bulletin no. 2007-21 highlights of this issue · 2007–21 i.r.b. may 21, 2007. the irs mission...

Bulletin No. 2007-21May 21, 2007

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2007–24, page 1282.Section 1035; certain exchanges of insurance policies.A taxpayer’s receipt of a check issued by an insurance com-pany under a non-qualified annuity contract is treated as a tax-able distribution, even if the check is endorsed to a secondinsurance company for the purchase of a second annuity. Thetransaction is not characterized as a tax-free exchange undersection 1035(a)(3) of the Code unless there is a direct ex-change or assignment of the original contract.

Rev. Rul. 2007–30, page 1277.Income attributable to domestic production activities;qualifying in-kind partnerships. This ruling provides thata partnership engaged in the extraction and processing of min-erals within the United States is a qualifying in-kind partnershipfor purposes of section 199 of the Code. Each partner ofa qualifying in-kind partnership is treated as having manufac-tured, produced, grown, or extracted (MPGE) property MPGEby the partnership that is distributed to that partner.

Rev. Rul. 2007–31, page 1275.Contributions to the capital of a corporation; nonshare-holder contributions. This ruling provides that payments re-ceived by a corporation under the federal universal service sup-port mechanisms do not represent a nonshareholder contri-bution to capital under section 118(a) of the Code. The fed-eral universal service support mechanisms are funded by con-tributions from telecommunications carriers. Telecommunica-tions carriers receive support payments to provide discountedtelecommunications services or telecommunication services inhigh cost areas.

Rev. Rul. 2007–32, page 1278.Accrual of interest. This ruling requires an accrual methodbank with a reasonable expectancy of receiving future pay-ments on a loan to include accrued interest (determined underregulations section 1.446–2(a)(2)) in gross income for the tax-able year in which the right to receive the interest becomesfixed, notwithstanding bank regulatory rules that prevent ac-crual of the interest for regulatory purposes. The ruling alsoprovides guidance as to the period in which a bank that haselected the conformity method of accounting under regulationssection 1.166–2(d)(3) can treat uncollected interest as worth-less. Rev. Rul. 81–18 distinguished.

Rev. Rul. 2007–33, page 1281.Real estate investment trust (REIT) foreign currency. Thisruling provides that section 988 gain that is recognized by aREIT will be qualifying income under section 856(c)(2) or (3) ofthe Code to the extent that the underlying income so qualifies.

Notice 2007–40, page 1284.Renewable electricity production, refined coal produc-tion, and Indian coal production; calendar year 2007inflation adjustment factors and reference prices. Thisnotice announces the calendar year 2007 inflation adjustmentfactors and reference prices for the renewable electricity pro-duction credit, refined coal production credit, and Indian coalproduction credit under section 45 of the Code.

(Continued on the next page)

Finding Lists begin on page ii.

Notice 2007–41, page 1287.The Department of Treasury and the Service invite public com-ments on recommendations for items that should be includedon the 2007–2008 Guidance Priority List. Taxpayers may sub-mit recommendations for guidance at any time during the year.Recommendations submitted by May 31, 2007, will be re-viewed for possible inclusion on the original 2007–2008 Guid-ance Priority List. Recommendations received after May 31,2007, will be reviewed for inclusion in the next periodic up-date.

Notice 2007–42, page 1288.This notice provides guidance to real estate investment trusts(REITs) concerning the circumstances under which section856(c)(2) or (3) of the Code characterizes section 987 gainas qualifying income for REIT qualification.

Rev. Proc. 2007–33, page 1289.This document provides the exclusive procedures under whicha bank may change its method of accounting for uncollectedinterest to an elective safe harbor method based on the bank’scollection experience. Rev. Proc. 2002–9 modified and ampli-fied.

EMPLOYEE PLANS

Notice 2007–33, page 1284.Weighted average interest rate update; corporate bondindices; 30-year Treasury securities. The weighted aver-age interest rate for May 2007 and the resulting permissiblerange of interest rates used to calculate current liability and todetermine the required contribution are set forth.


EXEMPT ORGANIZATIONS

Notice 2007–41, page 1287.The Department of Treasury and the Service invite public com-ments on recommendations for items that should be includedon the 2007–2008 Guidance Priority List. Taxpayers may sub-mit recommendations for guidance at any time during the year.Recommendations submitted by May 31, 2007, will be re-viewed for possible inclusion on the original 2007–2008 Guid-

ance Priority List. Recommendations received after May 31,2007, will be reviewed for inclusion in the next periodic up-date.

ESTATE TAX

REG–143316–03, page 1292.Proposed regulations under section 2053 of the Code provideguidance to determine the amount deductible from a dece-dent’s gross estate for claims against the estate under section2053(a)(3). Under these regulations, the amount deductibleis generally the amount actually paid in satisfaction of a legit-imate claim. The regulations provide special rules for poten-tial claims, contested claims, claims against multiple parties,claims by family members and related entities, unenforceableclaims, and recurring payments. A public hearing is scheduledfor August 6, 2007.


GIFT TAX


(Continued on the next page)

May 21, 2007 2007–21 I.R.B.

EMPLOYMENT TAX


EXCISE TAX


ADMINISTRATIVE


Announcement 2007–49, page 1300.This document contains corrections to final regulations (T.D.9315, 2007–15 I.R.B. 891) that address various dual consoli-dated loss issues, including exceptions to the general prohibi-tion against using a dual consolidated loss to reduce the tax-able income of any other member of the affiliated group.

2007–21 I.R.B. May 21, 2007

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents 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 ofthe 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 internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

May 21, 2007 2007–21 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 118.—Contribu-tions to the Capital ofa Corporation26 CFR 1.118–1: Contributions to the capital of acorporation.

Contributions to the capital of acorporation; nonshareholder contribu-tions. This ruling provides that paymentsreceived by a corporation under the fed-eral universal service support mechanismsdo not represent a nonshareholder con-tribution to capital under section 118(a)of the Code. The federal universal ser-vice support mechanisms are funded bycontributions from telecommunicationscarriers. Telecommunications carriersreceive support payments to provide dis-counted telecommunications services ortelecommunication services in high costareas.

Rev. Rul. 2007–31

ISSUE

Is universal service support received bya corporation under the universal servicesupport mechanisms a nonshareholdercontribution to capital under section 118(a)of the Internal Revenue Code?

FACTS

The federal universal service supportmechanisms are required by 47 U.S.C.§ 254. The Federal CommunicationCommission (Commission) is requiredto establish periodically the services to besupported by federal universal service sup-port mechanisms. 47 U.S.C. § 254(c)(1).The Commission has established that thefollowing services be supported by federaluniversal service support mechanisms: (1)voice grade access to the public switchednetwork; (2) local usage; (3) dual tonemulti-frequency signaling or its functionalequivalent; (4) single-party service or itsfunctional equivalent; (5) access to emer-gency services; (6) access to operator ser-vices; (7) access to interexchange service;(8) access to directory assistance; and (9)toll limitations for qualifying low-incomeconsumers. 47 C.F.R. § 54.101(a). Aneligible telecommunications carrier must

offer each of the services in order to re-ceive federal universal service support. 47C.F.R. § 54.101(b).

The Universal Service AdministrativeCompany (Administrator) administers thefederal universal service support mecha-nisms. 47 C.F.R. § 54.701. The Adminis-trator is responsible for administering thefollowing federal universal support mech-anisms: (1) the high cost support mecha-nisms described in 47 C.F.R. part 54, sub-part D; (2) the low income support mecha-nisms described in 47 C.F.R. part 54, sub-part E; (3) the schools and libraries supportmechanism described in 47 C.F.R. part 54,subpart F; (4) the rural health care supportmechanism described in 47 C.F.R. part 54,subpart G; (5) the interstate access uni-versal support mechanism described in 47C.F.R. part 54, subpart J; and (6) the in-terstate common line support mechanismdescribed in 47 C.F.R. part 54, subpart K.47 C.F.R. § 54.702(a). The Administratoris responsible for billing contributors, col-lecting contributions to the universal ser-vice support mechanisms, and disbursinguniversal service support funds. 47 C.F.R.§ 54.702(b).

The federal universal service supportmechanisms are funded by contributionsfrom telecommunications carriers. Everytelecommunications carrier that providesinterstate telecommunications servicesmust contribute, on an equitable andnondiscriminatory basis, to the specific,predictable, and sufficient mechanisms es-tablished by the Commission to preserveand advance universal service. 47 U.S.C.§ 254(d). Entities that provide interstatetelecommunications services to the public,or to such classes of users as to be effec-tively available to the public, for a feewill be considered telecommunicationscarriers providing interstate telecommuni-cations services and must contribute to theuniversal service support mechanisms. 47C.F.R. § 54.706(a). Federal universal ser-vice contribution costs may be recoveredthrough interstate telecommunications-re-lated charges to end users. 47 C.F.R.§ 54.712(a).

In order to receive support, an eligibletelecommunications carrier first must pro-vide the supported services. The univer-

sal service support provided pursuant to47 C.F.R. part 54, subparts D, J, and K(identified above) ensures that consumersin all regions of the nation have access toand pay rates for telecommunication ser-vices that are reasonably comparable tothose in urban areas. The universal ser-vice support provided by 47 C.F.R. part54, subparts E, F, and G (identified above)allows carriers to provide discounted, orreduced, rates to low income consumers,schools and libraries, and rural health careproviders. The amount of federal univer-sal service support received depends on ei-ther the discount offered to the targetedcustomers or the cost of providing service(the carrier’s revenue requirement) in highcost areas. For financial accounting pur-poses, the Commission requires all carri-ers to record their federal universal servicesupport receipts as revenue.

All carriers that receive universal ser-vice support must use that support only forthe provision, maintenance, and upgrad-ing of facilities and services for which theuniversal service support is intended. 47U.S.C. § 254(e) and 47 C.F.R. § 54.7. Thisincludes, for example, the ability to use thefunds to reduce intrastate rates, to coveroperating expenses (billing and marketingexpenses) associated with the supportedservices, and to upgrade the facilities forthe supported services. Annual certifica-tions are required to be filed with the Ad-ministrator and the Commission with re-spect to universal service support from cer-tain universal service support mechanismsstating that all universal service supportreceived from such mechanisms will beused only for the provision, maintenance,and upgrading of facilities and services forwhich the support is intended.

LAW AND ANALYSIS

Section 118(a) of the Code providesthat in the case of a corporation, gross in-come does not include any contribution tothe capital of the taxpayer. The commit-tee reports accompanying the enactment ofwhat is now section 118(a) indicate that theprovision was intended to codify the exist-ing law that had developed through admin-istrative and court decisions on the subject.

2007–21 I.R.B. 1275 May 21, 2007

H.R. Rep. No. 1337, 83d Cong., 2d Sess.17 (1954); S. Rep. No. 1622, 83d Cong.,2d Sess. 18 (1954).

Section 1.118–1 of the Income TaxRegulations includes within the meaningof a contribution to capital, a contributionby a nonshareholder and cites as examplesof nonshareholder contributions to capi-tal: the value of land and other propertycontributed to a corporation by a govern-mental unit or by a civic group for thepurpose of inducing the corporation tolocate its business in a particular commu-nity, or for the purpose of enabling thecorporation to expand its operating facil-ities. However, the exclusion from grossincome does not apply to any money orproperty transferred to the corporation inconsideration for goods or services ren-dered.

In Detroit Edison Co. v. Commis-sioner, 319 U.S. 98 (1943), 1943 C.B.1019, the Supreme Court held that pay-ments by prospective customers to an elec-tric power company that were used by thecompany to construct the facilities neces-sary to deliver electricity to the customerswere not nonshareholder contributions tocapital. The Court found that the moti-vation for the prospective customers’ con-tributions was to obtain electric servicesfrom the power company and, therefore,the contributions were payment for ser-vices. 319 U.S. at 102, 1943 C.B. at 1021.

In contrast, Brown Shoe Co. v. Com-missioner, 339 U.S. 583 (1950), 1950–1C.B. 38, held that money and property con-tributions by community groups to inducea shoe company to locate or expand its fac-tory operations in the contributing commu-nities were nonshareholder contributionsto capital. The Court reasoned that whenthe motivation of the contributors is to ben-efit the community at large and the contrib-utors do not anticipate any direct benefitfrom their contributions, the contributionsare nonshareholder contributions to capi-tal. 339 U.S. at 591, 1950–1 C.B. at 41.

The Court again considered this issuein United States v. Chicago, Burlington &Quincy R.R., 412 U.S. 401 (1973), 1973–2C.B. 428. In that case, the Court set forththe following five characteristics of a non-shareholder contribution to capital: (1)the contribution must become a perma-nent part of transferee’s working capitalstructure; (2) the contribution may not becompensation, such as a direct payment

for a specific, quantifiable service pro-vided for the transferor by the transferee;(3) the contribution must be bargainedfor; (4) the asset transferred foreseeablymust result in benefit to the transferee inan amount commensurate with its value;and (5) the asset ordinarily, if not always,will be employed in or contribute to theproduction of additional income and itsvalue assured in that respect. 412 U.S. at413, 1973–2 C.B. at 432.

In reaching its conclusion that the im-provements at issue did not qualify as con-tributions to capital, the Court reasoned:

Although the assets were not paymentsfor specific, quantifiable services per-formed by CB&Q for the Governmentas a customer, other characteristics ofthe transaction lead us to the conclusionthat, despite this, the assets did not qual-ify as contributions to capital. The fa-cilities were not in any real sense bar-gained for by CB&Q. Indeed, exceptfor the orders by state commissions andthe government subsidies, the facilitieswould not have been constructed at all.

412 U.S. at 413–14, 1973–2 C.B. at 432.In Texas & Pacific Railway Co. v.

United States, 286 U.S. 285 (1932), XI–1C.B. 263, the Court held that paymentsreceived by a railroad company from thefederal government did not constitute acontribution to capital and thus were in-cludible in income. The Court noted theTransportation Act of 1920 provided forpayments representing a guarantee of min-imum operating income to compensate therailroad during the transition from federalcontrol to private ownership. The Courtreasoned that the payments did not repre-sent capital contributions:

Here they were to be measured by a de-ficiency in operating income, and mightbe used for the payment of dividends, ofoperating expenses, of capital charges,or for any other purpose …. The Gov-ernment’s payments were not in theirnature bounties, but an addition to adepleted operating revenue consequentupon a federal activity.

286 U.S. at 290, XI–1 C.B. at 265.In Deason v. Commissioner, 590 F.2d

1377 (5th Cir. 1979), the Fifth Circuit heldthat payments received from the Depart-ment of Labor for job training for unem-ployed individuals were not a contributionto capital under section 118. The court af-firmed the opinion of the Tax Court, which

concluded that irrespective of the publicbenefit of reduced unemployment that oc-curred as a result of the payments, the pay-ments constituted direct compensation fortraining services and thus could not be con-sidered a contribution to capital.

As provided in section 1.118–1 andstated by the Supreme Court in DetroitEdison and Chicago, Burlington & QuincyR.R., compensation in exchange for a spe-cific quantifiable service constitutes tax-able income, not a capital contribution.Indeed, the Court in Brown Shoe premisedits decision that inducement payments bycommunity groups to a private corpora-tion for relocating and building a factoryconstituted a capital contribution, basedon the specific absence of customers andpayment for services. Conversely, theseare precisely the factors that are presentin the universal service support. Thereis a clear nexus between the universalservice support and the provision of uni-versal telecommunications services by thecarriers. The motivation underlying theuniversal service support is to compensatethe carriers for the shortfall in operatingincome for providing services at a discountto certain customers and/or providing ser-vices to customers in high cost areas atbelow cost rates. The universal servicesupport is predicated on the carriers pro-viding the mandated universal service andis an integral part of the government’smandate to insure that universal service isprovided.

In addition, the universal service sup-port does not satisfy the five characteristicsof a nonshareholder contribution to capitalset forth in Chicago, Burlington & QuincyR.R., because the universal service sup-port: (1) does not necessarily become apermanent part of the carrier’s workingcapital structure because the support is notlimited to the acquisition of capital assetsand can be used to pay current expenses;(2) is made for specific, quantifiabletelecommunication services to telecom-munication customers of the carrier; (3)is not bargained for because the universalservice support mechanisms are a unilat-eral government program and the methodof participation by carriers is mandated(despite any certification requirements);(4) does not benefit the carrier commensu-rate with the value of the support becausethe support payments merely maintain thecarrier’s viability; and (5) does not neces-

May 21, 2007 1276 2007–21 I.R.B.

sarily generate additional income for thecarrier because the support is not limitedto the acquisition of capital assets that willgenerate additional income for the carrier,but can be used to pay current expenses orto replace capital assets.

The holdings in Texas Pacific andDeason also are illustrative in this context.In Texas Pacific, the federal governmentprovided payments to fulfill a statutorypublic purpose and yet because of theinherent nature of the transaction as re-imbursement for deficiencies in operatingincome, the payments did not warrantcapital contribution treatment. In Deason,the federal government made paymentsthat served the public goal of reducingunemployment. Despite the existence of apublic benefit derived from the payment,the court concluded that the paymentswere compensation for services and there-fore ineligible as a capital contribution.Similarly, although a public purpose isserved by payment of the universal servicesupport, and the payor is not the consumerof the universal telecommunications ser-vices, the universal service support isnonetheless compensation to the carriersfor the provision of universal telecommu-nications services.

HOLDING

Universal service support received bya corporation under the universal servicesupport mechanisms is not a nonshare-holder contribution to capital under sec-tion 118(a) of the Code.

DRAFTING INFORMATION

The principal author of this revenueruling is David McDonnell of the Officeof Associate Chief Counsel (Passthroughsand Special Industries). For further in-formation regarding this revenue ruling,contact Mr. McDonnell at (202) 622–3040(not a toll-free call).

Section 166.—Bad DebtsA revenue ruling providing guidance as to the

period in which a bank that has elected the confor-mity method of accounting under regulations section1.166–2(d)(3) can treat uncollected interest as worth-less. See Rev. Rul. 2007-32, page 1278.

Section 199.—IncomeAttributable to DomesticProduction Activities26 CFR 199–9: Application of section 199 to pass-thru entities for taxable years beginning on or beforeMay 17, 2006, the enactment date of the Tax IncreasePrevention and Reconciliation Act of 2005.(Also § 1.199–3T.)

Income attributable to domestic pro-duction activities; qualifying in-kindpartnerships. This ruling provides that apartnership engaged in the extraction andprocessing of minerals within the UnitedStates is a qualifying in-kind partnershipfor purposes of section 199 of the Code.Each partner of a qualifying in-kind part-nership is treated as having manufactured,produced, grown, or extracted (MPGE)property MPGE by the partnership that isdistributed to that partner.

Rev. Rul. 2007–30

This revenue ruling designates theextraction and processing of miner-als (as defined in § 1.611–1(d)(5) ofthe Income Tax Regulations) as an ac-tivity within § 1.199–9(i)(2)(iii) and§ 1.199–3T(i)(7)(ii)(C) of the temporaryIncome Tax Regulations. A partnershipengaged solely in an activity or indus-try designated by the Secretary will bea qualifying in-kind partnership under§§ 1.199–9(i)(2) and 1.199–3T(i)(7)(ii).

Pursuant to §§ 1.199–9(i)(1) and1.199–3T(i)(7)(i), each partner of a qual-ifying in-kind partnership is treated ashaving manufactured, produced, grown,or extracted (MPGE) property MPGE bythe partnership that is distributed to thatpartner.

Sections 1.199–9(i)(2) and 1.199–3T(i)(7)(ii) provide that a qualifying in-kindpartnership includes a partnership en-gaged solely in the extraction, refining,or processing of oil, natural gas, petro-chemicals, or products derived fromoil, natural gas, or petrochemicals inwhole or in significant part within theUnited States; or the production orgeneration of electricity in the UnitedStates. Under §§ 1.199–9(i)(2)(iii) and1.199–3T(i)(7)(ii)(C), a qualifying in-kindpartnership may include a partnershipengaged solely in an activity or industrydesignated by the Secretary by publicationin the Internal Revenue Bulletin.

