 12] x 7 = 12,000.) (vi)Calculating the amount of the credit or re- fund. Using the EM, the amount of A’s credit or re- fund is calculated as follows: 2003: $9,000 x .013 = $117 (117÷10 = 11.7) Monthly amount $11.70 2004: $16,000 x .013 = $208 (208÷12 = 17.33) Monthly amount $17.33 2005: $20,000 x .013 = $260 (260÷12 = 21.67) Monthly amount $21.67 2006: $12,000 x .013 = $156 (156÷7 = 22.29) Monthly amount $22.29 (vii)Reporting the credit or refund amounts on Form 8913—(A) Because the credit or refund pe- riod does not align with the calendar quarters, Form 8913 requires taxpayers to report the credit or re- fund amounts in 13 three-month intervals and one two-month interval. Thus, A would report credit or refund amounts on Form 8913 as follows: March,April,May2003—$35.10(11.70x3= 35.10) June, July, August 2003 — $35.10 (11.70 x 3 = 35.10) September, October, November 2003 — $35.10 (11.70 x 3 = 35.10) December 2003, January, February 2004 — $46.36 (11.70 + [17.33 x 2] = 46.36) March, April, May 2004 — $51.99 (17.33 x 3 = 51.99) June,July,August2004—$51.99(17.33x3= 51.99) September, October, November 2004 — $51.99 (17.33 x 3 = 51.99) December 2004, January, February 2005 — $60.67 (17.33 + [21.67 x 2] = 60.67) March, April, May 2005 — $65.01 (21.67 x 3 = 65.01) June,July,August2005—$65.01(21.67x3= 65.01) September, October, November 2005 — $65.01 (21.67 x 3 = 65.01) December 2005, January, February 2006 — $66.25 (21.67 + [22.29 x 2] = 66.25) 2007–5 I.R.B.408January 29, 2007 March, April, May 2006 — $66.87 (22.29 x 3 = 66.87) June, July 2006 — $44.58 (22.29 x 2 = 44.58) (B) After determining the amount of credit or re- fund using the EM, A reports the amounts on Form 8913, and attaches the Form 8913 to A’s 2006 federal income tax return. Example 2. The same facts asExample 1except that A has 500 employees. A’s FETP is capped at 1 percent. Thus, A must make the same calculation as inExample 1to determine the proper amount of A’s credit or refund of federal communications excise tax using the FETP of 1 percent, rather than 1.3 percent. SECTION 13. FORM 1040EZ–T, REQUEST FOR REFUND OF FEDERAL TELEPHONE EXCISE TAX Individuals who do not have to file a federal income tax return and who meet the conditions for requesting a refund of the federal communications excise tax may file Form 1040EZ–T to request the refund. Individuals requesting a refund of actual amounts of federal communica- tions excise tax paid must complete Form 8913 and attach that form to the Form 1040EZ–T. SECTION 14. MODIFICATION OF PROVISION REGARDING REQUESTS FOR CREDIT OR REFUND (a)Present requirement. Section 5(g) of Notice 2006–50 provides as follows: Requests that do not follow the pro- visions of this notice. Requests that do not follow the provisions of this notice (whether filed before or after its publi- cation)— (1) Will not be processed to the extent they relate to the tax paid on nontaxable service that was billed after February 28, 2003; and (2) Will be processed normally to the extent they relate to the tax paid on non- taxable service that was billed before March 1, 2003. (b)Reason for modification.Manyof the pending refund claims that were filed on or before May 25, 2006, include re- fund claims for nontaxable service that was billed before March 1, 2003, and after February 28, 2003. In the interest of sound tax administration and efficiency, the IRS will process all claims for credit or refund that were filed on or before May 25, 2006. (c)Revised requirement. Accordingly, section 5(g) of Notice 2006–50 is modified to read as follows: (1) Requests that do not follow the provisions of Notice 2006–50 and that were filed on or before May 25, 2006, will be processed normally. (2) Requests that were filed on or af- ter May 26, 2006, and do not follow the provisions of Notice 2006–50, will not be processed to the extent they relate to the tax paid on nontaxable service that was billed after February 28, 2003. SECTION 15. EFFECT ON OTHER DOCUMENTS Notice 2006–50 is amplified, clarified, and modified. SECTION 16. DRAFTING INFORMATION The principal author of this notice is Barbara B. Franklin of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further in- formation regarding this notice, contact 202–622–3130 (not a toll-free number). Weighted Average Interest Rates Update Notice 2007–12 This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under §412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addi- tion, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II). CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE Sections 412(b)(5)(B)(ii) and 412(l)(7) (C)(i), as amended by the Pension Funding EquityActof2004andbythePensionPro- tection Act of 2006, provide that the inter- est rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a per- missible range based on the weighted av- erage of the rates of interest on amounts invested conservativelyinlongtermin- vestment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. Notice 2004–34, 2004–1 C.B. 848, pro- vides guidelines for determining the cor- porate bond weighted average interest rate and the resulting permissible range of in- terest rates used to calculate current liabil- ity. That notice establishes that the corpo- rate bond weighted average is based on the monthly composite corporate bond rate de- rived from designated corporate bond in- dices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–36 I.R.B. 366. The composite corporate bond rate for December 2006 is 5.75 percent. Pursuant to Notice 2004–34, the Service has de- termined this rate as the average of the monthly yields for the included corporate bond indices for that month. The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below. For Plan Years Corporate Bond90% to 110% Beginning in:WeightedPermissible MonthYearAverageRange January20075.785.21 to 5.78 January 29, 20074092007–5 I.R.B. 30-YEAR TREASURY SECURITIES INTEREST RATE Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulations provides that the applica- ble interest rate for a month is the annual interest rate on 30-year Treasury securi- ties as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin. The rate of interest on 30-year Treasury securities for December 2006 is 4.68 per- cent. The Service has determined this rate as the monthly average of the daily deter- mination of yield on the 30-year Treasury bond maturing in February 2036. Drafting Information The principal authors of this notice are Paul Stern and Tony Montanaro of the Em- ployee Plans, Tax Exempt and Govern- ment Entities Division. For further infor- mation regarding this notice, please con- tact the Employee Plans’ taxpayer assis- tance telephone service at 877–829–5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 202–283–9703. Mr. Montanaro may be reached at 202–283–9714. The telephone numbers in the preceding sen- tences are not toll-free. Modification of the Substantial Assistance Rules Notice 2007–13 SECTION 1. OVERVIEW This notice announces that the Trea- sury Department and the Internal Revenue Service (the IRS) will amend Treas. Reg. § 1.954–4(b)(1)(iv) and (b)(2)(ii) and the examples thereunder, which provide that substantial assistance rendered by a related person or persons to a controlled foreign corporation (“CFC”) is included within the definition of foreign base company services income under section 954(e) of the Internal Revenue Code (Code). These amended regulations will limit the types of activities that constitute substantial as- sistance to certain assistance rendered, directly or indirectly, by a United States person or persons (as the term is defined in section 957(c) of the Code) to a related CFC. Until regulations reflecting these changes are issued, taxpayers may rely on this notice. In addition, in light of the repeal of the foreign base company shipping income rules under subpart F, this notice confirms that income that previously was foreign base company shipping income will con- tinue to be foreign base company income to the extent that it is within the definition of a remaining category of foreign base company income. This notice also clari- fies that Treas. Reg. § 1.954–6, which pro- vides rules addressing foreign base com- pany shipping income, is effective only for purposes of applying the rules for the with- drawal of previously excluded subpart F income from qualified investments under section 955. SECTION 2. SUBSTANTIAL ASSISTANCE RULES A. BACKGROUND Under section 951(a)(1)(A)(i) of the Code, a United States