Internal Revenue Bulletin 2008-29 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
8-29
July 21, 2008
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
T.D. 9409, page 118.
REG–121698–08, page 163.
Final, temporary, and proposed regulations under section 7216
of the Code update the rules regarding disclosures of tax re-
turn information by tax return preparers, providing an exception
allowing a U.S. tax return preparer to obtain consent from a tax-
payer to disclose a taxpayer’s social security number (SSN) to
a non-U.S. tax return preparer when the U.S. preparer makes
thedisclosurethroughtheuseofan“adequatedataprotec-
tion safeguard,” the non-U.S. preparer receives the SSN via an
“adequate data protection safeguard,” and the U.S. preparer
verifies the maintenance of the adequate data protection safe-
guards in the request for the taxpayer’s consent. The regula-
tions also provide clarification that the general SSN masking
rule and the exception thereto apply only to consents related
to returns in the Form 1040 series, and clarification regarding
U.S. preparers on temporary travel status. The regulations are
applicable to disclosures of taxreturn information occurring
on or after January 1, 2009. A public hearing on the proposed
regulations is scheduled for October 6, 2008.
Notice 2008–59, page 123.
This notice provides guidance on questions and answers re-
garding Health Savings Accounts (HSAs) that have not previ-
ously been addressed in published guidance. Notices 2004–2,
2004–50, and 2007–22 amplified.
Rev. Proc. 2008–35, page 132.
This procedure modifies and supersedes Rev. Proc. 2008–12,
2008–5 I.R.B. 368, which provided guidance to tax return pre-
parers regarding the format and content of consents to use
and consents to disclose tax return information with respect to
taxpayers filing a return in the Form 1040 series (e.g.,Form
1040NR, Form 1040A, or Form 1040EZ) under regulations
section 301.7216–3, and also provided specific requirements
for electronic signatures when a taxpayer executes an elec-
tronic consent to the use or disclosure of the taxpayer’s tax re-
turn information. This procedure modifies Rev. Proc. 2008–12
to include the description of an “adequate data security safe-
guard,” provide mandatory consent language for use in a con-
sent when an unmasked or unredacted SSN is to be disclosed
outside the U.S., add an example of valid consent in the context
of SSN disclosure outside of the U.S., and provide other minor
clarifications. Rev. Proc. 2008–12 modified and superseded.
Rev. Proc. 2008–37, page 137.
This procedure provides issuers with the terms and procedures
for requesting, pursuant to regulations section 1.148–3(i), a
recovery of overpayments of arbitrage rebate, penalty in lieu
of rebate, and yield reduction paid to the United States under
section 148 of the Code. The procedure also establishes a
deadline of no later than two years after the final computation
date with respect to an issue for the filing of these requests and
provides a transitional period of two years from the publication
of this procedure for requests relating to issues for which the
final computation date has already occurred. Finally, this proce-
dure clarifies that similar requests for overpayments for bond
issues governed by the temporary regulations published in the
Federal Register on May 18, 1992,will be treated in the same
manner as requests for recovery of overpayments made under
section 1.148–3(i). Rev. Proc. 92–83 obsoleted.
(Continued on the next page)
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 164.
Finding Lists begin on page ii.

EMPLOYEE PLANS
Notice 2008–62, page 130.
This notice provides that the Treasury Department and the IRS
anticipate proposing regulations that will address, among other
things, when an arrangement in which an employee or inde-
pendent contractor receives recurring part-year compensation
over an extended period, such as a 12-month payment sched-
ule, does not constitute deferred compensation for purposes
of section 457(f) of the Code. Until further guidance is issued,
taxpayers may rely on the rule described in section II of this
notice beginning with the first taxable year that includes July 1,
2008.
EXEMPT ORGANIZATIONS
Announcement 2008–66, page 164.
The IRS has revoked its determination that Human Progress,
Inc., of Redlands, CA; Petty Foundation of Calumet City, IL;
American Indian Services, Inc., of Minneapolis, MN; The Foun-
dation of Port Monmouth, NJ; Larry & Bladie Dye Foundation
of Covington, TN; Catherine Desaintphalle Smith Family Foun-
dation of San Rafael, CA; and Bonnemort Foundation of Salt
Lake City, UT, qualify as organizations described in sections
501(c)(3) and 170(c)(2) of the Code.
ESTATE TAX
Rev. Rul. 2008–35, page 116.
Transfer tax valuation of interest in restricted manage-
ment account.This ruling addresses whether an interest in a
restricted management account (RMA) will be valued for trans-
fer tax purposes without any reduction or discount for the re-
strictions imposed by the RMA agreement.
GIFT TAX
Rev. Rul. 2008–35, page 116.
Transfer tax valuation of interest in restricted manage-
ment account.This ruling addresses whether an interest in a
restricted management account (RMA) will be valued for trans-
fer tax purposes without any reduction or discount for the re-
strictions imposed by the RMA agreement.
ADMINISTRATIVE
T.D. 9409, page 118.
REG–121698–08, page 163.
Final, temporary, and proposed regulations under section 7216
of the Code update the rules regarding disclosures of tax re-
turn information by tax return preparers, providing an exception
allowing a U.S. tax return preparer to obtain consent from a tax-
payer to disclose a taxpayer’s social security number (SSN) to
a non-U.S. tax return preparer when the U.S. preparer makes
the disclosure through the use of an “adequate data protec-
tion safeguard,” the non-U.S. preparer receives the SSN via an
“adequate data protection safeguard,” and the U.S. preparer
verifies the maintenance of the adequate data protection safe-
guards in the request for the taxpayer’s consent. The regula-
tions also provide clarification that the general SSN masking
rule and the exception thereto apply only to consents related
to returns in the Form 1040 series, and clarification regarding
U.S. preparers on temporary travel status. The regulations are
applicable to disclosures of tax return information occurring
on or after January 1, 2009. A public hearing on the proposed
regulations is scheduled for October 6, 2008.
Rev. Proc. 2008–38, page 139.
Life insurance contracts; qualified additional benefits;
closing agreement.This document provides a procedure by
which an issuer of a life insurance contract may remedy a failure
to account for charges for qualified additional benefits (QABs)
under the expense charge rule of section 7702(c)(3)(B)(ii) of
the Code. Rev. Rul. 2005–6 amplified.
Rev. Proc. 2008–39, page 143.
Life insurance contracts, modified endowment contracts
(MECs); closing agreement.This document provides a pro-
cedure by which an issuer of a life insurance contract may
remedy an inadvertent non-egregious failure to comply with the
modified endowment contract rules under section 7702A of the
Code. Rev. Procs. 2001–42 and 2007–19 superseded.
Rev. Proc. 2008–40, page 151.
Life insurance contracts; closing agreement.This docu-
ment provides a procedure by which an issuer of a life insur-
ance contract may remedy the failure of one or more contracts
to meet the definition of a life insurance contract under section
7702(a) or to satisfy the requirements of section 101(f) of the
Code. Rev. Rul. 91–17 superseded in part. Notice 99–48
superseded.
Rev. Proc. 2008–41, page 155.
Life insurance; variable contracts, closing agreement.
This document provides a procedure by which an issuer of a
variable contract may remedy an inadvertent failure of a vari-
able contract to satisfy the diversification requirements of sec-
tion 817(h) of the Code. Rev. Rul. 91–17 amplified. Rev. Proc.
92–25 superseded. Notice 2000–9 obsoleted.
Rev. Proc. 2008–42, page 160.
Life insurance contracts; automatic waiver.This docu-
ment provides a procedure by which an issuer of a life insur-
ance contract may automatically obtain a waiver, under section
7702(f)(8) or section 101(f)(3)(H) of the Code, for certain rea-
sonable errors that caused the contract to fail to satisfy the
requirements of section 7702 or section 101(f), as applicable.
Rev. Rul. 91–17 amplified.
July 21, 20082008–29 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2008–29 I.R.B.July 21, 2008

July 21, 20082008–29 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 101.—
Certain
Death Benefit
s
A revenue proc
edure provides a procedure by
which an issue
r of a life insurance contract may auto-
matically obt
ain a waiver, under section 7702(f)(8) or
section 101(
f)(3)(H) of the Internal Revenue Code,
for certain r
easonable errors that caused the contract
to fail to sat
isfy the requirements of section 7702
or section 10
1(f), as applicable. Rev. Rul. 91–17,
1991–1 C.B.
190, is amplified. See Rev. Proc.
2008-42, pa
ge 160.
Section 817.—Treatment
of Variable Contracts
26 CFR 1.817–5: Diversification requirements for
variable annuity, endowment, and life insurance con-
tracts.
A revenue procedure provides a procedure by
whichanissuerofavariablecontractmayremedyan
inadvertent failure of a variable contract to satisfy the
diversification requirements of section 817(h) of the
Internal Revenue Code. Rev. Rul. 91–17, 1991–1
C.B. 190, is amplified; Rev. Proc. 92–25, 1992–1
C.B. 741, is superseded; Notice 2000–9, 2000–1
C.B. 449, is obsolete. See Rev. Proc. 2008-41, page
155.
Section 2031.—Definition
of Gross Estate
26 CFR 20.2031–1: Definition of gross estate; valu-
ation of property.
This revenue ruling addresses whether an interest
in a restricted management account (RMA) will be
valued for transfer tax purposes without any reduc-
tion or discount for the restrictions imposed by the
RMA agreement. See Rev. Rul. 2008-35, page 116.
Section 2
036.—Transfers
With Reta
ined Life Estate
26 CFR 20.
2036–1: Transfers with retained life es-
tate.
This rev
enue ruling addresses whether an interest
in a rest
ricted management account (RMA) will be
valued f
or transfer tax purposes without any reduc-
tion or d
iscount for the restrictions imposed by the
RMA agre
ement. See Rev. Rul. 2008-35, page 116.
Section 2512.
—Valuation
of Gifts
26 CFR 25.2512–1: Valuation of property; in gen-
eral.
This revenue ruling addresses whether an interest
in a restricted management account (RMA) will be
valued for transfer tax purposes without any reduc-
tion or discount for the restrictions imposed by the
RMA agreement. See Rev. Rul. 2008-35, page 116.
26 CFR 25.2512–1: Valuation of property; in gen-
eral.
(Also Sections 2031, 2036, 2703; 20.2031–1,
20.2036–1, 25.2703–1.)
Transfer tax valuation of interest in
restricted management account.This
ruling addresses whether an interest in a re-
stricted management account (RMA) will
be valued for transfer tax purposes without
any reduction or discount for the restric-
tions imposed by the RMA agreement.
Rev. Rul. 2008–35
ISSUE
In determining the value for federal gift
and estate tax purposes of any part or all of
a restricted management account (RMA),
do the restrictions imposed by the RMA
agreement result in a value that is less than
the full fair market value of the assets in
the RMA?
FACTS
In ye
ar 1,A, as the Depositor, enters
into
an agreement withBank Mpursuant
to wh
ichAagrees to deposit marketable se-
curi
ties and cash into an account described
as a
nRMAwithBank M.Awas advised
tha
t the terms of the RMA were designed
to e
nhance the investment performance of
the
portfolio by allowingBank Mand any
inv
estment advisor appointed byBank M
to m
aximize the portfolio’s long term per-
fo
rmance without the risk of withdrawal
of
assets from the RMA before the expi-
ra
tion of the selected term of the RMA.
Ba
nk Magreed to accept a reduced in-
ve
stment management fee becauseBank M
w
as guaranteed a fee over the fixed term of
t
he RMA.
During the ter
m of the agreement,Bank
Mwill manage t
he RMA and have com-
plete discret
ion regarding investment of
the assets he
ld in the RMA.Awill retain
apropertyin
terest under applicable law in
the assets he
ld within the RMA andBank
Mhas no prope
rty rights with respect to as-
sets in the a
ccount. All dividends, interest,
and other in
come earned within the RMA
is to be reta
ined and reinvested, and no
distributi
ons of income or principal may
be made from
the RMA during the agree-
ment term,
except as otherwise noted in the
agreement
. The Depositor may nominate
an investm
ent advisor to be appointed by
Bank M,but
Bank Mwill have the power
to select
and replace the investment advi-
sor durin
g the term of the agreement. The
agreemen
t provides that it shall terminate
on the fif
th anniversary of the date of its
executio
n. However, the term may be ex-
tended a
t any time by the Depositor, with
the cons
ent ofBank M. On the expiration
of the te
rm of the agreement, the assets in
the RMA a
re to be paid to the Depositor
or to th
e Depositor’s legal representative
if the D
epositor is no longer living.
During
the term of the agreement, the
Deposi
tor, with the consent ofBank M,
may ass
ign or transfer all or any part of
the RMA
to a permitted transferee, defined
in the a
greement as a spouse, parent, or
desce
ndant of the Depositor, or to the es-
tate o
r a trust for the benefit of a permitted
trans
feree. If the Depositor exercises the
assig
nment power with respect to only a
part o
ftheRMA,Bank Mwill create a sep-
arat
e RMA in the name of the designated
tran
sferee, and will select the assets (equal
in va
lue to the amount designated by the
Depo
sitor) to be transferred to the separate
RMA.
The terms of the agreement will ap-
ply t
o the new RMA, the recipient of the
new
RMA will be bound by the terms of
the
agreement, and the recipient will be-
com
e the Depositor of the new RMA for
pur
poses of the agreement. The recipient,
as t
he new Depositor, will have a prop-
ert
y interest under applicable law in the as-
se
ts held within the new RMA. The RMA
ag
reement is binding on the new Deposi-
to
r’s heirs, successors, transferees, execu-
to
rs and administrators.
2008–29 I.R.B.116July 21, 2008

All securities in the RMA requiring reg-
istration are to be inscribed in the name
ofBank M’snominee and negotiability is
to be provided byBank Mas custodian.
Bank Missues Forms 1099 toAwith re-
spect to income generated by assets held
within the RMA. Purchasers of securities
from the RMA are not subject to the re-
strictions imposed by the RMA agreement.
Afunds the RMA in Year 1 with mar-
ketable securities and cash having a to-
tal fair market value of $50x. In Year 2,
when the total fair market value of the as-
sets held in the RMA is $60x,Aassigns
one-sixth of the RMA toA’s child,B. In ac-
cordance with the terms of the agreement,
Bank Mestablishes a new RMA withB
designated as the Depositor, selects assets
held inA’s RMA then having a fair market
value of $10x, and transfers those assets
toB’s RMA. The new RMA is subject to
the terms of the same agreement and will
terminate at the same time as specified in
the agreement, unlessB, as the Depositor
of the new RMA, extends the termination
date of that RMA.
In Year 3 withBank M’s consent,Aex-
tends the term ofA’s RMA to Year 7.A
dies in Year 4. At the time ofA’s death,
the fair market value of the assets held in
A’s RMA is $55x.
LAW
Section 2501 imposes a tax on the trans-
fer of property by gift by an individual.
Section 2511(a) provides that the tax im-
posed by section 2501 applies whether the
transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the
property is real or personal, tangible or in-
tangible.
Section 2512(a) provides that if a gift
is made in property, the value thereof at
the date of the gift shall be considered the
amount of the gift. Section 25.2512–1
of the Gift Tax Regulations provides that
the value of the transferred property is the
price at which the property would change
hands between a willing buyer and a will-
ing seller, neither being under any compul-
sion to buy or to sell, and both having rea-
sonable knowledge of the relevant facts.
Section 2031(a) provides that the value
of the gross estate of a decedent in-
cludes the value at the date of death of
all property, real or personal, tangible or
intangible, wherever situated. Section
20.2031–1(b) of the Estate Tax Regula-
tions provides that, in general, the value
of every item of property includible in the
decedent’s gross estate is its fair market
value at the time of the decedent’s death,
which is the price at which the property
would change hands between a willing
buyer and a willing seller, neither being
under any compulsion to buy or to sell and
both having reasonable knowledge of rele-
vant facts. Section 20.2031–2(g) provides
that if the decedent holds a trading account
with a broker, all securities belonging to
the decedent and held by the broker at the
date of death must be included at their fair
market value as of theapplicable valua-
tion date, even if pledged to secure a debt.
Similarly, under section 20.2031–5, the
amount of cash belonging to the decedent
at the date of death, whether in the posses-
sion of the decedent or another person, or
deposited with a bank, is included in the
gross estate.
Section 2036(a) provides that the value
of the gross estate shall include the value
of all property to the extent of any interest
therein of which the decedent has at any
time made a transfer (except in case of a
bona fidesale for an adequate and full con-
sideration in money or money’s worth), by
trust or otherwise, under which he has re-
tained for his life, or for any period not as-
certainable without reference to his death,
or for any period which does not in fact
end before his death — (1) the possession
or enjoyment of, or the right to the income
from, the property, or (2) the right, either
alone or in conjunction with any person,
to designate the persons who shall possess
or enjoy the property or the income there-
from.
Section 2703(a)(2) provides that, for
federal estate, gift, and generation-skip-
ping transfer tax purposes, the value of
any property shall be determined without
regard to any restriction on the right to
sell or use such property. Under section
2703(b), section 2703(a)(2) does not ap-
ply to a restriction (1) that is abona fide
business arrangement; (2) that is not a de-
vice to transfer property to members of
the decedent’s family for less than full
and adequate consideration in money or
money’s worth; and (3) whose terms are
comparable to similar arrangements en-
tered into by persons in an arm’s length
transaction. Section 25.2703–1(b)(2) con-
firms that each of the three requirements
described in section 2703(b) must be in-
dependently satisfied for a right or restric-
tion to meet this exception. Although Con-
gress, in enacting section 2703, focused
primarily on below-market buy-sell agree-
ments, the legislative history of that sec-
tion confirms that it is to have a broad ap-
plication. Section 25.2703–1(a)(3) further
clarifies that a right or restriction may be
contained in a partnership agreement, ar-
ticles of incorporation, corporate bylaws,
a shareholders’ agreement, or any other
agreement, or may be implicit in the capi-
tal structure of an entity.
The willing buyer-willing seller test,
applicable for both estate and gift tax pur-
poses, is an objective test to be applied
without reference to a specific donor, dece-
dent, or his or her beneficiaries. InSmith
ex. rel. Estate of Smith v. United States,
391F.3d621,628(5
th
Cir. 2004), the
court concluded that, in determining the
estate tax value of retirement accounts that
could not be sold, “[a]pplying the [will-
ing buyer-willing seller] test appropriately
...entailslookingatwhatahypothetical
buyer would pay for the assets in the Re-
tirement Accounts.” Accordingly, no dis-
count was allowed for the anticipated in-
come tax that would be incurred if the as-
sets were distributed to the account bene-
ficiaries.See also Estate of Kahn v. Com-
missioner, 125 T.C. 227, 237–240 (2005)
(reaching a similar conclusion and denying
a marketability discount with respect to an
individual retirement account).
ANALYSIS
The fair market value of all property
transferred during life or owned at death
byA, including marketable securities and
cash, is the amount subject to transfer tax,
even if that property is held in an account
with a broker, deposited with a bank, or in
the possession of another person. The in-
terposition of the RMA agreement to man-
ageA’s assets, reduces neither the fair mar-
ket value of the transferred property for
gift tax purposes nor the fair market value
of the property included inA’s gross estate
for estate tax purposes.Aat all times re-
tains a property interest under applicable
law in the assets in the RMA, andBank
Mhas no such interest in any of the as-
sets. Notwithstanding the restrictions on
A’s ability to withdraw assets from the
RMA and onA’s ability to terminate or
July 21, 20081172008–29 I.R.B.

transfer an interest in the RMA (in this
case, to anyone other than the natural ob-
jects ofA’s bounty),Aremains the sole and
outright owner of the assets in the RMA
and the income from those assets.Ahas
not changed the nature ofA’s property by
entering into the RMA agreement. Conse-
quently,A’s assets held in the RMA consti-
tutethepropertytobevaluedforgiftand
estate tax purposes.
In substance, the RMA agreement is a
management contract between the owner
of property and the person agreeing to
serve as the property manager. Any re-
strictions imposed by the RMA agreement
relate primarily to the performance of the
management contract (e.g., by establish-
ing and ensuring a long-term investment
horizon to be pursued by the manager,
and an appropriate fee in light of this
circumstance), rather than to substantive
restrictions on the underlying assets held
in the RMA. Any restrictions on the ability
to withdraw assets, terminate the agree-
ment, or transfer interests in the RMA do
not impact the price at which those assets
would change hands between a willing
buyer and a willing seller and, thus, do not
affect the value of the assets in the RMA.
In this regard, the RMA is comparable
to the retirement fund and the individual
retirement account at issue in theSmith
andKahncases, above, in which the fair
market value of assets within a particular
type of account was held to not be affected
by the value of those assets in the hands of
the ultimate beneficiary. Further, the situ-
ation presented with respect toA’s RMA is
similar to that presented where the owner
of a parcel of rental real estate enters into a
contract with a property manager relating
to the management of that property. The
existence of the management contract has
no effect on the fair market value of the
real property subject to that contract.
In addition to the above analysis under
sections 2511, 2512, and 2031, other Inter-
nal Revenue Code sections apply in deter-
mining that the amount subject to federal
transfer tax is the fair market value of the
assets in the RMA. Specifically, section
2036 applies toA’s retained interest in the
assets of the RMA and section 2703(a)(2)
applies to disregard the restrictions on the
sale or use of property for federal transfer
tax valuation purposes. Further, to the ex-
tentAhas the ability to terminate the rela-
tionship withBank Munder state law prin-
ciples of agency, the amount subject to fed-
eral transfer tax is the fair market value of
the assets in the RMA.
HOLDINGS
The fair market value of an interest in
an RMA for gift and estate tax purposes is
determined based on the fair market value
of the assets held in the RMA without any
reduction or discount to reflect restrictions
imposedbytheRMAagreementonthe
transfer of any part or all of the RMA or on
the use of the assets held in the RMA. Ac-
cordingly,A’s gift toBin Year 2 is valued
at $10X, the full fair market value of the
assets transferred intoB’s separate RMA.
Similarly, the amount to be included inA’s
gross estate for estate tax purposes with re-
spect to the RMA is $55X, the full fair mar-
ket value of the assets in the RMA atA’s
death.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Karlene M. Lesho of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this revenue ruling, con-
tact Ms. Lesho at (202) 622–3090 (not a
toll-free call).
Section 2703.—Certain
Rights and Restrictions
Disregarded
26 CFR 25.2703–1: Property subject to restrictive
arrangements.
This revenue ruling addresses whether an interest
in a restricted management account (RMA) will be
valued for transfer tax purposes without any reduc-
tion or discount for the restrictions imposed by the
RMA agreement. See Rev. Rul. 2008-35, page 116.
Sectio
n 7121.—Closing
Agreements
26 CFR 301.7121–1: Closing agreements.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may
remedy a failure to account for charges for qualified
additional benefits (QABs) under the expense charge
rule of section 7702(c)(3)(B)(ii) of the Internal Rev-
enue Code. Rev. Rul. 2005–6, 2005–1 C.B. 471, is
amplified. See Rev. Proc. 2008-38, page 139.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may rem-
edy an inadvertent non-egregious failure to comply
with the modified endowment contract rules under
section 7702A of the Internal Revenue Code. Rev.
Proc. 2001–42, 2001–2 C.B. 212, and Rev. Proc.
2007–19, 2007–1 C.B. 515, are superseded. See Rev.
Proc. 2008-39, page 143.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may
remedy the failure of one or more contracts to meet
the definition of a life insurance contract under
section 7702(a) or to satisfy the requirements of
section 101(f) of the Internal Revenue Code. Rev.
Rul. 91–17, 1991–1 C.B. 190, is superseded in part;
Notice 99–48, 1999–2 C.B. 429, is superseded. See
Rev. Proc. 2008-40, page 151.
A revenue procedure provides a procedure by
which an issuer of a variable contract may remedy an
inadvertent failure of a variable contract to satisfy the
diversification requirements of section 817(h) of the
Internal Revenue Code. Rev. Rul. 91–17, 1991–1
C.B. 190, is amplified; Rev. Proc. 92–25, 1992–1
C.B. 741, is superseded; Notice 2000–9, 2000–1
C.B. 449, is obsolete. See Rev. Proc. 2008-41, page
155.
Section 7216.—Disclosure
or Use of Information by
Preparers of Returns
26 CFR 301.7216–3T: Disclosure or use permitted
only with the taxpayer’s consent (temporary).
T.D. 9409
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Amendments to the Section
7216 Regulations—Disclosure
or Use of Information by
Preparers of Returns
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal and temporary regulations that provide
rules relating to the disclosure and use of
taxreturninformationbytaxreturnpre-
parers. These regulations provide updated
2008–29 I.R.B.118July 21, 2008

guidance regarding the disclosure of a tax-
payer’s social security number to a tax re-
turn preparer located outside of the United
States. The text of these regulations also
serves as the text of the proposed regu-
lations (REG–121698–08) set forth in the
notice of proposed rulemaking on this sub-
ject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective on July 2, 2008.
Applicability Date:See §301.7216–
3T(d).
FOR FURTHER INFORMATION
CONTACT: Lawrence E. Mack, (202)
622–4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part
301 to provide modified rules relating to
the ability of a tax return preparer located
within the United States to disclose a tax-
payer’s social security number constitut-
ing tax return information with the tax-
payer’s consent to a tax return preparer lo-
cated outside of the United States. In the
accompanying and cross-referenced notice
of proposed rulemaking, the Treasury De-
partment and IRS request comments on the
proposed rule from all interested persons.
On December 8, 2005, the Treasury
Department and IRS published a notice of
proposed rulemaking (REG–137243–02,
2006–1 C.B. 317) in theFederal Register
(70 FR 72954) proposing amendments to
the regulations under section 7216 (re-
garding the use or disclosure of tax return
information by income tax return prepar-
ers). On January 3, 2008, the Treasury De-
partment and IRS issued final regulations
under section 7216 (T.D. 9375, 2008–5
I.R.B. 344) applicable to disclosures or
uses of tax return information occurring on
or after January 1, 2009. Thus, T.D. 9375
replaces previously issued final regula-
tions that remain applicable to disclosures
or uses of tax return information occurring
prior to January 1, 2009.
T.D. 9375 included the revision of
§301.7216–3(b)(4), which, for disclosures
and uses of tax return information occur-
ring on or after January 1, 2009, provides
that an income tax return preparer located
in the United States may not disclose the
taxpayer’s social security number (SSN)
to a tax return preparer located outside
of the United States even if the taxpayer
consents to the disclosure. These tempo-
rary regulations modify the rules under
§301.7216–3(b)(4).
Explanation of Provisions
The Treasury Department and IRS are
amending the regulations under section
7216 applicable to disclosures and uses
of tax return information occurring on
or after January 1, 2009, to provide a
limited exception to the general rule that
an income tax return preparer located
in the United States may not disclose a
taxpayer’s SSN to a tax return preparer
located outside of the United States. Sec-
tion 301.7216–3(b)(4) provides that a tax
return preparer located within the United
States, including any territory or posses-
sion of the United States, may not obtain
consent to disclose a taxpayer’s SSN to a
tax return preparer located outside of the
United States or any territory or posses-
sion of the United States. Thus, with one
exception, if a tax return preparer located
within the United States obtains consent
from a taxpayer to disclose tax return in-
formationtoanothertaxreturnpreparer
located outside of the United States, as
provided under §§301.7216–3(a)(3)(i)(D),
301.7216–2(c)(2) and 301.7216–2(d), the
tax return preparer located in the United
States may not disclose the taxpayer’s
SSN, and must redact or otherwise mask
the taxpayer’s SSN before the tax return
information is disclosed outside of the
United States. The exception is limited
to the circumstance in which a tax return
preparer located inside the United States
initially receives the SSN from a tax return
preparer located outside the United States
and the preparer within the United States
retransmits the SSN to the preparer that
provided the SSN. When a taxpayer-client
requests that a tax return preparer within
the United States transfer the return prepa-
ration engagement to a tax return preparer
located outside the United States, the pre-
parer still must redact or otherwise mask
the taxpayer’s SSN before the information
is disclosed and, in this situation, it will be
incumbent upon the taxpayer to provide
the SSN directly to the tax return preparer
located abroad.
The revisions containing the SSN dis-
closure prohibition in§301.7216–3(b)(4)
were explained in the preamble to the final
regulations. The regulation was adopted in
light of factors including: 1) the fact that it
is not necessary for tax return preparers to
disclose certain taxpayer identifying infor-
mation to other tax return preparers who
are assisting them in preparing a return; 2)
the important role an SSN plays in the tax
administration process, and the heightened
potential for misuse when an SSN is read-
ily associated with confidential informa-
tion, such as tax return information; and 3)
the heightened concern about the theft of
taxpayer identifying information resulting
from disclosures outside the United States.
Upon further consideration, the Trea-
sury Department and IRS have concluded
that §301.7216–3(b)(4) can be amended to
provide flexibility to allow a tax return
preparer within the United States to dis-
close an SSN with the taxpayer’s consent
to a tax return preparer located outside of
the United States if both tax return pre-
parers have sufficient data security pro-
grams and procedures in operation to pro-
tect such important confidential informa-
tion from misuse or unauthorized access
or disclosure. These measures will signif-
icantly reduce the security risks associated
with the disclosure of this information out-
side of the United States. Although SSN
security is the primary focus of these reg-
ulations, the flexibility provided by these
regulations will enable qualified tax return
preparers to address situations in which
there is a need for a tax return preparer
in the United States to disclose an SSN
to a tax return preparer located outside of
the United States, as appropriate under the
circumstances. This includes, but is not
limited to, situations in which the tax re-
turn preparer locatedoutside of the United
States is a signing tax return preparer or
requires an unredacted SSN to file a re-
turn on behalf of a taxpayer, the tax return
preparer located outside the United States
may need a copy of the entire return, in-
cluding the taxpayer’s SSN (for example,
to assist an expatriated U.S. taxpayer se-
cure treaty benefits from the relevant for-
eign government), or the taxpayer prefers
that the tax return preparer located within
the United States disclose the taxpayer’s
SSN to the tax return preparer located out-
side the United States (for example, be-
cause the taxpayer concludes that the data
security protection provided by the tax re-
turn preparer in the United States and the
July 21, 20081192008–29 I.R.B.