By this revenue ruling, the Inter-nal Revenue Service designates the ex-traction and processing of minerals (asdefined in § 1.611–1(d)(5)) as an ac-tivity within §§ 1.199–9(i)(2)(iii) and1.199–3T(i)(7)(ii)(C). Accordingly, a part-nership engaged solely in the extractionand processing of minerals within theUnited States will be a qualifying in-kindpartnership under §§ 1.199–9(i)(2) and1.199–3T(i)(7)(ii).

EFFECTIVE DATE

This revenue ruling is effective for tax-able years beginning after December 31,2004, the effective date of § 199. How-ever, for taxable years beginning beforeJune 1, 2006, a taxpayer may apply thisrevenue ruling only if the taxpayer applies§§ 1.199–1 through 1.199–8 to that taxableyear.


The principal author of this revenueruling is David McDonnell of the Officeof Associate Chief Counsel (Passthroughsand Special Industries). For further in-formation regarding this revenue ruling,contact Mr. McDonnell at (202) 622–3040(not a toll-free call).

Section 446.—General Rulefor Methods of Accounting

A revenue ruling requiring an accrual method bankwith a reasonable expectation of receiving future pay-ments on a loan to include accrued interest (deter-mined under regulations section 1.446–2) in gross in-come for the taxable year in which the right to receivethe interest becomes fixed, notwithstanding bank reg-ulatory rules that prevent accrual of the interest forregulatory purposes. See Rev. Rul. 2007-32, page1278.

A revenue procedure providing the procedure un-der which a bank may change its method of account-ing for uncollected interest to an elective safe harbormethod based on the bank’s collection experience.See Rev. Proc. 2007-33, page 1289.

Section 451.—General Rulefor Taxable Year of Inclusion

A revenue procedure providing an elective safeharbor method of accounting for a bank’s uncollectedinterest based on the bank’s collection experience.See Rev. Proc. 2007-33, page 1289.

2007–21 I.R.B. 1277 May 21, 2007

26 CFR 1.451–1: General rule for taxable year ofinclusion.(Also: Part I, §§ 166, 446; 1.166–2, 1.446–1,1.446–2.)

Accrual of interest. This ruling re-quires an accrual method bank with areasonable expectancy of receiving futurepayments on a loan to include accruedinterest (determined under regulationssection 1.446–2(a)(2)) in gross incomefor the taxable year in which the rightto receive the interest becomes fixed,notwithstanding bank regulatory rules thatprevent accrual of the interest for regula-tory purposes. The ruling also providesguidance as to the period in which a bankthat has elected the conformity methodof accounting under regulations section1.166–2(d)(3) can treat uncollected in-terest as worthless. Rev. Rul. 81–18distinguished.

Rev. Rul. 2007–32

ISSUES

1. If federal banking rules require abank to suspend the recognition of cer-tain uncollected “accrued interest” as de-fined in § 1.446–2 of the Income Tax Reg-ulations as income for regulatory financialstatement purposes should the bank alsocease recognizing uncollected accrued in-terest into income for federal income taxpurposes?

2. If a bank uses a conformitymethod of accounting as provided forin § 1.166–2(d) but does not recognizeuncollected accrued interest as incomefor regulatory financial statement pur-poses, when should the bank recognize aworthless debt with respect to uncollectedaccrued interest for federal income taxpurposes?

3. If a bank receives payments on a loanwhere the bank for federal income tax pur-poses either (i) previously recognized theuncollected accrued interest as income andsubsequently deducted the accrued interestreceivable as a worthless debt under sec-tion 166 or (ii) did not recognized the un-collected accrued interest on the loan as in-come, how should the payments be charac-terized for federal income tax purposes?

FACTS

X corporation is a bank as defined in§ 1.166–2(d)(4)(i). X determines its tax-

able income using an accrual method of ac-counting and files its federal income tax re-turns on a calendar year basis. Loans madeby X are subject to § 1.446–2, which de-termines the amount of “accrued interest”related to each loan for federal income taxpurposes.

X is subject to regulatory supervisionby federal banking authorities (“supervi-sory authorities”) and is required to pre-pare regulatory financial statements thatcomply with federal banking rules. Forregulatory financial statement purposes,unless a loan is both well secured and inthe process of collection, federal bankingrules generally require that X suspend therecognition into income of uncollectedaccrued interest on a loan and reverse anypreviously recognized uncollected interestincome if:

(i) the loan is maintained on a cash basisbecause of deterioration in the borrower’sfinancial condition;

(ii) payment in full of principal or inter-est is not expected; or

(iii) payment of principal or interest hasbeen in default for a period of 90 days ormore.

Under federal banking rules, a loan maybe considered a bankable asset (i.e., notwritten off for regulatory financial state-ment purposes) even if accrued interest onthe loan is no longer being recognized asincome (or was previously recognized andsubsequently charged off) for regulatoryfinancial statement purposes. In this rev-enue ruling, the loan is referred to as a“non-accrual loan receivable.”

In general, federal banking rules requirea bank such as X to apply any payment re-ceived on a non-accrual loan receivable toreduce its recorded investment in the loan(i.e., treat all monies that come in on theloan as a collection of loan principal) tothe extent necessary to eliminate doubt asto collectibility. Therefore, for regulatoryfinancial statement purposes, X character-izes any payment received on a non-ac-crual loan receivable as a payment of prin-cipal rather than a payment of the outstand-ing accrued interest on the loan until the re-maining principal on the non-accrual loanreceivable is considered to be fully col-lectible.

On January 16, 2007, X classifies LoanA as a non-accrual loan receivable for reg-ulatory financial statement purposes be-cause an amount of principal or interest has

become 90 days past due. Nonetheless,X reasonably expects the borrower to con-tinue making some but not all payments onthe loan.

On January 16, 2007, the uncollectedaccrued interest on Loan A is $9,000($8,000 attributable to the calendar yearending December 31, 2006, and $1,000attributable to the period January 1, 2007through January 16, 2007). Prior to Jan-uary 17, 2007, X recognized the $9,000as income for regulatory financial state-ment purposes. During the period January17, 2007 through December 31, 2007,an additional $23,000 of accrued interestbecomes due on Loan A.

Pursuant to federal banking rules, onJanuary 16, 2007, X reverses the $9,000 ofuncollected accrued interest that had pre-viously been recognized by making adjust-ments to appropriate income statement andbalance sheet accounts for regulatory fi-nancial statement purposes. In addition,federal banking rules do not permit X torecognize as income any of the $23,000accrued interest attributable to the periodJanuary 17, 2007 through December 31,2007.

On January 1, 2008, X receives a$31,000 payment on Loan A. For reg-ulatory financial statement purposes, Xcharacterizes the $31,000 payment as arecovery of principal rather than a recov-ery of accrued interest. Therefore, X doesnot recognize any of the $31,000 paymentas interest income for regulatory financialstatement purposes.

X’s supervisory authorities, in connec-tion with the most recent examination ofX’s regulatory financial statements andlending practices, have determined that Xmaintains and applies standards that areconsistent with federal banking rules.

LAW AND ANALYSIS

Issue 1.

Section 1.446–2 provides rules fordetermining the amount of accrued in-terest (other than interest described in§ 1.446–2(a)(2)) that is generated on aloan over time for federal income tax pur-poses.

Section 1.446–2(a)(1) provides thatthe period in which a taxpayer recog-nizes accrued interest (determined under§ 1.446–2(b) or § 1.446–2(c)) in gross

May 21, 2007 1278 2007–21 I.R.B.

income is determined under the taxpayer’sregular method of accounting.

Section 451(a) provides that the amountof any item of gross income is included ingross income for the taxable year in whichreceived by the taxpayer, unless, under themethod of accounting used in computingtaxable income, such amount is to be prop-erly accounted for in a different period.

In the case of an accrual method tax-payer, § 1.451–1(a) provides that incomeis includible in gross income when all theevents have occurred which fix the rightto receive such income and the amountthereof can be determined with reasonableaccuracy. See also § 1.446–1(c)(1)(ii).

As an accrual method taxpayer, X gen-erally is required to recognize accruedinterest determined under § 1.446–2 intogross income for the taxable year in whichall the events have occurred which fixthe right to receive such interest and theamount thereof can be determined withreasonable accuracy. See § 1.451–1(a).Under the “all events” test, a taxpayer’sright to receive income becomes fixed onthe earlier of the date that: (1) paymentis earned through performance; (2) pay-ment is due; or (3) payment is actuallyreceived. Rev. Rul. 84–31, 1984–1 C.B.127. An amount of accrued interest de-termined pursuant to § 1.446–2 satisfiesthe “reasonable accuracy” requirement of§ 1.451–1(a).

Although federal banking rules do notpermit X to recognize accrued interest re-lated to a non-accrual loan receivable asincome for regulatory financial statementpurposes, regulatory accounting rules arenot controlling for federal income tax pur-poses. See Old Colony R. Co. v. Commis-sioner, 284 U.S. 552, 562 (1932).

“A fixed right to a determinable amountdoes not require accrual, however, if theincome is uncollectible when the right toreceive the income item arises. Accrual ofincome is not required when a fixed rightto receive arises if there is not a reason-able expectancy that the claim will ever bepaid.” European Am. Bank & Trust Co. v.United States, 20 Cl. Ct. 594, 605 (1990)(footnotes omitted), aff’d per curiam, 940F.2d 677 (Fed. Cir. 1991); see also JonesLumber Co. v. Commissioner, 404 F.2d764, 766 (6th Cir. 1968) (stating that “[t]heright to receive . . . determines the ac-crual of income unless, at the time the rightarises, there exists a reasonable doubt as to

its collectibility”); Koehring Co. v. UnitedStates, 421 F.2d 715, 721 (Ct. Cl. 1970)(stating that “a reasonable doubt as to thecollectibility of a debt is a sufficient rea-son to justify its nonaccrual as income”);Rev. Rul. 80–361, 1980–2 C.B. 164 (cit-ing Jones Lumber Co., supra.)

The “no reasonable expectancy of pay-ment” exception to the fundamental rulesof income accrual is strictly construed.“For accrual of income to be prevented,uncertainty as to collection must be sub-stantial.” European Am. Bank & TrustCo., 20 Cl. Ct. at 605. To treat an itemas non-accruable because of doubtfulcollectibility, the cases generally haverequired substantial evidence as to thefinancial instability or insolvency of thedebtor. See Jones Lumber Co., 404 F.2d at766. This substantiation requirement hasbeen applied on a loan by loan basis.

Temporary financial difficulty of adebtor cannot support non-recognition ofincome absent the existence of real doubtregarding ultimate payment. KoehringCo., 421 F.2d 715, 721–722; see alsoHarmont Plaza Inc. v. Commissioner, 64T.C. 632, 650 (1975), aff’d, 549 F.2d 414(6th Cir. 1977) (stating that “the fact that alapse of time is contemplated before actualsatisfaction is possible does not constitutethe requisite doubtful collectibility”). Ifthere is some doubt regarding receipt ofpayment but a reasonable person wouldhave an expectancy of payment, then anaccrual method taxpayer is required torecognize the income.

When an income item is properly ac-crued and subsequently becomes uncol-lectible, a taxpayer’s remedy is by wayof a bad debt deduction under section 166rather than through elimination of the ac-crual. Rev. Rul. 80–361. See also§ 1.166–1(e) (relating to a bad debt de-duction for uncollected income items in-cluded as income for the taxable year inwhich the bad debt deduction is claimed orfor a prior taxable year); section 585 (al-lowing certain banks to deduct additionsto a reserve for bad debts in lieu of thebad debt deduction provided by section166) and § 1.585–2(e)(2) (excluding inter-est that has not been included in gross in-come from a loan used to determine addi-tions to the reserve for bad debts). Thisrule is applicable even when the item isaccrued and becomes uncollectible dur-ing the same taxable year. Spring City

Foundry Co. v. Commissioner, 292 U.S.182 (1934). See also Atlantic Coast LineRailroad Co. v. Commissioner, 31 B.T.A.730, 751 (1934), acq., XIV–2 C.B. (1935).

Rev. Rul. 81–18, 1981–1 C.B. 295,addressed an accrual basis savings andloan association operating on a calendaryear for federal income tax purposes. Onits 1978 income tax return, the savings andloan recognized into income uncollectedaccrued interest on a loan. However, nointerest payments were ever received onthe loan. On January 30, 1979, the savingsand loan charged off the previously recog-nized 1978 accrued interest for regulatoryfinancial accounting purposes and rec-ognized a bad debt deduction for federalincome tax purposes. The charge-off wasmade pursuant to then existing FederalHome Loan Bank Board (FHLBB) regu-lations. The FHLBB regulations requiredthat interest be treated as uncollectible ifany portion of the interest was due butuncollected for a period in excess of 90days. FHLBB examiners, upon their firstaudit of the savings and loan after thecharge-off, confirmed that the charge-offwas properly recognized for regulatoryfinancial statement purposes and made inaccordance with established policies ofthe FHLBB. The ruling considered twoissues: (1) whether the savings and loan’sclaim for the uncollected 1978 interestwas worthless for purposes of recognizinga section 166 bad debt deduction; and (2)whether the savings and loan was requiredunder section 451 and § 1.451–1(a) torecognize the uncollected accrued intereston the nonperforming loan for periodsafter December 31, 1978 under the ac-crual method of accounting. The rulingconcluded that for federal income tax pur-poses, the savings and loan’s claim to the1978 uncollected accrued interest was aworthless debt for purposes of section 166.The ruling also concluded that the savingsand loan was not required to recognize anyuncollected accrued interest on the loanafter December 31, 1978.

Unlike the situation in Rev. Rul.81–18, where no payments on the loanwere made and there was no reason-able expectation of payment, in this rev-enue ruling X reasonably expects theborrower to continue making some butnot all payments on Loan A. Therefore,the borrower’s default on Loan A onlydemonstrates that timely repayment is not

2007–21 I.R.B. 1279 May 21, 2007

occurring. The late payment of interestby itself is not sufficient to demonstratethat X has no reasonable expectation ofpayment of the accrued interest related toLoan A. Under these circumstances, the“no reasonable expectancy of payment”exception to the general accrual rule doesnot apply. See Koehring Co., 421 F.2d at721–722; Harmont Plaza Inc., 64 T.C. at650.

As an accrual method taxpayer, X isrequired to recognize the $8,000 of un-collected 2006 accrued interest as incomein X’s 2006 taxable year for federal in-come tax purposes. X is also requiredto recognize the $24,000 of uncollected2007 accrued interest in X’s 2007 tax-able year. The result is the same regard-less of whether the bank uses a confor-mity method of accounting provided for in§ 1.166–2(d).

Issue 2.

Section 166(a)(1) provides that a de-duction shall be allowed for any debt thatbecomes worthless during the taxable year.In addition, section 166(a)(2) provides adeduction for “partially worthless debts”not in excess of the part charged off inthe taxpayer’s books and records withinthe taxable year to the extent the Com-missioner is satisfied that the debt is re-coverable only in part. A deduction for aworthless debt arising from an item of tax-able income shall be allowed only if theitem is recognized as taxable income dur-ing the taxable year in which the deduc-tion is claimed or a prior taxable year. See§ 1.166–1(e).

In general, there is no bright line test fordetermining the period in which a debt be-comes worthless. However, § 1.166–2(d)permits a bank subject to supervision byfederal banking authorities to use a con-formity method of accounting to determinewhen a debt becomes worthless. Under aconformity method, debts that are chargedoff, in whole or in part, for regulatory pur-poses are conclusively presumed to be-come worthless for federal income tax pur-poses at the time of the regulatory chargeoff. Under a conformity method of ac-counting, the bank is allowed to recog-nize a bad debt deduction for the taxableyear in which a debt is conclusively pre-sumed to have become worthless. See§ 1.166–2(d)(3)(ii)(A)(2).

In connection with the most recentexamination of X’s regulatory financialstatements, X’s supervisory authoritieshave determined that X maintains andapplies standards that are consistent withfederal banking rules. See Rev. Proc.92–84, 1992–2 C.B. 489 (providing theform for the determination). Therefore,X satisfies the express determination re-quirement of § 1.166–2(d)(3)(iii)(D).

Various procedures can be usedby a bank to classify a debt, or por-tion thereof, as a loss asset describedin § 1.166–2(d)(3)(ii)(C). Rev. Rul.2001–59, 2001–2 C.B. 585. On January16, 2007, X reverses the recognition ofthe $9,000 of pre-January 17, 2007 uncol-lected accrued interest as interest incomeon Loan A ($8,000 of 2006 interest and$1,000 of interest for the period January1, 2007 through January 16, 2007) forregulatory financial statement purposes.X’s reversal of the accrual of $9,000 ofuncollected pre-January 17, 2007 accruedinterest, removes the interest receivablefrom X’s books and records for regula-tory financial statement purposes. Underfederal banking rules, the $9,000 interestreceivable is treated as an uncollectibleasset of such little value that its inclusionas a bankable asset is not warranted. Thereversal of the accrual of the $9,000 ofinterest receivable constitutes a charge offof the interest receivable as a loss asset forpurposes of § 1.166–2(d)(3)(ii)(C).

For regulatory purposes, X does notrecognize as income any of the $23,000 ofaccrued interest attributable to the periodJanuary 17, 2007 through December 31,2007 because X’s right to the $23,000 ofaccrued interest has such little value thatrecognition of the accrued interest receiv-able as a bankable asset is not warranted.Under these circumstances, X’s failure torecognize the $23,000 of accrued interestfor regulatory financial statement purposesis tantamount to recognizing the accruedinterest as income and immediately charg-ing off the uncollected accrued interest re-ceivable as a loss asset.

As a result of X’s conformity methodof accounting under § 1.166–2(d), X willbe entitled to claim a worthless debt de-duction under section 166 in X’s tax yearending December 31, 2007 for the $32,000of uncollected accrued interest on Loan A($8,000 of uncollected accrued interest in

2006 and $24,000 of uncollected accruedinterest in 2007).

Issue 3.

In general, § 1.446–2(e) provides thateach payment made on a loan (other thanpayments of additional interest or simi-lar charges with regard to amounts thatare not paid when due) is treated as apayment of interest to the extent of anyaccrued interest that is uncollected onthe date the payment becomes due. Theinterest characterization provided for in§ 1.446–2(e) applies to all payments madeon a loan regardless of the taxpayer’soverall method of accounting. For exam-ple, the interest characterization providedfor in § 1.446–2(e) would apply to a pay-ment on a loan for which the uncollectedaccrued interest was not previously rec-ognized as income for federal income taxpurposes. Similarly, the interest character-ization provided for in § 1.446–2(e) wouldapply to a payment on a loan for whichthe uncollected accrued interest was pre-viously recognized as income for federalincome tax purposes and subsequentlydeducted as a worthless debt under thetaxpayer’s method of accounting.

Under § 1.166–1(f), any amount attrib-utable to a recovery of a bad debt, or of aportion of a bad debt, which was allowedas a deduction from gross income in a priortaxable year, is included in gross incomefor the taxable year of recovery, exceptto the extent that the recovery is excludedfrom gross income under the provisions ofsection 111 and § 1.111–1.

On January 1, 2008, X receives a$31,000 payment on Loan A. For regula-tory financial statement purposes, X char-acterizes the $31,000 as a payment of loanprincipal. However, under § 1.446–2(e),X is required to characterize any paymentreceived on Loan A (other than paymentsof additional interest or similar chargeswith regard to amounts that are not paidwhen due) as a payment of interest forfederal income tax purposes to the extentthere is uncollected accrued interest out-standing on Loan A.

Immediately prior to the receipt of the$31,000 payment on January 1, 2008, theuncollected accrued interest on Loan A is$32,000 ($8,000 attributable to 2006 and$24,000 attributable to 2007). Therefore,§ 1.446–2(e) requires that X characterize

May 21, 2007 1280 2007–21 I.R.B.

the $31,000 payment on Loan A as a pay-ment of interest for federal income tax pur-poses. The characterization of the $31,000payment as interest under § 1.446–2(e)would be the same regardless of whether:(i) X had not yet recognized the $32,000of uncollected accrued interest on Loan Aas income under its method of account-ing for federal income tax purposes, (ii)X had recognized the $32,000 of uncol-lected accrued interest on Loan A as in-come for federal tax purposes but subse-quently deducted the interest receivable asa bad debt under section 166 under itsmethod of accounting, or (iii) X used aconformity method of accounting under§ 1.166–2(d).

