Internal Revenue Bulletin 2012-8 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 201
2-8
February 21, 201
2
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. 9565, page 378.
REG–124627–11, page 417.
Final, temporary, and proposed regulations under section 368
of the Code provide guidance regarding the continuity of inter-
est requirement for corporate reorganizations. The guidance
is necessary to establish the date upon which continuity of in-
terest is measured. The regulations affect corporations and
their shareholders.
T.D. 9567, page 395.
REG–130302–10, page 412.
Temporary and proposed regulations under section 6038D of
the Code provide guidance relating to the requirement that indi-
viduals attach a statement to their income tax return to provide
required information regarding foreign financial assets in which
they have an interest. The notice of proposed rulemaking also
includes a proposed regulation setting forth requirements for
certain domestic entities to report foreign financial assets in
the same manner as an individual.
Notice 2012–14, page 411.
This notice addresses whether individuals who are eligible for
services at an Indian Health Service facility are also eligible
individuals for purposes of contributing to a Health Savings
Account (HSA) under section 223 of the Code.
EMPLOYEE PLANS
Rev. Rul. 2012–3, page 383.
Application of survivor annuity requirements to deferred
annuity contracts under a defined contribution plan.
This ruling describes how the qualified joint and survivor an-
nuity (“QJSA”) and the qualified preretirement survivor annuity
(“QPSA”) rules, described in sections 401(a)(11) and 417 of
the Code, apply when a deferred annuity contract is purchased
under a profit-sharing plan.
Rev. Rul. 2012–4, page 386.
Rollover from qualified defined contribution plan to qual-
ified defined benefit plan to obtain additional annuity.
This ruling describes whether a qualified defined benefit pen-
sion plan that accepts a direct rollover of an eligible rollover dis-
tribution from a qualified defined contribution plan maintained
by the same employer satisfies sections 411 and 415 of the
Code in a case in which the defined benefit plan provides an
annuity resulting from the direct rollover.
EMPLOYMENT TAX
T.D. 9566, page 389.
Final regulations under sections 6011 and 6302 of the Code
provide guidance relating to the annual filing of federal em-
ployment tax returns and requirements for employment tax de-
posits. The regulations concern reporting and paying income
taxes withheld from wages and reporting and paying taxes un-
der the Federal Insurance Contributions Act (FICA) (collectively,
“employment taxes”). The regulations generally allow certain
employers to file a Form 944,Employer’sANNUALFederalTax
Return, rather than Form 941,Employer’sQUARTERLYFederal
TaxReturn.
Finding Lists begin on page ii.

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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.
February 21, 20122012–8 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 368.—
Definition
Relating to Co
rporate
Reorganizations
26 CFR 1.368–1: Purpose and scope of exception of
reorganization exchanges.
T.D. 9565
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Corporate Reorganizations;
Guidance on the Measurement
of Continuity of Interest
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations that provide guidance regard-
ing the continuity of interest requirement
for corporate reorganizations. The guid-
ance is necessary to establish the date upon
which continuity of interest is measured.
These regulations affect corporations and
their shareholders.
DATES:Effective Date:These regulations
are effective on December 19, 2011.
Applicability Date:For dates of appli-
cability, see §1.368–1(e)(9)(ii).
FOR FURTHER INFORMATION
CONTACT: Richard Starke at (202)
622–7790 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The I
nternal Revenue Code of 1986
(Cod
e) provides for general non-recog-
nit
ion treatment for reorganizations de-
scr
ibed in section 368 of the Code. In
add
ition to satisfying the statutory require-
men
ts of a reorganization, a transaction
als
o must satisfy certain non-statutory re-
qu
irements, such as continuity of interest
(COI). COI req
uires that, in substance, a
substantial p
art of the value of the propri-
etary interes
ts in the target corporation be
preserved in
the reorganization. A propri-
etary intere
st in the target corporation is
preserved if
, in a potential reorganization,
it is exchang
ed for a proprietary interest in
the issuing
corporation, it is exchanged by
the acquiri
ng corporation for a direct in-
terest in th
e target corporation enterprise,
or it otherw
ise continues as a proprietary
interest in
the target corporation. See
§1.368–1(
e)(1)(i).
On August 1
0, 2004, the IRS and the
Treasury D
epartment published a notice of
proposed r
ulemaking (REG–129706–04,
2004–2 C.B
. 479) in theFederal Register
(69 FR 4842
9) (2004 proposed regula-
tions) id
entifying certain circumstances
in which t
he determination of whether
aproprie
tary interest in the target cor-
poration
is preserved would be made by
referenc
e to the value of the issuing corpo-
ration’
s stock on the day before there is an
agreeme
nt to effect the potential reorga-
nizatio
n. Specifically, the 2004 proposed
regulat
ions provided that, in determining
whethe
r a proprietary interest in the target
corpor
ation is preserved, the considera-
tion to
be exchanged for the proprietary
intere
sts in the target corporation pursuant
to a con
tract to effect the potential reor-
ganiz
ation is valued on the last business
day be
fore the first date such contract
is a bi
nding contract (the Pre-Signing
Date)
, if such consideration was fixed at
the si
gning date (the signing date rule).
On Se
ptember 16, 2005, the IRS and the
Trea
sury Department published final reg-
ulat
ions (T.D. 9225, 2005–2 C.B. 716)
in th
eFederal Register(70 FR 54631)
(200
5 final regulations) that retained the
gene
ral framework of the 2004 proposed
reg
ulations but made several modifica-
tio
ns in response to comments received
reg
arding the proposed regulations. Af-
ter
consideration of comments relating
to t
he 2005 final regulations, the IRS
and
the Treasury Department published
te
mporary (T.D. 9316, 2007–1 C.B. 962)
an
d proposed (REG–146247–06, 2007–1
C.
B. 977) regulations in theFederal
Re
gister(72FR12974and72FR
13
058 respectively) (the 2007 temporary
regulations)
.The 2007 temporary
regulations g
enerally narrowed the
definition of
fixed consideration, and
accordingly
, limited the application of the
signing date
rule. The preamble explained
that the sign
ing date rule is based on the
principle th
at, where a binding contract
provides fo
r fixed consideration, the target
corporatio
n shareholders can generally be
viewed as be
ing subject to the economic
fortunes of
the issuing corporation as of
the signing
date. However, if the contract
does not pr
ovide for fixed consideration,
the signin
g date value of the issuing
corporati
on stock is not relevant for
purposes o
f determining the extent to
which a pr
oprietary interest in the target
corporat
ion is preserved.
On March 1
7, 2010, the IRS released
Notice 20
10–25 (the notice), 2010–14
I.R.B. 52
7. Notice 2010–25 acknowl-
edged tha
t the 2007 temporary regulations
would, as
required by sunset provisions of
section
7805(e)(2), expire on March 19,
2010. It
also noted that proposed regu-
lations
(REG–146247–06, 2007–1 C.B.
977) pre
viously published in theFederal
Regist
er
(72 FR 13058) had the same
text as
the expiring temporary regulations
and wou
ld remain outstanding after that
expira
tion. The notice provided that, until
the iss
uance of new regulations, taxpayers
could
choose, as long as a specified con-
ditio
n of consistency among parties was
satis
fied, to apply the rules in the proposed
regul
ations. The ability of taxpayers to
elect
to apply the rules of the proposed
regu
lations, as provided in the notice, is
inco
rporated into §1.368–1(e)(9)(ii), the
effe
ctive/applicability date of these final
regu
lations. See §601.601(d)(2)(ii)(b).
Expl
anation of Revisions
The
se final regulations adopt the 2007
tem
porary regulations with only minor
cha
nges. First, questions were raised con-
cer
ning whether a contract can provide for
fix
ed consideration under the general defi-
ni
tion of fixed consideration if the contract
pr
ovides for a shareholder election. These
fi
nal regulations clarify that a shareholder
el
ection does not prevent a contract from
sa
tisfying the general definition of fixed
2012–8 I.R.B.378February 21, 2012

consideration if that requirement is other-
wise met. Second,Example 9is modified
to address a more typical fact pattern.
In response to comments regarding the
application of the signing date rule and af-
ter further consideration of the purpose and
operation of that rule, the IRS and the Trea-
sury Department have proposed a regula-
tion, published elsewhere in this issue of
the Bulletin, under which application of
the signing date principles would be ex-
panded. That notice of proposed rulemak-
ing (REG–124627–11) also requests com-
ments regarding the propriety of applying
signing date principles more generally to
transactions in which the target corpora-
tion shareholders, pursuant to a binding
contract to effect a potential reorganiza-
tion, become subject to the economic for-
tunes of issuing corporation consideration
between the signing date and the closing
date. In these cases, a more liberal applica-
tion of signing date principles may result in
valuing issuing corporation consideration
at one or more dates between the signing
date and the closing date.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13565. Therefore, a regulatory assess-
ment is not required. It also has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
does not apply to this regulation and, be-
cause the regulation does not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Therefore, a Regu-
latory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding this regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
nesses.
Drafting Information
The principal author of these final reg-
ulations is Richard Starke of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368–1 is amended
by revising paragraph (e)(2), revising the
paragraph heading of (e)(9)(i), and revis-
ing paragraph (e)(9)(ii) to read as follows:
§1.368–1 Purpose and scope of exception
of reorganization exchanges.
*****
(e) * * *
(2)Measuring continuity of inter-
est—(i)In general. In determining
whether a proprietary interest in the target
corporation is preserved, the consideration
to be exchanged for the proprietary inter-
ests in the target corporation pursuant to
a contract to effect the potential reorgani-
zation shall be valued on the last business
day before the first date such contract is
a binding contract (the pre-signing date),
if such contract provides for fixed consid-
eration. If a portion of the consideration
provided for in such a contract consists
of other property identified by value, then
this specified value of such other property
is used for purposes of determining the
extent to which a proprietary interest in
the target corporation is preserved. If the
contract does not provide for fixed con-
sideration, this paragraph (e)(2)(i) is not
applicable.
(ii)Binding contract—(A)In general.
A binding contract is an instrument en-
forceable under applicable law against the
parties to the instrument. The presence of a
condition outside the control of the parties
(including, for example, regulatory agency
approval) shall not prevent an instrument
from being a binding contract. Further, the
fact that insubstantial terms remain to be
negotiated by the parties to the contract, or
that customary conditions remain to be sat-
isfied, shall not prevent an instrument from
being a binding contract.
(B)Modifications—(1)In general.Ifa
term of a binding contract that relates to
the amount or type of the consideration the
target shareholders will receive in a poten-
tial reorganization is modified before the
closing date of the potential reorganiza-
tion, and the contract as modified is a bind-
ing contract, the date of the modification
shall be treated as the first date there is a
binding contract.
(2)Modification of a transaction that
preserves continuity of interest.Notwith-
standing paragraph (e)(2)(ii)(B)(1)ofthis
section, a modification of a term that re-
lates to the amount or type of considera-
tion the target shareholders will receive in
a transaction that would have resulted in
the preservation of a substantial part of the
value of the target corporation sharehold-
ers’ proprietary interests in the target cor-
poration if there had been no modification
will not be treated as a modification if—
(i) The modification has the sole effect
of providing for the issuance of additional
shares of issuing corporation stock to the
target corporation shareholders;
(ii) The modification has the sole ef-
fect of decreasing the amount of money or
other property to be delivered to the target
corporation shareholders; or
(iii) The modification has the effect of
decreasing the amount of money or other
property to be delivered to the target cor-
poration shareholders and providing for
the issuance of additional shares of issuing
corporation stock to the target corporation
shareholders.
(3)Modification of a transaction
that does not preserve continuity of
interest.Notwithstanding paragraph
(e)(2)(ii)(B)(1) of this section, a modifica-
tion of a term that relates to the amount or
type of consideration the target sharehold-
ers will receive in a transaction that would
not have resulted in the preservation of a
substantial part of the value of the target
corporation shareholders’ proprietary in-
terests in the target corporation if there had
been no modification will not be treated as
a modification if—
(i) The modification has the sole ef-
fect of providing for the issuance of fewer
shares of issuing corporation stock to the
target corporation shareholders;
(ii) The modification has the sole effect
of increasing the amount of money or other
property to be delivered to the target cor-
poration shareholders; or
(iii) The modification has the effect of
increasing the amount of money or other
February 21, 20123792012–8 I.R.B.

property to be delivered to the target corpo-
ration shareholders and providing for the
issuance of fewer shares of issuing corpo-
ration stock to the target corporation share-
holders.
(C)Tender offers. For purposes of this
paragraph (e)(2), a tender offer that is
subject to section 14(d) of the Securities
and Exchange Act of 1934 [15 U.S.C.
78n(d)(1)] and Regulation 14D (17 CFR
240.14d–1 through 240.14d–101) and
is not pursuant to a binding contract, is
treated as a binding contract made on the
date of its announcement, notwithstanding
that it may be modified by the offeror
or that it is not enforceable against the
offerees. If a modification (not pursuant
to a binding contract) of such a tender
offer is subject to the provisions of Reg-
ulation 14d–6(c) (17 CFR 240.14d–6(c))
and relates to the amount or type of the
consideration received in the tender offer,
then the date of the modification shall be
treated as the first date there is a binding
contract.
(iii)Fixed consideration—(A)In gen-
eral. A contract provides for fixed con-
sideration if it provides the number of
shares of each class of stock of the issuing
corporation, the amount of money, and
the other property (identified either by
value or by specific description), if any,
to be exchanged for all the proprietary
interests in the target corporation, or to
be exchanged for each proprietary interest
in the target corporation. A shareholder’s
election to receive a number of shares of
stock of the issuing corporation, money,
or other property (or some combination of
stock of the issuing corporation, money, or
other property) in exchange for all of the
shareholder’s proprietary interests in the
target corporation, or each of the share-
holder’s proprietary interests in the target
corporation, will not prevent a contract
from satisfying the definition of fixed con-
sideration provided for in this paragraph
(e)(2)(iii)(A).
(B)Shareholder elections. A contract
that provides a target corporation share-
holder with an election to receive a num-
ber of shares of stock of the issuing corpo-
ration, money, or other property (or some
combination of stock of the issuing cor-
poration, money, or other property) in ex-
change for all of the shareholder’s propri-
etary interests in the target corporation, or
each of the shareholder’s proprietary inter-
ests in the target corporation, provides for
fixed consideration if the determination of
thenumberofsharesofissuingcorpora-
tion stock to be provided to the target cor-
poration shareholder is determined using
the value of the issuing corporation stock
on the last business day before the first
date there is a binding contract. This is the
case even though the shareholder election
may preclude a determination, prior to the
closing date, of the number of shares of
each class of the issuing corporation, the
amount of money, and the other property
(or the combination of shares, money and
other property) to be exchanged for each
proprietary interest in the target corpora-
tion.
(C)Contingent adjustments to the con-
sideration—(1)In general. Except as pro-
vided in paragraph (e)(2)(iii)(C)(2)ofthis
section, a contract that provides for contin-
gent adjustments to the consideration will
be treated as providing for fixed consider-
ation if it would satisfy the requirements
of paragraph (e)(2)(iii)(A) of this section
without the contingent adjustment provi-
sion.
(2)Exceptions. A contract will not be
treated as providing for fixed considera-
tion if the contract provides for contingent
adjustments to the consideration that pre-
vent (to any extent) the target corporation
shareholders from being subject to the eco-
nomic benefits and burdens of ownership
of the issuing corporation stock after the
last business day before the first date the
contract is a binding contract. For exam-
ple, a contract will not be treated as pro-
viding for fixed consideration if the con-
tract provides for contingent adjustments
to the consideration in the event that the
value of the stock of the issuing corpora-
tion, the value of the assets of the issu-
ing corporation, or the value of any sur-
rogate for either the value of the stock of
the issuing corporation or the assets of the
issuing corporation increases or decreases
after the last business day before the first
date there is a binding contract. Similarly,
a contract will not be treated as provid-
ing for fixed consideration if the contract
provides for contingent adjustments to the
number of shares of the issuing corpora-
tion stock to be provided to the target cor-
poration shareholders computed using any
value of the issuing corporation shares af-
ter the last business day before the first
date there is a binding contract.
(D)Escrows. Placing part of the con-
sideration to be exchanged for proprietary
interests in the target corporation in escrow
to secure target’s performance of custom-
ary pre-closing covenants or customary
target representations and warranties will
not prevent a contract from being treated
as providing for fixed consideration.
(E)Anti-dilution clauses. The presence
of a customary anti-dilution clause will not
prevent a contract from being treated as
providing for fixed consideration. How-
ever, the absence of such a clause will pre-
vent a contract from being treated as pro-
viding for fixed consideration if the issu-
ing corporation alters its capital structure
between the first date there is an otherwise
binding contract to effect the transaction
and the effective date of the transaction in a
manner that materially alters the economic
arrangement of the parties to the binding
contract. If the number of shares of the is-
suing corporation to be issued to the tar-
get corporation shareholders is altered pur-
suant to a customary anti-dilution clause,
the value of the shares determined under
paragraph (e)(2)(i) of this section must be
adjusted accordingly.
(F)Dissenters’ rights. The possibility
that some shareholders may exercise dis-
senters’ rights and receive consideration
other than that provided for in the binding
contract will not prevent the contract from
being treated as providing for fixed consid-
eration.
(G)Fractional shares. The fact that
money may be paid in lieu of issuing frac-
tional shares will not prevent a contract
from being treated as providing for fixed
consideration.
(iv)New issuances. For purposes of
applying paragraph (e)(2)(i) of this sec-
tion, any class of stock, securities, or in-
debtedness that the issuing corporation is-
sues to the target corporation sharehold-
ers pursuant to the potential reorganization
and that does not exist before the first date
there is a binding contract to effect the po-
tential reorganization is deemed to have
been issued on the last business day before
the first date there is a binding contract to
effect the potential reorganization.
(v)Examples. For purposes of the ex-
amples in this paragraph (e)(2)(v), P is the
issuing corporation, T is the target corpo-
ration, S is a wholly owned subsidiary of
P, all corporations have only one class of
stock outstanding, A is an individual, no
2012–8 I.R.B.380February 21, 2012

transactions other than those described oc-
cur, and the transactions are not otherwise
subject to recharacterization. The follow-
ing examples illustrate the application of
this paragraph (e)(2):
Example 1.Application of signing date rule.On
January 3 of year 1, P and T sign a binding contract
pursuant to which T will be merged with and into P on
June 1 of year 1. Pursuant to the contract, the T share-
holders will receive 40 P shares and $60 of cash in ex-
change for all of the outstanding stock of T. Twenty of
the P shares, however, will be placed in escrow to se-
cure customary target representations and warranties.
ThePstockislistedonanestablishedmarket. On
January 2 of year 1, the value of the P stock is $1 per
share. On June 1 of year 1, T merges with and into
P pursuant to the terms of the contract. On that date,
the value of the P stock is $.25 per share. None of the
stockplacedinescrowisreturnedtoP.Becausethe
contract provides for the number of shares of P and
the amount of money to be exchanged for all of the
proprietary interests in T, under this paragraph (e)(2),
there is a binding contract providing for fixed consid-
eration as of January 3 of year 1. Therefore, whether
the transaction satisfies the continuity of interest re-
quirement is determined by reference to the value of
the P stock on the pre-signing date. Because, for con-
tinuity of interest purposes, the T stock is exchanged
for $40 of P stock and $60 of cash, the transaction
preserves a substantial part of the value of the propri-
etary interest in T. Therefore, the transaction satisfies
the continuity of interest requirement.
Example 2.Treatment of forfeited escrowed stock.
(i) Escrowed stock. The facts are the same as inEx-
ample 1except that T’s breach of a representation re-
sults in the escrowed consideration being returned to
P. Because the contract provides for the number of
shares of P and the amount of money to be exchanged
for all of the proprietary interests in T, under this para-
graph (e)(2), there is a binding contract providing for
fixed consideration as of January 3 of year 1. There-
fore, whether the transaction satisfies the continuity
of interest requirement is determined by reference to
the value of the P stock on the pre-signing date. Pur-
suant to paragraph (e)(1)(i) of this section, for conti-
nuity of interest purposes, the T stock is exchanged
for $20 of P stock and $60of cash, and the transac-
tion does not preserve a substantial part of the value
of the proprietary interest in T. Therefore, the trans-
action does not satisfy the continuity of interest re-
quirement.
(ii)Escrowed stock and cash. The facts are the
same as in paragraph (i) of thisExample 2except that
the consideration placed in escrow consists solely of
eight of the P shares and $12 of the cash. Because the
contract provides for the number of shares of P and
the amount of money to be exchanged for all of the
proprietary interests in T, under this paragraph (e)(2),
there is a binding contract providing for fixed consid-
eration as of January 3 of year 1. Therefore, whether
the transaction satisfies the continuity of interest re-
quirement is determined by reference to the value of
the P stock on the pre-signing date. Pursuant to para-
graph (e)(1)(i) of this section, for continuity of inter-
est purposes, the T stock is exchanged for $32 of P
stock and $48 of cash, and the transaction preserves a
substantial part of the value of the proprietary interest
in T. Therefore, the transaction satisfies the continu-
ity of interest requirement.
Example 3.Redemption of stock received pur-
suant to binding contract.The facts are the same as in
Example 1except that A owns 50 percent of the out-
standing stock of T immediately prior to the merger
and receives 10 P shares and $30 in the merger and
an additional 10 P shares upon the release of the stock
placed in escrow. In connection with the merger, A
and S agree that, immediately after the merger, S will
purchase any P shares that A acquires in the merger
for $1 per share. Shortly after the merger, S pur-
chases A’s P shares for $20. Because the contract pro-
vides for the number of shares of P and the amount
of money to be exchanged for all of the proprietary
interests in T, under this paragraph (e)(2), there is a
binding contract providing for fixed consideration as
of January 3 of year 1. Therefore, whether the trans-
action satisfies the continuity of interest requirement
is determined by reference to the value of the P stock
on the pre-signing date. In addition, S is a person re-
lated to P under paragraph (e)(4)(i)(A) of this section.
Accordingly, A is treatedas exchanging his T shares
for $50 of cash. Because, for continuity of interest
purposes, the T stock is exchanged for $20 of P stock
and $80 of cash, the transaction does not preserve a
substantial part of the value of the proprietary inter-
est in T. Therefore, the transaction does not satisfy the
continuity of interest requirement.
Example 4.Modification of binding con-
tract—continuity not preserved. The facts are the
same as inExample 1except that on April 1 of year
1, the parties modify their contract. Pursuant to the
modified contract, which isa binding contract, the T
shareholders will receive 50 P shares (an additional
10 shares) and $75 of cash (an additional $15 of
cash) in exchange for all of the outstanding T stock.
On March 31 of year 1, the value of the P stock is
$.50 per share. Under this paragraph (e)(2), although
there was a binding contract providing for fixed
consideration as of January 3 of year 1, terms of that
contract relating to the consideration to be provided
to the target shareholders were modified on April 1
of year 1. The execution of the transaction without
modification would have resulted in the preserva-
tion of a substantial part of the value of the target
corporation shareholders’ proprietary interests in the
target corporation if there had been no modification.
However, because the modified contract provides
for additional P stock and cash to be exchanged for
all the proprietary interests in T, the exception in
paragraph (e)(2)(ii)(B)(2) of this section does not ap-
ply to preserve the originalsigning date. Therefore,
whether the transaction satisfies the continuity of
interest requirement is determined by reference to the
value of the P stock on March 31 of year 1. Because,
for continuity of interest purposes, the T stock is
exchanged for $25 of P stock and $75 of cash, the
transaction does not preserve a substantial part of the
value of the proprietary interest in T. Therefore, the
transaction does not satisfy the continuity of interest
requirement.
Example 5.Modification of binding contract dis-
regarded—continuity preserved. The facts are the
same as inExample 4except that, pursuant to the
modified contract, which isa binding contract, the T
shareholders will receive 60 P shares (an additional
20 shares as compared to the original contract) and
$60 of cash in exchange for all of the outstanding T
stock. In addition, on March 31 of year 1, the value
of the P stock is $.40 per share. Under this paragraph
(e)(2), although there was a binding contract provid-
ing for fixed consideration as of January 3 of year 1,
terms of that contract relating to the consideration to
be provided to the target shareholders were modified
on April 1 of year 1. Nonetheless, the modification
has the sole effect of providing for the issuance of
additional P shares to the T shareholders. In addi-
tion, the execution of the terms of the contract with-
out regard to the modification would have resulted in
the preservation of a substantial part of the value of
the T shareholders’ proprietary interest in T because,
for continuity of interest purposes, the T stock would
have been exchanged for $40 of P stock and $60 of
cash. Pursuant to paragraph (e)(2)(ii)(B)(2)ofthis
section, the modification is not treated as a modifica-
tion for purposes of paragraph (e)(2)(ii)(B)(1)ofthis
section. Accordingly, whether the transaction satis-
fies the continuity of interest requirement is deter-
mined by reference to the value of the P stock on the
pre-signing date. Because, for continuity of interest
purposes, the T stock is exchanged for $60 of P stock
and $60 of cash, the transaction preserves a substan-
tial part of the value of the proprietary interest in T.
Therefore the transaction satisfies the continuity of
interest requirement.
Example 6.New issuance. The facts are the same
as inExample 1, except that, instead of cash, the T
shareholders will receive a new class of P securities
that will be publicly traded. In the aggregate, the se-
curities will have a stated principal amount of $60 and
bear interest at the average LIBOR (London Inter-
bank Offered Rates) during the 10 days prior to the
potential reorganization. If the T shareholders had
been issued the P securities on January 2 of year 1,
the P securities would have had a value of $60 (deter-
mined by reference to the value of comparable pub-
licly traded securities). Whether the transaction sat-
isfies the continuity of interest requirement is deter-
mined by reference to the value of the P stock and
the P securities to be issued to the T shareholders on
January 2 of year 1. Under paragraph (e)(2)(iv) of
this section, for purposes of valuing the new P secu-
rities, they will be treated as having been issued on the
pre-signing date. Because, for continuity of interest
purposes, the T stock is exchanged for $40 of P stock
and $60 of other property, the transaction preserves a
substantial part of the value of the proprietary interest
in T. Therefore, the transaction satisfies the continu-
ity of interest requirement.
Example 7.Fixed consideration—continuity not
preserved. OnJanuary3ofyear1,PandTsigna
binding contract pursuant to which T will be merged
withandintoPonJune1ofyear1. Pursuanttothe
contract, 60 shares of the T stock will be exchanged
for $80 of cash and 40 shares of the T stock will be
exchanged for 20 shares of P stock. On January 2
of year 1, the value of the P stock is $1 per share. On
June 1 of year 1, T merges with and into P pursuant to
the terms of the contract. This contract provides for
fixed consideration and therefore whether the trans-
action satisfies the continuity of interest requirement
is determined by reference to the value of the P stock
on the pre-signing date. However, applying the sign-
ing date rule, the P stock represents only 20 percent of
the value of the total consideration to be received by
the T shareholders. Accordingly, based on the eco-
nomic realities of the exchange, the transaction does
February 21, 20123812012–8 I.R.B.