tax return preparer located outside of the
United States is sound).
In light of these considerations, the
Treasury Department and IRS, pursuant
to these temporary regulations, amend
the regulations contained in T.D. 9375
(applicable to disclosures and uses of
tax return information on or after Jan-
uary 1, 2009) to include an exception
to §301.7216–3(b)(4). The exception in
§301.7216–3T(b)(4)(ii) provides that a tax
return preparer located within the United
States, including any territory or pos-
session of the United States, may obtain
consent to disclose the taxpayer’s SSN to
a tax return preparer located outside of the
United States or any territory or posses-
sion of the United States if the tax return
preparer discloses the SSN through the
use of an “adequate data protection safe-
guard” as described in guidance published
in the Internal Revenue Bulletin and veri-
fies the maintenanceof the adequate data
protection safeguards in the request for the
taxpayer’s consent pursuant to the specifi-
cations described in guidance published in
the Internal Revenue Bulletin. The excep-
tion authorizes only those preparers with
an adequate data protection safeguard in
operation to request a taxpayer’s consent
to disclose an SSN to a preparer located
outside the United States that also has an
adequate data protection safeguard. The
Treasury Department and IRS anticipate
that requiring tax return preparers that seek
a taxpayer’s consent to disclose an SSN
to a tax return preparer located abroad
to maintain adequate data security would
provide the further benefit of enhancing
the level of security of any data transfer, in-
cluding the data transfer of the taxpayer’s
SSN, while providing additional flexibil-
ity to address situations in which there is
a reason or need to disclose an SSN to a
tax return preparer located abroad. Tax
return preparers without an adequate data
protection safeguard, or those preparers
with an adequate data protection safeguard
that seek to disclose an SSN to a tax return
preparer located abroad that does not have
an adequate data protection safeguard,
must continue to comply with the general
rule in §301.7216–3T(b)(4)(i), and are
still required to mask any SSN prior to
disclosure to a tax return preparer located
outside the United States, or any territory
or possession of the United States, even if
the taxpayer has consented to disclosure
of an SSN.
Revenue Procedure 2008–35, pub-
lished concurrently with these regulations,
provides the relevant guidance regarding
the exception in §301.7216–3T(b)(4)(ii)
to the general rule requiring SSN mask-
ing. Section 4.07 of Revenue Procedure
2008–35 provides guidance regarding the
requirements for an adequate data protec-
tion safeguard. Pursuant to Section 4.07,
an “adequate data protection safeguard”
is a data security program, policy and
practice that meets or conforms to one
of the following privacy or data security
frameworks:
(1) The United States Department of
Commerce “safe harbor” framework for
data protection (or successor program);
(2) A foreign law data protection safe-
guard that includes a security component,
for example, the European Commission’s
Directive on Data Protection;
(3) A framework that complies with
the requirements of a financial or simi-
lar industry-specific standard that is gen-
erally accepted as best practices for tech-
nology and security related to that industry,
for example, the BITS (Financial Services
Roundtable) Financial Institution Shared
Assessment Program;
(4) The requirements of the
AICPA/CICA Privacy Framework;
(5) The requirements of the most recent
version of IRS Publication 1075,Tax In-
formation Security Guidelines for Federal,
State and Local Agencies and Entities;or
(6) Any other data security framework
that provides the same level of privacy pro-
tection as contemplated by one or more of
the frameworks described in (1) through
(5).
Section 4.04(1)(e)(ii) of Revenue Pro-
cedure 2008–35 provides guidance regard-
ing mandatory language that must be in-
cluded in each request for consent pro-
vided to an individual taxpayer by the tax
return preparer that seeks consent to dis-
close an SSN to a return preparer located
outside the United States or its territories
or possessions. See §601.601(d)(2)(ii)(b).
These regulations clarify that the rule
in §301.7216–3T(b)(4) applies only to a
tax return preparer’s request for consent
to disclose tax return information, includ-
ing an SSN, from a taxpayer filing a re-
turn in the Form 1040 series, for example,
Form 1040, Form 1040NR, Form 1040A,
or Form 1040EZ. Also, the regulations
clarify that a tax return preparer located
outside of the United States does not in-
clude a tax return preparer who is con-
tinuously and regularly employed in the
United States or any territory or possession
of the United States and who is in a tem-
porary travel status outside of the United
States. This clarification is necessary to
avoid disruption of the performance of the
duties of employees of tax return prepar-
ers based in the United States who are on a
temporary travel assignment in a location
outside of the United States.
The Treasury Department and IRS also
conclude that the addition of the exception
in §301.7216–3T(b)(4)(ii) appropriately
balances concerns regarding safeguarding
of sensitive tax return information and
identity theft against the tax return pre-
parers’ needs for disclosing SSNs and a
taxpayer’s right to control access to his
or her SSN. In a separate notice of pro-
posed rulemaking published with these
temporary regulations, the Treasury De-
partment and IRS request comments on
the proposed rules, as well as the guidance
regarding the requirements for an adequate
data protection safeguard in Section 4.07
of Revenue Procedure 2008–35.
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. chap-
ter 5) does not apply to these regulations
because they are interpretive regulations.
Because these regulations are necessary to
provide tax return preparers and taxpay-
ers with immediate guidance on the appli-
cation of the section 7216 rules regarding
SSN masking requirements, particularly in
light of the January 1, 2009 applicability
date provided by the recently promulgated
section 7216 regulations contained in T.D.
9375, and as these regulations are intended
to provide a limited exception to, and re-
lief from, the rule requiring SSN mask-
ing in all instances where tax return in-
formation is disclosed to a tax return pre-
parer located outside of the United States
and its territories and possessions, good
cause would otherwise exist for dispens-
2008–29 I.R.B.120July 21, 2008

ing with notice and public comment pur-
suant to 5 U.S.C. 553(b) and (c). For appli-
cability of the Regulatory Flexibility Act
(5 U.S.C. chapter 6), refer to the Special
Analyses section of the preamble to the
cross-referenced notice of proposed rule-
making published in this issue of the Bul-
letin. Pursuant to section 7805(f) of the In-
ternal Revenue Code, these temporary reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Lawrence E. Mack, Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Amendments to the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7216–3T also issued under
26U.S.C.7216***
Paragraph 2. Section 301.7216–3 is
amended by revising paragraph (b)(4) to
read as follows:
§301.7216–3 Disclosure or use permitted
only with the taxpayer’s consent.
*****
(b) * * *
(4) [Reserved]. For further guidance,
see §301.7216–3T(b)(4).
*****
Paragraph 3. Section 301.7216–3T is
added to read as follows:
§301.7216–3T Disclosure or use
permitted only with the taxpayer’s consent
(temporary).
(a) [Reserved]. For further guidance,
see §301.7216–3(a).
(b)Timing requirements and limita-
tions—(1) through (3) [Reserved]. For
further guidance, see §301.7216–3(b)(1)
through (3).
(4)No consent to the disclosure of a tax-
payer’s social security number to a return
preparer outside of the United States with
respecttoataxpayersfilingareturninthe
Form 1040 Series—(i)In general. Except
as provided in paragraph (ii), a tax return
preparer located within the United States,
including any territory or possession of
the United States, may not obtain consent
to disclose the taxpayer’s social security
number (SSN) with respect to taxpayers
filing a return in the Form 1040 Series,
for example, Form 1040, Form 1040NR,
Form 1040A, or Form 1040EZ, to a tax re-
turn preparer located outside of the United
States or any territory or possession of
the United States. Thus, if a tax return
preparer located within the United States
(including any territory or possession of
the United States) obtains consent from
an individual taxpayer to disclose tax re-
turn information to another tax return pre-
parer located outside of the United States,
as provided under §§301.7216–2(c) and
301.7216–2(d), the tax return preparer lo-
cated in the United States may not disclose
the taxpayer’s SSN, and the tax return pre-
parer must redact or otherwise mask the
taxpayer’s SSN before the tax return infor-
mation is disclosed outside of the United
States. If a tax return preparer located
within the United States initially receives
or obtains a taxpayer’s SSN from another
tax return preparer located outside of the
United States, however, the tax return pre-
parer within the United States may, with-
out consent, retransmit the taxpayer’s SSN
to the tax return preparer located outside
the United States that initially provided
the SSN to the tax return preparer located
within the United States. For purposes of
this section, a tax return preparer located
outside of the United States does not in-
clude a tax return preparer who is con-
tinuously and regularly employed in the
United States or any territory or possession
of the United States and who is in a tem-
porary travel status outside of the United
States.
(ii)Exception.A tax return preparer lo-
cated within the United States, including
any territory or possession of the United
States, may obtain consent to disclose the
taxpayer’s SSN to a tax return preparer lo-
cated outside of the United States or any
territory or possession of the United States
where the tax return preparer within the
United States discloses the SSN to a tax
return preparer outside of the United States
through the use of an adequate data protec-
tion safeguard as defined by the Secretary
in guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b) of
this chapter) and verifies the maintenance
of the adequate data protection safeguards
in the request for the taxpayer’s consent
pursuant to the specifications described by
the Secretary in guidance published in the
Internal Revenue Bulletin.
(b)(5) and (c) [Reserved]. For further
guidance, see §301.7216–3(b)(5) and (c).
(d)Effective/applicability date.This
section applies to disclosures or uses of
tax return information occurring on or af-
ter January 1, 2009. The applicability of
this section expires on July 1, 2011.
LindaE.St
iff,
Deputy Com
missioner for
Services a
nd Enforcement.
Approved June 25, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 1, 2008,
8:45 a.m., and published in the issue of the Federal Register
for July 2, 2008, 73 F.R. 37910)
Section 7702.—Life
Insurance Contract Defined
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may
remedy a failure to account for charges for qualified
additional benefits (QABs) under the expense charge
rule of section 7702(c)(3)(B)(ii) of the Internal Rev-
enue Code. Rev. Rul. 2005–6, 2005–1 C.B. 471, is
amplified. See Rev. Proc. 2008-38, page 139.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may
remedy the failure of one or more contracts to meet
the definition of a life insurance contract under
section 7702(a) or to satisfy the requirements of
section 101(f) of the Internal Revenue Code. Rev.
Rul. 91–17, 1991–1 C.B. 190, is superseded in part;
Notice 99–48, 1999–2 C.B. 429, is superseded. See
Rev. Proc. 2008-40, page 151.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may auto-
matically obtain a waiver, under section 7702(f)(8) or
section 101(f)(3)(H) of the Internal Revenue Code,
for certain reasonable errors that caused the contract
July 21, 20081212008–29 I.R.B.

to fail to satisfy the requirements of section 7702
or section 101(f), as applicable. Rev. Rul. 91–17,
1991–1 C.B. 190, is amplified. See Rev. Proc.
2008-42, page 160.
Section 7702A.—Modified
Endowment Contract
Defined
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may
remedy a failure to account for charges for qualified
additional benefits (QABs) under the expense charge
rule of section 7702(c)(3)(B)(ii) of the Internal Rev-
enue Code. Rev. Rul. 2005–6, 2005–1 C.B. 471, is
amplified. See Rev. Proc. 2008-38, page 139.
A revenue procedure provides a procedure by
which an issuer of a life insurance contract may rem-
edy an inadvertent non-egregious failure to comply
with the modified endowment contract rules under
section 7702A of the Internal Revenue Code. Rev.
Proc. 2001–42, 2001–2 C.B. 212, and Rev. Proc.
2007–19, 2007–1 C.B. 515, are superseded. See Rev.
Proc. 2008-39, page 143.
2008–29 I.R.B.122July 21, 2008

Part III. Administrative, Procedural, and Miscellaneous
Health Savings Accounts
Notice 2008–59
PURPOSE
This notice provides guidance on
Health Savings Accounts.
BACKGROUND
Section 1201 of the Medicare Prescrip-
tion Drug, Improvement, and Moderniza-
tion Act of 2003, Pub. L. No. 108–173,
added § 223 to the Internal Revenue Code
to permit eligible individuals to establish
Health Savings Accounts (HSAs) for tax-
able years beginning after December 31,
2003. The Health Opportunity Patient Em-
powerment Act of 2006, Pub. L. No.
109–432 (HOPE Act), amended § 223 of
the Code effective generally for taxable
years after December 31, 2006.
Notice 2004–2, 2004–1 C.B. 269, and
Notice 2004–50, 2004–2 C.B. 196, pro-
vide guidance on HSAs in question and an-
swer format. This notice addresses addi-
tional questions relating to HSAs.
TABLE OF CONTENTS
The following is an outline of the questions and answers covered in this notice.
DEFINITIONS
I. ELIGIBLE INDIVIDUALS
Q&A–1. Payment of HDHP premiums by an HRA not disqualifying coverage
Q&A–2. Disqualifying benefits before HDHP minimum deductible satisfied
Q&A–3. Employer reimbursement of medical expenses before HDHP minimum deductible satisfied
Q&A–4. HDHP with embedded deductibles and post-deductible HRA or health FSA
Q&A–5. Eligible for Medicare Part D and contributions to HSA
Q&A–6. Enrolled in Medicare Part D and contributions to HSA
Q&A–7. HDHP and other high deductible coverage
Q&A–8. HDHP and HRA or health FSA that reimburses familymembers before minimum HDHP deductible satisfied
Q&A–9. Disregarded coverage or preventive care through Department of Veterans Affairs
Q&A–10. Access to health care that is free or at charges below fair market value
Q&A–11. Family HDHP coverage and dependents with disqualifying coverage
II. HIGH DEDUCTIBLE HEALTH PLANS
Q&A–12. Changing from family HDHP to self-only HDHP
Q&A–13. Different deductibles for specific benefits
Q&A–14. Benefits limited to hospitalization or in-patient care
Q&A–15. Expenses that apply towards meeting deductible
III. CONTRIBUTIONS
Q&A–16. Contribution limits for individuals with family coverage and dependents with non-permitted coverage
Q&A–17. Contribution limits for married couples with different types of HDHP coverage
Q&A–18. Contribution limits for married couples who each have family HDHP coverage
Q&A–19. Contribution limits for months when covered by an HDHP
Q&A–20. Rollovers from an existing HSA to a new HSA
Q&A–21. Employer contributions for prior year
Q&A–22. Catch-up contributions for spouses
Q&A–23. Employer contributions to an employee who was never an eligible individual
Q&A–24. Error resulting in excess contributions
Q&A–25. Employer contributions to an employee who ceases to be an eligible individual
July 21, 20081232008–29 I.R.B.

Q&A–26. Employer contributions to HSA of employee’s spouse
IV. DISTRIBUTIONS
Q&A–27. Debit cards
Q&A–28. Third party authorization
Q&A–29. Payment of Medicare Part D premiums
Q&A–30. Medicare premiums for spouse
Q&A–31. Continuation coverage premiums
Q&A–32. Premiums for a dependentreceiving unemployment benefits
Q&A–33. Expenses for a child claimed as a dependent by another
V. PROHIBITED TRANSACTIONS
Q&A–34. Borrowing from HSA
Q&A–35. Loan from trustee to HSA
Q&A–36. Pledging HSA as security for a loan
Q&A–37. Consequences for entering into a prohibited transaction
VI. ESTABLISHING AN HSA
Q&A–38. When an HSA is established
Q&A–39. Not treating as established before state law considers HSA established
Q&A–40. Establishment date for rollovers
Q&A–41. Establishment date for successive HSAs
VII. ADMINISTRATION
Q&A–42. Reporting HSA administration and maintenance fees withdrawn by the trustee from an HSA
DEFINITIONS
The following definitions apply for pur-
poses of this notice.
Eligible individualmeans an individ-
ual who: (1) is covered by a high de-
ductible health plan (HDHP); (2) is not
also covered by any other health plan that
is not an HDHP (with certain exceptions
for plans providing certain types of limited
coverage); (3) is not enrolled in Medicare;
and (4) may not be claimed as a depen-
dent on another person’s tax return. See
§ 223(c)(1).
Limited-purpose health flexible spend-
ing arrangement (FSA)means a health
FSA described in a cafeteria plan that only
pays or reimburses permitted coverage
benefits (as defined in § 223(c)(1)(B)),
such as vision care, dental care or pre-
ventive care (as defined for purposes of
§ 223(c)(2)(C)). See Prop. Treas. Reg.
§ 1.125–5(m)(3).
Limited-purpose health reimbursement
arrangement (HRA)means an HRA that
only pays or reimburses permitted cover-
age benefits (as defined in § 223(c)(1)(B)),
such as vision care, dental care or preven-
tive care. See Rev. Rul. 2004–45, 2004–1
C.B. 971.
Post-deductible health FSAmeans a
health FSA in a cafeteria plan that only
pays or reimburses medical expenses (as
defined in § 213(d)) for preventive care
or medical expenses incurred after the
minimum annual HDHP deductible un-
der § 223(c)(2)(A)(i) is satisfied. No
medical expenses incurred before the an-
nual HDHP deductible is satisfied may
be reimbursed by a post-deductible FSA,
regardless of whether the HDHP covers
the expense or whether the deductible is
later satisfied. See Prop. Treas. Reg.
§ 1.125–5(m)(4).
Post-deductible HRAmeans an HRA
that only pays or reimburses medical ex-
penses (as defined in § 213(d)) for preven-
tive care or medical expenses incurred af-
ter the minimum annual HDHP deductible
under § 223(c)(2)(A)(i) is satisfied. No
medical expenses incurred before the an-
nual HDHP deductible is satisfied may be
reimbursed by a post-deductible HRA, re-
gardless of whether the HDHP covers the
expense or whether the deductible is later
satisfied. See Rev. Rul. 2004–45.
QUESTIONS AND ANSWERS
I.ELIGIBLE INDIVIDUALS
Q–1. Does an individual fail to be an el-
igible individual, as defined in § 223(c)(1),
merely because the individual is covered
byanHRAwhich,inadditiontopaying
and reimbursing expenses for vision, den-
tal and preventive care, pays and reim-
burses premiums for coverage by an acci-
dent and health plan?
A–1. No. An individual who is oth-
erwise an eligible individual does not
fail to be an eligible individual merely
because the individual is covered by an
HRA which, in addition to paying and
reimbursing expenses for vision, dental
and preventive care, pays and reimburses
premiums for coverage by an accident and
health plan. See Notice 2002–45, 2002–2
C.B. 93, and Rev. Rul. 2002–41, 2002–2
C.B. 75, for guidance on HRAs.
Example. In 2008, Employer A provides an HRA
which reimburses any § 213(d) medical expense in-
curred by an employee, employee’s spouse and de-
2008–29 I.R.B.124July 21, 2008

pendents. For 2009, Employer A amends the HRA
to limit its benefits to expenses for vision care, dental
care, and preventive care and to pay the employee’s
share of the premiums for the employer-sponsored
HDHP. During 2009, A’s employees are otherwise el-
igible individuals.
For 2009, Employer A’s employees are eligible
individuals even if covered by the HRA.
Q–2. If an individual is covered un-
der a plan that pays for medical expenses
incurred before the minimum HDHP
deductible is satisfied and the cover-
age is not permitted insurance under
§ 223(c)(3), disregarded coverage under
§ 223(c)(1)(B)(ii) or preventive care under
§ 223(c)(2)(C), is that individual an eligi-
ble individual as defined in § 223(c)(1)?
A–2. No. To be an eligible individ-
ual, an individual must be covered by an
HDHP and by no other health plan that
provides coverage other than disregarded
coverage under § 223(c)(1)(B) or preven-
tive care under § 223(c)(2)(C). See Rev.
Rul. 2004–45.
Example. Individual B is covered by an HDHP.
In addition, Individual B is covered by a “mini-med”
plan that provides the following benefits: a fixed
amount per day of hospitalization; a fixed amount
per office visit with a physician; a fixed amount per
out-patient treatment at a hospital; a fixed amount per
ambulance use; and coverage for expenses relating to
the treatment of a specified list of diseases.
Although the fixed amount per day of hospitaliza-
tion benefit and specified disease benefit are allowed
in addition to the HDHP as permitted insurance, the
other benefits are not disregarded coverage or preven-
tive care and, thus, Individual B is not an eligible in-
dividual who can contribute to an HSA.
Q–3. If an employee is covered by
an HDHP and the employer pays or reim-
burses some or all of the employee’s medi-
cal expenses incurred before the minimum
HDHP deductible is satisfied (other than
disregarded coverage under § 223(c)(1)(B)
or preventive care under § 223(c)(2)(C)), is
the employee an eligible individual under
§ 223(c)(1)?
A–3. No. To be an eligible individ-
ual, an individual must be covered by an
HDHP and no other health plan except
disregarded coverage or preventive care.
If at any time, an employer pays or reim-
burses, directly or indirectly, all or part
of employees’ medical expenses below
the minimum HDHP deductible under
§ 223(c)(2)(A) (other than for disregarded
coverage or preventive care) the employ-
ees are not eligible to contribute to an
HSA.
Example 1. For 2008, an HDHP with self-only
coverage has an annual deductible of $2,500. The
employee pays the first $250 of covered medical ex-
penses below the deductible. The employer reim-
burses the next $1,350 of covered medical expenses
below the deductible. The employee is responsible
for the last $900 of covered medical expenses below
the deductible. The $1,350 of medical expenses paid
or reimbursed by the employer is not a contribution to
an HSA and not disregarded coverage or preventive
care.
An employee covered by this type of plan is not
an eligible individual under § 223(c)(1) because the
employee has disqualifying coverage from a plan that
is not an HDHP.
Example 2. For 2008, an HDHP with self-only
coverage has an annual deductible of $4,500. The
employee pays the first $1,100 of covered medical
expenses below the deductible. The employer reim-
burses the next $3,400 of covered medical expenses
below the deductible. The $3,400 of medical ex-
penses paid or reimbursed by the employer is not a
contributiontoanHSAandnotdisregardedcoverage
or preventive care.
An employee covered by this type of plan is an
eligible individual under § 223(c)(1) because the em-
ployee is responsible for the minimum annual de-
ductible under § 223(c)(2)(A).
Q–4(a). If an individual has family
HDHP coverage under which benefits
are paid once the entire family incurs a
minimum amount of covered expenses
(an umbrella deductible), but which also
provides benefits to each individual if that
individual incurs expenses in excess of
the minimum family HDHP deductible in
§ 223(c)(2)(A)(i)(II) (the embedded indi-
vidual deductible), does the individual fail
to be an eligible individual merely because
of the embedded individual deductible?
A–4(a). No, the individual does not fail
to be an eligible individual merely because
of an embedded individual deductible that
is no less than the minimum family HDHP
deductible in § 223(c)(2)(A)(i)(II).
Q–4(b). May a post-deductible HRA
or post-deductible health FSA pay or re-
imburse qualified medical expenses of an
individual with family HDHP coverage
once the minimum annual deductible in
§ 223(c)(2)(A)(i)(II) for family HDHP
coverage has been satisfied?
A–4(b). Yes, a post-deductible HRA or
post-deductible health FSA may pay or re-
imburse qualified medical expenses of an
individual with family HDHP coverage in-
curred at any time after the minimum an-
nual deductible in § 223(c)(2)(A)(i)(II) for
family HDHP coverage has been satisfied.
Example. In 2008, a family with family HDHP
coverage has an umbrella deductible of $3,500, and
an embedded individual deductible of $2,200. A
post-deductible HRA reimburses § 213(d) medical
expenses incurred after $2,200 of medical expenses
covered by the HDHP have been incurred.
The covered individuals, if otherwise eligible, are
eligible individuals.
Q–5. Does an individual fail to be an
eligible individual merely because the in-
dividual is eligible for, but not enrolled in,
Medicare Part D (or any other Medicare
benefit)?
A–5. No. However, an individual is not
an eligible individual under § 223(c)(1) in
any month during which such individual
is both eligible for benefits under Medi-
care and enrolled to receive benefits un-
der Medicare. See also Notice 2004–50,
Q&A–2 and Q&A–3, regarding Medicare
Parts A and B.
Q–6. Does an individual fail to be an
eligible individual merely because the in-
dividual is enrolled in Medicare Part D, or
any other Medicare benefit?
A–6. Yes. Under § 223(b)(7), an indi-
vidual who is enrolled in Medicare is not
an eligible individual in any month during
which the individual is enrolled in Medi-
care. See also Q&A–29 of this notice re-
garding paying Medicare premiums with
fundsinanHSA.
Q–7. May an otherwise eligible indi-
vidual covered by an HDHP as defined in
§ 223(c)(2) also be covered by a health
plan that is not an HDHP with a deductible
equal to or greater than the statutory mini-
mum HDHP deductible?
A–7. Yes, as long as the deductible of
the other coverageequals or exceeds the
statutory minimum HDHP deductible, the
individual remains an eligible individual.
Example. An otherwise eligible individual has
self-only HDHP coverage from January 1 through
December 31, 2008, with a deductible of $2,500 and
a life-time limit on benefits of $1,000,000. In addi-
tion to the HDHP, the individual has self-only health
plan coverage with a $1,000,000 deductible and a
$2,000,000 life-time limit on benefits.
The individual is an eligible individual.
Q–8. Is an individual with family
HDHP coverage who is also covered by
a post-deductible HRA or post-deductible
health FSA an eligible individual under
§ 223(c)(1) if the post-deductible HRA
or post-deductible health FSA reimburses
§ 213(d) medical expenses of a spouse
or dependent incurred before the min-
imum family HDHP deductible under
§ 223(c)(2)(A)(i)(II) has been satisfied?
A–8. No. If an individual with fam-
ily HDHP coverage is covered by a post-
deductible HRA or post-deductible health
FSA that reimburses the § 213(d) medical
expenses of any covered individual before
July 21, 20081252008–29 I.R.B.