HOLDINGS

1. X is required to recognize in grossincome the uncollected accrued interest onLoan A for federal income tax purposesnotwithstanding that federal banking rulesrequired X to suspend the recognition ofaccrued interest on Loan A into income forregulatory financial statement purposes.For the taxable year ending December 31,2006, X must recognize in gross incomethe $8,000 of uncollected accrued intereston Loan A that was generated during 2006.For the taxable year ending December 31,2007, X must recognize in gross incomethe $24,000 of uncollected accrued inter-est on Loan A that was generated during2007. X must recognize the uncollectedaccrued interest as gross income in 2006and 2007 regardless of whether X haselected a conformity method of account-ing under § 1.166–2(d)(3) to determinewhen a debt becomes worthless.

2. As X uses a conformity methodof accounting under § 1.166–2(d), X’s$32,000 accrued interest receivable re-lated to Loan A ($8,000 of uncollectedaccrued interest in 2006 and $24,000 ofuncollected accrued interest in 2007) isconsidered worthless for purposes of sec-tion 166 in the year the amount is chargedoff for regulatory financial statement pur-poses. Therefore, for federal income taxpurposes, X is allowed a worthless debtdeduction for the $32,000 of uncollectedaccrued interest written off for regulatoryfinancial statement purposes in the taxyear ending December 31, 2007.

3. X is required to characterize the$31,000 payment received on Loan A in

2008 as a payment of interest for federalincome tax purposes. The result would bethe same whether (i) X had not yet recog-nized the $32,000 of uncollected accruedinterest on Loan A as gross income un-der its method of accounting for federal in-come tax purposes, (ii) X had recognizedthe $32,000 of uncollected accrued intereston Loan A as gross income for federal taxpurposes but subsequently deducted the re-ceivable as a bad debt under section 166,or (iii) X used a conformity method of ac-counting under § 1.166–2(d). If X hadpreviously deducted the $32,000 of uncol-lected accrued interest as a bad debt forfederal income tax purposes then the sub-sequent $31,000 payment on the loan willbe characterized as a partial recovery ofthat bad debt.

EFFECT ON OTHER RULINGS

Rev. Rul. 81–18 is distinguished withregard to when interest accrues for federalincome tax purposes.


The principal author of this revenue rul-ing is Timothy Sebastian of the Office ofthe Associate Chief Counsel (Financial In-stitutions and Products). For further infor-mation regarding this revenue ruling, con-tact Mr. Sebastian (202) 622–7417.

Section 856.—Definition ofReal Estate Investment Trust

A notice provides that if a REIT recognizes cur-rency gain under section 987, the REIT may applythe principles of the proposed regulations under sec-tion 987 that were issued on September 7, 2006, todetermine whether the currency gain is derived fromincome described in section 856(c)(2) or (3). See No-tice 2007-42, page 1288.

26 CFR 1.856–2: Limitations.(Also § 988; 1.988–2.)

Real estate investment trust (REIT)foreign currency. This ruling providesthat section 988 gain that is recognized bya REIT will be qualifying income undersection 856(c)(2) or (3) of the Code to theextent that the underlying income so qual-ifies.

Rev. Rul. 2007–33

ISSUE

If a real estate investment trust (REIT)recognizes foreign currency gain in a sec-tion 988 transaction, to what extent is thatgain qualifying income for purposes of theREIT income tests under § 856(c) of theInternal Revenue Code?

FACTS

R, a corporation with the U.S. dollaras its functional currency, has elected, andqualifies, to be treated as a REIT undersubchapter M of Chapter 1 of the Code. Rinvests both in real property from which Rderives rental income and in debt instru-ments that are partially or fully secured bymortgages on real property.

Some of the leases of the real estatethat R owns provide for rents to be paidin euros. For some of these leases, Rrecognizes rental income for federal in-come tax purposes before receiving thecorresponding rent payments. R’s rentalincome from these euro-denominatedleases is described in § 856(c)(2)(C) andin § 856(c)(3)(A).

Some of the mortgage loans that R ac-quires are denominated in euros, and bothprincipal and interest under these loans arepayable in euros. R’s interest income fromthese euro-denominated loans is describedin § 856(c)(2)(B) and in § 856(c)(3)(B).

R’s activities of investing in rent-pro-ducing real estate and in mortgage loansare not subject to § 987. Therefore, if theeuro changes in value against the dollar,payments of rent under the leases of thereal estate and periodic payments made un-der the mortgage loans may generate for-eign currency gain or loss under § 988. See§ 1.988–2(b).

During its taxable year, R recognizedrental income on the euro-denominatedleases, interest income on the euro-de-nominated mortgage loans, and section988 gain on payments received under theleases and the mortgage loans.

LAW AND ANALYSIS

To qualify as a REIT for a taxable year,at least 95 percent of an entity’s gross in-come must be “derived from” the types ofincome listed in § 856(c)(2), and at least75 percent of its gross income must be

2007–21 I.R.B. 1281 May 21, 2007

“derived from” the types of income listedin § 856(c)(3). Gains from foreign cur-rency are not specifically enumerated in§ 856(c)(2) or (c)(3).

Section 988(c)(1) defines a “section988 transaction” as any transaction de-scribed in § 988(c)(1)(B) if the amountwhich the taxpayer is entitled to receive(or is required to pay) by reason of suchtransaction is denominated in terms ofa nonfunctional currency or is deter-mined by reference to the value of oneor more nonfunctional currencies. Under§ 988(c)(1)(B)(i), a section 988 transactionincludes the acquisition of a debt instru-ment or becoming the obligor under a debtinstrument. Under § 988(c)(1)(B)(ii), asection 988 transaction also includes ac-cruing (or otherwise taking into account)any item of gross income or receipts whichis received after the date on which so ac-crued or taken into account.

Section 988(b)(1) provides that the term“foreign currency gain” means any gainfrom a section 988 transaction to the ex-tent that such gain does not exceed gainrealized by reason of changes in exchangerates on or after the booking date (as de-fined in § 988(c)(2)) and before the pay-ment date (as defined in § 988(c)(3)).

Rev. Rul. 74–191, 1974–1 C.B. 170,holds that otherwise-qualifying assets donot fail to satisfy § 856(c)(4) merely be-cause the assets are foreign:

Neither section 856 of the Code nor theregulations thereunder restrict the term“real estate assets” to those locatedwithin the United States. Accordingly,it is held that, for purposes of section856(c), the term “real property” in-cludes land or improvements thereonlocated outside the United States andthe term “mortgages on real property”includes a security interest which, un-der the laws of the jurisdiction in whichthe property is located, is the legalequivalent of a mortgage or deed oftrust in the United States.

1974–1 C.B. at 170. It follows from thisholding both that rents on foreign realproperty qualify under § 856(c)(2)–(3) tothe same extent that they would qualifyif the property were located in the UnitedStates and that interest on foreign mort-gage loans qualifies under § 856(c)(2)–(3)to the same extent that it would qualify ifthe loans were governed by United States

law and the property were located in theUnited States. Thus, foreign situs of aREIT’s assets does not necessarily preventthe REIT from satisfying the income andasset tests of § 856(c), which must be metin order to qualify as a REIT. Rev. Rul.74–191, however, does not address thetreatment of foreign currency gain thatmay result from investing in real prop-erty or other assets that produce incomedenominated in a currency other than thetaxpayer’s functional currency.

The legislative history describing thetax treatment of REITs indicates that thecentral concern behind the gross incomerestrictions in § 856(c) is that a REIT’sgross income should largely be com-posed of passive income. For example,H.R. Rep. No. 2020, 86th Cong., 2d Sess.4 (1960) at 6, 1960–2 C.B. 819, 822–23states, “One of the principal purposes ofyour committee in imposing restrictionson types of income of a qualifying realestate investment trust is to be sure thebulk of its income is from passive incomesources and not from the active conduct ofa trade or business.”

Although § 856(c) describes the sourcesof REIT qualifying income, neither thestatute nor its legislative history describeswhat it means for income to be “derivedfrom” those sources. Because of the closenexus, however, between section 988 gainon payments received by a REIT and theincome from which that payment is de-rived, the section 988 gain qualifies un-der § 856(c)(2) or (3) to the extent thatthe underlying income does. Thus, for ex-ample, if interest income recognized by Rqualifies under § 856(c)(2) or (3), then sodoes the 988 gain from that interest in-come. Similarly, if an item of income qual-ifies as rents from real property for pur-poses of § 856(c)(3)(C), then, for purposesof § 856(c)(3), section 988 gain with re-spect to that income is derived from a typeof income listed in § 856(c)(3)(A)–(H). Cf.Rev. Rul. 92–56, 1992–2 C.B. 153 (con-cluding that a regulated investment com-pany’s (RIC’s) receipt of a reimbursementof an investment advisory fee was “derivedfrom” the RIC’s business of investing instock, securities, or foreign currencies andwas therefore qualifying income under the“other income” provision of § 851(b)(2)).

HOLDING

If section 988 gain is recognized withrespect to income recognized by a REIT,the gain qualifies under § 856(c)(2) or (3)to the extent that the underlying income soqualifies.


The principal author of this revenue rul-ing is Jonathan D. Silver of the Office ofAssociate Chief Counsel (Financial Insti-tutions & Products). For further informa-tion regarding this revenue ruling, contactJonathan D. Silver at (202) 622–3930 (nota toll-free call).

Section 987.—BranchTransactions

A notice provides that if a REIT recognizes cur-rency gain under section 987, the REIT may applythe principles of the proposed regulations under sec-tion 987 that were issued on September 7, 2006, todetermine whether the currency gain is derived fromincome described in section 856(c)(2) or (3). See No-tice 2007-42, page 1288.

Section 988.—Treatment ofCertain Foreign CurrencyTransactions

A revenue ruling holds that if section 988 gain isrecognized with respect to income recognized by aREIT, the gain qualifies under section 856(c)(2) or (3)to the extent that the underlying income so qualifies.See Rev. Rul. 2007-33, page 1281.

Section 1035.—CertainExchanges of InsurancePolicies26 CFR 1.1035–1: Certain exchanges of insurancepolicies.(Also § 72.)

Section 1035; certain exchanges of in-surance policies. A taxpayer’s receipt ofa check issued by an insurance companyunder a non-qualified annuity contract istreated as a taxable distribution, even ifthe check is endorsed to a second insur-ance company for the purchase of a secondannuity. The transaction is not character-ized as a tax-free exchange under section1035(a)(3) of the Code unless there is a di-rect exchange or assignment of the originalcontract.

May 21, 2007 1282 2007–21 I.R.B.

Rev. Rul. 2007–24

ISSUE

If a Taxpayer receives a check from alife insurance company under a non-qual-ified annuity contract, does the endorse-ment of the check to a second companyas consideration for a second annuity con-tract qualify as a tax-free exchange un-der § 1035(a)(3) of the Internal RevenueCode?

FACTS

A, an individual, owned a non-qualifiedannuity contract issued by IC1, a life in-surance company. In 2007, A requestedthat IC1 issue directly to IC2, another lifeinsurance company, a check as consider-ation for a new annuity contract to be is-sued by IC2. A intended the transactionto be treated as a tax-free exchange under§ 1035. IC1 refused to do so and, instead,issued a check to A. A did not deposit thecheck, but instead endorsed it to IC2 asconsideration for a new annuity contract.

LAW AND ANALYSIS

Section 72(a) provides that, except asotherwise provided in Chapter 1 of theInternal Revenue Code, gross income in-cludes any amount received as an annuityunder an annuity contract. Under § 72(e),amounts received under an annuity con-tract, but not as an annuity, generally areincluded in gross income to the extent al-locable to income on the contract. Thatis, they are taxed on an income-first ba-

sis. Section 72(e)(5)(E) provides that thisrule applies to any amounts received on thecomplete surrender, redemption, or matu-rity of an annuity contract.

Section 1035(a)(3) provides that nogain or loss is recognized on the exchangeof an annuity contract for another annuitycontract. The legislative history of § 1035explains that § 1035 provides non-recog-nition treatment for taxpayers who have“merely exchanged an [annuity contract]for another better suited to their needsand who have not actually realized gain.”H. Rep. 1337, 83d Cong., 2d Sess. 81(1954). Under § 1.1035–1, the contractsexchanged must relate to the same insured,and the obligee or obligees under the con-tract received in the exchange must be thesame as those under the original contract.

In Rev. Rul. 72–358, 1972–2 C.B. 473,a taxpayer who owned a life insurance con-tract issued by one insurance company as-signed the contract, prior to its maturity, toa second insurance company in exchangefor a variable annuity contract issued bythe second company. The ruling concludesthat, pursuant to § 1035, no gain or lossis recognized on the exchange. Similarly,Rev. Rul. 2002–75, 2002–2 C.B. 812,concludes that an individual’s assignmentof an annuity contract issued by one insur-ance company to a second insurance com-pany, which then deposits the cash surren-der value of the assigned contract into apre-existing annuity contract owned by thesame taxpayer, qualifies as a tax-free ex-change under § 1035.

In the present case, there was no ac-tual exchange of annuity contracts; nor

did A assign the IC1 contract to IC2; norwas there a direct transfer from IC1 toIC2 of the cash value of the old contractin exchange for the new contract. In-stead, IC1 disbursed a check to A, whichA, in turn, endorsed to IC2 as considera-tion for a new contract. Neither § 1035nor the regulations make any special pro-vision for the purchase of an annuity con-tract with amounts distributed to the poli-cyholder under another contract. Becausethe annuity contract was a non-qualifiedcontract, no rollover provision, such as§ 403(a)(4), applied to the amount receivedfrom IC1. Accordingly, the amount that Areceived from IC1 under the first annuitycontract is taxable in 2007 to the extent setforth in § 72(e).

HOLDING

If a Taxpayer receives a check from alife insurance company under a non-qual-ified annuity contract, the endorsement ofthe check to a second company as consid-eration for a second annuity contract doesnot qualify as a tax-free exchange under§ 1035(a)(3). Instead, the amount receivedis taxable to the extent set forth in § 72(e).


The principal author of this revenueruling is Josephine H. Firehock of the Of-fice of Associate Chief Counsel (FinancialInstitutions & Products). For further in-formation regarding this revenue ruling,contact Josephine H. Firehock at (202)622–3970 (not a toll-free call).

2007–21 I.R.B. 1283 May 21, 2007

Part III. Administrative, Procedural, and MiscellaneousWeighted Average InterestRates Update

Notice 2007–33

This notice provides guidance as to thecorporate bond weighted average interestrate and the permissible range of interestrates specified under § 412(b)(5)(B)(ii)(II)of the Internal Revenue Code. In addi-tion, it provides guidance as to the interestrate on 30-year Treasury securities under§ 417(e)(3)(A)(ii)(II).

CORPORATE BOND WEIGHTEDAVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding

Equity Act of 2004 and by the Pension Pro-tection Act of 2006, provide that the inter-est rates used to calculate current liabilityand to determine the required contributionunder § 412(l) for plan years beginning in2004 through 2007 must be within a per-missible range based on the weighted av-erage of the rates of interest on amountsinvested conservatively in long term in-vestment grade corporate bonds during the4-year period ending on the last day beforethe beginning of the plan year.

Notice 2004–34, 2004–1 C.B. 848, pro-vides guidelines for determining the cor-porate bond weighted average interest rateand the resulting permissible range of in-terest rates used to calculate current liabil-ity. That notice establishes that the corpo-

rate bond weighted average is based on themonthly composite corporate bond rate de-rived from designated corporate bond in-dices. The methodology for determiningthe monthly composite corporate bond rateas set forth in Notice 2004–34 continues toapply in determining that rate. See Notice2006–75, 2006–36 I.R.B. 366.

The composite corporate bond rate forApril 2007 is 5.98 percent. Pursuant to No-tice 2004–34, the Service has determinedthis rate as the average of the monthlyyields for the included corporate bond in-dices for that month.

The following corporate bond weightedaverage interest rate was determined forplan years beginning in the month shownbelow.

For Plan YearsCorporate

Bond 90% to 100%Beginning in: Weighted Permissible

Month Year Average Range

May 2007 5.80 5.22 to 5.80

30-YEAR TREASURY SECURITIESINTEREST RATE

Section 417(e)(3)(A)(ii)(II) definesthe applicable interest rate, which mustbe used for purposes of determining theminimum present value of a participant’sbenefit under § 417(e)(1) and (2), as theannual rate of interest on 30-year Treasurysecurities for the month before the dateof distribution or such other time as theSecretary may by regulations prescribe.Section 1.417(e)–1(d)(3) of the IncomeTax Regulations provides that the applica-ble interest rate for a month is the annualinterest rate on 30-year Treasury securi-ties as specified by the Commissioner forthat month in revenue rulings, notices orother guidance published in the InternalRevenue Bulletin.

The rate of interest on 30-year Treasurysecurities for April 2007 is 4.87 percent.The Service has determined this rate as themonthly average of the daily determina-tion of yield on the 30-year Treasury bondmaturing in February 2037.

Drafting Information

The principal authors of this notice arePaul Stern and Tony Montanaro of the Em-ployee Plans, Tax Exempt and Govern-ment Entities Division. For further infor-mation regarding this notice, please con-tact the Employee Plans’ taxpayer assis-tance telephone service at 877–829–5500(a toll-free number), between the hours of8:30 a.m. and 4:30 p.m. Eastern time,Monday through Friday. Mr. Stern may bereached at 202–283–9703. Mr. Montanaromay be reached at 202–283–9714. Thetelephone numbers in the preceding sen-tences are not toll-free.

Credit for RenewableElectricity Production,Refined Coal Production,and Indian Coal Production,and Publication of InflationAdjustment Factors andReference Prices for CalendarYear 2007

Notice 2007–40

This notice publishes the inflation ad-justment factors and reference prices forcalendar year 2007 for the renewable elec-tricity production credit, the refined coalproduction credit, and the Indian coal pro-duction credit under § 45 of the InternalRevenue Code. The 2007 inflation adjust-ment factors and reference prices are usedin determining the availability of the cred-its. The 2007 inflation adjustment factorsand reference prices apply to calendar year2007 sales of kilowatt-hours of electricityproduced in the United States or a pos-session thereof from qualified energy re-sources and to calendar year 2007 sales ofrefined coal and Indian coal produced inthe United States or a possession thereof.

May 21, 2007 1284 2007–21 I.R.B.

BACKGROUND

Section 45(a) provides that the renew-able electricity production credit for anytax year is an amount equal to the prod-uct of 1.5 cents multiplied by the kilowatthours of specified electricity produced bythe taxpayer and sold to an unrelated per-son during the tax year. This electricitymust be produced from qualified energyresources and at a qualified facility duringthe 10-year period beginning on the datethe facility was originally placed in ser-vice.

Section 45(b)(1) provides that theamount of the credit determined under§ 45(a) is reduced by an amount whichbears the same ratio to the amount of thecredit as (A) the amount by which thereference price for the calendar year inwhich the sale occurs exceeds 8 cents,bears to (B) 3 cents. Under § 45(b)(2),the 1.5 cent amount in § 45(a), the 8 centamount in § 45(b)(1), the $4.375 amount in§ 45(e)(8)(A), and in § 45(e)(8)(B)(i) thereference price of fuel used as feedstock(within the meaning of § 45(c)(7)(A)) in2002 are each adjusted by multiplying theamount by the inflation adjustment factorfor the calendar year in which the saleoccurs. If any amount as increased underthe preceding sentence is not a multipleof 0.1 cent, the amount is rounded to thenearest multiple of 0.1 cent.

Section 45(c)(1) defines qualifiedenergy resources as wind, closed-loopbiomass, open-loop biomass, geother-mal energy, solar energy, small irrigationpower, municipal solid waste, and quali-fied hydropower production.

Section 45(d)(1) defines a qualified fa-cility using wind to produce electricity asany facility owned by the taxpayer that isoriginally placed in service after Decem-ber 31, 1993, and before January 1, 2009.See § 45(e)(7) for rules relating to the in-applicability of the credit to electricity soldto utilities under certain contracts.