not preserve a substantial part of the value of the pro-
prietary interest in T. Therefore, the transaction does
not satisfy the continuity of interest requirement.
Example 8.Anti-dilution clause.(i)Absence of
anti-dilution clause. On January 3 of year 1, P and T
sign a binding contract pursuant to which T will be
merged with and into P on June 1 of year 1. Pursuant
to the contract, the T shareholders will receive 40
P shares and $60 of cash in exchange for all of the
outstanding stock of T. The contract does not contain
a customary anti-dilution provision. The P stock is
listed on an established market. On January 2 of year
1, the value of the P stock is $1 per share. On April 10
of year 1, P issues its stock to effect a stock split;
each shareholder of P receives an additional share of
P for each P share that it holds. On April 11 of year
1, the value of the P stock is $.50 per share. Because
P altered its capital structure between January 3
and June 1 of year 1 in a manner that materially
alters the economic arrangement of the parties, under
paragraph (e)(2)(iii)(E) of this section, the contract
is not treated as a binding contract that provides
for fixed consideration. Accordingly, whether
the transaction satisfies the continuity of interest
requirement cannot be determined by reference to
the value of the P stock on January 2 of year 1.
(ii)Adjustment for anti-dilution clause. The facts
are the same as in paragraph (i) of thisExample 8ex-
cept that the contract contains a customary anti-dilu-
tion provision, and the T shareholders receive 80 P
shares and $60 of cash in exchange for all of the out-
standing stock of T. Under paragraph (e)(2)(iii)(E) of
this section, the contract is treated as a binding con-
tract that provides for fixedconsideration as of Jan-
uary 3 of year 1. Therefore,whether the transaction
satisfies the continuity of interest requirement is gen-
erally determined by reference to the value of the P
stock on January 2 of year 1. However, under para-
graph (e)(2)(iii)(E) of this section, the value of the P
stock on the pre-signing date must be adjusted to take
the stock split into account. For continuity of interest
purposes, the T stock is exchanged for $40 of P stock
(($1/2) x 80) and $60 of cash. Therefore, the transac-
tion satisfies the continuity of interest requirement.
Example 9.Shareholder election.OnJanuary3
of year 1, P and T sign a binding contract pursuant
to which T will be merged with and into P on June 1
of year 1. On January 2 of year 1, the value of the P
stock and the T stock is $1 per share. Pursuant to the
contract, at the shareholders’ election, each share of
T’s 100 shares will be exchanged for cash of $1, or
alternatively, P stock. The contract provides that the
determination of the number of shares of P stock to
be exchanged for a share of T stock is made using the
value of the P stock on the last business day before
the first date there is a binding contract (that is, $1
per share). The contract further provides that, in the
aggregate, 40 shares of P stock and $60 will be deliv-
ered, and contains a proration mechanism in the event
that either item of consideration is oversubscribed.
On the closing date, the value of the P stock is $.20
per share, and all target shareholders elect to receive
cash. Pursuant to the proration provision, each tar-
get share is exchanged for $.60 of cash and $.08 of P
stock. Pursuant to paragraph (e)(2)(iii)(A) of this sec-
tion, the contract providesfor fixed consideration be-
cause it provides for the number of shares of P stock
and the amount of money to be exchanged for all the
proprietary interests in the target corporation. Fur-
thermore, pursuant to paragraph (e)(2)(iii)(B) of this
section, the contract provides for fixed consideration
because the number of shares of issuing corporation
stock to be provided to the target corporation share-
holders is determined using the pre-signing date value
of P stock. Accordingly, whether the transaction sat-
isfies the continuity of interest requirement is deter-
mined by reference to the value of the P stock on Jan-
uary 2 of year 1. Because, for continuity purposes,
the T stock is exchanged for $40 of P stock and $60
of cash, the transaction preserves a substantial part of
the value of the proprietary interest in T. Therefore,
the transaction satisfies the continuity of interest re-
quirement.
Example 10.Contingent adjustment based on the
value of the issuing corporation stock—continuity
not preserved. On January 3 of year 1, P and T
sign a binding contract pursuant to which T will be
merged with and into P on June 1 of year 1. On
January 2 of year 1, the value of the P stock is $1
per share. Pursuant to the contract, if the value of
the P stock does not decrease after January 2 of year
1, the T shareholders will receive 40 P shares and
$60 of cash in exchange for all of the outstanding
stockofT.Furthermore,the contract provides that
the T shareholders will receive $.16 of additional
P shares and $.24 for every $.01 decrease in the
value of one share of P stock after January 2 of
year 1. On June 1 of year 1, T merges with and into
P pursuant to the terms of the contract. On that date,
the value of the P stock is $.40 per share. Pursuant
to the terms of the contract, the consideration is
adjusted so that the T shareholders receive 24 more
P shares ((60 x $.16)/$.40) and $14.40 more cash
(60 x $.24) than they would absent an adjustment.
Accordingly, at closing the T shareholders receive
64 P shares and $74.40 ofcash. Because the contract
provides that additional P shares and cash will be
delivered to the T shareholders if the value of the
stock of P decreases after January 2 of year 1,
under paragraph (e)(2)(iii)(C)(2)ofthissection,
the contract is not treated as providing for fixed
consideration, and therefore whether the transaction
satisfies the continuity of interest requirement cannot
be determined by reference to the value of the P stock
on January 2 of year 1. For continuity of interest
purposes, the T stock is exchanged for $25.60 of
P stock (64 x $.40) and $74.40 of cash and the
transaction does not preserve a substantial part of the
value of the proprietary interest in T. Therefore, the
transaction does not satisfy the continuity of interest
requirement.
Example 11.Contingent adjustment to boot
based on the value of the target corporation
stock—continuity not preserved. OnJanuary3of
year 1, P and T sign a binding contract pursuant to
which T will be merged with and into P on June 1
of year 1. On January 2 of year 1, T has 100 shares
outstanding, and each T share is worth $1. On Jan-
uary 2 of year 1, each P share is worth $1. Pursuant
to the contract, if the value of the T stock does not
increase after January 3 of year 1, the T shareholders
will receive 40 P shares and $60 of cash in exchange
for all of the outstanding stock of T. Furthermore,
the contract provides that the T shareholders will
receive $1 of additional cash for every $.01 increase
in the value of one share of T stock after January 3 of
year 1. On June 1 of year 1, the value of the T stock
is $1.40 per share and the value of the P stock is $.75
per share. Pursuant to the terms of the contract, the
consideration is adjusted so that the T shareholders
receive $40 more cash (40 x $1) than they would
absent an adjustment. Accordingly, at closing the
T shareholders receive 40 P shares and $100 of
cash. Because the contract provides the number of
shares of P stock and the amount of money to be
exchanged for all the proprietary interests in T, and
the contingent adjustment to the cash consideration
is not based on changes in the value of the P stock,
P assets, or any surrogate thereof, after January 2 of
year 1, there is a binding contract providing for fixed
consideration as of January 3 of year 1. Therefore,
whether the transaction satisfies the continuity of
interest requirement is determined by reference to
the value of the P stock on January 2 of year 1.
For continuity of interest purposes, the T stock is
exchanged for $40 of P stock (40 x $1) and $100 of
cash. Therefore, the transaction does not satisfy the
continuity of interest requirement.
Example 12.Contingent adjustment to stock
based on the value of the target corporation
stock—continuity preserved. OnJanuary3ofyear
1, P and T sign a binding contract pursuant to which
T will be merged with and into P on June 1 of year
1. On that date T has 100 shares outstanding, and
each T share is worth $1. On January 2 of year 1,
each P share is worth $1. Pursuant to the contract,
if the value of the T stock does not decrease after
January 3 of year 1, the T shareholders will receive
40 P shares and $60 of cash in exchange for all of
the outstanding stock of T. Furthermore, the contract
provides that the T shareholders will receive $.40 less
P stock and $.60 less cash for every $.01 decrease in
the value of one share of T stock after January 3 of
year 1. The contract also provides that the number of
P shares by which the consideration will be reduced
as a result of this adjustment will be determined
based on the value of the P stock on January 2 of
year 1. On June 1 of year 1, T merges with and into
P pursuant to the terms of the contract. On that date,
the value of the T stock is $.70 per share and the
value of the P stock is $.75 per share. Pursuant to the
terms of the contract, the consideration is adjusted
so that the T shareholders receive 12 fewer P shares
((30 x $.40)/$1) and $18 less cash (30 x $.60) than
they would absent an adjustment. Accordingly, at
closing the T shareholders receive 28 P shares and
$42 of cash. Because the contract provides for the
number of shares of P stock and the amount of money
to be exchanged for all of the proprietary interests
in T, the contract does not provide for contingent
adjustments to the consideration based on a change
in value of the P stock, P assets, or any surrogate
thereof, after January 2 of year 1, and the adjustment
to the number of P shares the T shareholders receive
is determined based on the value of the P shares
on January 2 of year 1, there is a binding contract
providing for fixed consideration as of January 3 of
year 1. Therefore, whether the transaction satisfies
the continuity of interest requirement is determined
by reference to the value of the P stock on January 2
of year 1. For continuity of interest purposes, the T
stock is exchanged for $28 of P stock (28 x $1) and
$42 of cash. Accordingly,the transaction satisfies
the continuity of interest requirement.
*****
2012–8 I.R.B.382February 21, 2012

(9)Effective/applicability dates—(i)
***
(ii)COI measurement date. Paragraph
(e)(2) of this section applies to transactions
occurring pursuant to binding contracts en-
tered into after December 19, 2011. For
transactions entered into after March 19,
2010, and occurring pursuant to binding
contracts entered into on or before Decem-
ber 19, 2011, the parties to the transac-
tion may elect to apply the provisions of
§1.368–1T as contained in 26 CFR, Part
1, §§1.301–1.400, revised as of April 1,
2009. However, the target corporation, the
issuing corporation,the controlling cor-
poration of the acquiring corporation if
stock thereof is provided as consideration
in the transaction, and any direct or indi-
rect transferee of transferred basis property
from any of the foregoing, may not elect to
apply the provisions of §1.368–1T as con-
tained in 26 CFR, Part 1, §§1.301–1.400,
revised as of April 1, 2009, unless all such
taxpayers elect to apply such provisions.
This election requirement will be satisfied
if none of the specified parties adopts in-
consistent treatment. For transactions en-
tered into on or before March 19, 2010, see
§1.368–1T as contained in 26 CFR, Part
1, §§1.301–1.400, revised as of April 1,
2009.
§1.368–1T [Removed]
Par. 3. Section 1.368–1T is removed.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 6, 2011.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 16,
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 19, 2011, 76 F.R. 78540)
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
(Also §§ 401(a)(11), 417; 26 CFR 1.401(a)–20.)
Application of survivor annuity re-
quirements to deferred annuity con-
tracts under a defined contribution
plan.This ruling describes how the qual-
ified joint and survivor annuity (“QJSA”)
and the qualified preretirement survivor
annuity (“QPSA”) rules, described in sec-
tions 401(a)(11) and 417 of the Code,
apply when a deferred annuity contract is
purchased under a profit-sharing plan.
Rev. Rul. 2012–3
ISSUE
How do the qualified joint and survivor
annuity (“QJSA”) and the qualified prere-
tirement survivor annuity (“QPSA”) rules,
described in §§ 401(a)(11) and 417 of the
Internal Revenue Code, apply when a de-
ferred annuity contract is purchased under
a profit-sharing plan in the situations de-
scribed below?
FACTS
Situation 1
Company A sponsors Plan X, which
is a profit-sharing plan qualified under
§ 401(a) with a qualified cash or deferred
arrangement described in § 401(k). No
portion of Plan X is an employee stock
ownership plan. Plan X provides for both
elective deferrals and matching contribu-
tions.
Plan X participants are permitted to di-
rect the investment of their elective de-
ferral and matching contribution accounts
among any of the investment options avail-
able under the plan, including a deferred
annuity contract thatis issued by an in-
surance company. The plan separately ac-
counts for all amounts by investment and
contribution source.
No other annuity options are available
under Plan X, and the plan is not a direct
or indirect transferee of assets or benefits
from another plan.
Amounts invested for a Plan X partici-
pant in a deferred annuity contract are ap-
plied at the time of investment to purchase
a contract that provides for payments com-
mencing by the first day of the first month
that begins after the later of the date the
participant retires or attains age 65 (subject
to an exception that provides for an earlier
commencement date in the case of any par-
ticipant who is a 5% owner, as defined in
§ 416, who retires after age 70
1
/2). The
amount payable under the deferred annu-
itycontractisfixedonthefirstdayofthe
first period for which an amount is paid un-
der the contract (the annuity starting date).
The amount payable under the deferred an-
nuity contract on the annuity starting date
depends on the amount accumulated un-
der the contract on that date and the ac-
tuarial assumptions, including interest rate
and mortality assumptions, used to deter-
mine the annuity purchase rate on that date,
subject to a minimum-purchase-rate guar-
antee set forth in the contract. Amounts in-
vested in the deferred annuity contract can
be transferred to other investments at any
time before the annuity starting date.
In general, a deferred annuity contract
under Plan X pays benefits in one of var-
ious life annuity forms that can be elected
during the 180-day period ending on the
annuity starting date, but the participant
can instead elect, at any time before the
annuity starting date, to have a single-sum
payment. The form of payment, if no other
form is elected, is a straight life annuity in
the case of a participant who is not married
on the annuity starting date and is a 50%
joint and survivor annuity (with the sur-
viving spouse as the joint annuitant) that
is actuarially equivalent to the straight life
annuity in the case of a participant who is
married on that date. If the participant is
married on the annuity starting date, the
notarized consent of the spouse must be
obtained if the participant elects a life an-
nuity form other than a joint and survivor
annuity with the surviving spouse as the
joint annuitant and the survivor annuity not
less than 50% or more than 100% of the
joint annuity amount. Thus, for example,
no spousal consent is required if a partici-
pant elects an annuity that satisfies the def-
inition for a qualified optional survivor an-
nuity (“QOSA”) described in § 417(g).
Plan X provides that if a participant dies
prior to the annuity starting date under the
deferred annuity contract, the participant’s
surviving spouse (or, if there is no sur-
viving spouse, the participant’s designated
beneficiary) will receive a death benefit
equal to the nonforfeitable accrued benefit
under the contract as of the date of death.
The nonforfeitable accrued benefit under
the deferred annuity contract is the con-
tract’s value calculated by taking into ac-
count 100% of the amounts attributable to
both elective deferrals and matching con-
tributions. In the case of a married partic-
ipant, the death benefit is paid to the sur-
viving spouse in the form of an annuity for
February 21, 20123832012–8 I.R.B.

the life of the surviving spouse (unless the
surviving spouse elects a single-sum pay-
ment).
With respect to amounts not invested in
a deferred annuity contract, Plan X pro-
vides that, upon the death of a partici-
pant, the participant’s nonforfeitable ac-
crued benefit (reduced by any security in-
terest held by the plan on account of an out-
standing participant loan) is payable in full
to the participant’s surviving spouse (or,
if there is no surviving spouse or the sur-
viving spouse gives notarized consent, to
a designated beneficiary).
Participant P invests portions of his
Plan X elective deferral and matching con-
tribution accounts in the deferred annuity
contract on various dates from age 45 to
age 65, and retires atage 65. The annuity
starting date for Participant P’s benefit
under the deferred annuity contract is the
first day of the month after he retires.
Situation 2
The facts are the same as in Situation 1,
except as follows.
A Plan X participant who invests
amounts in a fixed deferred annuity con-
tract may not subsequently transfer those
amounts out of the contract and may not
elect to take those amounts in the form
of a single-sum payment. Thus, amounts
invested in the deferred annuity contract
will be paid in the form of a life annuity,
without an option for the participant to
accelerate payment of the amounts in the
form of a single-sum payment.
The amount payable under the deferred
annuity contract on a Plan X participant’s
annuity starting date in the form of a
straight life annuity that is attributable
to an amount invested in the contract is
fixed on the date the investment is made.
Thus, the amount payable under the fixed
annuity contract depends on the amount
invested in the contract on the date the
investment is made and the actuarial as-
sumptions, including interest rate and
mortality assumptions, used to determine
the annuity purchase rate on that date.
Situation 3
The facts are the same as in Situation 2,
except as follows.
A Plan X participant who invests
amounts in a deferred annuity contract
can make an election to have no benefits
payable under the contract with respect
to amounts invested in the contract that
are attributable to matching contributions
in the event of death before the annuity
starting date. If the participant makes this
election, then the participant’s spouse, if
any, must give notarized consent to the
election.
LAW
Section 401(a)(11) sets out two require-
ments regarding annuity benefit forms for
certain retirement plans qualified under
§ 401(a). Except as provided under § 417,
§ 401(a)(11)(A)(i) requires that, in the
case of a vested participant who does not
die before his or her annuity starting date,
the accrued benefit payable to the partic-
ipant be provided in the form of a QJSA
and § 401(a)(11)(A)(ii) requires that, in
the case of a vested participant who dies
before his or her annuity starting date and
who has a surviving spouse, a QPSA be
provided to the participant’s surviving
spouse.
Section 401(a)(11)(B)(i) and (ii) pro-
vides that the QJSA and QPSA require-
ments apply to any defined benefit plan
and to any defined contribution plan that is
subject to the funding standards of § 412.
(Section 412(e)(2)(A) provides that the
funding standards of § 412 do not apply to
any profit-sharing or stock bonus plan.)
Section 401(a)(11)(B)(iii) provides that
the QJSA and QPSA requirements also ap-
ply to a participant under any other defined
contribution plan (i.e., a profit-sharing or
stock bonus plan) unless:
•The plan provides that the participant’s
nonforfeitable accrued benefit (re-
duced by any security interest held by
the plan on account of an outstanding
participant loan) is payable in full, on
the death of the participant, to the par-
ticipant’s surviving spouse (or, if there
is no surviving spouse or the surviving
spouse consents, to a designated bene-
ficiary) (§ 401(a)(11)(B)(iii)(I));
•The participant does not elect a pay-
ment of benefits in the form of a life
annuity (§ 401(a)(11)(B)(iii)(II)); and
•With respect to the participant, the plan
is not a direct or indirect transferee (in
a transfer after 1984) of a plan that
was subject to the QJSA and QPSA re-
quirements with respect to the partici-
pant (§ 401(a)(11)(B)(iii)(III)).
Under § 401(a)(11)(B), if a defined con-
tribution plan separately accounts for as-
sets (and related income) that are trans-
ferred from a plan that is subject to the
QJSA and QPSA requirements, then only
those transferred assets (and related in-
come) are subject to the QJSA and QPSA
requirements on account of the transfer.
Section 417(a)(1) imposes a number
of conditions in order for a plan to satisfy
§ 401(a)(11). These conditions include
certain waiver, spousal consent, and writ-
ten explanation rules relating to QJSAs
and QPSAs, and also include requirements
regarding the availability of a QOSA
(as defined in § 417(g)). For example,
§ 417(a)(1)(A) generally imposes a con-
dition that each participant must be able
to elect at any time during an applicable
election period (defined in § 417(a)(6))
to waive the QJSA form of benefit or the
QPSA form of benefit (or both). However,
under § 417(a)(5), this requirement that
a participant be able to elect to waive the
QJSA or QPSA form of benefit (as the
case may be) does not apply if such benefit
may not be waived (or another beneficiary
selected) and the plan fully subsidizes the
costs of such benefit.
Section 417(b) defines a QJSA as an an-
nuity (1) for the life of the participant with
a survivor annuity for the life of the spouse
that is not less than 50% nor more than
100% of the amount of the annuity payable
during their joint lives and (2) that is the
actuarial equivalent of a single annuity for
the life of the participant.
Section 417(c)(2) defines a QPSA, in
the case of a defined contribution plan, as
an annuity for the life of the spouse the ac-
tuarial equivalent of which is not less than
50% of the portion of the account balance
of the participant (as of the date of death) to
which the participant had a nonforfeitable
right under § 411. For a defined con-
tribution plan, the accrued benefit is de-
fined in § 411(a)(7)(A)(ii) as the balance of
the employee’s account. In general, under
§ 417(f)(2)(A), the annuity starting date is
the first day of the first period for which an
amount is payable as an annuity or, in the
case of a benefit not payable in the form of
an annuity, the first day on which all events
have occurred which entitle the participant
to the benefit.
Section 401(a)(7) provides that, to
be qualified under § 401(a), a retire-
2012–8 I.R.B.384February 21, 2012

ment plan must satisfy the requirements
of § 411. Section 411(a) requires that
a plan provide that certain benefits are
nonforfeitable upon attainment of nor-
mal retirement age or the completion of
a specified number of years of service.
However, § 411(a)(3)(A) permits certain
forfeitures upon a participant’s death (ex-
cept in the case of a survivor annuity
described in § 401(a)(11)). Pursuant to
§ 401(k)(2)(C), a qualified cash or de-
ferred arrangement must provide that an
employee’s right to his or her accrued ben-
efit derived from elective contributions is
nonforfeitable. Section 1.401(k)–1(c)(2)
of the Income Tax Regulations provides
that the amount attributable to an em-
ployee’s elective contributions may not be
forfeited under § 411(a)(3)(A). In addition,
§ 1.401(a)–20, Q&A–20, provides that
a contributory defined contribution plan
with a § 411(a)(3)(A) forfeiture provision
may not use more than a proportional per-
cent of the account balance attributable to
contributions that may not be forfeited at
death (such as elective deferrals) to satisfy
the QPSA benefit. Thus, for example,
where a participant’s date-of-death ac-
count balance comprises 60% attributable
to elective deferralsand 40% attributable
to matching contributions, the maximum
portion of a QPSA that can consist of
amounts attributableto elective deferrals
is 60%.
Section 1.401(a)–11(b)(1) defines a life
annuity to mean an “annuity that provides
retirement payments and requires the sur-
vival of the participant or his spouse as one
of the conditions for any payment or pos-
sible payment under the annuity.” Thus, a
joint and survivor annuity is a “life annu-
ity” under this definition.
Section 1.401(a)–20 sets forth addi-
tional rules reflecting the amendments to
§ 401(a)(11) by the Retirement Equity Act
of 1984, P.L. 98–397, and the enactment
of § 417.
Under § 1.401(a)–20, Q&A–4, if a
defined contribution plan separately ac-
counts for an amount with respect to which
a participant elects a life annuity, then only
that separate account balance is subject
to the QJSA and QPSA requirements on
account of the participant’s election of a
life annuity.
Under § 1.401(a)–20, Q&A–37, if a
plan fully subsidizes a QJSA or QPSA and
does not allow a participant to waive the
QJSA or QPSA, respectively, or to select
a nonspouse beneficiary, then the plan is
not required to provide the written expla-
nation required by § 417(a)(3)(A) or (B).
However, if the plan offers an election to
waive the benefit or designate a benefi-
ciary, it must satisfy the election, consent
and notice requirements with respect to the
subsidized benefit. Under § 1.401(a)–20,
Q&A–38(b), a QPSA is fully subsidized in
a defined contribution plan.
ANALYSIS
Since Plan X is neither a defined ben-
efit plan nor a defined contribution plan
that is subject to the funding standards of
§ 412, the plan satisfies the first two condi-
tions in § 401(a)(11)(B) for the exception
to the application of the QJSA and QPSA
requirements. Under § 401(a)(11)(B)(iii),
a plan must satisfy three additional con-
ditions, set forth in § 401(a)(11)(B)(iii)(I),
(II), and (III), to avoid being subject to the
QJSA and QPSA requirements.
In Situation 1, Plan X satisfies the
§ 401(a)(11)(B)(iii)(I) condition because a
participant’s entire nonforfeitable accrued
benefit, including amounts attributable
to the investment in the deferred annuity
contract, is payablein full, on the death of
the participant prior to the annuity starting
date, to the participant’s surviving spouse
(or, if there is no surviving spouse, the
participant’s designated beneficiary). Plan
X satisfies the § 401(a)(11)(B)(iii)(III)
condition because Plan X is not a direct or
indirect transferee of a plan that was sub-
ject to the QJSA and QPSA requirements
with respect to any participant.
Plan X also satisfies the
§ 401(a)(11)(B)(iii)(II) condition that the
participant not elect a payment of benefits
in the form of a life annuity. Although a
life annuity is the default payment under
the deferred annuity contract in Situation
1, Participant P can elect another form
of payment prior to the annuity starting
date under the contract, either by trans-
ferring amounts invested in the contract
to another investment option (with respect
to which other forms of distribution are
available) or by electing a single-sum
payment under the contract. Thus, in the
absence of an affirmative election of a life
annuity during the 180-day period ending
on the annuity starting date, Participant
P does not elect a life annuity under the
deferred annuity contract until his annuity
starting date with respect to the contract.
Because Participant P does not elect a
life annuity under the deferred annuity
contract until his annuity starting date
with respect to the contract, and the other
conditions are satisfied for the exception
under § 401(a)(11)(B)(iii), the plan is not
subject to the QPSA requirements before
the annuity starting date.
However, at the annuity starting date, if
Participant P has not previously elected to
receive another form of payment, Plan X
becomes subject to the QJSA requirements
with respect to the deferred annuity. Be-
cause Plan X separately accounts for the
deferred annuity contract, the remainder of
the plan is not subject to the QJSA and
QPSA requirements.
In Situation 2, Plan X is generally sub-
ject to the QJSA and QPSA requirements
of § 401(a)(11) with respect to Participant
P’s benefits under the deferred annuity
contract beginning when Participant P first
invests in the contract. The deferred annu-
ity contract does not qualify for the excep-
tion under § 401(a)(11)(B)(iii) because, at
the time Participant P invests amounts in
the contract, he has elected a life annuity
within the meaning of § 1.401(a)–11(b)(1).
The death benefit under the deferred an-
nuity contract in Situation 2 provides the
participant’s surviving spouse a life annu-
ity that is based on 100% of the amounts
in the contract attributable to both elective
deferrals and matching contributions. This
satisfies the requirements for a QPSA un-
der § 1.401(a)–20, Q&A–20, and, in par-
ticular, the requirement in § 1.401(a)–20,
Q&A–20, that the plan provide a preretire-
ment survivor annuity with a value which
is not less than 50% of the nonforfeitable
account balance as of the date of the par-
ticipant’s death.
Further, because the QPSA in Situation
2 satisfies the requirements in § 417(a)(5)
that (1) the plan fully subsidize the costs
of the QPSA (i.e., no charge is imposed
forthecoverage)and(2)aparticipantmay
not waive the QPSA or select a nonspouse
beneficiary, Plan X is not required to pro-
vide the written QPSA explanation oth-
erwise required by § 417(a)(3) or obtain
spousal consent with respect to a QPSA.
However, since the QJSA does not satisfy
the requirements of § 417(a)(5), Plan X
must obtain notarized spousal consent for
a participant to waive a QJSA and must
February 21, 20123852012–8 I.R.B.

provide the written QJSA explanation re-
quired by § 417(a)(3) before the annuity
starting date.
The result would be the same if, in or-
der to maximize the annuity payable dur-
ing the participant’s lifetime, death ben-
efits under the deferred annuity contract
were reduced to the minimum permissi-
ble. In such case, the QPSA would be
based on 50% of the amounts invested in
the contract that are attributable to elec-
tive deferrals and 50% of the amounts in-
vested in the contract that are attributable
to matching contributions. In addition, a
death benefit based on the remaining 50%
of the amounts invested in the contract that
are attributable to elective deferrals would
be payable to the participant’s designated
beneficiary.
In Situation 3, for the reasons described
with respect to Situation 2, Plan X is gen-
erally subject to the QJSA and QPSA re-
quirements of § 401(a)(11) with respect to
Participant P’s benefits under the deferred
annuity contract beginning when Partici-
pant P first invests in the contract.
However, unlike in Situation 2, Plan
X in Situation 3 is required to comply
with the rules of § 417(a) with respect to
the participant’s waiver of the QPSA. This
is because the § 417(a)(5)(A) exception
from the requirements of § 417(a) imposes
two conditions: (1) that the benefit not be
waived and (2) that the benefit be fully
subsidized. In Situation 3, unlike in Sit-
uation 2, the plan allows Participant P to
waive the QPSA and thus must provide a
written explanation and obtain notarized
spousal consent to any waiver.
HOLDINGS
In Situation 1, Plan X qualifies for the
exception in § 401(a)(11)(B)(iii), and thus
is not subject to the QJSA and QPSA re-
quirements of § 401(a)(11) with respect to
Participant P’s deferred annuity contract
until Participant P’s annuity starting date
under the deferred annuity contract.
In Situation 2, Plan X is generally sub-
ject to the QJSA and QPSA requirements
of § 401(a)(11) with respect to the deferred
annuity contract beginning when Partic-
ipant P first invests in the contract. The
death benefit provided under the deferred
annuity contract in Situation 2 satisfies
the requirements to be a QPSA under
§ 1.401(a)–20, Q&A–20. Because the
QPSA is fully subsidized in Situation 2
(i.e., no charge is imposed for the cover-
age) and Plan X does not allow Participant
P to waive the QPSA or to select a non-
spouse beneficiary, the plan is not required
to obtain spousal consent with respect to
the QPSA.
In Situation 3, Plan X is generally sub-
ject to the QJSA and QPSA requirements
of § 401(a)(11) with respect to the deferred
annuity contract beginning when Partici-
pant P first invests in the contract. Because
Plan X permits a participant to waive the
QPSA, any such waiver must be accompa-
nied by the spouse’s notarized consent fol-
lowing a written explanation in accordance
with the rules of § 417(a)(2) and (3).
In all three situations, because Plan X
separately accounts for the deferred annu-
ity contract, the remainder of the plan is
not subject to the QJSA and QPSA require-
ments.
DRAFTING I
NFORMATION
The principal authors of this rev-
enue ruling are Larry Isaacs and
Roger Kuehnle of the Employee
Plans, Tax Exempt and Government
Entities Division. Mr. Isaacs and
Mr. Kuehnle may be reached by e-mail at
RetirementPlanQuestions@irs.gov.
(Also, §§ 411, 415; 26 CFR 1.401(a)(31), 1.411(a)–4,
1.411(a)–4T, 1.411(c)–1, 1.415(b)–1.)
Rollover from qualified defined con-
tribution plan to qualified defined ben-
efit plan to obtain additional annuity.
This ruling describes whether a qualified
defined benefit pension plan that accepts a
direct rollover of an eligible rollover distri-
bution from a qualified defined contribu-
tion plan maintained by the same employer
satisfies sections 411 and 415 of the Code
in a case in which the defined benefit plan
provides an annuity resulting from the di-
rect rollover.
Rev. Rul. 2012–4
ISSUES
1. Does a qualified defined benefit pen-
sion plan that accepts a direct rollover
of an eligible rollover distribution
from a qualified defined contribution
plan maintained by the same em-
ployer satisfy §§ 411 and 415 of the
InternalRevenueCodeinacasein
which the defined benefit plan pro-
vides an annuity resulting from the
direct rollover that is determined by
converting the amount directly rolled
over into an actuarially equivalent
immediate annuity using the appli-
cable interest rate and the applicable
mortality table under § 417(e)?
2. How does the result vary if the de-
fined benefit plan applies different
conversion factors for purposes of
calculating the annuity resulting from
the amount directly rolled over?
FACTS
Plan A is a profit-sharing plan spon-
soredbyEmployerXthatisqualified
under § 401(a). Plan A satisfies the re-
quirements under § 401(a)(11)(B)(iii) to be
exempted from the qualified joint and sur-
vivor annuity and qualified preretirement
survivor annuity rules of § 401(a)(11).
Plan A does not provide for after-tax em-
ployee contributions.
Plan B is a qualified defined benefit
plan also sponsored by Employer X. Plan
B permits benefits to commence at any
time after separation from service and
offers various optional forms of benefit.
Plan B complies with all otherwise appli-
cable rules under § 401(a), including the
rules of §§ 401(a)(11), 411(a)(11), and
417 with respect to distributions and does
not apply the rule of § 411(a)(11)(D) (i.e.,
does not disregard rollover contributions
for purposes of mandatory distributions
of small amounts). As permitted under
§ 411(a)(3)(A), Plan B provides that, ex-
cept to the extent of the qualified preretire-
ment survivor annuity, the accrued benefit
resulting from employer contributions is
forfeited on the death of the participant.
Plan B provides that a participant can elect
to commence a distribution between 30
days and 180 days after the furnishing
of the QJSA explanation that is required
pursuant to § 417(a)(3). Plan B does not
permit participants to elect a retroactive
annuity starting date as provided under
§ 417(a)(7).
Plan B provides that it will accept a
direct rollover from Plan A for any em-
ployee or former employee of Employer
X who separates from service after age 55
2012–8 I.R.B.386February 21, 2012