shareholder of a CFC includes in gross income each year itspro ratashare of the CFC’s subpart F income for the taxable year of the CFC which ends with or within such taxable year of the shareholder. Section 952(a)(2) defines the term “subpart F income” to mean, in part, foreign base company in- come (as defined under section 954). Section 954(a)(3) of the Code defines “foreign base company income” to include “foreign base company services income” for the taxable year. Section 954(e)(1) de- fines “foreign base company services in- come” for purposes of section 954(a)(3) to mean income derived in connection with the performance of services which are per- formed (1) for, or on behalf of, any re- lated person and (2) outside the country under the laws of which the CFC is cre- ated or organized. The statute does not ex- plicitly provide for substantial assistance rules under section 954(e). Those rules are promulgated under the Secretary’s author- ity under section 7805(a) to issue regula- tions interpreting the term “for, or on be- half of, any related person” under section 954(a)(3). Treas. Reg. § 1.954–4(b)(1)(iv) de- fines “services which are performed for, or on behalf of, a related person” to in- clude substantial assistance contributing to the performance of services by a CFC that hasbeenfurnishedbyarelatedpersonor persons. Treas. Reg. § 1.954–4(b)(2)(ii) sets forth the rules for the application of the substantial assistance test. Treas. Reg. § 1.954–4(b)(2)(ii)(a) states, in general, that assistance “shall include, but shall not be limited to, direction, su- pervision, services, know-how, financial assistance (other than contributions to capital), and equipment, material, or sup- plies.” Treas. Reg. § 1.954–4(b)(2)(ii)(b) and (c) then provide separate tests depend- ing on whether the assistance provided by the related person or persons is in the form of (1) direction, supervision, services or know-how, or (2) financial assistance, equipment, material or supplies. Treas. Reg. § 1.954–4(b)(2)(ii)(b) pro- vides that assistance in the form of direc- tion, supervision, services or know-how may be substantial under either a subjec- tive or an objective test. Under the subjec- tive test, assistance in the form of direc- tion, supervision, services or know-how will be considered substantial if the assis- tance provides the CFC with skills which are a principal element in producing the income from the performance of such ser- vices by such CFC (the principal element test). For example, a CFC enters into a contract with an unrelated person to drill an oil well. The technical and supervi- sory personnel who oversee the drilling of the well are employees of M, a person re- latedtoCFC.Insuchaninstance,theser- vices performed by CFC for the unrelated party are considered foreign base company services because the services performed by M substantially assist CFC in the per- formance of the contract and the services performed by M are a principal element in producing the income from the perfor- mance of the drilling contract.Cf. Treas. Reg. § 1.954–4(b)(3), Ex. 2. Alternatively, under the objective test, assistance in the form of direction, super- vision, services or know-how may be sub- 2007–5 I.R.B.410January 29, 2007 stantial if the cost to the CFC of the assis- tance furnished by persons related to the CFC equals 50 percent or more of the total cost to the CFC of performing the services performed by such CFC (the cost test). For these purposes, costs are determined af- ter taking into account adjustments (if any) made under section 482.SeeTreas. Reg. § 1.954–4(b)(2)(ii)(b). Treas. Reg. § 1.954–4(b)(2)(ii)(c) states, in general, that financial assistance, equipment, material, or supplies furnished by a person related to the CFC shall be considered assistance only in the amount, after taking into account adjustments (if any) made under section 482, by which the consideration actually paid by the CFC to the related person for the purchase or use of such item is less than the arm’s length charge for such purchase or use. The total of all such amounts from all related per- sons is compared with the profits derived by the CFC from the performance of the services to determine whether the related party’s contributions qualify as substantial assistance. Treas. Reg. § 1.954–4(b)(2)(ii)(d) expands on the tests in Treas. Reg. § 1.954–4(b)(2)(ii)(b) and (c) by pro- viding that, even if assistance furnished by a related person or persons to a CFC is not considered substantial under paragraphs (b) or (c) in isolation, it may neverthe- less constitute substantial assistance when taken together or in combination with other assistance furnished by a related person or persons to the CFC. Treas. Reg. § 1.954–4(b)(2)(ii)(e) provides that, in ap- plying Treas. Reg. § 1.954–4(b)(2)(ii)(b) and (d), assistance in the form of direc- tion, supervision, services, or know-how shall not be taken into account, unless the assistance so furnished assists the CFC directly in the performance of the services performed. Treas. Reg. § 1.954–4(b)(3) sets forth examples, including examples addressing the application of the substan- tial assistance test. B. DISCUSSION The substantial assistance rules were published as final regulations in 1968 (T.D. 6981, 1968–2 C.B. 314). The pur- pose of the substantial assistance rules is to treat as foreign base company services income, income received by a CFC from rendering services to an unrelated person where in rendering those services a re- latedpersonsubstantially contributes to the CFC’s performance of such services in a manner that suggests that the CFC, rather than the related party, entered into the contract to obtain a lower rate of tax on the service income. Since the regulations were published in 1968, there has been a substantial expansion in the reach of the global economy, particularly in the provi- sion of global services. As a result, many of the U.S. multinationals that provide ser- vices outside of the United States currently have globally integrated businesses with support capabilities for unrelated customer projects in different geographic locations, largely based on factors such as expertise and cost efficiencies. For example, a CFC may contract with an unrelated person to provide installa- tion and subsequent repair services. A re- lated CFC, however, is the foreign corpo- ration that provides the repair services. Al- though the foreign related CFC that is pro- viding the support services will continue to have foreign base company services in- cometotheextentthatitperformsthose services outside of its country of incor- poration, it does not seem appropriate in the current global economy to continue to treat the profits of the CFC contracting to furnish services to the unrelated person as foreign base company services income be- cause of the support services provided by a related foreign person. If the substantial assistance regulations are not amended to deal with these types of businesses struc- tures, the regulations may cause taxpay- erstochangethewaytheydobusiness or structure their operations in light of the substantial assistance rules, even if such a structure would be less efficient from a business perspective by, for example, re- quiring a taxpayer to duplicate a full ser- vice infrastructure in each country. The Treasury Department and the IRS, however, remain concerned about the abil- ity of related United States persons to shift profits offshore to CFCs organized in low tax jurisdictions in cases where the related United States person or persons provides so much assistance to the CFC that the CFC cannot be said to be providing ser- vices on its own account and thus acting as an independent entity. Accordingly, the Treasury Department and the IRS will re- vise the regulations to eliminate the sub- stantial assistance rules, except in certain limited instances in which a United States person or persons provide sufficient as- sistance directly or indirectly to a related CFC. C. PROPOSED GUIDANCE The Treasury Department and the IRS will amend Treas.Reg. § 1.954–4(b)(1)(iv) and (b)(2)(ii) and the examples thereunder. Treas. Reg. § 1.954–4(b)(1)(iv) as amended will pro- vide that services performed by a CFC in a case where substantial assistance by a related United States person or persons (as the term is defined in section 957(c) of the Code) contributes to the perfor- mance of such service will constitute “services which are performed for, or on behalf of, a