us-irs-revenue-rulings-irb-2008-29-pdf•Internal Revenue Bulletin 2008-29 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 2008-29 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-2008-29-pdfInternal Revenue Bulletin 2008-29 (PDF rendition): IRS Revenue RulingsGuidance
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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 The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under related topics, select More Topics. Then select Internal Revenue Bulletins. INTERNAL REVENUE BULLETINS ON CD-ROM Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to six weeks, plus mailing time, for delivery. WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BULLETIN If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. 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