with at least 10 years of service. Plan B
will accept direct rollovers from Plan A
with respect to an employee or former em-
ployee only if the individual is electing or
has elected to commence receiving ben-
efits from Plan B and the election speci-
fies a single annuity starting date for all of
the employee’s or former employee’s ben-
efits under Plan B (including the additional
benefit resulting from the direct rollover,
which is determined as described below).
Neither Plan A nor Plan B is a govern-
mental plan, a nonelecting church plan, or
another plan to which § 411 does not apply
under § 411(e)(1). Plan B does not con-
tain a qualified cost-of-living arrangement
within the meaning of § 415(k)(2).
Participant P’s employment with Em-
ployer X terminates, and Participant P
elects a distribution from Participant P’s
Plan A account balance that is made in
the form of a direct rollover to Plan B.
Participant P elects to receive payment of
the benefit attributable to the rollover in
the form of an annuity from Plan B. For
the entire plan year that includes the date
of the rollover, Plan B’s adjusted fund-
ing target attainment percentage under
§ 436(j)(2) is at least 60 percent. Partici-
pant P is over age 55 and has at least 10
years of service with Employer X.
Plan B provides that if a participant
in both Plan A and Plan B elects a di-
rect rollover from Plan A to Plan B and
elects to use that direct rollover amount to
obtain an immediate straight life or other
form of annuity from Plan B, then the
amount of that annuity is determined as the
actuarial equivalent of the amount rolled
over from Plan A, where actuarial equiv-
alence is determined using the applica-
ble interest rate andmortality table under
§ 417(e). A package of election forms is
used for the distribution from Plan A, the
election of a direct rollover to Plan B, and
the election of an immediate annuity from
Plan B. The package provides for notarized
spousal consent if the participant is mar-
ried and elects a distribution from Plan B
that is not a qualified joint and survivor
annuity, and is accompanied by a disclo-
sure that includes a statement that if Plan B
terminates with insufficient funds to cover
its benefit liabilities, the benefit resulting
from the direct rollover will be subject to
Title IV of the Employee Retirement In-
come Security Act of1974 (ERISA), Pub-
lic Law 93–406, and a description of the
maximum benefit limitation and other rel-
evant Title IV limitations on guaranteed
benefits.
1
Plan B provides that if a participant in
both Plan A and Plan B elects a direct
rollover from Plan A to Plan B but the an-
nuity starting date is after the time of the
direct rollover (which could occur under
Plan B if the annuity starting date elected
by a participant is not more than 180 days
after the date of the election notice pro-
vided under Plan B), then the amount of
the annuity is determined by crediting the
amount directly rolled over with interest
at 120 percent of the Federal mid-term
rate under § 1274 until the annuity start-
ing date and then converting the resulting
amount to an actuarially equivalent imme-
diate annuity using the applicable interest
rate and the applicablemortality table un-
der § 417(e) that apply at that later annuity
starting date.
If a participant under Plan B dies be-
fore the annuity starting date, a benefit
equal to any amount directly rolled over
by the participant to Plan B from Plan A
(plus interest as described above) will be
paid from Plan B to the participant’s ben-
eficiary, which is in addition to the death
benefit under Plan B that would be paid if
no amount had been directly rolled over to
Plan B. However, if such a participant is
married at the time of death and the partic-
ipant did not waive (with notarized spousal
consent) the qualified preretirement sur-
vivor annuity payable in accordance with
§§ 401(a)(11) and 417, then the death ben-
efit instead is a life annuity to the surviving
spouse that is actuarially equivalent to the
amount directly rolled over to Plan B from
Plan A (plus interest as described above)
determined using the applicable interest
rate and mortality table under § 417(e),
whichisalsoinadditiontothedeathbene-
fit under Plan B that would be paid if no
amount had been directly rolled over to
Plan B.
LAW
Section 401(a)(7) requires that a quali-
fied plan satisfy the requirements of § 411.
Section 401(a)(16) requires that a qualified
plan not provide for benefits or contribu-
tions that exceed the limitations of § 415.
Section 401(a)(31) requires that a par-
ticipant in a qualified plan be permitted
to elect to have a distribution made in
the form of a direct rollover to another
eligible retirement plan if the distribution
qualifies as an eligible rollover distribu-
tion. Section 1.401(a)(31)–1, A–15, of
the Income Tax Regulations provides that,
for purposes of applying the plan qualifi-
cation requirements of § 401(a), a direct
rollover is a distribution and rollover of
the eligible rollover distribution (rather
than a transfer of assets and liabilities).
Section 1.401(a)(31)–1, A–13, provides
that a qualified plan is not required to
accept rollovers or it can provide that it
will accept rollovers under limited circum-
stances.
Section 411(a)(1) requires that the
accrued benefit derived from an em-
ployee’s contributions be nonforfeitable.
Section 1.411(a)–4T provides that adjust-
ments in benefits, such as adjustments in
excess of reasonable actuarial assump-
tions, can result in an impermissible for-
feiture of participants’ rights. Section
1.411(a)–4(b)(1)(ii) provides that the ben-
efit derived from employee contributions
is not treated as forfeitable merely be-
cause, after commencement of annuity
payments, the participant dies without
receiving payments equal in amount to
the nonforfeitable accrued benefit derived
from mandatory contributions determined
at the time of commencement.
Section 411(c)(2) prescribes rules for
the determination of the accrued benefit
derived from employee contributions. Un-
der § 411(c)(2)(B), in the case of a quali-
fied defined benefitplan, the accrued bene-
fit derived from the contributions made by
an employee is equal to the accumulated
contributions expressed as an annual ben-
efit commencing at normal retirement age,
using an interest rate which would be used
under the plan under § 417(e)(3) (as of the
determination date). Section 411(c)(2)(C)
defines accumulated contributions as the
mandatory contributions made by the em-
ployee, increased by interest. With respect
to periods during plan years beginning on
or after January 1, 1988, the interest is de-
termined using the rate of 120 percent of
1
The Pension Benefit Guaranty Corporation (PBGC) has informed the Servicethat Title IV generally applies to benefits resulting from a rollover, and is developing guidance on the Title IV
treatment of such benefits, including guarantee limitations under section 4022 of ERISA and asset allocation under section 4044(a) of ERISA.
February 21, 20123872012–8 I.R.B.

the Federal mid-term rate under § 1274 for
the first month of each plan year for the
period ending on the date the determina-
tion is being made, and using the interest
rate under § 417(e)(3) for the period be-
tween the determination date and the nor-
mal retirement age. Under § 411(c)(2)(C)
and § 1.411(c)–1(c)(4), mandatory contri-
butions are defined asamounts contributed
totheplanbytheemployeewhicharere-
quired as a condition of employment, as a
condition of participation in the plan, or as
a condition of obtaining benefits (or addi-
tional benefits) under the plan attributable
to employer contributions.
Section 411(c)(3) requires that, if the
accrued benefit derived from employee
contributions is to be determined with
respect to a benefit other than an annual
benefit in the form of a single life annuity
(without ancillary benefits) commencing
at normal retirement age, the accrued ben-
efit derived from contributions made by
the employee must be the actuarial equiv-
alent of the amount determined under
§411(c)(2).
Section 415(a)(1)(A) provides that, in
the case of a qualified defined benefit
plan, the associated trust will not be a
qualified trust if the plan provides benefits
with respect to a participant in excess of
the limitations under § 415(b). Section
415(b)(1) prescribes limitations that are
based on the annual benefit determined
under § 415(b)(2). Section 415(b)(2)(B)
provides for adjustments, in accordance
with regulations, to the benefit determined
under the plan if employees contribute or
make rollover contributions to the plan.
Section 1.415(b)–1(b)(1) prescribes
rules for the determination of the annual
benefit for purposes of § 415(b). Un-
der § 1.415(b)–1(b)(1)(ii), the annual
benefit does not include the annual ben-
efit attributable to rollover contributions
as described in § 401(a)(31). Section
1.415(b)–1(b)(2) provides rules for the
determination of the annual benefit attrib-
utable to rollover contributions. Under
§ 1.415(b)–1(b)(2)(iii), the annual ben-
efit attributable to rollover contributions
is determined by applying the factors
applicable to mandatory employee contri-
butions as described in § 411(c)(2)(B) and
(C) and the regulations thereunder.
Section 401(a)(29) requires that a qual-
ified defined benefit plan (other than a
multiemployer plan) satisfy the require-
ments of § 436. Section 436 sets forth
a series of limitations on the accrual and
payment of benefits under an underfunded
plan. Section 436(b) places limitations on
the payment of plant shutdown benefits
and other unpredictable contingent event
benefits; § 436(c) places limitations on
plan amendments that increase liabilities
for benefits; § 436(d) places limitations on
the payment of accelerated benefit distri-
butions; and § 436(e) places limitations on
benefit accruals. These limitations are ap-
plied based on the plan’s adjusted funding
target attainment percentage (AFTAP) for
the plan year, as certified by the plan’s en-
rolled actuary.
ANALYSIS
Under § 1.401(a)(31)–1, A–15, an
amount directly rolled over from Plan
A to Plan B is treated as if it were dis-
tributed to Participant P from Plan A and
then rolled over into Plan B. Accordingly,
this amount is treated as contributed by
Participant P to Plan B. Furthermore, the
contribution is required as a condition of
receiving additional benefits under Plan
B attributable to employer contributions.
For example, if the employee lives longer
than the life expectancy under the mortal-
ity table used to calculate the annuity and
there are no offsetting actuarial gains or
the plan earns less than the interest rate
used to calculate the annuity, the employer
would be required to make contributions
to provide the additional benefits. Thus,
under § 1.411(c)–1(c)(4), the amounts di-
rectly rolled over aretreated as mandatory
contributions for purposes of § 411(c) and
the accrued benefit derived from those
amounts, determined under the rules of
§ 411(c), must be nonforfeitable.
The benefit resulting from the direct
rollover that Plan B provides as an imme-
diate annuity is determined as the actuarial
equivalent of the amount rolled over from
Plan A, where actuarial equivalence is de-
termined using the applicable interest rate
and mortality table under § 417(e). Fur-
thermore, in the event of a delay between
the rollover and the annuity starting date,
interest on the rollover contribution is ac-
cumulated in accordance with the require-
ments of § 411(c)(2)(C)(iii). Thus, Plan
B satisfies the requirements of § 411(c)(2)
with respect to the rollover.
Prior to the annuity starting date un-
der Plan B, the benefit resulting from the
amount directly rolled over is not for-
feitable, even if the participant were to die
prior to the annuity starting date. If the
participant were to die after the annuity
starting date, the benefit resulting from the
amount directly rolled over is not treated
as being forfeited as a result of the cessa-
tion of the annuity, even if the participant
dies prior to having received an amount
equal to the amount rolled over to Plan
B from Plan A plus interest as described
above.
Accordingly, Plan B’s provisions re-
lating to the benefit resulting from the
amount directly rolled over satisfy the
requirement of § 411(a)(1) that the benefit
derived from an employee’s own contri-
butions be nonforfeitable. In addition,
the Plan B benefit resulting from the
amount directly rolled over is excluded
from Participant P’s annual benefit for
purposes of § 415(b). This is because, un-
der § 1.415(b)–1(b), the annual benefit for
purposes of § 415(b) excludes the benefit
attributable to rollover contributions, de-
termined using the rules of § 411(c)(2)(B)
and (C), and the Plan B benefit resulting
from the amount directly rolled over is de-
termined using the rules of § 411(c)(2)(B)
and (C).
However, if Plan B were to use a less
favorable actuarial basis (such as an inter-
est rate that is lower than the applicable in-
terest rate under § 417(e)(3)(C) or a mor-
tality table with longer life expectancies
than the applicable mortality table under
§ 417(e)(3)(B)) to determine the amount
of an annuity resulting from the amount
rolled over, Plan B would not satisfy the
requirement under § 411(a)(1) that the ben-
efit derived from an employee’s own con-
tributions be nonforfeitable.
By contrast, if Plan B were to use a
more favorable actuarial basis (such as a
higher interest rate than the § 417(e)(3)(C)
applicable interest rate or a mortality table
with shorter life expectancies than the ap-
plicable § 417(e)(3)(B) mortality table) for
purposes of calculating the annuity result-
ing from the rollover amount, or otherwise
provided for a larger annuity than the an-
nuity derived from employee contributions
as determined under § 411(c), then the por-
tion of the Plan B benefit resulting from the
amount directly rolled over that exceeds
the benefit derived from that rolled over
2012–8 I.R.B.388February 21, 2012

amount under the rules of § 411(c)(2)(B) is
not treated as the benefit derived from the
employee’s own contributions and there
are other considerations which must be
taken into account. For example, the liabil-
ity for additional benefits under Plan B will
likely be greater than the assets transferred
to the Plan (which means that the em-
ployer will become responsible for addi-
tional funding costs). Similarly, the excess
portion would be included in the annual
benefit for purposes of § 415(b). In addi-
tion, any benefit that exceeds the actuar-
ial equivalent of the amount directly rolled
over (determined using reasonable actuar-
ial assumptions) would not be treated as at-
tributable to the rollover within the mean-
ing of § 1.401(a)(4)–11(b)(1), and, accord-
ingly, would be taken into account in ap-
plying the nondiscriminatory amount re-
quirement of § 1.401(a)(4)–1(b)(2).
The election procedures under Plans A
and B that are described in the facts of this
revenue ruling satisfy the requirements of
§§ 401(a)(11), 411(a)(11), and 417.
If Plan B’s certified or presumed
AFTAP were to drop below 60%, Plan
B would not be permitted to receive
direct rollover contributions from Plan A
because such rollovercontributions would
give rise to additional benefit accruals that
are not permitted under § 436(e).
The analysis in this revenue ruling
would be the same if Plan B allowed the
annuity resulting from the amount directly
rolled over to have an annuity starting date
that differs from the annuity starting date
fortheremainderofthePlanBbenefits.
HOLDINGS
1. Under the facts presented, a qualified
defined benefit plan that accepts a di-
rect rollover of an employee’s or for-
mer employee’s benefit from a qual-
ified defined contribution plan main-
tained by the same employer does not
violate § 411 or 415 if the defined ben-
efit plan providesan annuity resulting
from the direct rollover that is deter-
mined by converting the amount di-
rectly rolled over into an actuarially
equivalent immediate annuity using
the applicable interest rate and appli-
cable mortality table under § 417(e).
2. If a defined benefit plan were to pro-
vide an annuity resulting from the
rollover amount that is determined
using a less favorable actuarial ba-
sis than required under the rules of
§ 411(c) (so that the annuity is smaller
than required under the rules of
§ 411(c)), then the plan would not sat-
isfy the requirements of § 411(a)(1).
3. If a defined benefit plan were to pro-
vide an annuity resulting from the
rollover amount that is determined
using a more favorable actuarial ba-
sis than required under the rules
of § 411(c) (so that the annuity is
larger than required under the rules of
§ 411(c)), then the portion of the ben-
efit resulting from the amount directly
rolled over that exceeds the benefit
derived from that rolled over amount
under the rules of § 411(c)(2)(B)
would be subject to the non-forfeiture
rules applicable to benefits derived
from employer contributions and
would be included in the annual ben-
efit for purposes of § 415(b).
PROSPECTIVE APPLICATION
Pursuant to the authority provided by
§ 7805(b)(8), the holdings of this rev-
enue ruling do not apply with respect to
rollovers made before January 1, 2013.
However, plan sponsors are permitted to
rely on the holdings of this ruling with
respect to rollovers made prior to that date.
DRAFTING INFORMATION
The principal author of this rev-
enue ruling is Carolyn E. Zimmerman
of the Employee Plans, Tax
Exempt and Government Entities
Division.Ms.Zimmerman
may be reached by e-mail at
RetirementPlanQuestions@irs.gov.
Section 6011.—General
Requirements of Return,
Statement, or List
26 CFR 31.6011(a)–1: Returns under federal insur-
ance contributions act.
T.D. 9566
Employer’s Annual Federal
Tax Return and Modifications
to the Deposit Rules
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to the Employers’
Annual Federal Tax Program (the Form
944 Program) and the requirements for
depositing social security, Medicare, and
withheld Federal income taxes (collec-
tively “employment taxes”). These final
regulations allow certain employers to
file a Form 944, “Employer’s ANNUAL
Federal Tax Return,” rather than Forms
941, “Employer’s QUARTERLY Federal
Tax Return.” Additionally, these final reg-
ulations provide guidance related to the
lookback periods and deposit requirements
for employers required to file Forms 941
and Form 944. These final regulations
affect taxpayers that file Forms 941, Form
944, and any related Spanish-language
returns or returns for U.S. possessions.
DATES:Effective Date:These regulations
are effective on December 14, 2011.
Applicability Date:For dates of
applicability, see §§31.6011(a)–1(g),
31.6011(a)–4(d), and 31.6302–1(n).
FOR FURTHER INFORMATION
CONTACT: Jennifer Records, (202)
622–4910 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations amend the Reg-
ulations on Employment Taxes and Col-
lection of Income Tax at Source (26 CFR
part 31) under section 6011 relating to the
employment tax return filing requirements
and section 6302 relating to the employ-
ment tax deposit requirements. These final
February 21, 20123892012–8 I.R.B.

regulations are part of the IRS’ continued
effort to reduce taxpayer burden by permit-
ting certain employers to file one employ-
ment tax return annually instead of four
quarterly employment tax returns.
The Treasury Department and the IRS
are considering changes to the annual
filing program in light of the program’s
performance as measured against the pro-
gram’s original goals, administrative and
operational considerations, and overall
program effectiveness. Any changes to
the program will be set forth in future
guidance.
On January 3, 2006, temporary reg-
ulations (T.D. 9239, 2006–1 C.B. 401)
relating to Form 944 (the 2006 temporary
regulations) were published in theFed-
eral Register(71 FR 11). A notice of
proposed rulemaking (REG–148568–04,
2006–1 C.B. 417) cross-referencing the
2006 temporary regulations was published
in theFederal Registeronthesameday
(71 FR 46) (the 2006 proposed regula-
tions). A correction to the 2006 temporary
regulations was published in theFed-
eral Registeron March 17, 2006 (71 FR
13766). On December 29, 2008, tem-
porary regulations (T.D. 9440, 2009–5
I.R.B. 409), which revised the 2006 tem-
porary regulations, relating to Form 944
(the 2008 temporary regulations) were
published in theFederal Register(73 FR
79354). A notice of proposed rulemak-
ing (REG–148568–04) cross-referencing
the 2008 temporary regulations was pub-
lished in theFederal Registeron the same
day (73 FR 79423) (the 2008 proposed
regulations). No requests for a public
hearing were received; therefore, no pub-
lic hearing was held. As noted in the 2008
temporary regulations, comments were
received responding to the 2006 notice of
proposed rulemaking. Those comments
requested that use of Form 944 be changed
from mandatory to voluntary and that the
amount of the employment tax liability
used to determine whether employers are
eligible to file Form 944 (the “eligibility
threshold”) be increased. The Treasury
Department and the IRS agreed to make
Form 944 voluntary and to continue to
consider whether to increase the eligibility
threshold. No comments responding to the
2008 notice of proposed rulemaking were
received. This Treasury decision adopts
the rules of the 2008 proposed regula-
tions with minor clarifying changes and
removes the temporary regulations. That
is, participation in the Form 944 Program
will remain voluntary and the eligibility
threshold for participation will remain at
$1,000.
Explanation of Revisions
Although this Treasury decision adopts
the rules of the proposed regulations with
no substantive change, some of the lan-
guage included in the proposed regulations
and the existing final regulations is clari-
fied and updated to reflect current law and
practice. The revisions are discussed in
this preamble.
Employers that request to participate
in the Form 944 Program must receive
written notice to file Form 944 before
they are permitted to file the form. Once
employers receive this notice, they must
file Form 944 for each year and cannot
file Forms 941 until they are notified that
their filing requirement has changed to
Forms 941 because (1) they contacted the
IRS to request that their filing requirement
be changed to Forms 941, or (2) they no
longer qualify for the Form 944 Program.
The IRS issued guidance published in the
Internal Revenue Bulletin (Rev. Proc.
2009–13, 2009–3 I.R.B. 323, and Rev.
Proc. 2009–51, 2009–45 I.R.B. 625) that
provides procedures for employers to fol-
low to request to file Form 944 instead of
Forms 941 (“opt in”). Additionally, Rev.
Proc. 2009–13 and Rev. Proc. 2009–51
provide procedures for employers to fol-
low to request to file Forms 941 instead
of Form 944 when the IRS previously
notified them they should file Form 944
(“opt out”). Under Rev. Proc. 2009–13,
for tax year 2009, employers who were
notified they should file Form 944 could
only opt out if they anticipated that their
employment tax liability would exceed the
$1,000thresholdoriftheywantedtoe-file
Forms 941 quarterly instead. Beginning
in 2010, employers were able to opt out
of filing Form 944 for any reason if they
followed the procedures set forth in Rev.
Proc. 2009–51 or its successor. These
final regulations clarify that employers
should follow the procedures contained in
Rev. Proc 2009–51 or its successor to opt
in or to opt out of the Form 944 Program.
The revisions contained in these final
regulations also impact employers that file
Spanish-language returns or returns for
U.S. possessions. For tax year 2012 and
later, Form 944–SS,Employer’s ANNUAL
Federal Tax Return (American Samoa,
Guam, the Commonwealth of the North-
ern Mariana Islands, and the U.S. Virgin
Islands)and Form 944–PR,Planilla para
la Declaración Federal ANUAL del Pa-
trono, will be eliminated due to the low
volume of employers filing these forms.
Employers who would otherwise file a
Form 944–SS or Form 944–PR will file
a Form 944. The Treasury Department
and the IRS plan to retain Form 944(SP),
Declaración Federal ANUAL de Impuestos
del Patrono o Empleador, which is the
Spanish equivalent of Form 944. Employ-
ers in the United States in the Form 944
Program may file Form 944(SP) as an al-
ternative to filing Form 944. Additionally,
employers in American Samoa, Guam,
the Commonwealth of the Northern Mar-
iana Islands, the U.S. Virgin Islands, and
Puerto Rico may file a Form 944(SP) as an
alternative to filing Form 944, for tax year
2012 and later. These final regulations
remove references to the eliminated forms
and update the language included in the
proposed regulations and the existing final
regulations to provide guidance to former
Form 944–SS and Form 944–PR filers
who are required to file Form 944 instead.
Employers in American Samoa, Guam,
the Commonwealth of the Northern Mar-
iana Islands, and the U.S. Virgin Islands
whoarerequiredtofileForm944fortax
year 2012 and later can request to file
Forms 941–SS instead of Form 944. Em-
ployers in Puerto Rico who are required
to file Form 944 for tax year 2012 and
later can request to file Forms 941–PR
instead of Form 944. Employers re-
quired to file Form 944 should follow
the procedures contained in Rev. Proc.
2009–51 or its successor to request to
file Form 941–SS or Form 941–PR. See
§601.601(d)(2)(ii)(b).
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It
2012–8 I.R.B.390February 21, 2012

is hereby certified that these regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties pursuant to the Regulatory Flexibility
Act (5 U.S.C. Chapter 6). The regulations
under sections 6011 and 6302 affect only
a small number of taxpayers that file em-
ployment tax returns, and participation in
the Form 944 Program is voluntary. There-
fore, the Treasury Department and the IRS
have determined that the regulations will
not affect a substantial number of small en-
tities. Pursuant to section 7805(f) of the
Internal Revenue Code, the proposed reg-
ulations preceding these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small en-
tities. No comments from the Small Busi-
ness Administration were received.
Drafting Information
The principal authors of these reg-
ulations are Blaise Dusenberry and
Jennifer Records of the Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Adoption Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 is amended by removing the entry
for §31.6302–1T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.6011(a)–1 is
amended by revising paragraphs (a)(1),
(a)(4), (a)(5) and (g) to read as follows:
§31.6011(a)–1 Returns under Federal
Insurance Contributions Act.
(a)Requirement—(1)In general.Ex-
cept as otherwise provided in paragraphs
(a)(3) and (a)(5) of this section and in
§31.6011(a)–5 every employer is required
to make a return for the first calendar
quarter in which the employer pays wages,
other than wages for agricultural labor,
subject to the tax imposed by the Fed-
eral Insurance Contributions Act, and is
required to make a return for each sub-
sequent calendar quarter (whether or not
wages are paid therein) until the employer
has filed a final return in accordance with
§31.6011(a)–6. Except as otherwise pro-
vided in §31.6011(a)–8 and in paragraphs
(a)(3), (a)(4), and (a)(5) of this section,
Form 941, “Employer’s QUARTERLY
Federal Tax Return,” is the form pre-
scribed for making the return required by
this paragraph (a)(1). Such return shall
not include wages for agricultural labor
required to be reported on any return pre-
scribed by paragraph (a)(2) of this section.
The return shall include wages received by
an employee in the form of tips only to the
extent of the tips reported by the employee
to the employer in a written statement fur-
nished to the employer pursuant to section
6053(a).
*****
(4)Employers in Puerto Rico, the U.S.
Virgin Islands, Guam, American Samoa,
or the Commonwealth of the Northern
Mariana Islands. Except as otherwise pro-
vided in paragraph (a)(5), Form 941–PR,
“Planilla para la Declaracion Federal
TRIMESTRAL del Patrono,”istheform
prescribed for use in making the return
required under paragraph (a)(1) of this
section in the case of every employer
whose principal place of business is in
Puerto Rico, or if the employer has em-
ployees who are subject to income tax
withholding for Puerto Rico. Except as
otherwise provided in paragraph (a)(5),
Form 941–SS, “Employer’s QUARTERLY
Federal Tax Return (American Samoa,
Guam, the Commonwealth of the North-
ern Mariana Islands, and the U.S. Virgin
Islands),” is the form prescribed for use
in making the return required under para-
graph (a)(1) of this section in the case
of every employer whose principal place
of business is in the U.S. Virgin Islands,
Guam, American Samoa, or the Common-
wealth of the Northern Mariana Islands,
or if the employer has employees who
are subject to income tax withholding for
these U.S. possessions. Form 941 (or
Form 944, as described under paragraph
(a)(5) of this section, if the IRS notified
the employer that Form 944 must be filed
in lieu of Form 941) is the form prescribed
for making the return in the case of ev-
ery employer who is required pursuant to
§31.6011(a)–4 to make a return of income
tax withheld from wages.
(5)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. Employers notified of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944) are re-
quired to file Form 944, “Employer’s
ANNUAL Federal Tax Return,” instead
of Form 941 (or Form 941–SS or Form
941–PR under paragraph (a)(4) of this
section) to make a return as required by
paragraph (a)(1) of this section. Upon
proper request by the employer, the IRS
will notify employers in writing of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944). The
IRS will notify employers when they no
longer qualify for the Employers’ Annual
Federal Tax Program (Form 944) and must
file Forms 941 instead. Qualified employ-
ers are those with an estimated annual
employment tax liability (that is, social
security, Medicare, and withheld Federal
income taxes) of $1,000 or less for the
entire calendar year, except employers
required under—
(A) Paragraph (a)(2) of this section to
make a return on Form 943, “Employer’s
Annual Federal Tax Return For Agricul-
tural Employees”; or
(B) Paragraph (a)(3) of this section to
make a return on Schedule H (Form 1040),
“Household Employment Taxes.”
(ii)Requests to opt in or opt out of the
Employers’ Annual Federal Tax Program
(Form 944). The IRS has established pro-
cedures in Revenue Procedure 2009–51
published in the Internal Revenue Bulletin
for employers to follow to request to par-
ticipate in the Employers’ Annual Federal
Tax Program (Form 944) (to opt in) and to
request to be removed from the Employ-
ers’ Annual Federal Tax Program (Form
944) after becoming a participant in or-
der to file Forms 941 instead (to opt out).
The IRS will notify employers that their
filing requirements have changed to Form
944 or Forms 941. Employers must fol-
low the procedures in Revenue Procedure
2009–51 or its successor to request to opt
in or opt out of the Employers’ Annual
Federal Tax Program (Form 944).
*****
February 21, 20123912012–8 I.R.B.