the minimum family HDHP deductible un-
der § 223(c)(2)(A)(i)(II) has been satisfied,
that individual is not an eligible individual
under § 223(c)(1).
Example 1. Employee C has family HDHP cov-
erage. Employee C’s spouse and children (but not
Employee C) are also covered by non-HDHP fam-
ily coverage provided by the spouse’s employer. Em-
ployee C and Employee C’s spouse and children are
also covered by a post-deductible health FSA. The
health FSA pays for unreimbursed medical expenses
of the spouse and child without regard to the satisfac-
tion of the deductible of the family HDHP.
Because the health FSA covering Employee C re-
imburses medical expenses before the minimum fam-
ily HDHP deductible is satisfied, Employee C is not
an eligible individual.
Example 2. Same facts asExample 1, except the
health FSA does not cover Employee C. Employee C
is an eligible individual.
Q–9. Is an individual an eligible indi-
vidual if he or she is eligible for medical
benefits through the Department of Veter-
ans Affairs (VA) but only receives medical
care that is disregarded coverage or pre-
ventive care from the VA and is otherwise
an eligible individual?
A–9. Yes. Although an individual
actually receiving medical benefits from
the VA at any time in the previous three
months is generally not an eligible individ-
ual, this rule does not apply if the medical
benefits consist solely of disregarded cov-
erage or preventive care.
Q–10. Is an otherwise eligible indi-
vidual who has access to free health care
or health care at charges below fair mar-
ket value from a clinic on an employer’s
premises an eligible individual under
§ 223(c)(1)?
A–10. An individual will not fail to be
an eligible individual under § 223(c)(1)(A)
merely because the individual has access
to free health care or health care at charges
below fair market value from an em-
ployer’s on-site clinic if the clinic does not
provide significant benefits in the nature
of medical care (in addition to disregarded
coverage or preventive care).
Example 1. A manufacturing plant operates an
on-site clinic that provides the following free health
care for employees: (1) physicals and immunizations;
(2) injecting antigens provided by employees (e.g.,
performing allergy injections); (3) a variety of as-
pirin and other nonprescription pain relievers; and (4)
treatment for injuries caused by accidents at the plant.
The clinic does not provide significant benefits in
the nature of medical care in addition to disregarded
coverage or preventive care.
Example 2. A hospital permits its employees to
receive care at its facilities for all of their medical
needs. For employees without health insurance, the
hospital provides medical care at no charge. For
employees who have health insurance, the hospital
waives all deductibles and co-pays.
Because the hospital provides significant care in
the nature of medical services, the hospital’s employ-
ees are not eligible individuals under § 223(c)(1)(A).
Q–11. If an otherwise eligible individ-
ual under § 223(c)(1) has family HDHP
coverage that covers dependents, and the
dependents have other, disqualifying, non-
HDHP coverage, is the individual an eligi-
ble individual?
A–11. Yes. See also Rev. Rul.
2005–25, 2005–1 C.B. 971. See Q&A–16
of this notice regarding the contribution
limit.
II.HIGH DEDUCTIBLE HEALTH
PLANS
Q–12. If an individual switches from a
family HDHP to a self-only HDHP, does
the individual fail to be an eligible individ-
ual during the period of self-only coverage
merely because the self-only HDHP, for
the purpose of satisfying the self-only
deductible, takes into account expenses
incurred while the individual had family
HDHP coverage?
A–12. Aself-onlyHDHPmayuse
any reasonable method to allocate the
covered expenses incurred during the pe-
riod of family coverage for the purpose
of satisfying the deductible for self-only
coverage. For example, subject to state
law requirements, the plan may allocate to
the self-only deductible only the expenses
incurred by that individual. Alternatively,
the plan may allocate the expenses in-
curred during family HDHP coverage on a
per-capitabasis according to the number
of persons covered by the family HDHP. If
the family deductible was satisfied before
the change to self-only coverage, the plan
may also treat the individual as having sat-
isfied the self-only deductible for that plan
year. In all cases, each expense must be
allocated on a reasonable and consistent
basis and, except in the case of COBRA
continuation coverage, each expense may
be allocated to only one individual, and
the plan year must be 12 months. For in-
dividuals switching from self-only HDHP
coverage to family HDHP coverage, see
Notice 2004–50, Q&A–23. If COBRA
continuation coverage is required to be
made available, the HDHP must com-
ply with the requirements of Q&A–2 of
§ 54.4980B–5 for those individuals re-
ceiving COBRA continuation coverage.
Example 1. Employer D offers its employees a
calendar year health plan otherwise qualifying as an
HDHP. Employee E and E’s spouse are covered by
Employer D’s family coverage HDHP with a $6,000
deductible. Employee E incurs $2,500 in covered ex-
penses; Employee E’s spouse incurs $2,000 in cov-
ered expenses. On July 1, Employee E and Employee
E’s spouse each change to self-only HDHP coverage
with a $3,000 deductible and Employee E’s spouse is
no longer covered under the plan.
For the period from July 1 through December
31, the plan may credit Employee E’s self-only de-
ductible with either: (1) $2,500 (the actual amount
of expenses Employee E incurred under family cov-
erage), or (2) $2,250 ($4,500/2), Employee E’sper-
capitashare of expenses incurred by the two indi-
viduals covered by family coverage. In this case
the HDHP must credit Employee E’s spouse with at
least $2,000 toward the satisfaction of the deductible;
the HDHP also complies with the requirements of
Q&A–2 of § 54.4980B–5 by crediting Employee E’s
spouse with $2,250 toward the satisfaction of the de-
ductible.
Example 2. The same facts asExample 1,ex-
cept that Employee E’s spouse is entitled to elect,
and elects, COBRA continuation coverage under the
HDHP. In this case, the HDHP must comply with the
requirements of Q&A–2 of § 54.4980B–5.
Example 3. The same facts asExample 2, except
that the amounts incurred by Employee E and Em-
ployee E’s spouse are reversed: Employee E incurred
$2,000 of medical expenses and Employee E’s spouse
incurred $2,500.
If the HDHP credits Employee E’s spouse with
$2,250 toward the satisfaction of the deductible,
this would not satisfy the requirements of Q&A–2
of § 54.4980B–5. Employee E’s spouse must be
credited with at least $2,500 toward the satisfaction
of the deductible to comply with the requirements of
Q&A–2 of §54.4980B–5.
Example 4. Employer F offers its employees a
calendar year health plan, otherwise qualifying as an
HDHP. As of January 1, 2008, Employee G, and Em-
ployee G’s spouse and child are covered by Employer
F’s family coverage HDHP with a $6,000 deductible.
From January 1 through September 30, 2008, Em-
ployee G incurs $2,500 in covered expenses; Em-
ployee G’s spouse incurs $500 in covered expenses,
and Employee G’s child incurs $3,000 in covered ex-
penses. Employee G and spouse are divorced, ef-
fective October 1, 2008. On that date, Employee G
changes to self-only HDHP coverage with a $3,000
deductible and the child and ex-spouse elect COBRA
continuation coverage in Employer F’s family HDHP
coverage.
The plan may (1) credit Employee G’s individ-
ual deductible with $2,500 and reduce the expenses
allocated to the child and ex-spouse in family cover-
age by $2,500; or (2) credit Employee G’s self-only
deductible with $2,000 and reduce the expenses al-
located to the child and ex-spouse by $2,000 (allo-
cating one-third of the $6,000 in expenses to Em-
ployee G’s individual deductible and two-thirds of the
$6,000 in expenses to the former spouse and child re-
maining in family coverage). Coverage of the child
and former spouse is COBRA continuation coverage.
However, if thepro rataallocation of expenses of the
family to the child and former spouse were less than
the actual expenses incurred by the child and former
2008–29 I.R.B.126July 21, 2008

spouse, then allocation of only the ratable share of the
family expenses would not comply with the require-
ments of Q&A–2 of § 54.4980B–5; (3) credit Em-
ployee G with no expenses and continue to credit the
child and ex-spouse with all expenses incurred under
family coverage; or (4) treat Employee G as having
satisfied the $3,000 individual deductible while treat-
ing the former spouse and child as having satisfied the
$6,000 family deductible.
Q–13. If a health plan imposes a sepa-
rate or higher deductible for specific bene-
fits, are amounts paid by covered individ-
uals to satisfy the separate or higher de-
ductible treated as out-of-pocket expenses
under § 223(c)(2)(A)?
A–13. If significant other benefits re-
main available under the plan in addition to
the specific benefits subject to the separate
or higher deductible, amounts paid to sat-
isfy the separate or higher deductible are
not treated as out-of-pocket expenses un-
der § 223(c)(2)(A).
Example. In 2008, a self-only health plan with
a $3,000 deductible imposes a lifetime limit of
$1,000,000 on reimbursements for covered benefits.
The plan pays 100 percent of covered expenses after
the $3,000 deductible is satisfied. Although the plan
provides benefits for substance abuse treatment, the
substance abuse treatment benefits are subject to a
separate $5,000 deductible, and these benefits are
limited to $10,000, after the separate deductible is
satisfied.
The plan is an HDHP and no expense incurred by
a covered individual other than the $3,000 general de-
ductible is treated as an out-of-pocket expense under
§ 223(c)(2)(A).
Q–14. If a health plan meeting the mini-
mum deductible of § 223(c)(2)(A) restricts
benefits to expenses for hospitalization or
in-patient care, is the plan an HDHP?
A–14. No. A plan must provide sig-
nificant benefits to be an HDHP. A plan
mayalsobedesignedwithreasonableben-
efit restrictions limiting the plan’s covered
benefits. See Notice 2004–50, Q&A–15.
However, if a plan only provides benefits
for expenses of hospitalization or in-pa-
tient care, significant other benefits do not
remain available under the plan in addition
to the benefits subject to exclusion. There-
fore, any expenses incurred by a covered
individual after satisfying the deductible
are treated as out-of-pocket expenses un-
der § 223(c)(2)(A).
Example. In 2008, a self-only health plan with
a $2,000 deductible includes a $3,000,000 lifetime
limit on covered benefits. Generally, the plan only
provides benefits for medical services provided while
a covered individual is admitted to a hospital as an
overnight patient or provided at a “same day” surgery
facility. A same day surgery facility does not include
a hospital emergency room, a trauma center, a physi-
cian’s office or a clinic. Covered medical services
for individuals admitted to a hospital or same day
surgery facility include room accommodations, mis-
cellaneous medical services and supplies necessary
for treatment, primary surgery, pathology charges and
the administration of anesthesia while at the hospital
or center, and charges by the primary attending physi-
cian for one visit per day while at the hospital. In ad-
dition, the plan provides: an organ transplant benefit,
a hospice care benefit, and home health care visits.
The home health care benefit is subject to a 60 visit
per year limit, and must be in connection with the hos-
pitalization. The plan also pays for certain preven-
tive care screening and ambulance service. The plan
pays for no visits to physician’s offices nor any other
out-patient care other thanthose noted above. The
maximum dollar amount that the covered individual
pays for covered benefits under the plan for 2008 is
$5,500.
The restriction of benefits to medical services
provided while the covered individual is admitted
to a hospital or at a same day surgery facility is not
reasonable because significant other benefits do not
remain available under the plan after application of
the restriction. Any expenses incurred by a covered
individual for out-patient care or visits to physi-
cian’s offices are treated as out-of-pocket expenses
under § 223(c)(2)(A). Because the plan maximum
for amounts paid by a covered individual does not
restrict payments for those out-of-pocket expenses,
the plan fails to qualify as an HDHP.
Q–15. What medical expenses may be
taken into account in determining when
the HDHP deductible is satisfied for pur-
poses of a post-deductible HRA or post-
deductible health FSA?
A–15. Only medical expenses de-
scribed in § 213(d) and covered by
the HDHP may be taken into account
in determining whether the HDHP de-
ductible, or the minimum deductible in
§ 223(c)(2)(A)(i), has been satisfied. For
example, if the HDHP does not cover
chiropractic care, expenses incurred for
chiropractic care do not count toward
satisfying the HDHP deductible or the
minimum deductible in § 223(c)(2)(A)(i).
For self-only HDHP coverage, only the
covered medical expenses of the covered
individual count toward satisfying the
HDHP deductible or the minimum de-
ductible in § 223(c)(2)(A)(i)(I).
Example. In 2008, an individual, spouse and
child have family HDHP coverage with a $2,500
deductible. The HDHP does not provide benefits for
vision or dental care. They are also covered by a
combination limited purpose/post-deductible HRA
that pays or reimburses § 213(d) medical expenses
incurred by each family member after the family
incurs $2,500 in covered medical expenses, and pays
or reimburses vision and dental expenses before and
after the HDHP deductible is satisfied. On February
15, 2008, the family incurs $2,500 in vision and
dental expenses that are reimbursed by the HRA. On
March 17, 2008, the family then incurs $400 in ex-
penses covered by the HDHP (but for the deductible).
The family must incur an additional $2,100 in cov-
ered medical expenses before the HDHP deductible
is satisfied.
The HRA may not reimburse the family for the
$400 of expenses because the family had not incurred
$2,500 in covered expenses when the $400 was in-
curred.
III.CONTRIBUTIONS
Q–16. How do the maximum annual
HSA contribution limits apply to an eligi-
ble individual with family HDHP coverage
for the entire year if the family HDHP cov-
ers spouses or dependent children who also
have coverage by a non-HDHP, Medicare,
or Medicaid?
A–16. The eligible individual may con-
tribute the § 223(b)(2)(B) statutory maxi-
mum for family coverage. Other coverage
of dependent children or spouses does not
affect the individual’s contribution limit,
except that if the spouse is not an otherwise
eligible individual, no part of the HSA con-
tribution can be allocated to the spouse.
Q–17. How do the maximum annual
HSA contribution limits apply to a married
couple if both spouses are eligible individ-
uals and one spouse has self-only HDHP
coverage and the other spouse has family
HDHP coverage?
A–17. The maximum annual HSA con-
tribution limit for a married couple if one
spouse has family HDHP coverage and the
other spouse has self-only HDHP cover-
age is the § 223(b)(2)(B) statutory maxi-
mum for family coverage. The contribu-
tion limit is divided between the spouses
by agreement. See § 223(b)(5) and No-
tice 2004–50, Q&A–32. This is the result
regardless of whether the family HDHP
coverage includes the spouse with self-
only HDHP coverage. See Notice 2004–2,
Q&A–15. If only one spouse is an eligible
individual, see Rev. Rul. 2005–25.
Example. For 2008, H and W are married. Both
are 40 years old. H and W are otherwise eligible
individuals. H has self-only HDHP coverage. W has
an HDHP with family coverage for W and their two
children.
The combined contribution limit for H and W is
$5,800, which is the § 223(b)(2)(B) statutory contri-
bution limit for 2008. H and W divide the $5,800
contribution limit between them by agreement.
Q–18. How do the maximum annual
HSA contribution limits apply to a mar-
ried couple if both spouses are eligible
individuals and each spouse has family
HDHP coverage that does not cover the
other spouse?
July 21, 20081272008–29 I.R.B.

A–18. The maximum HSA contribu-
tion limit for a married couple where both
spouses have family HDHP coverage is the
§ 223(b)(2)(B) statutory maximum. This
rule applies regardless of whether each
spouse’s family coverage covers the other
spouse. The contribution limit is divided
between the spouses by agreement.
Example. In 2008, H, who is 37, and W, who is
32, are married with two dependent children. H has
HDHP family coverage for H and their two children
with an annual deductible of $3,000. W has HDHP
family coverage for W and their two children with a
deductible of $3,500.
The combined contribution limit for H and W is
$5,800, the maximum annual contribution limit. H
and W divide the $5,800 contribution limit between
them by agreement.
Q–19. May an individual who ceases
to be an eligible individual during a year
still contribute to anHSA with respect to
the months of the year when the individual
was an eligible individual?
A–19. Yes. An individual who ceases
to be an eligible individual may, until
the date for filing the federal income tax
return (without extensions) for the year,
make HSA contributions with respect to
the months of the year when the individual
was an eligible individual.
Example. J has a self-only HDHP, and is an eligi-
ble individual for the first four months of 2008. J has
until April 15, 2009 (the date for filing the 2008 re-
turn, without extensions) to contribute 4/12 x $2,900
($967) to an HSA.
Q–20. May an individual who is not an
eligible individual make a rollover contri-
bution from his or her existing HSA to a
new HSA?
A–20. Yes.
Q–21. May employer contributions to
employees’ HSAs made between January
1 and the date for filing the employee’s
return, without extensions, be allocated to
the prior year?
A–21. Yes. For employer contribu-
tions (including salary reduction contribu-
tions) made between January 1 and the
date for filing the employees’ federal in-
come tax return without extension, the em-
ployer must notify the HSA trustee or cus-
todian if the contributions relate to the
prior year. The employer must also inform
the employee of the designation. However,
the contributions designated as made for
the prior year are still reported in box 12
with code W on the employees’ Form W–2
for the year in which the contributions are
actually made.
Example. In January 2009, Employer K con-
tributes $500 to each employee’s HSA and notifies
the HSA trustee (and provides a statement to the em-
ployees) that the contributions are for 2008. Sub-
sequently, in 2009, Employer K contributes $250 to
each employee’s HSA on March 31, June 30, Septem-
ber 30 and December 31. For each employee whose
HSA received these contributions, Employer K re-
ports a total contribution of $1,500 in box 12 with
code W on the Form W–2 for 2009.
In completing the Form 8889 for 2008, to com-
pute Employer K’s contributions, the employees add
the $500 to any employer contributions reported in
box 12, code W on the 2008 Form W–2. In com-
pleting the Form 8889 for 2009, the employees sub-
tract the $500 from the box 12 code W amount on the
2009 Form W–2 and add to the remaining $1,000 any
contributions for 2009 made by Employer K between
January 1, 2009 and his or her filing date without ex-
tensions. See Instructions to Form 8889.
Q–22. If a husband and wife are each
eligible to make catch-up contributions un-
der § 223(b)(3), must each spouse con-
tribute their catch-up contributions to their
own HSA?
A–22. Yes. An individual who is eli-
gible to make catch-up contributions may
only make such contributions to his or
her own HSA. See also Notice 2004–50,
Q&A–32. If both spouses are eligible
for the catch-up contribution, each spouse
must make catch-up contributions to his or
her own HSA.
Q–23. If an employer contributes to the
account of an employee who was never
an eligible individual, can the employer
recoup the amounts?
A–23. If the employee was never an eli-
gible individual under § 223(c)(1), then no
HSA ever existed and the employer may
correct the error. At the employer’s option,
the employer may request that the finan-
cial institution return the amounts to the
employer. However, if the employer does
not recover the amounts by the end of the
taxable year, then the amounts must be in-
cluded as gross income and wages on the
employee’s Form W–2 for the year dur-
ing which the employer made the contri-
butions.
Example 1. In February 2008, Employer L con-
tributed $500 to an account of Employee M, reason-
ably believing the account to be an HSA. In July
2008, Employer L first learned that Employee M’s ac-
count is not an HSA because Employee M has never
been an eligible individual under § 223(c).
Employer L may request that the financial insti-
tution holding Employee M’s account return the bal-
ance of the account ($500 plus earnings less admin-
istration fees directly paid from the account) to Em-
ployer L. If Employer L does not receive the bal-
ance of the account, Employer L must include the
amounts in Employee M’s gross income and wages
on his Form W–2 for 2008.
Example 2. The same facts asExample 1, except
Employer L first discovers the mistake in July 2009.
Employer L issues a corrected 2008 Form W–2 for
Employee M, and Employee M files an amended fed-
eral income tax return for 2008.
Q–24. If an employer contributes
amounts to an employee’s HSA that ex-
ceed the maximum annual contribution
allowed in § 223(b) due to an error, can
the employer recoup the excess amounts?
A–24. If the employer contributes
amounts to an employee’s HSA that ex-
ceed the maximum annual contribution
allowed in § 223(b) due to an error, the em-
ployer may correct the error. In that case,
at the employer’s option, the employer
may request that the financial institution
return the excess amounts to the employer.
Alternatively, if the employer does not re-
cover the amounts, then the amounts must
be included as gross income and wages
on the employee’s Form W–2 for the year
during which the employer made contri-
butions. If, however, amounts contributed
are less than or equal to the maximum
annual contribution allowed in § 223(b),
the employer may not recoup any amount
from the employee’s HSA.
Q–25. If an employer contributes to
the HSA of an employee who ceases to
be an eligible individual during a year,
can the employer recoup amounts that the
employer contributed after the employee
ceased to be an eligible individual?
A–25. No. Employers generally can-
not recoup amounts from an HSA other
than as discussed above in Q&A–23 and
Q&A–24. See Notice 2004–50, Q&A–82.
Example. Employee N was an eligible individual
on January 1, 2008. On April 1, 2008, Employee N
is no longer an eligible individual because Employee
N’s spouse enrolled in a general purpose health FSA
that covers all family members. Employee N first
realizes that he is no longer eligible on July 17, 2008,
at which time Employee N informs Employer O to
cease HSA contributions.
Employer O’s contributions into Employee N’s
HSA between April 1, 2008 and July 17, 2008 cannot
be recouped by Employer O because Employee N
has a nonforfeitable interest in his HSA. Employee
N is responsible for determining if the contributions
exceed the maximum annual contribution limit in
§ 223(b), and for withdrawing the excess contribution
and the income attributable to the excess contribution
and including both in gross income.
Q–26. Are employer contributions to
the HSA of an employee’s spouse (who
is not an employee of this employer) ex-
2008–29 I.R.B.128July 21, 2008

cluded from the employee’s gross income
and wages?
A–26. No. The exclusion under
§ 106(d)(1) is limited to contributions by
an employer to the HSA of an employee
who is an eligible individual. Any con-
tribution by an employer to the HSA of
anon-employee(e.g., a spouse of an em-
ployee or any other individual), including
salary reduction amounts made through a
§ 125 cafeteria plan, must be included in
the gross income and wages of the em-
ployee.
IV.DISTRIBUTIONS
Q–27. May an HSA be administered
through a debit card that restricts payments
and reimbursements to health care?
A–27. Yes, if the funds in the HSA are
otherwise readily available. For example,
in addition to the restricted debit card, the
HSA account beneficiary must also be able
to access the funds other than by purchas-
ing health care with the debit card, such
as through online transfers, withdrawals
from automatic teller machines or check
writing. Employers must notify employ-
ees that other access to the funds is avail-
able. See also Notice 2004–50, Q&A–77
and Q&A–79.
Q–28. May an HSA account benefi-
ciary authorize someone else to withdraw
funds from his or her HSA?
A–28. Yes. Although an HSA is an
individual account, an HSA account ben-
eficiary can designate other individuals to
withdraw funds pursuant to the procedures
of the trustee or custodian of the HSA. Dis-
tributions are subject to tax if they are not
used to pay for qualified medical expenses
for the HSA account beneficiary, the ac-
count beneficiary’s spouse, or dependents.
See Notice 2004–2, Q&A–25. But see
Q&A–34, Q&A–35 and Q&A–36 of this
notice regarding prohibited transactions.
Q–29. If the account beneficiary has at-
tained age 65, are Medicare Part D premi-
ums qualified medical expenses?
A–29. Yes. If an account beneficiary
has attained age 65, premiums for Medi-
care Part D for the account beneficiary,
the account beneficiary’s spouse, or the ac-
count beneficiary’s dependents are quali-
fied medical expenses. See also Notice
2004–2, Q&A–27, and Notice 2004–50,
Q&A–4 and Q&A–45, regarding Medi-
care Parts A and B. See Q&A–6 of this no-
tice regarding eligibility of Medicare en-
rollees to contribute to an HSA.
Q–30. If the account beneficiary has
not attained age 65, are Medicare premi-
ums for coverage of an account benefi-
ciary’s spouse (who has attained age 65)
qualified medical expenses?
A–30. No. If the account beneficiary
has not attained age 65, Medicare premi-
ums are generally not qualified medical
expenses.
Q–31. Are premiums for continuation
coverage required under Federal law for
the spouse or dependent of an account ben-
eficiary qualified medical expenses?
A–31. Yes. Although qualified medi-
cal expenses generally exclude payments
for insurance, § 223(d)(2)(C)(i) provides
an exception for the expense of coverage
under a health plan during any period of
continuation coverage.
Q–32. Are premiums for health cover-
age for a spouse or dependent during a pe-
riod when the spouse or dependent is re-
ceiving unemployment compensation un-
der any Federal or state law qualified med-
ical expenses?
A–32. Yes. Although qualified medical
expenses generally exclude payments for
insurance, § 223(d)(2)(C)(iii) provides an
exception for the expense of coverage un-
der a health plan during a period in which
an individual is receiving unemployment
compensation under any Federal or state
law.
Q–33. Do qualified medical expenses
for HSA purposes include the § 213(d)
medical expenses incurred by an account
beneficiary’s child who is claimed as a de-
pendent by the account beneficiary’s for-
mer spouse?
A–33. [RESERVED].
V.PROHIBITED TRANSACTIONS
Q–34. If an account beneficiary bor-
rows funds from his or her HSA, is this a
prohibited transaction under § 4975?
A–34. Yes. An HSA is a plan as
defined in § 4975(e)(1)(E). An HSA ac-
count beneficiary is a disqualified person
under § 4975(e)(2). A loan or extension
of credit between a plan and a disqualified
person is a prohibited transaction. Sec-
tion 4975(c)(1)(B). Thus, any direct or in-
direct extension of credit between the ac-
count beneficiary and his or her HSA is a
prohibited transaction.
Q–35. If a trustee of an HSA lends
money to the HSA, is this a prohibited
transaction under § 4975?
A–35. Yes. An HSA is a plan as defined
in § 4975(e)(1)(E). An HSA trustee is a
disqualified person under § 4975(e)(2). A
loan or extension of credit between a plan
and a disqualified person is a prohibited
transaction. Section 4975(c)(1)(B). Thus,
any direct or indirect extension of credit
between the HSA trustee and the HSA is
a prohibited transaction.
Example 1. Bank X is the trustee of an HSA. Bank
X extends a line of credit to the HSA. The line of
credit is a prohibited transaction under § 4975.
Example 2. Bank Y is the trustee of an HSA. The
account beneficiary accesses the funds in the HSA
through a debit card. In addition, Bank Y extends
a line of credit to the account beneficiary, which is
not secured by the account beneficiary’s HSA, and
amounts in the HSA cannot be used to repay the line
of credit.
The line of credit is not a prohibited transaction.
Q–36. If an account beneficiary
pledges his or her HSA as security for a
loan, is this a prohibited transaction under
§ 4975?
A–36. Yes. An HSA is a plan as
defined in § 4975(e)(1)(E). An HSA ac-
count beneficiary is a disqualified person
under § 4975(e)(2). A loan or extension
of credit between a plan and a disqualified
person is a prohibited transaction. Sec-
tion 4975(c)(1)(B). Thus, any direct or in-
direct extension of credit between the ac-
count beneficiary and his or her HSA is a
prohibited transaction.
Example. Individual P is an account beneficiary
of an HSA. Bank Z is the trustee of the HSA. Bank Z
extends to Individual P a line of credit secured by the
HSA.
The pledge securing the line of credit is a prohib-
ited transaction under § 4975.
Q–37. What are the consequences if
account beneficiaries orother disqualified
persons enter into a prohibited transaction
with an HSA?
A–37. Section 223(e)(2) provides that
rules similar to the rules of §§ 408(e)(2)
and (4) apply to HSAs. Therefore, ac-
count beneficiaries may not enter into
“prohibited transactions” with an HSA
(e.g., the account beneficiary may not
sell, exchange, or lease property, borrow
or lend money, pledge the HSA, furnish
goods, services or facilities, transfer to or
use by or for the benefit of himself/her-
self any assets of the HSA, etc.). If an
account beneficiary engages in a prohib-
ited transaction with his or her HSA the
July 21, 20081292008–29 I.R.B.