Section 45(d)(2)(A) defines a qualifiedfacility using closed-loop biomass to pro-duce electricity as any facility (i) ownedby the taxpayer that is originally placed inservice after December 31, 1992, and be-fore January 1, 2009, or (ii) owned by thetaxpayer which before January 1, 2009, isoriginally placed in service and modifiedto use closed-loop biomass to co-fire withcoal, with other biomass, or with both,

but only if the modification is approvedunder the Biomass Power for Rural De-velopment Programs or is part of a pilotproject of the Commodity Credit Corpora-tion as described in 65 Fed. Reg. 63052.Section 45(d)(2)(B) provides that in thecase of a qualified facility described in§ 45(d)(2)(A)(ii), (i) the 10-year period re-ferred to in § 45(a) is treated as begin-ning no earlier than the date of enactmentof § 45(d)(2)(B)(i); (ii) the amount of thecredit determined under § 45(a) with re-spect to the facility is an amount equalto the amount determined without regardto § 45(d)(2)(B)(ii) multiplied by the ratioof the thermal content of the closed-loopbiomass used in the facility to the thermalcontent of all fuels used in the facility; and(iii) if the owner of the facility is not theproducer of the electricity, the person eli-gible for the credit allowable under § 45(a)is the lessee or the operator of the facility.

Section 45(d)(3)(A) defines a qualifiedfacility using open-loop biomass to pro-duce electricity as any facility owned bythe taxpayer which (i) in the case of a facil-ity using agricultural livestock waste nutri-ents, (I) is originally placed in service afterthe date of enactment of § 45(d)(3)(A)(i)(I)and before January 1, 2009, and (II) thenameplate capacity rating of which is notless than 150 kilowatts; and (ii) in the caseof any other facility, is originally placed inservice before January 1, 2009. In the caseof any facility described in § 45(d)(3)(A),if the owner of the facility is not the pro-ducer of the electricity, § 45(d)(3)(B) pro-vides that the person eligible for the creditallowable under § 45(a) is the lessee or theoperator of the facility.

Section 45(d)(4) defines a qualified fa-cility using geothermal or solar energy toproduce electricity as any facility ownedby the taxpayer which is originally placedin service after the date of enactment of§ 45(d)(4) and before January 1, 2009 (Jan-uary 1, 2006, in the case of a facility us-ing solar energy). A qualified facility us-ing geothermal or solar energy does not in-clude any property described in § 48(a)(3)the basis of which is taken into account bythe taxpayer for purposes of determiningthe energy credit under § 48.

Section 45(d)(5) defines a qualifiedfacility using small irrigation power toproduce electricity as any facility ownedby the taxpayer which is originally placed

in service after the date of enactment of§ 45(d)(5) and before January 1, 2009.

Section 45(d)(6) defines a qualified fa-cility using gas derived from the biodegra-dation of municipal solid waste to produceelectricity as any facility owned by the tax-payer which is originally placed in serviceafter the date of enactment of § 45(d)(6)and before January 1, 2009.

Section 45(d)(7) defines a qualified fa-cility that burns municipal solid waste toproduce electricity as any facility ownedby the taxpayer which is originally placedin service after the date of enactment of§ 45(d)(7) and before January 1, 2009. Aqualified facility burning municipal solidwaste includes a new unit placed in servicein connection with a facility placed in ser-vice on or before the date of enactment of§ 45(d)(7), but only to the extent of the in-creased amount of electricity produced atthe facility by reason of such new unit.

Section 45(d)(8) provides in the caseof a facility that produces refined coal,the term “refined coal production facility”means a facility which is placed in serviceafter the date of enactment of § 45(d)(8)and before January 1, 2009.

Section 45(d)(9) defines a qualifiedfacility producing qualified hydroelec-tric production described in § 45(c)(8) as(A) any facility producing incrementalhydropower production, but only to theextent of its incremental hydropower pro-duction attributable to efficiency improve-ments or additions to capacity describedin § 45(c)(8)(B) placed in service after thedate of enactment of § 45(d)(9) and beforeJanuary 1, 2009, and (B) any other facilityplaced in service after the date of enact-ment of § 45(d)(9) and before January 1,2009. Section 45(d)(9)(C) provides that inthe case of a qualified facility described in§ 45(d)(9)(A), the 10-year period referredto in § 45(a) is treated as beginning onthe date the efficiency improvements oradditions to capacity are placed in service.

Section 45(d)(10) provides in the caseof a facility that produces Indian coal,the term “Indian coal production facility”means a facility which is placed in servicebefore January 1, 2009.

Section 45(e)(8)(A) provides that therefined coal production credit is an amountequal to $4.375 per ton of qualified re-fined coal (i) produced by the taxpayerat a refined coal production facility dur-ing the 10-year period beginning on the

2007–21 I.R.B. 1285 May 21, 2007

date the facility was originally placed inservice, and (ii) sold by the taxpayer (I)to an unrelated person and (II) during the10-year period and the tax year. Section45(e)(8)(B) provides that the amount ofcredit determined under § 45(e)(8)(A) isreduced by an amount which bears thesame ratio to the amount of the increaseas (i) the amount by which the referenceprice of fuel used as feedstock (within themeaning of § 45(c)(7)(A)) for the calendaryear in which the sale occurs exceeds anamount equal to 1.7 multiplied by the ref-erence price for such fuel in 2002, bears to(ii) $8.75.

Section 45(e)(10)(A) provides in thecase of a producer of Indian coal, the creditdetermined under section 45 for any tax-able year shall be increased by an amountequal to the applicable dollar amount perton of Indian coal (i) produced by the tax-payer at an Indian coal production facilityduring the 7-year period beginning on Jan-uary 1, 2006, and (ii) sold by the taxpayer(I) to an unrelated person, and (II) duringsuch 7-year period and such taxable year.

Section 45(e)(10)(B)(i) defines “ap-plicable dollar amount” for any taxableyear as (I) $1.50 in the case of calendaryears 2006 through 2009, and (II) $2.00 inthe case of calendar years beginning after2009.

Section 45(e)(2)(A) requires the Secre-tary to determine and publish in the Fed-eral Register each calendar year the infla-tion adjustment factor and the referenceprice for the calendar year. The infla-tion adjustment factors and the referenceprices for the 2007 calendar year were pub-lished in the Federal Register on March 29,2007 (72 Fed. Reg. 14862).

Section 45(e)(2)(B) defines the infla-tion adjustment factor for a calendar yearas the fraction the numerator of which isthe GDP implicit price deflator for the pre-ceding calendar year and the denominatorof which is the GDP implicit price defla-tor for the calendar year 1992. The term“GDP implicit price deflator” means themost recent revision of the implicit pricedeflator for the gross domestic product ascomputed and published by the Depart-ment of Commerce before March 15 of thecalendar year.

Section 45(e)(2)(C) provides that thereference price is the Secretary’s determi-nation of the annual average contract priceper kilowatt hour of electricity generated

from the same qualified energy resourceand sold in the previous year in the UnitedStates. Only contracts entered into af-ter December 31, 1989, are taken into ac-count.

Under § 45(e)(8)(C), the determinationof the reference price for fuel used as feed-stock within the meaning of § 45(c)(7)(A)is made according to rules similar to therules under § 45(e)(2)(C).

Under section 45(e)(10)(B)(ii), in thecase of any calendar year after 2006,each of the dollar amounts under section45(e)(10)(B)(i) shall be equal to the prod-uct of such dollar amount and the inflationadjustment factor determined under sec-tion 45(e)(2)(B) for the calendar year,except that section 45(e)(2)(B) shall beapplied by substituting 2005 for 1992.

INFLATION ADJUSTMENT FACTORSAND REFERENCE PRICES

The inflation adjustment factor forcalendar year 2007 for qualified energyresources and refined coal is 1.3433. Theinflation adjustment factor for Indian coalis 1.0293. The reference price for calendaryear 2007 for facilities producing elec-tricity from wind (based upon informationprovided by the Department of Energy)is 3.29 cents per kilowatt hour. The ref-erence prices for fuel used as feedstockwithin the meaning of § 45(c)(7)(A), re-lating to refined coal production (basedupon information provided by the Depart-ment of Energy) are $31.90 per ton forcalendar year 2002 and $48.35 per ton forcalendar year 2007. The reference pricesfor facilities producing electricity fromclosed-loop biomass, open-loop biomass,geothermal energy, solar energy, small ir-rigation power, municipal solid waste, andqualified hydropower production have notbeen determined for calendar year 2007.The IRS is exploring methods of deter-mining those reference prices for calendaryear 2008.

PHASE-OUT CALCULATION

Because the 2007 reference price forelectricity produced from wind does notexceed 8 cents multiplied by the infla-tion adjustment factor, the phaseout ofthe credit provided in § 45(b)(1) doesnot apply to such electricity sold duringcalendar year 2007. Because the 2007 ref-erence price of fuel used as feedstock for

refined coal does not exceed the $31.90reference price of such fuel in 2002 mul-tiplied by the inflation adjustment factorand 1.7, the phaseout of credit providedin § 45(e)(8)(B) does not apply to re-fined coal sold during calendar year 2007.Further, for electricity produced fromclosed-loop biomass, open-loop biomass,geothermal energy, solar energy, smallirrigation power, municipal solid waste,and qualified hydropower production, thephaseout of credit provided in § 45(b)(1)does not apply to such electricity sold dur-ing calendar year 2007.

CREDIT AMOUNT BY QUALIFIEDENERGY RESOURCE AND FACILITY,REFINED COAL, AND INDIAN COAL

As required by § 45(b)(2), the 1.5 centamount in § 45(a)(1), the 8 cent amountin § 45(b)(1), and the $4.375 amount in§ 45(e)(8)(A) are each adjusted by mul-tiplying such amount by the inflationadjustment factor for the calendar yearin which the sale occurs. If any amountas increased under the preceding sen-tence is not a multiple of 0.1 cent, suchamount is rounded to the nearest multi-ple of 0.1 cent. In the case of electricityproduced in open-loop biomass facilities,small irrigation power facilities, landfillgas facilities, trash combustion facili-ties, and qualified hydropower facilities,§ 45(b)(4)(A) requires the amount in ef-fect under § 45(a)(1) (before roundingto the nearest 0.1 cent) to be reduced byone-half. Under the calculation requiredby § 45(b)(2), the credit for renewableelectricity production for calendar year2007 under § 45(a) is 2.0 cents per kilo-watt hour on the sale of electricity pro-duced from the qualified energy resourcesof wind, closed-loop biomass, geothermalenergy, and solar energy, and 1.0 cent perkilowatt hour on the sale of electricityproduced in open-loop biomass facilities,small irrigation power facilities, landfillgas facilities, trash combustion facilities,and qualified hydropower facilities. Underthe calculation required by § 45(b)(2), thecredit for refined coal production for cal-endar year 2007 under section 45(e)(8)(A)is $5.877 per ton on the sale of qualifiedrefined coal. The credit for Indian coalproduction for calendar year 2007 under§ 45(e)(10)(B) is $1.544 per ton on thesale of Indian coal.

May 21, 2007 1286 2007–21 I.R.B.

DRAFTING AND CONTACTINFORMATION

The principal author of this notice isDavid A. Selig of the Office of AssociateChief Counsel (Passthroughs and SpecialIndustries). For further information re-garding this notice, contact Mr. Selig at(202) 622–3040 (not a toll-free call).

Public Comment Invitedon Recommendations for2007–2008 Guidance PriorityList

Notice 2007–41

The Department of Treasury and Inter-nal Revenue Service invite public com-ment on recommendations for items thatshould be included on the 2007–2008Guidance Priority List.

Treasury’s Office of Tax Policy and theService use the Guidance Priority List eachyear to identify and prioritize the tax is-sues that should be addressed through reg-ulations, revenue rulings, revenue proce-dures, notices, and other published admin-istrative guidance. The 2007–2008 Guid-ance Priority List will establish the guid-ance that the Treasury Department and theService intend to issue from July 1, 2007,through June 30, 2008. The Treasury De-partment and the Service recognize theimportance of public input to formulatea Guidance Priority List that focuses re-sources on guidance items that are mostimportant to taxpayers and tax administra-tion. Published guidance plays an impor-tant role in increasing voluntary compli-ance by helping to clarify ambiguous areasof the tax law.

As is the case whenever significantlegislation is enacted, the Treasury De-partment and the Service have continuedto dedicate substantial resources duringthe current plan year to published guid-ance projects necessary to implement theprovisions of the American Jobs CreationAct of 2004, Pub. L. No. 108–357, 118Stat. 1418, which was enacted on Oc-tober 22, 2004; the Energy Policy Actof 2005, Pub. L. No. 109–58, 119 Stat.594, which was enacted on August 8,2005; the Gulf Opportunity Zone Act of2005, Pub. L. No. 109–135, 119 Stat.

2577, which was enacted on December21, 2005; and the Tax Increase Preventionand Reconciliation Act of 2005, Pub. L.No. 109–222, 120 Stat. 345, which wasenacted on May 17, 2006. Similarly, theTreasury Department and the Service havedevoted substantial resources to publishedguidance projects necessary to implementthe provisions of additional tax legislationthat was enacted during the current planyear, such as the Pension Protection Act of2006, Pub. L. No. 109–280, 120 Stat. 780,which was enacted on August 17, 2006;and the Tax Relief and Health Care Actof 2006, Pub. L. No. 109–432, 120 Stat.2922, which was enacted on December20, 2006. The Treasury Department andthe Service will continue to evaluate thepriority of each guidance project in lightof the above-mentioned tax legislation andother developments occurring during the2007–2008 plan year.

In reviewing recommendations andselecting projects for inclusion on the2007–2008 Guidance Priority List, theTreasury Department and the Service willconsider the following:

1. Whether the recommended guidanceresolves significant issues relevant tomany taxpayers;

2. Whether the recommended guidancepromotes sound tax administration;

3. Whether the recommended guidancecan be drafted in a manner that willenable taxpayers to easily understandand apply the guidance;

4. Whether the Service can administerthe recommended guidance on a uni-form basis; and

5. Whether the recommended guidancereduces controversy and lessens theburden on taxpayers or the Service.

Taxpayers may submit recommenda-tions for guidance at any time during theyear. Please submit recommendations byMay 31, 2007, for possible inclusion onthe original 2007–2008 Guidance Prior-ity List. The Service plans to update the2007–2008 Guidance Priority List period-ically to reflect additional guidance thatthe Treasury Department and the Serviceintend to publish during the plan year.

The periodic updates allow the TreasuryDepartment and the Service to respond tothe need for additional guidance that mayarise during the plan year. Recommenda-tions for guidance received after May 31,2007, will be reviewed for inclusion in thenext periodic update.

Taxpayers are not required to submitrecommendations for guidance in any par-ticular format. Taxpayers should, how-ever, briefly describe the recommendedguidance and explain the need for the guid-ance. In addition, taxpayers may includean analysis of how the issue should be re-solved. It would be helpful if taxpayerssuggesting more than one guidance projectwould prioritize the projects by order ofimportance. If a large number of projectsare being suggested, it also would be help-ful if the projects were grouped in terms ofhigh, medium or low priority.

Taxpayers should send written com-ments to:

Internal Revenue ServiceAttn: CC:PA:LPD:PR

(Notice 2007–41)Room 5203P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

or hand deliver comments Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to:

Courier’s DeskInternal Revenue ServiceAttn: CC:PA:LPD:PR

(Notice 2007–41)1111 Constitution Avenue, N.W.Washington, D.C. 20224

Alternatively, taxpayers may sub-mit comments electronically viae-mail to the following address:[email protected] should include “Notice2007–41” in the subject line. All com-ments will be available for public inspec-tion and copying in their entirety.

For further information regarding thisnotice, contact Henry Schneiderman ofthe Office of Associate Chief Counsel(Procedure and Administration) at (202)622–3400 (not a toll-free call).

2007–21 I.R.B. 1287 May 21, 2007

Treatment of Currency GainThat a Real Estate InvestmentTrust (REIT) Recognizes Froma Qualified Business Unit(QBU) of the REIT

Notice 2007–42

This notice provides guidance with re-spect to the circumstances under which§ 856(c)(2) or § 856(c)(3) characterizes§ 987 gain as qualifying income for pur-poses of REIT qualification.

BACKGROUND

Under paragraph (3) of § 856(c), at least75 percent of a REIT’s annual gross in-come must be derived from the types of in-come listed in that paragraph, often charac-terized as income from real estate sources.Under paragraph (2) of § 856(c), at least95 percent of a REIT’s annual gross in-come must be derived from the types of in-come listed in that paragraph, often charac-terized as income from “passive” sources,including interest and dividends.

The Service is aware that some REITshave invested in real estate assets outsidethe United States through entities or part-nerships that qualify as QBUs, as definedin § 989(a). The Service has explicitlyruled that otherwise-qualifying assets donot fail to satisfy § 856(c)(4) merely be-cause the assets are foreign:

Neither section 856 of the Code nor theregulations thereunder restrict the term“real estate assets” to those locatedwithin the United States. Accordingly,it is held that, for purposes of sec-tion 856(c), the term “real property”includes land or improvements thereonlocated outside the United States andthe term “mortgages on real property”includes a security interest which, un-der the laws of the jurisdiction in whichthe property is located, is the legalequivalent of a mortgage or deed oftrust in the United States.

Rev. Rul. 74–191, 1974–1 C.B. 170,170. It follows from this holding both thatrents on foreign real property qualify un-der § 856(c)(2)–(3) to the same extent that

they would qualify if the property were lo-cated in the United States, and that intereston foreign mortgage loans qualifies under§ 856(c)(2)–(3) to the same extent that itwould qualify if the loans were governedby United States law and the property werelocated in the United States. Thus, foreignsitus of a REIT’s assets does not necessar-ily prevent the REIT from satisfying theincome and asset tests of § 856(c), whichmust be met in order to qualify as a REIT.Rev. Rul. 74–191, however, does notaddress the treatment of foreign currencygain that may result from investing in realproperty or other assets through a QBUwith a functional currency other than thedollar.

In general, § 985 provides that alldeterminations for federal income tax pur-poses are to be made in the taxpayer’sfunctional currency. Section 985(a). Sec-tion 1.985–1(b)(1)(iii) of the IncomeTax Regulations provides that, exceptas otherwise provided by ruling or ad-ministrative pronouncement, the U.S.dollar is the functional currency of aQBU that has the United States as its res-idence, as defined in § 988(a)(3)(B).Section 1.989(a)–1(b)(2)(i) providesthat a corporation is a QBU. Section988(a)(3)(B)(i)(II) provides that theUnited States is the residence of a cor-poration that is a United States person.Section 7701(a)(30) provides, in part, thatthe term “United States person” includes adomestic corporation. Section 7701(a)(4)provides that the term “domestic,” as ap-plied to a corporation, means created ororganized in the United States or underthe law of the United States or any State.Thus, absent a ruling to the contrary, aREIT has the dollar as its functional cur-rency because § 856(a)(3) requires it to betaxable as a domestic corporation.

A REIT may have a QBU that is subjectto § 987 and that has a functional currencyother than the dollar. See § 1.985–1(c). Insuch a case, a REIT may recognize cur-rency gain under § 987 when the QBU re-mits property to the REIT. Section 987(3).

Proposed regulations (REG–208270–86, 2006–42 I.R.B. 698 [71 FR 52,876])under § 987 were issued September 7,

2006. Section 1.987–6(b) of the proposedregulations generally provides that theowner of a § 987 QBU must determine thecharacter of § 987 gain or loss in the yearof remittance using the asset method pro-vided in § 1.861–9T(g), as modified by theproposed regulations. The modified grossincome method described in § 1.861–9T(j)cannot be used. If finalized as currentlyproposed, however, the regulations willnot apply to REITs. See Prop. Treas. Reg.§ 1.987–1(b)(1)(iii). Some REITs haverequested guidance concerning the statusunder § 856(c)(2)–(3) of any foreign cur-rency gain that is recognized under § 987when a QBU remits property to a REIT.

INTERIM GUIDANCE

Because the currency gain from remit-tances is determined under § 987, the Ser-vice believes that it is appropriate for is-sues that arise in connection with that gainto be addressed under methods similar tothose provided in § 987 and the regulationsthereunder. The Treasury Department andthe Service therefore intend to amend theproposed regulations under § 987 to in-clude guidance concerning the character-ization for purposes of § 856(c)(2) and (3)of § 987 gain recognized by a REIT on aremittance from a QBU of the REIT.