related person.” Treas. Reg. § 1.954–4(b)(2)(ii) as amended will pro- vide that “substantial assistance” consists of assistance furnished (directly or indi- rectly) by a related United States person or persons to the CFC if the assistance satis- fies an objective cost test. The subjective “principal element” test will no longer apply to determine substantial assistance. For purposes of the objective cost test, the definition of the term “assistance” will in- clude, but will not be limited to, direction, supervision, services, know-how, finan- cial assistance (other than contributions to capital), and equipment, material, or supplies provided directly or indirectly by a related United States person to a CFC. The cost test will be satisfied if the cost to the CFC of the assistance furnished by the related United States person or persons equals or exceeds 80 percent of the total cost to the CFC of performing the ser- vices. The term “cost” will be determined after taking into account adjustments, if any, made under section 482 of the Code. Taxpayers may apply the cost test either by demonstrating that the assistance pro- vided, directly or indirectly, by related United States persons is below the 80 per- cent cost threshold, or, alternatively, by demonstrating that the cost of the services provided by the CFC itself, and/or by a relatedCFC,ismorethan20percentof the total cost to the CFC of performing the services. For this purpose, services provided by a CFC itself are not assistance provided “indirectly” by a related United States person (or persons). However, em- ployees, officers, or directors of the CFC January 29, 20074112007–5 I.R.B. who are concurrently employees, officers, or directors of a related United States per- son during a taxable year of the CFC will be considered employees, officers or di- rectors solely of the related United States person for such taxable year for purposes of this notice. The examples under Treas. Reg. § 1.954–4(b)(2)(ii) will be amended to reflect the amendments to the regulations. The application of the proposed cost test is illustrated by the following examples. Example 1: USP, a U.S. corporation, wholly owns CFC1 and CFC2, each a foreign corporation. CFC1 enters into a contract with FP, an unrelated foreign person,todesignabridgeforFPinCountryY,afor- eign country that is not CFC1’s country of organiza- tion. CFC1 incurs a total of $100x of costs to design the bridge for FP. USP performs supervisory services in Country Y for CFC1 with respect to the contract for which CFC1 pays USP a fee. CFC1 directly per- forms services related to the performance of that con- tract that cost CFC1 $15x. CFC2 performs central- ized support services related to the performance of that contract in Country X, its country of organiza- tion, for which CFC1 pays CFC2 $10x. CFC1 is not treated as receiving substantial assistance in the per- formance of that contract because more than 20% of thecostofthatcontractisattributabletoservicesfur- nished directly by CFC1 or a related CFC (CFC2). Example 2: USP, a U.S. corporation, wholly owns CFC1 and CFC2, each a foreign corporation. CFC2 enters into a contract with FP, an unrelated person, to design a bridge in Country Y, a foreign country that is not CFC2’s country of organization. With respect to the contract with FP, USP performs services in Coun- tryYforCFC1intheformofdesignandtechnical services for which CFC1 pays USP $85x. CFC1 con- tracts with CFC2 to provide those services and others to CFC2 for $90x. CFC2 uses those services together with services it performs itself that cost CFC2 $10x to design the bridge for FP. Pursuant to the cost test, USP provides substantial assistance to CFC2 in the performance of its contract for FP because USP indi- rectly furnishes assistance to CFC2 (through CFC1) that exceeds 80 percent of the total cost to CFC2 for performing the contract. Example 3: USP, a U.S. corporation, wholly owns CFC1 and CFC2, each a foreign corporation. CFC2 enters into a contract with FP, an unrelated person, to design a bridge in Country Y, a foreign country that is not CFC2’s country of organization. With respect to the contract with FP, USP performs services in Coun- tryYforCFC1intheformofdesignandtechnical services for which CFC1 pays USP $60x. CFC1 con- tracts with CFC2 to provide those services and others to CFC2 for $70x. CFC2 uses those services together with services it performs itself that cost CFC2 $30x to design the bridge for FP. CFC2 is not treated as re- ceiving substantial assistance in the performance of that contract because more than 20% of the cost of that contract is attributable to services furnished di- rectly by CFC2. D. EFFECTIVE DATE Regulations to be issued incorporating the guidance set forth in this notice will apply to taxable years of foreign corpora- tions beginning on or after January 1, 2007 and to taxable years of United States share- holders in which or with which such tax- able years of the foreign corporations end. Until such regulations are issued, taxpay- ers may rely on this notice. SECTION 3. FOREIGN BASE COMPANYSHIPPINGRULES Section 415 of the American Jobs Cre- ations Act (“AJCA”) repealed sections 954(a)(4) and 954(f) of the Code, (the foreign base company shipping rules). It also made conforming amendments by repealing sections 954(b)(6) and (b)(7) and striking a reference to foreign base company shipping income in section 954(b)(5). These changes are effective for taxable years of foreign corporations beginning after December 31, 2004, and taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end. Further, section 415 of the AJCA enacted a special safe harbor for certain leasing activities under section 954(c)(2)(A). The special safe harbor rule has been addressed in a separate published guidance project.See Notice 2006–48, 2006–21 I.R.B. 922. As a result of, and as of the effective date of, the repeal of the foreign base company shipping income rules, Treas. Reg. § 1.954–1(e)(4)(i)(A), which pro- vides that income that qualifies as foreign base company shipping income will not be considered insurance income or income in any other category of foreign base com- pany income, is obsolete and Treas. Reg. § 1.954–6, which prescribes rules for de- termining foreign base company shipping income, is only effective for purposes of applying the rules for the withdrawal of previously excluded subpart F income from qualified investments under section 955. Accordingly, Treas. Reg. § 1.954–6 will be amended to include new applica- bility language. Moreover, the repeal of sections 954(a)(4) and 954(f) of the Code was only intended to eliminate the separate category of foreign base company shipping income. It was not intended to exclude income from subpart F that would otherwise qual- ify under another category of foreign base company income. Income that might have been described in sections 954(a)(4) and 956(f) before the AJCA still must be tested under the remaining categories of foreign base company income. Consequently, this notice confirms that income described in section 954(f) as it existed before its re- peal will continue to constitute subpart F income to the extent that it falls within another category of foreign base company income. SECTION 4. REQUEST FOR COMMENTS The Treasury Department and the IRS request comments on the new substantial assistance rules proposed in this notice. Comments are requested on whether the new rules are appropriately targeted and whether any modifications to the rules should be made before they are pro- mulgated as regulations. In particular, comments are requested on whether the proposed cost test is appropriate for cer- tain industries, and if not, how the rules could be modified or supplemented to properly address those industries while still addressing the Treasury Department’s and the IRS’ concerns about shifting prof- its offshore to CFCs organized in low tax jurisdictions. In addition, the Trea- sury Department and the IRS understand that taxpayers are also concerned with the special rule concerning a guaranty of performance contained in Treas. Reg. § 1.954–4(b)(2)(i). The Treasury De- partment and the IRS are reviewing this rule, particularly in light of Treas. Reg. § 1.482–9T, and request comments on whether changes to this rule are warranted and, if so, how it should be modified. Written comments on the issues ad- dressed in this notice may be submit- ted to the Office of Associate Chief Counsel International, Attention: No- tice 2007–13, room 4710, CC:INTL:BR2, Internal Revenue Service, 1111 Consti- tution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically toNo- tice.Comments@m1.irscounsel.treas.gov. 2007–5 I.R.B.412January 29, 2007 Comments will be available for public inspection and copying. SECTION 5. DRAFTING INFORMATION The principal author of this notice is Ethan Atticks of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ethan Atticks at (202) 622–3840 (not a toll-free call). 