sanction, in general, is disqualification of
the account. Thus, the HSA stops being an
HSA as of the first day of the taxable year
of the prohibited transaction. The assets
of the beneficiary’s account are deemed
distributed, and the appropriate taxes, in-
cluding the 10 percent additional tax under
§ 223(f)(4) for distributions not used for
qualified medical expenses, apply.
If the employer sponsoring the account
(or other disqualified person) is the party
engaging in a prohibited transaction, then
the employer (or other party) is liable for
the excise tax, but the account beneficiary
is not.
VI.ESTABLISHING AN HSA
Q–38. When is an HSA established?
A–38. An HSA is an exempt trust
established through a written govern-
ing instrument under state law. Section
223(d)(1). State trust law determines
when an HSA is established. Most state
trust laws require that for a trust to exist,
an asset must be held in trust; thus, most
state trust laws require that a trust must
be funded to be established. Whether the
account beneficiary’s signature is required
to establish the trust also depends on state
law.
Q–39. May a trustee treat an HSA as es-
tablished before the date of establishment
determined under state law, such as the
date when HDHP coverage began?
A–39. No. But see Q&A–40 and
Q&A–41 of this notice concerning the es-
tablishment date for HSAs in connection
with rollovers, or where a previous HSA
was established.
Q–40. When is an HSA established if
the funds in the HSA were rolled over or
transferred from an Archer MSA or an-
other HSA?
A–40. An HSA that is funded by
amounts rolled over or transferred from
an Archer MSA or another HSA is estab-
lished as of the date the prior account was
established. Qualified HSA distributions
under § 106(e) or qualified HSA funding
distributions under § 408(d)(9) do not af-
fect the HSA establishment date. See also
Notice 2004–2, Q&A–23.
Example. An account beneficiary established an
Archer MSA on October 17, 2000. On May 13, 2004,
the account beneficiary rolled the entire amount held
in the Archer MSA into an HSA. On January 1, 2008,
the account beneficiary has the HSA trustee make a
direct transfer of the entire HSA to an HSA with a
new trustee.
The establishment date of the HSA with the new
trustee is October 17, 2000.
Q–41. On what date is an HSA estab-
lished if the account beneficiary had previ-
ously established an HSA?
A–41. If an account beneficiary estab-
lishes an HSA, and later establishes an-
other HSA, any later HSA is deemed to
be established when the first HSA was es-
tablished if the account beneficiary has an
HSA with a balance greater than zero at
any time during the 18-month period end-
ing on the date the later HSA is established.
Example 1. An account beneficiary established
an HSA on March 1, 2007. On June 15, 2007, he
withdrew all the funds from the HSA, resulting in a
zero balance. On November 21, 2008, he established
a second HSA.
Because the second HSA was established within
18 months of June 15, 2007, the second HSA is
deemed to be established on March 1, 2007.
Example 2. The same facts asExample 1, except
that the account beneficiary establishes a third HSA
on January 1, 2009. On that date, the second HSA
has a balance greater than zero.
The third HSA is deemed to be established on
March 1, 2007.
VII. ADMINISTRATION
Q–42. How are HSA administration
and maintenance fees withdrawn by the
trustee from an HSA reported by the
trustee?
A–42. HSA administration and main-
tenance fees withdrawn by the trustee are
reflected on the Form 5498–SA in the fair
market value of the HSA at the end of the
taxable year. These fees are not reported
as distributions from the HSA.
EFFECT ON OTHER DOCUMENTS
Notice 2004–2, 2004–1 C.B. 269, No-
tice 2004–50, 2004–2 C.B. 196, and No-
tice 2007–22, 2007–10 I.R.B. 670, are am-
plified.
DRAFTING INFORMATION
The principal author of this notice is
Leslie R. Paul of the Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). For fur-
ther information regarding this notice, con-
tact Ms. Paul at (202) 622–6080 (not a
toll-free call).
Interim Guidance on the
Application of § 457(f) to
Certain Recurring Part-Year
Compensation
Notice 2008–62
This notice describes a rule that the
Treasury Department and the Internal Rev-
enue Service (IRS) anticipate will be in-
cluded in regulations to be proposed under
§ 457(f) of the Internal Revenue Code.
The regulations to be proposed are
expected to address certain types of ar-
rangements involving recurring part-year
compensation, including common ar-
rangements involving public school em-
ployees who provide services during a
10-month school year and elect to be paid
ratably over 12 months. It is expected
that the regulations would provide that
if certain conditions described below are
satisfied, § 457(f) would not apply to such
arrangements. It is also expected that a
conforming change will be proposed for
regulations under § 409A, so that § 409A
also will not apply to such arrangements if
such conditions are met.
Section II of this notice describes the
rule expected to be included in the pro-
posed regulations. Taxpayers may imme-
diately rely on the rule described in section
II of this notice.
SECTION I. BACKGROUND
Section 131 of the Revenue Act of
1978, Public Law 95–600 (92 Stat. 2779),
added § 457 to the Internal Revenue Code
of 1954. On July 11, 2003, final regu-
lations under § 457 (T.D. 9075, 2003–2
C.B. 608) were published in theFederal
Register(68 FR 41230) (2003 § 457 reg-
ulations). The 2003 § 457 regulations
provide guidance on deferred compensa-
tion plans of tax-exempt entities and state
and local governments, including plans
that are subject to § 457(f). Compensation
deferred by participants under ineligible
§ 457(f) plans of tax-exempt entities and
state and local governments, including
public schools, is generally included in the
participant’s gross income for the first tax-
able year in which the compensation is not
subject to a substantialrisk of forfeiture.
In Notice 2007–62, 2007–32 I.R.B.
331, the Treasury Department and the IRS
2008–29 I.R.B.130July 21, 2008

announced their intention to issue guid-
ance under § 457, including providing
guidance on the definitions of abona fide
severance pay plan under § 457(e)(11)
and a substantial risk of forfeiture under
§ 457(f)(1)(B). This guidance will also ad-
dress other topics under § 457(f), including
the particular types of arrangements that
are subject to § 457(f).
Section 885 of the American Jobs Cre-
ation Act of 2004, Public Law 108–357
(118 Stat. 1418), added § 409A to the In-
ternal Revenue Code. Section 409A gen-
erally provides that, unless certain require-
ments are met, amounts deferred under a
nonqualified deferred compensation plan
for all taxable years are currently includi-
ble in gross income to the extent not sub-
ject to a substantial risk of forfeiture and
not previously included in gross income.
On April 17, 2007, final regulations un-
der § 409A were published in theFederal
Register( T.D. 9321, 2007–19 I.R.B. 1123
[73 FR 19234]). The § 409A final regula-
tions provide guidance regarding the defi-
nition of a nonqualified deferred compen-
sation plan subject to § 409A and set forth
the requirements to comply with the rules
governing deferral elections and payment
timing under § 409A. The final regulations
are applicable for taxable years beginning
on or after January 1, 2009. See Notice
2007–86, 2007–46 I.R.B. 990.
SECTION II. GUIDANCE REGARDING
RECURRING PART-YEAR
COMPENSATION
The Treasury Department and the IRS
anticipate that the regulations to be pro-
posed under § 457(f) will specify that
an arrangement in which an employee
or independent contractor receives recur-
ring part-year compensation (as defined
in §1.409A–2(a)(14)) does not provide
for deferred compensation for purposes
of § 457(f) if: (1) the arrangement does
not defer payment of any of the recur-
ring part-year compensation beyond the
last day of the 13
th
month following the
beginning of the service period and (2)
does not defer from one taxable year to
the next taxable year the payment of more
than the applicable dollar amount under
§ 402(g)(1)(B) in effect for the calendar
year in which the service period begins
($15,500 for 2008).
In a typical case of a school teacher,
the recurring part-year compensation con-
sists of the compensation the teacher earns
during a service period consisting of a
school year comprising 9 or 10 months
that begins in one calendar year and ends
in the next calendar year. Under a com-
mon arrangement, the school system pays
all of its teachers (or allows individual
teachers to elect to be paid) based upon a
12-month payment schedule, so that some
of the compensation that the teacher earns
for working during one calendar year is
paid in the next calendar year at or after
the end of the school year. Under the
anticipated rule in this situation, none of
the compensation paid to a teacher would
be deferred compensation if the amount
the teacher earns during the first calendar
year that is paid in the second calendar
year does not exceed the dollar amount
under § 402(g)(1)(B) applicable for the
first calendar year ($15,500 for 2008).
For example, assume a school district
employee works during a school year that
begins on August 1, 2008 and ends on
May 31, 2009 (a 10-month school year).
Assume further that the employee is paid
over the 12-month period beginning Au-
gust 1, 2008 (either because the school
system pays over a 12-month period or
because the employee may elect to be paid
over the 12-month period and has made
such an election). Under these facts and
circumstances, the arrangement would
not provide for deferred compensation for
purposes of § 457(f) unless the employee
earns more than $186,000 for the school
year. Since five months of the school
year are in 2008 and five months are in
2009, an employee whose salary for the
school year is $186,000 earns $93,000
in 2008 and $93,000 in 2009. Under the
12-month payment schedule, the employee
receives $77,500 in 2008, and $108,500 in
2009. Because the amount the employee
earns during 2008 that is paid in 2009
($93,000 - $77,500, or $15,500) does not
exceed the applicabledollar amount under
§ 402(g)(1)(B) for 2008 ($15,500), the ar-
rangement would not provide for deferred
compensation for purposes of § 457(f).
Similarly, a schooldistrict employee
working during a school year that begins
on September 1, 2008 and ends on June
30, 2009 (a 10-month school year), that
paid the employee over the 12 month pe-
riod beginning September 1, 2008, would
not provide for deferred compensation
for purposes of § 457(f) if the employee
earns less than $232,500 for the school
year. Since four months of the school
year are in 2008 and six months are in
2009, an employee whose salary for the
school year is $232,500 earns $93,000 in
2008 and $139,500 in 2009. Under the
12-month payment schedule, the employee
receives $77,500 in 2008 and $155,000 in
2009. Because the amount the employee
earns during 2008 that is paid in 2009
($93,000 - $77,500, or $15,500) does not
exceed the applicable dollar amount under
§ 402(g)(1)(B) for 2008 ($15,500), the ar-
rangement would not provide for deferred
compensation for purposes of § 457(f).
The Treasury Department and the IRS
also anticipate that a change to the reg-
ulations under § 409A will be proposed,
which would provide that the arrangement
described in the first paragraph of section
II of this notice is not a nonqualified de-
ferred compensation plan for purposes of
§ 409A (including an arrangement that is
not covered by § 457(f) because the service
recipient is not an eligible employer under
§ 457(e)(1)). However, the proposed regu-
lations are not expected to affect the appli-
cation of any other Code provisions or fed-
eral tax doctrines that may affect the taxa-
tion of these arrangements.
The Treasury Department and the IRS
anticipate that these rules should ex-
clude from coverage under §§ 457(f) and
409A most arrangements for public school
teachers and other school-year employees
under which they are permitted to annual-
ize school-year compensation (whether or
not they are given individual elections).
SECTION III. EFFECTIVE DATE AND
RELIANCE
Until further guidance is issued, tax-
payersmayrelyontheruledescribedin
section II of this notice for purposes of
both §§ 457(f) and 409A beginning with
the first taxable year that includes July 1,
2008.
SECTION IV. DRAFTING
INFORMATION
The principal authors of this notice are
Pamela R. Kinard and Stephen Tackney of
the Office of the Division Counsel/Asso-
ciate Chief Counsel (Tax Exempt and Gov-
ernment Entities). For further information
July 21, 20081312008–29 I.R.B.

regarding this notice, contact Ms. Kinard
at (202) 622–6060 regarding § 457(f) and
Mr. Tackney at (202) 927–9639 regarding
§ 409A (not toll-free numbers).
26 CFR 301.7216–3: Disclosure or use permitted
only with the taxpayer’s consent.
(Also: Sections 7216, 6713.)
Rev. Proc. 2008–35
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance to tax return preparers regarding the
format and content of consents to disclose
and consents to use tax return information
with respect to taxpayers filing a return
in the Form 1040 series,e.g., Form 1040,
Form 1040NR, Form 1040A, or Form
1040EZ, under section 301.7216–3 of the
Regulations on Procedure and Adminis-
tration (26 CFR Part 301). This revenue
procedure also provides specific require-
ments for electronic signatures when a
taxpayer executes an electronic consent
to the disclosure or use of the taxpayer’s
tax return information. This revenue pro-
cedure modifies and supersedes Revenue
Procedure 2008–12, 2008–5 I.R.B. 368,
to provide guidance pursuant to section
301.7216–3T(b)(4)(ii).
SECTION 2. BACKGROUND
.01 In general, section 7216(a) of the
Internal Revenue Code imposes crimi-
nal penalties on tax return preparers who
knowingly or recklessly make unautho-
rized disclosures or uses of information
furnished in connection with the prepara-
tion of an income tax return. A violation
of section 7216 is a misdemeanor, with
a maximum penalty of up to one year
imprisonment or a fine of not more than
$1,000, or both, together with the costs of
prosecution. Section 7216(b) establishes
exceptions to the general rule in section
7216(a) and also authorizes the Secretary
to promulgate regulations prescribing ad-
ditional permitted disclosures and uses.
.02 Section 6713(a) prescribes a related
civil penalty for unauthorized disclosures
or uses of information furnished in connec-
tion with the preparation of an income tax
return. The penalty for violating section
6713 is $250 for each disclosure or use, not
to exceed a total of $10,000 for a calendar
year. Section 6713(b) provides that the ex-
ceptions in section 7216(b) also apply to
section 6713.
.03 Section 301.7216–3 provides that,
unless section 7216 or §301.7216–2
specifically permits the disclosure or use
of tax return information, a tax return pre-
parer may not disclose or use a taxpayer’s
tax return information prior to obtain-
ing a consent from the taxpayer. Sec-
tion 301.7216–3(a) provides that consent
must be knowing and voluntary. Section
301.7216–3(a)(3)(i) prescribes the form
and content requirements that all consents
to disclose or use must include. Sec-
tions 301.7216–3(b) and 301.7216–3T(b)
provide timing requirements and other
limitations upon consents to disclose
or use tax return information. Section
301.7216–3T(b)(4) provides a limitation
upon consents to disclose a taxpayer’s
social security number to a tax return pre-
parer located outside of the United States.
.04 Section 301.7216–3(a)(3)(ii) pro-
vides that the Secretary may, by publi-
cation in the Internal Revenue Bulletin,
prescribe additional requirements for tax
return preparers regarding the format
and content of consents to disclose and
consents to use tax return information
with respect to taxpayers filing a return
in the Form 1040 series, as well as the
requirements for a valid signature on an
electronic consent under section 7216.
Section 301.7216–3T(b)(4)(ii) provides
that the Secretary may, by publication in
the Internal Revenue Bulletin, describe the
requirements of an “adequate data protec-
tion safeguard” for purposes of removing
the limitation upon consents to disclose
a taxpayer’s social security number to a
tax return preparer located outside of the
United States. This revenue procedure
provides additional consent format and
content requirements and defines an “ade-
quate data protection safeguard.”
SECTION 3. SCOPE
This revenue procedure applies to
all tax return preparers, as defined in
§301.7216–1(b)(2), who seek consent to
disclose or use tax return information pur-
suant to §§301.7216–3 and 301.7216–3T
with respect to taxpayers who file a return
in the Form 1040 series,e.g., Form 1040,
Form 1040NR, Form 1040A, or Form
1040EZ.
SECTION 4. FORM AND CONTENT
OF A CONSENT TO DISCLOSE OR A
CONSENT TO USE FORM 1040 TAX
RETURN INFORMATION
.01 Separate Written Document. Ex-
cept as provided by §301.7216–3(c)(1)
(special rule for multiple disclosures or
uses within a single consent form), and
described in section 4.05, below, a tax-
payer’s consent to each separate disclosure
or use of tax return information must be
containedonaseparatewrittendocu-
ment, which can be furnished on paper or
electronically. For example, the separate
written document may be provided as an
attachment to an engagement letter fur-
nished to the taxpayer.
.02 A consent furnished to the taxpayer
on paper must be provided on one or more
sheets of 8
1
/2inch by 11 inch or larger
paper. All of the text on each sheet of
paper must pertain solely to the disclosure
or use the consent authorizes, and the sheet
or sheets, together, must contain all the
elements described in section 4.04 and, if
applicable, comply with section 4.06. All
of the text on each sheet of paper must also
be in at least 12-point type (no more than
12 characters per inch).
.03 An electronic consent must be pro-
vided on one or more computer screens.
All of the text placed by the preparer on
each screen must pertain solely to the dis-
closure or use of tax return information au-
thorized by the consent, except for com-
puter navigation tools. The text of the
consent must meet the following specifi-
cations: the size of the text must be at
least the same size as, or larger than, the
normal or standard body text used by the
website or software package for direction,
communications or instructions and there
must be sufficient contrast between the text
and background colors. In addition, each
screen or, together, the screens must—
(1) contain all the elements described
in section 4.04 and, if applicable, comply
with section 4.06,
(2)beabletobesignedasrequiredby
section 5 and dated by the taxpayer,
(3)beabletobeformattedinareadable
and printer-friendly manner.
.04 Requirements for Every Consent.
In addition to the requirements provided in
2008–29 I.R.B.132July 21, 2008

§301.7216–3, consents to disclose or use
Form 1040 series tax return information
must satisfy the following requirements—
(1) Mandatory statements in the con-
sent. The following statements must be
included in a consent under the circum-
stances described below, except that a tax
return preparer may substitute the pre-
parer’s name where “we” or “our” is used.
(a) Consent to disclose tax return in-
formation in context other than tax prepa-
ration or auxiliary services. Unless a tax
return preparer is obtaining a taxpayer’s
consent to disclose the taxpayer’s tax re-
turn information to another tax return pre-
parer for the purpose of performing ser-
vices that assist in the preparation of, or
provide auxiliary services (as defined in
§301.7216–1(b)(2)(ii)) in connection with
the preparation of, the tax return of the
taxpayer, any consent to disclose tax re-
turn information must contain the follow-
ing statements in the following sequence:
Federal law requires this consent
form be provided to you. Unless au-
thorized by law, we cannot disclose,
without your consent, your tax return
information to third parties for purposes
other than the preparation and filing of
your tax return. If you consent to the
disclosure of your tax return informa-
tion, Federal law may not protect your
taxreturninformationfromfurtheruse
or distribution.
You are not required to complete this
form. If we obtain your signature on
this form by conditioning our services
on your consent, your consent will not
be valid. If you agree to the disclosure
of your tax return information, your
consent is valid for the amount of time
that you specify. If you do not specify
the duration of your consent, your con-
sent is valid for one year.
(b) Consent to disclose tax return infor-
mation in tax preparation or auxiliary ser-
vices context. If a tax return preparer is
otherwise required to obtain a taxpayer’s
consent to disclose the taxpayer’s tax re-
turn information to another tax return pre-
parer for the purpose of performing ser-
vices that assist in the preparation of, or
provide auxiliary services (as defined in
§301.7216–1(b)(2)(ii)) in connection with
the preparation of, the tax return of the
taxpayer, any consent to disclose tax re-
turn information must contain the follow-
ing statements in the following sequence:
Federal law requires this consent
form be provided to you. Unless au-
thorized by law, we cannot disclose,
without your consent, your tax return
information to third parties for pur-
poses other than the preparation and
filing of your tax return and, in certain
limited circumstances, for purposes in-
volving tax return preparation. If you
consent to the disclosure of your tax
return information, Federal law may
not protect your tax return information
from further use or distribution.
You are not required to complete this
form. Because our ability to disclose
yourtaxreturninformationtoanother
tax return preparer affects the service
that we provide to you and its cost, we
may decline to provide you with service
or change the terms of service that we
provide to you if you do not sign this
form. If you agree to the disclosure of
your tax return information, your con-
sent is valid for the amount of time that
you specify. If you do not specify the
duration of your consent, your consent
is valid for one year.
(c) Consent to use. All consents to
use tax return information must contain the
following statements in the following se-
quence:
Federal law requires this consent
form be provided to you. Unless autho-
rized by law, we cannot use, without
your consent, your tax return informa-
tion for purposes other than the prepa-
ration and filing of your tax return.
You are not required to complete this
form. If we obtain your signature on
this form by conditioning our services
on your consent, your consent will not
be valid. Your consent is valid for the
amount of time that you specify. If you
do not specify the duration of your con-
sent, your consent is valid for one year.
(d) All consents must contain the fol-
lowing statement:
If you believe your tax return informa-
tion has been disclosed or used improp-
erly in a manner unauthorized by law or
without your permission, you may con-
tact the Treasury Inspector General for
Tax Administration (TIGTA) by tele-
phone at 1–800–366–4484, or by email
atcomplaints@tigta.treas.gov.
(e) Mandatory statement in any con-
sent to disclose tax return information to
a tax return preparer located outside of
the United States. If a tax return pre-
parer to whom the tax return information
is to be disclosed is located outside of the
United States, the taxpayer’s consent un-
der §301.7216–3 prior to any disclosure is
required.See§§ 301.7216–3(a)(3)(i)(D),
301.7216–2(c) and (d).
(i)Ifthetaxreturninformationtobe
disclosed does not include the taxpayer’s
social security number, or if the social se-
curity number is fully masked or otherwise
redacted, consents for disclosure of tax re-
turn information to a tax return preparer
outside of the United States must contain
the following statement:
This consent to disclose may result in
your tax return information being dis-
closed to a tax return preparer located
outside the United States.
(ii) If the tax return information to be
disclosed includes the taxpayer’s social
security number, or if the social security
number is not fully masked or otherwise
redacted, pursuant to the limitations of
§301.7216–3T(b)(4) and section 4.07,
consents for disclosure of the taxpayer’s
tax return information including a social
security number to a tax return preparer
outside of the United States must contain
the following statement:
This consent to disclose may result in
your tax return information being dis-
closed to a tax return preparer located
outside the United States,including
your personally identifiable infor-
mation such as your Social Security
Number (“SSN”). Both the tax return
preparer in the United States that will
disclose your SSN and the tax return
preparer located outside the United
States which will receive your SSN
maintain an adequate data protection
safeguard (as required by the regula-
tions under 26 U.S.C. Section 7216) to
protect privacy and prevent unautho-
rized access of tax return information.
If you consent to the disclosure of your
tax return information, Federal agen-
cies may not be able to enforce U.S.
laws that protect the privacy of your tax
return information against a tax return
preparer located outside of the U.S. to
which the information is disclosed.
(2) Affirmative consent. All consents
must require the taxpayer’s affirmative
consent to a tax return preparer’s disclo-
sure or use of tax return information. A
consent that requires the taxpayer to re-
July 21, 20081332008–29 I.R.B.

move or “deselect” disclosures or uses that
the taxpayer does not wish to be made,
i.e., an “opt-out” consent, is not permitted.
(3) Signature. All consents to disclose
or use tax return information must be
signedbythetaxpayer.
(a) For consents on paper, the tax-
payer’s consent to a disclosure or use must
contain the taxpayer’s signature.
(b) For electronic consents, a taxpayer
must sign the consent by any method pre-
scribedinsection5,below.
(4) Incomplete consents. A tax return
preparer shall not present a consent form
with blank spaces related to the purpose of
the consent to the taxpayer for signature.
.05 Special rule for multiple disclosures
within a single consent form or multiple
uses within a single consent form. Section
301.7216–3(c)(1) provides that a taxpayer
may consent to multiple uses within the
same written document, or multiple disclo-
sures within the same written document.
Multiple disclosure consents and multiple
use consents must provide the taxpayer
with the opportunity, within the separate
written document, to affirmatively select
each separate disclosure or use. Further,
the taxpayer must be provided the informa-
tion in section 4.04 for each separate dis-
closure or use. The mandatory statements
required in section 4.04(1) relating to use
or disclosure need only be stated once in
a multiple disclosure or multiple use con-
sent.
.06 Disclosure of entire return. If, un-
der §301.7216–3(c)(2), a consent autho-
rizes the disclosure of a copy of the tax-
payer’s entire tax return or all information
contained within a return, the consent must
provide that the taxpayer has the ability to
request a more limited disclosure of tax re-
turn information as the taxpayer may di-
rect.
.07 Adequate data protection safeguard.
Pursuant to §301.7216–3T(b)(4), a tax
return preparer located within the United
States, including any territory or posses-
sion of the United States, may disclose a
taxpayer’s SSN to a tax return preparer
located outside of the United States or any
territory or possession of the United States
with the taxpayer’s consent only when
both the tax return preparer located within
the United States and the tax return pre-
parer located outside of the United States
maintain an adequatedata protection safe-
guard at the time the taxpayer’s consent is
obtained and when making the disclosure.
An “adequate data protection safeguard”
is a security program, policy and practice
that has been approved by management
and implemented thatincludes adminis-
trative, technical and physical safeguards
to protect tax return information from mis-
use or unauthorized access or disclosure
and that meets or conforms to one of the
following privacy or data security frame-
works:
(1) The United States Department of
Commerce “safe harbor” framework for
data protection (or successor program);
(2) A foreign law data protection safe-
guard that includes a security component,
e.g., the European Commission’s Directive
on Data Protection;
(3) A framework that complies with
the requirements of a financial or simi-
lar industry-specific standard that is gen-
erally accepted as best practices for tech-
nology and security related to that industry,
e.g., the BITS (Financial Services Round-
table) Financial Institution Shared Assess-
ment Program;
(4) The requirements of the
AICPA/CICA Privacy Framework;
(5) The requirements of the most recent
version of IRS Publication 1075,Tax In-
formation Security Guidelines for Federal,
State and Local Agencies and Entities;or
(6) Any other data security framework
that provides the same level of privacy pro-
tection as contemplated by one or more of
the frameworks described in (1) through
(5).
SECTION 5. ELECTRONIC
SIGNATURES
.01 If a taxpayer furnishes consent to
disclose or use tax return information elec-
tronically, the taxpayer must furnish the
taxreturnpreparerwithanelectronicsig-
nature that will verify that the taxpayer
consented to the disclosure or use. The
regulations under §301.7216–3(a) require
that the consent be knowing and volun-
tary. Therefore, for an electronic consent
to be valid, it must be furnished in a man-
ner that ensures affirmative, knowing con-
sent to each disclosure or use.
.02 A tax return preparer seeking to ob-
tain a taxpayer’s consent to the disclosure
or use of tax return information electroni-
cally must obtain the taxpayer’s signature
on the consent in one of the following man-
ners:
(a) Assign a personal identification
number (PIN) that is at least 5 characters
long to the taxpayer. To consent to the dis-
closure or use of the taxpayer’s tax return
information, the taxpayer may type in the
pre-assigned PIN as the taxpayer’s signa-
ture authorizing the disclosure or use. A
PIN may not be automatically furnished
by the software so that the taxpayer only
has to click a button for consent to be fur-
nished. The taxpayer must affirmatively
enter the PIN for the electronic signature
to be valid;
(b) Have the taxpayer type in the tax-
payer’s name and then hit “enter” to au-
thorize the consent. The software must not
automatically furnish the taxpayer’s name
so that the taxpayer only has to click a but-
ton to consent. The taxpayer must affir-
matively type the taxpayer’s name for the
electronic consent to be valid; or
(c) Any other manner in which the tax-
payer affirmatively enters 5 or more char-
acters that are unique to that taxpayer that
are used by the tax return preparer to verify
the taxpayer’s identity. For example, en-
try of a response to a question regarding a
shared secret could be the type of informa-
tion by which the taxpayer authorizes dis-
closure or use of tax return information.
SECTION 6. EXAMPLES
.01 The application of this revenue pro-
cedureisillustratedbythefollowingex-
amples:
(1)Example 1. Preparer P offers tax prepara-
tion services over the Internet. P wishes to use in-
formation the taxpayer provides during tax prepa-
ration of the taxpayer’s Form 1040 to generate tar-
geted banner advertisements (i.e., electronic adver-
tisements appearing on the computer screen based on
the taxpayer’s tax return information). In the course
of advertising services and products, P wishes also to
disclose to other third parties information that the tax-
payer provides.
(a) P posts, in pertinent part, the following con-
sent on the computer screen for taxpayers to indicate
approval. If a taxpayer does not indicate approval,
the tax return preparation software does not permit
the taxpayer to use the software.
2008–29 I.R.B.134July 21, 2008

PRIVACY STATEMENT
Your privacy is very important to us
at P. We are providing this statement
to inform you about the types of infor-
mation we collect from you, and how
we may disclose or use that information
in connection with the services we pro-
vide. This Privacy Statement describes
the privacy practices of our company
asrequiredbyapplicablelaws....
During the course of providing our ser-
vices to you, we may offer you vari-
ous other services that may be of inter-
est to you based on our determination
of your needs through analysis of your
data. Your use of the services we offer
constitutes a consent to our disclosure of
tax information to the service providers.
If at any time you wish to limit your re-
ceipt of promotional offers based upon
information you provide, you may call
us at the following. . . .
(b) Beneath this Privacy Statement, the following
acknowledgment line appears next to two button im-
ages stating “yes” and “no:”
“I have read the Privacy Statement and agree to it
by clicking here.”
(c) If the taxpayer clicks “no,” a message ap-
pears on the screen informing the taxpayer that tax
return preparation will notproceed without the tax-
payer agreeing to the company’s Privacy Statement.
(d) P has failed to comply with the requirements
of §301.7216–3 and this revenue procedure. P has at-
tempted to obtain consent from the taxpayer by mak-
ing the use of the program contingent on the tax-
payer’s consent to P’s disclosure and use of the tax-
payer’s tax return information for purposes other than
tax preparation (e.g., for use in displaying targeted
banner advertisement). Thus, the consent is not vol-
untary, as required by §301.7216–3(a). P has also
failed to identify the tax return information that it will
disclose or use, as required by §301.7216–3(a)(3)(C),
to identify the purposes of the disclosures and uses, as
required by section §301.7216–3(a)(3)(B), and to the
extent that P intends to disclose the entire return based
on the consent, P’s consent has not provided that the
taxpayer has the ability to request a more limited dis-
closure of tax return information as the taxpayer may
direct as required by section 4.06. The single docu-
ment attempts to have the taxpayer consent to both
disclosures and uses, in violation of section 4.05. P
has not used the mandatory statements required by
section 4.04(1). The consent is not signed by the tax-
payer because P has not provided a means for the tax-
payer to electronically sign the consent in a form au-
thorized by section 5. Finally, the consent is not dated
as required by section 4.03(2).
(2)Example 2. Preparer Q offers tax preparation
services over the Internet and wishes to use targeted
banner advertisements during tax return preparation.
Q contracts with Bank A regarding the advertisement
of Individual Retirement Accounts (IRAs). Preparer
Q displays advertisements to the taxpayer only if the
taxpayer’s tax return information indicates that the
services are relevant to the taxpayer (i.e.,theyaretar-
geted banner advertisements). A taxpayer using Q’s
software must enter a password to begin the process
of preparing a return.
(a) Before the taxpayer starts providing tax return
information, the following screen appears on Q’s tax
preparation program.
CONSENT TO USE OF TAX
RETURN INFORMATION
Federal law requires this consent
form be provided to you. Unless au-
thorized by law, we cannot use, without
your consent, your tax return informa-
tion for purposes other than the prepa-
ration and filing of your tax return.
You are not required to complete this
form. If we obtain your signature on
this form by conditioning our services
on your consent, your consent will not
be valid. Your consent is valid for the
amount of time that you specify. If you
do not specify the duration of your con-
sent, your consent is valid for one year.
For your convenience, Q has entered
into arrangements with certain banks re-
garding the provision of Individual Re-
tirement Accounts (IRAs). To deter-
mine whether this service may be of in-
terest to you, Q will need to use your tax
return information.
If you would like Q to use your tax
return information to determine whether
this service is relevant to you while we
are preparing your return, please check
the corresponding box if you are inter-
ested, provide the information requested
below, and sign and date this consent to
the use of your tax return information.
□I, [INSERT NAME] authorize Q
to use the information I provide to Q
during the preparation of my tax return
for 2006 to determine whether to offer
me an opportunity to invest in an IRA.
Signature: [INSERT SIGNATURE
AS PRESCRIBED UNDER SECTION
5]
Date: [INSERT DATE]
If you believe your tax return in-
formation has been disclosed or used
improperly in a manner unautho-
rized by law or without your per-
mission, you may contact the Trea-
sury Inspector General for Tax Ad-
ministration (TIGTA) by telephone
at 1–800–366–4484, or by email at
complaints@tigta.treas.gov.
(b) If the taxpayer selects the consent above, the
taxpayer is directed to print the screen. Later, after the
taxpayer has entered data to prepare his or her 2006
tax return, the following screen is displayed:
CONSENT TO DISCLOSURE OF
TAX RETURN INFORMATION
Federal law requires this consent
form be provided to you. Unless au-
thorized by law, we cannot disclose,
without your consent, your tax return
information to third parties for purposes
other than the preparation and filing of
your tax return. If you consent to the
disclosure of your tax return informa-
tion, Federal law may not protect your
tax return information from further use
or distribution.
You are not required to complete this
form. If we obtain your signature on
this form by conditioning our services
on your consent, your consent will not
be valid. If you agree to the disclosure
of your tax return information, your con-
sent is valid for the amount of time that
you specify. If you do not specify the
duration of your consent, your consent
is valid for one year.
You have indicated that you are inter-
ested in obtaining information on IRAs.
To provide you with this information, Q
must forward your tax return informa-
tion, as indicated below, to the bank that
provides this service.
If you would like Q to disclose your
tax return information to the bank pro-
viding this service, please check the cor-
responding box for the service in which
you are interested, provide the informa-
tion requested below, and sign and date
your consent to the disclosure of your
tax return information.
July 21, 20081352008–29 I.R.B.