Until further guidance is published, if aREIT recognizes § 987 gain, the REIT mayapply the principles of the proposed reg-ulations under § 987 issued September 7,2006 to determine whether that § 987 gainis derived from income that is described in§ 856(c)(2)(A) – (H) or § 856(c)(3)(A) –(I).

The principal author of this noticeis Jonathan D. Silver of the Office ofAssociate Chief Counsel (Financial In-stitutions & Products). For furtherinformation regarding this notice, con-tact Jonathan D. Silver at (202) 622–3930(not a toll-free call).

May 21, 2007 1288 2007–21 I.R.B.

26 CFR 601.601: Rules and regulations.(Also, Part I, §§ 446, 451; 1.446–2, 1.451–1.)

Rev. Proc. 2007–33

TABLE OF CONTENTS

SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 4. SAFE HARBOR METHOD OF ACCOUNTING FOR UNCOLLECTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 5. EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 6. ADOPTION OF SAFE HARBOR METHOD OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 7. REQUEST FOR COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 8. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 9. EFFECT ON OTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

DRAFTING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 1. PURPOSE

This revenue procedure provides theexclusive procedure by which a taxpayerdescribed in SECTION 3 may obtainthe Commissioner’s consent to changeits method of accounting for uncollectedinterest (other than interest described in§ 1.446–2(a)(2) of the Income Tax Regula-tions) to the safe harbor method providedin SECTION 4 of this revenue procedure.

SECTION 2. BACKGROUND

.01 For certain types of interest,§ 1.446–2 provides rules for determin-ing the amount of interest that accruesduring an accrual period and the portion ofa payment that consists of accrued interest.For descriptions of the types of interest(e.g., original issue discount) to which the§ 1.446–2 accrual rules do not apply, see1.446–2(a)(2).

.02 Section 1.446–2(b) provides that“qualified stated interest” accrues ratablyover an accrual period (or periods) towhich it is attributable and accrues at thestated rate for the period (or periods). Ingeneral, “qualified stated interest” is statedinterest that is unconditionally payable incash or in property (other than debt instru-ments of the issuer) at least annually at asingle fixed rate that appropriately takes

into account the length of the interval be-tween payments. See 1.1273–1(c).

.03 In the case of interest other than“qualified stated interest,” § 1.446–2(c)provides that the amount of interest that ac-crues for any accrual period is determinedunder rules similar to those in the regu-lations under sections 1272 and 1275 ofthe Internal Revenue Code for the accrualof original issue discount (subject to themodifications set forth in § 1.446–2(d)).

.04 Section 1.446–2(e) provides thateach payment on a loan (other than pay-ments of additional interest or similarcharges with regard to amounts not paidwhen due) is treated as a payment of inter-est to the extent of the accrued but unpaidinterest (determined under § 1.446–2(b)and § 1.446–2(c)) as of the date the pay-ment becomes due.

.05 Section 1.446–2(a)(1) provides thata taxpayer determines the taxable year inwhich to include an amount of accrued in-terest (determined under § 1.446–2(b) or§ 1.446–2(c)) in gross income under thetaxpayer’s regular method of accounting.

.06 Rev. Rul. 2007–32, page 1278 ofthis Bulletin, requires an accrual methodbank with a reasonable expectancy ofreceiving future payments on a loan toaccrue interest in the taxable year in whichthe right to receive the interest becomesfixed, notwithstanding bank regulatory

rules that prevent accrual of the interestfor regulatory purposes. The ruling alsoprovides guidance as to the period in whicha taxpayer that has elected the conformitymethod of accounting under 1.166–2(d)(3)can treat uncollected interest as worthless.

.07 APPENDIX 5A of Rev. Proc.2002–9, 2002–1 C.B. 327, modified andclarified by Announcement 2002–17,2002–1 C.B. 561, modified and amplifiedby Rev. Proc. 2002–19, 2002–1 C.B.696, amplified, clarified, and modified byRev. Proc. 2002–54, 2002–2 C.B. 432,states that “for interest to be determineduncollectible, the taxpayer must substan-tiate, taking into account all the facts andcircumstances, that it has no reasonableexpectation of payment of the interest.”APPENDIX 5A of Rev. Proc. 2002–9 alsostates that the “substantiation requirementis applied on a loan by loan basis.”

.08 Substantiation of uncollectibleinterest using a loan-by-loan facts and cir-cumstances methodology can be admin-istratively burdensome and impractical,particularly for smaller unsecured loans.For example, a bank may have a signifi-cant number of consumer loans. For theseloans, the bank’s loan files often may notcontain updated information regarding thedebtors’ financial condition or the valueof the collateral, if any, securing the loans.

2007–21 I.R.B. 1289 May 21, 2007

SECTION 3. SCOPE

This revenue procedure applies to a“bank” as defined in 1.166–2(d)(4)(i)that—

(1) uses an accrual method of account-ing to determine its taxable income for fed-eral income tax purposes,

(2) is subject to supervision by Federalauthorities, or by state authorities main-taining substantially equivalent standards,and

(3) has uncollected interest other thaninterest described in 1.446–2(a)(2).

SECTION 4. SAFE HARBORMETHOD OF ACCOUNTING FORUNCOLLECTED INTEREST

.01 Safe Harbor Method. Under thesafe harbor method of accounting pro-vided by this SECTION 4, a bank deter-mines for each taxable year the amountof uncollected interest (other than interestdescribed in 1.446–2(a)(2)) for which itis considered to have a reasonable ex-pectancy of payment by multiplying:(1) the total accrued (determined under§ 1.446–2) but uncollected interest forthe year by, (2) the bank’s “recovery per-centage” (determined under paragraph.02 of this SECTION 4) for that year.Solely for purposes of this safe harbor,the bank is not considered to have a rea-sonable expectancy of payment for theexcess, if any, of the accrued but uncol-lected interest over the expected collectionamount determined using the bank’s re-covery percentage. The bank includes ingross income the portion of accrued butuncollected interest for which it has a rea-sonable expectancy of payment. The bankexcludes from income the portion of ac-crued but uncollected interest for which ithas no reasonable expectancy of payment.

.02 Recovery Percentage. (1) Subject tothe limitations and conditions in subpara-graphs (2) – (4) of this SECTION 4.02,a bank determines its recovery percentagefor each taxable year by dividing—

(a) total payments that the bank re-ceived on loans (including principal andinterest) during the 5 taxable years im-mediately preceding the taxable year (or,with the approval of the Commissioner,a shorter period if the bank has less than6 years of collection experience, i.e., the

taxable year and the 5 immediately pre-ceding taxable years), by

(b) total amounts that were due andpayable to the bank on loans during thesame 5 (or fewer) taxable years.

(2) The recovery percentage cannot ex-ceed 100 percent.

(3) The recovery percentage must becalculated to at least four decimal places.

(4) The data used in the recovery per-centage must take into account acquisi-tions and dispositions as follows:

(a) If a bank acquires the major portionof a trade or business of another person(predecessor) or the major portion of a sep-arate unit of a trade or business of a prede-cessor, then in applying this revenue pro-cedure for any taxable year ending on orafter the acquisition, the data from preced-ing taxable years of the predecessor attrib-utable to the portion of the trade or busi-ness acquired, if available, must be used indetermining the bank’s recovery percent-age.

(b) If a bank disposes of a major portionof a trade or business or the major portionof a separate unit of a trade or business,and the bank furnished the acquiring per-son the information necessary for the com-putations required by this revenue proce-dure, then in applying this revenue proce-dure for any taxable year ending on or af-ter the disposition, the data from precedingtaxable years attributable to the disposedportion of the trade or business may notbe used in determining the bank’s recov-ery percentage.

SECTION 5. EXAMPLE

.01 Facts. Bank X is a calendar yeartaxpayer that determines its taxable in-come using an accrual method of ac-counting. For 2007, Bank X’s accruedbut uncollected interest (determined un-der § 1.446–2) is $51,600. Bank X usesthe safe harbor method of accounting de-scribed in SECTION 4 of this revenueprocedure to determine the amount of un-collected interest for which the Bank hasa reasonable expectancy of payment. Dur-ing the 5 immediately preceding taxableyears, Bank X received $73,048,313 ofpayments on all of its loans. During thesame 5-year period, $74,900,705 was dueand payable on the loans.

.02 Analysis. (1) To determine the por-tion of the accrued but uncollected inter-

est for which there is a reasonable ex-pectancy of payment, Bank X first cal-culates its recovery percentage for 2007.Bank X determines its recovery percent-age by dividing the $73,048,313 of pay-ments received during the 2002–2006 pe-riod by the $74,900,705 that was due andpayable during the same period. BankX’s 2007 recovery percentage is 97.5269%[$73,048,313 ÷ $74,900,705 = 97.5269%].Bank X determines the portion of the un-collected 2007 interest for which it is con-sidered to have a reasonable expectancy ofpayment by multiplying the $51,600 of ac-crued but uncollected interest for that yearby the 97.5269 recovery percentage. BankX has a reasonable expectancy of paymentfor $50,323.88 of the uncollected 2007 in-terest [$51,600 × 97.5269% = $50,323.88].Bank X includes the $50,323.88 of uncol-lected 2007 interest in gross income for2007.

(2) Bank X is considered not to havea reasonable expectancy of payment for$1,276.12 of the uncollected 2007 interest($51,600 - $50,323.88 = $1,276.12). BankX excludes $1,276.12 of the uncollected2007 interest from its 2007 gross income.

SECTION 6. ADOPTION OF SAFEHARBOR METHOD OF ACCOUNTING

.01 Any change to the safe harbormethod provided in SECTION 4 of thisrevenue procedure is a change in methodof accounting to which the provisionsof section 446 and section 481, and theregulations thereunder, apply. Under§ 1.446–1(e)(2)(i), a taxpayer generallymust secure the consent of the Commis-sioner before changing a method of ac-counting for federal income tax purposes.Section 1.446–1(e)(3)(ii) authorizes theCommissioner to prescribe administrativeprocedures setting forth the terms andconditions necessary to obtain consent tochange a method of accounting.

.02 If a bank with less than 6 years ofcollection experience wants to change itsmethod of accounting for uncollected in-terest to the safe harbor method providedin SECTION 4 of this revenue procedure,the bank is required to follow the provi-sions of Rev. Proc. 97–27, 1997–1 C.B.680 (or its successor), as modified and am-plified by Rev. Proc. 2002–19, as ampli-fied and clarified by Rev. Proc. 2002–54,except that the scope limitations in section

May 21, 2007 1290 2007–21 I.R.B.

4.02(2) through (6) of Rev. Proc. 97–27 donot apply to a bank that makes the changefor either its first or second taxable yearending on or after December 31, 2006.

.03 If a bank with 6 or more years ofcollection experience wants to change itsmethod of accounting for uncollected in-terest to the safe harbor method providedin SECTION 4 of this revenue procedure,the bank is required to follow the auto-matic change in method of accounting pro-visions of Rev. Proc. 2002–9 (or its suc-cessor), with the following modifications:

(1) the scope limitations in section 4.02of Rev. Proc. 2002–9 do not apply to abank that makes the change for either itsfirst or second taxable year ending on orafter December 31, 2006; and

(2) the designated automatic accountingchange number for changes in method ofaccounting made pursuant to the revenueprocedure is 108.

SECTION 7. REQUEST FORCOMMENTS

The Internal Revenue Service requestscomments on this revenue procedure. Inparticular, comments are requested regard-ing the appropriate treatment of paymentsreceived in future years. For example,comments are requested regarding how todetermine the portion, if any, of a paymentattributable to amounts that the bank ex-cluded from gross income. All commentsshould be submitted by August 20, 2007,to:

Internal Revenue ServiceP. O. Box 7604Ben Franklin StationWashington, DC 20044Attn: CC:PA:LPD:PRB (FIP)Room 5529

Alternatively, comments may be sub-mitted electronically directly to the Ser-vice via the following e-mail address:[email protected] include “Rev. Proc. 2007–33” in

the subject line of any electronic commu-nication. All materials submitted will beavailable for public inspection and copy-ing.

SECTION 8. EFFECTIVE DATE

This revenue procedure is effective fortax years ending on or after its publication.

SECTION 9. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–9 is modified and am-plified to include the accounting methodchange provided by this revenue proce-dure.


The principal author of this revenueprocedure is Timothy Sebastian of theOffice of the Associate Chief Counsel(Financial Institutions and Products). Forfurther information regarding this revenueprocedure, contact Mr. Sebastian (202)622–7417 (not a toll-free call).

2007–21 I.R.B. 1291 May 21, 2007

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Guidance Under Section 2053Regarding Post-Death Events

REG–143316–03

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed amendments to the regulations relat-ing to the amount deductible from a dece-dent’s gross estate for claims against theestate under section 2053(a)(3) of the In-ternal Revenue Code (Code). In addition,the proposed regulations update the pro-visions relating to the deduction for cer-tain state death taxes to reflect the statu-tory amendments made in 2001 under sec-tions 2053(d) and 2058. The proposedregulations will affect estates of decedentsagainst whom there are claims outstandingat the time of the decedent’s death. Thisdocument also provides notice of a publichearing on these proposed regulations.

DATES: Written or electronic commentsmust be received by July 23, 2007. Out-lines of topics to be discussed at the publichearing scheduled for August 6, 2007, at10 a.m., must be received by July 30, 2007.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–143316–03),Room 5203, Internal Revenue Service, POBox 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–143316–03),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC; or sent electroni-cally via the Federal eRulemaking Por-tal at http://www.regulations.gov (IRSREG–143316–03). The public hearingwill be held in the IRS Auditorium, Inter-nal Revenue Building, 1111 ConstitutionAvenue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, DeAnn K. Malone, at(202) 622–3112; concerning submis-sions of comments, the hearing, and/orto be placed on the building access listto attend the hearing, Richard Hurst,at (202) 622–2949 (TDD telephone)(not toll-free numbers) or e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Background

Section 2001 of the Code imposes atax on the transfer of the taxable estate,determined as provided in section 2051,of every decedent, citizen, or resident ofthe United States. Section 2031(a) gen-erally provides that the value of the dece-dent’s gross estate shall include the valueat the time of decedent’s death of all prop-erty, real or personal, tangible or intangi-ble, wherever situated. Section 2051 pro-vides that the value of the taxable estateis determined by deducting from the valueof the gross estate the deductions providedfor in sections 2051 through 2058. Pur-suant to section 2053(a), “the value of thetaxable estate shall be determined by de-ducting from the value of the gross estatesuch amounts – (1) for funeral expenses,(2) for administration expenses, (3) forclaims against the estate, and (4) for un-paid mortgages on, or any indebtedness inrespect of, property where the value of thedecedent’s interest therein, undiminishedby such mortgage or indebtedness, is in-cluded in the value of the gross estate, asare allowable by the laws of the jurisdic-tion, whether within or without the UnitedStates, under which the estate is being ad-ministered.”

The deductions allowable under sec-tions 2051 through 2058 operate to elim-inate from estate taxation those portionsof the gross estate that are necessarily ex-pended in paying certain claims and ex-penses of the estate. The rationale forthose deductions is that those expendedportions of the gross estate are not trans-ferred to the decedent’s legatees, benefi-ciaries, or heirs and, therefore, are not sub-ject to the transfer tax.

The amount an estate may deduct forclaims against the estate has been a highlylitigious issue. Unlike section 2031, sec-tion 2053(a) does not contain a specificdirective to value a deductible claim atits date of death value. Section 2053, infact, specifically contemplates expensessuch as funeral and administration ex-penses, which are only determinable afterthe decedent’s date of death. Althoughnumerous courts have addressed section2053(a)(3), there is little or no consistencyamong the conclusions of those courtswith regard to the extent (if any) to whichpost-death events are to be considered invaluing such claims. One line of cases fol-lows the decision in Ithaca Trust v. Com-missioner, 279 U.S. 151 (1929), holdingthat the estate tax charitable deduction fora charitable remainder interest was to bedetermined as of date of death. In Federaljudicial circuits where the Ithaca Trustdate-of-death valuation approach is ap-plied to a claim against a decedent’s estateunder section 2053(a)(3), courts generallyhold that post-death events may not beconsidered when determining the amountdeductible for that claim. At the oppositeend of the spectrum, there is a line of casesthat follows the Eighth Circuit’s opinionin Jacobs v. Commissioner, 34 F.2d 233(8th Cir. 1929), cert. denied, 280 U.S.603 (1929), in which the court consideredbut rejected the date-of-death valuationapproach in determining the deductibleamount of a claim against the estate. Thecourt in Jacobs distinguished Ithaca Trust,stating that, unlike charitable deductions,“…the claims which Congress intendedto be deducted were actual claims, nottheoretical ones.” The court therefore heldthat only claims presented and determinedas valid against the estate and actuallypaid could be deducted as claims againstthe estate. Jacobs, 34 F.2d at 235. Thecourts that follow Jacobs generally re-strict the amount deductible under section2053(a)(3) to amounts actually paid by theestate in satisfaction of the claim.

Even in the circuits where the date-of-death valuation approach has been ap-plied in determining the amount that maybe deducted for a claim against the dece-dent’s estate, courts have recognized ex-ceptions that necessitate taking into ac-

May 21, 2007 1292 2007–21 I.R.B.

count events that occur after the decedent’sdeath. For example, courts have deviatedfrom the date-of-death valuation approachin favor of the actual payment approachwhen a claim is contested, contingent, un-enforceable, becomes unenforceable afterthe decedent’s death, or is not in fact pre-sented for payment. The application andextent of these exceptions are inconsistentfrom circuit to circuit, however, and can-not be reconciled to form a conclusive ruleapplicable to all estates.

The result of this lack of consistency inthe case law is that similarly situated es-tates are being treated differently for Fed-eral estate tax purposes, depending onlyupon the jurisdiction in which the executorresides. The Treasury Department and theIRS believe that similarly situated estatesshould be treated consistently by havingsection 2053(a)(3) construed and appliedin the same way in all jurisdictions.

One possible approach would be tovalue claims against a decedent’s estateon the basis of the facts existing on thedate of the decedent’s death. The Trea-sury Department and the IRS believe,however, that this date-of-death valuationapproach, when applied, has required aninefficient use of resources for taxpayers,the IRS, and the courts. Determining adate-of-death value requires the taxpayerand the IRS to retry the substantive issuesunderlying the claims against the estate ina tax controversy setting. In most cases,the tax controversy is addressed after theissue either has been settled by or has beenargued by parties with adverse interestsin a court of competent jurisdiction thatis more familiar with the nuances of theunderlying applicable law. Furthermore,this approach has proven to be expensive,both in terms of appraisal and litigationcosts. In addition, this approach gener-ally results in a deduction that is differentfrom the amount actually paid on disputedclaims. Finally, the date-of-death valu-ation approach often forces the taxpayerinvolved in actively defending against aclaim to take contradictory positions onthe estate tax return and in the substantivecourt pleadings, and may actually increasethe taxpayer’s potential liability.

After carefully considering the numer-ous judicial decisions and the analysis andconclusion in each, the legislative historyof section 2053 and its predecessors, andthe various possible alternatives, and in or-

der to further the goal of the effective andfair administration of the tax laws, the pro-posed regulations adopt rules based on thepremise that an estate may deduct undersection 2053(a)(3) only amounts actuallypaid in settlement of claims against the es-tate. If the resolution of a contested or con-tingent claim cannot be reached prior to theexpiration of the period of limitations forclaims for refund, the estate may file a pro-tective claim for refund to preserve its rightto claim a deduction under section 2053(a).

Explanation of Provisions

The proposed regulations will amendthe regulations under section 2053 to clar-ify that events occurring after a decedent’sdeath are to be considered when determin-ing the amount deductible under all provi-sions of section 2053 and that deductionsunder section 2053 are limited to amountsactually paid by the estate in satisfactionof deductible expenses and claims. Finalcourt decisions as to the amount and en-forceability of the claim or expense areaccepted in determining the amount de-ductible if the court passes upon the factsupon which deductibility depends. Set-tlements are accepted if they are reachedin bona fide negotiations between adverseparties with valid claims recognizable un-der applicable law, and if they are not in-consistent with the applicable law. A pro-tective claim for refund may be filed be-fore the expiration of the period of limita-tions for claims for refund in order to pre-serve the estate’s right to claim a refund ifthe amount of a liability will not be ascer-tainable by the time of the expiration of theperiod of limitations for claims of refund.A deduction is not allowed to the extent theexpense or claim is compensated for by in-surance or is otherwise reimbursed.