26 CFR 601.601: Rules and regulations. (Also Part 1, § 1397E.) Rev. Proc. 2007–18 SECTION 1. PURPOSE Pursuant to § 1397E(e)(2) of the Inter- nal Revenue Code, this revenue procedure sets forth the maximum face amount of Qualified Zone Academy Bonds (“Bond” or “Bonds”) that may be issued for each State for each of the calendar years 2006 and 2007. For this purpose, “State” in- cludes the District of Columbia and the possessions of the United States. SECTION 2. BACKGROUND .01 Section 226 of the Taxpayer Relief Act of 1997, Pub. L. 105–34, 111 Stat. 821 (1997), added § 1397E to the Internal Rev- enue Code to provide a credit to holders of Bonds under certain circumstances so that the Bonds generally can be issued without discount or interest. Ninety-five percent of Bond proceeds are to be used for qualified purposes, as defined by § 1397E(d)(5), with respect to a qualified zone academy, as defined by § 1397E(d)(4). .02 Section 1397E(e)(1), as amended by § 107 of the Tax Relief and Health Care Act of 2006, Pub. L. 109–432, 120 Stat. 2922 (2006), provides that the na- tional Bond limitation is $400 million for each of the years 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2007. This amount is to be allocated among the States by the Secretary on the basis of their respective populations below the poverty level (as defined by the Office of Manage- ment and Budget) and is to be further allo- cated by each State to qualified zone acad- emies within the State. .03 Section 1397E(e)(4), as amended by § 509 of the Tax Relief Extension Act of 1999, Pub. L. 106–170, 113 Stat. 1860 (1999), provides that any carryforward of a limitation amount may be carried forward only to the first 2 years (3 years for carry- forwards from 1998 or 1999) following the unused limitation year. For this purpose, a limitation amount shall be treated as used on a first-in, first-out basis. .04 Rev. Proc. 98–9, 1998–1 C.B. 341; Rev. Proc. 98–57, 1998–2 C.B. 682; Rev. Proc. 2000–10, 2000–1 C.B. 287; Rev. Proc. 2001–14, 2001–1 C.B. 343; Rev. Proc. 2002–25, 2002–1 C.B. 800; Rev. Proc. 2002–72, 2002–2 C.B. 931; Rev. Proc. 2004–61, 2004–2 C.B. 707; and Rev. Proc. 2004–72, 2004–2 C.B. 1033, allo- cated among the States the national limi- tation for 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005, respectively. SECTION 3. NATIONAL QUALIFIED ZONE ACADEMY BOND LIMITATION FOR 2006 AND 2007 The national limitation for Bonds for each of the calendar years 2006 and 2007 is $400 million. This amount is allocated among the States as follows: STATE MAXIMUM FACE AMOUNT OF BONDS THAT MAY BE ISSUED FOR EACH OF THE CALENDAR YEARS 2006 AND 2007 (thousands of dollars) Alaba ma 7,698 Alaska677 Arizona9,412 Arka nsas 3,92 1 California48,404 Colorado5,440 Con necticut 3,3 46 Delaware801 District of Columbia1,180 Fl orida 20 ,271 Georgia13,322 Hawaii1,129 Id aho 1, 468 Illinois14,790 Indiana7,944 I owa 3 ,356 Kansas3,459 Kentucky6,148 Louisiana7,677 Maine1,704 Maryland5,563 Massachusetts6,579 Michigan12,275 Minnesota4,229 Mississippi5,861 January 29, 20074132007–5 I.R.B. STATE MAXIMUM FACE AMOUNT OF BONDS THAT MAY BE ISSUED FOR EACH OF THE CALENDAR YEARS 2006 AND 2007 (thousands of dollars) Missouri6,764 Montana1,314 Nebraska1,714 Nevada2,669 New Hampshire749 New Jersey6,076 New Mexico3,562 New York28,328 North Carolina11,444 North Dakota718 Ohio14,287 Oklahoma5,573 Oregon4,475 Pennsylvania14,082 Rhode Island1,304 South Carolina6,425 South Dakota924 Tennessee8,950 Texas37,781 Utah2,381 Vermont482 Virginia7,020 Washington6,528 West Virginia2,833 Wisconsin5,676 Wyoming554 American Samoa363 Guam397 Northern Marianas380 Puerto Rico19,230 Virgin Islands363 Total $400,000 SECTION 4. EFFECTIVE DATE This revenue procedure is effective for Bonds issued pursuant to the national lim- itation for calendar year 2006 on or after January 1, 2006, and Bonds issued pur- suant to the national limitation for calendar year 2007 on or after January 1, 2007. SECTION 5. DRAFTING INFORMATION The principal author of this revenue procedure is David White of the Office of Division Counsel/Associate Chief Coun- sel (Tax Exempt & Government Entities). For further information regarding this revenue procedure, contact Mr. White at (202) 622–3980 (not a toll-free call). 2007–5 I.R.B.414January 29, 2007 Part IV. Items of General Interest Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations Corporate Reorganizations; Distributions Under Sections 368(a)(1)(D) and 354(b)(1)(B) REG–125632–06 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regula- tions. SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9303) that provide guidance regard- ing the qualification of certain transactions as reorganizations described in section 368(a)(1)(D) where no stock and/or secu- rities of the acquiring corporation is issued and distributed in the transaction. These regulations affect corporations engaging in such transactions and their shareholders. The text of those regulations also serves as the text of these proposed regulations. DATES: Written or electronic comments and requests for a public hearing must be received by March 19, 2007. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–125632–06), In- ternal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered to CC:PA:LPD:PR (REG–147144–06), Courier Desk, Internal Revenue Ser- vice, Crystal Mall 4, 1901 South Bell Street, Arlington, Virginia, or sent elec- tronically, via the IRS Internet site at www.irs.gov/regsor via the Federal eRule- making Portal atwww.regulations.gov (IRS REG–125632–06). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Bruce A. Decker, (202) 622–7550; concerning submission of comments, requests for a public hearing, and/or a publication and regulations spe- cialist, Treena Garrett, (202) 622–7180. SUPPLEMENTARY INFORMATION: Background Temporary regulations in this issue of the Bulletin amend 26 CFR part 1. The temporary regulations provide guidance on circumstances where the distribution of stock and/or securities under section 354(b)(1)(B) will be deemed satisfied in the absence of an actual issuance of stock and/or securities pursuant to a reorgani- zation described in section 368(a)(1)(D). The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments. Explanation of Provisions These temporary regulations provide guidance regarding the circumstances in which the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) is deemed satisfied despite the fact that no stock and/or securities are actually issued in a transaction otherwise described in section 368(a)(1)(D). These regulations will affect certain cash sales of assets be- tween two corporations that have the same direct or indirect shareholders or ade min- imisvariation in shareholder identity and proportionality. 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. Therefore, a regula- tory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regu- lations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Inter- nal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Busi- ness Administration for comment on its impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, considera- tion will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the pro- posed rules and how they can be made eas- ier to understand. The IRS and Treasury Department request comments on several issues relating to acquisitive reorganiza- tions described in section 368(a)(1)(D). Specifically, the IRS and Treasury Depart- ment request comments on whether the meaningless gesture doctrine is inconsis- tent with the distribution requirement in sections 368(a)(1)(D) and 354(b)(1)(B), especially in situations in which the cash consideration received equals the full fair market value of the property transferred such that there is no missing considera- tion for which the nominal share of stock deemed received and distributed could substitute. The IRS and Treasury Depart- ment also request comments on the extent, if any, to which the continuity of interest requirement should apply to a reorgani- zation described in section 368(a)(1)(D). The IRS and Treasury Department request comments on whether these temporary regulations should apply when the parties to the reorganization are members of a consolidated group. Finally, the IRS and Treasury Department request comments on the continued vitality of various liq- uidation-reincorporation authorities after the enactment of the Tax Reform Act of 1986, Public Law 99–514 (100 Stat. 2085 (1986)). All comments will be available for public inspection and copying. A pub- lic hearing will be scheduled if requested in writing by any person that timely sub- mits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be pub- lished in theFederal Register. Drafting Information The principal author of these regula- tions is Bruce A. Decker, Office of Asso- ciate Chief Counsel (Corporate). ***** January 29, 20074152007–5 I.R.B. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–2 is amended by revising paragraph (l) to read as follows: §1.368–2 Definition of terms. ***** (l) [The text of this proposed amend- ment to §1.368–2(l) is the same as the text of §1.368–2T(l)(1) through (l)(4)(i) pub- lished elsewhere in this issue of the Bul- letin. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on December 18, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 18, 2006, 71 F.R. 75898) Railroad Track Maintenance Credit; Correction Announcement 2007–8 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Correction to temporary regula- tions. SUMMARY: This document contains cor- rections to temporary regulations (T.D. 9286, 2006–43 I.R.B. 750) that were pub- lished in theFederal Registeron Friday, September 8, 2006 (71 FR 53009) provid- ing rules for claiming the railroad track maintenance credit under section 45G of the Internal Revenue Code for qualified railroad track maintenance expenditures paid or incurred by a Class II railroad or Class III railroad and other eligible tax- payers during the taxable year. DATES: This correction is effective September 8, 2006. FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, (202) 622–3110 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background The correction notice that is the subject of this document is under section 45G of the Internal Revenue Code. Need for Correction As published, temporary regulations (T.D. 9286) contain errors that may prove to be misleading and are in need of clarifi- cation. Correction of Publication Accordingly, the publication of the tem- porary regulations (T.D. 9286), which was the subject of FR Doc. E6–14858, is cor- rected as follows: 1. On page 53010, column 1, in the pre- amble, under the paragraph heading “Gen- eral Overview”, first and second lines from the bottom of the second paragraph, the language “assigned to such person by such a railroad.” is corrected to read “assigned to such person by a Class II railroad or a Class III railroad.”. 2. On page 53010, column 2, in the preamble, under the paragraph heading “Scope”, first paragraph of the column, last line of the paragraph, the language “of controlled groups under section 45G.” is corrected to read “of controlled groups under section 45G with respect to the RTMC.”. 3. On page 53010, column 2, in the pre- amble, under the paragraph heading “El- igible Taxpayer”, fourth line of the first paragraph, the language “defined in the temporary regulations as:” is corrected to read “defined as:”. 4. On page 53010, column 2, in the pre- amble, under the paragraph heading “Eli- gible Taxpayer”, third line from the bottom of the first paragraph, the language “rail- road track assigned to the person for” is corrected to read “railroad track assigned to the taxpayer for”. 5. On page 53010, column 2, in the pre- amble, under the paragraph heading “Eli- gible Taxpayer”, second through the sixth line from the bottom of the second para- graph, the language “Price Index)). 49 CFR part 1201, subpart A, §1–1(a). In general, Class III railroads have annual carrier operating revenues of $20 million or less after applying the railroad revenue deflator formula. 49” is corrected to read “Price Index)). See 49 CFR part 1201, sub- part A, §1–1(a). In general, Class III rail- roads have annual carrier operating rev- enues of $20 million or less after applying the railroad revenue deflator formula. See 49”. 6. On page 53010, column 3, in the preamble, under the paragraph heading “Eligible Taxpayer”, second paragraph of the column, tenth to seventeenth lines, the language “services are the transport of freight by rail, the loading and unloading of freight transported by rail, locomotive leasing or rental, and maintenance of a railroad’s right-of-way (including veg- etation control). Examples of services that are not railroad-related services are general business services,” is corrected to read “services include the transport of freight by rail, the loading and unloading of freight transported by rail, locomotive leasing or rental, and maintenance of a railroad’s right-of-way (including vegeta- tion control). Examples of services that are not railroad-related services include general business services,”. 7. On page 53011, column 1, in the pre- amble, under the paragraph heading “De- termination of QRTME Paid or Incurred”, second paragraph, third and fourth lines, the language “to a taxpayer using an ac- crual method of accounting. In this case, paid or” is corrected to read “to taxpay- ers using an accrual method of accounting. For such taxpayers, paid or”. 8. On page 53011, column 1, in the preamble, under the paragraph heading “Determination of QRTME Paid or In- curred”, second paragraph, fifteenth to twentieth lines, the language “any such expenditures. The temporary regulations provide that reimbursements may con- sist of amounts paid either directly or indirectly to the taxpayer. Examples of indirect reimbursements are discounted freight shipping rates,” is corrected to read “any expenditures that would otherwise qualify as QRTME. The temporary regu- lations provide that reimbursements may consist of amounts paid either directly or indirectly to the taxpayer. Examples of in- direct reimbursements include discounted freight shipping rates,”. 9. On page 53011, column 1, in the pre- amble, under the paragraph heading “De- termination of QRTME Paid or Incurred”, third paragraph, first line, the language 2007–5 I.R.B.416January 29, 2007 “If an eligible taxpayer (assignee) pays” is corrected to read “The IRS and Treasury believe that the statute is intended to allow suppliers and shippers to claim the credit for providing the funding for the QRTME performed on railroad track owned by, or leased to, a Class II railroad or Class III railroad. However, the suppliers and ship- pers may not have the necessary exper- tise to perform the repairs and improve- ments. The IRS and Treasury believe that these eligible taxpayers should be able to claim the credit for providing the funding to the extent that the Class II railroads and Class III railroads use such funding to per- form the repairs and improvements to the track. Therefore, if an eligible taxpayer (assignee) pays”. 10. On page 53011, column 1, in the preamble, under the paragraph heading “Determination of QRTME Paid or In- curred”, third paragraph, fifth line from the bottom of the column, the language “paragraph, this QRTME would be” is corrected to read “paragraph, QRTME would be”. 11. On page 53011, column 2, in the preamble, under the paragraph head- ing “Assignment of Railroad Track Miles”, first paragraph, first through fifth lines, the language “For purposes of section 45G, the temporary regulations provide that an assignment of a mile of railroad track is not a legal transfer of title, but merely a designation. This designation must be” is corrected to read “The temporary reg- ulations provide that an assignment of a mile of railroad track is not a legal transfer of title, but merely a designation made solely for purposes of section 45G. This designation must be”. 12. On page 53011, column 2, in the preamble, under the paragraph heading “Assignment of Railroad Track Miles”, second paragraph, fifth line, the language “track. Thus, if a Class II railroad or Class” is corrected to read “track. If a Class II railroad or Class”. 13. On page 53011, column 2, in the preamble, under the paragraph heading “Assignment of Railroad Track Miles”, fourth paragraph, second line, the lan- guage “that a taxpayer must file Form 8900,” is corrected to read “that a taxpayer file Form 8900,”. 