(g)Effective/applicability dates. Para-
graphs (a)(1) and (a)(5)(i) of this section
apply to taxable years beginning on or af-
ter December 30, 2008. Paragraph (a)(4)
of this section applies to taxable years
beginning on or after January 1, 2012.
Paragraph (a)(5)(ii) of this section applies
to taxable years beginning on or after
January 1, 2010. The rules of paragraph
(a)(1) of this section that apply to tax-
able years beginning before December 30,
2008, are contained in §31.6011(a)–1 as
in effect prior to December 30, 2008. The
rules of paragraph (a)(4) of this section
that apply to taxable years beginning
before January 1, 2012, are contained
in §31.6011(a)–1 as in effect prior to
January 1, 2012. The rules of paragraph
(a)(5)(ii) of this section that apply to
taxable years beginning before January 1,
2010, but on or after December 30, 2008,
are contained in §31.6011(a)–1T as in
effect on or after December 30, 2008. The
rules of paragraph (a)(5) of this section
that apply to taxable years beginning
before December 30, 2008, are contained
in §31.6011(a)–1T as in effect prior to
December 30, 2008.
§31.6011(a)–1T [Removed].
Par. 3. Section 31.6011(a)–1T is re-
moved.
Par. 4. Section 31.6011(a)–4 is
amended by revising paragraphs (a)(1),
(a)(4) and (d) to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
(a)Withheld from wages—(1)In gen-
eral. Except as otherwise provided in para-
graphs (a)(2), (a)(3), (a)(4), and (b) of this
section, and in §31.6011(a)–5, every per-
sonrequiredtomakeareturnofincome
tax withheld from wages pursuant to sec-
tion 3402 shall make a return for the first
calendar quarter in which the person is re-
quired to deduct and withhold such tax
and for each subsequent calendar quarter,
whether or not wages are paid therein, un-
til the person has filed a final return in ac-
cordance with §31.6011(a)–6. Except as
otherwise provided in paragraphs (a)(2),
(a)(3), (a)(4), and (b) of this section, and
in §31.6011(a)–8, Form 941, “Employer’s
QUARTERLY Federal Tax Return,” is the
form prescribed for making the return re-
quired under this paragraph (a)(1).
*****
(4)Employers in the Employers’ An-
nual Federal Tax Program (Form 944)—(i)
In general. Employers notified of their
qualification for the Employers’ Annual
Federal Tax Program (Form 944) are re-
quired to file Form 944, “Employer’s
ANNUAL Federal Tax Return,” instead
of Form 941 to make a return of income
tax withheld from wages pursuant to sec-
tion 3402. Upon proper request by the
employer, the IRS will notify employers
in writing of their qualification for the
Employers’ Annual Federal Tax Program
(Form 944). The IRS will notify employ-
ers when they no longer qualify for the
Employers’ Annual Federal Tax Program
(Form 944) and must file Forms 941 in-
stead. Qualified employers are those with
an estimated annual employment tax lia-
bility (that is, socialsecurity, Medicare,
and withheld federal income taxes) of
$1,000 or less for the entire calendar year,
except employers required under—
(A) Paragraph (a)(3) of this section to
makeareturnonForm943,“Employer’s
Annual Federal Tax Return For Agricul-
tural Employees”; or
(B) Paragraph (a)(2) of this section to
make a return on Schedule H (Form 1040),
“Household Employment Taxes.”
(ii)Request to opt in or opt out of the
Employers’ Annual Federal Tax Program
(Form 944). The IRS established proce-
dures in Revenue Procedure 2009–51 pub-
lished in the Internal Revenue Bulletin for
employers to follow to request to partici-
pate in the Employers’ Annual Federal Tax
Program (Form 944) (to opt in) and to re-
quest to be removed from the Employers’
Annual Federal Tax Program (Form 944)
after becoming a participant in order to
file Forms 941 instead (to opt out). The
IRS will notify employers that their fil-
ing requirements have changed to Form
944 or Forms 941. Employers must fol-
low the procedures in Revenue Procedure
2009–51 or its successor to opt in or opt
out of the Employers’ Annual Federal Tax
Program (Form 944).
*****
(d)Effective/applicability dates. Para-
graphs (a)(1) and (a)(4)(i) of this sec-
tion apply to taxable years beginning
on or after December 30, 2008. Para-
graph (a)(4)(ii) of this section applies
to taxable years beginning on or after
January 1, 2010. The rules of paragraph
(a)(1) of this section that apply to taxable
years beginning before December 30,
2008, are contained in §31.6011(a)–4 as
in effect prior to December 30, 2008.
The rules of paragraph (a)(4)(ii) of
this section that apply to taxable years
beginning before January 1, 2010, but
on or after December 30, 2008, are
contained in §31.6011(a)–4T as in effect
on or after December 30, 2008. The
rules of paragraph (a)(4) of this section
that apply to taxable years beginning
before December 30, 2008, are contained
in §31.6011(a)–4T as in effect prior to
December 30, 2008. Paragraph (b)(6) of
this section (relating to certain payments
made by government entities subject to
withholding under section 3402(t)) applies
to payments made by government entities
under section 3402(t) after December 31,
2012.
§31.6011(a)–4T [Removed].
Par. 5. Section 31.6011(a)–4T is re-
moved.
Par. 6. Section 31.6071(a)–1 is
amended by revising paragraph (a)(1) to
read as follows:
§31.6071(a)–1 Time for filing returns and
other documents.
(a)Federal Insurance Contributions
Act and income tax withheld from wages
and from nonpayroll payments—(1)Quar-
terly or annual returns.Except as pro-
vided in paragraph (a)(4) of this section,
each return required to be made under
§31.6011(a)–1, in respect of the taxes
imposed by the Federal Insurance Con-
tributions Act (26 U.S.C. 3101–3128), or
required to be made under §31.6011(a)–4,
in respect of income tax withheld, shall be
filed on or before the last day of the first
calendar month following the period for
which it is made. A return may be filed
on or before the 10th day of the second
calendar month following such period if
timely deposits under section 6302(c) of
the Code and the regulations have been
made in full payment of such taxes due for
the period.
*****
Par. 7. Section 31.6302–0 is amended
as follows:
1. Revising the introductory text.
2012–8 I.R.B.392February 21, 2012

2. Revising the section heading for
§31.6302–1.
3. Adding entries for paragraphs
(b)(4)(i), (b)(4)(ii), (c)(5), (c)(6), (f)(4)(ii)
and (f)(4)(iii) for §31.6302–1.
4. Revising the entries for paragraphs
(d), (f)(4)(i), (f)(5), (g)(1) and (n) for
§31.6302–1.
5.Removing the heading for
§31.6302–1T and the entries for para-
graphs (a) though (n).
The revisions and additions to read as
follows:
§31.6302–0 Table of contents.
This section lists the table of contents
for §§31.6302–1 through 31.6302–4.
§31.6302–1 Deposit rules for taxes under
the Federal Insurance Contributions Act
(FICA) and withheld income taxes.
*****
(b) * * *
(4) * * *
(i) In general.
(ii) Adjustments and claims for refund.
(c) * * *
(5) Exception to the monthly and semi-
weekly deposit rules for employers in the
Employers’ Annual Federal Tax Program
(Form 944).
(6) Extension of time to deposit for em-
ployers in the Employers’ Annual Federal
Tax Program (Form 944) during the pre-
ceding year.
*****
(d) Examples.
*****
(f) * * *
(4) * * *
(i)De minimisdeposit rules for quar-
terly and annual return periods beginning
on or after January 1, 2001.
(ii)De minimisdeposit rule for quar-
terlyreturnperiodsbeginningonorafter
January 1, 2010.
(iii)De minimisdeposit rule for em-
ployers who file Form 944.
(5) Examples.
(g) * * *
(1) In general.
*****
(n) Effective/applicability dates.
*****
§31.6302–0T [Removed].
Par. 8. Section 31.6302–0T is removed.
Par. 9. Section 31.6302–1 is amended
by revising paragraphs (b)(4), (c)(5),
(c)(6), (d)Example 6, (e)(2), (f)(4), (f)(5)
Example 3, (g)(1) and (n) to read as fol-
lows:
§31.6302–1 Deposit rules for taxes under
the Federal Insurance Contributions Act
(FICA) and withheld income taxes.
*****
(b) * * *
(4)Lookback period—(i)In general.
For employers who file Form 941, “Em-
ployer’s QUARTERLY Federal Tax Re-
turn,” (or any related Spanish-language
returns or returns for U.S. possessions)
the lookback period for each calendar
year is the twelve month period ended
the preceding June 30. For example, the
lookback period for calendar year 2006
is the period July 1, 2004, to June 30,
2005. The lookback period for employers
who file Form 944, “Employer’s ANNUAL
Federal Tax Return,” or filed Form 944
(or any related Spanish-language returns
or returns for U.S. possessions) for either
of the two previous calendar years, is the
second calendar year preceding the current
calendar year. For example, the lookback
period for calendar year 2006 is calendar
year 2004. In determining status as either
a monthly or semi-weekly depositor, an
employer should determine the aggregate
amount of employment tax liabilities re-
ported on its return(s) (Forms 941 or Form
944) for the lookback period. The amount
of employment tax liabilities reported for
the lookback period is the amount the em-
ployer reported on either Forms 941 or
Form 944 even if the employer is required
to file the other form for the current calen-
dar year. New employers shall be treated
as having employment tax liabilities of
zero for any part of the lookback period
before the date the employer started or
acquired its business.
(ii)Adjustments and claims for refund.
The employment tax liability reported on
the original return for the return period is
the amount taken into account in determin-
ing whether the aggregate amount of em-
ployment taxes reported for the lookback
period exceeds $50,000. Any amounts re-
ported on adjusted returns or claims for
refund pursuant to sections 6205, 6402,
6413, and 6414 filed after the due date
of the original return are not taken into
account when determining the aggregate
amount of employment taxes reported for
the lookback period. Prior period adjust-
ments reported on Forms 941 or Form 944
for 2008 and earlier years are taken into ac-
count in determining the employment tax
liability for the return period in which the
adjustments are reported.
(c) * * *
(5)Exception to the monthly and semi-
weekly deposit rules for employers in the
Employers’ Annual Federal Tax Program
(Form 944). Generally, an employer who
files Form 944 for a taxable year may remit
its accumulated employment taxes with its
timely filed return for that taxable year and
is not required to deposit under either the
monthly or semi-weekly rules set forth in
paragraphs (c)(1) and (c)(2) of this section
during that taxable year. An employer who
files Form 944 whose actual employment
tax liability exceeds the eligibility thresh-
old, as set forth in §§31.6011(a)–1(a)(5)
and 31.6011(a)–4(a)(4), will not qualify
for this exception and should follow the
deposit rules set forth in this section.
(6)Extension of time to deposit for em-
ployers in the Employers’ Annual Federal
Tax Program (Form 944) during the pre-
ceding year. An employer who filed Form
944 for the preceding year but will file
Forms 941 instead for the current year will
be deemed to have timely deposited its cur-
rent year’s January deposit obligation(s)
under paragraphs (c)(1) through (c)(4) of
this section if the employer deposits the
amount of such deposit obligation(s) by
March15ofthatyear.
*****
(d) * * *
Example 6.Extension of time to deposit for
employers who filed Form 944 for the preceding year
satisfied. F (a monthly depositor) was notified to
file Form 944 to report its employment tax liabilities
for the 2006 calendar year. F filed Form 944 on
January 31, 2007, reporting a total employment tax
liability for 2006 of $3,000. Because F’s annual
employment tax liability for the 2006 taxable year
exceeded $1,000 (the applicable eligibility threshold
for that taxable year), the IRS notified F to file
Forms 941 for calendar year 2007 and thereafter.
Based on F’s liability during the lookback period
(calendar year 2005, pursuant to paragraph (b)(4)(i)
of this section), F is a monthly depositor for 2007.
F accumulates $1,000 in employment taxes during
January 2007. Because F is a monthly depositor, F’s
January deposit obligation is due February 15, 2007.
February 21, 20123932012–8 I.R.B.

F does not deposit these accumulated employment
taxes on February 15, 2007. F accumulates $1,500
in employment taxes during February 2007. F’s
February deposit is due March 15, 2007. F deposits
the $2,500 of employment taxes accumulated during
January and February on March 15, 2007. Pursuant
to paragraph (c)(6) of this section, F will be deemed
to have timely deposited the employment taxes due
for January 2007, and, thus, the IRS will not impose
a failure-to-deposit penalty under section 6656 for
that month.
(e) * * *
(2) The termemployment taxesdoes not
include taxes with respect to wages for do-
mestic service in a private home of the em-
ployer, unless the employer is otherwise
required to file a Form 941 or Form 944
under §31.6011(a)–4 or §31.6011(a)–5.
In the case of employers paying advance
earned income credit amounts for periods
ending before January 1, 2011, the amount
of taxes required to be deposited shall
be reduced by advance amounts paid to
employees. Also, see §31.6302–3 con-
cerning a taxpayer’s option with respect to
payments made before January 1, 1994, to
treat backup withholding amounts under
section 3406 separately.
(f) * * *
(4)De minimis rule—(i)De minimis de-
posit rules for quarterly and annual return
periods beginning on or after January 1,
2001. If the total amount of accumulated
employment taxes for the return period
isde minimisand the amount is fully
deposited or remitted with a timely filed
return for the return period, the amount
deposited or remitted will be deemed to
have been timely deposited. The total
amount of accumulated employment taxes
isde minimisif it is less than $2,500 for the
return period or if it isde minimispursuant
to paragraph (f)(4)(ii) of this section.
(ii)De minimis deposit rule for quar-
terly return periods beginning on or after
January 1, 2010. For purposes of para-
graph (f)(4)(i) of this section, if the total
amount of accumulated employment taxes
for the immediately preceding quarter was
less than $2,500, unless §31.6302–1(c)(3)
applies to require a deposit at the close of
the next day, then the employer will be
deemed to have timely deposited the em-
ployer’s employment taxes for the current
quarter if the employer complies with the
time and method payment requirements
contained in paragraph (f)(4)(i) of this sec-
tion.
(iii)De minimis deposit rule for em-
ployers who file Form 944.Anemployer
who files Form 944 whose employment
tax liability for the year equals or exceeds
$2,500 but whose employment tax liability
foraquarteroftheyearisde minimispur-
suant to paragraph (f)(4)(i) of this section
will be deemed to have timely deposited
the employment taxes due for that quarter
if the employer fully deposits the employ-
ment taxes accumulated during the quarter
by the last day of the month following the
close of that quarter. Employment taxes
accumulated during the fourth quarter can
be either deposited by January 31 or remit-
ted with a timely filed return for the return
period.
(5) * * *
Example 3.De minimis deposit rule for employ-
ers who file Form 944 satisfied. K (a monthly de-
positor) was notified to file Form 944 to report its
employment tax liabilities for the 2006 calendar year.
In the first quarter of 2006, K accumulates employ-
ment taxes in the amount of $1,000. On April 28,
2006, K deposits the $1,000 of employment taxes
accumulated in the first quarter. K accumulates an-
other $1,000 of employment taxes during the sec-
ond quarter of 2006. On July 31, 2006, K deposits
the $1,000 of employment taxes accumulated in the
second quarter. K’s business grows and accumulates
$1,500 in employment taxes during the third quarter
of 2006. On October 31, 2006, K deposits the $1,500
of employment taxes accumulated in the third quarter.
K accumulates another $2,000 in employment taxes
during the fourth quarter. K files Form 944 on Jan-
uary 31, 2007, reporting a total employment tax li-
ability for 2006 of $5,500 and submits a check for
the remaining $2,000 of employment taxes with the
return. K will be deemed to have timely deposited
the employment taxes due for all of 2006 because K
complied with thede minimisdeposit rule provided
in paragraph (f)(4)(iii) of this section. Therefore, the
IRS will not impose a failure-to-deposit penalty un-
der section 6656 for any month of the year. Under this
de minimisdeposit rule, because K was required to
file Form 944 for calendar year 2006, if K’s employ-
ment tax liability for a quarter isde minimis,thenK
may deposit that quarter’s liability by the last day of
the month following the close of the quarter. Thisde
minimisrule allows K to have the benefit of the same
quarterlyde minimisamount K would have received
if K filed Form 941 each quarter instead of Form 944
annually. Thus, because K’s employment tax liabil-
ity for each quarter wasde minimis, K could deposit
quarterly.
(g)Agricultural employers—special
rules—(1)In general. An agricultural em-
ployer reports wages paid to farm workers
annually on Form 943 (Employer’s Annual
Tax Return for Agricultural Employees)
and reports wages paid to nonfarm work-
ers quarterly on Form 941 or annually on
Form 944. Accordingly, an agricultural
employer must treat employment taxes re-
portable on Form 943 (“Form 943 taxes”)
separately from employment taxes re-
portable on Form 941 or Form 944 (“Form
941 or Form 944 taxes”). Form 943 taxes
and Form 941 or Form 944 taxes are not
combined for purposes of determining
whether a deposit of either is due, whether
the One-Day rule of paragraph (c)(3) of
this section applies, or whether any safe
harbor is applicable. In addition, Form
943 taxes and Form 941 or Form 944
taxes must be deposited separately. (See
paragraph (b) of this section for rules for
determining an agricultural employer’s de-
posit status for Form 941 taxes). Whether
an agricultural employer is a monthly or
semi-weekly depositor of Form 943 taxes
is determined according to the rules of this
paragraph (g).
*****
(n)Effective/applicability dates.Ex-
cept for the deposit of employment taxes
attributable to payments made by gov-
ernment entities under section 3402(t),
§§31.6302–1 through 31.6302–3 apply
with respect to the deposit of employ-
ment taxes attributable to payments made
after December 31, 1992. Paragraph
(e)(1)(iii)(E) of this section applies with
respect to the deposit of employment taxes
attributable to payments made by gov-
ernment entities under section 3402(t)
after December 31, 2012. To the ex-
tent that the provisions of §§31.6302–1
through 31.6302–3 are inconsistent with
the provisions of §§31.6302(c)–1 and
31.6302(c)–2, a taxpayer will be consid-
ered to be in compliance with §§31.6302–1
through 31.6302–3 if the taxpayer makes
timely deposits during 1993 in accordance
with §§31.6302(c)–1 and 31.6302(c)–2.
Paragraphs (b)(4), (c)(5), (c)(6), (d)Ex-
ample 6, (e)(2), (f)(4)(i), (f)(4)(iii), (f)(5)
Example 3, and (g)(1) of this section
apply to taxable years beginning on or
after December 30, 2008. Paragraph
(f)(4)(ii) of this section applies to taxable
years beginning on or after January 1,
2010. The rules of paragraphs (e)(2) and
(g)(1) of this section that apply to taxable
years beginning before December 30,
2008, are contained in §31.6302–1 as in
effect prior to December 30, 2008. The
rules of paragraphs (b)(4), (c)(5), (c)(6),
(d)Example 6, (f)(4)(i), (f)(4)(iii), and
(f)(5)Example 3of this section that apply
to taxable years beginning on or after
2012–8 I.R.B.394February 21, 2012

January 1, 2006, and before December
30, 2008, are contained in §31.6302–1T
as in effect prior to December 30, 2008.
The rules of paragraphs (b)(4) and (f)(4)
of this section that apply to taxable years
beginning before January 1, 2006, are
contained in §31.6302–1 as in effect
prior to January 1, 2006. The rules of
paragraph (g) of this section eliminating
use of Federal tax deposit coupons apply
to deposits and payments made after
December 31, 2010.
*****
§31.6302–1T [Removed].
Par. 10. Section 31.6302–1T is re-
moved.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 6, 2011.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 9,
2011 4:14 p.m., and published in the issue of the Federal
Register for December 14, 2011, 76 F.R. 77672)
Section 6038D.—Returns
and Records With Respect
to Certain Fringe Benefit
Plans
26 CFR 1.6038D–1T: Reporting with respect to spec-
ified foreign financial assets, definition of terms (tem-
porary).
T.D. 9567
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Reporting of Specified Foreign
Financial Assets
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to the pro-
visions of the Hiring Incentives to Restore
Employment (HIRE) Act, Public Law
111–147 (124 Stat. 71) that require for-
eign financial assets to be reported to
the Internal Revenue Service for taxable
years beginning after March 18, 2010.
In particular, the temporary regulations
provide guidance relating to the require-
ment that individuals attach a statement
to their income tax return to provide
required information regarding foreign
financial assets in which they have an in-
terest. The temporary regulations affect
individuals required to file Form 1040,
“U.S. Individual Income Tax Return,”
and certain individuals required to file
Form 1040–NR, “U.S. Nonresident Alien
Income Tax Return.” The text of these
temporary regulations also serves as the
text of proposed regulations contained in
a cross-reference notice of proposed rule-
making (REG–130302–10) published in
this issue of the Bulletin.
DATES:Eff
ective Date:These regulations
are effect
ive on December 19, 2011.
Applicabi
lity Dates:For dates of
applicabi
lity, see §§1.6038D–1T(b),
1.6038D–2
T(e),1.6038D–3T(e),
1.6038D–
4T(b),1.6038D–5T(g),
1.6038D–
7T(d), and 1.6038D–8T(g).
FOR FURTHER INFORMATION
CONTACT: Joseph S. Henderson, (202)
622–3880 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public
comment pursuant to the Administra-
tive Procedure Act (5 U.S.C. 553). For
this reason, the collection of information
contained in these regulations has been
reviewed and pending receipt and eval-
uation of public comments, approved by
the Office of Management and Budget
under Control Number 1545–2195. Re-
sponses to this collection of Information
are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid con-
trol number. The collection of information
contained in these regulations is satisfied
by filing Form 8938,“Statement of Spec-
ified Foreign Financial Assets,”OMB No.
1545–2195, with the respondent’s income
tax return.
For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the pream-
ble to the cross-referencing notice of pro-
posed rulemaking published in this issue of
the Bulletin.
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 tax
return information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR Part
1) for reporting specified foreign financial
assets under section 6038D of the Internal
Revenue Code (Code).
Section 6038D was enacted by section
511 of the HIRE Act. Section 6038D(a) re-
quires an individual who holds any interest
in a specified foreign financial asset dur-
ing the taxable year to attach a statement
to that individual’s return of tax imposed
by subtitle A of the Code to report the in-
formationidentifiedinsection6038D(c),
if the aggregate value of the specified for-
eign financial assets in which the indi-
vidual holds an interest exceeds $50,000
for the taxable year, or such higher dollar
amount as the Secretary may prescribe.
Section 6038D(b) defines specified for-
eign financial assets. For purposes of sec-
tion 6038D, a specified foreign financial
asset is any financial account maintained
by a foreign financial institution and, to the
extent not held in an account at a finan-
cial institution: (i) any stock or security
issued by any person other than a United
States person; (ii) any financial instrument
or contract held for investment that has an
issuer or counterparty that is not a United
States person; and (iii) any interest in a for-
eign entity.
Section 6038D(c) sets forth the infor-
mation an individual must include on the
statement reporting specified foreign fi-
nancial assets. For a financial account, the
name and address of the financial institu-
tion in which the account is maintained
February 21, 20123952012–8 I.R.B.

must be reported, as well as the account
number. For any stock or security, the
name and address of the non-U.S. issuer,
as well as information necessary to iden-
tify the class or issue of which the stock or
security is a part, must be reported. In the
case of any other instrument, contract, or
interest, the names and addresses of all is-
suers and counterparties must be reported,
together with the information necessary to
identify the instrument, contract, or inter-
est. The maximum value of each specified
foreign financial asset during the taxable
year also must be reported.
An individual who fails to disclose the
information required to be reported by
section 6038D(c) is subject to a $10,000
penalty under section 6038D(d)(1). Sec-
tion 6038D(d)(2) provides that if the fail-
ure to comply continues for more than 90
days after the day on which the Secretary
mails notice of the failure to the individ-
ual, the individual must pay an additional
penalty of $10,000 for each 30-day pe-
riod (or fraction thereof) during which
the failure to disclose continues after the
expiration of the 90-day period. This con-
tinuation penalty is not to exceed $50,000
with respect to any such failure.
Under section 6038D(e), the aggregate
value of any specified foreign financial as-
sets in which an individual has an inter-
est is presumed to exceed the reporting
thresholds set forth in section 6038D(a) if
the Secretary determines that the individ-
ual has an interest in one or more spec-
ified foreign financial assets and has not
provided sufficient information to demon-
strate the aggregate value of the assets.
This presumption applies for purposes of
assessing the penalties imposed under sec-
tion 6038D.
Section 6038D(f) authorizes the Secre-
tary to issue regulations or other guidance
applying the provisions of section 6038D
to any domestic entity as if the domestic
entity were an individual, if the domes-
ticentityisformedoravailedofforthe
purposes of holding, directly or indirectly,
specified foreign financial assets.
Section 6038D(g) provides that no
penalty will be imposed by section 6038D
for any failure to report that is shown to
be due to reasonable cause and not due to
willful neglect. A foreign law restriction,
whether civil or criminal, on disclosing
the information required to be reported is
not reasonable cause.
Section 6038D(h) authorizes the Secre-
tary to issue regulations or other guidance
as may be necessary or appropriate to
carry out the purposes of section 6038D.
This guidance may include appropriate
exceptions from reporting for nonresident
aliens,bona fideresidents of U.S. pos-
sessions, and classes of assets identified
by the Secretary, such as assets subject to
duplicative reporting requirements. The
term “U.S. possession” means Ameri-
can Samoa, Guam, the Northern Mariana
Islands, Puerto Rico, or the U.S. Virgin Is-
lands, each of which is generally referred
to as a U.S. territoryin this explanation.
Section 6038D is effective for taxable
years beginning after March 18, 2010 (the
date of enactment of the HIRE Act). No-
tice 2011–55, 2011–29 I.R.B. 53 (July 18,
2011), provides that an individual that has
a taxable year that begins after March 18,
2010, and is required to attach a statement
of specified foreign financial assets to an
annual return to be filed prior to the is-
suance of Form 8938, “Statement of Spec-
ified Foreign Financial Assets,” is to sat-
isfy his or her obligation under section
6038D for such taxable year by attaching
Form 8938 for such taxable year to his
or her next annual return required to be
filed after the issuance of Form 8938.See
§601.601(d)(2)(ii)(b) of this chapter.
Explanation of Provisions
1.Requirement to Report Specified
Foreign Financial Assets
Section 1.6038D–1T sets forth the defi-
nitions of certain terms for purposes of sec-
tion 6038D and the regulations . Section
1.6038D–2T provides rules for determin-
ing if a specified individual (as defined in
§1.6038D–1T(a)(2)) or a specified domes-
tic entity (collectively referred to as a spec-
ified person) must file a Form 8938 with
the specified person’s annual return (as de-
fined in §1.6038D–1T(a)(11)).
For purposes of section 6038D, a speci-
fied person’s annual return includes an an-
nual federal income tax return of a speci-
fied individual or an annual federal income
tax return or information return of a speci-
fied domestic entity filed with the Internal
Revenue Service under section 876, 6011,
6012, 6013, 6031, or 6037, and the regu-
lations. For example, a partnership that is
a specified domestic entity is required to
attach Form 8938 to its Form 1065,“U.S.
Return of Partnership Income,”for the tax-
able year.
A specified person must file Form 8938
if the person has an interest in one or more
specified foreign financial assets and those
assets have an aggregate fair market value
exceeding either $50,000 on the last day
of the taxable year or $75,000 at any time
during the taxable year. Married specified
individuals filing a joint annual return are
not required to file Form 8938 unless the
aggregate value of all of the specified for-
eign financial assets in which either spouse
has an interest exceeds $100,000 on the
last day of the taxable year or $150,000 at
any time during the taxable year.
An individual residing outside the
United States can reasonably be expected
to have a greater amount of specified for-
eign financial assets for reasons unrelated
to the policies underlying section 6038D.
Accordingly, the regulations increase the
reporting threshold of section 6038D(a)
in the case of a specified individual who
is a qualified individual under section
911(d)(1). The regulations provide that
such a specified individual is not required
to file Form 8938 unless the aggregate
value of the specified foreign financial
assets in which the specified individual
has an interest exceeds $200,000 on the
last day of the taxable year or $300,000
at any time during the taxable year. If
married specified individuals file a joint
annual return and either spouse is a qual-
ified individual under section 911(d)(1),
the regulations provide that they are not
required to file Form 8938 unless the ag-
gregate value of all of the specified foreign
financial assets in which either spouse has
an interest exceeds $400,000 on the last
day of the taxable year or $600,000 at any
time during the taxable year.
As discussed in section 6 of this expla-
nation, certain specified foreign financial
assets are excepted from the reporting obli-
gations imposed under section 6038D. As-
sets reported by a specified person on cer-
tain other forms timely filed with the Inter-
nal Revenue Service are not required to be
separately identified on Form 8938, but if
a specified person is required to file Form
8938, the number of such other forms filed
with the Internal Revenue Service must be
reported on Form 8938. In addition, the
value of specified foreign financial assets
that qualify for this exception is included
2012–8 I.R.B.396February 21, 2012

for purposes of determining whether the
aggregate value of specified foreign finan-
cial assets in which a specified individual
has an interest exceeds the applicable re-
porting threshold.
Another category of assets excepted
from reporting are assets considered
owned by a specified person that is treated
as the owner of certain trusts. Addition-
ally, certain assets held by a specified
individual who is abona fideresident of
a U.S. territory are also excepted from re-
porting. Specified foreign financial assets
that qualify for either of these two ex-
ceptions are not included for purposes of
determining whether the aggregate value
of specified foreign financial assets in
which a specified person has an interest
exceeds the applicable reporting threshold.
The Form 8938 reporting period is the
taxable year for a specified individual who
is a U.S. citizen, a resident alien, or abona
fideresident of a U.S. territory for the en-
tire taxable year. The Form 8938 report-
ing period for a specified domestic entity
is the entity’s taxable year. The Form 8938
reporting period for a specified individual
who is a U.S. citizen or resident alien for
less than the entire taxable year is the por-
tion of the taxable year for which the spec-
ified individual is a U.S. citizen or resident
alien. The Form 8938 reporting period for
a specified individual who isbona fideres-
ident of Puerto Rico for less than the entire
taxable year under §1.937–1(f)(2)(ii) is the
portion of the taxable year for which the
specified individual is a U.S. citizen.
A specified person is not required to
file Form 8938 for any taxable year for
which the specified person is not required
to file an annual return (for example, a
Form 1040,“U.S. Individual Income Tax
Return,”Form 1041, “U.S. Income Tax Re-
turn for Estates and Trusts,”Form 1120,
“U.S. Corporation Income Tax Return,”
Form 1120–S, “U.S. Income Tax Return for
an S Corporation,” or Form 1065,“U.S.
Return of Partnership Income”)with the
Internal Revenue Service.
If a specified domestic entity is a mem-
ber of an affiliated group of corporations
that files a consolidated return, the Form
8938 of the specified domestic entity must
be filed with the consolidated federal in-
come tax return of the affiliated group.
A.Individuals required to file Form 8938,
“Statement of Specified Foreign Financial
Assets”
For section 6038D purposes, a specified
individual is a U.S. citizen, a resident alien
of the United States (as determined un-
der section 7701(b) and §§301.7701(b)–1
through 301.7701(b)–9 of this chapter), or
a nonresident alien who has elected under
section 6013(g) or (h) to be taxed as a U.S.
resident. A resident alien who elects to
be taxed as a resident of a foreign country
pursuant to a U.S. income tax treaty’s resi-
dency tie-breaker rules is a specified indi-
vidual for purposes of section 6038D and
the regulations.
In addition, certain nonresident aliens
who are treated as residents under other
sections of the Code are specified individ-
uals for the purposes of section 6038D and
the regulations. Under section 876 and
§1.876–1, nonresident alien individuals of
the United States under section 7701(b)
who arebona fideresidents of Puerto Rico
or a section 931 possession (as defined in
§1.931–1(c)(1)) are subject to tax under
sections 1 and 55 in generally the same
manner as a U.S. resident. Therefore, the
rules under section 6038D apply to a non-
resident alien who is abona fideresident
of Puerto Rico or American Samoa in the
same manner as they apply to a U.S. citi-
zen or resident.
As noted in this preamble, a specified
person is not required to file Form 8938 if
the specified person is not required to file
an annual return with the Internal Revenue
Service. With respect tobona fideresi-
dents of U.S. territories, this rule means
that abona fideresident of a U.S. terri-
tory has a filing requirement under sec-
tion 6038D and the regulations only if he
or she is required to file a federal income
tax return for the taxable year. In gen-
eral,bona fideresidents of the U.S. Vir-
gin Islands and U.S. territories to which
section 935 applies (currently, Guam and
the Northern Mariana Islands) are not re-
quired to file a federal income tax return
provided they correctly report and pay tax
on their worldwide income to their U.S.
territory taxing authority.Bona fideresi-
dentsofPuertoRicoorasection931pos-
session (currently, American Samoa) gen-
erally are required to file a federal income
taxreturnwiththeInternalRevenueSer-
vice only if they have income from sources
without the relevant U.S. territory, because
sections 931(a) and 933 generally exclude
from gross income any income derived
from sources within the relevant U.S. terri-
tory. Section 6038D and these regulations
generally require onlybona fideresidents
of Puerto Rico or a section 931 possession
that are required to file a federal income
tax return with the Internal Revenue Ser-
vice to file a Form 8938 with the Internal
Revenue Service.
B.Interest in a specified foreign financial
asset
For section 6038D purposes, a speci-
fied person is generally considered to have
an interest in a specified foreign financial
asset if any income, gains, losses, deduc-
tions, credits, gross proceeds, or distribu-
tions attributable to the holding or disposi-
tion of the asset are or would be required
to be reported, included, or otherwise re-
flected on the specified person’s annual re-
turn filed with the Internal Revenue Ser-
vice (even if no income, gains, losses, de-
ductions, credits, gross proceeds, or distri-
butions are attributable to the asset for a
particular taxable year).
For purposes of section 6038D and the
regulations, a parent that makes an elec-
tion under section 1(g)(7) to include cer-
tain unearned income of a child in the par-
ent’s gross income required to be reported
for the taxable year has an interest in any
specified foreign financial asset held by
the child.
A specified person that is the owner
of an entity disregarded as an entity sep-
arate from its owner (as provided in
§301.7701–2(c)(2)(i) of this chapter) (dis-
regarded entity) is treated as having an
interest in any specified foreign finan-
cial assets held by the disregarded entity.
A specified person that is treated as the
owner of a trust or any portion of a trust
under sections 671 through 679 is treated
as having an interest in any specified for-
eign financial assets held by the trust or by
the portion of the trust that the specified
person owns, except as described in sec-
tion 6(B) of this explanation. A specified
person is not treated as having an interest
in any specified foreign financial assets
held by a partnership, corporation, trust
(except as described in this explanation),
or estate solely as a result of the specified
February 21, 20123972012–8 I.R.B.