The proposed regulations further pro-vide that no deduction may be taken on anestate tax return for a claim that is poten-tial, unmatured, or contested at the time thereturn is filed. A protective claim for re-fund may be filed before the expiration ofthe period of limitations for claims for re-fund in order to preserve the estate’s rightto claim a refund by reason of the deduc-tion of a claim against the estate to the ex-tent that claim is ultimately paid by the es-tate.

Additional provisions in the proposedregulations provide guidance for other

particular circumstances. When a claimagainst an estate lists multiple defendants,the estate may only deduct the decedent’sportion of the liability. Claims by familymembers or beneficiaries of a decedent’sestate will be strictly scrutinized to en-sure that they are legitimate claims. Ifa claim becomes unenforceable after thedecedent’s death, the estate may not takea section 2053(a)(3) deduction with re-spect to the claim. If a claim representsa decedent’s obligation to make recur-ring payments that will likely continuefor a period extending beyond the finaldetermination of the estate tax liability, adeduction is allowed only as each paymentis made, provided the period of limitationsfor claims for refund has not expired orthe estate has properly preserved the claimfor refund. Alternatively, a deductionis allowed for the cost of a commercialannuity purchased by the estate from anunrelated dealer in commercial annuitiesin satisfaction of that obligation.

Finally, the proposed regulations reflectchanges made to section 2053(d) and theenactment of section 2058 in 2001 andclarify that the rules in section 20.2053–9apply only to the estates of decedents dy-ing on or before December 31, 2004.

Proposed Effective Date

The regulations, as proposed, apply tothe estate of any decedent dying on or afterthe date final regulations are published inthe Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regu-lations, and because these regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Therefore, a Regulatory Flexibility Anal-ysis is not required. Pursuant to section7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

2007–21 I.R.B. 1293 May 21, 2007

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill 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 IRS and the Treasury Department alsorequest comments on the clarity of the pro-posed rules and how they can be made eas-ier to understand. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduledfor August 6, 2007, at 10 a.m. in theIRS Auditorium, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Due to building securityprocedures, visitors must enter at the Con-stitution Avenue entrance. In addition, allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the immediate entrance area morethan 30 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHER IN-FORMATION CONTACT” section of thispreamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit electronic or written comments byJuly 16, 2007, and an outline of the topicsto be discussed and the time to be devotedto each topic (signed original and eight (8)copies) by July 30, 2007. A period of 10minutes will be allotted to each person formaking comments. An agenda showingthe scheduling of the speakers will be pre-pared after the deadline for receiving out-lines has passed. Copies of the agenda willbe available free of charge at the hearing.

Drafting Information

The principal author of these proposedregulations is DeAnn K. Malone, Office ofthe Chief Counsel, IRS.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 20 is pro-posed to be amended as follows:

PART 20—ESTATE TAX; ESTATESOF DECEDENTS DYING AFTERAUGUST 16, 1954

Paragraph 1. The authority citation forpart 20 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Par. 2. Section 20.2051–1 is revised to

read as follows:

§20.2051–1 Definition of taxable estate.

(a) The taxable estate of a dece-dent who was a citizen or resident (see§20.0–1(b)(1)(i)) of the United States atdeath is determined by subtracting the to-tal amount of the deductions authorized bysections 2052 through 2058 from the totalamount which must be included in thegross estate under sections 2031 through2044. These deductions are in general asfollows:

(1) An exemption of $60,000 (section2052) (applicable only to the estates ofdecedents dying on or before December31, 1976).

(2) Funeral and administration ex-penses and claims against the estate(including certain taxes and charitablepledges) (section 2053).

(3) Losses from casualty or theft dur-ing the administration of the estate (section2054).

(4) Charitable transfers (section 2055).(5) The marital deduction (section

2056).(6) Qualified domestic trusts (section

2056A).(7) Family-owned business interests

(section 2057) (applicable only to theestates of decedents dying on or beforeDecember 31, 2003).

(8) State death taxes (section 2058) (ap-plicable only to the estates of decedentsdying after December 31, 2004).

(b) See section 2106 and these regula-tions for the computation of the taxable es-tate of a decedent who was not a citizenor resident of the United States. See also§1.642(g)–1 of this chapter concerning thedisallowance for income tax purposes ofcertain deductions allowed for estate taxpurposes.

(c) Effective date. The rules of this sec-tion apply to the estates of decedents dyingon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

Par. 3. Section 20.2053–1 is amendedby:

1. Revising the introductory text ofparagraph (a).

2. Adding two new sentences at the endof paragraph (b)(1).

3. Revising paragraph (b)(2).4. Redesignating paragraph (b)(3) as

(b)(4) and revising the newly-designatedparagraph (b)(4).

5. Adding new paragraphs (b)(3),(b)(5), (b)(6), and (e).

The revisions and additions read as fol-lows:

§20.2053–1 Deductions for expenses,indebtedness, and taxes; in general.

(a) General rule. In determining thetaxable estate of a decedent who was acitizen or resident of the United Statesat death, there are allowed as deductionsunder section 2053(a) and (b) amountsfalling within the following two categories(subject to the limitations contained inthis section and in §§20.2053–2 through20.2053–10):

* * * * *(b) * * * (1) * * * In order to properly

take into account events occurring afterthe date of a decedent’s death when de-termining the amount deductible againsta decedent’s estate, the deduction for anyitem described in paragraph (a) of thissection is limited to the total amount actu-ally paid (subject to any time requirementunder paragraph (a) of this section) insettlement or satisfaction of that item.(See however, §20.2053–1(b)(4) for a spe-cial rule for deducting certain estimatedamounts.)

(2) Effect of court decree—(i) In gen-eral. If the court with appropriate jurisdic-tion over the administration of the estatereviews and approves expenditures for fu-neral expenses, administration expenses,claims against the estate, or unpaid mort-gages as allowable estate expendituresunder local law, the executor may rely onthe final judicial decision in that matterto determine the amount deductible forestate tax purposes if the following con-ditions are satisfied: the expenditures areotherwise deductible under section 2053and the corresponding regulations; theexpenditures have been paid by the estateor meet the requirements for estimated

May 21, 2007 1294 2007–21 I.R.B.

expenses; the court reviewed the facts re-lating to the expenditures; and the court’sdecision is consistent with local law. See§20.2053–2 for additional rules regard-ing the deductibility of funeral expenses.See §20.2053–3 for additional rules re-garding the deductibility of administrationexpenses. See §20.2053–4 for additionalrules regarding the deductibility of claimsagainst the estate. See §20.2053–7 foradditional rules regarding the deductibil-ity of unpaid mortgages. If the decisionreached by the court is inconsistent withlocal law, the estate may not rely on thecourt’s decree to establish the amountdeductible for estate tax purposes. Forexample, a local court decree approvingan allowance made to an executor in ex-cess of the amount or limit prescribed bystatute may not be relied upon to establishthe amount deductible under section 2053.An estate will not be denied an otherwiseallowable deduction under section 2053solely because a local court decree has notbeen entered with respect to that amountif the amount would be allowable underlocal law and if no court decree is requiredunder applicable law for payment.

(ii) Consent decree. An executor mayrely on a local court decree rendered byconsent to establish the amount deductibleunder section 2053 for amounts paid (ormeeting the requirements for estimated ex-penses) if the consent was a bona fiderecognition of the validity of the claim andwas accepted by the court as satisfactoryevidence upon the merits. Consent givenby all parties having interests adverse tothat of the claimant will be presumed tobe recognition of the claim’s validity. See§20.2053–4(b)(4) for special rules to de-termine the amount deductible for claimsby decedent’s family members, related en-tities, or beneficiaries of the decedent’s es-tate or revocable trust.

(3) Settlements. An executor may relyon a settlement to establish the amount de-ductible under section 2053 for amountspaid (or meeting the requirements for esti-mated expenses) (subject to any applicabletime limitation under paragraph (a) of thissection) if the following conditions are sat-isfied: the settlement resolves a bona fideissue in an active and genuine contest; thesettlement is the product of arm’s lengthnegotiations by parties having adverse in-terests with respect to the claim; and thesettlement is within the range of reason-

able outcomes under applicable state lawgoverning the issues resolved by the set-tlement. A settlement that results in a com-promise between the positions of such ad-verse parties and reflects the parties’ as-sessments of the relative strengths of theirrespective positions is a settlement that iswithin the range of reasonable outcomes.However, a deduction for amounts paidin settlement of a claim against the dece-dent’s estate will not be allowed if theterms of the settlement are inconsistentwith applicable local law. No deductionwill be allowed for amounts paid in set-tlement of an unenforceable claim. See§20.2053–4(b)(4) for special rules to de-termine the amount deductible for claimsby decedent’s family members, related en-tities, or beneficiaries of the decedent’s es-tate or revocable trust. For settlementsstructured using recurring payments, see§20.2053–4(b)(7).

(4) Estimated amounts. A deductionwill be allowed for a claim that satisfiesall applicable requirements even though itsexact amount is not then known, providedthat the amount is ascertainable with rea-sonable certainty, and will be paid. Underthis exception to the rule set forth in para-graph (b)(1) of this section, no deductionmay be taken upon the basis of a vagueor uncertain estimate. If a deduction is al-lowed in advance of payment and the pay-ment is thereafter waived or otherwise leftunpaid, it shall be the duty of the executorto notify the Commissioner and to pay theresulting tax, together with interest. To theextent that the amount of a liability other-wise deductible under section 2053 is notascertainable with reasonable certainty atthe time of examination of the return by theCommissioner, or to the extent that it is notthen clear that the amount will be paid, thatamount will not be allowed as a deductionby the Commissioner. If the deduction isdisallowed in whole or in part on examina-tion of the return and the amount of the lia-bility is subsequently ascertained and paid,relief may be sought by a timely claim forrefund as provided by section 6511. A pro-tective claim for refund may be filed be-fore the expiration of the period of limita-tions for claims for refund in order to pre-serve the estate’s right to claim a refund ifthe amount of a liability was or will not bepaid before the expiration of the period oflimitations for claims for refund. Althoughthe protective claim need not state a partic-

ular dollar amount or demand an immedi-ate refund, the protective claim must iden-tify the outstanding liability or claim thatwould have been deductible under section2053(a) had it already been paid. The pro-tective claim must also describe the rea-sons and contingencies delaying the deter-mination of the liability or the actual pay-ment of the claim. Action on protectiveclaims will proceed after the executor hasnotified the Commissioner that the contin-gency has been resolved.

(5) Reimbursements. A deduction is notallowed to the extent that the expense orclaim is or could be compensated for byinsurance or otherwise reimbursed.

(6) Examples. The following examplesillustrate the application of this section.Assume that the amounts are payableout of property subject to claims and areallowable by the law of the jurisdictiongoverning the administration of the es-tate, whether the applicable jurisdiction iswithin or without the United States.

Example 1. Estimated amounts, deduction ascer-tainable. Decedent’s (D’s) estate was probated instate. State law provides that the personal representa-tive shall receive compensation equal to 2.5 percentof the value of the probate estate. The executor (E)may claim a deduction for estimated fees equal to 2.5percent of D’s probate estate on the estate tax returnfiled for D’s estate as an estimated amount, providedthe amount will be paid to E after the estate tax re-turn is filed. To the extent that, at the time of the ex-amination of the return, the amount has not been paidand E cannot satisfy the conditions listed in paragraph(b)(4) of this section and §20.2053–3(b)(1), the de-duction will be disallowed, but the executor may filea timely protective claim for refund to protect the es-tate’s right to a refund once the amount has been paidor satisfies the applicable conditions. If the deductionis allowed in advance of payment and the payment isthereafter waived or otherwise left unpaid, it shall bethe duty of the executor to notify the Commissionerand to pay the resulting tax, together with interest.

Example 2. Estimated amounts, deduction not as-certainable. Prior to death, Decedent (D) is sued byClaimant (C) for $100x in a tort proceeding and re-sponds asserting affirmative defenses available to Dunder applicable local law. C and D are unrelated.D subsequently dies and D’s Form 706 is due be-fore a final judgment is entered in the case. Theexecutor (E) of D’s estate may not take a deduc-tion for $100x on D’s estate tax return as an esti-mated amount because the deductible amount can-not be ascertained with reasonable certainty in accor-dance with §20.2053–4(b)(2). If the amount of theactual liability will not be paid or cannot be ascer-tained with reasonable certainty before the expirationof the period of limitations for claims for refund, Emay file a protective claim before that date in orderto preserve the estate’s right subsequently to claim arefund.

* * * * *

2007–21 I.R.B. 1295 May 21, 2007

(e) Effective date. The rules of this sec-tion apply to the estates of decedents dyingon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

Par. 4. Section 20.2053–3 is amendedby:

1. Redesignating paragraphs (b)(2) and(b)(3) as paragraphs (b)(4) and (b)(5), re-spectively.

2. Designating the undesignated textfollowing paragraph (b)(1) as new para-graph (b)(3).

3. Revising paragraphs (b)(1) and(c)(1).

4. Adding new paragraphs (b)(2),(d)(3) and (e).

The revisions and additions read as fol-lows:

§20.2053–3 Deductions for expenses ofadministering estate.

* * * * *(b) Executor’s commissions. (1) The

executor, in filing the estate tax return,may deduct executor’s commissions insuch an amount as has actually been paid,or in an amount which at the time of filingthe estate tax return may reasonably beexpected to be paid, but no deduction maybe taken if no commissions are to be col-lected. If the amount of the commissionshas not been fixed by decree of the propercourt, the deduction will be allowed onthe examination of the return, to the extentthat all three of the following conditionsare satisfied:

(i) The Commissioner is reasonably sat-isfied that the commissions claimed will bepaid.

(ii) The amount claimed as a deductionis within the amount allowable by the lawsof the jurisdiction in which the estate isbeing administered.

(iii) It is in accordance with the usuallyaccepted practice in the jurisdiction to al-low such an amount in estates of similarsize and character.

(2) If the conditions described in para-graph (b)(1) of this section are not met, aprotective claim for refund may be filedbefore the expiration of the period of lim-itations for claims for refund in order topreserve the estate’s right to claim a re-fund for future amounts paid as describedin §20.2053–1(b)(4).

(3) If the deduction is disallowed inwhole or in part on the examination of thereturn and a protective claim was timelyfiled, the disallowance will be subject tomodification once the requirements for de-ductibility are met. If the deduction is al-lowed in advance of payment and paymentis thereafter waived or otherwise left un-paid, it shall be the duty of the executor tonotify the Commissioner and to pay the re-sulting tax, together with interest.

* * * * *(c) Attorney’s fees. (1) The executor,

in filing the estate tax return, may deductsuch an amount of attorney’s fees as hasactually been paid, or an amount which atthe time of filing may reasonably be ex-pected to be paid. If on the examination ofthe return, the fees claimed have not beenawarded by the proper court and paid, thededuction will, nevertheless, be allowed, ifthe Commissioner is reasonably satisfiedthat the amount claimed will be paid andthat it does not exceed a reasonable remu-neration for the services rendered, takinginto account the size and character of theestate and the local law and practice. Ifthe amount does not satisfy these require-ments, a protective claim for refund maybe filed before the expiration of the periodof limitations for claims for refund in orderto preserve the estate’s right to claim a re-fund for future amounts paid as describedin §20.2053–1(b)(4). If the deduction isdisallowed in whole or in part on the exam-ination of the return and a protective claimwas timely filed, the disallowance will besubject to modification once the require-ments for deductibility are met.

* * * * *(d) * * *(3) Expenses incurred in defending the

estate against claims described in section2053(a)(3) are deductible as provided in§20.2053–1 if the expenses are incurredincident to the assertion of defenses tothe claim available under the applicablelaw, even if the estate is not ultimatelyvictorious. For purposes of this section,“expenses incurred in defending the estateagainst claims” include costs relating tothe arbitration and mediation of contestedissues, costs associated with defendingthe estate against claims (whether or notenforceable), and costs associated withreaching a negotiated settlement of the

issues. Expenses incurred merely for thepurpose of unreasonably extending thetime for payment, or incurred other thanin good faith, are not deductible.

(e) Effective date. The rules of this sec-tion apply to the estates of decedents dyingon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

Par. 5. Section 20.2053–4 is revised toread as follows:

§20.2053–4 Deduction for claims againstthe estate.

(a) In general. (1) For purposes ofthis section, liabilities imposed by law orarising out of contracts or torts are de-ductible if they meet the requirements setforth in §20.2053–1 and this section. Ex-cept as provided in paragraph (b) of thissection, the amounts that may be deductedas claims against a decedent’s estate arelimited to amounts for legitimate and bonafide claims that—

(i) Represent personal obligations of thedecedent existing at the time of the dece-dent’s death;

(ii) Are enforceable against the dece-dent’s estate at the time of payment; and

(iii) Are actually paid by the estate insettlement of the claim.

(2) Events occurring after the date of adecedent’s death shall be considered whendetermining the amount deductible againsta decedent’s estate.

(b) Special rules—(1) Potential and un-matured claims. Claims that are unma-tured on the date of the decedent’s deathand that later mature and are paid are de-ductible by the estate. However, no deduc-tion may be taken on an estate tax returnfor a potential or unmatured claim. If theclaim matures and is paid prior to the ex-piration of the period of limitations for fil-ing a claim for refund, the estate may filea claim for refund as provided by section6511. A protective claim for refund maybe filed before the expiration of the periodof limitations for claims for refund in orderto preserve the estate’s right to claim a re-fund once the claim against the decedent’sestate is matured and is paid or may be es-timated as provided in §20.2053–1(b)(4).Although the protective claim need notstate a particular dollar amount or demandan immediate refund, the protective claimmust identify the outstanding liability or

May 21, 2007 1296 2007–21 I.R.B.

claim that would have been deductible un-der section 2053(a) had it already beenpaid, and must describe the reasons andcontingencies delaying actual payment ofthe liability or claim. Action on protectiveclaims will proceed after the executor hasnotified the Commissioner that the contin-gency has been resolved.

(2) Contested claims. No deductionmay be taken on an estate tax returnfor a claim against the decedent’s es-tate to the extent the estate is contestingthe decedent’s liability. However, see§20.2053–1(b)(4) relating to estimatedamounts.

(3) Claims against multiple parties. Ifthe decedent or the decedent’s estate is oneof two or more parties against whom theclaim is being asserted, the estate may onlydeduct the portion of the total claim duefrom and paid by the estate, reduced by thetotal of any reimbursement received fromanother party, insurance, or otherwise. Theestate’s deductible portion will also be re-duced by the amount or contribution theestate could have collected from anotherparty or an insurer but which the estatedeclines or fails to attempt to collect. If,however, the estate establishes that the bur-den of necessary collection efforts wouldhave outweighed the benefit from those ef-forts, the potential reimbursement will notreduce the estate’s deductible portion ofthe total claim. If the estate establishesthat the party from whom a potential re-imbursement could be collected could onlypay a portion of the potential reimburse-ment, then only that portion that could rea-sonably have been expected to be collectedwill reduce the estate’s deductible portionof the total claim.

(4) Claims by family members, relatedentities, or beneficiaries. Relationshipswith and among a decedent and the dece-dent’s family members, related entities,and beneficiaries may create the potentialfor collusion in asserting invalid or exag-gerated claims in order to reduce the dece-dent’s taxable estate. Thus, notwithstand-ing §20.2053–1 and paragraph (a) of thissection, there will be a rebuttable presump-tion that claims by a family member ofthe decedent, a related entity, or a bene-ficiary of the decedent’s estate or revoca-ble trust are not legitimate and bona fideand therefore are not deductible. Evidencesufficient to rebut the presumption may in-clude evidence that the claim arises from

circumstances that would reasonably sup-port a similar claim by unrelated persons ornon-beneficiaries. Similarly, a settlementbetween a decedent’s estate or revocabletrust and a family member, a related en-tity, or a beneficiary of the decedent’s es-tate or revocable trust will be presumed tonot be deductible absent evidence of the le-gitimacy and bona fide nature of the claim.For purposes of this section, family mem-bers include the spouse of the decedent;the grandparents, parents, siblings, and lin-eal descendants of the decedent or of thedecedent’s spouse; and the spouse and lin-eal descendants of any such grandparent,parent, and sibling. Family members in-clude adopted individuals. For purposes ofthis section, a related entity is an entity inwhich the decedent, either directly or in-directly, had a beneficial ownership inter-est at the time of the decedent’s death orat any time during the three-year periodending on the decedent’s date of death.Such an entity, however, shall not include apublicly-traded entity nor shall it include aclosely-held entity in which the combinedbeneficial interest, either direct or indirect,of the decedent and the decedent’s familymembers, collectively, is less than thirtypercent of the beneficial ownership inter-ests (whether voting or non-voting).