14. On page 53011, column 3, in the preamble, last paragraph of the column, first line, the language “The temporary regulations also” is corrected to read “The temporary regulations”. 15. On page 53012, column 1, in the preamble, first paragraph of the column, first line, the language “assignment is properly reported.” is corrected to read “assignment is reported.”. 16. On page 53012, column 1, in the preamble, under the paragraph heading “Special Rules”, first paragraph, second through fourth lines from the bottom of the paragraph, the language “structure (rail- road track, roadbed, bridges, and related track structures) and intangible assets to which the” is corrected to read “structure and intangible assets to which the”. 17. On page 53012, column 1, in the preamble, under the paragraph heading “Special Rules”, second paragraph, sixth line, the language “of the RTMC allow- able. This reduction” is corrected to read “of the RTMC allowable. The basis re- duction”. 18. On page 53012, column 1, in the preamble, under the paragraph heading “Special Rules”, third paragraph, first line, the language “The temporary regulations also” is corrected to read “The temporary regulations do not”. 19. On page 53012, column 2, in the preamble, under the paragraph heading “Special Rules”, first paragraph of the column, fourth line to the last of the para- graph, the language “legislative history does not refer to, any exception to this rule. Accordingly, pursuant to section 61 and the regulations under section 61, the owner of the tangible assets (for example, railroad track and roadbed) with respect to which the QRTME is paid or incurred by another person that does not have a de- preciable interest in those assets has gross income in the amount of that QRTME. However, the application of section 61 to QRTME paid or incurred with respect to eligible railroad track that is leased by a Class II railroad or Class III railroad raises a question as to under what circumstances the owner or lessee should recognize gross income with respect to QRTME. The IRS and Treasury Department request com- ments on this issue.” is replaced to read “legislative history does not refer to, any exception to this rule for an owner of tan- gible assets (for example, railroad track and roadbed) for the value of the repairs or improvements to such assets with respect to which QRTME is paid or incurred by another person that does not have a depre- ciable interest in such assets.” LaNita Van Dyke, Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration). (Filed by the Office of the Federal Register on December 7, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 8, 2006, 71 F.R. 710 45) Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; Stewardship Expense; Correction Announcement 2007–9 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Correcting amendments. SUMMARY: This document contains cor- rections to final and temporary regulations (T.D. 9278, 2006–34 I.R.B. 256) that was published in theFederal Registeron Fri- day, August 4, 2006 (71 FR 44466) regard- ing the treatment of controlled services transactions under section 482 and the al- location of income from intangibles, in particular with respect to contributions by a controlled party to the value of an intan- gible owned by another controlled party. This document also contains corrections to final and temporary regulations that mod- ify the regulations under section 861 con- cerning stewardship expenses to be consis- tent with the changes made to the regula- tions under section 482. EFFECTIVE DATE: The amendments are effective on January 1, 2007. FOR FURTHER INFORMATION CONTACT: Thomas A. Vidano, (202) 435–5265, or Carol B. Tan (202) 435–5159, for matters relating to sec- tion 482, and David F. Bergkuist, (202) 622–3850, for matters relating to steward- ship expenses (not toll-free numbers). January 29, 20074172007–5 I.R.B. SUPPLEMENTARY INFORMATION: Background The final and temporary regulations that are the subject of these corrections are under sections 482 and 861 of the Internal Revenue Code. Need for Correction As published, the final and temporary regulations (T.D. 9278) contains errors that may prove to be misleading and are in need of clarification. ***** Correction of Publication Accordingly, 26 CFR part 1 is cor- rected by making the following correcting amendments: PART 1—INCOME TAXES Paragraph 1. T he authority citation for part 1 continu es to read in part as follows: Authority: 26 U.S.C.7805*** Par. 2. Sectio n 1.482–0T is amended by removing th e entries for paragraphs (i)(1) throu gh (i)(10), (j)(1), (j)(2) and (j)(3) from § 1.482–1T. Par. 3. Secti on 1.482–1 is amended by revising par agraph (i) introductory text to read as follo ws: §1.482–1 Allocation of income and deductions among taxpayers. ***** (i) [Reserved]. For further guidance, see §1.482–1T(i) introductory text. ***** Par. 4. Section 1.482–1T is amended as follows: 1. Paragraphs (i)(1) through (i)(10) are added and reserved. 2. Paragraphs (j)(1) through (j)(5) are amended by adding “§” before the lan- guage “1.482–1(j)(1)”. The addition reads as follows: §1.482–1T Allocation of income and deductions among taxpayers (temporary). ***** (i)(1) through (i)(10) [Reserved]. For further guidance, see §1.482–1(i)(1) through (i)(10). ***** Par. 5. Section 1.482–8T is amended by revising paragraph (b)Example 12. (iv), second sentenceto read as follows: §1.482–8T Example of the best method rule (temporary). ***** (b) * * * Example 12.(i)*** (iv) * * * USP contributed the long-term endorse- ment contracts with professional athletes. * * * ***** Par. 6. Section 1.482–9T is amended as follows: 1. Paragraph (b)(6),Example 22.(vi), introductory text is revised. 2. Paragraph (g)(2),Example 2.(iv), fifth sentence is revised. 3. Paragraph (i)(2) is revised. 4. Paragraph (i)(5),Example 1.(iii), first sentence is revised. 5. Paragraph (i)(5),Example 3.(ii), first sentence is revised. 6. Paragraph (l)(5),Example 20.(i), second sentence is revised. 7. Paragraph (m)(5),Example 1.(ii), fourth sentence is revised. The revisions read as follows: §1.482–9T Methods to determine taxable income in connection with a controlled services transaction (temporary). ***** (b) * * * (6) * * * Example 22.(i)*** (vi) In contrast, if aggregated services AB were allocated by reference to the total U.S. dollar value of sales to uncontrolled parties (trade sales) by each company, the following results would obtain: ***** (g) * * * (2) * * * Example 2.*** (iv) * * * In the bid on the Country 2 contract for Level 1 waste remediation, Company B proposes to use a multidisciplinary team of specialists from Com- panyAandCompanyB.*** ***** (i) * * * (2) * * * For purposes of this para- graph (i), an arrangement will be treated as a contingent-payment arrangement if it meets all of the requirements in paragraph (i)(2)(i) of this section and is consistent with the economic substance and conduct requirement in paragraph (i)(2)(ii) of this section. ***** (5) * * * Example 1.(i) * * * (iii) The years under examination are years 6 through 9. *** ***** Example 3.(i) * * * (ii) The years under examination are years 6 through9. *** ***** (l) * * * (5) * * * Example 20.(i) * * * Y, a Country B corporation, is a distribution and marketing company that also per- forms clinical trials for X in Country B. * * * ***** (m)*** (5) * * * Example 1.(i) * * * (ii)***Thecomparableprofitsmethodmaypro- vide the most reliable measure of an arm’s length re- sult if uncontrolled parties are identified that perform similar, combined functions of maintaining and pro- viding spare parts for similar equipment. * * * ***** Par. 7. Section 1.861–8T is amended as follows: 1. Paragraph (b)(3) is revised. 2. Paragraph (g), paragraph (i) follow- ingExample 30. (i)(C) is redesignated as paragraph (ii) and the paragraph designa- tion forExample 30. (i)(C) is removed. 3. Paragraph (h)(1), first three sen- tences are revised. 