□I, [INSERT NAME], authorize Q
to disclose to Bank A that portion of
my tax return information for 2006 that
is necessary for Bank A to contact me
and provide information on obtaining an
IRA or altering my contribution to an
IRA for 2006.
Signature: [INSERT SIGNATURE
AS PRESCRIBED UNDER SECTION
5]
Date: [INSERT DATE]
If you believe your tax return in-
formation has been disclosed or used
improperly in a manner unautho-
rized by law or without your per-
mission, you may contact the Trea-
sury Inspector General for Tax Ad-
ministration (TIGTA) by telephone
at 1–800–366–4484, or by email at
complaints@tigta.treas.gov.
If the taxpayer consents to the disclosure of the
tax return information usingthe screen above, the tax-
payer is directed to print the screen. Q will then trans-
mit only that portion of the taxpayer’s tax return infor-
mation for 2006 that is necessary for the bank autho-
rized in the consent, Bank A, to provide the service.
(c) These two consent documents, above, satisfy
the requirements of §301.7216–3(c) and this revenue
procedure for the disclosure or use of the information
provided therein for the specific purposes stated.
(3)Example 3. Large corporation C employs 200
expatriated employees who work in Belgium. Pre-
parer R, located in the United States, prepares indi-
vidual income tax returns for C’s expatriated work-
ers pursuant to a corporate plan for executive tax re-
turn preparation. Preparer R is affiliated with Pre-
parer F, located in Belgium. Pursuant to the corporate
plan for executive tax returnpreparation, Preparer R
plans to provide the expatriated employees’ tax re-
turn information, including the expatriated employ-
ees’ SSNs, located on Preparer R’s U.S. based data
servers to Preparer F who then plans to meet with the
expatriated employees to prepare those employees’
2008 individual income tax returns. Preparer R ob-
tains information electronically from various sources
in anticipation of providing the information to Pre-
parer F. Preparer R developed, adopted and incorpo-
rated into its operations a data privacy program which
meets the requirements of the AICPA/CICA Privacy
Framework. Preparer F also developed, adopted and
incorporated into its operations a data privacy pro-
gram and Preparer F’s data privacy program is sub-
ject to the European Commission’s Directive on Data
Protection. The data privacy programs adopted by
Preparer R and Preparer F are in operation at the time
all consents to disclose are obtained by Preparer R
and disclosures are made by Preparer R to Preparer F.
(a) Before transmitting or sending any expatriated
employee’s SSN to Preparer F, Preparer R provides
the expatriated employee (taxpayer) with the follow-
ing document.
CONSENT TO DISCLOSURE OF
TAX RETURN INFORMATION
Federal law requires this consent
form be provided to you. Unless au-
thorized by law, we cannot disclose,
without your consent, your tax return
information to third parties for purposes
other than the preparation and filing of
your tax return and, in certain limited
circumstances, for purposes involving
tax return preparation. If you consent
to the disclosure of your tax return in-
formation, Federal law may not protect
your tax return information from further
use or distribution.
You are not required to complete this
form. Because our ability to disclose
your tax return information to another
tax return preparer affects the service
that we provide to you and its cost, we
may decline to provide you with service
or change the terms of service that we
provide to you if you do not sign this
form. If you agree to the disclosure of
your tax return information, your con-
sent is valid for the amount of time that
you specify. If you do not specify the
duration of your consent, your consent
is valid for one year.
This consent to disclose may result
in your tax return information being dis-
closed to a tax return preparer located
outside the United States,including
your personally identifiable information
such as your Social Security Number
(“SSN”). Both the tax return preparer
in the United States that will disclose
your SSN and the tax return preparer
located outside the United States which
will receive your SSN maintain an ad-
equate data protection safeguard (as
required by the regulations under 26
U.S.C. Section 7216) to protect privacy
and prevent unauthorized access of tax
return information. If you consent to
the disclosure of your tax return infor-
mation, Federal agencies may not be
able to enforce U.S. laws that protect
the privacy of your tax return informa-
tion against a tax return preparer located
outside of the U.S. to which the infor-
mation is disclosed.
If you agree to allow Preparer R to
disclose your tax return information,
including your SSN, to Preparer F for
purposes of providing assistance in the
preparation of your 2008 individual
income tax return, please check the
box below, provide the information re-
quested below, and sign and date your
consent to the disclosure of your tax
return information.
□I, [INSERT NAME], authorize
Preparer R to disclose to Preparer F
my tax return information including my
SSN to allow Preparer F to assist in
the preparation of my 2008 individual
income tax return.
Signature:
Date: [INSERT DATE]
If you believe your tax return in-
formation has been disclosed or used
improperly in a manner unautho-
rized by law or without your per-
mission, you may contact the Trea-
sury Inspector General for Tax Ad-
ministration (TIGTA) by telephone
at 1–800–366–4484, or by email at
complaints@tigta.treas.gov.
The taxpayer provides consent by checking the
box and signing and dating the consent form. Pre-
parer R then provides a copy of the signed and dated
consent form to the taxpayer, and then transmits the
taxpayer’s tax return information to Preparer F for
processing of taxpayer’s 2008 individual income tax
return.
(b) The consent above satisfies the requirements
of §§ 301.7216–3, 301.7216–3T and this revenue pro-
cedure for the disclosure of the information provided
therein for the specific purpose stated.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 2008–12, 2008–5 I.R.B.
368, is modified and superseded.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
January 1, 2009.
SECTION 9. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Lawrence Mack of the Office
of Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue procedure, contact
2008–29 I.R.B.136July 21, 2008

Lawrence Mack at (202) 622–4940 (not a
toll-free call).
26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 103; 148; 1.148–3, 1.148–13T.)
Rev. Proc. 2008–37
SECTION 1. PURPOSE
In general, this revenue procedure pro-
vides guidance to issuers of tax-exempt
bonds regarding the terms and procedures
for claims for recovery of overpayments
under § 1.148–3(i) of the Income Tax Reg-
ulations of amounts paid to the United
States with respect to the arbitrage rebate
requirement under § 148(f) of the Internal
Revenue Code, the penalty in lieu of rebate
provisions under § 148(f)(4)(C)(vii) and
(viii), or the yield reduction payment pro-
vision under § 1.148–5(c) for purposes of
the arbitrage investment restrictions gener-
ally under § 148. This revenue procedure
also establishes a deadline for claims for
these recoveries of overpayments which
requires that issuers file these claims by
no later than the date that is two years
after the final computation date with re-
spect to the applicable issue of bonds un-
der § 1.148–3(e)(2), or two years from July
1, 2008, for an issue of bonds whose final
computation date is on or before June 24,
2008. Further, this revenue procedure pro-
vides that claims for recovery of overpay-
ments of rebate or penalty in lieu of rebate
with respect to bonds that are subject to
§ 1.148–13T of the temporary Income Tax
Regulations published in the Federal Reg-
ister on May 18, 1992 (T.D. 8418, 1992–1
C.B. 29 [57 Fed. Reg. 20971]) (the1992
regulations) will be treated in the same
manner as claims for recovery of overpay-
ments made under § 1.148–3(i).
SECTION 2. BACKGROUND
.01 Under § 103(a) and (b)(2), the ex-
clusion from gross income of interest on
any State or local bond does not apply to
interest on an arbitrage bond within the
meaning of § 148.
.02 Section 148(f)(1) generally pro-
vides that a bond that is part of an issue
shall be treated as an arbitrage bond un-
less the issuer pays to the United States
the arbitrage rebate amounts described in
§ 148(f)(2) for the issue (rebate) in accor-
dance with § 148(f)(3).
.03 Section 148(f)(3) provides, in part,
that, except to the extent provided by the
Secretary, rebate must be paid in install-
ments that are made at least once every five
years. The last installment must be made
no later than 60 days after the day on which
the last bond of the issue is discharged.
.04 Sections 148(f)(4)(C)(vii) and (viii)
permit issuers of certain construction is-
sues to elect to pay a penalty in lieu of re-
bate (penalty) in the manner and amount
described in § 148(f)(4)(C)(vii) and (viii).
.05 Section 1.148–5(c)(1) permits is-
suers to pay yield reduction payments that
may be taken into account in determining
the yield on an issue for arbitrage pur-
poses under § 148 (yield reduction)inthe
circumstances and manner described in
§ 1.148–5(c).
.06 Section 1.148–13T of the 1992 reg-
ulations provides rules for recovering an
overpayment of rebate or penalty in lieu of
rebate with respect to certain bonds issued
before July 1, 1993. Under § 1.148–13T(a)
and (c)(1) of the 1992 regulations, an is-
suer may recover an overpayment of re-
bate or penalty to the extent that recovery
on the date requested would not result in
an additional rebate amount as of the date
requested if the issuer proves to the satis-
faction of the Commissioner that the over-
payment occurred and was paid as a result
of a mistake.
.07 Section 1.148–3(i)(1) provides that,
in general, an issuer may recover an over-
payment of rebate by establishing to the
satisfaction of the Commissioner that the
overpayment occurred. An overpayment
is the excess of the amount paid over the
sum of the “rebate amount” (as defined in
§ 1.148–3(b)), as of the most recent “com-
putation date” (as defined in § 1.148–3(e))
and all amounts that are otherwise required
to be paid under § 148 as of the date the re-
covery is requested.
.08 In general, overpayments of penalty
and yield reduction are treated in the same
manner as overpayments of rebate. See
generally §§ 1.148–3(i)(1), 1.148–7(k)(3),
and 1.148–5(c)(1) and (2).
.09 In Rev. Proc. 92–83, 1992–2 C.B.
487, the Internal Revenue Service (theSer-
vice) sets forth procedures for claims for
recovery of overpayments of rebate.
.10 In Announcement 2001–115,
2001–2 C.B. 539, the Service announced
that Form 8038-R,Request for Recovery
of Overpayments Under Arbitrage Rebate
Provisions, replaces the procedures set
forth in Rev. Proc. 92–83.
.11 Under 26 U.S.C. § 7422, in gen-
eral, a civil action may not be commenced
against the United States to recover any in-
ternal revenue tax, any applicable penalty
or “any sum alleged to have been exces-
sive or in any manner wrongly collected”
until a claim for refund has been duly filed
according to the provisions of law in that
regard. The Service has determined that
this provision applies to claims with re-
spect to overpayments of rebate, penalty,
and yield reduction because the amount of
any such overpayment is covered within
the “any sum” language of § 7422.Cf.
United States v. Clintwood Elkhorn Min-
ing Co., 128 S. Ct. 1511 (2008).
SECTION 3. PROCEDURE FOR
FILING CLAIMS FOR RECOVERY
OF OVERPAYMENT OF REBATE,
PENALTY, AND YIELD REDUCTION
.01Form 8038-R. This section sets forth
terms and procedures for filing claims for
recovery of an overpayment of rebate,
penalty, or yield reduction with respect
to an issue (anoverpayment amount). In
order to receive any recovery of an over-
payment amount, an issuer must duly file
a claim for recovery of an overpayment
amount (arefund claim)onthethen-ap-
plicable form (form) and at the then-ap-
plicable place of filing, as announced by
the Service from time to time. Presently,
a refund claim shall be made by complet-
ing Form 8038–R and filing the form and
any attachments thereto with the Inter-
nal Revenue Service, Ogden Submission
Processing Center, Ogden, Utah, 84201
(Ogden Center).
.02Filing Deadline for Refund Claims
on Overpayment Amounts. Except as pro-
vided in section 6.02, the form for making
a refund claim for an overpayment amount
mustbefiledbyanissuernolaterthanthe
date that is two years after the final compu-
tation date for the applicable issue of bonds
under § 1.148–3(e)(2).
.03Processing a Refund Claim.This
section 3.03 describes the present pro-
cedures that the Service will employ in
processing refund claims on overpayment
amounts. These procedures may be re-
fined or revised as necessary, without
July 21, 20081372008–29 I.R.B.

affecting the issuer’s responsibilities un-
der this revenue procedure, by publication
in the Internal Revenue Manual.
(1) The Ogden Center will determine
whether the issuer has satisfied the fol-
lowing initial processing requirements: (i)
that the form has been completed accord-
ing to the instructions for the form and
includes the required attachments; (ii) that
the issuer has previously submitted rebate,
penalty, or yield reduction payments ac-
companied by one or more Forms 8038–T
(Arbitrage Rebate, Yield Reduction and
Penalty in Lieu of Arbitrage Rebate)with
respect to the issue in question; and (iii)
the amount previously submitted as re-
bate, penalty, or yield reduction payments
is greater than or equal to the overpay-
ment amounts stated in the refund claim.
If the initial processing requirements are
satisfied, the Ogden Center will promptly
forward a copy of the refund claim to the
Service’s Office of Tax Exempt Bonds,
Compliance and Program Management
(TEB CPM) for further processing. If the
Ogden Center concludes that the initial
processing requirements are not satisfied,
the Ogden Center will notify the issuer
by telephone or letter (theOgden Notifi-
cation) describing any requirements that
have not been satisfied. If the issuer fails
to file a supplement satisfying the initial
processing requirements within 45 days
starting on the date of the Ogden Notifi-
cation, the Ogden Center will forward the
refund claim to TEB CPM for issuance
of a Refund Claim Rejection letter. Any
refiling must be within the period for filing
the form in section 3.02 of this procedure.
(2) TEB CPM will review the process-
ing requirements and determine whether
an overpayment occurred and the amount
of the overpayment that an issuer may re-
cover as follows:
(a)Refund Claim Approval.If
TEB CPM determines that the correct
amount of overpayment is equal to or
greater than the overpayment amounts on
the refund claim, TEB CPM will notify
the issuer in writing of the approval and
will authorize a refund for the entirety of
the requested overpayment amounts.
(b)Refund Claim Rejection.TEB CPM
mayrejectarefundclaimbasedonanis-
suer’s failure to follow the procedures for
refund claims set forth in section 3.03(1) of
this revenue procedure or an issuer’s fail-
ure to provide sufficient information to en-
able TEB CPM to determine that an over-
payment occurred. The issuer may resub-
mit a refund claim in compliance with the
initial processing requirements provided
that any such resubmission is made by the
filing deadlines set forth in sections 3.02
and 6.02 of this revenue procedure. A re-
fund claim that is rejected on the basis of a
procedural deficiency or incomplete infor-
mation is not a Refund Claim Denial un-
der section 3.03(2)(c) of this revenue pro-
cedure.
(c)Refund Claim Denial.Excluding
rejections of refund claims for procedural
deficiencies or incomplete information,
as described in section 3.03(2)(b) of this
revenue procedure, TEB CPM may deny
a refund claim, in full or in part, on the
following grounds: (i) the correct amount
of overpayment is less than the requested
overpayment amounts, or (ii) no over-
payment occurred. If TEB CPM makes
a preliminary determination that a refund
claim should be denied, TEB CPM will
notify the issuer in writing that it may
submit additional information to sup-
port the refund claim or participate in a
conference or both. Any additional infor-
mation must be submitted within 21 days
of the later of either the notification to
allow additional information in support
of the refund claim or the conference.
If the issuer fails to submit additional
information within the 21-day period to
support the refund claim to the satisfac-
tion of TEB CPM, or TEB CPM still
disagrees that an overpayment occurred,
TEB CPM will issue, by certified or
registered mail, a formal letter to the issuer
stating that the refund claim is denied (a
Refund Claim Denial), subject only to
the issuer’s appeal right, as described in
section 3.04 of this revenue procedure.
The Refund Claim Denial letter will
explain the reasons for the determination
to deny the refund claim and inform
the issuer of its right to request from
the Office of Appeals an administrative
appeal of the denial pursuant to Revenue
Procedure 2006–40, 2006–2 C.B. 694, as
subsequently amended, supplemented, or
superseded. If an appeal is not requested
within 30 days of the date of the Refund
Claim Denial letter,then the Refund Claim
Denial becomes final, as of the date of
issuance of the Refund Claim Denial letter
by certified or registered mail, and the
issuer may not refile the refund claim
thereafter.
.04 Appeals. An issuer is entitled to
appeal a Refund Claim Denial to the Office
of Appeals pursuant to section 3.01 of Rev.
Proc. 2006–40, as subsequently amended,
supplemented, or superseded.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
This revenue procedure obsoletes Rev.
Proc. 92–83.
SECTION 5. AMENDMENT TO
REGULATIONS
The Service and the Department of the
Treasury expect to issue regulations under
§ 148 and § 1.148–3(i) to provide that a
claim for recovery of an overpayment of
rebate, penalty, or yield reduction must be
filed with the Commissioner by no later
than two years after the final computation
date of the issue of bonds to which the
refund claim relates.
SECTION 6. EFFECTIVE DATE
.01In General. Except as provided in
Section 6.02, this revenue procedure ap-
plies to refund claims arising from an issue
of bonds for which the final computation
date is after June 24, 2008.
.02Transition Rule. For refund claims
arising from an issue of bonds for which
the final computation date is on or before
June 24, 2008 the two year period in sec-
tion 3.02 begins on July 1, 2008.
SECTION 7. PAPERWORK
REDUCTION ACT
The collection of information contained
in section 3 of this revenue procedure has
been previously reviewed and approved by
the Office of Management and Budget in
accordance with the Paperwork Reduction
Act (44 U.S.C. § 3507) under control num-
ber 1545–1750.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential as required by
26 U.S.C. § 6103.
2008–29 I.R.B.138July 21, 2008

SECTION 8. DRAFTING
INFORMATION
The principal authors of the revenue
procedure are Christopher C. Woodin,
Tax Exempt Bonds, Compliance and
Program Management, and Timothy L.
Jones, Office of Chief Counsel (Finan-
cial Institutions and Products), Internal
Revenue Service. For further informa-
tion regarding this revenue procedure,
contact Mr. Woodin at 202–283–9780 or
Mr. Jones at 202–622–3980 (not toll-free
numbers).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, §§ 7702, 7702A.)
Rev. Proc. 2008–38
SECTION 1. PURPOSE
This revenue procedure provides a pro-
cedure by which an issuer of a life insur-
ance contract may remedy a failure to ac-
count for charges for qualified additional
benefits (QABs) under the expense charge
rule of § 7702(c)(3)(B)(ii) of the Internal
Revenue Code. Rev. Rul. 2005–6, 2005–1
C.B. 471, is amplified.
SECTION 2. BACKGROUND
.01Definition of a life insurance con-
tract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance con-
tract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicablelaw and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value ac-
cumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline pre-
mium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline sin-
gle premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the con-
tract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
tablesetforthin§7702(d)(2).
(5) Section 7702 is effective for con-
tracts issued after December 31, 1984, in
tax years ending after that date.
.02Definition of a modified endowment
contract (MEC).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the con-
tract—
(a) is entered into on or after June 21,
1988, and fails to meet the 7-pay test of
§ 7702A(b), or
(b) is received in exchange for a con-
tract described in paragraph (a) of this sec-
tion 2.02(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid under
the contract at any time during the first 7
contract years exceeds the sum of the net
level premiums that would have to be paid
on or before such time if the contract were
to provide for paid-up future benefits after
the payment of 7 level annual premiums.
(3) Section 72(e)(12) provides that, for
purposes of determining amounts includi-
ble in gross income, all MECs issued by
thesamecompanytothesamecontract
holder during any calendar year are treated
as one MEC.
.03Accounting for charges for QABs.
Section 7702(f)(5) identifies five cate-
gories of benefits as QABs: guaranteed
insurability; accidental death or disability
benefit; family term coverage; disability
waiver benefit; or other benefits pre-
scribed under regulations. These benefits
are not treated as future benefits under
the contract, but charges for the bene-
fits are treated as future benefits. For
purposes of the cash value accumula-
tion test of § 7702(b), § 7702(b)(2)(B)
requires that charges for QABs be ac-
counted for using the expense charge rule
of § 7702(c)(3)(B)(ii), rather than the mor-
tality charge rule of § 7702(c)(3)(B)(i).
Section 7702A(c)(1) requires that the same
rule be used for purposes of the 7-pay test
as well. Although § 7702 is silent on the
treatment of charges for QABs for pur-
poses of applying the guideline premium
requirements, Rev. Rul. 2005–6 con-
cludes that charges for such benefits are to
be taken into account under the expense
charge rule of § 7702(c)(3)(B)(ii) for that
purpose as well.
.04Authority to enter into closing
agreements.Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and con-
clusive, except upon a showing of fraud,
malfeasance, or misrepresentation of a
material fact.
.05Correction procedure for QABs.
Rev. Rul. 2005–6 sets forth three alter-
natives for issuers whose compliance sys-
tems do not currently account for charges
for QABs under the expense charge rule
of § 7702(c)(3)(B)(ii):
(1) Alternative A provides that, if an
issuer’s compliance system does not prop-
erly account for charges for QABs but
no contracts have failed to satisfy the re-
quirements of § 7702(a) as a result of the
system’s deficiency, the issuer may correct
its compliance system to account for those
charges using the expense charge rule
without contacting the Internal Revenue
Service (Service).
(2) Alternative B provides a correc-
tion procedure for closing agreements that
were requested on or before February 7,
2006.
(3) Alternative C provides that an issuer
whose compliance system does not prop-
erly account for charges for QABs may
request a closing agreement under terms
and conditions that are enumerated in Rev.
Rul. 2005–6.
.06Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how var-
ious correction procedures — including
those for improper accounting for charges
for QABs under Rev. Rul. 2005–6 —
may be improved. This revenue proce-
dure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure sets fortha model closing agree-
July 21, 20081392008–29 I.R.B.

ment and explains in more detail the terms
and conditions that apply under Alterna-
tive C of Rev. Rul. 2005–6.
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of one or more contracts that failed
to meet the definition of a life insurance
contract under § 7702(a) or to meet the
requirements of § 7702A by reason of a
compliance system that does not account
for charges for QABs under the expense
charge rule of § 7702(c)(3)(B)(ii). For this
purpose, the term “issuer” means any com-
pany that issues a contract that is intended
to satisfy the definition of a life insurance
contract under § 7702. The term also in-
cludes a company that insures a contract
holder under a contract originally issued
by another company.
SECTION 4. PROCEDURE
.01Request for a ruling.An issuer
that seeks relief under this revenue pro-
cedure must submit a request for a ruling
that meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any succes-
sor). Additionally, the submission must
contain an exhibit setting forth the policy
number for each contract for which relief
is requested.
.02Closing Agreement.The issuer also
must submit a proposed closing agree-
ment, in triplicate, executed by the issuer,
in the same form as the model closing
agreement in section 5 of this revenue
procedure. The amount shown in Section
1(A) of the proposed closing agreement
istheamountrequiredtobepaid(deter-
mined under section 4.03 of this revenue
procedure) for all of the contracts covered
by the agreement.
.03Determination of amount required
to be paid.The amount required to be
paid is based on the aggregate number of
contracts for which relief is requested, as
set forth in the following schedule:
Number of ContractsAmount Due
20 or fewer
$1,500.00
21 to 50
$2,000.00
51 to 100
$5,000.00
101 to 500
$10,000.00
501 to 1,000
$16,000.00
1,001 to 5,000
$30,000.00
5,001 to 10,000
$40,000.00
Over 10,000
$50,000.00
.04Payment of amount.The issuer
is required to pay the amount determined
under section 4.03 of this revenue proce-
dure within 60 days of the date of execu-
tion of the closing agreement by the Ser-
vice. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05Correction of contracts and compli-
ance system.With respect to each con-
tract that is in force on the effective date
of the closing agreement, the issuer must
bring the contract into compliance with
§ 7702 (or § 7702A, as applicable), either
by increasing the contract’s death benefit
or returning the contract’s excess premi-
ums and earnings thereon to the contract
holder. The issuer also must correct its
compliance system to account properly for
charges for QABs as provided in Rev. Rul.
2005–6. The issuer must take the correc-
tive action required under this section 4.05
within 90 days of the date of execution of
the closing agreement by the Service.
.06Representations.The submission
must include representations to the effect
that the issuer is within the scope of section
3 of this revenue procedure and that the
amount due to the Service under the clos-
ing agreement is computed correctly un-
der section 4.03. The representations must
be executed under penalties of perjury by
an appropriate party (as set forth in section
7.01 of Rev. Proc. 2008–1 (or its succes-
sor)). The issuer must retain documenta-
tion available for audit to support the rep-
resentations.
.07Electronic Submissions.The ex-
hibit required under section 4.01 of this
revenue procedure may be submitted to
the Service electronically,inread-onlyfor-
mat, on a CD-ROM. Adobe Portable Doc-
ument format is a suitable format. Other
formats may be arranged on a case-by-case
basis. The issuer must provide a total of
three CD-ROMs, one for each of the three
copies of the closing agreement.SeeNo-
tice 2005–35, 2005–1 C.B. 1087.
SECTION 5. MODEL CLOSING
AGREEMENT
2008–29 I.R.B.140July 21, 2008

Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER REV. PROC. 2008–38
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by and
between[Insert Taxpayer name, address and EIN](“Taxpayer”) and the Commissioner of Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more contracts that were intended to qualify as life insurance contracts under § 7702[;that
were not intended to be treated as modified endowment contracts under § 7702A;]and that provided qualified additional benefits
(QABs) within the meaning of § 7702(f)(5).
B. Pursuant to Rev. Proc. 2008–38, 2008–29 I.R.B. 139, the Serviceunder certain circumstances will waive civil penalties for
failure of a taxpayer to satisfy the reporting, withholding and/or deposit requirements for income received or deemed received under
§ 7702(g).
C. By letter dated[Insert date],Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B.1[or successor
Rev. Proc., if applicable],a request for this Agreement covering[Insert number]life insurance contracts identified in Exhibit A
attached to this Agreement (the “Contracts”).
D. Taxpayer intended that each of the Contracts meet the definition of a life insurance contract under § 7702[and not be a
modified endowment contract under § 7702A]. Taxpayer, however, maintained a compliance system for the contracts that did not
account properly for charges for qualified additional benefits (QABs) under § 7702(c)(3)(B)(ii). As a result, the Contracts identified
in Exhibit A failed to satisfy the requirements of § 7702 or § 7702A.
E. Taxpayer represents that the errors described in D above qualify the Taxpayer for the remedy described in Rev. Proc. 2008–38.
F. Taxpayer represents that the amount determined under section 4.03 of Rev. Proc. 2008–38 is $[Insert amount].Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–38.
G. Taxpayer represents that it has corrected its compliance system, or will correct the compliance system within the time limit
prescribed in Section 1(F), to account properly for charges for QABs.
H. To ensure that the Contracts satisfy the requirements of § 7702[and § 7702A, if applicable], Taxpayer and the Service have
entered into this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SER-
VICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
To pay the Service the amount of $[Insert amount]at the time and in the manner described in Section 3 below.
(B) The amount paid pursuant to Section 1(A) above is not deductible, nor is such amount refundable, subject to credit
or offset, or otherwise recoverable from the Service.
(C) For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(i) neither the investment in the contract for purposes of § 72, nor the premiums paid for purposes of § 7702,
on any Contract can be increased by any portion of the amount set forth in Section 1(A) above. If any such
increases are made, they are entitled to no effect.
(ii) neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702, on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
(D) With respect to each Contract that is in force on the effective date of this Agreement, to the extent necessary in order
to bring such Contract into compliance with § 7702[and § 7702A, if applicable]:
(i) If the sum of the premiums paid as of the effective date of this Agreement exceeds the amount necessary to
keep the Contracts in compliance with the requirements of § 7702[and § 7702A, if applicable], Taxpayer
will take the following corrective action:
July 21, 20081412008–29 I.R.B.