(5) Unenforceable claims. Claims thatare unenforceable prior to or at the dece-dent’s death are not deductible, even ifthey are actually paid. Claims that becomeunenforceable during the administration ofthe estate are not deductible to the extentthat they are paid after they become unen-forceable. To the extent that enforceabilityof a claim is at issue, see paragraph (b)(2)of this section relating to contested claims.

(6) Claims founded upon a promise.Except with regard to pledges or sub-scriptions, (see §20.2053–5), section2053(c)(1)(A) provides that the deduc-tion for a claim founded upon a promise oragreement is limited to the extent that thepromise or agreement was bona fide and inexchange for adequate and full considera-tion in money or money’s worth. For thispurpose, bona fide and for adequate andfull consideration in money or money’sworth requires that the promise or agree-ment must have been made in good faith,and that the price must have been an ad-equate and full equivalent reducible to amoney value.

(7) Recurring payments—(i) Non-Con-tingent obligations. If a decedent is obli-gated to make recurring payments on anenforceable and certain claim that are notsubject to a contingency and if the pay-ments will continue for a period that willlikely extend beyond the final determi-nation of the estate tax liability, the obli-gation may be deducted as an estimatedamount using the rules in §20.2053–1. Theamount deductible is the present value ofthe payments on the decedent’s date ofdeath as determined under §20.2031–7(d).See §§20.7520–1 through 20.7520–4. Ifthere is a reasonable likelihood that fullsatisfaction of the liability will not bemade, then the obligation will be deemedto be subject to a contingency for purposesof this section.

(ii) Contingent obligations. If a dece-dent has a recurring obligation to pay anenforceable and certain claim, but thedecedent’s obligation is subject to a con-tingency or is otherwise not describedin paragraph (b)(7)(i) of this section, theestate’s deduction is limited to amountsactually paid by the estate in satisfactionof the claim.

(iii) Purchase of commercial annuityto satisfy recurring obligation to pay.If a decedent has a recurring obligation(whether or not contingent) to pay an en-forceable and certain claim and the estatepurchases a commercial annuity from anunrelated dealer in commercial annuitiesin an arms-length transaction to satisfy theobligation, the amount deductible by theestate is the sum of—

(A) The amount paid for the commer-cial annuity; and

(B) Any amount actually paid to theclaimant by the estate prior to the purchaseof the commercial annuity.

(c) Interest on claims. The interest ona deductible claim is itself deductible as aclaim under section 2053, but only to theextent of the amount of interest accrued atthe date of the decedent’s death and actu-ally paid, even if the executor elects thealternate valuation method under section2032. (Post-death accrued interest maybe deductible in appropriate circumstanceseither as an estate tax administration ex-pense under section 2053 or as an incometax deduction.)

(d) Examples. The following examplesillustrate the application of paragraphs (a)through (c) of this section. Except as is

2007–21 I.R.B. 1297 May 21, 2007

otherwise provided in the examples, as-sume that the claimant (C) is not a fam-ily member, related entity or beneficiaryof the decedent (D) and is not the executor(E). Assume that a claim represents a per-sonal obligation of D existing at the timeof D’s death and is enforceable against D’sestate. Assume that the payment of theclaim, where applicable, is made out ofproperty subject to claims (as defined insection 2053(c)(2) and §20.2053–1(c)(2))and is allowable by the law of the juris-diction under which the decedent’s estateis being administered, or is paid prior tothe filing of the estate tax return (includingany extension granted under section 6081)from property not subject to claims. As-sume that any court decree is based uponthe facts upon which deductibility dependsand is consistent with applicable local law.Assume that any settlement is reached inbona fide negotiations between or amongparties having adverse interests with re-spect to the claim and that the terms of thesettlement are not inconsistent with appli-cable local law.

Example 1. Contested claim, single defendant,no decision. D is sued by C for $100x in a tort pro-ceeding and responds asserting affirmative defensesavailable to D under applicable local law. D dies andE is substituted as defendant in the suit. D’s estatetax return is due before a judgment is reached in thecase. D’s gross estate includes only property sub-ject to claims and exceeds $100x. E may not takea deduction on the return for the claim under section2053(a)(3). A deduction may be claimed on the re-turn, however, for expenses incurred prior to the fil-ing of the estate tax return in defending the estateagainst the claim if the expenses have been paid inaccordance with §20.2053–3(c) or (d)(3) or as an es-timate under §20.2053–1(b)(4). E may file a protec-tive claim for refund before the expiration of the pe-riod of limitations for claims for refund of the estatetax in order to preserve the estate’s right to claim arefund if the amount of the liability will not be paidor cannot be ascertained with reasonable certainty bythe expiration of that period of limitations. If pay-ment is subsequently made pursuant to a court deci-sion or a settlement, a deduction for the payment, aswell as expenses incurred incident to the claim andnot previously deducted, may be taken and relief maybe sought by supplementing a previously filed protec-tive claim or by filing a claim for refund as providedby section 6511.

Example 2. Contested claim, single defendant, fi-nal court decree and payment. The facts are the sameas in Example 1 except that, before the return is timelyfiled, the court enters a decision in favor of C, notimely appeal is filed, and payment is made. A de-duction is allowed for the amount paid in satisfactionof the claim pursuant to the final decision of the lo-cal court, including any interest accrued prior to D’sdeath, under section 2053(a)(3). In addition, a de-duction may be available under §20.2053–3(d)(3) for

expenses incurred prior to the filing of the estate taxreturn in defending the estate against the claim and inprocessing payment of the claim.

Example 3. Contested claim, single defendant,settlement and payment. The facts are the same asin Example 1 except that, before the return is timelyfiled, a settlement is reached between D’s estate andC for $80x and payment is made. A deduction isallowed for the amount of the settlement paid to C($80x) under section 2053(a)(3). In addition, a de-duction may be available under §20.2053–3(d)(3) forexpenses incurred prior to the filing of the estate taxreturn in defending the estate, reaching a settlement,and processing payment of the claim.

Example 4. Contested claim, multiple defendants.The facts are the same as in Example 1 except that thesuit filed by C lists D and K, an unrelated third-party,as defendants. If the claim is not resolved prior tothe time the estate tax return is filed, E may not takea deduction for the claim under section 2053(a)(3)on the return. If payment is subsequently made ofD’s share of the claim pursuant to a court decisionor a settlement holding D liable for 40 percent ofthe amount due and K liable for 60 percent of theamount due, then the estate may take a deduction forthe amount paid in satisfaction of the claim represent-ing D’s share of the liability as assigned by the courtdecree ($40x), plus any interest on that share accruedprior to D’s death, under section 2053(a)(3). If thecourt decision finds D and K jointly and severally li-able for the entire $100x and D’s estate pays the entire$100x but could have reasonably collected $50x fromK in reimbursement, the estate may take a deductionunder section 2053(a)(3) and paragraph (b)(3) of thissection for only $50x and the interest on $50x ac-crued prior to D’s death. In both instances, a deduc-tion may also be available under §20.2053–3(d)(3)for expenses incurred and not previously deducted indefending the estate against the claim and processingpayment of the amount due from D.

Example 5. Contested claim, multiple defendants,settlement and payment. The facts are the same asin Example 1 except that the suit filed by C lists Dand K, an unrelated third-party, as defendants. D’sestate settles with C for $10x and payment is madebefore the return is timely filed. E may take a deduc-tion for the amount paid to C in satisfaction of theclaim. In addition, a deduction may be available un-der §20.2053–3(d)(3) for expenses incurred prior tothe filing of the estate tax return in defending the es-tate, reaching a settlement, and processing paymentof the claim.

Example 6. Mixed claims. During life, D con-tracts with C to perform specific work on D’s homefor $75x. Under the contract, additional work mustbe approved in advance by D. C performs additionalwork and sues D for $100x for work completed in-cluding the $75x agreed to in the contract. D diesand D’s estate tax return is due before a judgmentis reached in the case. E contests liability for $25x.E may take a deduction on the return for $75x if ithas been paid or if it meets the requirements of anestimated amount. In addition, a deduction may beclaimed on the return for expenses incurred in defend-ing the estate against the claim if they have been paidunder §20.2053–3(c) or (d)(3) or as an estimate un-der §20.2053–1(b)(4). E may file a protective claimfor refund before the expiration of the period of limi-tations on claims for refund of the estate tax in order

to preserve the estate’s right to claim a refund if pay-ment on any amount in excess of $75x is subsequentlymade in resolution of a claim that would qualify for adeduction under section 2053. To the extent that theexpenses incurred in defending the estate against theclaim are not deducted as an estimate, they may beincluded in the protective claim for refund.

Example 7. Unenforceable claims. D is sued by Cfor $100x in a tort proceeding but the claim is barredby the applicable period of limitations and there is noother recourse available to C. A deduction is not al-lowed for the claim under section 2053(a)(3) whetheror not the estate actually pays money in satisfactionof the claim. A deduction may be available, however,under §20.2053–3(d)(3) for expenses incurred in de-fending the estate against the claim.

Example 8. Non-contingent and recurring obli-gation to pay, binding on estate. D’s property settle-ment agreement incident to D’s divorce, signed threeyears prior to D’s death, obligates D or D’s estate topay to S, D’s former spouse, $20x per year for 10years. The payments are not conditioned on whetheror not S remarries. If S dies prior to the last payment,the terms of the agreement state that the remainingpayments are to be made to S’s estate or as S mayappoint in S’s will. Prior to filing D’s estate tax re-turn, D’s estate pays the first of the 7 payments re-maining as of D’s death. The estate may take a de-duction for the present value of these payments. See§§20.7520–1 through 20.7520–4.

Example 9. Contingent recurring obligation topay, binding on estate. D’s property settlement agree-ment incident to D’s divorce, signed three years priorto D’s death, obligates D or D’s estate to pay to S,D’s former spouse, $20x per year for 10 years. Theobligation to make the annual payments ceases uponS’s remarriage or S’s death prior to the due date of thelast payment. Prior to filing D’s estate tax return, D’sestate pays the first of the 7 payments remaining as ofD’s death. E may take as a deduction on the return theamount of the 1 payment made prior to the filing ofD’s estate tax return. Additional payments becomedeductible as they are paid. E may file a protectiveclaim for refund before the expiration of the periodof limitations for claims for refund of the estate tax inorder to preserve the estate’s right to claim a refundif the amount of the liability will not be paid or is notascertainable with reasonable certainty by the expira-tion of the applicable period of limitations. If the totalamount to be paid in satisfaction of the liability is notascertainable with reasonable certainty at the time ofexamination of the return, relief may be sought by aclaim for refund (either actual or protective) as pro-vided by section 6511.

Example 10. Recurring obligation to pay, es-tate purchases a commercial annuity in satisfaction.D’s property settlement agreement incident to D’s di-vorce, signed three years prior to D’s death, obligatesD or D’s estate to pay to S, D’s former spouse, $20xper year for 10 years. D’s estate purchases a commer-cial annuity from an unrelated dealer in commercialannuities, XYZ, in a bona fide sale to satisfy the obli-gation to S. E may deduct the entire amount paid toXYZ to obtain the annuity, regardless of whether ornot the obligation to S was contingent.

(e) Effective date. The rules of this sec-tion apply to the estates of decedents dyingon or after the date of publication of the

May 21, 2007 1298 2007–21 I.R.B.

Treasury decision adopting these rules asfinal regulations in the Federal Register.

Par. 6. Section 20.2053–6 is amendedby revising paragraphs (a) and (c) andadding new paragraphs (g) and (h) to readas follows:

§20.2053–6 Deduction for taxes.

(a) In general. Taxes are deductiblein computing a decedent’s gross estateonly as claims against the estate (exceptto the extent that excise taxes may beallowable as administration expenses),and only to the extent not disallowed bysection 2053(c)(1)(B) (see the remainingparagraphs of this section). However, see§§20.2053–9 and 20.2053–10 with respectto the deduction allowed for certain stateand foreign death taxes.

* * * * *(c) Death taxes. (1) For the estates of

decedents dying on or before December31, 2004, no estate, succession, legacy orinheritance tax payable by reason of thedecedent’s death is deductible, except asprovided in §20.2053–9 and §20.2053–10with respect to certain state and foreigndeath taxes on transfers for charitable, etc.,uses. However, see sections 2011 and2014 and these regulations with respect tocredits for death taxes.

(2) For the estates of decedents dyingafter December 31, 2004, see section 2058to determine the deductibility of statedeath taxes.

* * * * *(g) Post-death adjustments of de-

ductible tax liability. Post-death adjust-ments increasing a tax liability accruedprior to the decedent’s death, includingincreases of taxes deducted under thissection, will increase the amount of thededuction taken under section 2053(a)(3)for that tax liability. Similarly, any re-fund subsequently determined to be dueto and received by the estate with respectto taxes deducted by the estate under thissection reduces the amount of the de-duction taken for that tax liability undersection 2053(a)(3). Expenses associ-ated with defending the estate against theincrease in tax liability or with obtain-ing the refund may be deductible under§20.2053–3(d)(3). A protective claim for

refund of estate taxes may be filed beforethe expiration of the period of limitationsfor claims for refund in order to preservethe estate’s right to claim a refund if theamount of a deductible tax liability may beaffected by such an adjustment or refund.The application of this section may beillustrated by the following examples:

Example 1. Increase in tax due. After the dece-dent’s death, the Internal Revenue Service examinesthe gift tax return filed by the decedent in the yearbefore the decedent’s death and asserts a deficiencyof $100x. The estate spends $30x in a non-frivolousdefense against the increased deficiency. The finaldetermination of the deficiency, in the amount of$90x, is paid by the estate. The estate may deduct$90x under section 2053(a)(3) and $30x under§20.2053–3(c)(2) or (d)(3).

Example 2. Refund of taxes paid. Decedent’s es-tate timely files D’s individual income tax return forthe year in which the decedent died. The estate timelypays the entire amount of the tax due, $50x, as shownon that return. The entire $50x was attributable toincome received prior to the decedent’s death. Dece-dent’s estate subsequently discovers an error on theincome tax return and files a timely claim for refund.Decedent’s estate receives a refund of $10x. The es-tate is only allowed a deduction of $40x under section2053(a)(3) for the income tax liability accrued priorto the decedent’s death. If a deduction for $50x wasallowed on the estate tax return prior to the receipt ofthe refund, it shall be the duty of the executor to no-tify the Commissioner of the change and to pay theresulting tax, with interest.

(h) Effective date. The rules of this sec-tion apply to the estates of decedents dyingon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

Par. 7. Section 20.2053–9 is amendedas follows:

1. Revising the heading for paragraph(a) and adding a sentence at the end ofparagraph (a).

2. Revising the first and last sentencesof paragraph (c).

3. Adding new paragraph (f).The revisions and addition read as fol-

lows:

§20.2053–9 Deduction for certain statedeath taxes.

(a) General rules for the estates of dece-dents dying on or before December 31,2004.* * * For the estates of decedents dy-ing after December 31, 2004, see section2058 to determine the deductibility of statedeath taxes.

* * * * *

(c) Exercise of election. The election totake a deduction for a state death tax im-posed upon a transfer for charitable, etc.,uses shall be exercised by the executor bythe filing of a written notification to thateffect with the Commissioner. * * * Theelection may be revoked by the executorby the filing of a written notification to thateffect with the Commissioner at any timebefore the expiration of such period.

* * * * *(f) Effective date. The rules of this sec-

tion apply to the estates of decedents dyingon or before December 31, 2004.

Par. 8. Section 20.2053–10 is amendedby revising paragraph (c) and adding a newparagraph (e) to read as follows:

§20.2053–10 Deduction for certainforeign death taxes.

* * * * *(c) Exercise of election. The election to

take a deduction for a foreign death tax im-posed upon a transfer for charitable, etc.,uses shall be exercised by the executor bythe filing of a written notification to that ef-fect with the Commissioner. An election totake the deduction for foreign death taxesis deemed to be a waiver of the right toclaim a credit under a treaty with any for-eign country for any tax or portion thereofclaimed as a deduction under this section.The notification shall be filed before theexpiration of the period of limitations forassessment provided in section 6501 (usu-ally 3 years from the last day for filing thereturn). The election may be revoked bythe executor by the filing of a written no-tification to that effect with the Commis-sioner at any time before the expiration ofsuch period.

* * * * *(e) Effective date. The rules of this sec-

tion apply to the estates of decedents dyingon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

Kevin M. Brown,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on April 20, 2007,8:45 a.m., and published in the issue of the Federal Registerfor April 23, 2007, 72 F.R. 20080)

2007–21 I.R.B. 1299 May 21, 2007

Dual Consolidated LossRegulations; Correction

Announcement 2007–49

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correcting amendments.

SUMMARY: This document contains cor-rections to final regulations (T.D. 9315,2007–15 I.R.B. 891) that were published inthe Federal Register on Monday, March19, 2007 (72 FR 12902) regarding dualconsolidated losses. Section 1503(d) gen-erally provides that a dual consolidatedloss of a dual resident corporation cannotreduce the taxable income of any othermember of the affiliated group unless, tothe extent provided in regulations, the lossdoes not offset the income of any foreigncorporation.

DATES: These correcting amendments areeffective April 25, 2007.

FOR FURTHER INFORMATIONCONTACT: Jeffrey P. Cowan, (202)622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subjectof this document are under section 1503(d)of the Internal Revenue Code.

Need for Correction

As published, final regulations (T.D.9315) contain errors that may prove to bemisleading and are in need of clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR part 1 is cor-rected by making the following correctingamendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.1503(d)–0 is amended

by revising the entries (1) and (2) of Sec-tion 1.1503(d)–8(b). The revisions read asfollows:

§1.1503(d)–0 Table of contents.

* * * * *

§1.1503(d)–8 Effective dates.

* * * * *(b) * * *(1) Reduction of term of agree-

ments filed under §§1.1503–2A(c)(3),1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or1.1503–2T(g)(2)(i).

(2) Reduction of term of agreementsfiled under §§1.1503–2(g)(2)(iv)(B)(2)(i)(1992), 1.1503–2(g)(2)(iv)(B)(3)(i), orRev. Proc. 2000–42.

* * * * *Par. 3. Section 1.1503(d)–5 is amended

by revising the last sentence of paragraph(a), the second sentence of paragraph(c)(4)(i)(A), and the only sentence ofparagraph (d) to read as follows:

§1.1503(d)–5 Attribution of items andbasis adjustments.

(a) * * * The rules in this section ap-ply for purposes of §§1.1503(d)–1 through1.1503(d)–7.

* * * * *(c) * * *(4) * * *(i) * * *(A) * * * For purposes of determining

items of income, gain, deduction, and lossof the domestic owner that are attributableto the domestic owner’s foreign branchseparate unit described in the precedingsentence, only items of income, gain, de-duction, and loss that are attributable to thedomestic owner’s interest in the hybrid en-tity, or transparent entity, as provided inparagraph (c)(3) of this section, shall betaken into account. * * *

* * * * *(d) * * * The fact that a particular item

taken into account in computing the in-come or dual consolidated loss of a dualresident corporation or a separate unit,or the income or loss of an interest in atransparent entity, is not taken into accountin computing income (or loss) subject toa foreign country’s income tax shall notcause such item to be excluded from beingtaken into account under paragraph (b),(c), or (e) of this section.

* * * * *

Par. 4. Section 1.1503(d)–7(c) isamended by revising the last sentence ofparagraph (iv) of Example 5 and the lastsentence of paragraph (C) of Example40(ii).