4. Paragraph (h)(3) is revised. The revisions read as follows: §1.861–8T Computation of taxable income from sources within the United States and from other sources and activities (temporary). ***** (b) * * * (3)Supportive functions. Deductions which are supportive in nature (such as overhead, general and administrative, and supervisory expenses) may relate to other deductions which can more readily be al- located to gross income. In such instance, such supportive deductions may be allo- cated and apportioned along with the de- ductions to which they relate. On the other hand, it would be equally accept- able to attribute supportive deductions on 2007–5 I.R.B.418January 29, 2007 some reasonable basis directly to activi- ties or property which generate, have gen- erated or could reasonably be expected to generate gross income. This would ordi- narily be accomplished by allocating the supportive expenses to all gross income or to another broad class of gross income and apportioning the expenses in accor- dance with paragraph (c)(1) of this section. For this purpose, reasonable departmental overhead rates may be utilized. For ex- amples of the application of the principles of this paragraph (b)(3) to expenses other than expenses attributable to stewardship activities, seeExamples 19through21of paragraph (g) of this section. See para- graph (e)(4)(ii) of this section for the allo- cation and apportionment of deductions at- tributable to stewardship expenses. How- ever, supportive deductions that are de- scribed in §1.861–14T(e)(3) shall be allo- cated and apportioned in accordance with the rules of §1.861–14T and shall not be al- located and apportioned by reference only to the gross income of a single member of an affiliated group of corporations as de- fined in §1.861–14T(d). ***** (h)***(1)***Ingeneral,the rules of this section, as well as the rules of §§1.861–9T, 1.861–10T, 1.861–11T, 1.861–12T, and 1.861–14T apply for tax- able years beginning after December 31, 1986, except for paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g) Example 17,Example 18,andExample 30of this section, which are generally applicable for taxable years beginning after December 31, 2006. Also, see §§1.861–8(e)(12)(iv) and 1.861–14(e)(6) for rules concerning the allocation and apportionment of deductions for charita- ble contributions. In the case of corpo- rate taxpayers, transition rules set forth in §1.861–13T provide for the gradual phase-in of certain provisions of this and the foregoing sections. * * * (3)Expiration date. The applicability of the paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g)Example 17, Example 18,andExample 30of this sec- tion, expires on or before July 31, 2009. Par. 8. Section 1.6662–6T is amended by revising paragraph (d)(2)(ii)(B), first sentence to read as follows: §1.6662–6T Transactions between parties described in section 482 and net section 482 transfer price adjustments (temporary). ***** (d)(2)(ii)(B) A taxpayer’s selection of the services cost method for certain ser- vices, described in §1.482–9T(b), and its application of that method to a controlled services transaction will be considered reasonable for purposes of the specified method requirement only if the taxpayer reasonably allocated and apportioned costs in accordance with §1.482–9T(k), reasonably concluded that the controlled services transaction meets the conditions of §1.482–9T(b)(3), and reasonably con- cluded that the controlled services transac- tion is not described in §1.482–9T(b)(2). *** ***** Cynthia Grigsby, Senior Federal Register Liaison Officer, Legal Processing Division, Associate Chief Counsel (Procedure and Administration). (Filed by the Office of the Federal Register on December 21, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2006, 71 F.R. 76902) January 29, 20074192007–5 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is be- ing made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the new ruling does nothing more than re- state the substance and situation of a previ- ously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rul- ings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The fol lowing abbreviations in current use and for merly used will appear in material publis hedintheBulletin. A—Individual. Acq.—A cquiescence. B—Individual. BE—Beneficiary. BK—Bank . B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cu mulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Coo perative. Ct.D.—Court Decision. CY—County. D—Decede nt. DC—Dummy Corporation. DE—Donee. Del. Order —Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Emp loyer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduc iary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Fo reign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Fed eral Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grante e. GP—General Partner. GR—Grantor. IC—Insura nce Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—No nacquiescence. O—Organization. P—Parent Corporation. PHC—Persona l Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Pa rtnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Re al Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsi diary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Trans feree. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpay er. TR—Trust. TT—Trustee. U.S.C.—Uni ted States Code. X—Corporation. Y—Corporation. Z—Corporat ion. 2007–5 I.R.B.iJanuary 29, 2007 Numerical Finding List 1 Bulletins 2007–1 through 2007–5 Announcements: 2007-1, 2007-1 I.R.B.243 2007-2, 2007-2 I.R.B.263 2007-3, 2007-4 I.R.B.376 2007-5, 2007-4 I.R.B.376 2007-6, 2007-4 I.R.B.376 2007-7, 2007-4 I.R.B.377 2007-8, 2007-5 I.R.B.416 2007-9, 2007-5 I.R.B.417 Notices: 2007-1, 2007-2 I.R.B.254 2007-2, 2007-2 I.R.B.254 2007-3, 2007-2 I.R.B.255 2007-4, 2007-2 I.R.B.260 2007-5, 2007-3 I.R.B.269 2007-6, 2007-3 I.R.B.272 2007-7, 2007-5 I.R.B.395 2007-8, 2007-3 I.R.B.276 2007-9, 2007-5 I.R.B.401 2007-10, 2007-4 I.R.B.354 2007-11, 2007-5 I.R.B.405 2007-12, 2007-5 I.R.B.409 2007-13, 2007-5 I.R.B.410 Proposed Regulations: REG-152043-05, 2007-2 I.R.B.263 REG-125632-06, 2007-5 I.R.B.415 Revenue Procedures: 2007-1, 2007-1 I.R.B.1 2007-2, 2007-1 I.R.B.88 2007-3, 2007-1 I.R.B.108 2007-4, 2007-1 I.R.B.118 2007-5, 2007-1 I.R.B.161 2007-6, 2007-1 I.R.B.189 2007-7, 2007-1 I.R.B.227 2007-8, 2007-1 I.R.B.230 2007-9, 2007-3 I.R.B.278 2007-10, 2007-3 I.R.B.289 2007-11, 2007-2 I.R.B.261 2007-12, 2007-4 I.R.B.354 2007-13, 2007-3 I.R.B.295 2007-14, 2007-4 I.R.B.357 2007-15, 2007-3 I.R.B.300 2007-16, 2007-4 I.R.B.358 2007-17, 2007-4 I.R.B.368 2007-18, 2007-5 I.R.B.413 Revenue Rulings: 2007-1, 2007-3 I.R.B.265 2007-2, 2007-3 I.R.B.266 Revenue Rulings— Continued: 2007-3, 2007-4 I.R.B.350 2007-4, 2007-4 I.R.B.351 2007-5, 2007-5 I.R.B.378 2007-6, 2007-5 I.R.B.393 Treasury Decisions: 9300, 2007-2 I.R.B.246 9301, 2007-2 I.R.B.244 9302, 2007-5 I.R.B.382 9303, 2007-5 I.R.B.379 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26, 2006. January 29, 2007ii2007–5 I.R.B. Finding List of Current Actions on Previously Published Items 1 Bulletins 2007–1 through 2007–5 Notices: 2005-29 Modified and superseded by Notice 2007-4, 2007-2 I.R.B.260 2006-2 Modified and superseded by Notice 2007-4, 2007-2 I.R.B.260 2006-50 Amplified, clarified, and modified by Notice 2007-11, 2007-5 I.R.B.405 Proposed Regulations: REG-141901-05 Corrected by Ann. 2007-7, 2007-4 I.R.B.377 REG-142270-05 Corrected by Ann. 2007-2, 2007-2 I.R.B.263 REG-127819-06 Corrected by Ann. 2007-5, 2007-4 I.R.B.376 REG-136806-06 Corrected by Ann. 2007-6, 2007-4 I.R.B.376 Revenue Procedures: 98-20 Superseded by Rev. Proc. 2007-12, 2007-4 I.R.B.354 2000-38 Modified by Rev. Proc. 2007-16, 2007-4 I.R.B.358 2000-50 Modified by Rev. Proc. 2007-16, 2007-4 I.R.B.358 2002-9 Modified by Rev. Proc. 2007-16, 2007-4 I.R.B.358 Modified and amplified by Rev. Proc. 2007-14, 2007-4 I.R.B.357 2004-11 Superseded by Rev. Proc. 2007-16, 2007-4 I.R.B.358 2005-12 Superseded by Rev. Proc. 2007-17, 2007-4 I.R.B.368 Revenue Procedures— Continued: 2005-69 Superseded by Rev. Proc. 2007-15, 2007-3 I.R.B.300 2006-1 Superseded by Rev. Proc. 2007-1, 2007-1 I.R.B.1 2006-2 Superseded by Rev. Proc. 2007-2, 2007-1 I.R.B.88 2006-3 Superseded by Rev. Proc. 2007-3, 2007-1 I.R.B.108 2006-4 Superseded by Rev. Proc. 2007-4, 2007-1 I.R.B.118 2006-5 Superseded by Rev. Proc. 2007-5, 2007-1 I.R.B.161 2006-6 Superseded by Rev. Proc. 2007-6, 2007-1 I.R.B.189 2006-7 Superseded by Rev. Proc. 2007-7, 2007-1 I.R.B.227 2006-8 Superseded by Rev. Proc. 2007-8, 2007-1 I.R.B.230 Revenue Rulings: 2003-43 Modified by Notice 2007-2, 2007-2 I.R.B.254 2005-76 Supplemented and superseded by Rev. Rul. 2007-4, 2007-4 I.R.B.351 Treasury Decisions: 9278 Corrected by Ann. 2007-9, 2007-5 I.R.B.417 9286 Corrected by Ann. 2007-8, 2007-5 I.R.B.416 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26, 2006. 