person’s status as a partner, shareholder,
or beneficiary.
C.Jointly owned assets
A joint interest in a specified foreign
financial asset is subject to reporting un-
der section 6038D and §1.6038D–2T(a) by
each specified person that is a joint owner
of the asset. In general, each joint owner
includes the full value of the jointly owned
asset for purposes of determining whether
the aggregate value ofall specified for-
eign financial assets in which the joint
owner has an interest exceeds the reporting
thresholds set forth in §1.6038D–2T(a).
1.Married individuals filing jointly
Married specified individuals who file
a joint annual return for the taxable year
must fulfill their reporting requirements
under section 6038D and §1.6038D–2T(a)
by filing a single Form 8938 that reports
all of the specified foreign financial as-
sets in which either married specified in-
dividual has an interest. A specified for-
eign financial asset that is jointly owned
by married specified individuals or a spec-
ified foreign financial asset held by a child
for which the married specified individu-
als have made an election under section
1(g)(7) is reported once on the single Form
8938. Married specified individuals who
file a joint annual return include the value
of a specified foreign financial asset that
they jointly own together or a specified
foreign financial asset held by a child for
which they have made an election under
section 1(g)(7) only once in determining
whether the aggregate value of all of the
specified foreign financial assets in which
either married specified individual has an
interest exceeds the appropriate reporting
threshold set forth in §1.6038D–2T(a).
2.Married individuals filing separately
A married specifiedindividual who
files a separate annual return for the
taxable year must fulfill the reporting
requirements under section 6038D and
§1.6038D–2T(a) by filing a separate Form
8938 that reports all of the specified for-
eign financial assets in which the married
specified individual has an interest, includ-
ing assets jointly owned with the married
specified individual’s spouse. A married
specified individual that files a separate
annual return and whose spouse is a spec-
ified person includes only one-half of the
value of a specified foreign financial as-
set that the married specified individual
jointly owns with his or her spouse in de-
termining whether the married specified
individual has an interest in specified for-
eign financial assets the aggregate value of
which exceeds the appropriate reporting
threshold set forth in §1.6038D–2T(a).
2.Specified Foreign Financial Assets
For purposes of section 6038D, speci-
fied foreign financialassets include finan-
cial accounts maintained by foreign finan-
cial institutions, as well as certain other
foreign financial assets or instruments. An
asset or instrument may be a specified for-
eign financial asset subject to reporting un-
der section 6038D and the regulations even
if the asset or instrument does not have a
positive value.
A.Financial account maintained by a
foreign financial institution
For purposes of section 6038D, a finan-
cial account is defined by reference to sec-
tion 1471(d)(2) and the regulations.
A foreign financial institution is defined
by reference to section 1471(d)(4). For
this purpose, a foreign financial institution
is a financial institution (as determined un-
der section 1471(d)(5)) that is a foreign en-
tity (as determined under section 1473(5)).
Under section 1471(d)(5), a financial insti-
tution is any entity that—
(1) Accepts deposits in the ordinary
course of a banking or similar business;
(2) Holds financial assets for the ac-
count of others as a substantial portion of
its business; or
(3) Is engaged, or holds itself out as be-
ing engaged, primarily in the business of
investing, reinvesting, or trading in securi-
ties (as defined in section 475(c)(2) with-
out regard to the last sentence thereof),
partnership interests, commodities (as de-
fined in section 475(e)(2)), or any interest
(including a futures or forward contract or
option) in such securities, partnership in-
terests, or commodities.
Notwithstanding that a financial insti-
tution organized under the laws of a U.S.
territory is not generally a foreign finan-
cial institution for purposes of section
1471(d)(4), for purposes of section 6038D
and the regulations, aspecified foreign
financial asset includes a financial account
maintained by a financial institution orga-
nized under the laws of a U.S. territory.
Accordingly, such an account must be re-
ported, except when owned by abona fide
resident of the relevant U.S. territory.
A financial account maintained
by a U.S. payor as defined in
§1.6049–5(c)(5)(i) (including assets held
in such an account) is not a specified
foreign financial asset for purposes
of section 6038D and the regulations
thereunder. For example, a specified
person is not required to report a financial
account maintained by a U.S. branch of a
foreign financial institution described in
§1.1441–1(b)(2)(iv).
An asset held in a financial account
maintained by a foreign financial institu-
tion is not required to be reported on Form
8938 separately from the reported finan-
cial account in which the asset is held. The
value of an asset held in a financial account
maintained by a foreign financial institu-
tion is included in determining the maxi-
mum value of that account.
B.Other specified foreign financial assets
Under §1.6038D–3T(b), specified for-
eign financial assets also include certain
assets that are held outside of a financial
account maintained by a financial insti-
tution. Specifically, aspecified foreign
financial asset includes any asset that is
held for investment and is described in one
or more of the following three categories:
stock or securities issued by a person other
than a U.S. person; a financial instrument
or contract issued by a person other than a
U.S. person or that has a counterparty that
is a person other thana U.S. person; and
any interest in a foreign entity. For these
purposes, a U.S. person is defined under
section 7701(a)(30). Whether an entity is a
foreignentityisdeterminedundersection
1473(5). These three categories are broad
and overlap in certain cases such that an as-
set not held in a financial account may be
within more than one of the statutory cate-
gories of section 6038D(b)(2). For exam-
ple, stock issued by a foreign corporation is
stock that is issued by a person other than
a U.S. person, and is also an interest in a
foreign entity.
An asset not held in an account main-
tained by a financial institution is held
for investment for purposes of section
2012–8 I.R.B.398February 21, 2012

6038D and the regulations if the asset is
not used or held for use in the specified
person’s trade or business. For purposes
of determining whether an asset is used
or held for use in the specified person’s
trade or business, the regulations apply
principles based on the asset-use test of
§1.864–4(c)(2), with certain modifica-
tions. The regulations provide that stock is
never considered to be used or held for use
in a trade or business in applying the trade
or business exception. The Department
of the Treasury and the Internal Revenue
Service believe this rule is appropriate
given the broad exception for section 475
mark-to-market accounting discussed in
section 2(D) of this explanation, and the
exception from reporting for stock held
in a financial account maintained by a
foreign financial institution (provided the
financial account is reported on Form
8938). The Department of the Treasury
and the Internal Revenue Service request
comments that concern the treatment of
stock under these regulations and, more
generally, what refinements, if any, to the
regulation’s trade or business standard
would facilitate the implementation of the
trade or business reporting exception.
C.Special rule for foreign estates and
foreign trusts
A beneficial interest in a foreign trust
or a foreign estate is not a specified for-
eign financial asset of a specified person
unless the specified person knows or has
reason to know based on readily accessi-
ble information of the interest. Receipt of
a distribution from the foreign trust or for-
eign estate is deemedfor this purpose to be
actual knowledge of the interest.
D.Assets not subject to reporting under
section 6038D
The following assets are not specified
foreign financial assets —
(1) An asset for which a specified per-
son uses mark-to-market accounting under
section 475;
(2) A financial account maintained by a
foreign financial institution for which the
specified person uses mark-to-market ac-
counting under section 475 for all of the
holdings in the account; and
(3) An interest in a social security, so-
cial insurance, or other similar program of
a foreign government.
3.Required Information
A specified person required to report
on Form 8938 must provide the following
information with regard to each specified
foreign financial asset:
(A) In the case of a financial account
maintained by a foreign financial institu-
tion, the name and address of the foreign
financial institution and the account num-
ber of the account;
(B) In the case of stock or a security, the
name and address of the issuer, and infor-
mation that identifies the class or issue of
which the stock or security is a part;
(C) In the case of a financial instrument
or contract held for investment, informa-
tion that identifies the financial instrument
or contract, including the names and ad-
dresses of all issuers and counterparties;
(D) In the case of an interest in a foreign
entity, information that identifies the inter-
est, including the name and address of the
entity;
(E) The maximum value of the speci-
fied foreign financial asset during the por-
tion of the taxable year in which the spec-
ified person has an interest in the asset;
(F) In the case of a financial account
that is a depository or custodial account
under section 1471(d)(2), whether such fi-
nancial account was opened or closed dur-
ing the taxable year;
(G) The date, if any, on which the
specified foreign financial asset, other
than a financial account that is a depos-
itory or custodialaccount under section
1471(d)(2), was either acquired or dis-
posed of (or both) during the taxable year;
(H) The amount of any income, gain,
loss, deduction, or credit recognized for
the taxable year with respect to the re-
ported specified foreign financial asset,
and the schedule, form, or return filed with
the Internal Revenue Service on which the
income, gain, loss, deduction, or credit, if
any, is reported or included by the speci-
fied person;
(I) The foreign currency exchange rate
and, if the source of such rate is other
than as described in §1.6038D–5T(d)(1),
the source of the rate used to determine the
specified foreign financial asset’s U.S. dol-
lar value, including maximum value; and
(J) For a specified foreign financial as-
set excepted from reporting on Form 8938
under §1.6038D–7T(a), the specified per-
son must report the number of each type
of form on which the asset is reported di-
rectly (for example, Form 3520,“Annual
Return To Report Transactions With For-
eign Trusts and Receipt of Certain Foreign
Gifts,”Form 3520–A,“Annual Informa-
tion Return of Foreign Trust With a U.S.
Owner,”Form 5471,“Information Return
of U.S. Persons With Respect To Certain
Foreign Corporations,”Form 8621,“In-
formation Return by a Shareholder of a
Passive Foreign Investment Company or
Qualified Electing Fund,”Form 8865,
“Return of U.S. Persons With Respect to
Certain Foreign Partnerships,”or Form
8891,“U.S. Information Return for Ben-
eficiaries of Certain Canadian Registered
Retirement Plans.”)
4.Valuation Guidelines
The value of a specified foreign finan-
cial asset must be determined both for pur-
poses of determining if the aggregate value
of the specified foreign financial assets in
which a specified person holds an interest
exceeds the reporting thresholds set forth
in §1.6038D–2T(a) and for purposes of re-
porting the maximum value of a specified
foreign financial asset on Form 8938 as
required by §1.6038D–4T(a)(5). Under
§1.6038D–5T, the value of a specified for-
eign financial asset for both of these pur-
poses generally is the asset’s fair market
value. The maximum value of a speci-
fied foreign financial asset is the asset’s
highest fair market value during the tax-
able year, except as otherwise provided
in §1.6038D–5T, and must be reported on
Form 8938 in U.S. dollars. If the max-
imum value of a specified foreign finan-
cial asset is less than zero, the value of the
specified foreign financial asset is treated
as zero for the purposes of determining the
aggregate value of specified foreign finan-
cial assets in which a specified person has
an interest and determining the maximum
value of a specified foreign financial asset
requiredtobereportedonForm8938.
A. Foreign currency conversion
If a specified foreign financial asset
isdenominatedinaforeigncurrency,the
value of the asset for purposes of de-
termining both the aggregate value of
specified foreign financial assets in which
a specified person holds an interest and the
maximum value of the specified foreign
financial asset is first determined in the
February 21, 20123992012–8 I.R.B.

foreign currency prior to conversion into
U.S. dollars (that is, independently of ex-
change rate fluctuations during the year).
The asset’s foreign currency value is then
converted into U.S. dollars at the taxable
year-end spot rate for converting the for-
eign currency into U.S. dollars (that is, the
rate to purchase U.S. dollars). The U.S.
Treasury Department’s Financial Manage-
ment Service foreign currency exchange
rate is to be used to convert the value of a
specified foreign financial asset into U.S.
dollars. If no U.S. Treasury Department
Financial Management Service foreign
currency exchange rate is available, an-
other publicly available foreign currency
exchange rate may be used to determine
an asset’s maximum value, but the use of
such rate must be disclosed on Form 8938.
B.Valuing financial accounts
The maximum value of a financial ac-
count means a reasonable estimate of the
maximum value of the holdings of the fi-
nancial account at any time during the tax-
able year. Periodic account statements
provided at least annually may be relied
upon for reporting a financial account’s
maximum value absent actual knowledge
or reason to know based on readily ac-
cessible information that the statements do
not reflect a reasonable estimate of the
maximum account value during the tax-
able year.
C.Valuing other specified foreign
financial assets
Except as described in sections 4(D)
and 4(E) of this explanation, for purposes
of determining the maximum value of a
specified foreign financial asset other than
a financial account maintained with a for-
eign financial institution, a specified per-
son may treat the asset’s fair market value
on the last day during the taxable year on
which the specified person has an inter-
est in the asset as the maximum value of
the asset. The specified person may not
use this valuation approach if the speci-
fied person has actual knowledge or rea-
son to know based on readily accessible
information that the fair market value de-
termined as of such date does not reflect a
reasonable estimate of the maximum value
of the asset during the year (for example,
because there is a reason to know that the
asset’s value declined significantly during
the year).
A specified person may determine the
fair market value of a specified foreign fi-
nancial asset based on information pub-
licly available from reliable financial in-
formation sources or from other verifiable
sources. Even if there is no information
from reliable financial information sources
regarding the fair market value of a re-
ported asset, the regulations do not require
a specified person to obtain an appraisal
by a third party in order to reasonably es-
timate the asset’s fair market value.
D.Special valuation rules for interests in
foreign trusts
If a specified person is a beneficiary of
a foreign trust, the maximum value of the
specified person’s interest in the trust is the
sum of the fair market value, determined as
of the last day of the taxable year, of all of
the currency or other property distributed
from the foreign trust during the taxable
year to the specified person, plus the value
as of the last day of the taxable year of the
specified person’s right as a beneficiary to
receive mandatory distributions from the
foreign trust as determined under section
7520.
For purposes of determining the aggre-
gate value of specified foreign financial
assets in which a specified person has an
interest, if the specified person does not
know or have reason to know based on
readily accessible information the fair mar-
ket value of the person’s interest in a for-
eign trust during the taxable year, the value
to be included in determining the aggre-
gate value of the specified foreign finan-
cial assets is the maximum value of the
specified person’s interest in the foreign
trust.
E.Special valuation rule for interests
in foreign estates, pension plans, and
deferred compensation plans
The maximum value of a specified per-
son’s interest in a foreign estate, foreign
pension plan, or a foreign deferred com-
pensation plan is the fair market value,
determined as of the last day of the tax-
able year, of the specified person’s bene-
ficial interest in the assets of the foreign
estate, foreign pension plan, or foreign de-
ferred compensation plan. If the speci-
fied person does not know or have reason
to know based on readily accessible infor-
mation such fair market value, the maxi-
mum value to be reported is the fair mar-
ket value, determined as of the last day
of the taxable year, of the currency and
other property distributed during the tax-
able year to the specified person as a ben-
eficiary or participant.
For purposes of determining the aggre-
gate value of specified foreign financial
assets in which a specified person has an
interest, if the specified person does not
know or have reason to know based on
readily accessible information the fair mar-
ket value of the person’s interest in a for-
eign estate, foreign pension plan, or for-
eign deferred compensation plan during
the taxable year, the value to be included
in determining the aggregate value of the
specified foreign financial assets is the fair
market value, determined as of the last day
of the taxable year, of the currency and
other property distributed during the tax-
able year to the specified person as a ben-
eficiary or participant.
F.Jointly owned assets
Except for certain married specified
individuals who jointly own a specified
foreign financial asset with a spouse,
a specified person that jointly owns a
specified foreign financial asset must
use the value of the entire asset, and not
the value of the specified person’s sepa-
rate interest, for purposes of determining
whether the reporting thresholds set forth
in §1.6038D–2T(a) are exceeded. A spec-
ified person, including a married specified
individual, that jointly owns a specified
foreign financial asset must report the
maximum value of the entire asset dur-
ing the portion of the taxable year that
the specified person has an interest in the
asset. Married specified individuals that
jointly own a specified foreign financial
asset and that file a joint annual income
return tax are only required to report the
asset once on the single Form 8938 filed
with their return.
5.Application to Entities Formed or
Availed of for Purposes of Holding,
Directly or Indirectly, Specified Foreign
Financial Assets
The notice of proposed rulemak-
ing accompanying these regulations
(REG–130302–10) includes Prop. Reg.
2012–8 I.R.B.400February 21, 2012

§1.6038D–6, which applies section 6038D
to certain domestic entities that are formed
or availed of for purposes of holding,
directly or indirectly, specified foreign
financial assets. The Department of the
Treasury and the Internal Revenue Service
anticipate that Prop. Reg. §1.6038D–6
will be issued as a final regulation during
2012 and will apply to taxable years be-
ginning after December 31, 2011. Until
Prop. Reg. §1.6038D–6 is issued as a final
regulation, no domestic entity is required
to file Form 8938 to report specified for-
eign financial assets with its annual return.
6.Exceptions from the Application of
Section 6038D
A.Duplicative reporting of assets
A specified person required to file Form
8938 with the Internal Revenue Service is
not required to report a specified foreign
financial asset on Form 8938 if the asset
is reported or reflected on a Form 3520
(in the case of a specified person who is
the beneficiary of a foreign trust), Form
5471, Form 8621, Form 8865, or Form
8891 timely filed with the Internal Rev-
enue Service by the specified person for
the taxable year, and the Form 8938 indi-
cates the filing of the form on which the
asset is reported.
A specified person required to file Form
8938 that is treated as an owner of a foreign
trust or any portion of such a trust under
sections 671 through 679 is not required to
report any specified foreign financial asset
held by the trust on Form 8938 provided
the specified person reports the trust on a
Form 3520 timely filed with the Internal
Revenue Service for the taxable year, the
trust timely files Form 3520–A with the
Internal Revenue Service for the taxable
year, and the Form 8938 filed by the spec-
ified person for the taxable year indicates
the filing of the Form 3520 and the Form
3520–A.
B.Owner of certain trusts
A specified person that is treated as an
owner of a domestic liquidating trust de-
scribed in §301.7701–4(d) of this chapter
created pursuant to a court order issued in
a bankruptcy under Chapter 7 (11 U.S.C.
701et seq.) or a confirmed plan under
Chapter 11 (11 U.S.C. 1101et seq.)ofthe
Bankruptcy Code, a domestic widely held
fixed investment trust under §1.671–5, or
any portion of such a trust under sections
671 through 679 is not required to file
Form 8938 to report any specified foreign
financial asset held by the trust.
C.Certain specified foreign financial
assets held by a bona fide resident of a
U.S. territory
As described in section 1(A) of this ex-
planation,bona fideresidents of the U.S.
Virgin Islands and U.S. territories to which
section 935 applies (currently, Guam and
the Northern Mariana Islands) generally
are not required to file a federal income
tax return and, therefore, generally would
not be required to file a Form 8938 with
the Internal Revenue Service. By contrast,
certainbona fideresidents of Puerto Rico
or a section 931 possession as defined
in §1.931–1(c)(1) (currently, American
Samoa) who have income from sources
outside their U.S. territory of residence
may be required to file a federal income
tax return; thus, the reporting requirements
of section 6038D and the regulations may
applytosuchpersons.
Noreportingisrequiredbyabona fide
resident of a U.S. territory with respect
to certain specified foreign financial as-
sets that have certain connections to the
U.S. territory of which the individual is a
bona fideresident. Reporting is not re-
quired with respect to a financial account
maintained by a financial institution orga-
nized under the laws of the U.S. territory of
which the specified person is abona fide
resident. Reporting also is not required
with respect to a financial account main-
tained by a branch of a financial institution
not organized under the laws of the U.S.
territory of which the specified person is a
bona fideresident, if the branch is subject
to the same income tax and information re-
porting requirements applicable to a finan-
cial institution organized under the laws of
the U.S. territory.
Reporting is also not required with re-
spect to stock or securities or any other in-
terest in an entity organized under the laws
of the U.S. territory of which the specified
person is abona fideresident. Similarly,
reporting is not required with respect to a
financial instrument or contract held for in-
vestment if the issuer or counterparty is: (i)
an entity organized under the laws of the
U.S. territory of which the specified per-
son is abona fideresident; or (ii) abona
fideresident of the U.S. territory of which
the specified person is abona fideresident.
These reporting exceptions for certain
U.S. territory-connected assets do not ap-
ply to assets held by a U.S. citizen or res-
ident who is not abona fideresident of
any U.S. territory or an individual who is a
bona fideresident of a U.S. territory other
than the one to which the assets are con-
nected.
D.Form TD F 90–22.1, “Report of
Foreign Bank and Financial Accounts”
(FBAR)
Reporting on Form TD F 90–22.1 is
required under Title 31 (31 U.S.C. 5314)
for other law enforcement purposes in
addition to tax administration. As a con-
sequence, different policy considerations
apply to Form 8938 and FBAR reporting.
These are reflected in the different cat-
egories of persons required to file Form
8938 and the FBAR, the different fil-
ing thresholds for Form 8938 and FBAR
reporting, and the different assets (and
accompanying information) required to
be reported on each form. Although cer-
tain information may be reported on both
Form 8938 and the FBAR, the information
required by the forms is not identical in
all cases, and reflects the different rules,
key definitions (forexample, “financial
account”), and reporting requirements
applicable to Form 8938 and FBAR re-
porting.
These differing policy considerations
were recognized during the passage of the
HIRE Act and the enactment of section
6038D, and the intention to retain FBAR
reporting notwithstanding the enactment
of section 6038D was specifically noted in
the Technical Explanation Of The Revenue
Provisions Contained In Senate Amend-
ment 3310, The “Hiring Incentives To Re-
store Employment Act,” Under Consid-
eration by the Senate (Staff of the Joint
Comm. on Taxation, JCX–4-10 (Febru-
ary 23, 2010)) (Technical Explanation) ac-
companying the HIRE Act. The Techni-
cal Explanation states that “[n]othing in
this provision [section 511 of the HIRE
Act enacting section 6038D] is intended
as a substitute for compliance with the
FBAR reporting requirements, which are
unchanged by this provision.” (Technical
February 21, 20124012012–8 I.R.B.

Explanation at p. 60). Against this back-
ground, reporting on Form 8938 and the
FBAR is not duplicative and both forms
must be filed, if required.
7.Penalties for Failure to Disclose
A.In general
If a specified person fails to file a
Form 8938 that includes the informa-
tion required by section 6038D(c) and
§1.6038D–4T with respect to any tax-
able year at the time and in the man-
ner described in section 6038D(a) and
§1.6038D–2T, a penalty of $10,000 will
apply to that specified person under sec-
tion 6038D(d) and §1.6038D–8T. If any
such failure continues for more than 90
days after the day on which the Commis-
sioner or his delegate mails a notice of the
failure to the specified person required to
file the Form 8938, the specified person is
subject to an additional penalty of $10,000
for each 30-day period (or fraction thereof)
during which the failure continues after
the 90-day period has expired. The addi-
tional (or continuation) penalty is limited
to a maximum of $50,000 for each such
failure.
Married specified individuals who file
a joint annual return and fail to file a re-
quired Form 8938,“Statement of Spec-
ified Foreign Financial Assets,”that in-
cludes the information required by section
6038D(c) and §1.6038D–4T with respect
to any taxable year at the time and in the
manner described in section 6038D(a) and
§1.6038D–2T are subject to penalties un-
der section 6038D(d) and §1.6038D–8T as
if the married specified individuals are a
single specified person. The liability of
married specified individuals who file a
joint annual return with respect to penal-
ties under this section is joint and several.
B.Presumption of aggregate value
For the purpose of assessing the penal-
ties for failure to disclose, if the Com-
missioner or his delegate determines that
a specified person has an interest in one
or more specified foreign financial assets,
and the specified person has not provided
sufficient information to demonstrate the
aggregate value of the assets upon request
by the Secretary, then the aggregate value
of the assets is treated as being in excess of
the applicable reporting threshold set forth
in §1.6038D–2T(a).
C.Reasonable cause exception
If a specified person shows that the fail-
uretoreporttheinformationrequiredun-
der section 6038D and §1.6038D–4T is
due to reasonable cause and not due to
willful neglect, no penalty will be imposed
under section 6038D(d) or §1.6038D–8T.
To show that the failure to report is due to
reasonable cause and not due to willful ne-
glect, the specified person must make an
affirmative showing of all the facts alleged
as reasonable cause for the failure to re-
port.
The determination of whether a fail-
uretodiscloseaspecified foreign finan-
cial asset on Form 8938 was due to rea-
sonable cause and not due to willful ne-
glect is made on a case-by-case basis, tak-
ing into account all pertinent facts and cir-
cumstances. For thispurpose, the fact that
a foreign jurisdiction would impose a civil
or criminal penalty on the specified person
(or any other person) for disclosing the re-
quired information is not reasonable cause.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act(5 U.S.C. chapter 5)
does not apply to these regulations. For the
applicability of the Regulatory Flexibility
Act (5 U.S.C. chapter 6), please refer to the
Special Analyses section of the preamble
to the cross-referenced notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f) of the
Internal Revenue Code, these regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.
Drafting Information
The principal author of these regula-
tions is Joseph S. Henderson, Office of
Associate Chief Counsel (International).
However, other personnel from the Inter-
nal Revenue Service and the Treasury De-
partment participated in the development
of the regulations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6038D–0T also issued under
26 U.S.C. 6038D.
Section 1.6038D–1T also issued under
26 U.S.C. 6038D.
Section 1.6038D–2T also issued under
26 U.S.C. 6038D.
Section 1.6038D–3T also issued under
26 U.S.C. 6038D.
Section 1.6038D–4T also issued under
26 U.S.C. 6038D.
Section 1.6038D–5T also issued under
26 U.S.C. 6038D.
Section 1.6038D–7T also issued under
26 U.S.C. 6038D.
Section 1.6038D–8T also issued under
26 U.S.C. 6038D.* * *
Par. 2. Section 1.6038D–0T is added to
read as follows:
§1.6038D–0T Outline of regulation
provisions (temporary).
This section lists the table of contents
for §§1.6038D–1T through 1.6038D–8T.
§1.6038D–1T Reporting with respect
to specified foreign financial assets,
definition of terms (temporary).
(b) In general.
(1) Specified person.
(2) Specified individual.
(3) Resident alien.
(4)Bona fideresident of a U.S. posses-
sion.
(5) U.S. possession.
(6) Specified foreign financial asset.
(7) Financial account.
(8) Financial institution.
(9) Foreign financial institution.
(10) Foreign entity.
(11) Annual return.
(12) Specified domestic entity. [Re-
served]
2012–8 I.R.B.402February 21, 2012

(b) Effective/applicability dates.
(c) Expiration date.
§1.6038D–2T Requirement to report
specified foreign financial assets
(temporary).
(a) Reporting requirement.
(1) In general.
(2) Special rule for married specified
individuals filing a joint annual return.
(3) Special rule for certain specified in-
dividuals living abroad.
(4) Special rule for qualified individuals
filing a joint annual return.
(5) Assets with no positive value.
(6) Excepted assets.
(7) Form 8938 filed with annual return.
(i) General rule.
(ii) Consolidated returns.
(8) Reporting required regardless of tax
result.
(9) Reporting period.
(10) Successor forms.
(b) Interest in a specified foreign finan-
cial asset.
(1) In general.
(2) Special rule for parent making an
election under section 1(g)(7).
(3) Entities.
(c) Special rules for joint interests.
(1) Aggregate value of assets.
(i) Specified persons.
(ii) Married specified individuals.
(2) Annual return filed by married spec-
ified individual.
(i) Joint annual return.
(ii) Separate annual return.
(d) Example.
(1) Facts.
(2) Filing requirement.
(i) Married specified individuals filing
separate annual returns.
(ii) Married specified individuals filing
a joint annual return.
(e) Effective/applicability dates.
(f) Expiration date.
§1.6038D–3T Specified foreign financial
assets (temporary).
(a) Financial accounts.
(1) In general.
(2) Financial account in a U.S. posses-
sion.
(3) Excepted financial accounts.
(i) Accounts maintained by U.S. pay-
ors.
(ii) Mark-to-market election under sec-
tion 475.
(b) Other specified foreign financial as-
sets.
(1) In general.
(2) Mark-to-market election under sec-
tion 475.
(3) Held for investment.
(4)Trade-or-business test.
(5) Direct relationship between holding
an asset and a trade or business.
(i) In general.
(ii) Presumption of direct relationship.
(c) Special rule for interests in foreign
trusts and foreign estates.
(d) Examples.
(e) Effective/applicability dates.
(f) Expiration date.
§1.6038D–4T Information required to be
reported (temporary).
(a) Required information.
(b) Effective/applicability dates.
(c) Expiration date.
§1.6038D–5T Valuation guidelines
(temporary).
(a) Fair market value.
(b) Valuation of assets.
(1) Maximum value.
(2) U.S. dollars.
(3) Asset with no positive value.
(c) Foreign currency conversion.
(1) In general.
(2) Other publicly available exchange
rate.
(3) Currency exchange rate.
(4) Determination date.
(d) Financial accounts.
(e) Asset held in a financial account.
(f) Other specified foreign financial as-
sets.
(1) General rule.
(2) Interests in trusts that are specified
foreign financial assets.
(i) Maximum value.
(ii) Reporting threshold.
(3) Interests in estates, pension plans,
and deferred compensation plans.
(i) Maximum value.
(ii) Reporting threshold.
(g) Effective/applicability dates.
(h) Expiration date.
§1.6038D–6T Specified domestic entities
(temporary).[Reserved]
§1.6038D–7T Exceptions from the
reporting of certain assets under Section
6038D (temporary).
(a) Elimination of duplicative reporting
of assets.
(1) In general.
(2) Foreign grantor trusts.
(b) Owner of certain trusts.
(c)Bona fideresident of a U.S. posses-
sion.
(d) Effective/applicability dates.
(e) Expiration date.
§1.6038D–8T Penalties for failure to
disclose (temporary).
(a) In general.
(b) Married specifiedindividuals filing
a joint annual return.
(c) Increase in penalty.
(d) Presumption of aggregate value.
(e) Reasonable cause exception.
(1) In general.
(2) Affirmative showing required.
(3) Facts and circumstances taken into
account.
(f) Penalties for underpayments attrib-
utable to undisclosed foreign financial as-
sets.
(1) Accuracy related penalty.
(2) Criminal penalties.
(g) Effective/applicability dates.
(h) Expiration date.
Par. 3. Section 1.6038D–1T is added to
read as follows:
§1.6038D–1T Reporting with respect
to specified foreign financial assets,
definition of terms (temporary).
(a)In general. The following defini-
tions apply for purposes of section 6038D
and the regulations —
(1)
Specified person.Thetermspecified
personmeans a specified individual or a
specified domestic entity.
(2)Specified individual.Thetermspec-
ified individualmeans an individual who is
a—
(i) U.S. citizen;
(ii) Resident alien of the United States
for any portion of the taxable year;
(iii) Nonresident alien for whom an
election under section 6013(g) or (h) is in
effect; or
February 21, 20124032012–8 I.R.B.