(a)
Increase the death benefit to not less than an amount that will ensure compliance with § 7702[and
§ 7702A, if applicable],or
(b) Refund to the Contract holder the amount of such excess with interest; or
(ii) If the sum of the premiums paid as of the effective date of this Agreement does not exceed the amount
necessary to keep the contracts in compliance with the requirements of § 7702[and § 7702A, if applicable],
Taxpayer will take no corrective action.
(E) With respect to any Contract which terminated by reason of the death of the insured (i) prior to the date this
Agreement is executed by the Service and (ii) at a time when the premiums paid exceeded the guideline premium
limitation for the Contract, Taxpayer will pay the Contract holder or the Contract holder’s estate such excess
with interest.
(F) Taxpayer represents that it, if it has not already doneso, will correct its compliance system within 90 days of the
effective date of this Agreement toaccount properly for charges for QABs.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A) To treat each Contract that is still in force as of the effective date of this Agreement as having satisfied the
requirements of § 7702[and § 7702A, if applicable], during the period from the date of issuance of the Contract
through and including the latest of (i) the date this Agreement is executed by the Service, (ii) the date of any corrective
action described in Section 1(D) above, or (iii) the date of any corrective action described in Section 1(F) above;
(B) To treat each Contract that terminated prior to the effective date of this Agreement as having satisfied the
requirements of § 7702[and § 7702A, if applicable]during the period from date of issuance of the Contract through
and including the date of the Contract’s termination;
(C) To treat the failures described above, and any corrective action described in Section 1(D) or 1(E) above, as having
no effect on the date the Contract was issued, entered into, or purchased for purposes of any provision of the
Code or the regulations thereunder;
(D) To treat any amount paid to any beneficiary prior tothe effective date of this Agreement under a Contract by
reason of the death of the insured as paid under a life insurance contract for purposes of the exclusion from gross
income under § 101(a)(1);
(E) To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements that
would be applicable but for the relief otherwise provided by this Agreement;and
(F) To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. Any action required of Taxpayer in Section 1(D) or 1(E) above shall be taken by Taxpayer no later than 90 days after the
date of execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within
60 days after the date of execution of this Agreement by the Service by check payable to the “United States Treasury” delivered
together with a copy of this executed Agreement, to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter
Blvd., Covington, KY 41011.
4. This Agreement is, and shall beconstrued as being, for the benefit of Taxpayer. Contract holders covered by this Agreement
are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of Taxpayer to the
Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the mat-
ters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
2008–29 I.R.B.142July 21, 2008

[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 2005–6 is amplified to pro-
vide terms and conditions and a model
closing agreement for use by taxpayers
seeking the relief described in Alternative
C.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine A. Hossofsky of
the Office of Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
procedure, contact Branch 4 of that office
at (202) 622–3970 (not a toll-free call).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, § 7702A.)
Rev. Proc. 2008–39
SECTION 1. PURPOSE
This revenue procedure provides a pro-
cedure by which an issuer of a life insur-
ance contract may remedy an inadvertent
non-egregious failure to comply with the
modified endowment contract rules under
§ 7702A of the Internal Revenue Code.
Rev. Proc. 2001–42, 2001–2 C.B. 212,
and Rev. Proc. 2007–19, 2007–1 C.B.
515, are superseded.
SECTION 2. BACKGROUND
.01Definition of a modified endowment
contract (MEC).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the con-
tract—
(a) is entered into on or after June 21,
1988, and fails to meet the 7-pay test of
§ 7702A(b), or
(b) is received in exchange for a con-
tract described in paragraph (a) of this sec-
tion 2.01(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid un-
der the contract at any time during the first
7 contract years exceeds the sum of the
net level premiums which would have to
be paid on or before such time if the con-
tract were to provide for paid-up future
benefits (as defined in §§ 7702A(c)(3) and
7702(f)(4)) after the payment of 7 level an-
nual premiums.
(3) Section 72(e)(12) provides that, for
purposes of determining amounts includi-
ble in gross income, all MECs issued by
thesamecompanytothesamecontract
holder during any calendar year are treated
as one MEC.
.02Tax treatment of amounts received
under a MEC.Section 72(e)(10) pro-
vides that a MEC is subject to the rules
of § 72(e)(2)(B), which tax non-annuity
distributions on an income-out-first basis,
and the rules of § 72(e)(4)(A) (as modified
by §§ 72(e)(10)(A)(ii) and 72(e)(10)(B)),
which generally deem loans and assign-
ments or pledges of any portion of the
value of a MEC to be non-annuity dis-
tributions. Moreover, under § 72(v), the
portion of any annuity or non-annuity dis-
tribution received under a MEC that is
includible in gross income is subject to a
10% additional tax unless the distribution
is made on or after the date on which the
taxpayer attains age 59
1
/2, is attributable to
the taxpayer’s becoming disabled (within
the meaning of § 72(m)(7)), or is part of a
series of substantially equal periodic pay-
ments (not less frequently than annually)
made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and the
taxpayer’s beneficiary.
.03Authority to enter into closing
agreements.Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and con-
clusive, except upon a showing of fraud,
malfeasance, or misrepresentation of a
material fact.
.04Correction procedure for inadver-
tent MECs.Rev. Proc. 2001–42 set
forth circumstances under which the Inter-
nal Revenue Service (Service) would enter
into closing agreements under which life
insurance contracts would be treated as if
they were not MECs, notwithstanding in-
advertent non-egregious failures to com-
ply with the rules of § 7702A. Under Rev.
Proc. 2001–42, an issuer was required
July 21, 20081432008–29 I.R.B.

to provide information about the contracts
that were subject to the closing agreement,
including a template for each contract set-
ting forth the cumulative amounts paid un-
der the contract, the contract’s cumulative
7-pay premium, the overage, if any, for
each contract year, the earnings rate appli-
cable for each contractyear, and the over-
age earnings for each contract year. In ad-
dition, the issuer was required to pay under
the closing agreement an amount based on
the contract’s overage, overage earnings,
and tax and interest thereon. Rev. Proc.
2001–42 was modified and amplified by
Rev. Proc. 2007–19, primarily to use in-
dices that are more accessible to taxpayers
than those previously required to be used
and to permit the submission of informa-
tion in an electronic format.
.05Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how var-
ious correction procedures — including
those for inadvertent MECs under Rev.
Proc. 2001–42 — may be improved. This
revenue procedure incorporates a number
of changes that taxpayers suggested in re-
sponse to Notice 2007–15. Significant
changes include providing an alternative
computation of the amount required to be
paid under a closing agreement with regard
to an inadvertent MEC, eliminating cer-
tain informational items that must be sub-
mitted, and revising some language of the
model closing agreement.
SECTION 3. DEFINITIONS
The following definitions and rules ap-
ply solely for purposes of this revenue pro-
cedure.
.01Testing period.The 7-year period
described in § 7702A(b) or such addi-
tional period as may be required under
§ 7702A(c)(3) if a contract undergoes a
material change.
.02Amount paid.The amount paid (as
defined in § 7702A(e)(1)) under a con-
tract in any contract year (as defined in
§ 7702A(e)(2)) equals the premiums paid
for the contract during the year, reduced by
amounts to which § 72(e) applies (deter-
mined without regard to § 72(e)(4)(A)) but
not including amounts includible in gross
income. For this purpose, premiums paid
do not include—
(1) any portion of any premium paid
during the contract year that is returned
(with interest) to the contract holder within
60 days after the end of the contract year in
order to comply with the 7-pay test, or
(2) the cash surrender value (as defined
in § 7702(f)(2)(A)) of another life insur-
ance contract (otherthan a contract that
fails the 7-pay test) exchanged for the con-
tract.
.037-pay premium.
(1)In general.Except as otherwise pro-
vided in section 3.03(2) of this revenue
procedure, the 7-pay premium for a con-
tract is the net level premium (computed in
accordance with the rules in § 7702A(c))
that would have to be paid for the contract
if the contract were to provide for paid up
future benefits after the payment of 7 level
annual premiums.
(2)7-pay premium for a contract that
undergoes a material change.If a contract
(other than a contract that fails the 7-pay
test) is materially changed, the contract is
treated as newly issued on the date of the
material change and the 7-pay premium for
the changed contract is an amount equal to
the excess, if any, of—
(a) the net level premium (computed in
accordance with the rules in § 7702A(c))
that would have to be paid for the changed
contract if the contract were to provide for
paid up future benefits after the payment
of 7 level annual premiums, over
(b) a proportionate share of the cash sur-
render value (as defined in section 3.04 of
this revenue procedure) under the contract.
.04Proportionate share of cash surren-
der value.The proportionate share of the
cash surrender value of a contract is the
amount obtained by multiplying—
(1) the cash surrender value (as defined
in § 7702(f)(2)(A)) of the contract, by
(2) a fraction, the numerator of which
is the net level premium (computed in ac-
cordance with the rules in § 7702A(c)) that
would have to be paid for the changed or
new contract if such contract were to pro-
vide for paid up future benefits after the
payment of 7 level annual premiums, and
the denominator of which is the net sin-
gle premium (determined using the rules in
§ 7702) for such contract at that time.
.05Overage.A contract’s overage is
the amount of the excess, if any, of—
(1) the sum of amounts paid under the
contract during the testing period for the
contract year and all prior contract years,
over
(2) the sum of the 7-pay premiums for
the contract year and all prior contract
years of the testing period.
.06Overage earnings.The overage
earnings for a contract year is the amount
obtained by multiplying—
(1) the sum of a contract’s overage for
the contract year and its cumulative over-
age earnings for all prior contract years,
by—
(2) the earnings rate set forth in section
3.07 of this revenue procedure.
.07Earnings rates.
(1)Contracts other than variable con-
tracts.Except as otherwise provided in
sections 3.07(3) and 3.07(8) of this rev-
enue procedure, the earnings rate applica-
ble to a contract yearis the general account
total return (as defined in section 3.07(2)
of this revenue procedure) for the calendar
year in which the contract year begins.
(2)General account total return.
(a)Pre-2008 contract years.The gen-
eral account total return applicable to a
contract year that begins before January 1,
2008, is the rate set forth in the follow-
ing table for the calendar year in which the
contract year begins.
2008–29 I.R.B.144July 21, 2008

YearGeneral Account Total Return
198810.2%
19899.7%
19909.8%
19919.2%
19928.6%
1993
7.5%
19948.3%
1995
7.8%
19967.7%
19977.6%
19986.9%
19997.4%
20008.0%
2001
7.5%
20027.2%
20036.2%
20046.1%
20055.6%
20066.0%
20076.0%
(b)Post
-2007 contract years.The gen-
eral acc
ount total return applicable to a
contra
ct year that begins after Decem-
ber 31,
2007, is the arithmetic average
(weigh
ted on a 50–50 basis) of the follow-
ing two
rates:
(i) Moo
dy’s Seasoned Corporate Aaa
Bond Yi
eld, frequency annual, or any suc-
cessor
thereto; and
(ii) Moo
dy’s Seasoned Corpo-
rate Baa
Bond Yield, frequency
annual
, or any successor thereto.
Both ra
tes are publicly available at
www.fe
deralreserve.gov.Thus, for
exampl
e, under this methodology the
genera
l account total return for 2007 is
(5.55
5833 + 6.4825)/2 = 6.0191665 =
6.0%.
(3)Vari
able contracts described in
§ 817(d)
.
(a)Pre-
2008 contract years.The earn-
ings rat
e applicable to a contract year that
begins
before January 1, 2008, is the rate
set for
th in the following table for the cal-
endar y
ear in which the contract year be-
gins.
YearVariable Contracts Earnings Rate
1988
13.5%
198917.4%
19901.4%
1991
25.4%
1992
5.9%
199313.9%
1994-1.0%
1995
23.0%
199614.3%
199717.8%
199819.7%
199912.8%
2000
-5.5%
2001-7.1%
2002-14.1%
200319.6%
20046.9%
2005
2.1%
200610.0%
20073.6%
(b)Post-2007 contract years.Except
as otherwise provided in section 3.07(8) of
this revenue procedure, the earnings rate
applicable to a contract year that begins
after December 31, 2007, is equal to the
sum of—
July 21, 20081452008–29 I.R.B.

(i) 10 percent of the general account
totalreturn(asdefinedinsection3.07(2)
of this revenue procedure), and
(ii) 90 percent of the separate account
totalreturn(asdefinedinsection3.07(4)
of this revenue procedure) for the calendar
year in which the contract year begins.
(4)Separate account total return.Ex-
cept as otherwise provided in section
3.07(8) of this revenue procedure, the sep-
arate account total return equals—
(a) 75 percent of the equity fund total
return (as defined in section 3.07(5) of this
revenue procedure), plus
(b) 25 percent of the bond fund total
return (as defined in section 3.07(6) of this
revenue procedure), less
(c) 1.1 percentage point.
(5)Equity fund total return.The equity
fund total return equals—
(a) the calendar year percentage return
(as defined in section 3.07(7) of this rev-
enue procedure) represented by the end-
of-year values of the Standard and Poor’s
(S&P) 500 Total Return Index, with daily
dividend reinvestment, or any successor
thereto, less
(b) 1.5 percentage point.
(6)Bond fund total return.The bond
fund total return equals—
(a) the calendar year percentage return
(as defined in section 3.07(7) of this rev-
enue procedure) represented by the end-of-
year values of the Merrill Lynch U.S. Cor-
porate Master Index (C0A0), or any suc-
cessor thereto, less
(b) 1.0 percentage point.
The Merrill Lynch U.S. Corporate Mas-
ter Index (C0A0) is publicly available at
www.mlindex.ml.com. Under this method-
ology, the bond fund total return for 2007
is (1689.135-1614.188) /1614.188 - .01 =
3.64301 percent.
(7)Calendar year percentage return.
The calendar year percentage return for an
index described in section 3.07(5) or sec-
tion 3.07(6) of this revenue procedure is
calculated by—
(a) dividing the end-of-year value of the
index for the calendar year by the end-of-
year value of the index for the immediately
preceding calendar year, and
(b) subtracting 1 from the result ob-
tained under paragraph (a) of this section
3.07(7).
(8)Incomplete calendar year.If the
general account total return or the sepa-
rate account total return for a calendar year
cannot be determined because the calendar
year in which the contract year begins has
not ended, then the earnings rate for the
contract year (or portion thereof) is deter-
mined using the general account total re-
turn and, if applicable, the average sepa-
rate account total return, for the 3 calendar
years immediately preceding the calendar
year in which the contract year begins.
.08Proportionate share of overage
earnings allocable to taxable distribu-
tions.The proportionate share of overage
earnings allocable to taxable distributions
under a contract is the amount obtained by
multiplying—
(1) the total amount of the taxable dis-
tributions under the contract, by
(2) a fraction, the numerator of which is
the contract’s cumulative overage earnings
and the denominator of which is the total
income on the contract.
.09Total income on a contract.The
total income on a contract as of any date is
an amount equal to the excess, if any, of—
(1) the contract’s cash surrender value
(as defined in § 7702(f)(2)(A)) on such
date, over
(2) the premiums paid under the con-
tract before such date, reduced by amounts
to which § 72(e) applies (determined with-
out regard to § 72(e)(4)(A)) but not in-
cluding amounts includible in the contract
holder’s gross income.
.10Distribution frequency factor.The
distribution frequency factor for a contract
is—
(1) .8, if—
(a) the interest rate with respect to any
portion of a policy loan that could be made
under the contract atany time (including
policy loans that could be made after a
contractually specified date in the future)
is guaranteed not to exceed the sum of:
(i) 1 percentage point, plus
(ii) the rate at which earnings are
credited to the portion of the contract’s
cash surrender value (as defined in
§ 7702(f)(2)(A)) that is allocable to such
portion of the policy loan; or
(b) the contract holder has an option to
make a partial withdrawal of the contract’s
cash surrender value that reduces the death
benefit (as defined in § 7702(f)(3)) under
the contract by less than an amount deter-
mined by multiplying—
(i) the death benefit under the con-
tract immediately before the withdrawal,
by (ii) the percentage obtained by divid-
ing the withdrawn amount by the con-
tract’s cash surrender value (as defined in
§ 7702(f)(2)(A)) immediately before the
withdrawal; and
(2) .5 for all other contracts.
.11Applicable percentage.
(1)In general.The applicable percent-
age for a contract is—
(a) 15%, if the death benefit under the
contract is less than $50,000,
(b) 28%, if the death benefit under the
contract is equal to or exceeds $50,000 but
is less than $180,000, and
(c) 36%, if the death benefit under the
contract is equal to or exceeds $180,000.
(2)Determination of amount of death
benefit.Forpurposesofdeterminingthe
applicable percentage, the death benefit
under the contract is the death benefit (as
defined in § 7702(f)(3)) as of any date
within 120 days of the date of the request
for closing agreement, or the last day the
contract is in force.
.12Reported amount.The reported
amount for a contract is the amount that—
(1) the issuer reports on a timely filed
information return as includible in the con-
tract holder’s gross income, or
(2) the contract holder includes in gross
income on a timely filed income tax return.
.13Aggregation of contracts.All
MECs issued by the same issuer to the
same contract holder during any calendar
year are treated as one MEC.
SECTION 4. SCOPE
.01Applicability.Except as provided
in section 4.02, this revenue procedure ap-
plies to any issuer of one or more life insur-
ance contracts that desires to remedy the
inadvertent non-egregious failure of con-
tracts to comply with the requirements of
§ 7702A. For this purpose, the term “is-
suer” means any company that issues a
contract that is intended to satisfy the def-
inition of a life insurance contract under
§ 7702 and comply with the MEC rules
under § 7702A. The term also includes a
company that insures a contract holder un-
der a contract originally issued by another
company.
.02Inapplicability.The Service may
exclude a contract from the correction
mechanism provided under this revenue
procedure if the contract’s status as a MEC
resulted from a failure to comply with the
requirements of § 7702A that—
2008–29 I.R.B.146July 21, 2008

(1) is attributable to one or more de-
fective interpretations or positions that the
Service determines to be a significant fea-
ture of a program to sell investment ori-
ented contracts, or
(2) arises where the controlling statu-
tory provision, as supplemented by any
legislative history or guidance published
by the Service, is clear on its face and
the Service determines that failure to fol-
low the provision results in a significant
increase in the investment orientation of a
contract.
.03Example.Pursuant to section 4.02 of this rev-
enue procedure, the Service generally will not apply
the correction mechanism under this revenue proce-
dure to a MEC if the contract provides for paid-up
future benefits after the payment of less than 7 level
annual premiums.
SECTION 5. PROCEDURE
.01Request for a ruling.An issuer
that seeks relief under this revenue pro-
cedure must submit a request for a ruling
that meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any succes-
sor). Additionally, the submission must
contain the following information:
(1) the policy number for each contract;
(2) a description of the defect[s] that
caused the contract[s] to fail to comply
with the 7-pay test, including an explana-
tion of how and why the defect[s] arose;
and
(3) a description of the administrative
procedures the issuer has implemented to
ensure that none of its contracts will inad-
vertently fail the 7-pay test in the future.
.02Closing agreement.The issuer also
must submit a proposed closing agree-
ment, in triplicate, executed by the issuer,
in the same form as the model closing
agreement in section 6 of this revenue
procedure. The amount shown in Section
1(A) of the proposed closing agreement
is the amount required to be paid (deter-
mined under section 5.03 of this revenue
procedure) for all of the contracts covered
by the agreement.
.03Determination of amount required
to be paid with regard to a contract.The
amount required to be paid with regard to a
contract under this section 5.03 is either the
amount determined based on overage earn-
ings under section 5.03(1) or, at the elec-
tion of the issuer, the amount determined
based on overage under section 5.03(2).
(1)Amount determined based on over-
age earnings.
(a)In general.Except as provided in
section 5.03(1)(b) of this revenue pro-
cedure, the amount determined based
on overage earnings under this section
5.03(1) is the sum of—
(i) the income tax (determined using,
in lieu of the contract holder’s actual tax
rate, the applicable percentage for the con-
tract under section 3.11 of this revenue
procedure) and the additional tax under
§ 72(v) with regard to amounts (other than
reported amounts (as defined in section
3.12 of this revenue procedure)) received
(or deemed received) under the contract
during the period commencing with the
date 2 years before the date on which the
contract first failed to satisfy the MEC
rules and ending on the effective date of
the closing agreement;
(ii) any interest computed under
§ 6621(a)(2) as if the amounts determined
under section 5.03(1)(a)(i) of this revenue
procedure are underpayments by the con-
tract holder[s] for the tax year[s] in which
the amounts are received (or deemed re-
ceived); and
(iii) an amount, not less than $0, ob-
tained by multiplying— (A) the excess, if
any, of the contract’s cumulative overage
earnings over the proportionate share of
overage earnings allocable to taxable dis-
tributions under the contract, by
(B) the applicable percentage for the
contract, and by
(C) the distribution frequency factor for
the contract under section 3.10 of this rev-
enue procedure.
(b)Special rule for contracts with de
minimis overage earnings.If the overage
earnings of a contract at all times during
the testing period donot exceed $100, then
the amount determined under this section
5.03(1) of this revenue procedure is deter-
mined without regard to paragraphs (i) and
(ii) of section 5.03(1)(a) of this revenue
procedure.
(2)Amount determined based on over-
age.An issuer may elect to pay an amount
equal to 100% of the overage as defined
in section 3.05 of this revenue procedure,
rather than the amount determined under
section 5.03(1)(a) of this revenue proce-
dure based on overage earnings with re-
spect to a contract.
(3)Examples of the determination of the
amount required to be paid with regard to
a contract.
(a)Example 1. A, an individual, purchases a life
insurance contract other than a contract described in
sections 3.07(3) or 4.02 of this revenue procedure.
The death benefit of the contract exceeds $180,000
on every day within 120 days of the date of the re-
quest for closing agreement. The net level premium
(assuming paid-up future benefits after seven annual
premium payments) for the contract is $10,490. The
contract provides that, within 60 days after the end of
a contract year, the issuer will return (with interest)
the amount of any excess premium that would cause
the contract to be a MEC under § 7702A.
The interest rate on all portions of any policy
loans will always exceed the rate at which interest
is credited to the contract’s associated cash value by
more than 1 percentage point. A partial withdrawal
of the cash surrender value (within the meaning of
§ 7702(f)(2)(A)) always reduces the death benefit by
an amount not less than the amount determined by
multiplying the death benefit immediately before the
withdrawal by the percentage obtained by dividing
the withdrawn amount by the cash surrender value
immediately before the withdrawal.
Apays a premium of $10,000 when the contract is
issued on January 1, 2001. At the beginning of each
of the next 6 contract years,Apays additional premi-
ums of $10,750, $10,800, $10,700, $11,500, $11,000,
and $10,000, respectively.Due to an inadvertent er-
ror, the issuer fails to return any of the excess premi-
ums.
The issuer desires to enter into a closing agree-
ment to remedy the failure to comply with § 7702A.
The issuer prepares the following template with re-
gard to the contract.
Contract Year
Cumulative Amounts
Paid
Cumulative 7-pay
PremiumOverageEarnings RateOverage Earnings
1 (2001)10,00010,4900
7.5%
0
2 (2002)
20,750
20,98007.2%0
3 (2003)
31,550
31,470806.2%4.96
4 (2004)
42,250
41,9602906.1%17.99
July 21, 20081472008–29 I.R.B.

Contract Year
Cumulative Amounts
Paid
Cumulative 7-pay
PremiumOverageEarnings RateOverage Earnings
5 (2005)53,75052,450
1,300
5.6%
74.09
6 (2006)
64,750
62,9401,8106.0%114.42
7 (2007)
74,750
73,4301,3206.0%91.89
Prior toA’s payment of the $10,800 premium at
the beginning of contract year 3, the cumulative pre-
miums paid for the contract do not exceed the con-
tract’s cumulative 7-pay premiums. Therefore, there
are no overage earnings in contract years 1 and 2.
Upon payment of the $10,800 premium at the be-
ginning of contract year 3, however, the cumulative
amount paid for the contract ($31,550) exceeds the
contract’s cumulative 7-pay premiums ($31,470) by
$80. As the earnings rate for the calendar year in
which contract year 3 beginsis6.2%,thecontract’s
overage earnings for contract year 3 equal $4.96 ($80
x 6.2%).
For contract year 4, the overage is $290 ($42,250
- $41,960). The cumulative overage earnings for all
prior contract years equal $4.96. The earnings rate is
6.1%. The overage earnings for contract year 4 equal
$17.99 (($290 + $4.96) x 6.1%).
For contract year 5, the overage is $1,300
($53,750 - $52,450). The cumulative overage earn-
ings for all prior contract years equal $22.95 ($4.96
+ $17.99). The earnings rate is 5.6%. The overage
earnings for contract year 5 equal $74.09 (($1,300 +
$22.95) x 5.6%).
For contract year 6, the overage is $1,810
($64,750 - $62,940). The cumulative overage earn-
ings for all prior contract years equal $97.04 ($4.96
+ $17.99 + $74.09). The earnings rate is 6.0%. The
overage earnings for contract year 6 equal $114.42
($1,810 + $97.04) x 6.0%).
For contract year 7, the overage is $1,320
($74,750 - $73,430). The cumulative overage earn-
ings for all prior contract years equal $211.46 ($4.96
+ $17.99 + $74.09 + $114.42). The earnings rate is
6.0%. The overage earnings for contract year 7 equal
$91.89 (($1,320 + $211.46) x 6.0%).
The cumulative overage earnings for the contract
equal $303.35 ($4.96 + $17.99 + $74.09 + $114.42 +
$91.89). Under sections 3.10 and 3.11 of this revenue
procedure, the distribution frequency factor is .5 and
the applicable percentage is 36%. Accordingly, the
amount determined based on overage earnings under
section 5.03(1) of this revenue procedure is $54.60
($303.35 x .5 x 36%).
The amount determined based on overage under
section 5.03(2) of this revenue procedure is equal to
100% of the overage, or $1,320. The issuer may
elect to pay either this amount or the amount deter-
mined under section 5.03(1) of this revenue proce-
dure ($54.60) under the terms of the closing agree-
ment with regard to the contract.
(b)Example 2.The facts are the same as inExam-
ple 1except that, at the beginning of contract year 5,A
receives $3,000 as a policy loan. The contract’s cash
value (within the meaning of § 72(e)(3)(A)(i)) imme-
diately prior to the loan is $58,500, which exceeds
A’s investment in the contract ($53,750) by $4,750.
Each yearApays the interest on the policy loan. The
issuer does not file a timely information return with
regard to the deemed distribution resulting from the
policyloanandAdoes not include the distribution in
gross income reported on the income tax return for
the taxable years in which the deemed distribution is
received. The total incomeon the contract (as defined
in section 3.09 of this revenue procedure) is $14,500.
The amount determined based on overage earn-
ings under section 5.03(1) of this revenue procedure
is the sum of—
(1) an amount equal to the income tax (deter-
mined using an applicable percentage of 36%) and the
additional tax under § 72(v) with regard to the $3,000
deemed distribution in contract year 5;
(2) interest computed under § 6621(a)(2) as if the
amounts determined under (1) were underpayments
for the taxable year in which the distributions are
deemed to have occurred; and
(3) 36% of $120.30, which is the excess of the
contract’s cumulative overage earnings over the pro-
portionate share of the overage earnings allocable to
taxable distributions ($303.35 - $62.76), multiplied
by the distribution frequency factor (.5). (The pro-
portionate share of overage earnings allocable to tax-
able distributions is obtained by multiplying the total
amount of the taxable distribution under the contract
($3,000), by a fraction, the numerator of which is the
contract’s cumulative overage earnings ($303.35) and
the denominator of which is the total income on the
contract ($14,500).)
The amount determined based on overage under
section 5.03(2) of this revenue procedure is equal to
100% of the overage, or $1,320. The issuer may elect
to pay either this amount or the amount determined
under section 5.03(1) of this revenue procedure under
the terms of the closing agreement with regard to the
contract.
.04Payment of amount.The issuer
is required to pay the amount determined
under section 5.03 of this revenue proce-
dure within 60 days of the date of execu-
tion of the closing agreement by the Ser-
vice. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05Correction of contracts.
(1)General rules.If, on the date of the
execution of the closing agreement by the
Service, the testing period (as defined in
section 3.01 of this revenue procedure) for
a contract has more than 90 days remain-
ing, then the issuer must bring the con-
tract into compliance with § 7702A. The
issuer may bring a contract into compli-
ance with § 7702A either by either increas-
ing the contract’s death benefit or returning
the contract’s excess premiums and earn-
ings thereon to the contract holder. The
issuer shall take the corrective action re-
quired under this section 5.05(1) of this
revenue procedure within 90 days of the
date of execution of the closing agreement
by the Service.
(2)No corrective action required if Ser-
vice executes closing agreement on a date
within ninety (90) days of the expiration
of testing period.If the testing period for
a contract expires on or before the date
within 90 days of the execution of the clos-
ing agreement by the Service, then the is-
suer is not required to take any corrective
action under section 5.05(1) of this rev-
enue procedure.
.06Representations.The submission
must include representations to the effect
that the issuer is within the scope of sec-
tion 4 of this revenue procedure and that
amount due to the Service under the clos-
ing agreement is computed correctly under
section 5.03(1) or (2) of this revenue pro-
cedure, as applicable. The representations
must be executed under penalties of per-
jury by an appropriate party (as set forth
in section 7.01 of Rev. Proc. 2008–1 (or
its successor). The issuer must retain doc-
umentation available for audit to support
the representations.
.07Electronic submissions.The in-
formation required under section 5.01(1)
of this revenue procedure may be sub-
mitted to the Service electronically, in
read-only format, on a CD-ROM. Adobe
Portable Document format is a suitable
format. Other formats may be arranged
on a case-by-case basis. The issuer must
provide a total of three CD-ROMs, one
for each of the three copies of the closing
agreement.
2008–29 I.R.B.148July 21, 2008

SECTION 6. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER SECTION 7702A
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by and
between[Insert Taxpayer name, address, and EIN](“Taxpayer”) and the Commissioner ofInternal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more life insurance contracts under § 7702.
B. Pursuant to Rev. Proc. 2008–39, 2008–29 I.R.B. 143, an issuer under certain circumstances may remedy an inadvertent
non-egregious failure to comply with the modified endowment contract rules under § 7702A.
C. By letter dated[Insert date],Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1[or successor
Rev. Proc., if applicable],a request for this Agreement covering[Insert number]modified endowment contracts identified on
Exhibit A attached to this Agreement (the “Contracts”).
D. Taxpayer intended that each of the Contracts not be a modifiedendowment contract under § 7702A. Taxpayer represents that
the Contract[s] is [are] not described in Sec.4.02 of Rev. Proc. 2008–39 and that the Contracts identified on Exhibit A are eligible
for relief under Rev. Proc. 2008–39.
E. Taxpayer represents that the amount determined under Sec. 5.03 of Rev. Proc. 2008–39 is $[Insert amount].Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–39.
F. To ensure that the Contract[s] is [are] not treated as [a] modified endowment contract[s], Taxpayer and the Service have entered
into this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SER-
VICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
Taxpayer will pay to the Service the amount of $[Insert amount]at the time and in the manner described in
Section 3 below.
(B) The amount paid pursuant to Section 1(A) above is not deductible by Taxpayer, nor is such amount refundable,
subject to credit or offset, or otherwise recoverable by Taxpayer from the Service.
(C) For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(i) neither the investment in the contract for purposes of § 72, nor the premiums paid for purposes of § 7702,
on any Contract can be increased by any portion of the amount set forth in Section 1(A) above. If any such
increases are made, they are entitled to no effect.
(ii) neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702, on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
(D) To bring Contract[s] for which the testing period (as defined in Sec. 3.01 of Rev. Proc. 2008–39) will not have
expired on or before the date 90 days after the execution of this Agreement into compliance with § 7702A, either by
an increase in death benefit[s] or the return of the excess premiums and earnings thereon to the Contract holder[s].
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A) To treat each Contract as having satisfied the requirements of § 7702A during the period from the date of issuance
of the Contract through and including the later of—
(i) date of the executionof this Agreement, and
(ii) the date of the corrective actions described in Section 1(D) above;
July 21, 20081492008–29 I.R.B.