The revisions read as follows:

§1.1503(d)–7 Examples.

* * * * *(c) * * *Example 5. * * *(iv) * * * In addition, pursuant to

§1.1503(d)–6(f)(1) and (3) , the deemed trans-fers pursuant to Rev. Rul. 99–5 as a result of thesale are not treated as triggering events described in§1.1503(d)–6(e)(1)(iv) or (v).

* * * * *Example 40. * * *(ii) * * *(C) * * * Pursuant to §1.1503(d)–6(j)(1)(iii), the

domestic use agreement filed by the P consolidatedgroup with respect to the year 1 dual consolidated lossof the Country X separate unit is terminated and hasno further effect.

* * * * *

Par. 5. Section 1.1503(d)–8 is amendedby revising the heading texts of paragraphs(b)(1) and (2), the only sentence of para-graph (b)(1), the first sentence of para-graph (b)(2) and the last sentence of para-graph (b)(4).

The revisions read as follows:

§1.1503(d)–8 Effective dates.

* * * * *(b) * * *(1) Reduction of term of agree-

ments filed under §§1.1503–2A(c)(3),1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or1.1503–2T(g)(i). If an agreement is filedin accordance with §§1.1503–2A(c)(3),1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or1.1503–2T(g)(2)(i) with respect to a dualconsolidated loss incurred in a taxable yearbeginning prior to the application date andan event requiring recapture with respectto the dual consolidated loss subject tothe agreement has not occurred as of theapplication date, then such agreement willbe considered by the Internal RevenueService to apply only for any taxable yearup to and including the fifth taxable yearfollowing the year in which the dual con-solidated loss that is the subject of theagreement was incurred and thereafterwill have no effect.

(2) Reduction of term of agreementsfiled under §§1.1503–2(g)(2)(iv)(B)(2)(i)(1992), 1.1503–2(g)(2)(iv)(B)(3)(i), or

May 21, 2007 1300 2007–21 I.R.B.

Rev. Proc. 2000–42. Taxpayers subject tothe terms of a closing agreement enteredinto with the Internal Revenue Servicepursuant to §§1.1503–2(g)(2)(iv)(B)(2)(i)(1992), 1.1503–2(g)(2)(iv)(B)(3)(i), orRev. Proc. 2000–42, 2000–2 C.B.394, see §601.601(d)(2)(ii)(b) of thischapter, will be deemed to have satis-fied the closing agreement’s fifteen-yearcertification period requirement if thefive-year certification period specifiedin §1.1503(d)–1(b)(20) has elapsed, pro-vided such closing agreement is still ineffect as of the application date, and pro-

vided the dual consolidated losses havenot been recaptured. * * *

* * * * *(4) * * * Notwithstanding the

general application of this para-graph (b)(4) to events described in§1.1503–2(g)(2)(iv)(B)(1)(i) through(iii) that occur after April 18, 2007,a taxpayer may choose to apply thisparagraph (b)(4) to events described in§1.1503–2(g)(2)(iv)(B)(1)(i) through (iii)that occur after March 19, 2007 and on orbefore April 18, 2007.

* * * * *

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on April 24, 2007,8:45 a.m., and published in the issue of the Federal Registerfor April 25, 2007, 72 F.R. 20423)

2007–21 I.R.B. 1301 May 21, 2007

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe 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 the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

May 21, 2007 i 2007–21 I.R.B.

Numerical Finding List1

Bulletins 2007–1 through 2007–21

Announcements:

2007-1, 2007-1 I.R.B. 243

2007-2, 2007-2 I.R.B. 263

2007-3, 2007-4 I.R.B. 376

2007-4, 2007-7 I.R.B. 518

2007-5, 2007-4 I.R.B. 376

2007-6, 2007-4 I.R.B. 376

2007-7, 2007-4 I.R.B. 377

2007-8, 2007-5 I.R.B. 416

2007-9, 2007-5 I.R.B. 417

2007-10, 2007-6 I.R.B. 464

2007-11, 2007-6 I.R.B. 464

2007-12, 2007-6 I.R.B. 465

2007-13, 2007-7 I.R.B. 519

2007-14, 2007-7 I.R.B. 519

2007-15, 2007-8 I.R.B. 596

2007-16, 2007-8 I.R.B. 597

2007-17, 2007-8 I.R.B. 597

2007-18, 2007-9 I.R.B. 625

2007-19, 2007-7 I.R.B. 521

2007-20, 2007-8 I.R.B. 599

2007-21, 2007-9 I.R.B. 630

2007-22, 2007-9 I.R.B. 631

2007-23, 2007-10 I.R.B. 665

2007-24, 2007-10 I.R.B. 681

2007-25, 2007-10 I.R.B. 682

2007-26, 2007-10 I.R.B. 682

2007-27, 2007-11 I.R.B. 733

2007-28, 2007-10 I.R.B. 683

2007-29, 2007-11 I.R.B. 733

2007-30, 2007-11 I.R.B. 734

2007-31, 2007-12 I.R.B. 769

2007-32, 2007-11 I.R.B. 734

2007-33, 2007-13 I.R.B. 841

2007-34, 2007-13 I.R.B. 842

2007-35, 2007-15 I.R.B. 949

2007-36, 2007-15 I.R.B. 953

2007-37, 2007-15 I.R.B. 954

2007-38, 2007-15 I.R.B. 954

2007-39, 2007-15 I.R.B. 954

2007-40, 2007-16 I.R.B. 978

2007-41, 2007-16 I.R.B. 978

2007-42, 2007-17 I.R.B. 1037

2007-43, 2007-17 I.R.B. 1038

2007-44, 2007-19 I.R.B. 1238

2007-45, 2007-18 I.R.B. 1122

2007-46, 2007-19 I.R.B. 1239

2007-47, 2007-20 I.R.B. 1260

2007-48, 2007-20 I.R.B. 1274

2007-49, 2007-21 I.R.B. 1300

Notices:

2007-1, 2007-2 I.R.B. 254

2007-2, 2007-2 I.R.B. 254

2007-3, 2007-2 I.R.B. 255

2007-4, 2007-2 I.R.B. 260

2007-5, 2007-3 I.R.B. 269

2007-6, 2007-3 I.R.B. 272

2007-7, 2007-5 I.R.B. 395

2007-8, 2007-3 I.R.B. 276

2007-9, 2007-5 I.R.B. 401

2007-10, 2007-4 I.R.B. 354

2007-11, 2007-5 I.R.B. 405

2007-12, 2007-5 I.R.B. 409

2007-13, 2007-5 I.R.B. 410

2007-14, 2007-7 I.R.B. 501

2007-15, 2007-7 I.R.B. 503

2007-16, 2007-8 I.R.B. 536

2007-17, 2007-12 I.R.B. 748

2007-18, 2007-9 I.R.B. 608

2007-19, 2007-11 I.R.B. 689

2007-20, 2007-9 I.R.B. 610

2007-21, 2007-9 I.R.B. 611

2007-22, 2007-10 I.R.B. 670

2007-23, 2007-11 I.R.B. 690

2007-24, 2007-12 I.R.B. 750

2007-25, 2007-12 I.R.B. 760

2007-26, 2007-14 I.R.B. 870

2007-27, 2007-13 I.R.B. 814

2007-28, 2007-14 I.R.B. 880

2007-29, 2007-14 I.R.B. 881

2007-30, 2007-14 I.R.B. 883

2007-31, 2007-16 I.R.B. 971

2007-32, 2007-17 I.R.B. 996

2007-33, 2007-21 I.R.B. 1284

2007-34, 2007-17 I.R.B. 996

2007-35, 2007-15 I.R.B. 940

2007-36, 2007-17 I.R.B. 1000

2007-37, 2007-17 I.R.B. 1002

2007-38, 2007-18 I.R.B. 1103

2007-39, 2007-20 I.R.B. 1243

2007-40, 2007-21 I.R.B. 1284

2007-41, 2007-21 I.R.B. 1287

2007-42, 2007-21 I.R.B. 1288

Proposed Regulations:

REG-100841-97, 2007-12 I.R.B. 763

REG-153037-01, 2007-15 I.R.B. 942

REG-157711-02, 2007-8 I.R.B. 537

REG-143316-03, 2007-21 I.R.B. 1292

REG-144859-04, 2007-20 I.R.B. 1245

REG-159444-04, 2007-9 I.R.B. 618

REG-115403-05, 2007-12 I.R.B. 767

REG-152043-05, 2007-2 I.R.B. 263

REG-158677-05, 2007-16 I.R.B. 975

REG-161919-05, 2007-6 I.R.B. 463

Proposed Regulations— Continued:

REG-125632-06, 2007-5 I.R.B. 415

REG-146247-06, 2007-16 I.R.B. 977

REG-147144-06, 2007-10 I.R.B. 680

REG-156420-06, 2007-18 I.R.B. 1110

REG-156779-06, 2007-17 I.R.B. 1015

REG-157834-06, 2007-13 I.R.B. 840

Revenue Procedures:

2007-1, 2007-1 I.R.B. 1

2007-2, 2007-1 I.R.B. 88

2007-3, 2007-1 I.R.B. 108

2007-4, 2007-1 I.R.B. 118

2007-5, 2007-1 I.R.B. 161

2007-6, 2007-1 I.R.B. 189

2007-7, 2007-1 I.R.B. 227

2007-8, 2007-1 I.R.B. 230

2007-9, 2007-3 I.R.B. 278

2007-10, 2007-3 I.R.B. 289

2007-11, 2007-2 I.R.B. 261

2007-12, 2007-4 I.R.B. 354

2007-13, 2007-3 I.R.B. 295

2007-14, 2007-4 I.R.B. 357

2007-15, 2007-3 I.R.B. 300

2007-16, 2007-4 I.R.B. 358

2007-17, 2007-4 I.R.B. 368

2007-18, 2007-5 I.R.B. 413

2007-19, 2007-7 I.R.B. 515

2007-20, 2007-7 I.R.B. 517

2007-21, 2007-9 I.R.B. 613

2007-22, 2007-10 I.R.B. 675

2007-23, 2007-10 I.R.B. 675

2007-24, 2007-11 I.R.B. 692

2007-25, 2007-12 I.R.B. 761

2007-26, 2007-13 I.R.B. 814

2007-27, 2007-14 I.R.B. 887

2007-28, 2007-16 I.R.B. 974

2007-29, 2007-17 I.R.B. 1004

2007-30, 2007-18 I.R.B. 1104

2007-31, 2007-19 I.R.B. 1225

2007-33, 2007-21 I.R.B. 1289

Revenue Rulings:

2007-1, 2007-3 I.R.B. 265

2007-2, 2007-3 I.R.B. 266

2007-3, 2007-4 I.R.B. 350

2007-4, 2007-4 I.R.B. 351

2007-5, 2007-5 I.R.B. 378

2007-6, 2007-5 I.R.B. 393

2007-7, 2007-7 I.R.B. 468

2007-8, 2007-7 I.R.B. 469

2007-9, 2007-6 I.R.B. 422

2007-10, 2007-10 I.R.B. 660

2007-11, 2007-9 I.R.B. 606

2007-12, 2007-11 I.R.B. 685

2007-13, 2007-11 I.R.B. 684

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin2006–52, dated December 26, 2006.

2007–21 I.R.B. ii May 21, 2007

Revenue Rulings— Continued:

2007-14, 2007-12 I.R.B. 747

2007-15, 2007-11 I.R.B. 687

2007-16, 2007-13 I.R.B. 807

2007-17, 2007-13 I.R.B. 805

2007-18, 2007-13 I.R.B. 806

2007-19, 2007-14 I.R.B. 843

2007-20, 2007-14 I.R.B. 863

2007-21, 2007-14 I.R.B. 865

2007-22, 2007-14 I.R.B. 866

2007-23, 2007-15 I.R.B. 889

2007-24, 2007-21 I.R.B. 1282

2007-25, 2007-16 I.R.B. 956

2007-26, 2007-16 I.R.B. 970

2007-27, 2007-18 I.R.B. 1099

2007-28, 2007-18 I.R.B. 1039

2007-29, 2007-19 I.R.B. 1223

2007-30, 2007-21 I.R.B. 1277

2007-31, 2007-21 I.R.B. 1275

2007-32, 2007-21 I.R.B. 1278

2007-33, 2007-21 I.R.B. 1281

Tax Conventions:

2007-23, 2007-10 I.R.B. 665

Treasury Decisions:

9298, 2007-6 I.R.B. 434

9299, 2007-6 I.R.B. 460

9300, 2007-2 I.R.B. 246

9301, 2007-2 I.R.B. 244

9302, 2007-5 I.R.B. 382

9303, 2007-5 I.R.B. 379

9304, 2007-6 I.R.B. 423

9305, 2007-7 I.R.B. 479

9306, 2007-6 I.R.B. 420

9307, 2007-7 I.R.B. 470

9308, 2007-8 I.R.B. 523

9309, 2007-7 I.R.B. 497

9310, 2007-9 I.R.B. 601

9311, 2007-10 I.R.B. 635

9312, 2007-12 I.R.B. 736

9313, 2007-13 I.R.B. 805

9314, 2007-14 I.R.B. 845

9315, 2007-15 I.R.B. 891

9316, 2007-16 I.R.B. 962

9317, 2007-16 I.R.B. 957

9318, 2007-17 I.R.B. 990

9319, 2007-18 I.R.B. 1041

9320, 2007-17 I.R.B. 994

9321, 2007-19 I.R.B. 1123

9322, 2007-18 I.R.B. 1100

9323, 2007-20 I.R.B. 1240

May 21, 2007 iii 2007–21 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2007–1 through 2007–21

Announcements:

2006-45

Updated and superseded by

Ann. 2007-47, 2007-20 I.R.B. 1260

Notices:

2002-45

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-1

Obsoleted in part by

T.D. 9321, 2007-19 I.R.B. 1123

2005-29

Modified and superseded by

Notice 2007-4, 2007-2 I.R.B. 260

2005-86

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-98


Notice 2007-26, 2007-14 I.R.B. 870

2006-2


Notice 2007-4, 2007-2 I.R.B. 260

2006-4

Superseded in part by

T.D. 9321, 2007-19 I.R.B. 1123

2006-13

Obsoleted by

T.D. 9315, 2007-15 I.R.B. 891

2006-50

Amplified, clarified, and modified by

Notice 2007-11, 2007-5 I.R.B. 405

2006-64

Superseded for taxable years on or after January 1,

2008 by

T.D. 9321, 2007-19 I.R.B. 1123

2006-77

Clarified, modified, and amplified by

Notice 2007-36, 2007-17 I.R.B. 1000

2006-87

Modified and supplemented by

Notice 2007-25, 2007-12 I.R.B. 760

2007-19

Amended and supplemented by

Notice 2007-31, 2007-16 I.R.B. 971

Proposed Regulations:

REG-208270-86

Corrected by

Ann. 2007-4, 2007-7 I.R.B. 518

REG-121509-00

Corrected by

Ann. 2007-17, 2007-8 I.R.B. 597

REG-139059-02

Corrected by

Ann. 2007-36, 2007-15 I.R.B. 953Ann. 2007-37, 2007-15 I.R.B. 954

REG-141901-05

Corrected by

Ann. 2007-7, 2007-4 I.R.B. 377

REG-142270-05

Corrected by

Ann. 2007-2, 2007-2 I.R.B. 263

REG-125632-06

Corrected by

Ann. 2007-26, 2007-10 I.R.B. 682

REG-127819-06

Corrected by

Ann. 2007-5, 2007-4 I.R.B. 376

REG-136806-06

Corrected by

Ann. 2007-6, 2007-4 I.R.B. 376

Hearing cancelled by

Ann. 2007-19, 2007-7 I.R.B. 521

Revenue Procedures:

98-20

Superseded by

Rev. Proc. 2007-12, 2007-4 I.R.B. 354

2000-38

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2000-42


T.D. 9315, 2007-15 I.R.B. 891

2000-50

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2001-31

Superseded by

Rev. Proc. 2007-29, 2007-17 I.R.B. 1004

2001-42

Modified and amplified by

Rev. Proc. 2007-19, 2007-7 I.R.B. 515

2002-9

Modified and amplified by

Rev. Proc. 2007-14, 2007-4 I.R.B. 357

Revenue Procedures— Continued:

Rev. Proc. 2007-33, 2007-21 I.R.B. 1289

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2004-11

Superseded by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2004-65


Rev. Proc. 2007-20, 2007-7 I.R.B. 517

2005-12

Superseded by

Rev. Proc. 2007-17, 2007-4 I.R.B. 368

2005-51

Amplified by

Rev. Proc. 2007-25, 2007-12 I.R.B. 761

2005-69

Superseded by

Rev. Proc. 2007-15, 2007-3 I.R.B. 300

2005-74

Superseded by

Rev. Proc. 2007-24, 2007-11 I.R.B. 692

2006-1

Superseded by

Rev. Proc. 2007-1, 2007-1 I.R.B. 1

2006-2

Superseded by

Rev. Proc. 2007-2, 2007-1 I.R.B. 88

2006-3

Superseded by

Rev. Proc. 2007-3, 2007-1 I.R.B. 108

2006-4

Superseded by

Rev. Proc. 2007-4, 2007-1 I.R.B. 118

2006-5

Superseded by

Rev. Proc. 2007-5, 2007-1 I.R.B. 161

2006-6

Superseded by

Rev. Proc. 2007-6, 2007-1 I.R.B. 189

2006-7

Superseded by

Rev. Proc. 2007-7, 2007-1 I.R.B. 227

2006-8

Superseded by

Rev. Proc. 2007-8, 2007-1 I.R.B. 230

2006-17


Rev. Proc. 2007-26, 2007-13 I.R.B. 814

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,2006.

2007–21 I.R.B. iv May 21, 2007

Revenue Procedures— Continued:

2006-20


Rev. Proc. 2007-31, 2007-19 I.R.B. 1225

2006-35

Modified by

Rev. Proc. 2007-22, 2007-10 I.R.B. 675

Revenue Rulings:

54-19


Rev. Rul. 2007-14, 2007-12 I.R.B. 747

55-132

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

56-462

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

56-518

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

57-505

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

58-370

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

58-500

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

69-141

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

69-212

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

69-587

Revoked by

Rev. Rul. 2007-12, 2007-11 I.R.B. 685

71-477

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

75-161

Obsoleted by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

76-188

Obsoleted by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

78-330

Modified by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

Revenue Rulings— Continued:

81-18

Distinguished by

Rev. Rul. 2007-32, 2007-21 I.R.B. 1278

81-225

Clarified and amplified by

Rev. Rul. 2007-7, 2007-7 I.R.B. 468

92-19

Supplemented in part by

Rev. Rul. 2007-10, 2007-10 I.R.B. 660

96-51

Amplified by

Rev. Rul. 2007-12, 2007-11 I.R.B. 685

2002-41

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2003-43

Modified by

Notice 2007-2, 2007-2 I.R.B. 254

2003-92

Clarified and amplified by

Rev. Rul. 2007-7, 2007-7 I.R.B. 468

2003-102

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2003-109

Superseded by

Rev. Rul. 2007–28, 2007-18 I.R.B. 1039

2005-24

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-76

Supplemented and superseded by

Rev. Rul. 2007-4, 2007-4 I.R.B. 351

2006-36

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

Treasury Decisions:

9263

Corrected by

Ann. 2007-22, 2007-9 I.R.B. 631

9276

Corrected by

Ann. 2007-20, 2007-8 I.R.B. 599Ann. 2007-21, 2007-9 I.R.B. 630

9278

Corrected by

Ann. 2007-9, 2007-5 I.R.B. 417Ann. 2007-10, 2007-6 I.R.B. 464

9286

Corrected by

Ann. 2007-8, 2007-5 I.R.B. 416

Treasury Decisions— Continued:

9298

Corrected by

Ann. 2007-32, 2007-11 I.R.B. 734

9303

Corrected by

Ann. 2007-25, 2007-10 I.R.B. 682

9313

Corrected by

Ann. 2007-48, 2007-20 I.R.B. 1274

9315

Corrected by

Ann. 2007-49, 2007-21 I.R.B. 1300

May 21, 2007 v 2007–21 I.R.B.

2007–21 I.R.B. May 21, 2007

May 21, 2007 2007–21 I.R.B.

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