(iv) Nonresident alien who is a
bona fideresident of Puerto Rico or a
section931possession(asdefinedin
§1.931–1(c)(1)).
(3)Resident alien.Thetermresident
alienhas the meaning set forth in sec-
tion 7701(b) and §§301.7701(b)–1 through
301.7701(b)–9 of this chapter.
(4)Bona fide resident of a U.S. posses-
sion.The termbona fide resident of a U.S.
possessionmeans an individual who is a
“bona fideresident” under section 937(a)
and §1.937–1.
(5)U.S. possession.ThetermU.S. pos-
sessionmeans American Samoa, Guam,
the Northern Mariana Islands, Puerto Rico,
or the U.S. Virgin Islands.
(6)Specified foreign financial asset.
The termspecified foreign financial asset
has the meaning set forth in §1.6038D–3T.
(7)Financial account.Thetermfinan-
cial accounthas the meaning set forth in
section 1471(d)(2) and the regulations.
(8)Financial institution.Theterm
financial institutionhas the meaning set
forth in section 1471(d)(5) and the regula-
tions.
(9)Foreign financial institution.The
termforeign financial institutionhas the
meaning set forth in section 1471(d)(4)
and the regulations .
(10)Foreign entity.Thetermforeign
entityhas the meaning set forth in section
1473(5) and the regulations .
(11)Annual return.Thetermannual re-
turnmeans an annual federal income tax
return of a specifiedindividual or an an-
nual federal income tax return or informa-
tion return of a specified domestic entity
filed with the Internal Revenue Service un-
der section 876, 6011, 6012, 6013, 6031,
or 6037, and the regulations.
(12)Specified domestic entity.—[Re-
served].
(b)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(c)Expiration date. The applicability
of this section expires December 12, 2014.
Par. 4. Section 1.6038D–2T is added to
read as follows:
§1.6038D–2T Requirement to report
specified foreign financial assets
(temporary).
(a)Reporting requirement—(1)In gen-
eral. Except as otherwise provided, a spec-
ified person that has any interest in a spec-
ified foreign financial asset during the tax-
able year must attach Form 8938,“State-
ment of Specified Foreign Financial As-
sets,”to that specified person’s annual re-
turn for the taxable year to report the in-
formationrequiredbysection6038Dand
§1.6038D–4T if the aggregate value of all
such assets exceeds—
(i) $50,000 on the last day of the taxable
year; or
(ii) $75,000 at any time during the tax-
able year.
(2)Special rule for married specified
individuals filing a joint annual return.
Except as provided in paragraph (a)(1)(4)
of this section, married specified individu-
als that file a joint annual return for the tax-
able year must attacha single Form 8938
to their joint annual return to report the in-
formationrequiredbysection6038Dand
§1.6038D–4T if the aggregate value of all
of the specified foreign financial assets in
which either married specified individual
has an interest exceeds—
(i) $100,000 on the last day of the tax-
able year; or
(ii) $150,000 at any time during the tax-
able year.
(3)Special rule for certain specified in-
dividuals living abroad. Except as pro-
vided in paragraph (a)(1)(4) of this section,
a specified individual who is a qualified
individual under section 911(d)(1) for the
taxable year is required to attach a Form
8938 to the specified individual’s annual
return and report the information required
by section 6038D and §1.6038D–4T if the
aggregate value of the specified foreign fi-
nancial assets in which the specified indi-
vidual has an interest exceeds—
(i) $200,000 on the last day of the tax-
able year; or
(ii) $300,000 at any time during the tax-
able year.
(4)Special rule for qualified individu-
als filing a joint annual return.Aquali-
fied individual under section 911(d)(1) and
the qualified individual’s spouse who file a
joint annual return must attach Form 8938
to their joint annual return to report the in-
formationrequiredbysection6038Dand
§1.6038D–4T if the aggregate value of the
all of the specified foreign financial assets
in which either married individual has an
interest exceeds—
(i) $400,000 on the last day of the tax-
able year; or
(ii) $600,000 at any time during the tax-
able year.
(5)Assets with no positive value.A
specified foreign financial asset is subject
to reporting even if the specified foreign
financial asset does not have a positive
value. See §1.6038D–5T(b) for reporting
the maximum value of a specified foreign
financial asset, including a specified for-
eign financial asset that does not have a
positive value during the taxable year.
(6)Excepted assets. The value of any
specified foreign financial asset in which
a specified individual has an interest and
that is excluded from reporting on Form
8938 pursuant to §1.6038D–7T(a) is in-
cluded for purposes of determining the ag-
gregate value of specified foreign financial
assets. The value of any specified foreign
financial asset in which a specified indi-
vidual has an interest and that is excluded
from reporting under §1.6038D–7T(b) or
(c) is excluded for purposes of determining
the aggregate value of specified foreign fi-
nancial assets.
(7)Form 8938 filed with annual re-
turn—(i)General rule. A specified per-
son, including a specified individual who
is abona fideresident of a U.S. possession,
is not required to file Form 8938 with re-
spect to a taxable year if the specified per-
son is not required to file an annual return
with the Internal Revenue Service with re-
spect to such taxable year.
(ii)Consolidated returns. If a specified
domestic entity is a member of an affiliated
group of corporations that files a consoli-
dated income tax return, the Form 8938 of
the specified domestic entity must be filed
with the affiliated group’s annual return.
(8)Reporting required regardless of tax
result. The Form 8938 required by section
6038D and this section must be furnished
by a specified person even if none of the
specified foreign financial assets that must
be reported affect the specified person’s
tax liability under the Internal Revenue
Code for the taxable year.
(9)Reporting period.Thereportingpe-
riod covered by Form 8938 is the specified
person’s taxable year, except the reporting
period for a specified person who is a spec-
2012–8 I.R.B.404February 21, 2012

ified individual for less than an entire tax-
able year is the portion of the taxable year
that the specified person is a specified in-
dividual.
(10)Successor forms. References to
Form 8938 include any successor form.
(b)Interest in a specified foreign finan-
cial asset—(1)In general. A specified
person has an interest in a specified for-
eign financial asset if any income, gains,
losses, deductions, credits, gross proceeds,
or distributions attributable to the holding
or disposition of the specified foreign fi-
nancial asset are or would be required to be
reported, included, or otherwise reflected
by the specified person on an annual re-
turn. A specified person has an interest in
a specified foreign financial asset even if
no income, gains, losses, deductions, cred-
its, gross proceeds, or distributions are at-
tributable to the holding or disposition of
the specified foreign financial asset for the
taxable year.
(2)Special rule for parent making elec-
tion under section 1(g)(7). A parent that
makes an election under section 1(g)(7) to
include certain unearned income of a child
in the parent’s gross income has an inter-
est in any specified foreign financial asset
held by the child for the purposes of sec-
tion 6038D and the regulations.
(3)Entities. Except as provided in this
paragraph, a specified person is not treated
as having an interestin any specified for-
eign financial assets held by a corporation,
partnership, trust, or estate solely as a re-
sult of the specified person’s status as a
shareholder, partner, or beneficiary of such
entity. A specified person that is treated
as the owner of a trust or any portion of
a trust under sections 671 through 679,
other than a domestic liquidating trust un-
der §301.7701–4(d) of this chapter created
pursuant to a court order issued in a bank-
ruptcy under Chapter 7 (11 U.S.C. 701et
seq.) or a confirmed plan under Chapter 11
(11 U.S.C. 1101et seq.) of the Bankruptcy
Code, or a domestic widely held fixed in-
vestment trust under §1.671–5, is treated
as having an interestin any specified for-
eign financial assets held by the trust or the
portion of the trust. See §1.6038D–3T(c)
to determine whether an interest in a for-
eign trust or an interest in a foreign estate
is a specified foreign financial asset. See
§1.6038D–5T(f) for rules to determine the
maximum value of an interest in a foreign
trust or estate.
(c)Special rules for joint interests—(1)
Aggregate value of assets—(i)Specified
persons. Except in the case of a specified
person described in paragraph (c)(1)(ii) of
this section, each specified person that is a
joint owner of a specified foreign financial
asset must include the entire value of the
specified foreign financial asset (and not
the value of the specified person’s inter-
est) for purposes of determining whether
the aggregate value of the specified per-
son’s specified foreign financial assets ex-
ceeds the reporting thresholds set forth in
§1.6038D–2T(a).
(ii)Married specified individuals.Mar-
ried specified individuals who file a joint
annual return must include the value of a
specified foreign financial asset that they
jointly own or in which they have an in-
terest under paragraph (b)(2) of this sec-
tion only once in determining whether the
aggregate value of all of the specified for-
eign financial assets in which either mar-
ried specified individual has an interest ex-
ceeds the reporting thresholds set forth in
§1.6038D–2T(a). If a married specified in-
dividual files a separate annual return and
his or her spouse is a specified individual,
the married specified individual includes
one-half of the value of a specified for-
eign financial asset that the married speci-
fied individual jointly owns with his or her
spouse in determining whether the married
specified individual has an interest in spec-
ified foreign financial assets the aggre-
gate value of which exceeds the reporting
thresholds set forth in §1.6038D–2T(a).
(2)Annual return filed by a married
specified individual—(i)Jointannualre-
turn. Married specified individuals that
file a joint annual return must file a sin-
gle Form 8938 to fulfill their reporting
requirements under section 6038D and
§1.6038D–2T(a). The single Form 8938
must report all of the specified foreign
financial assets in which either married
specified individual has an interest. If the
married specified individuals jointly own
a specified foreign financial asset or if
they have an interest in a specified foreign
financial asset under paragraph (b)(2) of
this section, the asset must be reported
only once on the single Form 8938 filed
for the taxable year.
(ii)Separate annual return.Amarried
specified individual who files a separate
annual return for the taxable year must ful-
fill the reporting requirements under sec-
tion 6038D and §1.6038D–2T(a) by filing
a separate Form 8938 that reports all of the
specified foreign financial assets in which
the married specifiedindividual has an in-
terest, including assets jointly owned with
the married specified individual’s spouse.
(d)Example. The following example
illustrates the application of paragraph (c)
of this section:
Example.(1)Facts. Two married specified in-
dividuals, H and W, jointly own a specified foreign
financial asset with a value of $90,000 at all times
during the taxable year. H separately has an interest
in a specified foreign financial asset with a value of
$10,000 at all times during the taxable year. W sep-
arately has an interest in a specified foreign financial
asset with a value of $1,000 at all times during the
taxable year.
(2)Filing requirement—(i)Married specified in-
dividuals filing a separate annual return.IfHand
W file separate annual returns, the aggregate value of
the specified foreign financial assets in which H has
an interest at the end of the taxable year is $55,000,
comprising one-half of the value of the jointly owned
asset, $45,000, and the value of H’s separately owned
specified foreign financialasset, $10,000. The aggre-
gate value of the specified foreign financial assets in
which W has an interest at the end of the taxable year
is $46,000, comprising one-half of the value of the
jointly owned asset, $45,000, and the value of W’s
separately owned specified foreign financial asset,
$1,000. H must file Form 8938 with his annual return
for the taxable year because the aggregate value of
the specified foreign financial assets in which H has
an interest exceeds the applicable reporting threshold
($50,000) set forth in §1.6038D–2T(a)(1). H must re-
port the maximum value of the entire jointly owned
asset, $90,000, and the maximum value of the sepa-
rately owned asset, $10,000. See §1.6038D–5T(b) re-
garding the maximum value of a jointly owned spec-
ified foreign financial asset to be reported by a speci-
fied person, including a married specified individual,
that is a joint owner of an asset. The aggregate value
of the specified foreign financial assets in which W
has an interest, $46,000,does not exceed the applica-
ble reporting threshold forth in §1.6038D–2T(a)(1).
W is not required to file Form 8938 with her separate
annual return.
(ii)Married specified individuals filing a joint an-
nual return. If H and W file a joint annual return,
they must file a single Form 8938 with their joint
annual return for the taxable year because the ag-
gregate value of all of thespecified foreign finan-
cial assets in which either H and W have an interest
($90,000 (included only once), $10,000, and $1000,
or $101,000) exceeds the applicable reporting thresh-
old ($100,000) set forth in §1.6038D–2T(a)(2). The
single Form 8938 must report the maximum value
of the jointly owned specified foreign financial asset,
$90,000, and the maximum value of the specified for-
eign financial assets separately owned by H and W,
$10,000 and $1,000, respectively.
(e)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
February 21, 20124052012–8 I.R.B.

taxable years ending prior to December 19,
2011.
(f)Expiration date. The applicability of
this section expires December 12, 2014.
Par. 5. Section 1.6038D–3T is added to
read as follows:
§1.6038D–3T Specified foreign financial
assets (temporary).
(a)Financial accounts—(1)In general.
Except as otherwise provided in this sec-
tion, a specified foreign financial asset in-
cludes any financial account maintained
by a foreign financial institution. An as-
set held in a financial account maintained
by a foreign financial institution is not re-
quired to be separately reported on Form
8938,“Statement of Specified Foreign Fi-
nancial Assets.”
(2)Financial account in a U.S. posses-
sion. A specified foreign financial asset in-
cludes a financial account maintained by a
financial institution that is organized under
the laws of a U.S. possession.
(3)Excepted financial accounts—(i)
Accounts maintained by U.S. payors.A
financial account maintained by a U.S.
payor as defined in §1.6049–5(c)(5)(i)
(including assets held in such an account)
is not a specified foreign financial asset
for purposes of section 6038D and the
regulations.
(ii)Mark-to-market election under sec-
tion 475. A financial account is not a spec-
ified foreign financial asset if the rules of
section 475(a) apply to all of the holdings
in the account or an election under section
475(e) or (f) is made with respect to all of
the holdings in the account.
(b)Other specified foreign financial as-
sets—(1)In general. Except as otherwise
provided in this section, a specified foreign
financial asset includes any of the follow-
ing assets that are held for investment and
not held in an account maintained by a fi-
nancial institution —
(i) Stock or securities issued by a person
other than a United States person;
(ii) A financial instrument or contract
that has an issuer or counterparty which is
other than a United States person; and
(iii)Aninterestinaforeignentity.
(2)Mark-to-market election under sec-
tion 475. An asset is not a specified foreign
financial asset if the rules of section 475(a)
apply to the asset or an election under sec-
tion 475(e) or (f) is made with respect to
the asset.
(3)Held for investment. An asset is
held for investment for purposes of section
6038D and the regulations if that asset is
not used in, or held for use in, the conduct
of a trade or business of a specified person.
(4)Trade-or-business test. For pur-
poses of section 6038D and the regula-
tions, an asset is used in, or held for use
in, the conduct of a trade or business and
not held for investment if the asset is—
(i) Held for the principal purpose of pro-
moting the present conduct of a trade or
business;
(ii) Acquired and held in the ordinary
course of a trade or business, as, for ex-
ample, in the case of an account or note
receivable arising from that trade or busi-
ness; or
(iii) Otherwise held in a direct relation-
ship to the trade or business as determined
under paragraph (b)(5) of this section.
(5)Direct relationship between holding
an asset and a trade or business—(i)In
general. In determining whether an asset is
held in a direct relationship to the conduct
of a trade or business by a specified per-
son, principal consideration will be given
to whether the asset is needed in the trade
or business of the specified person. An as-
set shall be considered needed in a trade or
business, for this purpose, only if the as-
set is held to meet the present needs of that
trade or business and not its anticipated fu-
ture needs. An asset shall be considered
as needed in the trade or business if, for
example, the asset is held to meet the op-
erating expenses of the trade or business.
Conversely, an asset shall be considered
as not needed in the trade or business if,
for example, the asset is held for the pur-
pose of providing for future diversification
into a new trade or business, future plant
replacement, or future business contingen-
cies. Stock is never considered used or
held for use in a trade or business for pur-
poses of applying this test.
(ii)Presumption of direct relationship.
An asset will be treated as held in a direct
relationship to the conduct of a trade or
business of a specified person if—
(A) The asset was acquired with funds
generated by the trade or business of the
specified person or the affiliated group of
the specified person, if any;
(B) The income from the asset is re-
tained or reinvested in the trade or busi-
ness; and
(C) Personnel who are actively in-
volved in the conduct of the trade or
business exercise significant management
and control over the investment of such
asset.
(c)Special rule for interests in foreign
trusts and foreign estates. An interest in
a foreign trust or a foreign estate is not a
specified foreign financial asset of a spec-
ified person unless the person knows or
has reason to know based on readily ac-
cessible information of the interest. Re-
ceipt of a distribution from the foreign trust
or foreign estate constitutes actual knowl-
edge for this purpose.
(d)Examples. Examples of assets other
than financial accounts that may be consid-
ered other specified foreign financial as-
sets include, but are not limited to—
(1) Stock issued by a foreign corpora-
tion;
(2) A capital or profits interest in a for-
eign partnership;
(3) A note, bond, debenture, or other
form of indebtedness issued by a foreign
person;
(4)Aninterestinaforeigntrust;
(5) An interest rate swap, currency
swap, basis swap, interest rate cap, interest
rate floor, commodity swap, equity swap,
equity index swap, credit default swap, or
similar agreement with a foreign counter-
party; and,
(6) Any option or other derivative in-
strument with respect to any of the items
listed as examples in this paragraph or with
respect to any currency or commodity that
is entered into with a foreign counterparty
or issuer.
(e)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(f)Expiration date. The applicability of
this section expires December 12, 2014.
Par. 6. Section 1.6038D–4T is added to
read as follows:
§1.6038D–4T Information required to be
reported (temporary).
(a)Required information.Thefol-
lowing information must be reported
2012–8 I.R.B.406February 21, 2012

on Form 8938,“Statement of Specified
Foreign Financial Assets,”with respect to
each specified foreign financial asset:
(1) In the case of a financial account
maintained by a foreign financial institu-
tion, the name and address of the foreign
financial institution and the account num-
ber of the account;
(2) In the case of stock or a security, the
name and address of the issuer, and infor-
mation that identifies the class or issue of
which the stock or security is a part;
(3) In the case of a financial instrument
or contract, information that identifies the
financial instrument or contract, including
the names and addresses of all issuers and
counterparties;
(4) In the case of an interest in a foreign
entity, information that identifies the inter-
est, including the name and address of the
entity;
(5) The maximum value of the specified
foreign financial asset during the portion
of the taxable year in which the specified
person has an interest in the asset;
(6) In the case of a financial account
that is a depository or custodial account
under section 1471(d)(2), whether the ac-
count was opened or closed during the tax-
able year;
(7) The date, if any, on which the
specified foreign financial asset, other
than a financial account that is a depos-
itory or custodial account under section
1471(d)(2), was either acquired or dis-
posed of (or both) during the taxable year;
(8) The amount of any income, gain,
loss, deduction, or credit recognized for
the taxable year with respect to the re-
ported specified foreign financial asset,
and the schedule, form, or return filed with
the Internal Revenue Service on which the
income, gain, loss, deduction, or credit, if
any,isreportedorincludedbythespeci-
fied person;
(9) The foreign currency exchange rate
and, if the source of such rate is other
than as described in §1.6038D–5T(c)(1),
the source of the rate used to determine the
specified foreign financial asset’s U.S. dol-
lar value, including maximum value; and
(10) For any specified foreign financial
assetexceptedfromreportingonForm
8938 under §1.6038D–7T(a), the spec-
ified person must report the number of
Forms 3520,“Annual Return To Report
Transactions With Foreign Trusts and Re-
ceipt of Certain Foreign Gifts,”Forms
3520–A,“Annual Information Return of
Foreign Trust With a U.S. Owner,”Forms
5471,“Information Return of U.S. Per-
sons With Respect To Certain Foreign
Corporations,”Forms 8621,“Informa-
tion Return by a Shareholder of a Passive
Foreign Investment Company or Quali-
fied Electing Fund,”Forms 8865,“Return
of U.S. Persons With Respect to Certain
Foreign Partnerships,”Forms 8891,“U.S.
Information Return for Beneficiaries of
Certain Canadian Registered Retirement
Plans,”or such other form under Title 26
of the United States Code identified by the
Secretary under §1.6038D–7T(a), timely
filed with the Internal Revenue Service
on which excepted foreign financial assets
are reported or reflected for the taxable
year.
(b)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(c)Expiration date. The applicability
of this section expires December 12, 2014.
Par. 7. Section 1.6038D–5T is added to
read as follows:
§1.6038D–5T Valuation guidelines
(temporary).
(a)Fair market value. Except as pro-
vided in paragraphs (c) and (e) of this sec-
tion, the value of a specified foreign finan-
cial asset for purposes of determining the
aggregate value of specified foreign finan-
cial assets held by a specified person and
the maximum value of a specified foreign
financial asset required to be reported on
Form 8938,“Statement of Specified For-
eign Financial Assets,”is the asset’s fair
market value.
(b)Valuation of assets—(1)Maximum
Value. Except as provided in this sec-
tion, the maximum value of a specified for-
eign financial asset means a reasonable es-
timate of the asset’s maximum fair market
value during the taxable year.
(2)U.S. dollars. For purpose of de-
termining the aggregate value of specified
foreign financial assets in which a speci-
fied person has an interest and determining
the maximum value of a specified foreign
financial asset, the value of a specified for-
eign financial asset denominated in a for-
eign currency during the taxable year must
be determined in the foreign currency and
then converted to U.S. dollars.
(3)Asset with no positive value.Ifthe
maximum fair market value of a specified
foreign financial asset is less than zero, its
value is treated as zero for purposes of de-
termining the aggregate value of specified
foreign financial assets in which a speci-
fied person has an interest and determining
the maximum value of the specified for-
eign financial asset,
(c)Foreign currency conversion—(1)
In general. Except as provided in para-
graph (c)(2) of this section, the U.S. Trea-
sury Department’s Financial Management
Service foreign currency exchange rate is
to be used to convert the value of a spec-
ified foreign financial asset into U.S. dol-
lars for purposes of determining the aggre-
gate value of specified foreign financial as-
sets in which a specified person has an in-
terest and determining the maximum value
of a specified foreign financial asset,
(2)Other publicly available exchange
rate. If no U.S. Treasury Financial Man-
agement Service foreign currency ex-
change rate is available for a particular
currency, another publicly available for-
eign currency exchange rate may be used
to convert the value of a specified foreign
financial asset into U.S. dollars. In such
case, the source of the foreign currency
exchange rate must be disclosed on Form
8938.
(3)Currency exchange rate
. In convert-
ing the currency of a foreign country, the
foreign currency exchange rate applicable
for converting the currency into U.S. dol-
lars (that is, to purchase U.S. dollars) must
be used.
(4)Determination date. In convert-
ing the currency of a foreign country into
U.S. dollars for purposes of determining
the maximum value of a specified foreign
financial asset and determining the aggre-
gate value of specified foreign financial as-
sets in which a specified person has an in-
terest, the applicable foreign currency ex-
change rate is the rate on the last day of the
taxable year of the specified person, even if
the specified person sold or otherwise dis-
posed of a specified foreign financial asset
prior to the last day of such year.
(d)Financial accounts. A specified
person may rely upon periodic account
statements providedat least annually to
determine a financial account’s maximum
value unless the specified person has ac-
February 21, 20124072012–8 I.R.B.

tual knowledge or reason to know based
on readily accessible information that the
statements do not reflect a reasonable esti-
mate of the maximum account value dur-
ing the taxable year.
(e)Asset held in a financial account.
The value of an asset held in a financial
account maintained by a foreign financial
institution is included in determining the
value of that financial account for purposes
of §1.6038D–5T(a).
(f)Other specified foreign financial as-
sets—(1)General rule. Except as pro-
vided in paragraphs (f)(2) and (f)(3) of this
section, for specifiedforeign financial as-
sets that are not held in a financial account
maintained by a foreign financial institu-
tion, a specified person may use the value
of the asset as of the last day of the tax-
able year on which the specified person
has an interest in the asset as the maxi-
mum value of that asset, unless the speci-
fied person has actual knowledge or reason
to know based on readily accessible infor-
mation that the valuedoes not reflect a rea-
sonable estimate of the maximum value of
the asset.
(2)Interests in trusts that are specified
foreign financial assets.
(i)Maximum value. If a specified per-
son is a beneficiary of a foreign trust, the
maximum value of the specified person’s
interest in the trust is the sum of —
(A) the fair market value, determined as
of the last day of the taxable year, of all of
the currency or other property distributed
from the foreign trust during the taxable
year to the specified person as a benefi-
ciary; and
(B) the value as of the last day of the
taxable year of the specified person’s right
as a beneficiary to receive mandatory dis-
tributions from the foreign trust as deter-
mined under section 7520.
(ii)Reporting threshold. For purposes
of determining the aggregate value of
specified foreign financial assets in which
a specified person has an interest, if the
specified person does not know or have
reason to know based on readily accessible
information the fair market value of the
person’s interest in a foreign trust during
the taxable year, the value to be included
in determining the aggregate value of the
specified foreign financial assets is the
maximum value of the specified person’s
interest in the foreign trust under para-
graph (f)(2)(i) of this section.
(3)Interests in estates, pension plans,
and deferred compensation plans.
(i)Maximum value. The maximum
value of a specified person’s interest in a
foreign estate, foreign pension plan, or a
foreigndeferredcompensationplanisthe
fair market value, determined as of the last
day of the taxable year, of the specified
person’s beneficial interest in the assets of
the foreign estate, foreign pension plan, or
foreign deferred compensation plan. If the
specified person does not know or have
reason to know based on readily acces-
sible information such fair market value,
themaximumvaluetobereportedisthe
fair market value, determined as of the last
day of the taxable year, of the currency
and other property distributed during the
taxable year to the specified person as a
beneficiary or participant.
(ii)Reporting threshold. For purposes
of determining the aggregate value of
specified foreign financial assets in which
a specified person has an interest, if the
specified person does not know or have
reason to know based on readily accessi-
ble information the fair market value of
the person’s interest in a foreign estate,
foreign pension plan, or foreign deferred
compensation plan during the taxable year,
the value to be included in determining the
aggregate value of the specified foreign
financial assets is the fair market value,
determined as of the last day of the taxable
year, of the currency and other property
distributed during the taxable year to the
specified person as a beneficiary or partic-
ipant.
(g)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(h)Expiration date. The applicability
of this section expires December 12, 2014.
Par. 8. Section 1.6038D–6T is added to
read as follows:
§1.6038D–6T Specified domestic entities
(temporary).[Reserved]
Par. 9. Section 1.6038D–7T is added to
read as follows:
§1.6038D–7T Exceptions from the
reporting of certain assets under Section
6038D (temporary).
(a)Elimination of duplicative reporting
of assets—(1)In general. A specified per-
son is not required to report a specified for-
eign financial asset on Form 8938, “State-
ment of Specified Foreign Financial As-
sets,”if the specified person—
(i) Reports the asset on at least one of
the following forms timely filed with the
Internal Revenue Service for the taxable
year—
(A) Form 3520,“Annual Return To Re-
port Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts”(in the
case of a specified person who is the ben-
eficiary of a foreign trust);
(B) Form 5471,“Information Return
of U.S. Persons With Respect To Certain
Foreign Corporations”;
(C) Form 8621,“Information Return
by a Shareholder of a Passive Foreign In-
vestment Company or Qualified Electing
Fund”;
(D) Form 8865,“Return of U.S. Per-
sons With Respect to Certain Foreign Part-
nerships”;or
(E) Form 8891,“U.S. Information Re-
turn for Beneficiaries of Certain Canadian
Registered Retirement Plans”;or
(F) Any other form under Title 26 of
the United States Code timely filed with
the Internal Revenue Service and identi-
fied for this purpose by the Secretary in
regulations or other guidance; and
(ii) Reports on Form 8938 the filing of
the form on which the asset is reported.
(2)Foreign grantor trusts. A specified
person that is treated as an owner of a for-
eign trust or any portion of a foreign trust
under sections 671 through 679 is not re-
quired to report any specified foreign fi-
nancial assets held by the foreign trust on
Form 8938, provided—
(i) The specified person reports the trust
on a Form 3520 timely filed with the Inter-
nal Revenue Service for the taxable year;
(ii) The trust timely files Form 3520–A,
“Annual Information Return of Foreign
Trust With a U.S. Owner,”with the Internal
Revenue Service for the taxable year; and
(iii) The Form 8938 filed by the speci-
fied person for the taxable year reports the
filing of the Form 3520 and Form 3520–A.
(b)Owner of certain trusts. A speci-
fied person that is treated as an owner of
2012–8 I.R.B.408February 21, 2012