(B) To treat the corrective action described in Section 1(D) above as having no effect on the date the Contract was issued,
entered into, or purchased for purposes of any provision of the Code or the regulations thereunder;
(C) To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, and/or deposit requirements for
income subject to tax under § 72(e)(10) that was received or deemed received by a Contract holder under a Contract
in a calendar year ending prior to the date of execution of this Agreement; and
(D) To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. The actions required of Taxpayer in Section 1(D) above shallbe taken by Taxpayer no later than 90 days after the date of
execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within 60 days
of the date of execution of this Agreement by the Service by check payable to the “United States Treasury,” delivered together with
a copy of this executed Agreement to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. The Contract holders covered by this Agree-
ment are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of an issuer to
the Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that Taxpayer and the Service mutually agree that the mat-
ters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
This revenue procedure supersedes
Rev. Proc. 2001–42 and Rev. Proc.
2007–19.
SECTION 9. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine A. Hossofsky of
the Office of Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
2008–29 I.R.B.150July 21, 2008

procedure, contact Branch 4 of that office
at (202) 622–3970 (not a toll-free call).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, Section 7702.)
Rev. Proc. 2008–40
SECTION 1. PURPOSE
This revenue procedure provides a pro-
cedure by which an issuer of a life insur-
ance contract may remedy the failure of
one or more contracts to meet the defi-
nition of a life insurance contract under
§ 7702(a) or to satisfy the requirements
of § 101(f) of the Internal Revenue Code.
Rev. Rul. 91–17, 1991–1 C.B. 190, is
superseded in part; Notice 99–48, 1999–2
C.B. 429, is superseded.
SECTION 2. BACKGROUND
.01Definition of a life insurance con-
tract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance con-
tract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicablelaw and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value ac-
cumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline pre-
mium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline sin-
gle premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the con-
tract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
tablesetforthin§7702(d)(2).
(5) Section 7702 is effective for con-
tracts issued after December 31, 1984, in
tax years ending after that date.
.02Tax treatment of a contract that does
not meet the requirements of § 7702(a).
Section 7702(g)(1)(A) provides that if at
any time a contract that is a life insurance
contract under the applicable law does not
meet the definition of a life insurance con-
tract under § 7702(a), the income on the
contract for any taxable year of the poli-
cyholder is treated as ordinary income re-
ceived or accrued by the policyholder dur-
ing such year. Further, § 7702(g)(1)(C)
provides that if, during any taxable year of
the policyholder, a contract that is a life in-
surance contract under the applicable law
ceases to meet the definition of a life in-
surance contract under § 7702(a), the in-
come on the contract for all prior taxable
years is treated as received or accrued dur-
ingthetaxableyearinwhichsuchcessa-
tion occurs.
.03Definition and treatment of a flex-
ible premium life insurance contract.A
flexible premium life insurance contract is
a life insurance contract that provides for
the payment of one or more premiums that
arenotfixedbytheinsurerastobothtim-
ing and amount. Section 101(f) provides
that any amount paid by reason of the death
of the insured under a flexible premium
life insurance contract is excluded from
gross income only if the contract satisfies
either (1) the guideline premium limita-
tion and the applicable percentage of cash
value test of § 101(f)(1)(A)(i) and (ii), or
(2) the cash value test of § 101(f)(1)(B).
The limitations of § 101(f) generally apply
to contracts issued before January 1, 1985.
.04Recordkeeping, reporting, with-
holding, and deposit requirements for
failed contracts.The issuer of a contract
that fails to satisfy the requirements of
§ 7702(a) or § 101(f) may have record-
keeping, reporting, withholding, and de-
posit obligations.
An issuer that fails to meet these obliga-
tions also may be subject to penalties.See
Rev. Rul. 91–17 (concerning failures to
satisfy the requirements of § 7702(a)).
.05Authority to enter into closing
agreements.Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person or
estate for whom he acts) in respect of any
internal revenue tax for any period. Such
an agreement is generally final and con-
clusive, except upon a showing of fraud
or malfeasance, or misrepresentation of a
material fact.
.06Correction procedure for failures to
satisfy the requirements of § 7702(a).
Rev. Rul. 91–17, concludes that if
a contract fails to meet the definition of
a life insurance contract under § 7702(a),
then the holder of the contract is deemed
to have received a nonperiodic distribu-
tion as ordinary income under § 7702(g) or
(h), and the issuer is subject to the record-
keeping, reporting, withholding, and de-
posit requirements applicable to nonperi-
odic distributions. In addition, Rev. Rul.
91–17 states that the Internal Revenue Ser-
vice (Service) will waive civil penalties for
an issuer’s failure to satisfy those require-
ments if, prior to June 3, 1991, the issuer
requested and, in a timely fashion, exe-
cuted a closing agreement under which the
issuer agreed to pay a specified amount.
Notice 99–48, indicated that since June 3,
1991, the Service has continued to exer-
cise its authority under § 7121 to enter into
closing agreements as set out in Rev. Rul.
91–17. Notice 99–48 also set forth the
ratestobeusedforthepurposeofcom-
puting the amount due pursuant to such a
closing agreement. As a matter of prac-
tice, the Service has entered into closing
agreements to address contracts that failed
to satisfy the requirements of § 101(f), as
well.
.07Changes to correction procedures.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how var-
ious correction procedures — including
those for correcting the failure of a contract
to satisfy the requirements of § 7702(a)
— may be improved. This revenue proce-
dure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure (1) sets forth a model closing
agreement for issuers that seek relief, and
(2) provides alternative calculations of the
amount due under the closing agreement.
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of one or more contracts that qual-
July 21, 20081512008–29 I.R.B.

ified as life insurance contracts under
the applicable law, but otherwise failed
to meet the definition of a life insurance
contract under § 7702(a) or to meet the
requirements of § 101(f). For purposes of
this revenue procedure, the term “issuer”
is any company that issues a contract that
is intended to satisfy the definition of a
life insurance contract under § 7702 or
§ 101(f). The term also includes a com-
pany that insures a contract holder under
a contract originally issued by another
company.
SECTION 4. PROCEDURE
.01Request for ruling.An issuer that
seeks relief under this revenue procedure
must submit a request for a ruling that
meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any succes-
sor). Additionally, the submission must
contain the following information:
(1) the policy number for each contract;
(2) a description of the defects that
caused the contracts to fail to comply with
§ 7702 or § 101(f); and
(3) a description of the administrative
procedures the issuer has implemented to
prevent additional failures to meet the re-
quirements of § 7702 or § 101(f) in the fu-
ture.
.02Closing agreement.In the case of a
failure to meet the guideline premium re-
quirements of § 7702(c), the issuer must
submit a proposed closing agreement, in
triplicate, executed by the issuer, in the
same form as the model closing agreement
in section 5 of this revenue procedure. The
amount shown in Section 1(A) of the pro-
posed closing agreement is the amount re-
quired to be paid (as determined under sec-
tion 4.03 of this revenue procedure) for all
of the contracts covered by the agreement.
In the case of any other failure, the is-
suer may propose amendments to the pro-
posed closing agreement set forth in sec-
tion 5 of this revenue procedure, including
the amount required to be paid, as appro-
priate on a case-by-case basis.
.03Determination of amount required
tobepaidwithregardtoacontract.
(1)In general.The amount required
to be paid with regard to a contract under
this section 4.03 of this revenue proce-
dure depends on the amount of excess
earnings with respectto the contract. For
a contract with excess earnings greater
than $5,000, the amount required to be
paid is the amount determined based on
income on the contract under section
4.03(2) of this revenue procedure; for a
contract with excess earnings less than or
equal to $5,000, the amount required to
be paid is the amount determined based
on excess earnings under section 4.03(3)
of this revenue procedure. In lieu of the
amount determined under section 4.03(2)
or section 4.03(3) of this revenue proce-
dure, however, the issuer may elect to pay
the amount determined based on excess
premiums under section 4.03(4) of this
revenue procedure.
(2)Amount determined based on in-
come on the contract.The amount re-
quired to be paid with regard to a contract
with excess earnings greater than $5,000
is the amount determined based on income
on the contract. This amount is equal to
(i) the amount of tax that would have been
owed by the contract holder if the con-
tract holder were treated as receiving the
income on the contract, plus (ii) any inter-
est with regard to such tax. For this pur-
pose, the income on the contract is deter-
minedinthemannersetforthinsection
4.03(5)(a) of this revenue procedure; the
tax rate is assumed to equal the applicable
percentage for the contract determined un-
der section 3.11 of Rev. Proc. 2008–39,
page 143, this Bulletin; and the amount
of interest is the amount computed under
§ 6621(a)(2) as if the amounts treated as
received by the contract holder as income
on the contract caused underpayments of
tax in the appropriate years.
(3)Amount determined based on excess
earnings.The amount required to be paid
with regard to a contract with excess earn-
ings less than or equal to $5,000 is the
amount determined based on excess earn-
ings. This amount is equal to the amount
of tax that would have been owed by the
contract holder if the contract holder were
treated as receiving the excess earnings on
the contract. For this purpose, the excess
earnings on the contract is the amount de-
termined under section 4.03(5)(b) of this
revenue procedure; the tax rate is assumed
to equal the applicable percentage for the
contract determined under section 3.11 of
Rev. Proc. 2008–39, and the amount
of interest is the amount computed under
§ 6621(a)(2) as if the amounts treated as
received by the contract holder as excess
earnings caused underpayments of tax in
the appropriate years.
(4)Amount determined based on excess
premiums.In lieu of the amount deter-
mined based on income on the contract
set forth in section 4.03(2) of this rev-
enue procedure or the amount determined
based on excess earnings set forth in sec-
tion 4.03(3) of this revenue procedure, as
applicable, an issuer may elect to pay an
amount with regard to a contract equal to
100% of the excess premiums as defined
in section 4.03(5)(c) of this revenue pro-
cedure.
(5)Definitions.
(a)Income on the contract.The in-
come on the contract is the amount deter-
mined with regard to the contract under
§ 7702(g)(1)(B).
(b)Excess earnings.The excess earn-
ings for a contract is equal to the amount
obtained by multiplying—
(i) the sum of a contract’s excess premi-
ums for a contract yearand its cumulative
excess earnings for all prior contract years,
by
(ii) the applicable earnings rate as
set forth in section 3.07 of Rev. Proc.
2008–39. (For contract years before 1988,
the applicable earnings rate is the rate de-
termined in a manner consistent with the
formulas set forth in section 3.07 of Rev.
Proc. 2008–39 for contract years after
2007.)
(c)Excess premiums.The excess pre-
miums with regard to a contract is equal
to the highest amount by which the total
premiums paid under the contract exceed
the guideline premium limitations under
§ 7702(c) at any time the contract is in
force.
.04Payment of amount.The issuer
is required to pay the amount determined
under section 4.03 of this revenue proce-
dure within 60 days of the date of execu-
tion of the closing agreement by the Ser-
vice. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05Correction of contracts.With re-
spect to each contract that is in force on the
effective date of the closing agreement, to
the extent necessary to bring the contract
into compliance with § 7702, the issuer is
2008–29 I.R.B.152July 21, 2008

required, no later than 90 days after the
date of execution of the closing agreement
with the Service, either (1) to increase the
death benefit to not less than an amount
that will ensure compliance with § 7702 or
§ 101(f), as applicable, or (2) to refund to
the contract holder the excess of the sum of
the premiums paid as of the effective date
of the closing agreement over the guide-
line premium limitation as of that date. If
the sum of the premiums paid does not ex-
ceed the guideline premium limitation, no
corrective action is necessary.
.06Required representations.The sub-
mission must include representations to
the effect that (1) the issuer is within the
scope of section 3 of this revenue proce-
dure; (2) the issuer properly computed the
amount required to be paid with regard to
the contracts in accordance with section
4.03 of this revenue procedure; and (3) the
issuer has brought the contracts into com-
pliance with the requirements of § 7702 or
§ 101(f), as applicable, or will do so within
the time period specified in the model
closing agreement set forth in section 5
of this revenue procedure. The represen-
tations must be executed under penalties
of perjury by an appropriate party (as set
forth in section 7.01 of Rev. Proc. 2008–1
(or its successor). The issuer must retain
documentation available for audit to sup-
port the representations.
.07Electronic submissions.The infor-
mation required under section 4.01 of this
revenue procedure may be submitted to the
Service electronically, in read-only format,
on a CD-ROM. Adobe Portable Document
format is a suitable format. Other formats
may be arranged on a case-by-case basis.
The issuer must provide a total of three
CD-ROMs, one for each of the three copies
of the closing agreement.
SECTION 5. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER § 7702[Insert “or § 101(f)” if applicable]
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by
and between[InsertTaxpayer name,address and EIN number](“Taxpayer”) and the Commissioner of Internal Revenue (the
“Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more contracts that were intendedtoqualifyaslifeinsurance contracts under § 7702[Insert
“or § 101(f)” if applicable].For each contract, however, Taxpayer accepted andretained premiums thatexceeded the contract’s
guideline premium limitations. As a result, the contract[s] failed to satisfy the requirements of § 7702[Insert “or § 101(f)” if
applicable].
B. Pursuant to Rev. Proc. 2008–40, 2008–29 I.R.B. 151, the Serviceunder certain circumstances will waive civil penalties for
failure of a taxpayer to satisfy the recordkeeping, reporting, withholding, or deposit requirements for income received or deemed
received under § 7702(g).
C. By letter dated[Insert date]Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1[or successor
ifapplicable], a request for this Agreement covering[Insert number]of Taxpayer’s life insurance contracts identified on Exhibit
A attached to this Agreement (the “Contracts”).
D. Taxpayer represents that the failure[s] describedin A above are eligible for relief under Rev. Proc. 2008–40.
E. Taxpayer represents that the amount determined under section 4.03 of Rev. Proc. 2008–40 is $[Insert amount].Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–40.
F. To ensure that the Contracts satisfy the requirements of § 7702(a)[Insert “or § 101(f)” ifapplicable],Taxpayer and the
Service have enteredinto this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SER-
VICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
To pay the Service the amount of $[Insert amount]at the time and in the manner described in Section 3 below.
(B) The amount paid pursuant to Section 1(A) above is not deductible, nor is such amount refundable, subject to credit
or offset, or otherwise recoverable from the Service.
(C) For purposes of complying with Taxpayer’s reporting and withholding obligations under the Code,
July 21, 20081532008–29 I.R.B.

(i) neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702
[Insert “or § 101(f)” ifapplicable], on any Contract can be increased by any portion of the amount set forth
in Section 1(A) above. If any such increasesare made, they are entitled to no effect.
(ii) neither the investment in the contract, for purposes of § 72, nor the premiums paid, for purposes of § 7702
[Insert “or § 101(f)” ifapplicable],on any Contract can be increased byany portion of the amount which
Taxpayer represents to be the income on the contractfor all of the Contracts in the aggregate. If any such
increases are made, they are entitled to no effect.
(D) With respect to each Contract that is in force on the effective date of this Agreement, to the extent necessary in order
to bring such Contract into compliance with § 7702[Insert “or §101(f)” if applicable],no later than 90 days after
the date of execution of thisAgreement by the Service:
(i) If the sum of the premiums paid as of the effective date of this Agreement exceeds the guideline premium
limitation as of such date, Taxpayer will take the following corrective action:
(a) Increase the death benefit to not less than an amount that will ensure compliance with § 7702[Insert
“or § 101(f)” if applicable],or
(b) Refund to the Contract holder the amount of such excess, with interest at the Contract’s interest crediting
rate; or
(ii) If the sum of the premiums paid as of the effective date of this Agreement does not exceed the guideline
premium limitation of § 7702[insert “or § 101(f)” if applicable]as of such date, to take no corrective action.
(E) With respect to any Contract which terminated by reason of the death of the insured (i) prior to the date this
Agreement is executed by the Service and Taxpayer and (ii) at a time when the premiums paid exceeded the amounts
necessary to keep the Contracts in compliance with the requirements of § 7702[Insert “or § 101(f)” if applicable]
guideline premium limitation for the Contract, Taxpayer will pay the Contractholder, or the Contract holder’s estate,
the amount of such excess with interest.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A) To treat each Contract that is still in force as of the effective date of this Agreement as having satisfied the
requirements of § 7702[Insert “or § 101(f)” if applicable]during the period from the date of issuance of the
Contract through and including the later of (i) the date of the execution of this Agreement by the Service or (ii) the
date of corrective action described in Section 1(D) with respect to that Contract;
(B) To treat each Contract that terminated prior to the effective date of this Agreement as having satisfied the
requirements of § 7702[Insert “or § 101(f)” if applicable]during the period from date of issuance of the Contract
through and including the date of the Contract’s termination;
(C) To treat the failure(s) described above, and any corrective action describedin Section 1(D) or 1(E) above, as having
no effect on the date the Contract was issued, entered into, or purchased for purposes of any provision of the
Code or regulations thereunder;
(D) To treat any amount paid prior to the effective date of this Agreement to any beneficiary under a Contract by
reason of the death of the insured as paid under a life insurance contract for purposes of the exclusion from gross
income under § 101(a)(1);
(E) To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements for
income deemed received by Contract holders due to the Contract’s failure to satisfythe requirements of § 7702
[Insert “or 101(f)” if applicable];and
(F) To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. Any action required of Taxpayer in Section 1(D) or 1(E) above shall be taken by Taxpayer no later than 90 days after the
date of execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within
60 days after the date of execution of this Agreement by the Service by check payable to the “United States Treasury,” delivered
together with a copy of this executed Agreement, to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter
Blvd., Covington, KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. Contract holders of the Contracts covered
by this Agreement are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of
Taxpayer to the Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
2008–29 I.R.B.154July 21, 2008

6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the mat-
ters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 6. EFFECTIVE DATE
Th
is revenue procedure is effective July
21
, 2008, the date of its publication in the
I
nternal Revenue Bulletin.
S
ECTION 7. EFFECT ON OTHER
D
OCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190, is
superseded in part to set forth new terms
and conditions under which the Service
will enter into a closing agreement to rem-
edy the failure of a contract to qualify as
a life insurance contract; Notice 99–48 is
superseded.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Melissa S. Luxner of the Of-
fice of Associate Chief Counsel (Financial
Institutions & Products). For further infor-
mation regarding this revenue procedure,
contact Branch 4 of that office at (202)
622–3970 (not a toll-free call).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, Section 817; 1.817–5.)
Rev. Proc. 2008–41
SECTION 1. PURPOSE
This revenue procedure provides a pro-
cedure by which an issuer of a variable
contract may remedy an inadvertent failure
of a variable contract to satisfy the diver-
sification requirements of § 817(h) of the
Internal Revenue Code. Rev. Rul. 91–17,
1991–1 C.B. 190, is amplified; Rev. Proc.
92–25, 1992–1 C.B. 741, is superseded;
Notice 2000–9, 2000–1 C.B. 449, is obso-
lete.
SECTION 2. BACKGROUND
.
01Definition and tax treatment of a
v
ariable contract.
(
1) Section 817(d) defines the term
“
variable contract” to mean a contract that
(
a) provides for the allocation of all or part
o
f the amounts received under the contract
t
o an account that, pursuant to state law or
regulations, is segregated from the general
asset accounts of the company, and (b)
provides for the payment of annuities, or
is a life insurance contract, or provides for
funding of insurance on retired lives. In
the case of an annuity contract or a con-
tract that provides funding of insurance on
retired lives, the amounts paid in or the
amounts paid out are required to reflect the
investment return and the market value of
the segregated asset account. In the case
of a life insurance contract, the amount of
the death benefit (or the period of cover-
age) must be adjusted on the basis of the
investment return and the market value of
the segregated asset account.
(2) Section 817(h) of the Code provides
that a variable contract (other than a pen-
sion plan contract) based on a segregated
July 21, 20081552008–29 I.R.B.

asset account shall not be treated as an an-
nuity, endowment, or life insurance con-
tract if the investments made by the ac-
count are not adequately diversified in ac-
cordance with regulations prescribed by
the Secretary.
(3) Section 1.817–5(a)(1) provides that
a variable contract is treated as based on
a segregated asset account for a calendar
quarter period if amounts received under
the contract (or earnings thereon) are al-
located to the account at any time dur-
ing the period. Section 1.817–5(e) of the
Income Tax Regulations provides that a
“segregated asset account” consists of all
assets the investment return and market
value of each of which must be allocated
in an identical manner to any variable con-
tract invested in any of such assets. Sec-
tion 1.817–5(g) illustrates the application
of this provision.
(4) Section 1.817–5(a) provides that, if
a variable contract that is a life insurance
contract under applicable law is not treated
as a life insurance or endowment contract
under § 7702(a), the income on the con-
tract for any taxable year of the policy-
holder is treated as ordinary income re-
ceived or accrued by the policyholder dur-
ing such year in accordance with § 7702(g)
and (h). Likewise, if a variable contract
is not treated as an annuity contract under
§ 72, the regulation provides that the in-
come on the contract for any taxable year
of the policyholder shall be treated as or-
dinary income received or accrued by the
policyholder during such year in the same
manner as a life insurance or endowment
contract under § 7702(g) and (h).
.02Diversification requirements.
(1) Section 1.817–5(b)(1) provides that
the investments of a segregated asset ac-
count are adequately diversified for pur-
poses of § 817(h) only if—
(a) No more than 55% of the value of
the total assets of the account is repre-
sented by any one investment;
(b) No more than 70% of the value of
the total assets of the account is repre-
sented by any two investments;
(c) No more than 80% of the value of
the total assets of the account is repre-
sented by any three investments, and
(d) No more than 90% of the value of
the total assets of the account is repre-
sented by any four investments.
For purposes of § 1.817–5, all securities of
the same issuer, all interests in the same
real property project, and all interests in the
same commodity are each treated as a sin-
gle investment. In the case of government
securities, each government agency or in-
strumentality is treated as a separate issuer.
(2) Section 817(h)(2) provides a safe
harbor under which the investments of a
segregated asset account are adequately
diversified for purposes of § 817(h) if
(a) the account meets the requirements of
§ 851(b)(3), and (b) no more than 55% of
the value of the total assets of the account
are assets described in § 851(b)(3)(A)(i)
(i.e., cash, cash items (including receiv-
ables), Government securities, and se-
curities of other regulated investment
companies).
(3) Under § 1.817–5(c)(1), a segregated
asset account that satisfies the require-
ments of § 1.817–5(b) as of the last day
of any calendar quarter period (or within
30 days after that last day) is considered
adequately diversified for that period.
.03Recordkeeping, reporting, with-
holding, and deposit requirements for
nondiversified contracts.
An issuer of a variable contract that fails
to satisfy the requirements of § 817(h) may
have recordkeeping, reporting, withhold-
ing, and deposit obligations. An issuer that
fails to meet these obligations also may be
subject to penalties.SeeRev. Rul. 91–17.
.04Authority to enter into closing
agreements.Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liabilityofsuchperson(oroftheperson
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and con-
clusive, except upon a showing of fraud
or malfeasance, or misrepresentation of a
material fact.
.05Correction procedure for failure to
satisfy the diversification requirements of
§ 817(h).
(1) Section 1.817–5(a)(2) provides that,
in the event of an inadvertent failure to
diversify, the investments of a segregated
asset account are nevertheless treated as
satisfying the diversification requirements
of § 1.817–5(b) for one or more periods
if —
(a) the issuer or holder of the variable
contract shows that the failure to satisfy the
diversification requirements was inadver-
tent;
(b) the investments of the account
satisfy the diversification requirements
within a reasonable item after discovery
of the failure; and
(c) the issuer or holder agrees to make
such adjustments or pay such amounts as
the Commissioner may require.
For this purpose (and for purposes of this
revenue procedure), income on the con-
tract is computed under § 7702(g)(1)(B),
without regard to § 7702(g)(1)(C), and is
computed using the period or periods of
nondiversification instead of the “taxable
year” referred to in § 7702(g)(1)(B). Thus,
for example, income attributable to each
segregated asset account on which a con-
tract is based (including accounts that at
all times were adequately diversified) is in-
cluded in the computation of income on the
contract.
(2) Rev. Proc. 92–25, 1992–1 C.B.
741, set forth the procedure by which an
issuer of a variable contract could request
the relief describedin § 1.817–5(a)(2)
with regard to an inadvertent failure to
satisfy the diversification requirements
of § 817(h). Among the requirements
set forth in Rev. Proc. 92–25 was a re-
quirement that the issuer pay an amount
under the closing agreement based on all
the income on the annuity contracts that
invested in the nondiversified accounts,
including income with regard to accounts
that were adequately diversified.
(3) Notice 2000–9, 2000–1 C.B. 449,
reminded issuers of variable annuity con-
tracts that the special rules of § 817(h)(3)
and § 1.817–5(b)(3), concerning diversifi-
cation of accounts with respect to variable
life insurance contracts, do not apply with
respect to variable annuity contracts. No-
tice 2000–9 provided a one-time procedure
to cure diversification failures that resulted
from a misapplication of that rule. That
procedure applied to requests for closing
agreement relief that were received on or
before August 1, 2000.
.06Changes to correction procedure.
In Notice 2007–15, 2007–7 I.R.B. 503,
the Service requested comments as to how
various correction procedures — including
those for inadvertent failures to satisfy the
diversification requirements of § 817(h) —
may be improved. This revenue proce-
dure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure (1) updates the model closing
2008–29 I.R.B.156July 21, 2008

agreement set forth in Rev. Proc. 92–25,
and (2) provides both an alternative com-
putation of the amount due under the clos-
ing agreement and an overall limit on the
amount that must be paid.
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of a variable contract that inad-
vertently failed to satisfy the diversifi-
cation requirements of § 817(h), pro-
vided the issuer is entitled to relief under
§ 1.817–5(a)(2). For purposes of this
revenue procedure, the term “issuer” is
any company that issues a contract that
is a variable contract under § 817(d) and
is intended to satisfy the diversification
requirements of § 817(h). The term also
includes a company that insures a contract
holder under a contract originally issued
by another company.
SECTION 4. PROCEDURE
.01Request for ruling.An issuer that
seeks relief under this revenue procedure
must submit a request for a ruling that
meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any succes-
sor). Additionally, the submission must —
(1) identify the period or periods during
which the investments of the segregated
asset account did not satisfy the diversifi-
cation requirements;
(2) show that the failure to diversify was
inadvertent;
(3) demonstrate that the investments
of the account were brought into compli-
ance with the diversification requirements
within a reasonable time after discovery
of the failure; and
(4) if the amount required to be paid is
determined under section 4.03(2) of this
revenue procedure, describe the method
used to compute the amount of income that
all holders of contracts based on the ac-
count would be treated as receiving dur-
ing the period or periods of nondiversifica-
tion if the account were not treated as ad-
equately diversified under §1.817–5(a)(2).
(This computation is to be made without
regard to contracts that were completely
surrendered during the nondiversification
period.) Otherwise, indicate whether the
amount required to be paid was determined
under section 4.03(3) or section 4.04(4) of
this revenue procedure.
.02Closing agreement.The issuer must
also submit a proposed closing agreement,
in triplicate, executed by the issuer, us-
ing the model closing agreement in sec-
tion 6 of this revenue procedure. The
amount shown in Section 1(A) of the pro-
posed closing agreement is the amount de-
termined under section 4.03 of this revenue
procedure for all of the contracts covered
by the agreement.
.03Determination of amount required
to be paid.
(1)In general.Except as provided in
section 4.03(4) of this revenue procedure,
the issuer must remit to the Service the
lesser of the amount determined based
on income on the contracts under section
4.03(2) of this revenue procedure, or the
amount determined based on the amount
by which the segregated asset account was
nondiversified undersection 4.03(3) of
this revenue procedure.
(2)Amount determined based on in-
come on the contracts. The amount re-
quired to be paid based on income on
the contracts is the sum of the following
amounts for variable annuity contracts and
for variable life insurance or endowment
contracts, as applicable:
(a) With regard to variable annuity con-
tracts, an amount equal to the sum of —
(i) 20% of income on annuity contracts
from which payments have not been made
as of the end of the period; plus
(ii) 15% of income on annuity contracts
from which payments have been made as
of the end of the period; plus
(iii) any interest computed under
§ 6621(a)(2) as if the amounts determined
under sections 4.03(2)(a)(i) and (ii) of this
revenue procedure were underpayments
by the contract holders for their tax year(s)
containing the period(s) of nondiversifica-
tion; and
(b) With regard to variable life insur-
ance or endowment contracts, an amount
equal to the sum of —
(i) 28% of the income on the contracts;
plus
(ii) any interest computed under
§ 6621(a)(2) as if the amount determined
under section 4.03(2)(b)(i) of this revenue
procedure were an underpayment by the
contract holders for their tax year(s) con-
taining the period(s) of nondiversification.
(3)Amount determined based on the
amount by which the segregated asset ac-
count was nondiversified.The amount
determined based on the amount by which
the segregated asset account was non-
diversified is an amount equal to 100%
of the amount by which the account’s
interest in a single investment exceeded
the applicable limitation of § 1.817–5(b).
Thus, for example, if a segregated asset
account’s investment in a single secu-
rity exceeded both the 55% limitation of
§ 1.817–5(b)(1)(i)(A) and the 70% limita-
tion of § 1.817–5(b)(1)(i)(B), the amount
determined under this section 4.03(3) is
the total amount by which the investment
would need to be reduced in order to sat-
isfy both requirements and comply with
the rules of § 817(h) and § 1.817–5(b).
This amount is determined as of the 30th
day after the last day of each calendar
quarter for which the segregated asset
account was not diversified. If nondiversi-
fication spans multiple calendar quarters,
the amount payable under this section is
based on the calendar quarter that pro-
duces the highest amount.
(4)Limitation on amount required to
be paid.Notwithstanding section 4.03(2)
or section 4.03(3) of this revenue proce-
dure, as applicable, the amount required
to be paid shall not exceed the lesser of
$5,000,000 or 5% of the total asset value
of the segregated asset account on the 30th
day after the last day of each calendar
quarter for which the segregated asset ac-
count was not diversified. If nondiversi-
fication spans multiple calendar quarters,
the amount payable under this section is
based on the calendar quarter that produces
the highest amount. The limitation applies
on a per segregated asset account basis,
and is not increased by any interest com-
puted under § 6621(a)(2).
.04Payment of amount. The issuer
is required to pay the amount determined
under section 4.03 of this revenue proce-
dure within 60 days of the date of execu-
tion of the closing agreement by the Ser-
vice. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05Correction of contracts. The issuer
is required to have satisfied the require-
ments of § 817(h) and § 1.817–5(b) of the
regulations within a reasonable time after
July 21, 20081572008–29 I.R.B.