2007–5 I.R.B.iiiJanuary 29, 2007 INDEX Internal Revenue Bulletins 2007–1 through 2007–5 The abbreviation and number in parenthesis following the index entry refer to the specific item; numbers in roman and italic type following the parenthesis refers to the Internal Revenue Bulletin in which the item may be found and the page number on which it appears. Key to Abbreviations: AnnAnnouncement CDCourt Decision DODelegation Order EOExecutive Order PLPublic Law PTEProhibited Transaction Exemption RPRevenue Procedure RRRevenue Ruling SPRStatement of Procedural Rules TCTax Convention TDTreasury Decision TDOTreasury Department Order EMPLOYEE PLANS Corporations, prohibited allocations of securities in an S corpo- ration (TD 9302) 5,382 Determination letters, issuing procedures (RP 6) 1,189 Full funding limitations, weighted average interest rate for: January 2007 (Notice 12) 5,409 Letter rulings: And determination letters, areas which will not be issued from: Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,108 Associate Chief Counsel (International) (RP 7) 1,227 And general information letters, procedures (RP 4) 1,118 User fees, request for letter rulings (RP 8) 1,230 Qualified retirement plans: Defined benefit pension plans, cash balance and other hybrid plans (Notice 6) 3,272 Distribution issues, multiple issues (Notice 7) 5,395 Pension plans, in-service distributions (Notice 8) 3,276 Remedial amendment period (Notice 3) 2,255 Regulations: 26 CFR 1.402(c)–2, revised; 1.409(p)–1, added; prohibited allocations of securities inan S corporation (TD 9302) 5, 382 Technical advice to IRS employees (RP 5) 1,161 EMPLOYMENT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,88 ESTATE TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,88 EXCISE TAX Communications excise tax (Notice 11) 5,405 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,88 EXEMPT ORGANIZATIONS Annual notice to donors regarding pending and settled declara- tory judgment suits (Ann 1) 1,243 Letter rulings: And determination letters, areas which will not be issued from Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,108 And general information letters, procedures (RP 4) 1,118 User fees, request for letter rulings (RP 8) 1,230 Revocations (Ann 3) 4,376 Technical advice to IRS employees (RP 5) 1,161 GIFT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,88 INCOME TAX Accounting methods: Automatic consent to change accounting method for execu- tory contract liabilities (RP 14) 4,357 Changes in accounting methods (RP 16) 4,358 Executory contract liabilities (RR 3) 4,350 Annual notice to donors regarding pending and settled declara- tory judgment suits (Ann 1) 1,243 Annuities, exchanges of property for an annuity contract, change in hearing location for REG–141901–05 (Ann 7) 4,377 Communications excise tax (Notice 11) 5,405 Consumer Price Index (CPI) adjustments, certain loans under section 1274A for 2007 (RR 4) 4,351 Controlled services transactions under section 482, treatment, al- location of income and deductions from intangibles, and stew- ardship expense, correction to TD 9278 (Ann 9) 5,417 Corporations: Bulgarian per se entity (Notice 10) 4,354 Controlled foreign corporation (CFC): Subpart F income (Notice 9) 5,401 January 29, 2007iv2007–5 I.R.B. INCOME TAX—Cont. Substantial assistance, shipping income (Notice 13) 5,410 Corporate reorganizations, distributions under sections 368(a)(1)(D) and 354(b)(1)(B) (TD 9303) 5,379; (REG–125632–06) 5,415 Foreign corporation interest expense allocations, branch prof- its tax, election for liability reduction (Notice 1) 2,254 Credits: Low-income housing credit, satisfactory bond, “bond factor” amounts for the period: January through March 2007 (RR 5) 5,378 Railroad track maintenance credit, hearing cancellation for REG–142270–05 (Ann 2) 2,263;correctiontoTD9286 (Ann 8) 5,416 Disaster relief, reduction in taxable income for housing Hur- ricane Katrina displacedindividuals (TD 9301) 2,244; (REG–152043–05) 2,263 Electronic filing, elimination of regulatory impediments to filing certain business income tax returns and other forms (TD 9300) 2,246 Employer-provided vehicles, cents-per-mile valuation rule, max- imum vehicle values (RP 11) 2,261 Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S, substitute form specifications (RP 15) 3,300 Health reimbursement arrangements (HRAs), debit cards (Notice 2) 2,254 Information reporting requirements, exclusion of the sale or ex- change of a principle residence (RP 12) 4,354 Insurance companies: Loss payment patterns and discount factors for the 2006 acci- dent year (RP 9) 3,278 Salvage discount factors forthe 2006 accident year (RP 10) 3,289 Interest: Investment: Federal short-term, mid-term, and long-term rates for: January 2007 (RR 2) 3,266 Inventory: LIFO, price indexes used by department stores for: November 2006 (RR 6) 5,393 Leases, tax-exempt use property (Notice 4) 2,260 Letter rulings: And determination letters, areas which will not be issued from: Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,108 Associate Chief Counsel (International) (RP 7) 1,227 And information letters issued by Associate Offices, determi- nation letters issued by Operating Divisions (RP 1) 1,1 Nonsufficient funds (NSF) fees, accounting for credit card NSF fees that are not interest (RR 1) 3,265 Pre-Filing Agreement (PFA) program, continued (RP 17) 4,368 Proposed Regulations: 26 CFR 1.45G–0, –1, added; railroad track maintenance credit, hearing cancellation for REG–142270–05 (Ann 2) 2,263 INCOME TAX—Cont. 26 CFR 1.368–2, amended; corporate reorganizations, dis- tributions under sections 368(a)(1)(D) and 354(b)(1)(B) (REG–125632–06) 5,415 26 CFR 1.9300–1, added; reduction in taxable income for housing Hurricane Katrina displaced individuals (REG–152043–05) 2,263 Qualified Zone Academy Bonds, allocations for years 2006 and 2007 (RP 18) 5,413 Regulations: 26 CFR 1.45G–0T, –1T, added; railroad track maintenance credit; correction to TD 9286 (Ann 8) 5,416 26 CFR 1.368–2, amended; 1.368–2T, added; corporate reor- ganizations, distributions under sections 368(a)(1)(D) and 354(b)(1)(B) (TD 9303) 5,379 26 CFR 1.170A–11, amended; 1.170A–11T, removed; 1.556–2, amended; 1.556–2T, removed; 1.565–1, amended; 1.565–1T, removed; 1.936–7, amended; 1.936–7T, removed; 1.1017–1, amended; 1.1017–1T, removed; 1.1368–1, amended; 1.1368–1T, removed; 1.1377–1, amended; 1.1377–1T, removed; 1.1502–21, amended; 1.1502–21T, amended; 1.1502–75, amended; 1.1502–75T, removed; 1.1503–2, amended; 1.1503–2T, removed; 1.6038B–1, amended; 1.6038B–1T, amended; 301.7701–3, amended; 301.7701–3T, removed; 602.101, amended; guidance necessary to facilitate business elec- tronic filing (TD 9300) 2,246 26 CFR 1.482; 1.861; 1.6038; 1.6038A; 1.6662; treatment of services under section 482, allocation of income and deduc- tions from intangibles, stewardship expense, correction to TD9278(Ann9)5,417 26 CFR 1.9300–1T, added; reduction in taxable income for housing Hurricane Katrina displaced individuals (TD 9301) 2,244 Revocations, exempt organizations (Ann 3) 4,376 Services cost method: And other issues under section 482 temporary regulations, partial modification of effective date and clarification (No- tice 5) 3,269 Under section 482 regulations, specified covered services el- igible (RP 13) 3,295 Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S, rules and specifications (RP 15) 3,300 Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) amendments to section 199, change in hearing location for REG–127819–06 (Ann 5) 4,376 Technical Advice Memoranda (TAMs) (RP 2) 1,88 Treatment of payments in lieu of taxes under section 141, change in hearing location for REG–136806–06 (Ann 6) 4,376 SELF-EMPLOYMENT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,88 2007–5 I.R.B.vJanuary 29, 2007 January 29, 20072007–5 I.R.B. 2007–5 I.R.B.January 29, 2007 January 29, 20072007–5 I.R.B. INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under related topics, select More Topics. Then select Internal Revenue Bulletins. INTERNAL REVENUE BULLETINS ON CD-ROM Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to six weeks, plus mailing time, for delivery. WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BUL LETIN If you have c omments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be p leased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page (www.irs.g ov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224 Internal Revenue Service W ashington,DC20224 Official B usiness Penalty for Private Use, $300
Poursuivez vos recherches dans ChatGPT ou Claude
Connectez Omnilex pour rechercher dans le corpus juridique depuis votre assistant IA.