any portion of a domestic trust under sec-
tions 671 through 678 is not required to file
Form 8938 to report any specified foreign
financial asset held by the trust if the trust
is—
(1) A widely-held fixed investment
trust under §1.671–5; or
(2) A liquidating trust within the mean-
ing of §301.7701–4(d) of this chapter that
is created pursuant to a court order issued
in a bankruptcy under Chapter 7 (11 U.S.C.
701et seq.) or a confirmed plan under
Chapter 11 (11 U.S.C. 1101et seq.)ofthe
Bankruptcy Code.
(c)Bona fide resident of a U.S. posses-
sion. A specified individual who is abona
fideresident of a U.S. possession and who
is required to file Form 8938 with the Inter-
nal Revenue Service is not required to re-
port the following specified foreign finan-
cial assets:
(1) A financial account maintained by
a financial institution organized under the
laws of the U.S. possession of which the
specified individual is abona fideresident;
(2) A financial account maintained by
a branch of a financial institution not or-
ganized under the laws of the U.S. posses-
sion of which the specified individual is a
bona fideresident, if the branch is subject
to the same tax and information reporting
requirements applicable to a financial in-
stitution organized under the laws of the
U.S. possession;
(3) Stock or securities issued by an en-
tity organized under the laws of the U.S.
possession of which the specified individ-
ual is abona fideresident;
(4) An interest in an entity organized
under the laws of the U.S. possession of
which the specified individual is abona
fideresident; and
(5) A financial instrument or contract
held for investment, provided each issuer
or counterparty that is not a United States
person is —
(i) An entity organized under the laws
of the U.S. possession of which the speci-
fied individual is abona fideresident; or
(ii) Abona fideresident of the U.S. pos-
session of which the specified individual is
abona fideresident.
(d)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(e)Expiration date. The applicability
of this section expires December 12, 2014.
Par. 10. Section 1.6038D–8T is added
to read as follows:
§1.6038D–8T Penalties for failure to
disclose (temporary).
(a)In general.If a specified person
fails to file a Form 8938,“Statement of
Specified Foreign Financial Assets,”that
includes the information required by sec-
tion 6038D(c) and §1.6038D–4T with re-
spect to any taxable year at the time and in
the manner described in section 6038D(a)
and §1.6038D–2T, a penalty of $10,000
will apply to that specified person.
(b)Married specified individuals filing
a joint annual return. Married speci-
fied individuals who file a joint annual
return and fail to file a required Form
8938,“Statement of Specified Foreign
Financial Assets,”that includes the in-
formationrequiredbysection6038D(c)
and §1.6038D–4T with respect to any
taxable year at the time and in the man-
ner described in section 6038D(a) and
§1.6038D–2T are subject to penalties un-
der this section as if the married specified
individuals are a single specified person.
The liability of married specified individ-
uals who file a joint annual return with
respect to any penalties under this section
is joint and several.
(c)Increase in penalty.If any failure
to comply with the applicable reporting re-
quirement of section 6038D and the reg-
ulations continues for more than 90 days
after the day on which the Commissioner
or his delegate mails a notice of the fail-
ure to the specified person required to file
the Form 8938, the specified person is
required to pay an additional penalty of
$10,000 for each 30-day period (or frac-
tion thereof) during which the failure con-
tinues after the 90-day period has expired.
The additional penalty imposed by section
6038D(d)(2) and this paragraph (c) is lim-
ited to a maximum of $50,000 for each
such failure.
(d)Presumption of aggregate value.
For the purpose of assessing penalties
imposed under section 6038D(d), if the
Commissioner or his delegate determines
that a specified person has an interest in
one or more specified foreign financial
assets and the specified person does not
provide sufficient information to demon-
strate the aggregate value of the assets
upon request by the Commissioner or his
delegate, then the aggregate value of the
assets is treated as being in excess of the
applicable reporting threshold set forth in
§1.6038D–2T(a).
(e)Reasonable cause exception—(1)In
general. If the failure to report the infor-
mationrequiredinsection6038D(c)and
§1.6038D–4T is shown to be due to rea-
sonable cause and not due to willful ne-
glect, no penalty will be imposed under
section 6038D(d) or this section.
(2)Affirmative showing required.In
order to show that the failure to disclose
is due to reasonable cause and not due
to willful neglect for purposes of section
6038D(g) and this section, the specified
person must make an affirmative showing
of all the facts alleged as reasonable cause
for the failure to disclose.
(3)
Facts and circumstances taken into
account. The determination of whether a
failure to disclose a specified foreign fi-
nancial asset on Form 8938 was due to rea-
sonable cause and not due to willful ne-
glect is made on a case-by-case basis, tak-
ing into account all pertinent facts and cir-
cumstances. The fact that a foreign ju-
risdiction would impose a civil or crimi-
nal penalty on the specified person (or any
other person) for disclosing the required
information is notreasonable cause.
(f)Penalties for underpayments attrib-
utable to undisclosed foreign financial as-
sets—(1)Accuracy-related penalty.For
application of the accuracy-related penalty
in the case of any portion of an under-
payment attributable to any undisclosed
foreign financial asset understatement, see
section 6662(j).
(2)Criminal penalties. In addition to
other penalties, failure to comply with the
reporting requirements of section 6038D
and the regulations, or any underpayment
related to such failure, may result in crim-
inal penalties under sections 7201, 7203,
7206,et seq., or other provisions of Fed-
eral law.
(g)Effective/applicability dates.This
section applies to taxable years ending af-
ter December 19, 2011. Taxpayers may
elect to apply the rules of this section to
taxable years ending prior to December 19,
2011.
(h)Expiration date. The applicability
of this section expires December 12, 2014.
February 21, 20124092012–8 I.R.B.

Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 30, 2011.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 14,
2011, 4:15 p.m., and published in the issue of the Federal
Register for December 19,2011, 76 F.R. 78553)
2012–8 I.R.B.410February 21, 2012

Part III. Administrative, Procedural, and Miscellaneous
Health Savings Accounts
Notice 2012–14
PURPOSE
This notice provides guidance on
whether an individual eligible to receive
medical services at an Indian Health Ser-
vice facility is an “eligible individual”
with respect to Health Savings Accounts
(HSAs) under § 223 of the Internal Rev-
enue Code (the Code).
BACKGROUND
Section 1201 of the Medicare Prescrip-
tion Drug, Improvement, and Moderniza-
tion Act of 2003, Pub. L. No. 108–173,
added § 223 of the Code to permit eligible
individuals to establish HSAs for taxable
years beginning after December 31, 2003.
The Health Opportunity Patient Empower-
ment Act of 2006, Pub. L. No. 109–432
(HOPE Act), amended § 223 of the Code
effective generally for taxable years after
December 31, 2006.
Section 223(c)(1) provides that an eli-
gible individual means, for any month, an
individual who is covered by a high de-
ductible health plan (HDHP) on the first
day of such month and, generally, is not
covered by any other health plan, with cer-
tain exceptions. In addition, an eligible
individual cannot be claimed as a tax de-
pendent on another person’s tax return and
cannot be enrolled in Medicare. Section
223(b)(6) and (7). An eligible individual
may establish and make tax-free contribu-
tions to an HSA. Notice 2004–2, 2004–1
C.B. 269, Notice 2004–50, 2004–2 C.B.
196, and Notice 2008–59, 2008–2 C.B.
123, provide guidance on HSAs.
Indian Health Service (IHS) is a Divi-
sion within the U.S. Department of Health
and Human Services. An “IHS facility”
means a facility operated directly by IHS,
or by a tribe or tribal organization under the
Indian Self-Determination and Education
Assistance Act. Eligibility for IHS ser-
vices is determined under 42 CFR 136.12.
HSA ELIGIBILITY RULES AND IHS
FACILITIES
An individual who is eligible to receive
medical services at an IHS facility, but
who has not actually received such ser-
vices during the previous three months, is
an eligible individual within the meaning
of § 223(c)(1) who may establish and make
tax-free contributions to an HSA. How-
ever, an individual generally is not an el-
igible individual if the individual has re-
ceived medical services at an IHS facil-
ity at any time during the previous three
months. Notice 2004–2, Q&A–6, provides
that the receipt of permitted coverage, such
as dental and vision care, or the receipt of
preventive care, suchas well-baby visits,
immunizations, weight-loss and tobacco
cessation programs, does not affect an in-
dividual’s eligibility.
REQUEST FOR COMMENTS
The Treasury Department and the IRS
request comments on the eligibility rule
described in this notice. Comments must
be submitted by April 30, 2012. All mate-
rials submitted will be available for public
inspection and copying. Comments should
be submitted to Internal Revenue Ser-
vice, CC:PA:LPD:RU (Notice 2012–14),
Room 5203, PO Box 7604, Ben Franklin
Station, Washington, DC 20224. Submis-
sions may also be hand-delivered Monday
through Friday between the hours of 8 a.m.
and 4 p.m. to the Courier’s Desk, 1111
Constitution Avenue, NW, Washington,
DC 20224, Attn: CC:PA:LPD:RU (Notice
2012–14), Room 5203. Submissions
may also be sent electronically via the
internet to the following email address:
Notice.comments@irscounsel.treas.gov.
Include the notice number (Notice
2012–14) in the subject line.
DRAFTING INFORMATION
The principal author of this notice
is Leslie Paul of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities) though
other Treasury Department and IRS
officials participated in its development.
For further information on the submission
of comments or the comments submitted,
contact (202) 622–7180 (not a toll-free
number). For furtherinformation on all
other provisions of this notice, contact
Leslie Paul at (202) 622–6080 (not a
toll-free number).
February 21, 20124112012–8 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations
Reporting of
Specified Foreign
Financial As
sets
REG–130302–10
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY:
In this issue of the Bulletin, the Internal
Revenue Service is issuing temporary reg-
ulations (T.D. 9567) relating to the require-
ment that individuals attach a statement
to their income tax return to provide re-
quired information regarding foreign fi-
nancial assets in which they have an in-
terest. The text of the temporary regula-
tions also serves as the text of these pro-
posed regulations. This notice of proposed
rulemaking also includes a proposed reg-
ulation setting forth requirements for cer-
tain domestic entities to report foreign fi-
nancial assets in the same manner as an in-
dividual.
DATE: Written or electronic comments
and requests for a public hearing must be
received by March 19, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–130302–10),
room 5205, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–130302–10),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, N.W.,
Washington, DC, or sent electronically,
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–130302–10).
FOR F
URTHER INFORMATION
CONT
ACT: Concerning the proposed
regulations,
Joseph S. Henderson, (202)
622–3880; con
cerning submission of
comments and/
or requests for a hearing,
Olawafunmila
yo (Funmi) Taylor, at (202)
622–7180 (not
toll-free numbers).
SUPPLEMENTAR
Y INFORMATION:
Paperwork Re
duction Act
The collecti
on of information contained
in this notic
e of proposed rulemaking has
been submitt
ed to the Office of Manage-
ment and Budg
et for review in accordance
with the Pap
erwork Reduction Act of 1995
(44 U.S.C. 3
507(d)). Comments on the
collection
of information should be sent to
theOffice o
f Management and Budget,
Attn: Desk O
fficer for the Department
of the Trea
sury, Office of Information
and Regula
tory Affairs, Washington, DC
20503, wit
h copies to theInternal Rev-
enue Servi
ce, Attn: IRS Reports Clear-
ance Offic
er, SE:W:CAR:MP:T:M:S,
Washingt
on, DC 20224. Comments on
the colle
ction of information should be re-
ceived by
February 13, 2012. Comments
are speci
fically requested concerning:
Whether t
he proposed collection of in-
formatio
n is necessary for the proper per-
formanc
e of the functions of the Internal
Revenue
Service, including whether the
informa
tion will have practical utility;
The accu
racy of the estimated burden
associa
ted with the proposed collection of
informa
tion;
How the q
uality, utility, and clarity of
the info
rmation to be collected may be en-
hanced;
How the b
urden of complying with the
propos
ed collection of information may be
minimi
zed, including through the appli-
cation
of automated collection techniques
or othe
r forms of information technology;
and
Estima
tes of capital or start-up costs
and cos
ts of operation, maintenance and
purch
ase of service to provide information.
The col
lection of information in these
propo
sed regulations is in §§1.6038D–2
and 1.
6038D–4. The collection of infor-
matio
n is mandatory with respect to a spec-
ified
person that has an interest in speci-
fied f
oreign financial assets and the value
of tho
se assets is more than the applicable
repo
rting threshold. The respondents are
U.S. citizens
, U.S. residents, certain non-
residents and
, to the extent provided in fu-
ture regulati
ons, certain domestic entities.
The collectio
n of information is satisfied
by filing Form
8938,“Statement of Spec-
ified Foreig
n Financial Assets,”OMB No.
1545–2195, w
ith the respondent’s income
tax return.
Estimated to
tal annual reporting bur-
den: 378,000
hours.
Estimated an
nual burden per respon-
dent: 1 hour a
nd 5 minutes.
Estimated nu
mber of respondents:
350,000.
Estimated an
nual frequency of re-
sponses: on
ce.
An agency may
not conduct or sponsor,
and a person
is not required to respond to, a
collection
of information unless it displays
a valid cont
rol number assigned by the Of-
fice of Mana
gement and Budget.
Books or rec
ords relating to a collection
of informat
ion must be retained as long
as their co
ntents may become material in
the admini
stration of any internal revenue
law. Gener
ally, tax returns and tax return
informati
on are confidential as required by
26 U.S.C. 6
103.
Backgroun
d
Section 60
38D was enacted by section
511 of the
Hiring Incentives to Restore
Employme
nt (HIRE) Act, Public Law
111–147 (
124 Stat. 71). Section 6038D(a)
requires
an individual who holds any
interest
in a specified foreign financial
asset du
ring the taxable year to attach a
stateme
nt to that individual’s return of
tax impo
sed by subtitle A of the Internal
Revenue
Code (Code) to report the in-
formati
on identified in section 6038D(c),
if the a
ggregate value of the specified
foreig
n financial assets in which the indi-
vidual
holds an interest exceeds $50,000
for the
taxable year, or such higher dollar
amount
as the Secretary may prescribe.
Sectio
n 6038D(f) provides that, to the
extent
provided by the Secretary in regu-
latio
ns or other guidance, section 6038D
shall
apply to any domestic entity which is
forme
d of availed of for purposes of hold-
ing, d
irectly or indirectly, specified foreign
finan
cial assets, in the same manner as if
the e
ntity were an individual.
2012–8 I.R.B.412February 21, 2012

Temporary regulations in this issue of
the Bulletin contain amendments to the
Income Tax Regulations (26 CFR Part 1)
providing guidance to individuals required
to report specified foreign financial assets
with their annual return pursuant to section
6038D of the Code. The text of those reg-
ulations also serves as the text of the regu-
lations contained in this document that are
proposed by cross-reference to the tem-
porary regulations, that is §§1.6038D–0
through 1.6038D–5, §1.6038D–7, and
§1.6038D–8. The preamble to the tempo-
rary regulations explains the amendments
added by the temporary regulations.
This document also contains a proposed
amendment to the Income Tax Regulations
(26 CFR Part 1) that sets out the conditions
under which a domestic entity will be con-
sidered a “specified domestic entity.” A
domestic entity that is a specified domestic
entity pursuant to Prop. Reg. §1.6038D–6
is required to report specified foreign fi-
nancial assets in which it holds an interest.
Explanation of Provisions
1.Application of Section 6038D to
Domestic Entities
Under the proposed regulations, do-
mestic entities that are subject to the re-
porting requirements of section 6038D are
designated as specified domestic entities
and include certain domestic corpora-
tions, domestic partnerships, and trusts
describedinsection7701(a)(30)(E),gen-
erally referred to as domestic trusts for
purposes of this explanation. Specified
domestic entities do not include domestic
estates.
A.Domestic corporations and
partnerships
For a domestic corporation or partner-
ship to be considereda specified domestic
entity, it must satisfy three conditions.
First, the domestic corporation or domes-
tic partnership must have an interest in
specified foreign financial assets (other
than assets excepted from reporting as pro-
vided in §1.6038D–7T) with an aggregate
value exceeding the reporting threshold
in §1.6038D–2T(a)(1). Second, it must
be closely held by a specified individual
(as defined in §1.6038D–1T(a)(2)). A
domestic corporation is closely held if a
specified individual owns at least 80 per-
cent of the corporation’s stock (by vote or
value) on the last day of the corporation’s
taxable year. A domestic partnership is
closely held if a specified individual owns
at least 80 percent of the capital or prof-
its interest in the partnership on the last
day of its taxable year. Direct, indirect,
and constructive ownership rules apply in
determining whether the corporation or
partnership is closelyheld for this purpose.
Finally, a domestic corporation or part-
nership must also meet either of the fol-
lowing two conditions:
(A) At least 50 percent of the corpora-
tion’s or partnership’s gross income for the
taxable year is passive income or at least
50 percent of the assets held by the corpo-
ration or partnership at any time during the
taxable year are assets that produce or are
held for the production of passive income;
or
(B) At least 10 percent of the corpo-
ration’s or partnership’s gross income for
the taxable year is passive income or at
least 10 percent of the assets held by the
corporation or partnership at any time
during the taxable year are assets that
produce or are held for the production of
passive income, and the corporation or
partnership is formed or availed of by a
specified individual with a principal pur-
pose of avoiding the reporting obligations
under section 6038D. The determination
of whether a corporation or partnership
is formed or availed of with a principal
purpose of avoiding reporting under sec-
tion 6038D takes into account all facts and
circumstances.
Two different aggregation rules apply
for purposes of determining whether a do-
mestic corporation or domestic partnership
is a specified domestic entity. First, in
determining whether a domestic corpora-
tion or domestic partnership meets the re-
porting thresholds in§1.6038D–2T(a)(1),
domestic corporations and domestic part-
nerships that are closely held by the same
specified individual are treated as a sin-
gle entity. Second, for purposes of de-
termining whether a corporation or part-
nership meets the passive income or as-
set test, domestic corporations and domes-
tic partnerships that are closely held by
the same individual and that are connected
through stock or partnership interest own-
ership with a common parent corporation
or partnership are treated as a single entity.
The determination of whether a corpo-
ration or partnership is a specified domes-
tic entity is made annually for each taxable
year of such corporation or partnership.
B.Domestic trusts
A domestic trust is considered a spec-
ified domestic entity if it has an interest
in specified foreign financial assets (other
than assets excepted from reporting as pro-
vided in §1.6038D–7T) with an aggregate
value exceeding the reporting threshold in
§1.6038D–2T(a)(1) and one or more spec-
ified persons as current beneficiaries. For
purposes of section 6038D, a current ben-
eficiary is any person who, during the tax-
able year, is entitled to, or at the discre-
tion of any person may receive, a distri-
bution from the principal or income of the
trust (determined without regard to any
power of appointment to the extent that
such power remains unexercised at the end
of the taxable year). As discussed in sec-
tion 2 of this explanation, certain domestic
trusts are not specified domestic entities.
The determination of whether a domes-
tic trust is a specified domestic entity is
made annually for each taxable year of
such trust.
2.Excepted Specified Domestic Entities
A domestic entity is not considered to
be a specified domestic entity if it is de-
scribed in section 1473(3) and the reg-
ulations as excepted from the definition
of the term “specified United States per-
son”. This exception does not apply to any
trust that is exempt from tax under section
664(c).
A domestic trust is not considered a
specified domestic entity if the trustee is
a bank, financial institution, or domestic
corporation that is subject to certain exam-
ination, oversight or registration require-
ments, has supervisory authority over or
fiduciary obligations with regard to the
trust’s specified foreign financial assets,
and files income tax returns and informa-
tion returns on behalf of the trust. In ad-
dition, a domestic trust or any portion of
the trust that is treated as owned by one or
more specified persons under sections 671
through 678 and the regulations issued un-
der those sections is not considered to be a
specified domestic entity.
February 21, 20124132012–8 I.R.B.

Proposed Effective Date
Section 1.6083D–6 is proposed to
apply to taxable years beginning after
December 31, 2011.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that the collection
of information in this notice of proposed
rulemaking will not have a significant
economic impact on a substantial number
of small entities within the meaning of
section 601(6) of the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6). Small
entities generally hold specified foreign
financial assets (that is, financial accounts,
stocks, securities, financial instruments,
contracts, or interests in foreign entities)
for use in their trade or business and there-
fore generally would not have a filing
requirement. The burden is further re-
duced because small entities that do hold
specified foreign financial assets gener-
ally will be excepted from reporting such
assets under these proposed rules if the
assets are reported on one or more of
the following forms: Form 3520,“An-
nual Return To Report Transactions With
Foreign Trusts and Receipt of Certain
Foreign Gifts”; Form 3520–A,“Annual
Information Return of Foreign Trust With
aU.S.Owner”; Form 5471,“Informa-
tion Return of U.S. Persons With Respect
To Certain Foreign Corporations”;Form
8621,“Information Return by a Share-
holder of a Passive Foreign Investment
Company or Qualified Electing Fund”;
Form 8865,“Return of U.S. Persons With
Respect to Certain Foreign Partnerships”;
or Form 8891,“U.S. Information Return
for Beneficiaries of Certain Canadian
Registered Retirement Plans.”Therefore,
a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act is not re-
quired. Pursuant to section 7805(f) of the
Code, this regulation has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small businesses.
The Internal Revenue Service invites the
public to comment on this certification.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The Department of the Treasury and the In-
ternal Revenue Service request comments
on all aspects of the proposed regulations.
All comments will be available for public
inspection and copying. A public hearing
will be scheduled if requested in writing
by any person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.
Drafting Information
The principal author of these proposed
regulations is Joseph S. Henderson, Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from the
Internal Revenue Service and the Depart-
ment of the Treasury participated in their
development.
*****
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part1isamendedbyaddingentriesinnu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6038D–1 also issued under
26 U.S.C. 6038D
Section 1.6038D–2 also issued under
26 U.S.C. 6038D
Section 1.6038D–3 also issued under
26 U.S.C. 6038D
Section 1.6038D–4 also issued under
26 U.S.C. 6038D
Section 1.6038D–5 also issued under
26 U.S.C. 6038D
Section 1.6038D–6 also issued under
26 U.S.C. 6038D
Section 1.6038D–7 also issued under
26 U.S.C. 6038D
Section 1.6038D–8 also issued under
26 U.S.C. 6038D* * *
Par. 2. Section 1.6038D–0 is added to
read as follows:
§1.6038D–0 Outline of regulation
provisions.
The text of proposed §1.6038D–0 is
the same as the text of §1.6038D–0T pub-
lished elsewhere in this issue of the Bul-
letin.
Par. 3. Section 1.6038D–1 is added to
read as follows:
§1.6038D–1 Re
porting with respect
to specified
foreign financial assets,
definition o
fterms.
The text of proposed §1.6038D–1 is the
same as the text of paragraphs (a) and (b) in
§1.6038D–1T published elsewhere in this
issue of the Bulletin.
Par. 4 Section 1.6038D–2 is added to
read as follows:
§1.6038D–2 Requirement to report
specified foreign financial assets.
The text of proposed §1.6038D–2 is the
same as the text of paragraphs (a) through
(e) in §1.6038D–2T published elsewhere
in this issue of the Bulletin.
Par. 5 Section 1.6038D–3 is added to
read as follows:
§1.6038D–3 Specified foreign financial
assets.
The text of proposed §1.6038D–3 is the
same as the text of paragraphs (a) through
(e) in §1.6038D–3T published elsewhere
in this issue of the Bulletin.
Par. 6. Section 1.6038D–4 is added to
read as follows:
§1.6038D–4 Information required to be
reported.
The text of proposed §1.6038D–4 is the
same as the text of paragraphs (a) and (b) in
§1.6038D–4T published elsewhere in this
issue of the Bulletin.
Par. 7. Section 1.6038D–5 is added to
read as follows:
§1.6038D–5 Valuation guidelines.
The text of proposed §1.6038D–5 is the
same as the text of paragrahs (a) through
(g) in §1.6038D–5T published elsewhere
in this issue of the Bulletin.
2012–8 I.R.B.414February 21, 2012

Par. 8. Section 1.6038D–6 is added to
read as follows:
§1.6038D–6 Specified domestic entities.
(a)Specified domestic entity. A speci-
fied domestic entity is a domestic corpora-
tion, a domestic partnership, or a trust de-
scribed in section 7701(a)(30)(E), if such
corporation, partnership, or trust is formed
or availed of for purposes of holding, di-
rectly or indirectly, specified foreign finan-
cial assets. Whether a domestic corpora-
tion, a domestic partnership, or a trust de-
scribed in section 7701(a)(30)(E) is a spec-
ified domestic entity is determined annu-
ally.
(b)Corporations and partner-
ships—(1)Formed or availed of. Except
as otherwise provided in paragraph (d) of
this section, a domestic corporation or a
domestic partnership is formed or availed
of for purposes of holding, directly or in-
directly, specified foreign financial assets
if and only if—
(i) The corporation or partnership has
an interest in specified foreign financial as-
sets (other than assets excepted from re-
porting as provided in §1.6038D–7T) with
an aggregate value exceeding the reporting
threshold in §1.6038D–2T(a)(1);
(ii) The corporation or partnership is
closely held by a specified individual as
determined under paragraph (b)(3) of this
section; and
(iii) One of the following two condi-
tionsissatisfied:
(A) At least 50 percent of the corpora-
tion’s or partnership’s gross income for the
taxable year is passive income or at least
50 percent of the assets held by the corpo-
ration or partnership at any time during the
taxable year are assets that produce or are
held for the production of passive income;
or
(B)(1) At least 10 percent of the corpo-
ration’s or partnership’s gross income for
the taxable year is passive income or at
least 10 percent of the assets held by the
corporation or partnership at any time dur-
ing the taxable year are assets that produce
or are held for the production of passive in-
come, and
(2) The corporation or partnership is
formed or availed of by the specified in-
dividual identified in paragraphs (b)(1)(ii)
and (b)(3) of this section with a principal
purpose of avoiding the reporting obliga-
tions under section 6038D. For purposes of
determining whether a corporation or part-
nership is formed or availed of with a prin-
cipal purpose of avoiding reporting under
section 6038D, all facts and circumstances
are taken into account.
(2)Passive income. For purposes of
paragraph (b) of this section, passive in-
come means the portion of gross income
that consists of—
(i) Dividends;
(ii) Interest;
(iii) Rents and royalties, other than rents
and royalties derived in the active conduct
of a trade or business conducted by em-
ployees of the corporation or partnership;
(iv) Annuities;
(v) The excess of gains over losses from
the sale or exchange of property that gives
rise to passive income described in para-
graphs (b)(2)(i), (b)(2)(ii), (b)(2)(iii), and
(b)(2)(iv) of this section;
(vi) The excess of gains over losses
from transactions (including futures, for-
ward, and similar transactions) in any com-
modity, but not including any commod-
ity hedging transaction described in sec-
tion 954(c)(5)(A) determined by treating
the corporation or partnership as a con-
trolled foreign corporation;
(vii) The excess of foreign currency
gains over foreign currency losses (as de-
fined in section 988(b)) attributable to any
section 988 transaction; and
(viii) Net income from notional princi-
pal contracts.
(3)Closely held—(i)Domestic corpo-
ration. A domestic corporation is closely
held by a specified individual for purposes
of paragraph (b)(1)(ii) of this section if at
least 80 percent of the total combined vot-
ing power of all classes of stock of the cor-
poration entitled to vote, or at least 80 per-
cent of the total value of the stock of the
corporation, is owned,directly, indirectly,
or constructively, by one specified individ-
ual on the last day of the corporation’s tax-
able year.
(ii)Domestic partnership. A partner-
ship is closely held by a specified individ-
ual for purposes of paragraph (b)(1)(ii) of
this section if at least 80 percent of the cap-
ital or profits interest in the partnership is
held, directly, indirectly, or constructively,
by one specified individual on the last day
of the partnership’s taxable year.
(iii)Constructive ownership. For pur-
poses of paragraphs (b)(1)(ii) and (b)(3) of
this section, section 267(c) and (e)(3) ap-
ply for the purpose of determining the in-
terest of a specified individual in a corpo-
ration or partnership, except that section
267(c)(4) is applied as if the family of an
individual includes the spouses of the indi-
vidual’s family members.
(iv)Example. The following exam-
ple illustrates the application of paragraph
(b)(3) of this section:
Example.(1)Facts. DC1 is a domestic corpo-
ration the total value of the stock of which is owned
60% by A, a specified individual, 30% by B, a mem-
berofA’sfamilyforpurposesofsection267(c)(2)
who is not a specified individual, and 10% by FC1, a
foreign corporation. DC1 owns 90% of the total value
of the stock of DC2, a domestic corporation. FC2, a
foreign corporation, owns 10% of DC2. Neither A
nor B owns, directly, indirectly, or constructively, any
stock in FC1 or FC2.
(2)Ownership determination. DC2 is closely
held by A within the meaning of paragraphs (b)(1)(ii)
and (b)(3) of this section because A, a specified
person, owns more than 80% of its total value. A
is considered to own 81% of the total value of DC2
by application of the rules of section 267(c) and this
section.
(4)Treatment of related corporations
and partnerships—(i)Determination
of reporting threshold. For purposes
of applying paragraph (b)(1)(i) of this
section and determining whether a do-
mestic corporation or domestic partner-
ship satisfies the reporting threshold in
§1.6038D–2T(a)(1), all domestic corpora-
tions and domestic partnerships that have
an interest in any specified foreign finan-
cial asset and are closely held by the same
specified individual as determined under
paragraphs (b)(1)(ii) and (b)(3) of this sec-
tion are treated as a single entity, and each
such related corporation or partnership
will be treated as owning the specified
foreign financial assets held by all such
related corporations or partnerships.
(ii)Determination of passive income
and asset thresholds. For purposes of
applying the passive income and asset
thresholds of paragraph (b)(1)(iii) of this
section, all domestic corporations and
domestic partnerships that are closely
held by the same specified individual as
determined under paragraphs (b)(1)(ii)
and (b)(3) of this section and that are
connected through stock or partnership
interest ownership with a common parent
corporation or partnership (as determined
under this paragraph (b)(4)(ii)) are treated
as a single entity. A domestic corporation
or a domestic partnership is considered
February 21, 20124152012–8 I.R.B.