the discovery of the failure to satisfy those
requirements.
.06Required representations.The sub-
mission must include representations to
the effect that (1) the issuer is within the
scope of section 3 of this revenue proce-
dure; (2) the issuer properly computed the
amount required to be paid with regard to
the contracts in accordance with section
4.03 of this revenue procedure; and (3) the
issuer has brought the contracts into com-
pliance with the requirements of § 817(h)
and § 1.817–5(b) of the regulations. The
representations must be executed under
penalties of perjury by an appropriate
party (as set forth in section 7.01 of Rev.
Proc. 2008–1 (or its successor)). The is-
suer must retain documentation available
for audit to support the representations.
.07Electronic submission.The infor-
mation required under this revenue pro-
cedure may be submitted to the Service
electronically, in read-only format, on a
CD-ROM. Adobe Portable Document is a
suitable format. Other formats may be ar-
ranged on a case-by-case basis. The issuer
must provide a total of three CD-ROMs,
one for each of the three copies of the clos-
ing agreement.
SECTION 6. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER SECTION 817(h)
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to section 7121 of theInternal Revenue Code (the “Code”), by
and between[Insert Taxpayer name, address and EIN](“Taxpayer”) and the Commissioner of Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more variable contracts, as defined in § 817(d) (without regard to § 817(h)) (the “Contracts”),
which are based, in whole or in part, on a segregated asset account(the “Account”) and that provides for the allocation of amounts
received under the variable contracts to the Account.
B. Pursuant to Rev. Proc. 2008–41, 2008–29 I.R.B. 155, the Service may treat the investments of a segregated asset account on
which a variable contract is based as satisfying the diversification requirements of § 817(h) and § 1.817–5(b) of the Income Tax
Regulations for periods during which there was an inadvertent failure to diversify.
C. By letter dated[Insert date]Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1[or successor,
if applicable]and Rev. Proc. 2008–41 a request for this Closing Agreement that[Insert account name](the Account) be treated
as adequately diversified under § 817(h) for the period[Insert period of nondiversification](“the period of nondiversification”).
D. Taxpayer represents that the failure of the Account to satisfy the requirements of § 817(h) is eligible for relief under Rev.
Proc. 2008–41.
E. Taxpayer represents that the failure of the investments in the Account to satisfy the requirements of § 1.817–5(b) was discov-
ered on[Insert date],and the investments came into compliance with those requirements on[Insert date].
F. Taxpayer represents that the amount determined under section[Insert 4.03(2), (3) or (4), as appropriate]of Rev. Proc.
2008–41 is $[Insert amount].Taxpayer represents that this amount has been computed correctly under the provisions of Rev.
Proc. 2008–41.
G. To ensure that variable contracts that provide for the allocation of amounts received thereunder to Account are treated as
annuity, endowment, or life insurance contracts, as applicable, Taxpayer and the Service have entered into this Agreement.
NOW THEREFORE IT IS HEREBY DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOL-
LOWS:
1. In consideration for the agreement of the Service as set forth in section 2 below, Taxpayer agrees as follows:
(A)
Taxpayer will pay the Service $[Insert amount]at the time and manner described in section 3 below.
(B) The amount paid pursuant to section 1(A) above is not deductible by Taxpayer, nor is such amount refundable,
subject to credit or offset, or otherwise recoverable from the Service;
(C) For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(i) neither the investment in the contract for purposes of § 72, not the premiums paid for purposes of section
§ 7702 on any Contract can be increased by any portion ofthe amount set for the in section 1(A) above. If any
such increases are made, they are entitled to no effect.
2008–29 I.R.B.158July 21, 2008

(ii) neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702 on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A) To treat the investments of the Account as adequately diversified for purposes of § 817(h) during the period of
nondiversification;
(B) To treat no portion of the amount described in Section 1(A) above as income to the Contract holders;
(C) To treat the failure(s) described above, and any corrective action described in Section 1(A) above, as having no
effect on the date the Contracts were issued, entered into or purchased for purposes of any provision of the Code
or regulations thereunder; and
(D) To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements for
income deemed received by Contract holders due to the Contracts’ failure to satisfy the requirements of § 817.
3. Payment of the amount described in Section 1(A) above shall be made within 60 days of the date of execution of this Agree-
ment by the Service. This payment must be made by check payable to the “United States Treasury,” delivered, together with a copy
of this executed Agreement, to Internal Revenue Service Center, Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. Holders of contracts based on the Account
are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of Taxpayer to the
holders of the contracts based on the Account.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the mat-
ters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that
they have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190, is
amplified to provide terms and conditions
and a model closing agreement for use by
taxpayers seeking the relief described in
§ 1.817–5(a)(2) of the regulations; Rev.
Proc. 92–25, 1992–1 C.B. 741, is super-
seded; Notice 2000–9, 2000–1 C.B. 449,
is obsolete.
SECTION 9. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
July 21, 20081592008–29 I.R.B.

and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Melissa S. Luxner of the Of-
fice of Associate Chief Counsel (Financial
Institutions & Products). For further infor-
mation regarding this revenue procedure,
contact Branch 4 of that office at (202)
622–3970 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(Also Part 1, §§ 101, 7702.)
Rev. Proc. 2008–42
SECTION 1. PURPOSE
This revenue procedure provides a
procedure by which an issuer of a life
insurance contract may automatically
obtain a waiver, under § 7702(f)(8) or
§ 101(f)(3)(H) of the Internal Revenue
Code, for certain reasonable errors that
caused the contract to fail to satisfy the
requirements of § 7702 or § 101(f), as
applicable. Rev. Rul. 91–17, 1991–1 C.B.
190, is amplified.
SECTION 2. BACKGROUND
.01Definition of a life insurance con-
tract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance con-
tract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicablelaw and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value ac-
cumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline pre-
mium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline sin-
gle premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the con-
tract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
tablesetforthin§7702(d)(2).
(5) Section 7702 is effective for con-
tracts issued after December 31, 1984, in
tax years ending after that date.
.02Definition and tax treatment of a
flexible premium life insurance contract.
A flexible premium life insurance contract
is a life insurance contract that provides for
the payment of one or more premiums that
arenotfixedbytheinsurerastobothtim-
ing and amount. Section 101(f) provides
that any amount paid by reason of the death
of the insured under a flexible premium
life insurance contract is excluded from
gross income only if the contract satisfies
either (1) the guideline premium limita-
tion and the applicable percentage of cash
value test of § 101(f)(1)(A)(i) and (ii), or
(2) the cash value test of § 101(f)(1)(B).
The limitations of § 101(f) generally apply
to contracts issued before January 1, 1985.
.03Correction procedure for reason-
able errors. Section 7702(f)(8) provides
that if a taxpayer establishes to the satisfac-
tion of the Secretary that the requirements
of § 7702(a) for any contract year were not
satisfied due to reasonable error, and rea-
sonable steps are being taken to remedy the
error, the Secretary may waive the failure
to satisfy those requirements. The Inter-
nal Revenue Service (Service) may waive
civil penalties for failure to satisfy the re-
porting, withholding, and deposit require-
ments for income deemed received under
§ 7702(g) and (h), as well.SeeRev. Rul.
91–17. Section 101(f)(3)(H) provides sim-
ilar authority for the Secretary to waive
the failure to satisfy the requirements of
§ 101(f). In order to request a waiver under
§ 7702(f)(8) or § 101(f)(3)(H), a taxpayer
generally must request a letter ruling from
the Service under the procedures set forth
in Rev. Proc. 2008–1, 2008–1 I.R.B. 1 (or
any successor).
.04Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how var-
ious correction procedures — including
those for obtaining a waiver with respect to
errors that are reasonable within the mean-
ing of § 7702(f)(8) or § 101(f)(3)(H) —
may be improved. This revenue proce-
dure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Specifically, this revenue proce-
dure provides a simplified procedure under
which a taxpayer may obtain a waiver for
a limited class of errors under these provi-
sions without incurring the cost of request-
ing a letter ruling.
SECTION 3. SCOPE
.01In general. This revenue procedure
applies to any issuer of a life insurance
contract that failed to satisfy the require-
ments of § 7702 or § 101(f), as applicable,
due to an eligible reasonable error, pro-
vided reasonable steps are taken to remedy
the error.
.02Issuer. For purposes of this revenue
procedure, the term “issuer” is any com-
pany that issues a contract that is intended
to satisfy the requirements of § 7702 or
§ 101(f). The term also includes a com-
pany that insures a contract holder under a
contract originally issued by another com-
pany.
.03Eligible reasonable error. An eli-
gible reasonable error for purposes of this
revenue procedure exists if: (1) the issuer
has compliance procedures with specific,
clearly articulated provisions that if fol-
lowed would have prevented the contract
from failing to satisfy the requirements of
2008–29 I.R.B.160July 21, 2008

§ 7702 or § 101(f); (2) an employee or in-
dependent contractorof the issuer acted, or
failed to act, in accordance with the com-
pliance procedures; and (3) such act or fail-
ure to act was inadvertent, and was the sole
reason that the contract failed to satisfy the
requirements of either§7702or§101(f).
Thus, for example, the term eligible rea-
sonable error includes an employee’s in-
correct recording of the age or gender of
the insured, or of the incorrect amount or
time of payment of the insured’s premium
payment.
.04Reasonable steps to remedy.The
requirement that reasonable steps be taken
to remedy the eligible reasonable error is
satisfied for purposes of this revenue pro-
cedure if the issuer refunds excess pre-
mium with interest and/or increases the
death benefit on the contract no later than
the date on which the issuer files the fed-
eral income tax return to which the tax re-
turn attachment described in section 4.03
of this revenue procedure is affixed. The
remedy required under this section 3.04 of
this revenue procedure does not include
changes to the issuer’s compliance proce-
dures, since the definition of an eligible
reasonable error under section 3.03 of this
revenue procedure requires that the sys-
tem already have specific, clearly artic-
ulated procedures that if followed would
have prevented the error.
.05Non-eligible errors. Although the
automatic waiver provided under this rev-
enue procedure is not available with re-
spect to an error that is not described in
section 3.03 of this revenue procedure, re-
lief may be available under other correc-
tion procedures. For example, neither a
defective legal interpretation nor a com-
puter programming error would satisfy the
requirement of section 3.03(1) of this rev-
enue procedure that the issuer’s compli-
ance procedures, if followed, would have
prevented the error. If such an error is rea-
sonable, however, the issuer may request
a waiver by letter ruling under the proce-
dures set forth in Rev. Proc. 2008–1 (or
any successor). In addition, errors that are
not reasonable may be eligible for correc-
tion by closing agreement under the proce-
dure set forth in Rev. Proc. 2008–40, page
151, this Bulletin.
SECTION 4. PROCEDURE
.01Automatic waiver. The failure of
one or more life insurance contracts to sat-
isfy the requirements of § 7702 or § 101(f),
as applicable, due to reasonable error will
be treated as waived pursuant to the author-
ity of § 7702(f)(8) or § 101(f)(3)(H), as ap-
plicable, provided the issuer (1) is within
the scope of section 3.01 of this revenue
procedure, and (2) files both the waiver
statement described in section 4.02 and the
taxreturnattachmentdescribedinsection
4.03 of this revenue procedure.
.02Waiver statement.Anautomatic
waiver for a reasonable error described
in section 3 of this revenue procedure is
available to an issuer only if it files with
the Service, in duplicate, a statement en-
titled “Automatic Waiver Request under
Rev. Proc. 2008–42” in which the issuer
(1) provides a brief description of the error
and the steps taken to remedy the error; (2)
lists the policy numbers of the life insur-
ance contracts for which it seeks an auto-
matic waiver; and (3) provides the repre-
sentations described in section 4.04 of this
revenue procedure. This statement should
be signed and dated, and submitted to the
Commissioner of Internal Revenue, Attn:
CC:FIP:4, Room 3550, 1111 Constitution
Avenue, NW, Washington, DC 20224, no
later than the date on which the issuer files
the federal income tax return to which the
taxreturnattachmentdescribedinsection
4.03 of this revenue procedure is affixed.
.03Tax return attachment. In addition,
the issuer must attach to its timely-filed
(including extensions) Federal income
tax return, for the taxable year during
which the issuer relies upon this rev-
enue procedure to obtain a § 101(f)(3)(H)
or § 7702(f)(8) waiver, a statement that
reads: “Issuer has submitted an Auto-
matic Waiver Request under section 4.02
of Rev. Proc. 2008–42 for certain errors
that caused one or more life insurance
contracts it issued to fail to comply with
§ 7702(f)(8) or § 101(f) of the Internal
Revenue Code. An issuer filing its return
electronically should attach this statement
as an Adobe Portable Document format
(PDF) file named “Rev. Proc. 2008–42.”
.04Representations. The waiver state-
ment required under section 4.02 of this
revenue procedure must include represen-
tations to the effect that the issuer is within
the scope of section 3 of this revenue pro-
cedure and that the issuer is otherwise enti-
tled to the requested waiver. The represen-
tations must be executed under penalties of
perjury by an appropriate party (as set forth
in section 7.01 of Rev. Proc. 2008–1 (or its
successor)). The issuer must retain docu-
mentation available for audit to support the
representations.
.05Electronic submissions.Thewaiver
statement required under section 4.02
of this revenue procedure may be sub-
mitted to the Service electronically, in
read-only format, on a CD-ROM. Adobe
Portable Document format is a suitable
format. Other formats may be arranged
on a case-by-case basis. The issuer must
provide a total of two CD-ROMs.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190,
is amplified to provide an automatic pro-
cedure by which an issuer of a life insur-
ance contract may automatically obtain a
waiver for certain reasonable errors that
caused the contract to fail to satisfy the re-
quirements of § 7702 or § 101, as applica-
ble.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
July 21, 20081612008–29 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue
procedure is Josephine H. Firehock of the
Office of Associate Chief Counsel (Finan-
cial Institutions & Products). For further
information regarding this revenue pro-
cedure, contact Branch 4 of that office at
(202) 622–3970 (not a toll-free call).
2008–29 I.R.B.162July 21, 2008

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations
and Notice of
Public Hearing
Amendments t
otheSection
7216 Regula
tions—Disclosure
or Use of Inf
ormation by
Preparers
of Returns
REG–12169
8–08
AGENCY: In
ternal Revenue Service
(IRS), Tre
asury.
ACTION: No
tice of proposed rulemaking
by cross-r
eference to temporary regula-
tions and n
otice of public hearing.
SUMMARY:
In this issue of the Bulletin,
the IRS is
issuing temporary regulations
(T.D. 940
9) that provide updated guidance
affectin
g tax return preparers regarding the
disclosu
re of a taxpayer’s social security
number t
o a tax return preparer located
outside
of the United States in order to pro-
vide an e
xception allowing such disclosure
with the
taxpayer’s consent in limited cir-
cumstan
ces. The text of those temporary
regula
tions also serves as the text of these
propos
ed regulations. This document in-
vites c
omments from the public on these
regula
tions, and provides notice of a pub-
lic hea
ring on these proposed regulations.
DATES:
Written or electronic comments
must b
e received by September 30, 2008.
Outli
nes of topics to be discussed at the
publi
c hearing scheduled for October 6,
2008 a
t 10 a.m. must be received by
Septe
mber 15, 2008.
ADDRE
SSES: Send submissions to:
CC:P
A:LPD:PR (REG–121698–08), room
5203
, Internal Revenue Service, PO Box
7604
, Ben Franklin Station, Washing-
ton,
D.C. 20044. Submissions may be
hand
delivered Monday through Friday
betw
een the hours of 8 a.m. and 4 p.m.
to C
C:PA:LPD:PR (REG–121698–08),
Cou
rier’s Desk, Internal Revenue
Ser
vice, 1111 Constitution Avenue, NW,
Was
hington, D.C., or sent electronically,
via
theFederaleRulemaking
Portal atwww.
regulations.gov(IRS
REG–121698–0
8).
FOR FURTHER IN
FORMATION
CONTACT: Conc
erning the proposed
regulations,
Lawrence E. Mack, (202)
622–4940; con
cerning the submissions of
comments and
requests for hearing, Funmi
Taylor, (202
) 622–7180 (not toll-free num-
bers).
SUPPLEMENTA
RY INFORMATION:
Background an
d Explanation of
Provisions
This documen
t contains proposed
amendments t
o 26 CFR part 301 under
section 7216
to provide modified rules
relating to t
heabilityofataxreturnpre-
parer locat
ed within the United States
to disclose
a taxpayer’s social security
number (“SS
N”) constituting tax return
informatio
n with the taxpayer’s consent
to a tax retu
rn preparer located outside
of the Unit
ed States. Simultaneously
with the pu
blication of this notice of pro-
posed rule
making, temporary regulations
are publis
hed in this issue of the Bul-
letin amen
ding 26 CFR part 301. Those
regulati
ons provide a limited exception
to the gen
eral rule prohibiting a return
preparer
from obtaining a taxpayer’s
consent t
o disclose the taxpayer’s SSN to
ataxret
urn preparer located outside of
the Unit
ed States. The limited exception
provide
s that a tax return preparer within
the Unit
ed States may disclose an SSN
with the
taxpayer’s consent to a tax return
prepare
r located outside of the United
States
when both the tax return preparer
locate
d within the United States and the
tax ret
urn preparer located outside of
the Uni
ted States maintain an “adequate
data pr
otection safeguard” and the tax
retur
n preparer located within the United
State
sverifiesthemaintenanceofthe
adequ
ate data protection safeguards in
the re
quest for the taxpayer’s consent.
Those
regulations also clarify that the
gene
ral prohibition regarding disclosure
of SS
Ns applies only to those taxpayers
fili
ng a return in the Form 1040 Series,
for e
xample, Form 1040, Form 1040NR,
Form
1040A, or Form 1040EZ. The text
of th
ose regulations also serves as the
text of these r
egulations. The preamble
to the tempora
ry regulations explains the
temporary reg
ulations and these proposed
regulations.
Special Analy
ses
It has been de
termined that this notice
of proposed r
ulemaking is not a significant
regulatory a
ction as defined in Executive
Order 12866.
Therefore, a regulatory
assessment
is not required. It also has
been determ
ined that section 553(b) of the
Administra
tive Procedure Act (5 U.S.C.
chapter 5) d
oes not apply to these regu-
lations, a
nd because the regulation does
not impose
a collection of information
on small en
tities, the Regulatory Flexi-
bility Act
(5 U.S.C. chapter 6) does not
apply. Pur
suant to section 7805(f) of the
Internal
Revenue Code, this notice of
proposed
rulemaking will be submitted
to the Chi
ef Counsel for Advocacy of
the Small
Business Administration for
comment o
n its impact on small business.
Comment
s and Public Hearing
Before t
hese proposed regulations are
adopted
as final regulations, consideration
will be g
iven to any written comments
(a signe
d original and eight (8) copies)
or elec
tronic comments that are submitted
timely
to the IRS. The IRS and Treasury
Depart
ment request comments on the clar-
ity of t
he proposed rules, how they can
be made
easier to understand, and the ad-
minis
trability of the rules in the proposed
regul
ations, as well as the accompanying
guida
nce published in Revenue Procedure
2008–
35. All comments will be available
for pu
blic inspection and copying.
A publ
ic hearing has been scheduled for
Octob
er 6, 2008, beginning at 10 a.m. in
the N
YU Room (room 2615) of the In-
tern
al Revenue Building, 1111 Constitu-
tion
Avenue, NW, Washington, DC. Due to
buil
ding security procedures, visitors must
ente
r at the Constitution Avenue entrance.
In ad
dition, all visitors must present photo
ide
ntification to enter the building. Be-
cau
se of access restrictions, visitors will
not
be admitted beyond the immediate en-
tra
nce area more than 15 minutes before
the
hearing starts. For information about
ha
ving your name placed on the building
July 21, 20081632008–29 I.R.B.

access list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments by September
30, 2008 and an outline of the topics to
be discussed and the time to be devoted
to each topic (signed original and eight (8)
copies) by September 15, 2008. A pe-
riod of 10 minutes will be allotted to each
person for making comments. An agenda
showing the schedule of the speakers will
be prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the hear-
ing.
Drafting Information
The principal author of these regula-
tions is Lawrence E. Mack, Office of the
Associate Chief Counsel (Procedure &
Administration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posedtobeamendedasfollows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Paragraph 2. Section 301.7216–3 is
amended by revising paragraph (b)(4) to
read as follows:
§301.7216–3 Disclosure or use permitted
only with the taxpayer’s consent.
*****
(b) * * *
(4) [Thetextofproposed
§301.7216–3(b)(4) is the same as the
text for §301.7216–3T(b)(4), published
elsewhere in this issue of the Bulletin.]
*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 1, 2008,
8:45 a.m., and published in the issue of the Federal Register
for July 2, 2008, 73 F.R. 37910)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2008–66
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on July 21, 2008, and
would end on the date the court first deter-
mines that the organization is not described
in section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For indi-
vidual contributors, the maximum deduc-
tion protected is $1,000, with a husband
and wife treated as one contributor. This
benefit is not extended to any individual, in
wholeorinpart,fortheactsoromissions
of the organization that were the basis for
revocation.
Human Progress, Inc.
Redlands, CA
Petty Foundation
Calumet City, IL
American Indian Services, Inc.
Minneapolis, MN
The Foundation
Port Monmouth, NJ
Larry & Bladie Dye Foundation
Covington, TN
Catherine Desaintphalle Smith Family
Foundation
San Rafael, CA
Bonnemort Foundation
Salt Lake City, UT
Notice of Disposition of
Declaratory Judgment
Proceedings Under Section
7428
Announcement 2008–67
This announcement serves notice to
donors that on March 20, 2007, the United
States Tax Court entered stipulated deci-
sion. The organization listed below is not
recognized as an organization described in
section 501(c)(3) and is not exempt from
tax under section 501(a) and is not an or-
ganization described in section 170(c) (2).
The Jonathan Drier Foundation
Paradise Valley, AZ
2008–29 I.R.B.164July 21, 2008

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
July 21, 2008i2008–29 I.R.B.

Numerical Finding List
1
Bulletins 2008–27 through 2008–29
Announcements:
2008-62, 2008-27 I.R.B.74
2008-63, 2008-28 I.R.B.114
2008-64, 2008-28 I.R.B.114
2008-66, 2008-29 I.R.B.164
2008-67, 2008-29 I.R.B.164
Notices:
2008-55, 2008-27 I.R.B.11
2008-56, 2008-28 I.R.B.79
2008-57, 2008-28 I.R.B.80
2008-58, 2008-28 I.R.B.81
2008-59, 2008-29 I.R.B.123
2008-62, 2008-29 I.R.B.130
Proposed Regulations:
REG-129243-07, 2008-27 I.R.B.32
REG-149405-07, 2008-27 I.R.B.73
REG-101258-08, 2008-28 I.R.B.111
REG-121698-08, 2008-29 I.R.B.163
Revenue Procedures:
2008-32, 2008-28 I.R.B.82
2008-33, 2008-28 I.R.B.93
2008-34, 2008-27 I.R.B.13
2008-35, 2008-29 I.R.B.132
2008-37, 2008-29 I.R.B.137
2008-38, 2008-29 I.R.B.139
2008-39, 2008-29 I.R.B.143
2008-40, 2008-29 I.R.B.151
2008-41, 2008-29 I.R.B.155
2008-42, 2008-29 I.R.B.160
Revenue Rulings:
2008-32, 2008-27 I.R.B.6
2008-33, 2008-27 I.R.B.8
2008-34, 2008-28 I.R.B.76
2008-35, 2008-29 I.R.B.116
2008-37, 2008-28 I.R.B.77
Treasury Decisions:
9401, 2008-27 I.R.B.1
9409, 2008-29 I.R.B.118
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin
2008–26, dated June 30, 2008.
2008–29 I.R.B.iiJuly 21, 2008

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–27 through 2008–29
Notices:
99-48
Superseded by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2000-9
Obsoleted by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
2004-2
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2004-50
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2007-22
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
Proposed Regulations:
REG-151135-07
Hearing scheduled by
Ann. 2008-64, 2008-28 I.R.B.114
Revenue Procedures:
92-25
Superseded by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
92-83
Obsoleted by
Rev. Proc. 2008-37, 2008-29 I.R.B.137
2001-42
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2006-29
Superseded by
Rev. Proc. 2008-34, 2008-27 I.R.B.13
2007-19
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2007-42
Superseded by
Rev. Proc. 2008-32, 2008-28 I.R.B.82
2007-43
Superseded by
Rev. Proc. 2008-33, 2008-28 I.R.B.93
2007-70
Modified by
Ann. 2008-63, 2008-28 I.R.B.114
Revenue Procedures— Continued:
2008-12
Modified and superseded by
Rev. Proc. 2008-35, 2008-29 I.R.B.132
Revenue Rulings:
91-17
Amplified by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
Rev. Proc. 2008-42, 2008-29 I.R.B.160
Superseded in part by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2005-6
Amplified by
Rev. Proc. 2008-38, 2008-29 I.R.B.139
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.
July 21, 2008iii2008–29 I.R.B.

2008–29 I.R.B.July 21, 2008

July 21, 20082008–29 I.R.B.

INTERNAL REVENUE BULLETIN
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