connected through stock or partnership
interest ownership with a common parent
corporation or partnership if stock repre-
senting at least 80 percent of the voting
power or value of each such corporation,
or partnership interests representing at
least 80 percent of theprofits interests or
capital interests of the partnership, in each
case other than stock of or partnership
interests in the common parent, is owned
by one or more of the other connected cor-
porations, connected partnerships, or the
common parent. For purposes of applying
paragraph (b)(1)(iii) of this section, each
member of a closely held and connected
group as determined under this paragraph
(b)(4)(ii) is treated as owning the com-
bined assets and receiving the combined
income of all members of that group. For
purposes of the preceding sentence, any
contract, equity, or debt existing between
members of such a group, as well as any
items arising under or from such contract,
equity, or debt relevant to the determi-
nation of the passive income percentage
under paragraph (b) of this section, are
eliminated.
(5)Examples. The following exam-
ples illustrate the application of the rules
of paragraph (b) of this section:
Example 1.(1)Facts. L is a specified individual.
In Year X, L wholly owns DC1, a domestic corpo-
ration, and also owns a 90% capital interest in DP,
a domestic partnership. DC1 owns 80% of the sole
class of stock of DC2, a domestic corporation. DC1
has no assets other than its interest in DC2. DC2’s
only assets are assets that produce passive income,
with a maximum value in Year X of $40,000 on Oc-
tober 12. DC2’s assets are comprised in relevant part
on October 12, Year X, of $15,000 of specified for-
eign financial assets. DP’s only assets are assets that
produce passive income and that are specified foreign
financial assets with a maximum value of $90,000 on
October 12, Year X and have a value of $20,000 on
December 31, Year X. DC1 and DC2 do not file a
consolidated annual return.
(2)Determination of reporting threshold.DC1,
DC2,andDParecloselyheldbyLforpurposesofap-
plying paragraph (b)(1)(ii) and (b)(3) of this section.
Under §1.6038D–3T, DC2 and DP each has an inter-
est in specified foreign financial assets; DC1 does not
have an interest in specified foreign financial assets.
For purposes of applying paragraph (b)(1)(i) of this
section and §1.6038D–2T(a)(1)—
(i)DC1. DC1 is not treated as a single entity with
DC2 and DP under paragraph (b)(4)(i) of this section.
As a result, DC1 does not satisfy the reporting thresh-
old of paragraph (b)(1)(i) of this section; and
(ii)DC2 and DP. DC2 and DP are treated as a
single entity under paragraph (b)(4)(i) of this sec-
tion. Therefore, for purposes of applying the report-
ing threshold of §1.6038D–2T(a)(1), DC2 is consid-
ered as owning in addition to its own assets the as-
sets of DP, and DP is considered as owning in ad-
dition to its own assets the assets of DC2. As a re-
sult, DC2 and DP each satisfies the reporting thresh-
old of §1.6038D–2T(a)(1), because the value of the
specified foreign financialassets each is considered
as owning under paragraph (b)(4)(i) of this section
exceeds $100,000 on October 12, Year X.
(3)Determination of passive income or passive
asset percentage—(i)DC1 and DC2.DC1andDC2
are treated as members of a closely held and con-
nected group of entities under paragraph (b)(4)(ii) of
this section, because DC1 and DC2 are closely held
by L, and DC2 is connected with DC1 though DC1’s
ownership of stock of DC2 representing at least 80%
of the voting power or value of DC2. As a result, DC1
and DC2 are considered a single entity for purposes of
applying paragraph (b)(1)(iii) of this paragraph, and
eachofDC1andDC2isconsideredasowningthe
combined assets, and receiving the combined income,
of both DC1 and DC2 (under paragraph (b)(4)(ii) of
this section). Therefore, DC1 and DC2 each satisfies
the passive asset threshold of paragraph (b)(1)(iii)(A)
of this section.
(ii)DP. DP is not treated as a member of the DC1
and DC2 closely held and connected group of enti-
ties because DC1 and DP are not owned by a com-
mon parent corporation or partnership. Therefore,
whether the passive income or passive asset threshold
of paragraph (b)(1)(iii) of this section is met with re-
spect to DP is determined solely by reference to DP’s
separately earned passive income and separately held
passive assets. DP has only passive assets on Oc-
tober 12, Year X, and, therefore, satisfies paragraph
(b)(1)(iii)(A) of this section.
(4)Reporting requirements—(i)DC1. DC1 is not
a specified domestic entity for Year X, and is not re-
quired to file Form 8938, because DC1 does not sat-
isfy the reporting threshold of paragraph (b)(1)(i) of
this section and §1.6038D–2T(a)(1).
(ii)DC2 and DP. DC2 and DP are specified do-
mestic entities for Year X, because they each meet the
conditions of paragraph (b)(1) of this section: each is
closely held by L, a specified individual; each has an
interest in specified foreign financial assets with an
aggregate value exceedingthe reporting threshold of
§1.6038D–2T(a)(1); and each satisfies the passive as-
set threshold. DC2 and DP must each file Form 8938
for Year X to report their respective specified foreign
financial assets and disclose their maximum values as
provided in §1.6038D–4T.
Example 2.(1)Facts. The facts are the same as
in Example 1, except that DC2 also has assets and
income from a trade or business. The income from
such business is not passive income and constitutes
60% of the gross income generated by DC2 in Year
X. The assets attributable to such trade or business
constitute at least 60% of the value of DC2’s assets
at all times during Year X. Assume that neither DC1
nor DC2 is formed or availed of by L with a principal
purpose of avoiding the reporting obligations under
section 6038D.
(2)
Determination of reporting threshold.DC1,
DC2, and DP are closely held by L for purposes of ap-
plying paragraph (b)(1)(ii) and (b)(3) of this section.
Under §1.6038D–3T, DC2 and DP each has an inter-
est in specified foreign financial assets; DC1 does not
have an interest in specified foreign financial assets.
For purposes of applying paragraph (b)(1)(i) of this
section and §1.6038D–2T(a)(1)—
(i)DC1. DC1 is not treated as a single entity with
DC2 and DP under paragraph (b)(4)(i) of this section.
As a result, DC1 does not satisfy the reporting thresh-
old of paragraph (b)(1)(i) of this section; and
(ii)DC2 and DP.DC2andDParetreatedasa
single entity under paragraph (b)(4)(i) of this sec-
tion. Therefore, for purposes of applying the report-
ing threshold of §1.6038D–2T(a)(1), DC2 is consid-
ered as owning in addition to its own assets the as-
sets of DP, and DP is considered as owning in addi-
tion to its own assets the assets of DC2. As a result,
DC2 and DP each satisfies the reporting threshold of
§1.6038D–2T(a)(1) because the value of the specified
foreign financial assets each is considered as own-
ing under paragraph (b)(4)(i) of this section exceeds
$100,000 on October 12, Year X.
(3)Determination of passive income or passive
asset percentage—(i)DC1 and DC2. DC1 and DC2
are treated as members of a closely held and con-
nected group of entities under paragraph (b)(4)(ii) of
this section, because DC1 and DC2 are closely held
by L, and DC2 is connected with DC1 though DC1’s
ownership of stock of DC2 representing at least 80%
of the voting power or value of DC2. As a result, DC1
and DC2 are considered a single entity for purposes
of applying paragraph (b)(1)(iii) of this paragraph,
and each of DC1 and DC2 is considered as owning
the combined assets, and receiving the combined in-
come, of both DC1 and DC2 (as determined under
paragraph (b)(4)(ii) of this section). DC1 and DC2 do
not have sufficient passive income or passive assets
to satisfy the thresholds of paragraph (b)(1)(iii)(A) of
this section. In addition, because neither DC1 nor
DC2 is formed or availed of by L with a principal pur-
pose of avoiding the reporting obligations under sec-
tion 6038D, neither DC1 nor DC2 meets the condi-
tions described in paragraph (b)(1)(iii)(B) of this sec-
tion.
(ii)DP. DP is not treated as a member of the DC1
and DC2 closely held and connected group of entities,
because DC1 and DP are not owned by a common
parent corporation or partnership. Therefore, whether
the passive income or asset threshold of paragraph
(b)(1)(iii) of this section is met with respect to DP
is determined solely by reference to DP’s separately
earned passive income and separately held passive
assets. DP has only passive assets that are specified
foreign financial assets on October 12, Year X, and
satisfies paragraph (b)(1)(iii)(A) of this section.
(4)Reporting requirements—(i)DC1. DC1 is not
a specified domestic entity for Year X, and is not re-
quired to file Form 8938, because DC1 does not sat-
isfy the reporting threshold of paragraph (b)(1)(i) of
this section and §1.6038D–2T(a)(1).
(ii)DC2. DC2 is not a specified domestic entity
for Year X, and is not required to file Form 8938, be-
cause DC2 does not satisfy the passive income or pas-
sive asset threshold of paragraph (b)(1)(iii)(A) of this
section and is not formed or availed of with a princi-
pal purpose of avoiding the reporting obligations un-
der section 6038D.
(iii)DP. DP is a specified domestic entity for
Year X because DP meets the conditions of paragraph
(b)(1) of this section: DP is closely held by L, a speci-
fied individual; DP has an interest in specified foreign
financial assets with an aggregate value exceeding
the reporting threshold of §1.6038D–2T(a)(1); and
DP satisfies the passive asset threshold of paragraph
(b)(1)(iii)(A) of this section. DP must file Form 8938
2012–8 I.R.B.416February 21, 2012

for Year X to report its specified foreign financial as-
sets and disclose their maximum value as provided in
§1.6038D–4T.
(c)Domestic trusts. Except as provided
in paragraph (d) of this section, a trust
described in section 7701(a)(30)(E) is a
specified domestic entity that is formed or
availed of for purposes of holding, directly
or indirectly, specified foreign financial as-
sets if and only if the trust—
(1) Has an interest in specified for-
eign financial assets (other than assets
excepted from reporting as provided in
§1.6038D–7T) with an aggregate value
exceeding the reporting threshold in
§1.6038D–2T(a)(1), and
(2) Has one or more specified persons
as a current beneficiary. For purposes of
this paragraph(c)(2), the term current ben-
eficiary means, with respect to the taxable
year, any person who at any time during
such taxable year is entitled to, or at the
discretion of any person may receive, a dis-
tribution from the principal or income of
the trust (determined without regard to any
power of appointment to the extent that
such power remains unexercised at the end
of the taxable year).
(d)Excepted domestic entities.Anen-
tity is not consideredto be a specified do-
mestic entity if the entity is—
(1)Certain persons described in section
1473(3). An entity, except for a trust that
is exempt from tax under section 664(c),
that is excepted from the definition of the
term “specified United States person” un-
der section 1473(3) and the regulations is-
sued under that section;
(2)Certain domestic trusts.Atrustde-
scribed in section 7701(a)(30)(E) provided
that the trustee of the trust—
(i) Has supervisory authority over or
fiduciary obligations with regard to the
specified foreign financial assets held by
the trust;
(ii) Timely files (including any applica-
ble extensions) annual returns and infor-
mation returns on behalf of the trust; and
(iii) Is —
(A) A bank that is examined by the Of-
fice of the Comptroller of the Currency,
the Board of Governors of the Federal Re-
serve System, the Federal Deposit Insur-
ance Corporation, the Office of Thrift Su-
pervision, or the National Credit Union
Association;
(B) A financial institution that is regis-
tered with and regulated or examined by
the Securities and Exchange Commission;
or
(C) A domestic corporation described
in section 1473(3)(A) or (B), and the reg-
ulations issued under that section.
(3)Domestic trusts owned by one or
more specified persons. A trust described
in section 7701(a)(30)(E) to the extent
such trust or any portion thereof is treated
as owned by one or more specified persons
under sections 671 through 678 and the
regulations issued under those sections.
(e)Effective/applicability dates.This
section applies to taxable years beginning
after December 31, 2011.
Par. 9. Section 1.6038D–7 is added to
read as follows:
§1.6038D–7 Exceptions from the
reporting of certain assets under Section
6038D.
The text of proposed §1.6038D–7 is the
same as the text of paragraphs (a) through
(d) in §1.6038D–7T published elsewhere
in this issue of the Bulletin.
Par. 10. Section 1.6038D–8 is added to
read as follows:
§1.6038D–8 Penalties for failure to
disclose.
The text of proposed §1.6038D–8 is the
same as the text of paragraphs (a) through
(g) in §1.6038D–8T published elsewhere
in this issue of the Bulletin.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on Dece
mber 14,
2011, 4:15 p.m., and published in the issue of the Federal
Register for December 19, 2011, 76 F.R. 78594)
Notice of Proposed
Rulemaking
Corporate Reorganizations;
Guidance on the Measurement
of Continuity of Interest
REG–124627–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations concerning the continu-
ity of interest requirement for corporate re-
organizations. The guidance is necessary
to clarify the manner in which the conti-
nuity of interest requirement is measured
in particular circumstances. The proposed
regulations affect corporations and their
shareholders.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 19, 2012.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–124627–11), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8:00 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–124627–11),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
N.W., Washington, DC, or electronically,
via the Federal e-Rulemaking Portal
athttp://www.regulations.gov/(IRS
REG–124627–11).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Richard Starke (202) 622–3497,
and concerning submission of comments,
Oluwafunmilayo Taylor (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This notice of proposed rulemaking
accompanies publication of final regula-
tions regarding the continuity of interest
requirement (COI) for corporate reorga-
nizations that are published in this issue
of the Bulletin (the 2011 regulations). In
general, the 2011 regulations provide the
circumstances under which the consider-
ation to be exchanged for the proprietary
interests in the target corporation is val-
ued on the last business day before the
first date there is a binding contract (the
signing date rule). The preamble explains
that the signing date rule is based on the
principle that where a binding contract
provides for fixed consideration, the target
corporation shareholders can generally be
viewed as being subject to the economic
fortunes of the issuing corporation as of
February 21, 20124172012–8 I.R.B.

the last business day before the signing
date (the Pre-Signing Date). However,
if the contract does not provide for fixed
consideration, the signing date value of the
issuing corporation stock is not relevant
for purposes of determining the extent to
which a proprietary interest in the target
corporation is preserved. For additional
background regarding the signing date
rule, see the preamble to the 2011 regula-
tions published elsewhere in this issue of
the Bulletin.
Explanation of Provisions
In response to comments, the IRS and
the Treasury Department have reconsid-
ered the scope of the signing date rule, and
agree that its underlying principles sup-
port additional methods for determining
whether COI is satisfied. For example, a
contract to effect a potential reorganization
may provide that the amount of an item of
consideration will vary as the value of issu-
ing corporation stock declines between the
stock’s Pre-Signing Date value and some
lower value provided for in the contract
(Floor Price), but will not vary below the
Floor Price. If the closing date value is
less than the Floor Price in such a case, the
target shareholders have been subjected to
the economic fortunes of owning the con-
sideration received in the exchange in the
same manner as if the contract had fixed
the consideration based upon the contract’s
stated Floor Price. Accordingly, these pro-
posed regulations generally provide that if,
pursuant to a binding contract, an item of
consideration varies as the value of issu-
ing corporation stock declines between the
stock’s Pre-Signing Date value and a Floor
Price, and the closing date value is less
than the Floor Price, COI is determined as
if the consideration that would have been
delivered at the Floor Price were issued
and valued based upon the Floor Price.
Applying the same principle, these pro-
posed regulations provide that if, pursuant
to a binding contract, an item of consider-
ation varies as the value of issuing corpo-
ration stock increases between the stock’s
signing date value and some higher value
provided for in the contract (Ceiling Price),
and the closing date value is greater than
the Ceiling Price, COI is determined as
if the consideration that would have been
delivered at the Ceiling Price were issued
and valued based upon the Ceiling Price.
For purposes of this rule, the Closing Date
means the date upon which the exchange
of consideration in the potential reorgani-
zation occurs.
In response to comments, these pro-
posed regulations also permit, in lieu of
the value of issuing corporation stock on
the Closing Date, the use of an average
value for issuing corporation stock in cer-
tain circumstances. The proposed regula-
tions provide that an average value may be
used if it is based upon issuing corporation
stock values occurringafterthesigning
date and before the Closing Date, and the
binding contract utilizes the average price,
so computed, in determining the number
of shares of each class of stock of the is-
suing corporation, the amount of money,
and the other property to be exchanged for
all the proprietary interests in the target
corporation, or to be exchanged for each
proprietary interest in the target corpora-
tion. This rule also applies signing date
rule principles because the average value
fixes the number of shares and amount of
other consideration. Accordingly, the tar-
get shareholders become subject to the for-
tunes of the issuer’s stock across the range
of dates being averaged.
Request for Comments
As previously stated, the signing date
rule and these proposed regulations are
based upon the concept that for purposes of
measuring COI, in certain circumstances
an item of consideration provided by the
issuing corporation can generally be val-
ued on the date that the target sharehold-
ers become subject to the economic for-
tunes of owning the item, assuming the
exchange ultimately occurs. Depending
upon the contract’s terms, this may occur
on a date between the signing date and the
closing date, and may occur for different
items of consideration on different dates.
Accordingly, for purposes of COI, it may
be appropriate to value an item of consid-
eration on a date between the signing date
and the closing date, and to value different
items on different dates. For example, fu-
ture guidance could provide that an item
of consideration is valued for COI pur-
poses at the earliest date on which the tar-
get shareholders (in the aggregate) become
fully subject to the appreciation and depre-
ciation in the value of that item pursuant
to a binding contract to effect the potential
reorganization, but not later than the date
of the reorganization exchange. In deter-
mining whether the target shareholders are
fully subject to market appreciation and
depreciation, certain circumstances, such
as the risk of not closing, would be disre-
garded. The IRS and the Treasury Depart-
ment request comments on the propriety of
such an approach.
Effective Date
These regulations are proposed to ap-
plytotransactionsoccurringonorafter
the date the regulations are published as
final regulations in theFederal Register,
unless completed pursuant to a binding
agreement that was in effect immediately
before the date such final regulations are
published and all times afterwards.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Execu-
tive Order 12866 as supplemented by Ex-
ecutive Order 13563. Therefore, a regu-
latory assessment is not required. It has
also been determined that 5 U.S.C. 553(b)
does not apply to these regulations and be-
cause the regulations do not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. 601et
seq.)does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking has been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small enti-
ties.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and 8 copies) or electronic
comments that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If
a public hearing is scheduled, notice of the
2012–8 I.R.B.418February 21, 2012

date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Richard Starke of the Office of
Associate Chief Counsel (Corporate), IRS.
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368–1 is amended
by adding new paragraphs (e)(2)(vi),
(e)(2)(vii), and revising (e)(9) to read as
follows:
§1.368–1 Purpose and scope of exception
of reorganization exchanges.
*****
(e) * * *
(2) * * *
(vi)Special Rules—(A)Floors.This
paragraph (e)(2)(vi)(A) applies if, pur-
suant to a binding contract, the amount of
an item of consideration to be exchanged
for all the proprietary interests in the target
corporation, or to be exchanged for each
proprietary interest in the target corpora-
tion, changes as the value of a share of the
issuing corporation varies above a speci-
fied price (Floor Price), but does not vary
below the Floor Price. If the value of the
share is greater than or equal to the Floor
Price on the Pre-Signing Date (as defined
in paragraph (e)(2)(i) of this section) but
below the Floor Price on the Closing Date
(as defined in paragraph (e)(2)(vi)(D) of
this section), whether a proprietary inter-
est is preserved is determined as if the
consideration was issued and valued based
upon the Floor Price.
(B)Ceilings.This paragraph
(e)(2)(vi)(B) applies if, pursuant to a
binding contract, the amount of an item
of consideration to be exchanged for all
the proprietary interests in the target cor-
poration, or to be exchanged for each
proprietary interest in the target corpo-
ration, changes as the value of a share
of the issuing corporation varies below a
specified price (Ceiling Price), but does
not vary above the Ceiling Price. If the
value of the share is less than or equal to
the Ceiling Price on the Pre-Signing Date
(as defined in paragraph (e)(2)(i) of this
section) but above the Ceiling Price on
the Closing Date (as defined in paragraph
(e)(2)(vi)(D) of this section), whether a
proprietary interest is preserved is deter-
mined as if the consideration was issued
and valued based upon the Ceiling Price.
(C)Closing Date value—average val-
ues between signing date and Closing
Date. In determining the Closing Date
value of issuing corporation stock for
purposes of determining whether a pro-
prietary interest in the target corporation
is preserved, an average of prices may be
used in lieu of the Closing Date price if —
(1) The average price is based upon
prices of issuing corporation stock occur-
ring after the signing date and before the
Closing Date, and
(2) The binding contract utilizes the av-
erage price, so computed, in determining
the number of shares of each class of stock
of the issuing corporation, the amount of
money, and the other property to be ex-
changed for all the proprietary interests in
the target corporation, or to be exchanged
for each proprietary interest in the target
corporation.
(D)Closing Date. For purposes of para-
graphs (e)(2)(vi) and (e)(2)(vii) of this sec-
tion, theClosing Datemeans the date upon
which the exchange of consideration in the
potential reorganization occurs.
(vii)Examples. For purposes of the ex-
amples in this paragraph (e)(2)(vii), P is
the issuing corporation, T is the target cor-
poration, each corporation has only one
class of stock outstanding, no transactions
other than those described occur, and the
transactions are nototherwise subject to
recharacterization. The following exam-
ples illustrate the application of paragraph
(e)(2)(vi) of this section:
Example 1.Price adjustment to provide more or
less cash.(i)Facts. On January 3 of year 1, P and
T sign a binding contract pursuant to which T will be
merged into P. Pursuant to the contract, the T share-
holders will receive 50 shares of P stock and $50 cash
in exchange for all of the outstanding shares of T
stock, subject to the following price adjustment:
(A) If the average price of P stock over the
five-day period prior to the Closing Date exceeds
$1, the amount of cash will be reduced by 50
times the excess of that price over $1, and
(B) If the average price of P stock during the
specified period is less than $1, the amount of
cash will be increased by 50 times the excess of
$1 over that price, provided that in no event will
P deliver cash of less than $40 or more than $60
to the T shareholders. This adjustment ensures
that the T shareholders will be entitled to receive
aggregate consideration with a value of $100 on
the closing date if the average price of P stock
during the specified period is between $.80, at
which point the T shareholders would receive $60
of cash ($50 + (($1 - $.80) x 50)), and $1.20, at
which point the T shareholders would receive $40
of cash ($50 - (($1.20-$1) x 50)).
(C)OnJanuary2ofyear1,thevalueofthe
P stock is $1 per share. On June 1 of year 1, T
merges into P, when the value of P stock is $.25
per share. The average price of P stock during
the specified period is also $.25 per share. In the
merger, the T shareholders receive $60 cash and
50 shares of P stock with a value (determined as
of the Closing Date) of $12.50.
(ii)COI determined at the Floor Price.For pur-
poses of determining whether a proprietary interest in
the target corporation is preserved, the rules of para-
graph (e)(2)(vi)(A) of this section apply because, pur-
suant to a binding contract, the amount of cash to be
exchanged for all the proprietary interests in the tar-
get corporation varies above a Floor Price of $.80 but
does not vary below the Floor Price, the Pre-Sign-
ing Date value exceeds the Floor Price, and the value
on the Closing Date is less than the Floor Price. Ac-
cordingly, whether a proprietary interest is preserved
is determined as if the consideration that would have
been delivered at the FloorPrice was issued and val-
ued based upon the Floor Price value. At the Floor
Price, the T shareholders would have received, in the
aggregate, $60 of cash and $40 of P stock. Therefore,
the transaction satisfies the continuity of interest re-
quirement.
Example 2.No Floor Price.Thefactsarethe
same as inExample 1, except that the Pre-Signing
Date value is $.50, the Closing Date value is $1.50,
and there is no limitation on the amount of additional
cash that the T shareholders may receive (that is,
there is no Floor Price). For purposes of determining
whether a proprietary interest in the target corporation
is preserved, the rules of paragraph (e)(2)(vi)(B) of
this section apply because, pursuant to a binding con-
tract, the amount of cash to be exchanged for all the
proprietary interests in the target corporation varies
below a Ceiling Price of $1.20 but does not vary
above the Ceiling Price, the Pre-Signing Date value
is less than the Ceiling Price, and the value on the
Closing Date exceeds the Ceiling Price. Accordingly,
whether a proprietary interest is preserved is deter-
mined as if the consideration that would have been
delivered at the Ceiling Price was issued and valued
based upon the Ceiling Price. At the Ceiling Price,
the T shareholders would have received, in the ag-
gregate, $40 of cash and $60 of P stock. Therefore,
the transaction satisfies the continuity of interest re-
quirement.
February 21, 20124192012–8 I.R.B.

Example 3. No Floor or Ceiling Price.(i)Facts.
On January 3 of year 1, P and T sign a binding con-
tract pursuant to which T will be merged into P. Pur-
suant to the contract, the T shareholders will receive
$50 cash and $50 of P stock based upon the P stock
value on the Closing Date. On January 2 of year 1,
the Pre-Signing Date, the value of the P stock is $1
per share. On June 1 of year 1, when the value of P
stock is $5 per share, T merges into P.
(ii)COIdeterminedontheClosingDate.Forpur-
poses of determining whether a proprietary interest in
the target corporation is preserved, the rules of para-
graph (e)(2)(vi) of this section do not apply because
the contract does not provide for a either a Floor Price
or a Ceiling Price. There is no Floor Price because
there is not a value below which the amount of P stock
will not vary. There is no Ceiling Price because there
is not a value above which the amount of P stock will
not vary. Because the transaction does not satisfy the
requirements of paragraph (e)(2)(vi) of this section
and does not satisfy the definition of fixed considera-
tion, the consideration will be valued on the Closing
Date. The transaction satisfies the continuity of inter-
est requirement because the T shareholders receive,
in the aggregate, $50 cash and $50 of P stock.
*****
(9)Effective/Applicability date. Para-
graphs (e)(2)(vi) and (e)(2)(vii) are pro-
posed to apply to transactions occurring on
or after the date the regulations are pub-
lished as final regulations in theFederal
Register, unless completed pursuant to a
binding agreement that was in effect im-
mediately before the date such final regu-
lations are published and at all times after-
wards.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 16,
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 19,2011, 76 F.R. 78591)
2012–8 I.R.B.420February 21, 2012

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.
February 21, 2012i2012–8 I.R.B.

Numerical Finding List
1
Bulletins 2012–1 through 2012–8
Announcements:
2012-1, 2012-1 I.R.B.249
2012-2, 2012-2 I.R.B.285
2012-3, 2012-4 I.R.B.335
2012-4, 2012-4 I.R.B.335
2012-5, 2012-5 I.R.B.348
2012-6, 2012-6 I.R.B.366
2012-7, 2012-6 I.R.B.367
2012-8, 2012-7 I.R.B.373
2012-9, 2012-7 I.R.B.377
Notices:
2012-1, 2012-2 I.R.B.260
2012-3, 2012-3 I.R.B.289
2012-4, 2012-3 I.R.B.290
2012-5, 2012-3 I.R.B.291
2012-6, 2012-3 I.R.B.293
2012-7, 2012-4 I.R.B.308
2012-8, 2012-4 I.R.B.309
2012-9, 2012-4 I.R.B.315
2012-10, 2012-5 I.R.B.343
2012-11, 2012-5 I.R.B.346
2012-12, 2012-6 I.R.B.365
2012-14, 2012-8 I.R.B.411
Proposed Regulations:
REG-130302-10, 2012-8 I.R.B.412
REG-149625-10, 2012-2 I.R.B.279
REG-102988-11, 2012-4 I.R.B.326
REG-124627-11, 2012-8 I.R.B.417
REG-130777-11, 2012-5 I.R.B.347
Revenue Procedures:
2012-1, 2012-1 I.R.B.1
2012-2, 2012-1 I.R.B.92
2012-3, 2012-1 I.R.B.113
2012-4, 2012-1 I.R.B.125
2012-5, 2012-1 I.R.B.169
2012-6, 2012-1 I.R.B.197
2012-7, 2012-1 I.R.B.232
2012-8, 2012-1 I.R.B.235
2012-9, 2012-2 I.R.B.261
2012-10, 2012-2 I.R.B.273
2012-11, 2012-7 I.R.B.368
2012-12, 2012-2 I.R.B.275
2012-13, 2012-3 I.R.B.295
2012-14, 2012-3 I.R.B.296
2012-15, 2012-7 I.R.B.369
Revenue Rulings:
2012-1, 2012-2 I.R.B.255
2012-2, 2012-3 I.R.B.286
Revenue Rulings— Continued:
2012-3, 2012-8 I.R.B.383
2012-4, 2012-8 I.R.B.386
2012-5, 2012-5 I.R.B.337
2012-6, 2012-6 I.R.B.349
2012-7, 2012-6 I.R.B.362
Treasury Decisions:
9559, 2012-2 I.R.B.252
9560, 2012-4 I.R.B.299
9561, 2012-5 I.R.B.341
9562, 2012-5 I.R.B.339
9563, 2012-6 I.R.B.354
9565, 2012-8 I.R.B.378
9566, 2012-8 I.R.B.389
9567, 2012-8 I.R.B.395
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin
2011–52, dated December 27, 2011.
2012–8 I.R.B.iiFebruary 21, 2012

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2012–1 through 2012–8
Announcements:
2011-63
Corrected by
Ann. 2012-9, 2012-7 I.R.B.377
Notices:
2010-88
As modified by Ann. 2011-40, is superseded by
Notice 2012-1, 2012-2 I.R.B.260
2011-28
Superseded by
Notice 2012-9, 2012-4 I.R.B.315
Revenue Procedures:
2003-61
Superseded by
Notice 2012-8, 2012-4 I.R.B.309
2007-44
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
2011-1
Superseded by
Rev. Proc. 2012-1, 2012-1 I.R.B.1
2011-2
Superseded by
Rev. Proc. 2012-2, 2012-1 I.R.B.92
2011-3
Superseded by
Rev. Proc. 2012-3, 2012-1 I.R.B.113
2011-4
Superseded by
Rev. Proc. 2012-4, 2012-1 I.R.B.125
2011-5
Superseded by
Rev. Proc. 2012-5, 2012-1 I.R.B.169
2011-6
Superseded by
Rev. Proc. 2012-6, 2012-1 I.R.B.197
2011-7
Superseded by
Rev. Proc. 2012-7, 2012-1 I.R.B.232
2011-8
Superseded by
Rev. Proc. 2012-8, 2012-1 I.R.B.235
2011-9
Superseded by
Rev. Proc. 2012-9, 2012-2 I.R.B.261
Revenue Procedures— Continued:
2011-10
Superseded by
Rev. Proc. 2012-10, 2012-2 I.R.B.273
2011-40
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2011-49
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
2011-50
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2011-51
Corrected by
Ann. 2012-6, 2012-6 I.R.B.366
2012-8
Corrected by
Ann. 2012-7, 2012-6 I.R.B.367
Revenue Rulings:
92-19
Supplemented in part by
Rev. Rul. 2012-6, 2012-6 I.R.B.349
2008-40
Modified by
Notice 2012-6, 2012-3 I.R.B.293
2011-1
Modified by
Notice 2012-6, 2012-3 I.R.B.293
Treasury Decision:
9517
Corrected by
Ann. 2012-4, 2012-4 I.R.B.335
Ann. 2012-5, 2012-5 I.R.B.348
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27,
2011.
February 21, 2012iii2012–8 I.R.B.

2012–8 I.R.B.February 21, 2012

February 21, 20122012–8 I.R.B.

INTERNAL REVENUE BULLETIN
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